# DT Midstream, Inc. (DTM) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DT Midstream, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1842022/000184202223000006/dtm-20221231.htm
Accession: 0001842022-23-000006
Filing date: 2023-02-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DTM/
All MD&A years: /company/DTM/mda/
Previous year: /company/DTM/mda/fy2021/ (FY 2021)
Next year: /company/DTM/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

On July 1, 2021, DT Midstream completed the Separation from DTE Energy and became an independent public company. See Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

Our Strategy

See discussion of DT Midstream's strategy under Part I, Items 1. and 2. "Business and Properties—Our Strategy" of this Form 10-K.

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 year ended December 31, 2022 to the year ended December 31, 2021, or the year ended December 31, 2021 to the year ended December 31, 2020, as applicable.

The following table summarizes our consolidated financial results:

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[[/GREPCENT_TABLE]]

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[[/GREPCENT_TABLE]]

42

Pipeline

The Pipeline segment consists of our interstate pipelines, intrastate pipelines, storage systems, lateral pipelines including related treatment plants and compression and surface facilities. This segment also includes our equity method investments. Pipeline results and outlook are discussed below:

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[[/GREPCENT_TABLE]]

Operating revenues increased $32 million in the year ended December 31, 2022, primarily due to higher volumes and rates on LEAP of $21 million, a new customer on Stonewall Gas Gathering of $7 million, and higher volumes and rates on Washington 10 Storage Complex of $4 million. Operating revenues increased $41 million in the year ended December 31, 2021, primarily due to higher LEAP revenues of $51 million as a result of a full year of LEAP operations in 2021. LEAP was placed into service in the third quarter 2020. This increase was partially offset by lower storage revenues at the Washington 10 Storage Complex of $8 million due to lower market rates.

Operation and maintenance expense decreased $5 million in the year ended December 31, 2022, primarily due to lower Separation-related transaction costs of $10 million, partially offset by increased maintenance and labor costs at the Washington 10 Storage Complex of $3 million. Operation and maintenance expense increased $6 million in the year ended December 31, 2021, primarily due to higher Separation-related transaction costs, higher public company costs, and higher LEAP operating costs after it was placed into service in the third quarter 2020, partially offset by cost savings initiatives.

Depreciation and amortization expense increased $11 million in the year ended December 31, 2021, primarily due to higher depreciation related to LEAP of $12 million after it was placed into service in the third quarter 2020, partially offset by lower depreciation of storage assets.

Taxes other than income expense increased $6 million in the year ended December 31, 2021, primarily due to LEAP property and ad valorem taxes after it was placed into service in the third quarter 2020.

Asset (gains) losses and impairments, net decreased $6 million in the year ended December 31, 2022 due to a one-time gain realized from a legal settlement with a supplier that occurred during the three months ended June 30, 2022.

Interest expense increased $6 million in the year ended December 31, 2022, primarily due to higher outstanding borrowings and higher interest rates on our external debt as compared to interest rates on borrowings from DTE Energy prior to the Separation. Interest expense increased $8 million in the year ended December 31, 2021 primarily due to higher capitalized interest during 2020 related to LEAP construction, partially offset by lower interest on borrowings from DTE Energy in 2021.

43

Earnings from equity method investees increased $24 million in the year ended December 31, 2022, primarily due to the Millennium acquisition of $9 million, higher revenues from increased contract rates and additional customers at NEXUS of $15 million and higher westbound contracted volumes at Vector Pipeline of $4 million, partially offset by a goodwill impairment at Generation Pipeline of $7 million. On October 7, 2022, DT Midstream closed on the $552 million purchase of an additional 26.25% ownership interest in Millennium Pipeline from National Grid. See Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. Earnings from equity method investees increased $18 million in the year ended December 31, 2021, primarily due to higher operating earnings of $12 million from NEXUS, $3 million from the Vector Pipeline and $2 million from the Millennium Pipeline.

Loss from financing activities increased $6 million in the year ended December 31, 2022, due to the partial repayment of our Term Loan Facility that occurred during the three months ended June 30, 2022. See Note 10, "Debt" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further details.

Income tax expense was unchanged in the year ended December 31, 2022, due to increased Income before income taxes, fully offset by a decrease in Pennsylvania income tax rates which resulted in a $15 million benefit from remeasuring our deferred tax balances. See Note 7, "Income Taxes" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further details. Income tax expense increased $4 million in the year ended December 31, 2021, primarily due to an increase in Income before income taxes.

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:

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[[/GREPCENT_TABLE]]

Operating revenues increased $47 million in the year ended December 31, 2022, primarily due to higher Blue Union revenues of $42 million and higher volumes on the Appalachia Gathering System of $5 million. Higher Blue Union revenues were driven by recovery of production-related operating expenses of $25 million and increased gathering volumes primarily from new contracts of $17 million. Operating revenues increased $45 million in the year ended December 31, 2021, primarily due to higher gathering revenues on Blue Union of $33 million and the Appalachia Gathering System of $17 million, partially offset by lower volumes on Susquehanna Gathering System of $4 million.

44

Operation and maintenance expense increased $40 million in the year ended December 31, 2022, primarily due to higher Blue Union and Susquehanna Gathering System expenses of $46 million and $2 million, respectively, partially offset by lower Appalachia Gathering System expenses of $7 million. Higher Blue Union expenses were driven by planned maintenance and increased production-related operating expenses recovered from customers. Higher public company costs were mostly offset by lower Separation-related transaction costs of $10 million. Operation and maintenance expense increased $50 million in the year ended December 31, 2021, primarily due to an increase of $30 million related to increased Blue Union operations, higher activity on the Appalachia Gathering System, higher Separation-related transaction costs, and higher public company costs.

Depreciation and amortization expense increased $4 million in the year ended December 31, 2022, primarily due to additional depreciation and amortization expense related to new Blue Union and Susquehanna Gathering System assets placed into service.

Asset gains of $17 million in the year ended December 31, 2022 increased as compared to Asset losses and impairments, net of $17 million in the year ended December 31, 2021. The increase was due to a one-time gain on sale of certain assets in the Utica shale region of $17 million that occurred during 2022 as compared to the 2021 loss on notes receivable for an investment in certain assets in the Utica shale region of $19 million, partially offset by a $2 million gain on sale of Michigan gathering assets. See Note 2, "Significant Accounting Policies" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further details. Asset losses and impairments, net of $17 million in the year ended December 31, 2021 increased as compared to Asset gains of $2 million in the year ended December 31, 2020, primarily due to the 2021 loss on notes receivable for an investment in certain assets in the Utica shale region.

Interest expense increased $19 million in the year ended December 31, 2022, primarily due to higher outstanding borrowings and higher interest rates on our external debt as compared to interest rates on borrowings from DTE Energy prior to the Separation. Interest expense decreased $9 million in the year ended December 31, 2021 primarily due to a lower interest rate on outstanding borrowings from DTE Energy.

Loss from financing activities increased $7 million in the year ended December 31, 2022 due to the partial repayment of our Term Loan Facility that occurred during the three months ended June 30, 2022. See Note 10, "Debt" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further details.

Other expense of $1 million in the year ended December 31, 2021 increased as compared to other income of $20 million in the year ended December 31, 2020, primarily due to a post Blue Union acquisition income settlement of $20 million in 2020.

Income tax expense decreased $4 million in the year ended December 31, 2022, primarily due to a decrease in Pennsylvania income tax rates, which resulted in a $10 million benefit from remeasuring our deferred tax balances. The decrease was partially offset by an increase in Income before income taxes. See Note 7, "Income Taxes" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for further details. Income tax expense decreased $16 million in the year ended December 31, 2021, primarily due to a decrease in Income before income taxes.

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.

45

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. On October 7, 2022, DT Midstream closed on the $552 million purchase of an additional 26.25% ownership interest in Millennium Pipeline from National Grid. See Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K. Our total capital expenditures, inclusive of $5 million in contributions to equity method investees and the Millennium Pipeline acquisition discussed above, were $895 million for the year ended December 31, 2022. 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 Part I, Items 1. and 2. "Business and Properties — Regulatory Environment — Environmental and Occupational Health and Safety Regulations" and Note 12, "Commitments and Contingencies" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

CLIMATE CHANGE

We believe we have a responsibility to address climate change and have made consistent, effective environmental policies a priority. Our Board of Directors includes a committee focused on environmental, social and governance initiatives. Our strategy will focus on targeted growth from carbon-reducing technologies associated with our current platforms. We have announced our intent to employ carbon-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. We expect to achieve a 30% reduction by 2030.

During 2023, we expect to continue our exploration of early-stage development opportunities for energy transition advancements leveraging our existing assets, competencies and partnerships. These opportunities include the following:

•Our efforts to advance carbon capture projects across our geographic regions;

•Our "wellhead to water" expansion proposal of the Haynesville System which offers a carbon neutral pathway for supply to reach LNG markets;

•Our strategic joint development agreement with Mitsubishi Power Americas, Inc. to advance hydrogen development projects across the United States; and

•Our partnership with Project Canary to monitor methane emissions.

Capital expenditure investments for these projects have been contemplated in our forecasted capital expenditures discussed in the Capital Investments section above.

DT Midstream published its inaugural Corporate Sustainability Report in the second quarter 2022. The information in our Corporate Sustainability Report is not incorporated by reference into this Form 10-K.

For discussion of various risks including transitional risks associated with climate change related laws and regulations, reputational risks of climate change, and the physical risks of climate change, see Part I, Item 1A. "Risk Factors—Regulatory Risks—Risks related to climate change could be material and adverse to our business, financial condition, results of operations, cash flow, access to and cost of capital or insurance, reputation, and business strategies." of this Form 10-K. For discussion of recent climate change related laws and regulations, see Part I, Items 1. and 2. "Business and Properties — Regulatory Environment—Environmental and Occupational Health and Safety Regulations—Climate Change" of this Form 10-K.

46

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.

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[[/GREPCENT_TABLE]]

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 $153 million in the year ended December 31, 2022, primarily due to net changes in working capital, an increase in operating income after adjustment for non-cash items including depreciation and amortization expense, amortization of operating lease right-of-use assets, and assets (gains) losses and impairments, and an increase in dividends received from equity method investees. These increases were partially offset by an increase in interest expense and an increase in cash paid for income taxes.

Net cash and cash equivalents from operating activities decreased $25 million in the year ended December 31, 2021, primarily due to net changes in working capital, and a decrease in other income driven by proceeds received from a nonrecurring settlement in 2020. These decreases were partially offset by an increase in operating income after adjustment for non-cash items, including depreciation and amortization expense, amortization of operating lease right-of-use assets, and asset (gains) losses and impairments.

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 of $854 million in the year ended December 31, 2022 increased as compared to net cash and cash equivalents from investing activities of $123 million in the year ended December 31, 2021. The increase was primarily due to the acquisition of an additional 26.25% ownership interest in the Millennium Pipeline from National Grid in 2022, cash collection of the Notes receivable from DTE Energy in 2021, and an increase in cash used for plant and equipment expenditures in 2022, partially offset by proceeds from the sale of notes receivable in 2022.

Net cash and cash equivalents from investing activities of $123 million in the year ended December 31, 2021 increased as compared to net cash and cash equivalents used for investing activities of $714 million in the year ended December 31, 2020. The increase was primarily due to the Separation-related cash collection of the Notes receivable from DTE Energy, a decrease in cash used for plant and equipment expenditures, and a reduction in contributions to equity method investees in 2021.

47

Financing Activities

Prior to the Separation, we relied on short-term borrowings and contributions from DTE Energy. In June 2021, we issued the 2029 Notes and 2031 Notes in aggregate principal amount of $2.1 billion and entered into a $1.0 billion Term Loan Facility. Proceeds were used for the repayment of the short-term borrowings due to DTE Energy, as well as a one-time special dividend provided to DTE Energy.

In April 2022, we issued the 2032 Notes in aggregate principal amount of $600 million. We used the net proceeds from the sale of the 2032 Notes of $593 million to partially repay indebtedness under our Term Loan Facility. See Note 10, "Debt" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

During the years ended December 31, 2022 and 2021, DT Midstream paid cash dividends on common stock of $244 million and $58 million, respectively. See Note 8, "Earnings Per Share and Dividends" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

Net cash and cash equivalents from financing activities of $58 million in the year ended December 31, 2022 increased as compared to net cash and cash equivalents used for financing activities of $605 million in the year ended December 31, 2021. The increase was primarily due to the 2021 Separation-related repayment of short-term borrowings and special dividend to DTE Energy, partially offset by contributions from DTE Energy that did not recur in 2022. Additionally, the increase was driven by higher borrowings under the revolving credit facility in 2022. The increase was partially offset by lower proceeds from the issuance of long-term debt, higher repayment of long-term debt, and higher dividends paid on common stock in 2022.

Net cash and cash equivalents used for financing activities of $605 million in the year ended December 31, 2021 increased as compared to net cash and cash equivalents from financing activities of $113 million in the year ended December 31, 2021. The increase was primarily due to the 2021 Separation-related repayment of short-term borrowings and special dividend to DTE Energy, a decrease in contributions from DTE Energy, and dividends paid on common stock in 2021. These increases were partially offset by net proceeds received from the issuance of long-term debt in June 2021 and decreased acquisition-related deferred payments.

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. In June 2021, we issued the 2029 Notes and 2031 Notes in aggregate principal amount of $2.1 billion and entered into a $1.0 billion Term Loan Facility. We also entered into a $750 million secured Revolving Credit Facility for general corporate purposes and letter of credit issuances to support our future operations and liquidity. In April 2022, we issued the 2032 Notes in an aggregate principal amount of $600 million and used the net proceeds of $593 million to partially repay indebtedness under our Term Loan Facility.

In October 2022, DT Midstream closed on the $552 million purchase of an additional 26.25% ownership interest in Millennium Pipeline from National Grid. Additionally, we amended the Credit Agreement to increase the Revolving Credit Facility commitments by $250 million to aggregate commitments of $1.0 billion and extended the maturity to October 19, 2027. See Note 1, "Description of the Business and Basis of Presentation" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for additional discussion on the Millennium Pipeline acquisition. The Credit Agreement covering the Term Loan Facility and Revolving Credit Facility includes financial covenants that DT Midstream must maintain. See Note 10, "Debt" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K for additional discussion on the amendment of the Credit Agreement and required financial covenants.

48

As of December 31, 2022, we had $39 million of letters of credit outstanding and $330 million of borrowings outstanding under our Revolving Credit Facility. We had approximately $692 million of available liquidity as of December 31, 2022, consisting of amounts available under our Revolving Credit Facility and cash and cash equivalents.

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 10, "Debt" and Note 12, "Commitments and Contingencies" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

Credit Ratings

Credit ratings are intended to provide banks and capital market participants with a framework for comparing the credit quality of securities and are not a recommendation to buy, sell, or hold securities. Our credit ratings affect our cost of capital and other terms of financing, as well as our ability to access the credit and commercial paper markets. Our management believes that the current credit ratings provide sufficient access to capital markets. However, disruptions in the banking and capital markets not specifically related to us may affect our ability to access these funding sources or cause an increase in the return required by investors.

Contractual Obligations

The following table details our contractual obligations due by year as of December 31, 2022:

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[[/GREPCENT_TABLE]]
_____________________________

(a) Short-term borrowings under our Revolving Credit Facility can be extended up to the October 2027 expiration date.

(b) Excludes $26 million of unamortized debt issuance costs.

(c) Excludes $1 million of unamortized debt discount and $6 million of unamortized debt issuance costs.

(d) Excludes $2 million of unamortized debt discount and $5 million of unamortized debt issuance costs.

(e) Interest Expense calculation related to the Term Loan Facility assumes the variable rate of LIBOR is 0.50% plus the margin rate of 2.00%.

49

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 II, Item 8 of this Form 10-K 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 12, "Commitments and Contingencies" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

INDEMNIFICATION OBLIGATIONS

We could have an indemnification obligation to DTE Energy pursuant to the Tax Matters Agreement and the Separation and Distribution Agreement. See Part I, Item 1A. "Risk Factors—Risks Relating to the Separation—We could have an indemnification obligation to DTE Energy in accordance with the terms of the Tax Matters Agreement if the Distribution were determined not to qualify for non-recognition treatment for U.S. federal tax purposes, which could materially adversely affect our business, financial condition and results of operations" of this Form 10-K for additional information.

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 areas described below require 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. Additional discussion of our accounting policies can be found in the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K.

Goodwill

We have goodwill that resulted from business combinations. An impairment test for goodwill is performed annually as of October 1st, or whenever events or circumstances indicate that the value of goodwill may be impaired. In performing the impairment test, we compare the fair value of each reporting unit to its carrying value including goodwill. If the carrying value including goodwill exceeds the fair value of a reporting unit, an impairment loss would be recognized. A goodwill impairment loss is measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

The October 1, 2022 fair values for the reporting units were calculated using an income approach. In prior years, the fair values for the reporting units were calculated using an equal weighted combination of the income approach and the market approach. We determined that the income approach was appropriate as we believe it is most representative of the value that would be received from a market participant as it allows the projected future results and cash flows to be generated by each reporting unit and the estimated fair value, to better align with DT Midstream's business model as it reflects the specific strengths of DT Midstream's reporting units. For example, many of our peers have commodity risk exposure resulting from the structure of their revenue contracts, while the majority of our revenue is generated under firm service revenue contracts. The income approach utilizes significant assumptions that require judgment by management. One such significant assumption is a terminal value that utilizes an assumed long-term growth rate, which incorporates management’s judgment regarding sustainable long-term growth of the reporting units. Another significant assumption includes 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. The WACC is based on our cost of debt, which includes U.S. industrial bond spreads, and cost of equity, which consists of U.S. Treasury Rates plus an equity risk premium. 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, this may lead to a goodwill impairment in the future.

Our goodwill impairment analysis included a comparison of the estimated fair value of the Company as a whole to our market capitalization. Management also compared the implied market multiple under the income approach to midstream industry transaction multiples and considered other market indicators to support the appropriateness of the fair value estimates.

In between annual impairment tests, we monitor our estimates and assumptions regarding estimated future cash flows, including the impact of movements in market indicators in future quarters, and will update the impairment analyses if a triggering event occurs. While we believe the assumptions are reasonable, actual results may differ from projections. To the

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extent projected results or cash flows are revised downward, the reporting unit may be required to write down all or a portion of its goodwill, which would adversely impact our earnings.

We performed our 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.

The results of the test are as follows as of the October 1, 2022 valuation date:

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__________________________________

(a) Percentage by which the estimated fair value of the reporting unit would need to decline to equal its carrying value including goodwill. The fair value reduction percentage narrowed as compared to the October 1, 2021 annual impairment test, principally due to the increased WACC. The WACC primarily increased due to the increased risk-free interest rate and increased industrial bond spreads during 2022.

(b) Discounted cash flows (DCF) incorporated 2022-2026 projected cash flows plus a calculated terminal value. DT Midstream calculated the terminal year cash flows using an estimated long-term growth rate of 2.0%, discounted at the WACC for each of the reporting units.

Assessment of Long-Lived Assets for Impairment

We evaluate the carrying value of long-lived assets, excluding goodwill, when circumstances indicate that the carrying value of those assets may not be recoverable. Conditions that could have an adverse impact on the cash flows and fair value of the long-lived assets are a deteriorating business climate, condition of the asset, or plans to dispose of or abandon the asset before the end of its useful life, which could result from the loss of or reduction in volume from our customers. The review of long-lived assets for impairment requires significant assumptions about operating strategies and estimates of future cash flows, which require assessments of current and projected market conditions and anticipated customer revenues. An impairment evaluation is based on an undiscounted cash flow analysis at the lowest level for which independent cash flows of long-lived assets can be identified from other groups of assets and liabilities. Impairment may occur when the carrying value of the asset exceeds the future undiscounted cash flows. When the undiscounted cash flow analysis indicates a long-lived asset is not recoverable, the amount of the impairment loss is determined by measuring the excess of the long-lived asset over its fair value. An impairment would require us to reduce both the long-lived asset and current period earnings by the amount of the impairment, which would adversely impact our earnings.

As part of our ongoing reviews of business operations and associated long-lived assets, we did not identify any indicators of impairment that existed during 2022.

Assessment of Equity Method Investments for Impairment

We assess at each balance sheet date whether there is objective evidence that the equity method investment is impaired by completing a quantitative or qualitative analysis of factors impacting the investment. If there is objective evidence of impairment, we determine whether the decline below carrying value is other than temporary. If the decline is determined to be other than temporary, an impairment charge is recorded in earnings with an offsetting reduction to the carrying value of the investment.

As part of our ongoing reviews of equity method investment operations, we did not identify any indicators of impairment that existed during 2022.

NEW ACCOUNTING PRONOUNCEMENTS

See Note 3, "New Accounting Pronouncements" to the Consolidated Financial Statements under Part II, Item 8 of this Form 10-K.

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