Hess Midstream LP — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021. Hess Midstream owns and operates fee-based gathering, processing and storage, and terminaling and export assets, primarily in North Dakota’s Bakken. Nearly all revenue is tied to long-term agreements with Hess, including third-party volumes contracted through Hess.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue and other income | $312.4 million | $288.8 million |
| Operating income | $195.5 million | $182.5 million |
| Net income | $159.6 million | $159.6 million |
| Net income attributable to Hess Midstream LP | $16.9 million | $8.6 million |
| Basic / diluted earnings per Class A share | $0.50 / $0.49 | $0.45 / $0.43 |
| Adjusted EBITDA | $241.6 million | $226.7 million |
| Distributable cash flow | $211.6 million | $204.6 million |
| Net cash from operating activities | $190.6 million | $165.4 million |
Operating and maintenance expense was $66.5 million (up from $59.8 million); depreciation was $44.4 million (up from $40.2 million); and net interest expense was $31.3 million (up from $23.1 million). Income tax expense was $5.0 million, versus $2.5 million. Adjusted EBITDA and distributable cash flow are non-GAAP measures.
Cash and cash equivalents were $3.0 million at quarter-end. Current assets were $147.2 million and current liabilities $143.8 million. Total debt carrying value was $2.561 billion; total assets were $3.483 billion. Cash capital additions to property, plant and equipment were $54.8 million, while capital expenditures on an accrual basis were $37.1 million, including $36.4 million expansion and $0.7 million maintenance. Distributions totaled $131.0 million.
Changes versus the prior comparable period
- Revenue increased $23.6 million, mainly from higher minimum volume commitment (MVC) levels and tariffs ($19.7 million) and higher pass-through revenue ($3.9 million). MVC shortfall fees rose to $33.9 million from $13.4 million.
- Adjusted EBITDA increased $14.9 million, while consolidated net income was unchanged. Hess Midstream-attributable income increased as the partnership’s noncontrolling interest declined following prior-year ownership transactions.
- Gas processing throughput rose 5%, gas gathering 3%, and water gathering 3%; crude oil gathering and terminaling volumes fell 14%, partly offset by MVC shortfall payments and higher tariffs.
- Operating cash flow increased $25.2 million. Investing cash outflow increased to $54.8 million from $26.7 million, primarily due to higher capital additions.
Outlook, commentary, risks and unusual items
Management said available liquidity sources, including operating cash flow and borrowing capacity, are expected to cover operating needs, planned near-term capital spending, debt service, distributions, and growth projects. No specific full-year earnings or revenue guidance is provided. The company expects to be above MVC levels in 2023 and 2024. One of two planned greenfield compressor stations entered service in March; together, the stations are expected to add 85 MMcf/d of installed capacity in 2022, expandable to 130 MMcf/d.
On April 25, 2022, the board declared a $0.5492 quarterly distribution per Class A share, payable May 13, approximately 6.3% above the prior-quarter distribution. Subsequent to quarter-end, the partnership repurchased 13.56 million Class B units from the sponsors for $400 million, funded initially by revolver borrowings and then refinanced with $400 million of 5.50% senior unsecured notes due 2030. The sponsors’ April secondary share sale generated no proceeds for the company. Following the transactions, the company’s consolidated partnership ownership increased to approximately 18.3% from 13.3%.
Existing debt included $2.1 billion of fixed-rate senior notes due 2026, 2028 and 2030, plus $105 million drawn on a $1.0 billion revolver and $385 million on the Term Loan A facility. The company reported compliance with debt covenants. It had no interest-rate hedges at quarter-end. Commodity-price exposure is described as limited directly because revenue is fee-based, but prolonged low prices could reduce Hess’s drilling and production and affect volumes. Other risks include dependence on Hess, execution of expansion projects, regulation and environmental obligations, market access, and operating disruptions. Environmental remediation reserves were $0.8 million; the filing reported no material accrued legal-contingency liabilities and assessed known legal matters as unlikely to materially affect results.
Most important facts for investors to verify
- Revenue and receivables remain highly concentrated: Hess represented approximately 100% of revenue and accounts receivable.
- Assess the protection provided by MVCs against falling volumes, including crude oil throughput weakness, and the expected timing of volumes exceeding MVCs.
- Review the effect of the $400 million unit repurchase and subsequent 5.50% notes issuance on leverage, interest costs, and ownership economics.
- Compare expansion spending and new compressor capacity with management’s expected production growth and future cash generation.
- Monitor distribution coverage, covenant headroom, and the company’s ability to maintain distributions amid capital needs and market or operational risks.