Hess Midstream LP — 2022 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2022, filed February 27, 2023. Hess Midstream owns and operates gathering, processing, storage, terminaling and export infrastructure, primarily in North Dakota’s Bakken. It earns predominantly fee-based revenue under long-term agreements with Hess Corporation; substantially all 2022 revenue was attributable to Hess, including third-party volumes contracted through Hess.
Key financial and operating metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue and other income | $1,275.2 million | $1,203.8 million |
| Operating income | $791.2 million | $727.2 million |
| Consolidated net income | $620.6 million | $617.8 million |
| Net income attributable to Hess Midstream LP | $83.9 million; $2.03 per basic Class A share | $46.4 million; $1.81 per basic Class A share |
| Net cash provided by operating activities | $861.1 million | $795.5 million |
| Adjusted EBITDA (non-GAAP) | $982.9 million | $908.5 million |
| Distributable cash flow (non-GAAP) | $835.2 million | $798.6 million |
| Capital expenditures | $231.8 million, including $224.6 million expansion and $7.2 million maintenance | $183.0 million |
| Debt at year-end | $2,918.0 million principal; $2,885.6 million carrying value | $2,594.0 million principal; $2,563.5 million carrying value |
| Cash at year-end | $3.1 million | $2.2 million |
Net interest expense was $149.3 million, up from $105.4 million. Total current assets were $132.3 million and current liabilities were $159.5 million. The company had $18 million drawn on its $1.0 billion revolving facility and $400 million outstanding on its Term Loan A at year-end. It reported compliance with debt covenants.
Average daily throughput changed year over year as follows: gas gathering rose 3% to 333 MMcf/d and gas processing rose 5% to 319 MMcf/d; crude oil gathering fell 13% to 96 MBbl/d and crude oil terminaling fell 11% to 103 MBbl/d. Water gathering averaged 74 MBbl/d, compared with 73 MBbl/d.
Material changes versus 2021
- Revenue increased $71.4 million, primarily from higher gas gathering and processing volumes, higher MVC levels and tariff rates. Lower crude oil and water MVCs and lower pass-through revenue partly offset the increase.
- Operating costs and expenses rose $7.4 million overall: lower maintenance costs, including the absence of the prior-year Tioga Gas Plant turnaround, were offset in part by higher depreciation and gathering-system costs.
- Consolidated net income increased $2.8 million, while attributable income increased $37.5 million. Interest expense rose $43.9 million, mainly due to the 2021 and 2022 note issuances and higher Term Loan A rates.
- Operating cash flow increased $65.6 million. Investing cash outflow increased to $238.2 million, primarily because of compression expansion spending.
- The Partnership repurchased $400 million of Class B units from the Sponsors, funded initially with revolving borrowings and subsequently with $400 million of 5.50% senior notes due 2030. Sponsors’ 2022 public share sale generated about $291.7 million net for the Sponsors; Hess Midstream received no proceeds.
Outlook, commentary, risks and unusual items
- Management expects 2023 oil gathering and terminaling volumes to be at or below established MVC levels, while gas gathering and processing are expected to be above MVC levels in 2023–2025. Forecast oil volumes are expected to exceed current MVC levels in 2024 and 2025. MVCs are based on 80% of Hess nominations, subject to agreement terms.
- Management plans two additional greenfield compressor stations in 2023, expected to add 100 MMcf/d of compression capacity. The two stations placed in service during 2022 added 85 MMcf/d.
- Most renewed commercial agreements run through December 31, 2033. For most systems, 2023 is the final annual rate-redetermination year; thereafter, fees generally move to inflation-based adjustments capped at 3% annually. Management notes this structure may provide less downside protection than the initial-term recalculation mechanism.
- On August 12, 2022, the company identified a produced-water release from an underground pipeline near Ray, North Dakota. The estimated release was approximately 34,000 barrels, affecting soils, crops and groundwater. The company recorded $5.7 million of total remediation reserves at year-end, stated it was working with regulators and affected landowners, and said the ultimate costs and any potential enforcement exposure were not fully predictable. It reported no material accrued legal contingency and assessed a material adverse outcome as remote based on information then available.
- Key risks include near-total reliance on Hess, Hess’s Bakken production and financial performance, weather and operating disruptions, competition, environmental and pipeline regulation, climate-related costs and demand changes, and access to financing. The company reported no material litigation expected to adversely affect its financial condition or results.
- The fourth-quarter distribution was $0.5696 per Class A share, paid February 13, 2023. The company states an intention to maintain a minimum quarterly distribution of $0.30 per share when available cash permits; payment is not guaranteed. 2022 distributions were $1.6678 per share for the first three quarters, with the fourth-quarter payment declared afterward.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Review Hess’s drilling plans, nominations and ability to meet MVCs, particularly given lower 2022 oil throughput and the company’s customer concentration.
- Assess the $2.9 billion debt burden, variable-rate exposure, debt maturities and the effect of additional interest costs on cash available for distributions.
- Track execution, cost and expected returns of the 2023 compression projects and other expansion spending.
- Monitor investigation and remediation of the produced-water release, including any regulatory action, final costs or changes to reserves.
- Reconcile non-GAAP Adjusted EBITDA and distributable cash flow with GAAP results and assess distribution coverage, recognizing that distributable cash flow excludes working-capital changes.