Hess Midstream LP — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial amounts are in millions of dollars unless otherwise stated. Hess Midstream owns and operates Bakken-area gathering, processing and storage, and terminaling and export assets. Its results are unaudited. The 2019 comparison was retrospectively adjusted for the December 2019 acquisition of Hess Infrastructure Partners (HIP); the restructuring also changed the public entity’s ownership structure.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $290.8 | $189.6 |
| Income from operations | $152.8 | $95.8 |
| Consolidated net income | $129.0 | $80.8 |
| Net income attributable to Hess Midstream LP | $6.5 | $18.1 |
| Net income per Class A share | $0.37 basic; $0.35 diluted | Not directly comparable; prior structure reported $0.32 per common and subordinated unit |
| Net cash from operating activities | $140.2 | $101.8 |
| Adjusted EBITDA | $195.3 | $129.4 |
| Distributable cash flow | $170.3 | Not directly comparable after restructuring |
| Free cash flow | $138.3 | $95.0 |
Revenue rose about 53%, reflecting higher throughput, tariff rates and pass-through costs. Consolidated net income increased, but income attributable to Hess Midstream LP declined, chiefly reflecting the post-restructuring allocation of earnings to noncontrolling interests. Approximately 93.7% of the Partnership interest was held by Hess and GIP. Adjusted EBITDA, distributable cash flow and free cash flow are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flows.
Throughput increased year over year: gas processing 36%, gas gathering 35%, crude oil gathering 34%, crude oil terminaling 34% and water gathering 64%. Management attributed the increases primarily to Hess production growth and completion of the Little Missouri 4 (LM4) processing plant ramp-up.
Liquidity, debt and capital
- At March 31, 2020, cash was $3.1; total assets were $3,314.5 and total liabilities were $1,974.1. Current assets were $113.2 versus current liabilities of $145.8.
- Total debt carrying value was $1,814.6. Debt included $800.0 of 5.625% senior notes due 2026, $550.0 of 5.125% senior notes due 2028, a fully drawn $400.0 Term Loan A and $92.0 drawn under a $1,000.0 revolving facility. The revolver’s nominal unused capacity was $908.0 before any letters of credit or other availability constraints.
- The Partnership reported compliance with its debt covenants. The credit facilities require total debt/EBITDA of no more than 5.00 to 1.00 (with specified acquisition-related relief) and, before investment-grade ratings, secured debt/EBITDA of no more than 4.00 to 1.00.
- Operating cash flow was $140.2; investing cash outflow was $78.1, including $78.1 of additions to property, plant and equipment; financing cash outflow was $62.3. Cash declined $0.2 during the quarter.
- Capital expenditures reported on an accrual basis were $57.0: $55.3 expansion and $1.7 maintenance. The difference from cash additions to property, plant and equipment reflects changes in accrued capital expenditures and related liabilities.
- The board declared a $0.4310-per-Class A share quarterly distribution on April 23, payable May 14, 2020. The quarter’s cash-flow statement includes $7.6 of distributions to shareholders and $113.4 to noncontrolling interests.
Material changes, outlook and risks
- Operating and maintenance expense rose to $91.9 from $54.3, including higher pass-through rail, water trucking and disposal, electricity, LM4 processing and maintenance costs. Net interest expense rose to $24.8 from $15.0, primarily due to debt issued in connection with the restructuring and higher credit-facility borrowings.
- COVID-19 and the sharp oil-demand and price decline prompted Hess to reduce its Bakken rig count from six to one by the end of May 2020; third-party producers also began curtailing production and drilling. Management said minimum-volume commitments and annual fee recalculation mechanisms were expected to cushion volume declines, but revenues above minimum commitments could fall.
- In March, the company reduced its 2020 expansion capital program by 20% and its 2021 program by 55%, citing fewer expected well connections and deferred or cancelled compression work. It also lowered its targeted annualized distribution growth rate from 15% to 5%, with growth targeted through 2022.
- The Tioga Gas Plant expansion—150 MMcf/d of additional capacity, for expected total capacity of 400 MMcf/d and estimated capital expenditures of approximately $150 million—was reported on schedule for service by mid-2021.
- Substantially all revenue and accounts receivable—approximately 100%—were attributable to Hess, including third-party volumes contracted through Hess. This concentration creates counterparty and activity exposure despite the fee-based contracts.
- Management said available cash, operating cash flow and financing sources were expected to meet operating needs, planned short-term capital spending, debt service and distributions. This is forward-looking and subject to COVID-19, production, market, financing and project risks.
- The filing reported no material accrued legal-contingency liabilities and stated known legal matters were considered unlikely to materially harm financial condition, results or cash flows. Environmental remediation reserves were $2.9 in total at March 31, 2020.
Most important facts for investors to verify
- Whether Hess’s reduced drilling and production, and third-party curtailments, affect volumes or revenues beyond contractual minimums.
- Hess’s ability to meet its obligations and the practical protection provided by minimum-volume commitments and fee recalculation provisions.
- Debt covenant headroom, revolver availability, interest costs and access to capital under stressed market conditions.
- Execution, cost and timing of the Tioga expansion and the reduced 2020–2021 capital plans.
- The distribution-growth target and capacity to sustain distributions, considering the lower 5% growth target and allocation between Class A holders and noncontrolling interests.
- Comparability of per-share earnings and distributable cash flow across periods, given the HIP acquisition, restructuring and retrospective recast.