Hess Midstream LP — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. The company’s public shares began trading as HESM on December 17, 2019, following a restructuring that converted the predecessor partnership into an “Up-C” structure. Prior-period financial information was retrospectively recast to include Hess Infrastructure Partners (HIP), so comparisons reflect that recast presentation.
Business context
Hess Midstream owns and operates gathering, processing, storage, terminaling and export assets, primarily in North Dakota’s Bakken. It earns predominantly fee-based revenue under long-term agreements with Hess, which dedicates substantially all of its existing and future controlled Bakken production to the system. Hess accounted for approximately 100% of revenue in 2019, including third-party volumes contracted through Hess.
Financial and operating results
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Revenue and other income | $848.3 million | $712.7 million | Up 19%; higher volumes, tariff rates and pass-through costs |
| Net income | $317.7 million | $325.5 million | Down 2%; 2019 included $26.2 million of restructuring transaction costs, added back in Adjusted EBITDA |
| Net income attributable to Hess Midstream LP | $70.1 million | $70.8 million | Down slightly |
| Net income per Class A share / limited partner unit | $1.21 basic; $1.20 diluted | $1.27 per unit | 2019 combines pre- and post-restructuring periods |
| Adjusted EBITDA | $550.7 million | $505.1 million | Up 9%; non-GAAP measure |
| Cash from operating activities | $470.7 million | $466.9 million | Up $3.8 million |
| Capital expenditures | $317.1 million | $271.3 million | Expansion $312.2 million; maintenance $4.9 million |
| Cash and cash equivalents at year-end | $3.3 million | $109.3 million | Cash declined amid investment and restructuring-related financing flows |
| Total debt, gross | $1.782 billion | $997.5 million | Includes $1.35 billion senior notes, $400 million term loan and $32 million revolver borrowings |
Fourth quarter: Revenue and other income was $253.5 million versus $185.9 million in Q4 2018; net income was $75.1 million versus $78.9 million; and net income attributable to Hess Midstream LP was $16.1 million versus $17.2 million. Fourth-quarter net income per Class A share was $0.28. The filing does not provide a clear standalone quarterly cash-flow value.
Margins and liquidity: Income from operations was $376.6 million, compared with $378.2 million in 2018; the filing does not present an operating margin percentage. Year-end current assets were $95.9 million and current liabilities were $176.1 million. The company had a $1.0 billion five-year revolving facility, with $32 million drawn, and a fully drawn $400 million term loan. It reported compliance with its debt covenants at year-end.
Throughput: Average volumes increased year over year: gas gathering 11% to 275 MMcf/d; crude oil gathering 33% to 118 MBbl/d; gas processing 12% to 260 MMcf/d; crude oil terminaling 30% to 131 MBbl/d; and water gathering 64% to 41 MBbl/d. Growth reflected Hess production, acquired assets, additional third-party volumes and the LM4 plant ramp-up.
Material changes versus the prior period
- Revenue rose, but operating income was nearly unchanged and net income declined modestly. Operating and maintenance costs increased by $83.3 million, including higher pass-through expenses, maintenance, and costs associated with expanded operations.
- The Tioga Gathering System was acquired from Summit Midstream for $89.2 million, with up to $10 million of contingent future payments. HIP acquired Hess Water Services for $225 million; the transaction was treated as a common-control acquisition.
- The December 2019 restructuring transferred HIP’s interests in the operating assets and Hess Water Services to the Partnership, simplified incentive distribution rights, converted public units into Class A shares and included $601.8 million cash consideration to the Sponsors. The Sponsors retained substantial control and economic interests.
- LM4, a 200 MMcf/d plant in which Hess Midstream owns 50%, entered service in Q3 2019; the company is entitled to 100 MMcf/d of capacity.
- Debt increased materially, and cash used in investing activities rose to $497.5 million, primarily reflecting acquisitions, capital spending and LM4 investment.
Outlook, commentary and risks
- Management’s strategy is to grow cash flow and distributions through fee-based contracts, Bakken infrastructure expansion, additional third-party business and acquisitions. The filing gives no numerical company-wide revenue or earnings guidance.
- The company planned a 150 MMcf/d expansion of the Tioga Gas Plant, taking capacity to 400 MMcf/d, with expected capital expenditures of approximately $150 million and anticipated service by mid-2021. A Tioga plant turnaround was planned for 2020.
- Hess’s minimum-volume commitments, fee escalators and recalculation mechanisms support revenue stability, but volumes and the company’s financial results remain closely tied to Hess’s production plans and ability to meet its obligations. Hess operated six Bakken rigs in 2019.
- The declared Q4 distribution was $0.4258 per Class A share, paid February 14, 2020; it was 15% above the Q4 2018 distribution. The company intends to maintain a minimum quarterly distribution of $0.30 per share when available cash permits, but payment is not guaranteed. The filing estimates approximately $85.3 million of quarterly distributable cash flow would be needed to support that minimum under the ownership structure at year-end.
- Key risks include customer concentration, lower commodity prices reducing Hess drilling and throughput, weather and operating outages, competition for third-party volumes, project execution and permitting, environmental and pipeline-safety requirements, and cyber or catastrophic events. Most revenue is fee-based, limiting direct commodity-price exposure, but not indirect exposure through customer activity.
- Debt covenants restrict distributions and other actions in specified circumstances. The company reported $65 million of 2020 purchase obligations. Environmental remediation reserves were $2.8 million in total; the company reported no accrued legal-contingency liabilities and no litigation it believed would materially affect results.
- Governance and related-party considerations are significant: the Sponsors control the general partner and board election, while Hess supplies operating and administrative services and reimbursable costs are not subject to general caps. The company is taxed as a corporation for U.S. federal and state income-tax purposes following the restructuring.
Important facts for investors to verify
- How the restructuring changes the economic claims and distribution cash flows attributable to public Class A shareholders, versus the Partnership and Sponsors’ interests.
- Hess’s current Bakken drilling plans, production outlook and ability to satisfy contractual minimum-volume commitments.
- Actual spending, schedule, permits and contracted takeaway for the Tioga expansion and the 2020 turnaround.
- Debt balances, interest costs, covenant headroom and liquidity available under the revolving facility after letters of credit and other commitments.
- Distribution coverage using cash flow attributable to public shareholders, distinguishing pre- and post-restructuring distributable cash flow and recognizing that it is a non-GAAP measure.
- Growth in unaffiliated customer volumes and the extent to which the reported throughput increases depend on Hess or pass-through reimbursements.