Hess Midstream LP — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Although the request references 2021 Q4, this filing reports annual results; it does not provide a complete standalone fourth-quarter income statement or cash-flow statement.
Business context
Hess Midstream is a fee-based midstream partnership with gathering, processing and storage, and terminaling and export operations primarily in North Dakota’s Bakken. It earns substantially all revenue under long-term agreements with Hess Corporation (Hess), including minimum volume commitments (MVCs). Hess represented approximately 100% of revenue and customer receivables in 2021.
Financial and operating performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Revenue | $1,203.8 million | $1,091.9 million |
| Operating income | $727.2 million | $576.5 million |
| Consolidated net income | $617.8 million | $484.9 million |
| Net income attributable to Hess Midstream LP | $46.4 million; $1.81 basic EPS | $24.0 million; $1.33 basic EPS |
| Net cash from operating activities | $795.5 million | $641.7 million |
| Adjusted EBITDA (non-GAAP) | $908.5 million | $748.8 million |
| Distributable cash flow (non-GAAP) | $798.6 million | $653.3 million |
| Capital expenditures | $183.0 million | $253.0 million |
Revenue grew 10.2%; operating income rose 26.1%, and consolidated net income increased 27.4%. Operating margin was approximately 60.4%, versus 52.8% in 2020. Consolidated net income includes substantial noncontrolling interests: $571.4 million was attributable to noncontrolling interests in 2021, leaving $46.4 million attributable to Hess Midstream LP.
By segment, 2021 revenue was $630.6 million in gathering, $435.7 million in processing and storage, and $137.5 million in terminaling and export. Crude oil gathering throughput fell 21% and crude oil terminaling throughput fell 20% year over year; gas gathering and processing volumes were roughly flat, while water gathering volumes increased 4%.
Cash, debt and distributions
At year-end, cash was $2.2 million, current assets were $133.1 million and current liabilities were $170.9 million. Affiliate accounts receivable was $120.3 million. The $1.0 billion revolving facility had $104.0 million drawn, leaving nominal undrawn capacity of $896.0 million, subject to facility terms.
Total debt principal was $2,594.0 million, with a carrying value of $2,563.5 million; this included $2.1 billion of fixed-rate notes, a $390.0 million Term Loan A and $104.0 million drawn on the revolver. Debt increased from $1,934.0 million principal at year-end 2020, primarily following the August 2021 issuance of $750 million of 4.25% notes due 2030. Proceeds funded a $750 million repurchase of Partnership Class B units from the Sponsors. The Partnership reported compliance with debt covenants at year-end.
Distributions declared for 2021 totaled $1.9839 per Class A share; the $0.5167 fourth-quarter distribution was paid in February 2022. Cash distributions paid during 2021 were $1.9143 per share. Management cited excess free cash flow beyond distributions as supporting a 10% increase in quarterly distribution levels.
Material changes and management outlook
- Revenue increased $111.9 million, principally from $171.1 million of higher tariff rates and MVC levels, partly offset by $59.2 million of lower pass-through revenue. MVC shortfall fees rose to $87.0 million from $18.7 million.
- Total costs and expenses declined to $476.6 million from $515.4 million, mainly because pass-through costs were lower. The TGP maintenance turnaround contributed to higher operating and maintenance costs in processing and storage; depreciation and interest expense also increased.
- Expansion capital spending declined as the Tioga Gas Plant (TGP) expansion neared completion. The additional 150 MMcf/d expansion entered service in October 2021; total TGP processing capacity of 400 MMcf/d became available in February 2022 after a third-party residue-export expansion.
- Management expected to be above MVC levels in 2023 and 2024, while noting that actual volumes depend on Hess’s development plans and market conditions. Two new compressor stations and related infrastructure were expected to add 85 MMcf/d of compression capacity in 2022. The filing provides no formal earnings or cash-flow guidance.
- Management’s cash-flow stability case relies on fee-based contracts and MVCs. In the secondary contract terms, certain fee recalculation mechanisms change to inflation-based fees, which management notes may provide less downside protection; MVCs continue.
Risks, contingencies and unusual items
- Customer concentration is a central risk: substantially all revenue depends on Hess’s performance, production, nominations and ability to meet contractual obligations. Lower drilling or production could reduce volumes and distributions.
- Commodity prices have limited direct effect under fee-based contracts but can affect Hess’s Bakken activity and, over time, throughput. COVID-19-related disruption and reduced drilling had continued to affect crude oil volumes in 2021.
- Other material risks include leverage and refinancing/covenant constraints, severe weather and operational interruptions, cyberattacks, competition, and evolving environmental, methane-emissions and pipeline-safety rules. The filing says costs of the new PHMSA gathering-pipeline rule could not yet be reliably estimated, though ongoing costs were not expected to be material overall.
- Environmental remediation reserves were $3.9 million at year-end 2021. The company reported no material accrued legal contingencies and no litigation it believed would materially adversely affect financial condition or results. No long-lived asset impairments were recorded in 2019–2021.
- The Sponsors retained substantial control and economic ownership of the Partnership. Public Class A ownership rose from 6.0% to 12.9% during 2021; the public offerings were Sponsor sales and generated no proceeds for the company. The unit repurchase was funded with debt.
Important facts for investors to verify
- Confirm the distinction between consolidated earnings and the much smaller amount attributable to Hess Midstream LP, given the Partnership’s noncontrolling interests.
- Assess whether Hess’s drilling, nominations and volumes will support MVCs and the expected move above MVC levels in 2023–2024.
- Review debt maturities, variable-rate exposure, covenant headroom and actual availability under the revolver alongside the low year-end cash balance.
- Evaluate the sustainability of distributions against distributable cash flow, maintenance capital needs and the company’s debt-funded repurchase.
- Track TGP’s expanded capacity and planned compression projects, including delivery timing, utilization and required capital.
- Review related-party terms, Sponsor governance and the effect of secondary-term contract fee structures on cash-flow protection.
The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting.