DT Midstream, Inc. - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2023
Or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
![DTM Logo.gif](https://www.sec.gov/Archives/edgar/data/0001842022/000184202223000009/dtm-20230331_g1.gif)
Commission File Number: 001-40392
DT Midstream, Inc.
Delaware | 38-2663964 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S Employer Identification No.) |
Registrant's address of principal executive offices: 500 Woodward Ave., Suite 2900, Detroit, Michigan 48226-1279
Registrant's telephone number, including area code: (313) 402-8532
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Exchange on which Registered | ||||||||||||
Common stock, par value $0.01 | DTM | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company | ||||||||||
☒ | ☐ | ☐ | ☐ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding at March 31, 2023:
Description | Shares | |||||||
Common stock, par value $0.01 | 96,890,219 |
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TABLE OF CONTENTS
Page | ||||||||
2
DEFINITIONS
Unless the context otherwise requires, references to "we," "us," "our," "Registrant," or the "Company" and words of similar importance refer to DT Midstream and, unless otherwise specified, its consolidated subsidiaries and its unconsolidated joint ventures. As used in this Form 10-Q, the terms and definitions below have the following meanings:
Appalachia Gathering System | A 144-mile pipeline delivering Marcellus shale gas to the Texas Eastern Pipeline and Stonewall Gas Gathering | |||||||
ASU | Accounting Standards Update issued by the FASB | |||||||
Bcf | Billion cubic feet of natural gas | |||||||
Blue Union | Blue Union Gathering System, a 363-mile gathering system delivering shale gas production from the Haynesville formation of Louisiana to markets in the Gulf Coast region | |||||||
Bluestone | Bluestone Gathering Lateral Pipeline, a 65-mile lateral pipeline and two compression facilities gathering Marcellus shale gas to the Millennium Pipeline and the Tennessee Pipeline | |||||||
Columbia Pipeline | Columbia Gas Transmission, LLC, owned by TC Energy Corporation | |||||||
Credit Agreement | DT Midstream's Credit Agreement provides for the Term Loan Facility and Revolving Credit Facility | |||||||
DT Midstream | DT Midstream, Inc., and its consolidated subsidiaries | |||||||
FASB | Financial Accounting Standards Board | |||||||
FERC | Federal Energy Regulatory Commission | |||||||
GAAP | Generally Accepted Accounting Principles in the United States | |||||||
Generation Pipeline | A 25-mile intrastate pipeline located in northern Ohio and owned by NEXUS | |||||||
Haynesville System | System is comprised of LEAP, Blue Union and associated facilities | |||||||
LEAP | Louisiana Energy Access Project gathering lateral pipeline, a 155-mile pipeline gathering Haynesville shale gas to markets in the Gulf Coast region | |||||||
LIBOR | London Inter-Bank Offered Rates | |||||||
LNG | Liquefied natural gas | |||||||
Michigan Gathering System | A 336-mile pipeline system in northern Michigan | |||||||
Millennium Pipeline | A 263-mile interstate pipeline and compression facilities owned by Millennium Pipeline Company, LLC serving markets in the northeast and supply from the northeast Marcellus region, in which DT Midstream owns a 52.5% interest | |||||||
MVCs | Minimum volume commitments | |||||||
National Grid | National Grid Millennium LLC | |||||||
NEXUS | NEXUS Gas Transmission, LLC, a joint venture which owns (i) a 256-mile interstate pipeline and three compression facilities transporting Utica and Marcellus shale gas to Ohio, Michigan and Ontario market centers and (ii) Generation Pipeline, in which DT Midstream owns a 50% interest | |||||||
Revolving Credit Facility | DT Midstream's secured revolving credit facility issued under the Credit Agreement | |||||||
SEC | Securities and Exchange Commission | |||||||
Separation | The separation and spin-off of DT Midstream from DTE Energy Company, effective July 1, 2021 | |||||||
SOFR | Secured Overnight Financing Rate | |||||||
South Romeo | South Romeo Gas Storage Corporation, a joint venture which owns the Washington 28 Storage Complex, in which DT Midstream owns a 50% interest | |||||||
Southwestern Energy | Southwestern Energy Company and/or its affiliates | |||||||
Stonewall Gas Gathering | Stonewall Gas Gathering Lateral Pipeline, a 68-mile pipeline in which DT Midstream owns an 85% interest, gathering Marcellus/Utica natural gas to the Columbia Pipeline |
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DEFINITIONS
Susquehanna Gathering System | A 198-mile pipeline delivering Marcellus shale gas production to Bluestone | |||||||
Tax Matters Agreement | The agreement that governs the respective rights, responsibilities and obligations of DTE Energy Company and DT Midstream after the Separation with respect to all tax matters | |||||||
Tennessee Pipeline | Tennessee Gas Pipeline Company, LLC, owned by Kinder Morgan, Inc. | |||||||
Term Loan Facility | DT Midstream's term loan facility issued under the Credit Agreement | |||||||
Texas Eastern Pipeline | Texas Eastern Transmission, LP, owned by Enbridge Inc. | |||||||
Topic 606 | FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, as amended | |||||||
U.S. | United States of America | |||||||
USD | United States Dollar ($) | |||||||
Vector Pipeline | A 348-mile interstate pipeline and five compression facilities connecting Illinois, Michigan, and Ontario market centers, in which DT Midstream owns a 40% interest | |||||||
VIE | Variable Interest Entity | |||||||
Washington 10 Storage Complex | A storage system located in Michigan with 94 Bcf of storage capacity, in which DT Midstream owns a 91% interest | |||||||
2029 Notes | Senior unsecured notes of $1.1 billion in aggregate principal amount due June 2029 | |||||||
2031 Notes | Senior unsecured notes of $1.0 billion in aggregate principal amount due June 2031 | |||||||
2032 Notes | Senior secured notes of $600 million in aggregate principal amount due April 2032 |
2
FILING FORMAT
This Form 10-Q should be read in its entirety. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and with Management's Discussion and Analysis included in DT Midstream's 2022 Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain information presented herein includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, and businesses of DT Midstream. Words such as "believe," "expect," "expectations," "plans," "strategy," "prospects," "estimate," "project," "target," "anticipate," "will," "should," "see," "guidance," "outlook," "confident," and other words of similar meaning in connection with a discussion of future operating or financial performance may signify forward-looking statements. Forward-looking statements are not guarantees of future results and conditions, but rather are subject to numerous assumptions, risks, and uncertainties that may cause actual future results to be materially different from those contemplated, projected, estimated, or budgeted. Many factors may impact forward-looking statements of DT Midstream including, but not limited to, the following:
•changes in general economic conditions, including increases in interest rates and the impact of inflation on our business;
•competitive conditions in our industry;
•global supply chain disruptions;
•actions taken by third-party operators, processors, transporters and gatherers;
•changes in expected production from Southwestern Energy and other third parties in our areas of operation;
•demand for natural gas gathering, transmission, storage, transportation and water services;
•the availability and price of natural gas to the consumer compared to the price of alternative and competing fuels;
•competition from the same and alternative energy sources;
•our ability to successfully implement our business plan;
•our ability to complete organic growth projects on time and on budget;
•our ability to finance, complete, or successfully integrate acquisitions;
•the price and availability of debt and equity financing;
•restrictions in our existing and any future credit facilities and indentures;
•energy efficiency and technology trends;
•changing laws regarding cyber security and data privacy, and any cyber security threat or event;
•operating hazards, environmental risks and other risks incidental to gathering, storing and transporting natural gas;
•changes in environmental laws, regulations or enforcement policies, including laws and regulations relating to climate change and greenhouse gas emissions;
•natural disasters, adverse weather conditions, casualty losses and other matters beyond our control;
•the impact of outbreaks of illnesses, epidemics and pandemics, and any related economic effects;
•the ongoing conflict between Russia and Ukraine, including resulting commodity price volatility and risk of cyber-based attacks;
•labor relations and markets, including the ability to attract, hire and retain key employee and contract personnel;
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•large customer defaults;
•changes in tax status, as well as changes in tax rates and regulations;
•ability to develop low carbon business opportunities and deploy greenhouse gas reducing technologies;
•the effects of existing and future laws and governmental regulations;
•changes in insurance markets impacting costs and the level and types of coverage available;
•the timing and extent of changes in commodity prices;
•the suspension, reduction or termination of our customers’ obligations under our commercial agreements;
•disruptions due to equipment interruption or failure at our facilities, or third-party facilities on which our business is dependent;
•the effects of future litigation;
•the Separation as a tax-free Distribution;
•the allocation of tax attributes from DTE Energy Company in accordance with the Tax Matters Agreement; and
•the risks described in our Annual Report on Form 10-K for the year ended December 31, 2022 and our reports and registration statements filed from time to time with the SEC.
The above list of factors is not exhaustive. New factors emerge from time to time. We cannot predict what factors may arise or how such factors may cause actual results to vary materially from those stated in forward-looking statements. Any forward-looking statements speak only as of the date on which such statements are made. We are under no obligation to, and expressly disclaim any obligation to, update or alter our forward-looking statements, whether as a result of new information, subsequent events or otherwise.
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
DT Midstream, Inc.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions, except per share amounts) | |||||||||||
Revenues | |||||||||||
Operating revenues | $ | 220 | $ | 215 | |||||||
Operating Expenses | |||||||||||
Operation and maintenance | 58 | 61 | |||||||||
Depreciation and amortization | 43 | 42 | |||||||||
Taxes other than income | 9 | 8 | |||||||||
Operating Income | 110 | 104 | |||||||||
Other (Income) and Deductions | |||||||||||
Interest expense | 38 | 31 | |||||||||
Earnings from equity method investees | (50) | (36) | |||||||||
Other (income) and expense | (1) | — | |||||||||
Income Before Income Taxes | 123 | 109 | |||||||||
Income Tax Expense | 39 | 25 | |||||||||
Net Income | 84 | 84 | |||||||||
Less: Net Income Attributable to Noncontrolling Interests | 3 | 3 | |||||||||
Net Income Attributable to DT Midstream | $ | 81 | $ | 81 | |||||||
Basic Earnings per Common Share | |||||||||||
Net Income Attributable to DT Midstream | $ | 0.84 | $ | 0.84 | |||||||
Diluted Earnings per Common Share | |||||||||||
Net Income Attributable to DT Midstream | $ | 0.84 | $ | 0.84 | |||||||
Weighted Average Common Shares Outstanding | |||||||||||
Basic | 96.8 | 96.7 | |||||||||
Diluted | 97.4 | 97.0 | |||||||||
See Notes to Consolidated Financial Statements (Unaudited)
5
DT Midstream, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Net Income | $ | 84 | $ | 84 | |||||||
Foreign currency translation and unrealized gain on derivatives, net of tax | 1 | — | |||||||||
Other comprehensive income | 1 | — | |||||||||
Comprehensive income | 85 | 84 | |||||||||
Less: Comprehensive income attributable to noncontrolling interests | 3 | 3 | |||||||||
Comprehensive Income Attributable to DT Midstream | $ | 82 | $ | 81 |
See Notes to Consolidated Financial Statements (Unaudited)
6
DT Midstream, Inc.
Consolidated Statements of Financial Position
(Unaudited)
March 31, | December 31, | ||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
ASSETS | |||||||||||
Current Assets | |||||||||||
Cash and cash equivalents | $ | 95 | $ | 61 | |||||||
Accounts receivable (net of $— allowance for expected credit loss for each period end) | 122 | 161 | |||||||||
Deferred property taxes | 17 | 22 | |||||||||
Prepaid expenses and other | 15 | 18 | |||||||||
249 | 262 | ||||||||||
Investments | |||||||||||
Investments in equity method investees | 2,171 | 2,200 | |||||||||
Property | |||||||||||
Property, plant, and equipment | 4,757 | 4,534 | |||||||||
Accumulated depreciation | (757) | (728) | |||||||||
4,000 | 3,806 | ||||||||||
Other Assets | |||||||||||
Goodwill | 473 | 473 | |||||||||
Long-term notes receivable — related party | 4 | 4 | |||||||||
Operating lease right-of-use assets | 42 | 31 | |||||||||
Intangible assets, net | 2,011 | 2,025 | |||||||||
Other | 31 | 32 | |||||||||
2,561 | 2,565 | ||||||||||
Total Assets | $ | 8,981 | $ | 8,833 |
See Notes to Consolidated Financial Statements (Unaudited)
7
DT Midstream, Inc.
Consolidated Statements of Financial Position
(Unaudited)
March 31, | December 31, | ||||||||||
2023 | 2022 | ||||||||||
(millions, except shares) | |||||||||||
LIABILITIES AND EQUITY | |||||||||||
Current Liabilities | |||||||||||
Accounts payable | $ | 107 | $ | 119 | |||||||
Short-term borrowings | 410 | 330 | |||||||||
Operating lease liabilities | 17 | 16 | |||||||||
Dividends payable | 67 | 62 | |||||||||
Interest payable | 39 | 10 | |||||||||
Property taxes payable | 22 | 29 | |||||||||
Accrued compensation | 6 | 20 | |||||||||
Other | 30 | 28 | |||||||||
698 | 614 | ||||||||||
Long-Term Debt | 3,061 | 3,059 | |||||||||
Other Liabilities | |||||||||||
Deferred income taxes | 959 | 923 | |||||||||
Operating lease liabilities | 28 | 19 | |||||||||
Other | 70 | 64 | |||||||||
1,057 | 1,006 | ||||||||||
Total Liabilities | 4,816 | 4,679 | |||||||||
Commitments and Contingencies (Note 9) | |||||||||||
Stockholders' Equity | |||||||||||
Preferred stock ($0.01 par value, 50,000,000 shares authorized, and no shares issued or outstanding at March 31, 2023 and December 31, 2022) | — | — | |||||||||
Common stock ($0.01 par value, 550,000,000 shares authorized, and 96,890,219 and 96,754,549 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively) | 1 | 1 | |||||||||
Additional paid in capital | 3,470 | 3,469 | |||||||||
Retained earnings | 561 | 547 | |||||||||
Accumulated other comprehensive income (loss) | (9) | (10) | |||||||||
Total DT Midstream Equity | 4,023 | 4,007 | |||||||||
Noncontrolling interests | 142 | 147 | |||||||||
Total Equity | 4,165 | 4,154 | |||||||||
Total Liabilities and Equity | $ | 8,981 | $ | 8,833 |
See Notes to Consolidated Financial Statements (Unaudited)
8
DT Midstream, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Operating Activities | |||||||||||
Net Income | $ | 84 | $ | 84 | |||||||
Adjustments to reconcile Net Income to Net cash and cash equivalents from operating activities: | |||||||||||
Depreciation and amortization | 43 | 42 | |||||||||
Stock-based compensation | 5 | 4 | |||||||||
Amortization of operating lease right-of-use assets | 5 | 5 | |||||||||
Deferred income taxes | 36 | 22 | |||||||||
Earnings from equity method investees | (50) | (36) | |||||||||
Dividends from equity method investees | 68 | 48 | |||||||||
Changes in assets and liabilities: | |||||||||||
Accounts receivable, net | 39 | 50 | |||||||||
Accounts payable | (8) | (2) | |||||||||
Interest payable | 29 | 22 | |||||||||
Other current and noncurrent assets and liabilities | (7) | (5) | |||||||||
Net cash and cash equivalents from operating activities | 244 | 234 | |||||||||
Investing Activities | |||||||||||
Plant and equipment expenditures | (228) | (20) | |||||||||
Distributions from equity method investees | 14 | 2 | |||||||||
Contributions to equity method investees | (2) | — | |||||||||
Notes receivable — third party and related party | — | 1 | |||||||||
Net cash and cash equivalents from (used for) investing activities | (216) | (17) | |||||||||
Financing Activities | |||||||||||
Repayment of long-term debt | — | (3) | |||||||||
Borrowings under the Revolving Credit Facility | 195 | — | |||||||||
Repayment of borrowings under the Revolving Credit Facility | (115) | — | |||||||||
Repurchase of common stock | — | (3) | |||||||||
Distributions to noncontrolling interests | (8) | (4) | |||||||||
Dividends paid on common stock | (62) | (58) | |||||||||
Other financing activities | (4) | — | |||||||||
Net cash and cash equivalents from (used for) financing activities | 6 | (68) | |||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 34 | 149 | |||||||||
Cash and Cash Equivalents at Beginning of Period | 61 | 132 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 95 | $ | 281 | |||||||
Supplemental disclosure of cash information | |||||||||||
Cash paid for: | |||||||||||
Interest, net of interest capitalized | $ | 6 | $ | 6 | |||||||
Income taxes | — | 1 | |||||||||
Supplemental disclosure of non-cash investing and financing activities | |||||||||||
Plant and equipment expenditures in accounts payable and other accruals | $ | 95 | $ | 9 |
See Notes to Consolidated Financial Statements (Unaudited)
9
DT Midstream, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||
(dollars in millions, shares in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2022 | 96,755 | $ | 1 | $ | 3,469 | $ | 547 | $ | (10) | $ | 147 | $ | 4,154 | ||||||||||||||||||||||||||||
Net Income | — | — | — | 81 | — | 3 | 84 | ||||||||||||||||||||||||||||||||||
Dividends declared on common stock ($0.69 per common share) | — | — | — | (67) | — | — | (67) | ||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (8) | (8) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 135 | — | 1 | — | — | — | 1 | ||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | 1 | — | 1 | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2023 | 96,890 | $ | 1 | $ | 3,470 | $ | 561 | $ | (9) | $ | 142 | $ | 4,165 | ||||||||||||||||||||||||||||
Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||
(dollars in millions, shares in thousands) | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2021 | 96,734 | $ | 1 | $ | 3,450 | $ | 431 | $ | (10) | $ | 149 | $ | 4,021 | ||||||||||||||||||||||||||||
Net Income | — | — | — | 81 | — | 3 | 84 | ||||||||||||||||||||||||||||||||||
Dividends declared on common stock ($0.64 per common share) | — | — | — | (62) | — | — | (62) | ||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | — | — | — | — | — | (4) | (4) | ||||||||||||||||||||||||||||||||||
Stock-based compensation | 57 | — | 3 | (1) | — | — | 2 | ||||||||||||||||||||||||||||||||||
Repurchase of common stock | (57) | — | — | (3) | — | — | (3) | ||||||||||||||||||||||||||||||||||
Balance, March 31, 2022 | 96,734 | $ | 1 | $ | 3,453 | $ | 446 | $ | (10) | $ | 148 | $ | 4,038 | ||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited)
10
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 — DESCRIPTION OF THE BUSINESS AND BASIS OF PRESENTATION
Description of the Business
DT Midstream is an owner, operator, and developer of an integrated portfolio of natural gas midstream assets. The Company provides multiple, integrated natural gas services to customers through two segments: (i) Pipeline, which includes interstate pipelines, intrastate pipelines, storage systems, lateral pipelines including related treatment plants and compression and surface facilities, and (ii) Gathering, which includes gathering systems, related treatment plants, and compression and surface facilities. DT Midstream's Pipeline segment also includes joint venture interests in equity method investees which own and operate interstate pipelines that connect to DT Midstream’s wholly owned assets.
DT Midstream’s core assets strategically connect key demand centers in the Midwestern U.S., Eastern Canada and Northeastern U.S. regions to the premium production areas of the Marcellus/Utica natural gas formation in the Appalachian Basin, and connect key demand centers and LNG export terminals in the Gulf Coast region to premium production areas of the Haynesville natural gas formation.
Basis of Presentation
The DT Midstream Consolidated Financial Statements and Notes to Consolidated Financial Statements are prepared under GAAP. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from DT Midstream’s estimates. DT Midstream believes the assumptions underlying these financial statements are reasonable. Certain prior-period amounts have been reclassified to conform to current-year presentation.
In DT Midstream's opinion, the accompanying unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, necessary to present a fair statement of our financial position as of March 31, 2023, results of operations for the three months ended March 31, 2023 and 2022, statement of changes in stockholders' equity for the three months ended March 31, 2023 and 2022, and cash flows for the three months ended March 31, 2023 and 2022. The balance sheet as of December 31, 2022 was derived from audited annual financial statements but does not include all disclosures required by GAAP. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2023. The Consolidated Financial Statements should be read in conjunction with DT Midstream Consolidated Financial Statements and Notes to Consolidated Financial Statements included in DT Midstream's 2022 Annual Report on Form 10-K.
Principles of Consolidation
DT Midstream consolidates all majority-owned subsidiaries and investments in entities in which we have a controlling influence. Non-majority owned investments are accounted for using the equity method of accounting when DT Midstream is able to significantly influence the operating policies of the investee. When DT Midstream does not influence the operating policies of an investee, the equity investment is measured at fair value, if readily determinable, or if not readily determinable, at cost less impairment, if applicable. DT Midstream eliminates all intercompany balances and transactions.
DT Midstream evaluates whether an entity is a VIE whenever reconsideration events occur. DT Midstream consolidates VIEs for which we are the primary beneficiary. If DT Midstream is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, DT Midstream considers all relevant facts and circumstances, including: the power, through voting or similar rights, to direct the activities of the VIE that most significantly impact the VIE's economic performance and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE. DT Midstream performs ongoing reassessments of all VIEs to determine if the primary beneficiary status has changed.
DT Midstream owns an 85% interest in the Stonewall Gas Gathering VIE and is the primary beneficiary, therefore Stonewall Gas Gathering is consolidated. DT Midstream owns a 50% interest in the South Romeo VIE and is the primary beneficiary, therefore South Romeo is consolidated.
11
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The following table summarizes the major line items in the Consolidated Statements of Financial Position for consolidated VIEs as of March 31, 2023 and December 31, 2022. All assets and liabilities of a consolidated VIE are presented where it has been determined that a consolidated VIE has either (1) assets that can be used only to settle obligations of the VIE or (2) liabilities for which creditors do not have recourse to the general credit of the primary beneficiary. The assets and liabilities of consolidated VIEs that meet the definition of a business and whose assets can be used for purposes other than the settlement of the VIEs' obligations have been excluded from the table below.
Amounts for consolidated VIEs are as follows:
March 31, | December 31, | ||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
ASSETS (a) | |||||||||||
Cash | $ | 3 | $ | 27 | |||||||
Accounts receivable | 9 | 9 | |||||||||
Other current assets | 1 | 3 | |||||||||
Intangible assets, net | 494 | 498 | |||||||||
Property, plant and equipment, net | 400 | 403 | |||||||||
Goodwill | 25 | 25 | |||||||||
$ | 932 | $ | 965 | ||||||||
LIABILITIES (a) | |||||||||||
Accounts payable and other current liabilities | $ | 3 | $ | 4 | |||||||
Other noncurrent liabilities | 4 | 4 | |||||||||
$ | 7 | $ | 8 |
_____________________________________
(a)Amounts shown are 100% of the consolidated VIEs' assets and liabilities.
Related Parties
Transactions between DT Midstream and its equity method investees have been presented as related party transactions in the accompanying Consolidated Financial Statements.
Equity Method Investments
Investments in non-consolidated affiliates that are not controlled by DT Midstream, but over which we have significant influence, are accounted for using the equity method of accounting. Under the equity method, investments are recorded at historical cost as an asset and adjusted for capital contributions, dividends and distributions received, and the Company's share of the investee's earnings or losses, which are recorded as earnings from equity method investees on the Consolidated Statements of Operations. DT Midstream's equity method investments are periodically evaluated for certain factors that may be indicative of other-than-temporary impairment. As of March 31, 2023 and December 31, 2022, DT Midstream’s carrying amounts of investments in equity method investees exceeded our share of the underlying equity in the net assets of the investees by $364 million and $368 million, respectively. The difference will be amortized over the life of the underlying assets. As of March 31, 2023 and December 31, 2022, DT Midstream's consolidated retained earnings balance includes undistributed earnings from equity method investments of $11 million and $43 million, respectively.
Equity method investees are described below:
Investments As of | % Owned As of | |||||||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||||||||||||
Equity Method Investee | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
(millions) | ||||||||||||||||||||||||||
NEXUS | $ | 1,294 | $ | 1,313 | 50% | 50% | ||||||||||||||||||||
Vector Pipeline | 137 | 135 | 40% | 40% | ||||||||||||||||||||||
Millennium Pipeline | 740 | 752 | 52.5% | 52.5% | ||||||||||||||||||||||
Total investments in equity method investees | $ | 2,171 | $ | 2,200 |
12
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
In October 2022, DT Midstream closed on the $552 million purchase of an additional 26.25% ownership interest in Millennium Pipeline from National Grid. The transaction was financed with cash on hand and available capacity under the Company's Revolving Credit Facility. The purchase constituted National Grid's full ownership interests in Millennium Pipeline, and brought DT Midstream's total ownership interest in Millennium Pipeline to 52.5%. DT Midstream accounts for its ownership interest in Millennium Pipeline under the equity method of accounting. Millennium is not a VIE and DT Midstream does not have a controlling interest due to shared control with its partner over all of Millennium's significant business activities. DT Midstream’s carrying amount of the Millennium Pipeline investment exceeded our share of the underlying equity in the net assets of the Millennium Pipeline by $343 million on the acquisition date.
The following table presents summarized financial information of DT Midstream's non-consolidated equity method investees. The amounts included below represent 100% of the results of continuing operations of such entities, including the portion owned by other parties.
Summarized income statement data is as follows:
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Operating revenues | $ | 211 | $ | 198 | |||||||
Operating expenses | 94 | 94 | |||||||||
Net Income | $ | 110 | $ | 95 |
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and highly liquid money market investments with remaining maturities of three months or less, when purchased. Cash equivalents are stated at cost, which approximates fair value.
Financing Receivables
Financing receivables are primarily composed of trade accounts receivable and notes receivable, which are stated at net realizable value.
DT Midstream regularly monitors the credit quality of its financing receivables by reviewing counterparty credit quality indicators and monitoring for triggering events, such as a credit rating downgrade or bankruptcy. DT Midstream has three internal grades of credit quality, with internal grade 1 as the lowest risk and internal grade 3 as the highest risk. The related credit quality indicators and risk ratings utilized to develop the internal grades have been updated through March 31, 2023. As of March 31, 2023, the Notes receivable — related party of $4 million, which originated prior to 2021, was classified as internal grade 1. There are no notes receivable on nonaccrual status and no past due financing receivables as of March 31, 2023.
For trade accounts receivable, the customer allowance for expected credit loss is calculated based on specific review of future collections based on receivable balances generally in excess of 30 days. Existing and future economic conditions, historical loss rates, customer trends and other relevant factors that may affect our ability to collect are also considered. Receivables are written off on a specific identification basis and determined based on the particular circumstances of the associated receivable. Uncollectible expense (recovery) was zero for the three months ended March 31, 2023 and 2022.
Our collections on accounts receivable from customers are current, and no material rate of historical loss was noted, which resulted in no allowance for expected credit loss as of March 31, 2023. Any balance would be shown as a deduction from the respective financing receivable's balance in the Consolidated Statements of Financial Position.
Operation and Maintenance
Operation and maintenance is primarily comprised of costs for labor and employee benefits, outside services, materials, compression, purchased natural gas, operating lease costs, office costs, and other operating and maintenance costs.
13
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 3 — GOODWILL
DT Midstream has goodwill that resulted from business combinations. The carrying value of goodwill is evaluated for impairment on an annual basis or whenever events or circumstances indicate that the value of goodwill may be impaired. We performed our prior year annual impairment test as of October 1, 2022 and determined that the estimated fair value of each reporting unit exceeded its carrying value, and no impairment existed. No additions, impairments or other changes occurred during the three months ended March 31, 2023.
The following is the summary of the carrying amount of goodwill:
March 31, | December 31, | ||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Pipeline | $ | 53 | $ | 53 | |||||||
Gathering | 420 | 420 | |||||||||
Total | $ | 473 | $ | 473 |
While we believe the estimates and assumptions in the estimated fair value are reasonable, the 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. If current expectations of future long-term growth are not met or market factors outside of our control change, such as U.S. Treasury Rates, a sustained further decline in our market capitalization, or a further decline in midstream industry transaction multiples, this may lead to a goodwill impairment in the future.
NOTE 4 — REVENUE
Disaggregation of Revenue
The following is a summary of revenues disaggregated by segment:
__________________________________
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Pipeline (a) | $ | 85 | $ | 77 | |||||||
Gathering | 135 | 138 | |||||||||
Total operating revenues | $ | 220 | $ | 215 |
(a)Includes revenues outside the scope of Topic 606 primarily related to contracts accounted for as leases of $1 million and $2 million for the three months ended March 31, 2023 and 2022, respectively.
14
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Nature of Services
DT Midstream primarily provides two types of revenue services: firm service and interruptible service. Firm service revenue contracts provide for fixed revenue commitments regardless of actual volumes of natural gas that flow, which leads to more stable operating performance, revenues and cash flows and limits our exposure to natural gas price fluctuations. Firm service revenue contracts are typically long-term and structured using fixed demand charges or MVCs with fixed deficiency fee rates. Contracts structured using fixed demand charges contain a performance obligation of a stand-ready series of distinct services that are substantially the same with the same pattern of transfer to the customer, therefore revenue is recognized ratably over time. Contracts structured using MVCs with fixed deficiency fee rates require customers to transport or store a minimum volume of natural gas over a specified time period. If a customer fails to meet its MVCs for the specified time period, the contract consideration includes a fixed rate for the actual volumes transported, gathered or stored, and a deficiency fee for the shortfall between the MVCs and the actual volumes transported, gathered or stored. If a customer exceeds its MVC for the specified time period, the contract consideration is based on fixed rates for the actual volumes transported, gathered or stored. The contract consideration is allocated to each distinct monthly performance obligation, consistent with the allocation objective and based upon the level of effort required to satisfy the service obligation. Revenues are generally recognized over time based on the output measure of natural gas volumes transported, gathered or stored, with the recognition of the deficiency fee revenue in the period when it is known the customer cannot make up the deficient volumes in the specified time period. Interruptible service revenue contracts typically contain fixed rates, with total consideration dependent on actual natural gas volumes that flow. Interruptible service revenues are recognized over time based on the output measure of natural gas volumes transported, gathered or stored. Certain of our gathering contracts allow for the recovery of production-related operating expenses, which are recorded as revenue and operating expense.
Contract Liabilities
The following is a summary of contract liability activity:
2023 | |||||
(millions) | |||||
Balance at January 1 | $ | 32 | |||
Increases due to cash received or receivable, excluding amounts recognized as revenue during the period | 5 | ||||
Revenue recognized that was included in the balance at the beginning of the period | (1) | ||||
Balance at March 31 | $ | 36 |
The contract liabilities at DT Midstream generally represent amounts paid by customers for which the associated performance obligation has not yet been satisfied. Contract liabilities associated with these services are recognized upon delivery of the service to the customer.
The following table presents contract liability amounts as of March 31, 2023 that are expected to be recognized as revenue in future periods:
(millions) | |||||
Remainder of 2023 | $ | 3 | |||
2024 | 4 | ||||
2025 | 5 | ||||
2026 | 5 | ||||
2027 | 5 | ||||
2028 and thereafter | 14 | ||||
Total | $ | 36 |
15
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
Transaction Price Allocated to the Remaining Performance Obligations
In accordance with optional exemptions available under Topic 606, DT Midstream does not disclose the value of unsatisfied performance obligations for (1) contracts with an original expected length of one year or less, (2) with the exception of fixed consideration, contracts for which the amount of revenue recognized depends upon DT Midstream's invoices for actual volumes transported, gathered or stored, and (3) contracts for which variable consideration relates entirely to an unsatisfied performance obligation.
Such contracts consist of various types of performance obligations, including providing midstream services. Contracts with variable volumes and/or variable pricing, including those with pricing provisions tied to a consumer price or other index, have also been excluded as the related contract consideration is variable at the contract inception. Contract lengths vary from cancellable to multi-year.
The following table presents revenue amounts related to fixed consideration associated with unsatisfied performance obligations as of March 31, 2023 that are expected to be recognized as revenue in future periods:
(millions) | |||||
Remainder of 2023 | $ | 79 | |||
2024 | 96 | ||||
2025 | 86 | ||||
2026 | 57 | ||||
2027 | 35 | ||||
2028 and thereafter | 50 | ||||
Total | $ | 403 |
Costs to Obtain or Fulfill a Contract
DT Midstream recognizes an asset from the costs incurred to obtain a revenue contract only if it expects to recover those costs. In addition, the costs to fulfill a revenue contract are capitalized if the costs are specifically identifiable to a revenue contract, would result in enhancing resources that will be used in satisfying performance obligations in the future, and are expected to be recovered. These capitalized costs are amortized on a systematic basis consistent with the pattern of transfer of the services to which such costs relate.
As of both March 31, 2023 and December 31, 2022, the Company had capitalized costs to obtain or fulfill a contract of $19 million, which are included in other current assets and other noncurrent assets in the accompanying Consolidated Statements of Financial Position. During the three months ended March 31, 2023 and 2022, we recognized less than $1 million of amortization expense related to such capitalized costs.
16
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5 — EARNINGS PER SHARE AND DIVIDENDS
Basic earnings per share is calculated by dividing Net Income attributable to DT Midstream by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the dilution that would occur if any potentially dilutive instruments were exercised or converted into common shares. Restricted stock units and performance shares, including dividend equivalents on those grants, are potentially dilutive and, if dilutive, are included in the determination of weighted average shares outstanding. Restricted stock units and performance shares do not receive cash dividends, as such, these awards are not considered participating securities.
The following is a reconciliation of DT Midstream's basic and diluted earnings per share calculation:
Three Months Ended | |||||||||||
2023 | 2022 | ||||||||||
(millions, except per share amounts) | |||||||||||
Basic and Diluted Earnings per Common Share | |||||||||||
Net Income Attributable to DT Midstream | $ | 81 | $ | 81 | |||||||
Average number of common shares outstanding — basic | 96.8 | 96.7 | |||||||||
Incremental shares attributable to: | |||||||||||
Average dilutive restricted stock units and performance share awards | 0.6 | 0.3 | |||||||||
Average number of common shares outstanding — diluted | 97.4 | 97.0 | |||||||||
Basic Earnings per Common Share | $ | 0.84 | $ | 0.84 | |||||||
Diluted Earnings per Common Share | $ | 0.84 | $ | 0.84 |
DT Midstream declared the following cash dividends:
Dividends Declared | Dividend Amount | Dividend Payment Date | ||||||||||||||||||
(quarter ended) | (per-share) | (millions) | ||||||||||||||||||
2022 | ||||||||||||||||||||
March 31 | $ | 0.64 | $ | 62 | April 2022 | |||||||||||||||
June 30 | $ | 0.64 | $ | 62 | July 2022 | |||||||||||||||
September 30 | $ | 0.64 | $ | 62 | October 2022 | |||||||||||||||
December 31 | $ | 0.64 | $ | 62 | January 2023 | |||||||||||||||
2023 | ||||||||||||||||||||
March 31 | $ | 0.69 | $ | 67 | April 2023 |
NOTE 6 — INCOME TAXES
Effective Tax Rates
DT Midstream records income taxes during the interim period using an estimated annual effective tax rate ("ETR") and recognizes specific events discretely as they occur.
The interim period ETRs of DT Midstream are 32% and 23% for the three months ended March 31, 2023 and 2022, respectively. The difference between the interim ETRs and federal statutory rate of 21% is primarily related to state income taxes. The increase in the interim ETRs for the comparative period is driven by remeasurements of state deferred taxes for changes in tax status and apportionment rates.
17
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7 — FAIR VALUE
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in a principal or most advantageous market. Fair value is a market-based measurement that is determined based on inputs, which refer broadly to assumptions that market participants use in pricing assets or liabilities. These inputs can be readily observable, market corroborated, or generally unobservable inputs. DT Midstream makes certain assumptions it believes that market participants would use in pricing assets or liabilities, including assumptions about risk, and the risks inherent in the inputs to valuation techniques. DT Midstream believes it uses valuation techniques that maximize the use of observable market-based inputs and minimize the use of unobservable inputs.
A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value in three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. All assets and liabilities are required to be classified in their entirety based on the lowest level of input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input may require judgment considering factors specific to the asset or liability and may affect the valuation of the asset or liability and its placement within the fair value hierarchy. DT Midstream classifies fair value balances based on the fair value hierarchy defined as follows:
•Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that DT Midstream has the ability to access as of the reporting date.
•Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the assets or liabilities or indirectly observable through corroboration with observable market data.
•Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.
Fair Value of Financial Instruments
The following table presents the carrying amount and fair value of financial instruments:
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
Carrying | Fair Value | Carrying | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||
Amount | Level 1 | Level 2 | Level 3 | Amount | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||||||||||||||
(millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Cash equivalents (a) | $ | 60 | $ | — | $ | 60 | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||||||||||
Long-term notes receivable — related party | 4 | — | — | 4 | 4 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
Short-term borrowings (a) | 410 | — | 410 | — | 330 | — | 330 | — | |||||||||||||||||||||||||||||||||||||||
Long-term debt (b) | $ | 3,061 | $ | — | $ | 2,776 | $ | — | $ | 3,059 | $ | — | $ | 2,701 | $ | — |
(a)Short-term borrowings and money market cash equivalents are stated at cost, which approximates fair value.
(b)Carrying value represents principal of $3,099 million, net of unamortized debt discounts and issuance costs.
18
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 8 — DEBT
Long-Term Debt
DT Midstream's long-term debt outstanding included:
Maturity | March 31, | December 31, | ||||||||||||||||||||||||||||||
Title | Type | Interest Rate | Date (d) | 2023 | 2022 | |||||||||||||||||||||||||||
(millions) | ||||||||||||||||||||||||||||||||
2029 Notes | Senior Notes (b) | 4.125% | 2029 | $ | 1,100 | $ | 1,100 | |||||||||||||||||||||||||
2031 Notes | Senior Notes (b) | 4.375% | 2031 | 1,000 | 1,000 | |||||||||||||||||||||||||||
2032 Notes | Senior Secured Notes (c) | 4.300% | 2032 | 600 | 600 | |||||||||||||||||||||||||||
Term Loan Facility | Term Loan Facility | Variable (a) | 2028 | 399 | 399 | |||||||||||||||||||||||||||
Long-term debt principal | 3,099 | 3,099 | ||||||||||||||||||||||||||||||
Unamortized debt discount | (3) | (3) | ||||||||||||||||||||||||||||||
Unamortized debt issuance costs | (35) | (37) | ||||||||||||||||||||||||||||||
Long-term debt | $ | 3,061 | $ | 3,059 |
(a) Variable rate is LIBOR plus 2.00%, where LIBOR will not be less than 0.50%. The Term Loan Facility includes $399 million with a one-month LIBOR interest period which ended April 28, 2023.
(b) Interest payable semi-annually in arrears each June 15 and December 15.
(c) Interest payable semi-annually in arrears each April 15 and October 15.
(d) DT Midstream does not have any scheduled debt maturities until 2028.
Short-Term Credit Arrangements and Borrowings
The following table presents the availability under the Revolving Credit Facility:
March 31, | |||||
2023 | |||||
(millions) | |||||
Total availability | |||||
Revolving Credit Facility, expiring October 2027 | $ | 1,000 | |||
Amounts outstanding | |||||
Revolving Credit Facility borrowings | 410 | ||||
Letters of credit | 39 | ||||
449 | |||||
Net availability | $ | 551 |
Borrowings under the Revolving Credit Facility are used for general corporate purposes, acquisitions, and letter of credit issuances to support DT Midstream's operations and liquidity. Revolving Credit Facility related issuance and amendment costs, net of amortization, were $7 million and $8 million, as of March 31, 2023 and December 31, 2022, respectively. These costs are included in Other noncurrent assets on DT Midstream's Consolidated Statements of Financial Position and are being amortized over the remaining term of the Revolving Credit Facility.
19
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
The Credit Agreement covering the Term Loan Facility and Revolving Credit Facility includes financial covenants that DT Midstream must maintain. These covenants restrict the ability of DT Midstream and its subsidiaries to incur additional indebtedness and guarantee indebtedness, create or incur liens, engage in mergers, consolidations, liquidations or dissolutions, sell, transfer or otherwise dispose of assets, make investments, acquisitions, loans or advances, pay dividends and distributions or repurchase capital stock, prepay, redeem or repurchase certain junior indebtedness, enter into agreements that limit the ability of the restricted subsidiaries to make distributions to DT Midstream or the ability of DT Midstream and its restricted subsidiaries to incur liens on assets and enter into certain transactions with affiliates. The Term Loan Facility requires the maintenance of a minimum debt service coverage ratio of 1.1 to 1, and the Revolving Credit Facility requires maintenance of (i) a maximum consolidated net leverage ratio of 5 to 1, and (ii) a minimum interest coverage ratio of no less than 2.5 to 1. The debt service coverage ratio means the ratio of annual consolidated EBITDA to debt service, as defined in the Credit Agreement. The consolidated net leverage ratio means the ratio of net debt determined in accordance with GAAP to annual consolidated EBITDA. The interest coverage ratio means the ratio of annual consolidated EBITDA to annual interest expense, as defined in the Credit Agreement. At March 31, 2023, the debt service coverage ratio, the consolidated net leverage ratio and the interest coverage ratio was 6.9 to 1, 3.7 to 1 and 6.0 to 1, respectively, and DT Midstream was in compliance with these financial covenants.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
From time to time, DT Midstream is subject to legal, administrative and environmental proceedings before various courts, arbitration panels and governmental agencies concerning claims arising in the ordinary course of business. These proceedings include certain contract disputes, additional environmental reviews and investigations, audits and pending judicial matters. DT Midstream cannot predict the final disposition of such proceedings. DT Midstream regularly reviews legal matters and records provisions for claims that we can estimate and are considered probable of loss. The amount or range of reasonably possible losses is not anticipated to, either individually or in the aggregate, materially adversely affect DT Midstream’s business, financial condition and results of operations.
Guarantees
In certain limited circumstances, DT Midstream enters into contractual guarantees. DT Midstream may guarantee another entity's obligation in the event it fails to perform and may provide guarantees in certain indemnification agreements. DT Midstream did not have any guarantees of other parties' obligations as of March 31, 2023.
Vector Pipeline Line of Credit
DT Midstream is the lender under a revolving term credit facility to Vector Pipeline, the borrower, in the amount of Canadian $70 million. The credit facility was executed in response to the passage of Canadian regulations requiring oil and gas pipelines to demonstrate their financial ability to respond to a catastrophic event and exists for the sole purpose of satisfying these regulations. Vector Pipeline may only draw upon the facility if the funds are required to respond to a catastrophic event. The maximum potential payout at March 31, 2023 is USD $52 million. The funding of a loan under the terms of the credit facility is considered remote.
Environmental Contingencies
In order to comply with certain state environmental regulations, DT Midstream has an obligation to restore pipeline right-of-way slope failures that may arise in the ordinary course of business in the Utica and Marcellus formations. Slope restoration expenditures are typically capital in nature. As of both March 31, 2023 and December 31, 2022, DT Midstream had accrued contingent liabilities of $19 million for future slope restoration expenditures. The accrual is included in Other current liabilities and Other liabilities in the Consolidated Statements of Financial Position. DT Midstream believes the accrued amounts are sufficient to cover estimated future expenditures.
20
DT Midstream, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 10 — SEGMENT AND RELATED INFORMATION
DT Midstream sets strategic goals, allocates resources, and evaluates performance based on the following structure:
The Pipeline segment owns and operates interstate and intrastate natural gas pipelines, storage systems, and natural gas gathering lateral pipelines. The segment also has interests in equity method investees that own and operate interstate natural gas pipelines. The Pipeline segment is also engaged in the transportation and storage of natural gas for intermediate and end user customers. During the three months ended March 31, 2023, DT Midstream completed the conversion of the Michigan Gathering System and began providing services under a new long-term dry gas transmission contract. During the three months ended March 31, 2023, the Michigan Gathering System financial results are presented in the Pipeline segment. The prior period comparative activity was for gathering services and therefore was not revised.
The Gathering segment owns and operates gas gathering systems. The segment is engaged in collecting natural gas from points at or near customers’ wells for delivery to plants for treating, to gathering pipelines for further gathering, or to pipelines for transportation, as well as associated ancillary services, including compression, dehydration, gas treatment, water impoundment, water transportation, water disposal, and sand mining.
Inter-segment billing for goods and services exchanged between segments is based upon contracted prices of the provider. Inter-segment billings were not significant for the three months ended March 31, 2023 and 2022.
The following table presents financial data by business segment:
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Operating Revenues | |||||||||||
Pipeline | $ | 85 | $ | 77 | |||||||
Gathering | 135 | 138 | |||||||||
Total | $ | 220 | $ | 215 |
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Net Income Attributable to DT Midstream by Segment | |||||||||||
Pipeline | $ | 57 | $ | 48 | |||||||
Gathering | 24 | 33 | |||||||||
Total | $ | 81 | $ | 81 |
NOTE 11 — SUBSEQUENT EVENT
NEXUS Financing
On April 6, 2023, NEXUS priced $750 million of senior unsecured notes with a weighted-average coupon rate of 5.52%. On April 28, 2023, NEXUS closed the notes offering, and by mid-May DT Midstream will receive a distribution from NEXUS for $375 million, less fees and expenses. DT Midstream intends to use the proceeds from the distribution to fund organic growth and repay borrowings outstanding under our Revolving Credit Facility.
21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 the DT Midstream 2022 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 that connect to our wholly owned assets.
Our core assets strategically connect key demand centers in the Midwestern U.S., Eastern Canada and Northeastern U.S. regions to the premium production areas of the Marcellus/Utica natural gas formation in the Appalachian Basin, and connect key demand centers and LNG export terminals in the Gulf Coast region to premium production areas of the Haynesville natural gas formation.
We have an established history of stable, long-term growth with contractual cash flows from customers that include
natural gas producers, local distribution companies, electric power generators, industrials, and national marketers.
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 we are executing on a plan to achieve net zero carbon emissions by 2050. Our strategy is premised on the following principles:
•disciplined capital deployment in assets supported by strong fundamentals;
•capitalize on asset integration and utilization opportunities;
•pursue economically attractive opportunities;
•grow cash flows supported by long-term firm revenue contracts; and
•provide exceptional service to our customers.
22
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.
For purposes of the following discussion, any increases or decreases refer to the comparison of the three months ended March 31, 2023 to the three months ended December 31, 2022, and the three months ended March 31, 2023 to the three months ended March 31, 2022, as applicable.
The following table summarizes our consolidated financial results:
Three Months Ended | |||||||||||||||||
March 31, | December 31, | March 31, | |||||||||||||||
2023 | 2022 | 2022 | |||||||||||||||
(millions, except per share amounts) | |||||||||||||||||
Operating revenues | $ | 220 | $ | 243 | $ | 215 | |||||||||||
Net Income Attributable to DT Midstream | 81 | 85 | 81 | ||||||||||||||
Diluted Earnings per Common Share | $ | 0.84 | $ | 0.88 | $ | 0.84 |
Three Months Ended | |||||||||||||||||
March 31, | December 31, | March 31, | |||||||||||||||
2023 | 2022 | 2022 | |||||||||||||||
(millions) | |||||||||||||||||
Net Income Attributable to DT Midstream by Segment | |||||||||||||||||
Pipeline | $ | 57 | $ | 58 | $ | 48 | |||||||||||
Gathering | 24 | 27 | 33 | ||||||||||||||
Total | $ | 81 | $ | 85 | $ | 81 |
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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. During the three months ended March 31, 2023, DT Midstream completed the conversion of the Michigan Gathering System and began providing services under a new long-term dry gas transmission contract. During the three months ended March 31, 2023, the Michigan Gathering System financial results are presented in the Pipeline segment. The prior period comparative activity was for gathering services and therefore was not revised.
Pipeline results and outlook are discussed below:
Three Months Ended | |||||||||||||||||
March 31, | December 31, | March 31, | |||||||||||||||
2023 | 2022 | 2022 | |||||||||||||||
(millions) | |||||||||||||||||
Operating revenues | $ | 85 | $ | 92 | $ | 77 | |||||||||||
Operation and maintenance | 11 | 17 | 13 | ||||||||||||||
Depreciation and amortization | 16 | 17 | 16 | ||||||||||||||
Taxes other than income | 4 | 2 | 4 | ||||||||||||||
Operating Income | 54 | 56 | 44 | ||||||||||||||
Interest expense | 16 | 16 | 13 | ||||||||||||||
Earnings from equity method investees | (50) | (43) | (36) | ||||||||||||||
Income Tax Expense | 28 | 22 | 16 | ||||||||||||||
Net Income | 60 | 61 | 51 | ||||||||||||||
Less: Net Income Attributable to Noncontrolling Interests | 3 | 3 | 3 | ||||||||||||||
Net Income Attributable to DT Midstream | $ | 57 | $ | 58 | $ | 48 |
Operating revenues decreased $7 million compared to the three months ended December 31, 2022 primarily due to lower short-term contract rates on LEAP of $3 million, lower estimated recovery of operational flow order fees of $4 million which is offset in operation and maintenance expense, and lower Stonewall Gas Gathering volumes of $2 million, partially offset by new transmission service contracts at the Michigan Gathering System of $2 million. Operating revenues increased $8 million compared to the three months ended March 31, 2022 primarily due to higher short-term contracting at Washington 10 Storage Complex of $4 million, higher volumes on Stonewall Gas Gathering of $3 million, and new transmission service contracts at the Michigan Gathering System of $2 million.
Operation and maintenance expense decreased $6 million compared to the three months ended December 31, 2022 primarily due to lower operational flow order fees of $4 million and lower maintenance on Bluestone.
Interest expense increased $3 million compared to the three months ended March 31, 2022 primarily due to interest related to the 2032 Notes, higher outstanding borrowings under the Revolving Credit Facility, and higher interest rates on the Term Loan Facility. This increase was partially offset by a lower balance on the Term Loan Facility and higher capitalized interest due to additional construction in progress during 2023.
Earnings from equity method investees increased $7 million compared to the three months ended December 31, 2022 primarily due to a 2022 goodwill impairment at Generation Pipeline of $7 million. Earnings from equity method investees increased $14 million compared to the three months ended March 31, 2022 primarily due to the higher ownership percentage in Millennium of $8 million, and higher contract rates and additional customers at NEXUS of $5 million.
Income tax expense increased $6 million compared to the three months ended December 31, 2022 and $12 million compared to the three months ended March 31, 2022, respectively, primarily due to a higher effective tax rate driven by the remeasurement of state deferred taxes in 2023 and an increase in Income before income taxes. See Note 6, "Income Taxes" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
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Pipeline 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 further expansion at the Haynesville System (LEAP) and Stonewall Gas Gathering, new contracts with higher rates on the Washington 10 Storage Complex, and additional growth related to our equity method investments.
Gathering
The Gathering segment includes gathering systems, related treatment plants and compression and surface facilities. Gathering results and outlook are discussed below:
Three Months Ended | |||||||||||||||||
March 31, | December 31, | March 31, | |||||||||||||||
2023 | 2022 | 2022 | |||||||||||||||
(millions) | |||||||||||||||||
Operating revenues | $ | 135 | $ | 151 | $ | 138 | |||||||||||
Operation and maintenance | 47 | 61 | 48 | ||||||||||||||
Depreciation and amortization | 27 | 27 | 26 | ||||||||||||||
Taxes other than income | 5 | 3 | 4 | ||||||||||||||
Operating Income | 56 | 60 | 60 | ||||||||||||||
Interest expense | 22 | 22 | 18 | ||||||||||||||
Interest income | — | (1) | — | ||||||||||||||
Other (income) and expense | (1) | (1) | — | ||||||||||||||
Income Tax Expense | 11 | 13 | 9 | ||||||||||||||
Net Income Attributable to DT Midstream | $ | 24 | $ | 27 | $ | 33 |
Operating revenues decreased $16 million compared to the three months ended December 31, 2022 primarily due to lower Blue Union revenues of $14 million driven by lower recoveries of production-related operating expenses of $9 million, lower gathering volumes of $2 million, and lower firm revenue of $3 million. Operating revenues decreased $3 million compared to the three months ended March 31, 2022 primarily due to lower Blue Union revenues of $5 million and lower Susquehanna Gathering System volumes of $2 million, partially offset by higher Appalachia Gathering System volumes of $4 million. Lower Blue Union revenues were driven by lower volumes and lower recoveries of production-related operating expenses, partially offset by new contracts.
Operation and maintenance expense decreased $14 million compared to the three months ended December 31, 2022 primarily due to lower production-related operating expenses and planned maintenance at Blue Union of $11 million and lower production-related operating expenses at the Appalachia Gathering System of $2 million.
Interest expense increased $4 million compared to the three months ended March 31, 2022 primarily due to interest related to the 2032 Notes, higher outstanding borrowings under the Revolving Credit Facility, and higher interest rates on the Term Loan Facility. The increase was partially offset by a lower balance on the Term Loan Facility and higher capitalized interest due to additional construction in progress during 2023.
Gathering Outlook
We believe our long-term agreements with producers and the quality of the natural gas reserves in the Marcellus/Utica and Haynesville formations 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 further expansion at the Haynesville System (Blue Union) and the Appalachia Gathering System.
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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 2023 of approximately $605 million to $690 million.
ENVIRONMENTAL MATTERS
We are subject to extensive U.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.
CAPITAL RESOURCES AND LIQUIDITY
Cash Requirements
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.
Three Months Ended | |||||||||||
March 31, | |||||||||||
2023 | 2022 | ||||||||||
(millions) | |||||||||||
Cash and Cash Equivalents at Beginning of Period | $ | 61 | $ | 132 | |||||||
Net cash and cash equivalents from operating activities | 244 | 234 | |||||||||
Net cash and cash equivalents from (used for) investing activities | (216) | (17) | |||||||||
Net cash and cash equivalents from (used for) financing activities | 6 | (68) | |||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 34 | 149 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 95 | $ | 281 |
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 under interruptible service revenue contracts, 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 leads to more stable operating performance, revenues and cash flows and limits our exposure to natural gas price fluctuations.
Net cash and cash equivalents from operating activities increased $10 million in the three months ended March 31, 2023, primarily due to 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, stock-based compensation, amortization of operating lease right-of-use assets, and assets (gains) losses and impairments. These increases were partially offset by a decrease in working capital changes and an increase in interest expense in 2023.
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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 used for investing activities increased $199 million in the three months ended March 31, 2023 primarily due to an increase in cash used for plant and equipment expenditures for expansions on LEAP, Blue Union, and the Appalachia Gathering System, partially offset by higher distributions from equity method investees in 2023.
Financing Activities
During the three months ended March 31, 2023 and 2022, DT Midstream paid cash dividends on common stock of $62 million and $58 million, respectively. See Note 5, "Earnings Per Share and Dividends" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Net cash and cash equivalents from financing activities of $6 million in the three months ended March 31, 2023 increased as compared to net cash and cash equivalents used for financing activities of $68 million in the three months ended March 31, 2022. The increase was driven by higher net borrowings under the revolving credit facility in 2023. The increase was partially offset by higher distributions to noncontrolling interests and higher dividends paid on common stock in 2023.
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 be primarily driven by changes in accounts receivable and accounts payable. We continue our efforts to identify opportunities to improve cash flows through working capital initiatives and obtaining additional long-term firm service revenue contracts from customers.
Our sources of liquidity include cash generated from operating activities and available borrowings under our Revolving Credit Facility. As of March 31, 2023, we had $39 million of letters of credit outstanding and $410 million of borrowings outstanding under our Revolving Credit Facility. We had approximately $646 million of available liquidity as of March 31, 2023, consisting of amounts available under our Revolving Credit Facility and cash and cash equivalents. By mid-May DT Midstream will receive a distribution from NEXUS for $375 million, less fees and expenses. DT Midstream intends to use the proceeds from the distribution to fund organic growth and repay borrowings outstanding under our Revolving Credit Facility. See Note 11, "Subsequent Event" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
We expect to pay regular cash dividends to DT 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.
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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.
Goodwill
We have goodwill that resulted from business combinations. Annually as of October 1st, an impairment test for goodwill is performed which compares the fair value of each reporting unit to its carrying value including goodwill. In between annual impairment tests, we monitor our estimates and assumptions regarding estimated future cash flows, including the impact of movements in market indicators. An interim impairment test is performed whenever a triggering event occurs or circumstances indicate that the value of goodwill may be impaired.
The estimated fair value in our annual goodwill impairment analysis utilizes significant assumptions that require judgement by management. One such significant assumption is the weighted average cost of capital (WACC) which is used to discount estimates of projected future results and cash flows to be generated by each reporting unit. We have noted a slight decline in our WACC for each reporting unit since our last annual goodwill impairment test. Our annual goodwill impairment analysis includes a comparison of the estimated fair value of the Company as a whole to our market capitalization. Management also compares the implied market multiple of the estimated fair value of each reporting unit to midstream industry transaction multiples. We have noted a recent decline in our consolidated market capitalization and gathering-related midstream industry transaction multiples since our last annual goodwill impairment test. After assessing all relevant facts and circumstances, we have concluded that no triggering event has occurred that indicates it is more likely than not that the goodwill is impaired for either reporting unit, and determined that an interim impairment test is not required. We will continue to monitor our estimates and assumptions on a quarterly basis as market conditions continue to evolve.
While we believe the estimates and assumptions in the estimated fair value are reasonable, the 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. If current expectations of future long-term growth are not met or market factors outside of our control change, such as U.S. Treasury Rates, a sustained further decline in our market capitalization, or a further decline in midstream industry transaction multiples, this may lead to a goodwill impairment in the future.
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 in DT Midstream's 2022 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 Note 1, "Description of the Business and Basis of Presentation—Principles of Consolidation" 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, which is 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
There are no new accounting pronouncements that are expected to have a material impact on DT Midstream's consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Price Risk
Our business is dependent on the continued availability of natural gas production and reserves in our areas of operation. Low prices for natural gas, including those resulting from regional basis differentials, could adversely affect development of additional reserves and future production that is accessible by our pipeline and storage assets. We manage our exposure through the use of short, medium, and long-term transportation, gathering, and storage contracts. Consequently, our existing operations and cash flows have limited direct exposure to natural gas price risk.
Credit Risk
We are exposed to credit risk, which is the risk of loss resulting from nonpayment or nonperformance under a contract. We manage our exposure to credit risk associated with customers through credit analysis, credit approval, credit limits and monitoring procedures. For certain transactions, we may request letters of credit, cash collateral, prepayments or guarantees as forms of credit support. Our FERC tariffs require tariff customers that do not meet specified credit standards to provide three months of credit support, however, we are exposed to credit risk beyond this three-month period when our tariffs do not require our customers to provide additional credit support. For some long-term contracts associated with system expansions, we have entered into negotiated credit agreements that provide for enhanced forms of credit support if certain credit standards are not met.
We depend on a key customer, Southwestern Energy, in the Haynesville formation in the Gulf Coast and in the Utica and Marcellus formations in the Northeastern U.S. for a significant portion of our revenues. The loss of, or reduction in volumes from, this key customer could result in a decline in demand for our services and materially adversely affect our business, financial condition and results of operations.
We engage with customers that are sub-investment grade, including our key customer, Southwestern Energy. These customers are otherwise considered creditworthy or are required to make prepayments or provide security to satisfy credit concerns. We regularly monitor for bankruptcy proceedings that may impact our customers and had no bankruptcy proceedings during the three months ended March 31, 2023.
Interest Rate Risk
We are subject to interest rate risk in connection with the issuance of debt. Our exposure to interest rate risk arises primarily from changes in LIBOR and SOFR. As of March 31, 2023, we had floating rate debt of $809 million and a floating rate debt-to-total debt ratio of 23% related to the variable rate Term Loan Facility. See Note 8, "Debt" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
We are subject to interest rate risk in connection with our goodwill impairment assessment. See "Critical Accounting Estimates" under Part I, Item 2 of this Form 10-Q.
Summary of Sensitivity Analysis
A sensitivity analysis was performed on the fair values of our long-term debt obligations. The sensitivity analysis involved increasing and decreasing interest rates at March 31, 2023 by a hypothetical 10% and calculating the resulting change in the fair values. The hypothetical losses related to long-term debt would be realized only if we transferred all of our fixed-rate long-term debt to other creditors. The results of the sensitivity analysis are as follows:
Assuming a 10% Increase in Rates | Assuming a 10% Decrease in Rates | Change in the Fair Value of | ||||||||||||||||||
Activity | As of March 31, 2023 | |||||||||||||||||||
(millions) | ||||||||||||||||||||
Interest rate risk | $ | (91) | $ | 96 | Long-term debt |
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Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
Management of DT Midstream carried out an evaluation, under the supervision and with the participation of DT Midstream's Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of DT Midstream's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2023, which is the end of the period covered by this report. Based on this evaluation, DT Midstream's CEO and CFO have concluded that such disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by DT Midstream in reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and (ii) is accumulated and communicated to DT Midstream's management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations in the effectiveness of any disclosure controls and procedures, management cannot provide absolute assurance that the objectives of its disclosure controls and procedures will be attained.
(b) Changes in internal control over financial reporting
There have been no changes in DT Midstream's internal control over financial reporting during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, DT Midstream's internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
For information on legal proceedings and matters related to DT Midstream, see Note 9, "Commitments and Contingencies" to the Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q.
Item 1A. Risk Factors
There are various risks associated with the operations of DT Midstream's businesses. To provide a framework to understand the operating environment of DT Midstream, a brief explanation of the more significant risks associated with DT Midstream's businesses is provided in Part I, Item 1A. "Risk Factors" in DT Midstream's 2022 Annual Report on Form 10-K. Although DT Midstream has identified and disclosed key risk factors, others could emerge in the future. In addition, the following amends our discussion of risk factors contained our 2022 Annual Report on Form 10-K:
Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affect our business, financial condition or results of operations.
Events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. Most recently, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although we assess our banking and customer relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect us, the financial services industry, our customers, our suppliers, our joint ventures, or the economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, and our customers, suppliers, or joint ventures may similarly be affected, which may adversely impact us. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our business, financial condition or results of operations.
Item 4. Mine Safety Disclosure
Our sand mining facility in Louisiana is subject to regulation by the Federal Mine Safety and Health Administration under the Federal Mine Safety and Health Act of 1977. Information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this Quarterly Report on Form 10-Q.
Item 5. Other Information
On April 6, 2023, NEXUS priced $750 million of senior unsecured notes with a weighted-average coupon rate of 5.52%. On April 28, 2023, NEXUS closed the notes offering, and by mid-May DT Midstream will receive a distribution from NEXUS for $375 million, less fees and expenses. DT Midstream intends to use the proceeds from the distribution to fund organic growth and repay borrowings outstanding under our Revolving Credit Facility.
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Item 6. Exhibits
Exhibit Number | Description | |||||||
(i) Exhibits incorporated by reference: | ||||||||
Amended and Restated Certificate of Incorporation of DT Midstream, Inc., effective July 1, 2021 (Exhibit 3.1 to DT Midstream's Form 8-K filed July 1, 2021) | ||||||||
Amended and Restated Bylaws of DT Midstream, Inc., effective July 1, 2021 (Exhibit 3.2 to DT Midstream's Form 8-K filed July 1, 2021) | ||||||||
Indenture, dated as of June 9, 2021, among DT Midstream, Inc., the Guarantors and U.S. Bank National Association, as trustee. (Exhibit 4.1 to DT Midstream's Form 8-K filed June 10, 2021) | ||||||||
Indenture, dated as of April 11, 2022, among DT Midstream, Inc., the Guarantors and U.S. Bank Trust Company, National Association, as trustee. (Exhibit 4.1 to DT Midstream's Form 8-K filed April 11, 2022) | ||||||||
Pari Passu Intercreditor Agreement, dated as of April 11, 2022, among DT Midstream, Inc., the Guarantors, Barclays Bank PLC, as Credit Agreement Agent, and U.S. Bank Trust Company, National Association, as Notes Collateral Agent. (Exhibit 4.2 to DT Midstream's Form 8-K filed April 11, 2022) | ||||||||
First Incremental Revolving Facility Amendment and Amendment No. 1 to Credit Agreement and Collateral Agreement, by and among DT Midstream, Inc., the lenders and letter of credit issuers party thereto and Barclays Bank PLC, as administrative agent and collateral agent, dated as of October 19, 2022 (incorporated by reference to Exhibit 10.1 to DT Midstream's Current Report on Form 8-K filed on October 20, 2022) | ||||||||
(ii) Exhibits filed herewith: | ||||||||
Chief Executive Officer Section 302 Form 10-Q Certification of Periodic Report | ||||||||
Chief Financial Officer Section 302 Form 10-Q Certification of Periodic Report | ||||||||
Mine Safety Disclosure | ||||||||
101.INS | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |||||||
101.SCH | XBRL Taxonomy Extension Schema | |||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||||
101.DEF | XBRL Taxonomy Extension Definition Database | |||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||
(iii) Exhibits furnished herewith: | ||||||||
Chief Executive Officer Section 906 Form 10-Q Certification of Periodic Report | ||||||||
Chief Financial Officer Section 906 Form 10-Q Certification of Periodic Report |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
Date: | May 2, 2023 | ||||||||||
DT MIDSTREAM, INC. | |||||||||||
By: | /S/ JEFFREY A. JEWELL | ||||||||||
Jeffrey A. Jewell Chief Financial and Accounting Officer | |||||||||||
(Duly Authorized Officer) |
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