Hess Midstream LP — FY2020 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. Hess Midstream owns and operates gathering, processing, storage, terminaling and export assets, primarily in North Dakota’s Bakken, and earns substantially all revenue from fee-based agreements with Hess Corporation.
Financial and operating results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $1,091.9 million | $848.3 million |
| Operating income | $576.5 million | $376.6 million |
| Net income | $484.9 million | $317.7 million |
| Net income attributable to Hess Midstream LP | $24.0 million; $1.33 per Class A share | $70.1 million; $1.21 per share for the combined reporting periods |
| Adjusted EBITDA | $748.8 million | $550.7 million |
| Distributable cash flow | $653.3 million | $140.1 million subsequent to the 2019 restructuring |
| Cash from operating activities | $641.7 million | $470.7 million |
| Capital expenditures | $253.0 million, including $245.9 million expansion and $7.1 million maintenance | $317.1 million |
Revenue rose 28.7% and consolidated net income rose 52.6%. Operating margin was approximately 52.8% versus 44.4% in 2019; net margin was approximately 44.4% versus 37.4%. These comparisons are affected by the December 2019 restructuring and the resulting noncontrolling-interest presentation. Despite higher consolidated earnings, income attributable to Hess Midstream LP fell, principally reflecting the post-restructuring ownership structure.
Throughput increased year over year: gas gathering to 323 MMcf/d from 275; crude oil gathering to 140 MBbl/d from 118; gas processing to 306 MMcf/d from 260; crude oil terminaling to 145 MBbl/d from 131; and water gathering to 70 MBbl/d from 41. Management cited Hess production growth, increased gas capture, higher tariffs and a full year of LM4 operations as contributors.
Debt, liquidity and distributions
At year-end, total borrowings were $1,934.0 million before deferred financing costs: $1,350 million of senior notes, $400 million under the Term Loan A facility and $184 million drawn on the revolving facility. Cash was $2.6 million; reported net debt was approximately $1.93 billion. A $1.0 billion revolving facility provides additional committed capacity, subject to its terms and covenants. The Partnership reported compliance with debt covenants. Current assets were $101.4 million and current liabilities $125.0 million.
FY2020 declared distributions totaled $1.7561 per Class A share, including $0.4471 for the fourth quarter, paid in February 2021. Management reduced its targeted annualized distribution growth rate from 15% to 5% in 2020 to preserve financial strength. Distributable cash flow is a non-GAAP measure and is not equivalent to cash available solely to public Class A shareholders.
Outlook, commentary and risks
- Management said the minimum-volume commitments and fee recalculation mechanisms largely offset the pandemic-era volume decline during the agreements’ initial terms. Hess cut its Bakken rig count from six to one in Q2 2020; Hess planned to add a rig in 2021, and the company expected throughput above minimum commitments in 2023.
- The 150 MMcf/d Tioga Gas Plant expansion was constructed by year-end 2020. Incremental capacity was expected in 2021 after a planned Q3 turnaround and tie-ins. The turnaround had been deferred from 2020 because of COVID-19 execution concerns.
- On December 30, 2020, the company exercised renewal options extending certain Hess gathering, processing, storage and terminal agreements through December 31, 2033. Other water and gas gathering renewals remained exercisable later. Secondary-term fee structures shift largely to inflation-based adjustments, potentially increasing indirect commodity-price exposure.
- Key risks include dependence on Hess for substantially all revenue and receivables, Hess’s production and credit condition, Bakken concentration, commodity-driven drilling and volume changes, substantial debt, environmental and pipeline safety regulation, permitting, severe weather, cyber incidents and potential limits on capital-market access. COVID-19 reduced industry demand and activity; the company reported no impairment of long-lived assets.
- The filing reports no litigation expected to have a material adverse effect and no material legal-contingency accrual. Environmental remediation reserves totaled $4.0 million at year-end. The 2019 restructuring included $601.8 million cash consideration and $26.2 million of transaction costs, affecting period comparability.
Important facts for investors to verify
- Confirm current Hess drilling plans, production levels and the ability to meet minimum-volume commitments; assess the concentration of revenue and receivables in Hess.
- Verify whether the Tioga expansion entered service as expected after the 2021 turnaround, and whether anticipated throughput and project economics were realized.
- Track debt, interest expense, covenant headroom, revolver availability and refinancing needs; compare distributions with cash flow after expansion spending and debt service.
- Review the distinction between consolidated net income, income attributable to public shareholders, and non-GAAP distributable cash flow, particularly given the restructuring and noncontrolling interests.
- Assess the terms and remaining renewal options of Hess agreements, including the transition to inflation-based fees and the associated volume and commodity sensitivities.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.