Hess Midstream LP — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited results. Hess Midstream provides fee-based gathering, processing, storage, terminaling and water services, primarily in North Dakota’s Bakken. Nearly all revenue and accounts receivable were attributable to Hess, including third-party volumes contracted through Hess.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $303.9 million | $264.8 million | $887.5 million | $825.4 million |
| Operating income | $159.2 million | $137.2 million | $527.3 million | $421.8 million |
| Net income | $131.1 million | $115.8 million | $452.7 million | $352.6 million |
| Net income attributable to Hess Midstream LP | $9.9 million | $5.6 million | $29.5 million | $17.4 million |
| Basic EPS attributable to LP | $0.39 | $0.31 | $1.27 | $0.97 |
| Adjusted EBITDA | $205.0 million | $181.6 million | $661.9 million | $549.7 million |
| Distributable cash flow | $171.5 million | $156.2 million | $583.6 million | $476.5 million |
| Cash provided by operating activities | $182.0 million | $149.6 million | $572.0 million | $467.2 million |
Margins: Q3 operating margin was approximately 52% (versus 52% in Q3 2020); Adjusted EBITDA margin was approximately 67% (versus 69%). These percentages are calculated from reported figures.
Liquidity and debt at September 30, 2021: Cash was $2.6 million; current assets were $151.5 million and current liabilities $168.7 million. Debt carrying value totaled $2,612.6 million, compared with $1,910.1 million at year-end 2020; fair value was approximately $2,707.5 million. Debt included $800 million of 5.625% notes due 2026, $550 million of 5.125% notes due 2028, $750 million of 4.250% notes due 2030, $392.5 million outstanding under Term Loan A and $152 million under the revolving facility. The $1 billion revolver had approximately $848 million undrawn. The company reported compliance with debt covenants.
Material changes and notable items
- Q3 revenue rose $39.1 million year over year, principally from higher minimum-volume commitment (MVC) levels and tariff rates. Net income rose $15.3 million and Adjusted EBITDA rose $23.4 million.
- Operating and maintenance costs increased $14.2 million in Q3, including approximately $13.7 million related to the Tioga Gas Plant turnaround. The turnaround also involved approximately $6.8 million of maintenance capital spending.
- Q3 throughput was lower year over year: gas processing down 4%, gas gathering down 2%, crude oil gathering down 23%, crude oil terminaling down 21%, and water gathering down 4%. Management attributed gas declines mainly to the turnaround and crude declines to reduced drilling; MVC shortfall payments and higher tariffs partly offset the volume impact.
- For the first nine months, operating cash flow increased $104.8 million, while cash capital expenditures fell to $120.0 million from $246.0 million, largely reflecting completion of the Tioga expansion. Accrual-basis capital expenditures were $128.6 million, including $119.0 million expansion and $9.6 million maintenance spending.
- On August 10, the Partnership repurchased 31.25 million Class B units from its Sponsors for $750 million, funded with $750 million of 2030 notes. The transaction increased LP ownership of the Partnership to 9.9%; Sponsors retained a 90.1% noncontrolling economic interest.
- Sponsor share offerings in March and October generated proceeds for the Sponsors, not the Partnership. The October offering increased LP ownership to 13.3% after quarter-end.
Outlook, risks and contingencies
- The filing provides no specific full-year financial or throughput guidance. Management said expected liquidity sources—operating cash flow, cash, credit facilities and debt or equity issuance—should cover operating needs, planned short-term capital expenditures, debt service, distributions and potential growth projects.
- Management highlighted the contract structure’s MVCs and fee-recalculation provisions as support for cash-flow stability. Certain agreements have been extended through December 31, 2033; during secondary terms, some fees move to inflation-based adjustments, capped at 3% annual increases solely from CPI.
- Management reported a $0.5104 quarterly distribution per Class A share, payable November 12, 2021, up 1.2% sequentially and consistent with a targeted 5% annual distribution growth rate. This is a target, not a guarantee.
- The 150 MMcf/d Tioga Gas Plant expansion tie-in was completed and placed in service in October; added capacity was expected to become available with completion of the WBI residue export tie-in.
- Key risks include reliance on Hess and its drilling plans, commodity-price-driven changes in production and volumes, reduced drilling, competing midstream capacity, project execution and permitting, environmental and safety regulation, severe weather, operational or cyber disruptions, and access to capital. The company had no interest-rate derivatives at quarter-end; changes in rates can affect floating-rate borrowings.
- Environmental remediation reserves totaled $3.5 million at September 30, 2021. The company reported no material accrued legal-contingency liabilities and believed known matters were unlikely to materially affect its financial condition, results or cash flows. No material risk-factor changes were reported.
Important facts for investors to verify
- Confirm the degree of customer concentration and Hess’s ability and obligation to meet MVCs and development plans.
- Track debt, interest expense, covenant headroom and the effect of the $750 million debt-funded repurchase on leverage and distributions.
- Verify whether the WBI residue export tie-in and expanded Tioga capacity became operational as planned, and whether volumes recover after the turnaround and reduced drilling.
- Assess whether distributable cash flow supports the distribution target alongside maintenance, expansion spending and debt service; distributable cash flow is a non-GAAP measure.
- Review the remaining capital program, environmental obligations, permits and any subsequent changes to legal or operational risks.