Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited financial statements and accompanying footnotes included under Item 1. Financial Statements and in conjunction with the audited consolidated financial statements and accompanying footnotes in our Annual Report on Form 10‑K for the year ended December 31, 2021 (our “2021 Annual Report”).
Unless otherwise stated or the context otherwise indicates, references in this report to “Hess Midstream LP,” “the Company,” “us,” “our,” “we” or similar terms refer to Hess Midstream LP, including its consolidated subsidiaries.
This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in our 2021 Annual Report.
Overview
We are a fee-based, growth-oriented, limited partnership that owns, operates, develops and acquires a diverse set of midstream assets and provides fee-based services to Hess Corporation (“Hess”) and third-party customers. We are managed and controlled by Hess Midstream GP LLC, the general partner of our general partner that is owned 50/50 by Hess and GIP II Blue Holding, L.P. (“GIP” and together with Hess, the “Sponsors”). Our assets are primarily located in the Bakken and Three Forks shale plays in the Williston Basin area of North Dakota, which we collectively refer to as the Bakken.
In March 2022, we brought online one of two new greenfield compressor stations and in September 2022 we brought online the second of the two new greenfield compressor stations planned for 2022. In aggregate, the new stations provide an additional 85 MMcf/d of installed capacity and can be expanded up to 130 MMcf/d in the future.
On April 4, 2022, the Sponsors sold an aggregate of 10,235,000 of our Class A shares, inclusive of the underwriters’ option to purchase up to 1,335,000 of additional shares, which was fully exercised, in an underwritten public offering at a price of $29.50 per Class A share, less underwriting discounts. The Sponsors received net proceeds from the offering of approximately $291.7 million, after deducting underwriting discounts. The Company did not receive any proceeds in the offering. The offering was conducted pursuant to a registration rights agreement among us and the Sponsors.
On April 4, 2022, the Partnership purchased directly from the Sponsors 13,559,322 Class B units representing limited partner interests in the Partnership for an aggregate purchase price of $400.0 million. The purchase price per Class B unit was $29.50, which is equal to the public offering price per Class A share in the secondary offering described above. The repurchase transaction was funded using borrowings under the Partnership’s revolving credit facility, which were subsequently repaid with proceeds from a $400.0 million aggregate principal amount of 5.500% senior unsecured notes due 2030.
In addition, we utilized the excess free cash flow beyond our growing distributions to provide increased return of capital to our shareholders through a 5% increase in our quarterly distribution level for the first quarter of 2022 in addition to the quarterly increase consistent with our targeted 5% growth in annual distributions per Class A share.
Our assets and operations are organized into the following three reportable segments: (1) gathering (2) processing and storage and (3) terminaling and export.
17
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Third Quarter Results
Significant financial and operating highlights for the third quarter of 2022 included:
•Consolidated net income of $159.4 million;
•Net income attributable to Hess Midstream LP after deduction for noncontrolling interest of $23.2 million, or $0.53 basic earnings per Class A share;
•Net cash provided by operating activities of $234.7 million;
•Adjusted EBITDA of $253.6 million;
•Distributable cash flow of $214.8 million;
•Cash distribution of $0.5627 per Class A share declared on October 24, 2022, an approximate 1.2% increase compared with the second quarter of 2022, consistent with the Company’s targeted 5% growth in annual distributions per Class A share.
Revenues and other income in the third quarter of 2022 were $334.8 million compared with $303.9 million in the prior-year quarter. Third quarter 2022 revenues and other income were up $30.9 million compared to the prior-year quarter, of which $37.5 million is primarily due to higher volumes, slightly higher tariff rates and generally higher minimum volume commitment (”MVC”) levels in gas gathering offset by generally lower MVC levels in oil gathering and terminaling. This increase is partially offset by lower pass-through revenues, including electricity, produced water trucking and disposal costs, rail transportation and certain other fees of $6.6 million. In the third quarter of 2022, we earned $27.0 million of shortfall fee payments related to MVCs compared with $31.6 million in the prior-year quarter, which were lower primarily due to higher gas capture. Total costs and expenses in the third quarter of 2022 were $130.8 million, down from $144.7 million in the prior-year quarter. The decrease is primarily attributable to lower operating and other expenses of $11.9 million, driven by the Tioga Gas Plant maintenance turnaround expenses in the prior year quarter and lower pass-through expenses of $6.6 million, for which we recognize revenues in the same amount, as described above. This decrease is partially offset by $4.0 million higher depreciation expense for additional assets placed in service and $0.6 million higher general and administrative expenses. Interest expense increased $11.9 million primarily attributable to the $750.0 million 4.25% fixed-rate senior notes issued in August of 2021 and the $400.0 million 5.500% fixed-rate senior notes issued in April of 2022. Income tax expense increased $4.4 million driven by increased ownership of the Partnership by Hess Midstream LP following the equity offering and unit repurchase transactions in 2021 and 2022. Income from equity investments decreased $0.2 million. As a result, consolidated net income increased $28.3 million while Adjusted EBITDA increased $48.6 million for the third quarter of 2022 compared with the third quarter of 2021.
Throughput volumes increased 24% for gas processing and 20% for gas gathering in the third quarter of 2022 compared with the third quarter of 2021, primarily due to higher gas capture in the current year quarter and the Tioga Gas Plant turnaround in the prior year quarter. Water gathering volumes increased 12% reflecting continued steady organic growth of our water handling business. Throughput volumes in the third quarter of 2022 compared with the third quarter of 2021 decreased 4% for crude oil gathering and 1% for terminaling due to lower third party volumes.
For additional discussion of the results of operations at the segment level, see “Results of Operations” below. For additional information regarding Adjusted EBITDA and distributable cash flow, our non‑GAAP financial measures, see “How We Evaluate Our Operations” and “Reconciliation of Non‑GAAP Financial Measures” below.
18
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
How We Generate Revenues
We generate substantially all of our revenues by charging fees for gathering, compressing and processing natural gas and fractionating NGLs; gathering, terminaling, loading and transporting crude oil and NGLs; storing and terminaling propane; and gathering and disposing of produced water. We have entered into long‑term, fee‑based commercial agreements with Hess effective January 1, 2014, for oil and gas services agreements, and effective January 1, 2019, for water services agreements.
Except for the water services agreements and except for a certain gathering sub-system, as described below, each of our commercial agreements with Hess has an initial 10-year term (“Initial Term”) and we have the unilateral right to renew each of these agreements for one additional 10-year term (“Secondary Term”). In September 2018, we amended our gas gathering and gas processing and fractionation agreements to enable us to provide certain services to Hess in respect of volumes to be delivered to and processed at the LM4 plant. The amended and restated gas gathering agreement also extends the Initial Term of the gathering agreement with respect to a certain gathering sub-system by 5 years to provide for a 15-year Initial Term and decreases the secondary term for that gathering sub-system by 5 years to provide for a 5-year Secondary Term. Initial Term for the water services agreements is 14 years and the Secondary Term is 10 years. On December 30, 2020, we exercised our renewal options to extend the terms of certain crude oil gathering, terminaling, storage, gas processing and gas gathering commercial agreements with Hess for the Secondary Term through December 31, 2033. There were no changes to any provisions of the existing commercial agreements as a result of the exercise of the renewal options. For the remaining water gathering and disposal agreements as well as the remaining gas gathering agreement, we have the sole option to renew these agreements for an additional term that is exercisable at a later date.
These agreements include dedications covering substantially all of Hess’ existing and future owned or controlled production in the Bakken, minimum volume commitments, inflation escalators and fee recalculation mechanisms, all of which are intended to provide us with cash flow stability and growth, as well as downside risk protection. In particular, Hess’ minimum volume commitments under our commercial agreements provide minimum levels of cash flows and the fee recalculation mechanisms under the agreements allow fees to be adjusted annually to provide us with cash flow stability during the initial term of the agreements. During the Secondary Term of the agreements, the fee recalculation model will be replaced by an inflation-based fee structure. See Note 4, Related Party Transactions for additional description of our commercial agreements.
Our revenues also include revenues from third-party volumes contracted with Hess and delivered to us under these commercial agreements with Hess, as well as pass-through third-party rail transportation costs, third-party produced water trucking and disposal costs, electricity fees and certain other third-party fees, for which we recognize revenues in an amount equal to the costs. Together with Hess, we are pursuing strategic relationships with third-party producers and other midstream companies with operations in the Bakken in order to maximize our utilization rates.
How We Evaluate Our Operations
Our management uses a variety of financial and operating metrics to analyze our operating results and profitability. These metrics include (i) volumes, (ii) operating and maintenance expenses, (iii) Adjusted EBITDA, and (iv) distributable cash flow.
Volumes. The amount of revenues we generate primarily depends on the volumes of crude oil, natural gas, NGLs and produced water that we handle at our gathering, processing, terminaling, storage facilities and disposal facilities. These volumes are affected primarily by the supply of and demand for crude oil, natural gas and NGLs in the markets served directly or indirectly by our assets, including changes in crude oil prices, which may further affect volumes delivered by Hess. Although Hess has committed to minimum volumes under our commercial agreements described above, our results of operations will be impacted by our ability to:
•utilize the remaining uncommitted capacity on, or add additional capacity to, our existing assets, and optimize our existing assets;
•identify and execute expansion projects, and capture incremental throughput volumes from Hess and third parties for these expanded facilities;
•increase throughput volumes at our Ramberg Terminal Facility, Tioga Rail Terminal and the Johnson’s Corner Header System by interconnecting with new or existing third‑party gathering pipelines; and
•increase gas throughput volumes by interconnecting with new or existing third‑party gathering pipelines.
19
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Operating and Maintenance Expenses. Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses are comprised primarily of costs charged to us under our omnibus agreement and employee secondment agreement, third‑party contractor costs, utility costs, insurance premiums, third‑party service provider costs, related property taxes and other non‑income taxes and maintenance expenses, such as expenditures to repair, refurbish and replace storage facilities and to maintain equipment reliability, integrity and safety. These expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities performed during that period and the timing of substantial expenses, such as gas plant turnarounds. We seek to manage our maintenance expenditures by scheduling periodic maintenance on our assets in order to minimize significant variability in these expenditures and minimize their impact on our cash flow.
Adjusted EBITDA and Distributable Cash Flow. We define Adjusted EBITDA as net income (loss) before net interest expense, income tax expense (benefit), depreciation and amortization and our proportional share of depreciation of our equity affiliates, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance, such as transaction costs, other income and other non‑cash and non‑recurring items, if applicable. We define distributable cash flow as Adjusted EBITDA less net interest, excluding amortization of deferred financing costs, cash paid for federal and state income taxes and maintenance capital expenditures. Distributable cash flow does not reflect changes in working capital balances. We use Adjusted EBITDA and distributable cash flow to analyze our liquidity and performance.
Adjusted EBITDA and distributable cash flow are non‑GAAP supplemental financial measures that management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:
•our operating performance as compared to other publicly traded companies in the midstream energy industry, without regard to historical cost basis or, in the case of Adjusted EBITDA, financing methods;
•the ability of our assets to generate sufficient cash flow to make distributions to our shareholders;
•our ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of Adjusted EBITDA and distributable cash flow provides useful information to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA and distributable cash flow are net income (loss) and net cash provided by (used in) operating activities. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to GAAP net income (loss), income (loss) from operations, net cash provided by (used in) operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or distributable cash flow in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
20
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Results of Operations
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Results of operations for the three months ended September 30, 2022 and 2021 are presented below (in millions, unless otherwise noted).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2022 |
|
Gathering |
|
|
Processing and Storage |
|
|
Terminaling and Export |
|
|
Interest and Other |
|
|
Consolidated Hess Midstream LP |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate services |
|
$ |
182.0 |
|
|
$ |
121.7 |
|
|
$ |
30.5 |
|
|
$ |
- |
|
|
$ |
334.2 |
|
Other income |
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
|
- |
|
|
|
0.6 |
|
Total revenues |
|
|
182.0 |
|
|
|
121.7 |
|
|
|
31.1 |
|
|
|
- |
|
|
|
334.8 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses (exclusive of depreciation shown separately below) |
|
|
48.9 |
|
|
|
25.1 |
|
|
|
5.6 |
|
|
|
- |
|
|
|
79.6 |
|
Depreciation expense |
|
|
26.9 |
|
|
|
14.5 |
|
|
|
4.1 |
|
|
|
- |
|
|
|
45.5 |
|
General and administrative expenses |
|
|
2.8 |
|
|
|
1.0 |
|
|
|
0.2 |
|
|
|
1.7 |
|
|
|
5.7 |
|
Total costs and expenses |
|
|
78.6 |
|
|
|
40.6 |
|
|
|
9.9 |
|
|
|
1.7 |
|
|
|
130.8 |
|
Income (loss) from operations |
|
|
103.4 |
|
|
|
81.1 |
|
|
|
21.2 |
|
|
|
(1.7 |
) |
|
|
204.0 |
|
Income from equity investments |
|
|
- |
|
|
|
2.8 |
|
|
|
- |
|
|
|
- |
|
|
|
2.8 |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
39.9 |
|
|
|
39.9 |
|
Income (loss) before income tax expense (benefit) |
|
|
103.4 |
|
|
|
83.9 |
|
|
|
21.2 |
|
|
|
(41.6 |
) |
|
|
166.9 |
|
Income tax expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.5 |
|
|
|
7.5 |
|
Net income (loss) |
|
|
103.4 |
|
|
|
83.9 |
|
|
|
21.2 |
|
|
|
(49.1 |
) |
|
|
159.4 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
84.5 |
|
|
|
68.7 |
|
|
|
17.2 |
|
|
|
(34.2 |
) |
|
|
136.2 |
|
Net income (loss) attributable to Hess Midstream LP |
|
$ |
18.9 |
|
|
$ |
15.2 |
|
|
$ |
4.0 |
|
|
$ |
(14.9 |
) |
|
$ |
23.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas gathering (MMcf/d)(1) |
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
370 |
|
Crude oil gathering (MBbl/d)(2) |
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
102 |
|
Gas processing (MMcf/d)(1) |
|
|
|
|
|
354 |
|
|
|
|
|
|
|
|
|
354 |
|
Crude oil terminaling (MBbl/d)(2) |
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
110 |
|
NGL loading (MBbl/d)(2) |
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
11 |
|
Water gathering (MBbl/d)(2) |
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
83 |
|
|
(1) Million cubic feet per day |
(2) Thousand barrels per day |
21
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2021 |
|
Gathering |
|
|
Processing and Storage |
|
|
Terminaling and Export |
|
|
Interest and Other |
|
|
Consolidated Hess Midstream LP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate services |
|
$ |
157.3 |
|
|
$ |
111.1 |
|
|
$ |
35.5 |
|
|
$ |
- |
|
|
$ |
303.9 |
|
Total revenues |
|
|
157.3 |
|
|
|
111.1 |
|
|
|
35.5 |
|
|
|
- |
|
|
|
303.9 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses (exclusive of depreciation shown separately below) |
|
|
38.1 |
|
|
|
55.7 |
|
|
|
4.3 |
|
|
|
- |
|
|
|
98.1 |
|
Depreciation expense |
|
|
25.4 |
|
|
|
12.0 |
|
|
|
4.1 |
|
|
|
- |
|
|
|
41.5 |
|
General and administrative expenses |
|
|
2.1 |
|
|
|
1.4 |
|
|
|
0.2 |
|
|
|
1.4 |
|
|
|
5.1 |
|
Total costs and expenses |
|
|
65.6 |
|
|
|
69.1 |
|
|
|
8.6 |
|
|
|
1.4 |
|
|
|
144.7 |
|
Income (loss) from operations |
|
|
91.7 |
|
|
|
42.0 |
|
|
|
26.9 |
|
|
|
(1.4 |
) |
|
|
159.2 |
|
Income from equity investments |
|
|
- |
|
|
|
3.0 |
|
|
|
- |
|
|
|
- |
|
|
|
3.0 |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
28.0 |
|
|
|
28.0 |
|
Income (loss) before income tax expense (benefit) |
|
|
91.7 |
|
|
|
45.0 |
|
|
|
26.9 |
|
|
|
(29.4 |
) |
|
|
134.2 |
|
Income tax expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3.1 |
|
|
|
3.1 |
|
Net Income (loss) |
|
|
91.7 |
|
|
|
45.0 |
|
|
|
26.9 |
|
|
|
(32.5 |
) |
|
|
131.1 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
83.0 |
|
|
|
40.5 |
|
|
|
24.4 |
|
|
|
(26.7 |
) |
|
|
121.2 |
|
Net income (loss) attributable to Hess Midstream Partners LP |
|
$ |
8.7 |
|
|
$ |
4.5 |
|
|
$ |
2.5 |
|
|
$ |
(5.8 |
) |
|
$ |
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas gathering (MMcf/d)(1) |
|
|
309 |
|
|
|
|
|
|
|
|
|
|
|
|
309 |
|
Crude oil gathering (MBbl/d)(2) |
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
106 |
|
Gas processing (MMcf/d)(1) |
|
|
|
|
|
285 |
|
|
|
|
|
|
|
|
|
285 |
|
Crude oil terminaling (MBbl/d)(2) |
|
|
|
|
|
|
|
|
111 |
|
|
|
|
|
|
111 |
|
NGL loading (MBbl/d)(2) |
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
8 |
|
Water gathering (MBbl/d)(2) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
|
(1) Million cubic feet per day |
(2) Thousand barrels per day |
Gathering
Revenues and other income increased $24.7 million in the third quarter of 2022 compared to the third quarter of 2021, of which $26.2 million is attributable to higher gas gathering MVC levels and gas gathering volumes, driven by higher gas capture. In addition, $3.7 million of the increase is attributable to higher tariff rates. This increase is partially offset by $3.9 million attributable to lower crude oil gathering volumes, $0.9 million is attributable to lower water gathering and disposal revenue primarily due to lower MVC levels and $0.4 million is attributable to lower pass-through revenues.
Operating and maintenance expenses increased $10.8 million, of which $5.9 million is attributable to the produced water release in August 2022, $3.5 million is attributable to higher operating expenses on our expanding gathering infrastructure and $1.8 million is attributable to higher employee costs allocated to us under our omnibus and employee secondment agreements. This increase is partially offset by $0.4 million attributable to lower pass-through costs, including electricity and other fees. Depreciation expense increased $1.5 million due to new compressors and other new gathering assets brought into service.
22
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Processing and Storage
Revenues and other income increased $10.6 million in the third quarter of 2022 compared to the third quarter of 2021, of which $18.2 million is attributable to higher physical volumes, as volumes moved above MVC levels in the third quarter of 2022. This increase is partially offset by $6.2 million attributable to lower pass-through revenue, including electricity and other fees related to temporary offloads during the TGP turnaround in 2021 and $1.4 million is attributable to lower tariff rates.
Operating and maintenance expenses decreased $30.6 million, of which $18.7 million is attributable to the TGP turnaround in 2021 and $6.2 million is attributable to lower pass-through costs including electricity and other fees related to temporary offloads during the TGP turnaround. In addition, $2.6 million is attributable to lower operating expenses, $1.8 million is attributable to lower employee costs allocated to us under our omnibus and employee secondment agreements and $1.3 million is attributable to lower third-party processing fees due to lower Hess volumes processed at the LM4 plant. Depreciation expense increased $2.5 million, primarily due to the TGP expansion and turnaround assets placed in service.
Terminaling and Export
Revenues and other income decreased $4.4 million in the third quarter of 2022 compared to the third quarter of 2021, of which $5.0 million is attributable to lower MVC shortfall fees, partially offset by $0.6 million higher volumes.
Operating and maintenance expenses increased $1.3 million, primarily due to higher employee costs allocated to us under our omnibus and employee secondment agreements.
Interest and Other
Interest expense, net of interest income, increased $11.9 million in the third quarter of 2022 compared to the third quarter of 2021, primarily attributable to the $400.0 million 5.50% fixed-rate senior notes issued in April 2022 and the $750.0 million 4.25% fixed-rate senior notes issued in August 2021. Income tax expense increased $4.4 million driven by increased ownership of the Partnership by Hess Midstream LP following equity offering and unit repurchase transactions in 2021 and 2022.
23
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Results of operations for the nine months ended September 30, 2022 and 2021 are presented below (in millions, unless otherwise noted).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2022 |
|
Gathering |
|
|
Processing and Storage |
|
|
Terminaling and Export |
|
|
Interest and Other |
|
|
Consolidated Hess Midstream LP |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate services |
|
$ |
511.8 |
|
|
$ |
352.0 |
|
|
$ |
95.5 |
|
|
$ |
- |
|
|
$ |
959.3 |
|
Other income |
|
|
- |
|
|
|
- |
|
|
|
1.3 |
|
|
|
- |
|
|
|
1.3 |
|
Total revenues |
|
|
511.8 |
|
|
|
352.0 |
|
|
|
96.8 |
|
|
|
- |
|
|
|
960.6 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses (exclusive of depreciation shown separately below) |
|
|
127.7 |
|
|
|
66.6 |
|
|
|
19.6 |
|
|
|
- |
|
|
|
213.9 |
|
Depreciation expense |
|
|
79.4 |
|
|
|
43.3 |
|
|
|
12.2 |
|
|
|
- |
|
|
|
134.9 |
|
General and administrative expenses |
|
|
7.9 |
|
|
|
3.0 |
|
|
|
0.6 |
|
|
|
5.5 |
|
|
|
17.0 |
|
Total costs and expenses |
|
|
215.0 |
|
|
|
112.9 |
|
|
|
32.4 |
|
|
|
5.5 |
|
|
|
365.8 |
|
Income (loss) from operations |
|
|
296.8 |
|
|
|
239.1 |
|
|
|
64.4 |
|
|
|
(5.5 |
) |
|
|
594.8 |
|
Income from equity investments |
|
|
- |
|
|
|
4.2 |
|
|
|
- |
|
|
|
- |
|
|
|
4.2 |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
108.6 |
|
|
|
108.6 |
|
Income (loss) before income tax expense (benefit) |
|
|
296.8 |
|
|
|
243.3 |
|
|
|
64.4 |
|
|
|
(114.1 |
) |
|
|
490.4 |
|
Income tax expense (benefit) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19.6 |
|
|
|
19.6 |
|
Net income (loss) |
|
|
296.8 |
|
|
|
243.3 |
|
|
|
64.4 |
|
|
|
(133.7 |
) |
|
|
470.8 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
247.3 |
|
|
|
202.7 |
|
|
|
53.7 |
|
|
|
(95.0 |
) |
|
|
408.7 |
|
Net income (loss) attributable to Hess Midstream LP |
|
$ |
49.5 |
|
|
$ |
40.6 |
|
|
$ |
10.7 |
|
|
$ |
(38.7 |
) |
|
$ |
62.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas gathering (MMcf/d)(1) |
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
|
335 |
|
Crude oil gathering (MBbl/d)(2) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
Gas processing (MMcf/d)(1) |
|
|
|
|
|
321 |
|
|
|
|
|
|
|
|
|
321 |
|
Crude oil terminaling (MBbl/d)(2) |
|
|
|
|
|
|
|
|
104 |
|
|
|
|
|
|
104 |
|
NGL loading (MBbl/d)(2) |
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
11 |
|
Water gathering (MBbl/d)(2) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
(1) Million cubic feet per day |
(2) Thousand barrels per day |
24
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2021 |
|
Gathering |
|
|
Processing and Storage |
|
|
Terminaling and Export |
|
|
Interest and Other |
|
|
Consolidated Hess Midstream LP |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate services |
|
$ |
464.6 |
|
|
$ |
319.9 |
|
|
$ |
103.0 |
|
|
$ |
- |
|
|
$ |
887.5 |
|
Total revenues |
|
|
464.6 |
|
|
|
319.9 |
|
|
|
103.0 |
|
|
|
- |
|
|
|
887.5 |
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses (exclusive of depreciation shown separately below) |
|
|
105.9 |
|
|
|
102.4 |
|
|
|
13.2 |
|
|
|
- |
|
|
|
221.5 |
|
Depreciation expense |
|
|
75.5 |
|
|
|
34.4 |
|
|
|
12.2 |
|
|
|
- |
|
|
|
122.1 |
|
General and administrative expenses |
|
|
6.7 |
|
|
|
4.2 |
|
|
|
0.6 |
|
|
|
5.1 |
|
|
|
16.6 |
|
Total costs and expenses |
|
|
188.1 |
|
|
|
141.0 |
|
|
|
26.0 |
|
|
|
5.1 |
|
|
|
360.2 |
|
Income (loss) from operations |
|
|
276.5 |
|
|
|
178.9 |
|
|
|
77.0 |
|
|
|
(5.1 |
) |
|
|
527.3 |
|
Income from equity investments |
|
|
- |
|
|
|
8.6 |
|
|
|
- |
|
|
|
- |
|
|
|
8.6 |
|
Interest expense, net |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
74.0 |
|
|
|
74.0 |
|
Income (loss) before income tax expense (benefit) |
|
|
276.5 |
|
|
|
187.5 |
|
|
|
77.0 |
|
|
|
(79.1 |
) |
|
|
461.9 |
|
Income tax expense (benefit) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
9.2 |
|
|
|
9.2 |
|
Net Income (loss) |
|
|
276.5 |
|
|
|
187.5 |
|
|
|
77.0 |
|
|
|
(88.3 |
) |
|
|
452.7 |
|
Less: Net income (loss) attributable to noncontrolling interest |
|
|
253.3 |
|
|
|
171.9 |
|
|
|
70.5 |
|
|
|
(72.5 |
) |
|
|
423.2 |
|
Net income (loss) attributable to Hess Midstream LP |
|
$ |
23.2 |
|
|
$ |
15.6 |
|
|
$ |
6.5 |
|
|
$ |
(15.8 |
) |
|
$ |
29.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Throughput volumes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas gathering (MMcf/d)(1) |
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
|
316 |
|
Crude oil gathering (MBbl/d)(2) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
111 |
|
Gas processing (MMcf/d)(1) |
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
297 |
|
Crude oil terminaling (MBbl/d)(2) |
|
|
|
|
|
|
|
|
118 |
|
|
|
|
|
|
118 |
|
NGL loading (MBbl/d)(2) |
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
13 |
|
Water gathering (MBbl/d)(2) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
(1) Million cubic feet per day |
(2) Thousand barrels per day |
Gathering
Revenues and other income increased $47.2 million in the first nine months of 2022 compared to the first nine months of 2021, of which $54.7 million is attributable to higher gas gathering MVC levels and gas gathering volumes due to higher gas capture and $9.6 million is attributable to higher tariff rates. This increase is partially offset by $9.4 million attributable to lower crude oil gathering MVC levels and $7.5 million attributable to lower water gathering and disposal revenue due to lower MVC levels in 2022 when compared to the same period in 2021. The remaining decrease of $0.2 million is attributable to lower pass-through revenues.
Operating and maintenance expenses increased $21.8 million, of which $11.8 million is attributable to higher operating expenses on our expanding gathering infrastructure and $5.9 million is attributable to the produced water release in August 2022. There was also an increase of $4.3 million attributable to higher employee costs allocated to us under our omnibus and employee secondment agreements. This increase is partially offset by $0.2 million attributable to lower pass-through costs, including produced water trucking and disposal and electricity fees. Depreciation expense increased $3.9 million due to new compressors, produced water disposal facilities and other new gathering assets brought into service. General and administrative expenses increased $1.2 million attributable to higher employee costs allocated to us under our omnibus and employee secondment agreements.
25
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Processing and Storage
Revenues and other income increased $32.1 million in the first nine months of 2022 compared to the first nine months of 2021, of which $41.6 million is attributable to higher physical volumes due to higher gas capture. This increase is partially offset by $5.7 million attributable to lower pass-through revenue, including electricity and other fees related to temporary offloads during the TGP turnaround in 2021. In addition, the remaining decrease of $3.4 million is attributable to lower tariff rates and $0.4 million is attributable to other income.
Operating and maintenance expenses decreased $35.8 million, of which $19.3 million is attributable to the TGP turnaround in 2021 and $6.1 million is attributable to lower third-party processing fees due to lower volumes processed at the LM4 plant. In addition, $5.7 million is attributable to lower pass-through costs, including electricity and other fees related to temporary offloads during the TGP turnaround in 2021, $3.8 million is attributable to lower employee costs allocated to us under our omnibus and employee secondment agreements and $0.9 million is attributable to lower operating costs. Depreciation expense increased $8.9 million due to the TGP expansion and turnaround assets placed in service in 2021. General and administrative expenses decreased $1.2 million attributable to lower employee costs allocated to us under our omnibus and employee secondment agreements.
Income from equity investments decreased $4.4 million in the first nine months of 2022 compared to the first nine months of 2021, primarily due to lower volumes processed and higher maintenance expenses at the LM4 plant.
Terminaling and Export
Revenues and other income decreased $6.2 million in the first nine months of 2022 compared to the first nine months of 2021, of which $10.0 million is attributable to lower MVC shortfall levels and $1.7 million attributable to lower tariff rates. This decrease was partially offset by $4.2 million attributable to higher rail transportation pass-through revenues and $1.3 million attributable to other income.
Operating and maintenance expenses increased $6.4 million, of which $4.2 million is attributable to higher rail transportation pass-through costs and $2.7 million is attributable to higher employee costs allocated to us under our omnibus and employee secondment agreements, partially offset by $0.5 million attributable to other operating costs.
Interest and Other
Interest expense, net of interest income, increased $34.6 million in the first nine months of 2022 compared to the first nine months of 2021, primarily attributable to the $400.0 million 5.50% fixed-rate senior notes issued in April 2022 and the $750.0 million 4.25% fixed-rate senior notes issued in August 2021. Income tax expense increased $10.4 million in the same periods driven by increased ownership of the Partnership by Hess Midstream LP following equity offering and unit repurchase transactions in 2021 and 2022.
26
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Other Factors Expected to Significantly Affect Our Future Results
We currently generate substantially all of our revenues under fee‑based commercial agreements with Hess, including third parties contracted with affiliates of Hess. These contracts provide cash flow stability and minimize our direct exposure to commodity price fluctuations, since we generally do not own any of the crude oil, natural gas, or NGLs that we handle and do not engage in the trading of crude oil, natural gas, or NGLs. However, commodity price fluctuations indirectly influence our activities and results of operations over the long-term, since they can affect production rates and investments by Hess and third parties in the development of new crude oil and natural gas reserves. The markets for oil and natural gas are volatile and will likely continue to be volatile in the future. In the second quarter of 2020, as a result of the sharp decline in crude oil prices, Hess reduced its rig count from six rigs to one rig in the Bakken. In addition, third parties in the Bakken also curtailed production and reduced drilling activity. Our contract structure has largely offset and is expected to continue to offset potential impact of the reduction in volumes on our financial performance metrics through the Initial Term of our commercial agreements, as our minimum volume commitments provide minimum levels of cash flows and the fee recalculation mechanisms under our agreements support our cash flow stability. Subsequently, Hess increased its rig count in the Bakken to three operated rigs in September 2021 and to four operated rigs in July 2022. We expect to be above MVC levels in 2023 and 2024. To the extent our plans include revenues for volumes above currently established MVC levels, such revenues could decline to the MVC levels as a result of market volatility.
The throughput volumes at our facilities depend primarily on the volumes of crude oil and natural gas produced by Hess in the Bakken, which, in turn, is ultimately dependent on Hess’ exploration and production margins. Exploration and production margins depend on the price of crude oil, natural gas, and NGLs. These prices are volatile and influenced by numerous factors beyond our or Hess’ control, including the domestic and global supply of and demand for crude oil, natural gas and NGLs. During the first quarter of 2020, worldwide crude oil prices declined significantly due in part to reduced global demand stemming from the COVID-19 global pandemic. Sustained periods of low prices for oil and natural gas could materially and adversely affect the quantities of oil and natural gas that Hess can economically produce. The commodities trading markets, as well as global and regional supply and demand factors, may also influence the selling prices of crude oil, natural gas and NGLs.
The Secondary Term of our commercial agreements includes continuing MVCs while the fees change to a fixed fee structure based on the average fees paid by Hess during the last three years of the Initial Term of the commercial agreements adjusted annually for inflation up to 3% a year. Such a fee structure may provide less downside risk protection in the future. Furthermore, our ability to execute our growth strategy in the Bakken, including attracting third-party volumes, will depend on crude oil and natural gas production in that area, which is also affected by the supply of and demand for crude oil and natural gas.
27
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Reconciliation of Non‑GAAP Financial Measures
The following table presents a reconciliation of Adjusted EBITDA and distributable cash flow to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(in millions) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Reconciliation of Adjusted EBITDA and Distributable Cash Flow to net income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
159.4 |
|
|
$ |
131.1 |
|
|
$ |
470.8 |
|
|
$ |
452.7 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
45.5 |
|
|
|
41.5 |
|
|
|
134.9 |
|
|
|
122.1 |
|
Proportional share of equity affiliates' depreciation |
|
|
1.3 |
|
|
|
1.3 |
|
|
|
3.9 |
|
|
|
3.9 |
|
Interest expense, net |
|
|
39.9 |
|
|
|
28.0 |
|
|
|
108.6 |
|
|
|
74.0 |
|
Income tax expense (benefit) |
|
|
7.5 |
|
|
|
3.1 |
|
|
|
19.6 |
|
|
|
9.2 |
|
Adjusted EBITDA |
|
$ |
253.6 |
|
|
$ |
205.0 |
|
|
$ |
737.8 |
|
|
$ |
661.9 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net(1) |
|
|
37.4 |
|
|
|
26.1 |
|
|
|
101.9 |
|
|
$ |
68.7 |
|
Maintenance capital expenditures |
|
|
1.4 |
|
|
|
7.4 |
|
|
|
3.3 |
|
|
|
9.6 |
|
Distributable cash flow |
|
$ |
214.8 |
|
|
$ |
171.5 |
|
|
$ |
632.6 |
|
|
$ |
583.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted EBITDA and Distributable Cash Flow to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
234.7 |
|
|
$ |
182.0 |
|
|
$ |
638.5 |
|
|
$ |
572.0 |
|
Changes in assets and liabilities |
|
|
(20.9 |
) |
|
|
(3.9 |
) |
|
|
(2.0 |
) |
|
|
24.4 |
|
Amortization of deferred financing costs |
|
|
(2.4 |
) |
|
|
(1.9 |
) |
|
|
(6.6 |
) |
|
|
(5.3 |
) |
Proportional share of equity affiliates' depreciation |
|
|
1.3 |
|
|
|
1.3 |
|
|
|
3.9 |
|
|
|
3.9 |
|
Interest expense, net |
|
|
39.9 |
|
|
|
28.0 |
|
|
|
108.6 |
|
|
|
74.0 |
|
Distribution from equity investments |
|
|
(1.4 |
) |
|
|
(3.1 |
) |
|
|
(7.5 |
) |
|
|
(14.6 |
) |
Earnings from equity investments |
|
|
2.8 |
|
|
|
3.0 |
|
|
|
4.2 |
|
|
|
8.6 |
|
Other |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(1.3 |
) |
|
|
(1.1 |
) |
Adjusted EBITDA |
|
$ |
253.6 |
|
|
$ |
205.0 |
|
|
$ |
737.8 |
|
|
$ |
661.9 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net(1) |
|
|
37.4 |
|
|
|
26.1 |
|
|
|
101.9 |
|
|
|
68.7 |
|
Maintenance capital expenditures |
|
|
1.4 |
|
|
|
7.4 |
|
|
|
3.3 |
|
|
|
9.6 |
|
Distributable cash flow |
|
$ |
214.8 |
|
|
$ |
171.5 |
|
|
$ |
632.6 |
|
|
$ |
583.6 |
|
(1)Excludes amortization of deferred financing costs.
28
PART I – FINANCIAL INFORMATION (CONT’D)
Table of Contents
Capital Resources and Liquidity
We expect our ongoing sources of liquidity to include:
•cash generated from operations;
•borrowings under our revolving credit facility;
•issuances of additional debt securities; and
•issuances of additional equity securities.
We believe that cash generated from these sources will be sufficient to meet our operating requirements, our planned short‑term capital expenditures, debt service requirements, our quarterly cash distribution requirements, future internal growth projects or potential acquisitions.
Our partnership agreement requires that we distribute all of our available cash, as defined in the agreement, to our shareholders. On October 24, 2022, we declared a quarterly cash distribution of $0.5627 per Class A share, to be paid on November 14, 2022 to shareholders of record on November 3, 2022. Simultaneously, the Partnership will make a distribution of $0.5627 per Class B unit of the Partnership to the Sponsors.
On August 16, 2022 the United States enacted the Inflation Reduction Act of 2022 (the “Inflation Reduction Act”), which includes a 15% book-income alternative minimum tax on corporations with average adjusted financial statement income over $1 billion for any 3-year period ending with 2022 or later and a 1% excise tax on the fair market value of stock that is repurchased by publicly traded U.S. corporations. The alternative minimum tax and the excise tax are effective in taxable years beginning after December 31, 2022. The alternative minimum tax is designed to be a temporary acceleration of cash tax as amounts paid under such regime are creditable against the regular U.S. corporate income tax liability in following tax years. The Department of the Treasury is expected to publish regulations relevant to many aspects of the minimum tax on corporations, including the calculation of adjusted financial statement income. We are currently awaiting such guidance and continue to evaluate the effect of the new law to our future cash flows and financial results.
Fixed‑Rate Senior Notes
On April 8, 2022, the Partnership issued $400.0 million aggregate principal amount of 5.500% fixed-rate senior unsecured notes due 2030 to qualified institutional investors. Interest is payable semi‑annually on April 15 and October 15, commencing October 15, 2022. The Partnership used the proceeds to repay the borrowings under its revolving credit facility used to finance the April 4, 2022, repurchase transaction.
As of September 30, 2022, the Partnership had $750.0 million aggregate principal amount of 4.250% fixed‑rate senior unsecured notes due 2030 that were issued to qualified institutional investors. Interest is payable semi‑annually on February 15 and August 15.
As of September 30, 2022, the Partnership also had $550.0 million aggregate principal amount of 5.125% fixed‑rate senior unsecured notes due 2028 that were issued to qualified institutional investors. Interest is payable semi‑annually on June 15 and December 15.
In addition, as of September 30, 2022, the Partnership had $800.0 million aggregate principal amount of 5.625% fixed‑rate senior unsecured notes due 2026 that were issued to qualified institutional investors. Interest is payable semi‑annually on February 15 and August 15.
The notes described above are guaranteed by certain subsidiaries of the Partnership. Each of the indentures for the senior notes described above contains customary covenants that restrict our ability and the ability of our restricted subsidiaries to (i) declare or pay any dividend or make any other restricted payments; (ii) transfer or sell assets or subsidiary stock; (iii) incur additional debt; or (iv) make restricted investments, unless, at the time of and immediately after giving pro forma effect to such restricted payments and any related incurrence of indebtedness or other transactions, no default has occurred and is continuing or would occur as a consequence of such restricted payment and if the leverage ratio does not exceed 4.25 to 1.00. As of September 30, 2022, we were in compliance with all debt covenants under the indentures.
In addition, the covenants included in the indentures governing the senior notes contain provisions that allow the Company to satisfy the Partnership’s reporting obligations under the indenture, as long as any such financial information of the Company contains information reasonably sufficient to identify the material differences, if any, between the financial information of the Company, on the one hand, and the Partnership and its subsidiaries on a stand-alone basis, on the other hand and the Company does not directly own capital stock of any person other than the Partnership and its subsidiaries, or material business operations
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that would not be consolidated with the financial results of the Partnership and its subsidiaries. The Company is a holding company and has no independent assets or operations. Other than the interest in the Partnership and the effect of federal and state income taxes that are recognized at the Company level, there are no material differences between the consolidated financial statements of the Partnership and the consolidated financial statements of the Company.
Credit Facilities
On July 14, 2022, the Partnership amended and restated its existing credit agreement for its senior secured credit facilities (the “Credit Facilities”) consisting of a $1,000.0 million 5-year revolving credit facility and a fully drawn $400.0 million 5-year Term Loan A facility, resulting in an incremental $20.0 million outstanding on the term loan facility at September 30, 2022. The amended and restated Credit Facilities mature in July 2027. Facility fees accrue on the total capacity of the revolving credit facility. Borrowings under the 5-year Term Loan A facility generally bear interest at Secured Overnight Financing Rate (”SOFR”) plus the applicable margin ranging from 1.65% to 2.55%, while the applicable margin for the 5-year syndicated revolving credit facility ranges from 1.375% to 2.050%. Pricing levels for the facility fee and interest rate margins are based on the Partnership’s ratio of total debt to EBITDA (as defined in the Credit Facilities). If the Partnership obtains an investment grade credit rating, the pricing levels will be based on the Partnership’s credit ratings in effect from time to time. At September 30, 2022, borrowings of $43.0 million were drawn and outstanding under the Partnership’s revolving credit facility, and borrowings of $400.0 million, excluding deferred issuance costs, were drawn and outstanding under the Partnership’s Term Loan A facility.
The Credit Facilities can be used for borrowings and letters of credit for general corporate purposes. The Credit Facilities are guaranteed by each direct and indirect wholly owned material domestic subsidiary of the Partnership, and are secured by first priority perfected liens on substantially all of the presently owned and after-acquired assets of the Partnership and its direct and indirect wholly owned material domestic subsidiaries, including equity interests directly owned by such entities, subject to certain customary exclusions. The Credit Facilities contain representations and warranties, affirmative and negative covenants and events of default that the Partnership considers to be customary for an agreement of this type, including a covenant that requires the Partnership to maintain a ratio of total debt to EBITDA (as defined in the Credit Facilities) for the prior four fiscal quarters of not greater than 5.00 to 1.00 as of the last day of each fiscal quarter (5.50 to 1.00 during the specified period following certain acquisitions) and, prior to the Partnership obtaining an investment grade credit rating, a ratio of secured debt to EBITDA for the prior four fiscal quarters of not greater than 4.00 to 1.00 as of the last day of each fiscal quarter. As of September 30, 2022, we were in compliance with these financial covenants.
Cash Flows
Operating Activities. Net cash provided by operating activities increased $66.5 million for the nine months ended September 30, 2022 compared to the same period in 2021. The change in operating cash flows resulted primarily from an increase in revenues and other income of $73.1 million, an increase in cash provided by changes in working capital of $26.4 million, partially offset by an increase in cash operating expenses of $25.9 million and a decrease in distributions received from equity investments of $7.1 million.
Investing Activities. Net cash used in investing activities increased $56.6 million for the nine months ended September 30, 2022 compared to the same period in 2021 driven by higher payments for additions to property, plant, and equipment.
Financing Activities. Net cash used in financing activities increased $9.5 million for the nine months ended September 30, 2022 compared to the same period in 2021. In the first nine months of 2022, we had higher repayments on our debt of $13.5 million, net of any changes in financing costs, partially offset by lower distributions to shareholders and noncontrolling interest of $3.5 million and $0.5 million lower transaction costs related to the $400.0 million Class B Unit Repurchase Transaction in 2022 compared to the $750.0 million Class B Unit Repurchase Transaction in 2021.
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Capital Expenditures
Our operations can be capital intensive, requiring investments to expand, upgrade, maintain or enhance existing operations and to meet environmental and operational regulations. Our partnership agreement requires that we distinguish between maintenance capital expenditures and expansion capital expenditures. Maintenance capital expenditures are capital expenditures made to maintain, over the long term, our operating capacity, operating income or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish or replace existing assets, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations. In contrast, expansion capital expenditures are expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity, operating income or revenue over the long term. Examples of expansion capital expenditures include the acquisition of equipment, construction, development or acquisition of additional capacity, or expenditures for connecting additional wells to our gathering systems, to the extent such capital expenditures are expected to expand our long‑term operating capacity, operating income or revenue.
The following table sets forth a summary of maintenance and expansion capital expenditures and reconciles capital expenditures on an accrual basis to additions to property, plant and equipment on a cash basis:
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
2022 |
|
|
2021 |
|
(in millions) |
|
|
|
|
|
Expansion capital expenditures |
$ |
166.1 |
|
|
$ |
119.0 |
|
Maintenance capital expenditures |
|
3.3 |
|
|
|
9.6 |
|
Total capital expenditures |
|
169.4 |
|
|
|
128.6 |
|
(Increase) decrease in accrued capital expenditures |
|
6.3 |
|
|
|
(6.1 |
) |
(Increase) decrease in capital expenditures included in accounts payable - affiliate |
|
0.9 |
|
|
|
(2.5 |
) |
Additions to property, plant and equipment |
$ |
176.6 |
|
|
$ |
120.0 |
|
Capital expenditures in 2022 are primarily attributable to continued expansion of our compression capacity and gas capture capabilities to meet Hess’ and third parties’ current and future production growth and gas capture targets. The activities focus on the construction of two new greenfield compressor stations and associated pipeline infrastructure, which were placed in service in March and September 2022, respectively. In aggregate, the new stations provide an additional 85 MMcf/d of installed capacity and can be expanded up to 130 MMcf/d in the future. Capital expenditures in 2021 were also attributable to continued expansion of our compression capacity, as well as maintenance capital expenditures related to the Tioga Gas Plant turnaround.
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Cautionary Note Regarding Forward-looking Information
This Quarterly Report on Form 10‑Q, including information incorporated by reference herein, contains “forward-looking statements” within the meaning of U.S. federal securities laws. Words such as “anticipate,” “estimate,” “expect,” “forecast,” “guidance,” “could,” “may,” “should,” “would,” “believe,” “intend,” “project,” “plan,” “predict,” “will,” “target” and similar expressions identify forward-looking statements, which are not historical in nature. Our forward-looking statements may include, without limitation: our future financial and operational results; our business strategy; our industry; our expected revenues; our future profitability; our maintenance or expansion projects; our projected budget and capital expenditures and the impact of such expenditures on our performance; and future economic and market conditions in the oil and gas industry.
Forward-looking statements are based on our current understanding, assessments, estimates and projections of relevant factors and reasonable assumptions about the future. Forward-looking statements are subject to certain known and unknown risks and uncertainties that could cause actual results to differ materially from our historical experience and our current projections or expectations of future results expressed or implied by these forward-looking statements. The following important factors could cause actual results to differ materially from those in our forward-looking statements:
•the direct and indirect effects of the COVID-19 global pandemic and other public health developments on our business and those of our business partners, suppliers and customers, including Hess;
•the ability of Hess and other parties to satisfy their obligations to us, including Hess’ ability to meet its drilling and development plans on a timely basis or at all, its ability to deliver its nominated volumes to us, and the operation of joint ventures that we may not control;
•our ability to generate sufficient cash flow to pay current and expected levels of distributions;
•reductions in the volumes of crude oil, natural gas, NGLs and produced water we gather, process, terminal or store;
•the actual volumes we gather, process, terminal and store for Hess in excess of our MVCs and relative to Hess' nominations;
•fluctuations in the prices and demand for crude oil, natural gas and NGLs, including as a result of the COVID-19 global pandemic;
•changes in global economic conditions and the effects of a global economic downturn on our business and the business of our suppliers, customers, business partners and lenders;
•our ability to comply with government regulations or make capital expenditures required to maintain compliance, including our ability to obtain or maintain permits necessary for capital projects in a timely manner, if at all, or the revocation or modification of existing permits;
•our ability to successfully identify, evaluate and timely execute our capital projects, investment opportunities and growth strategies, whether through organic growth or acquisitions;
•costs or liabilities associated with federal, state and local laws, regulations and governmental actions applicable to our business, including legislation and regulatory initiatives relating to environmental protection and safety, such as spills, releases, pipeline integrity and measures to limit greenhouse gas emissions;
•our ability to comply with the terms of our credit facility, indebtedness and other financing arrangements, which, if accelerated, we may not be able to repay;
•reduced demand for our midstream services, including the impact of weather or the availability of the competing third-party midstream gathering, processing and transportation operations;
•potential disruption or interruption of our business due to catastrophic events, such as accidents, severe weather events, labor disputes, information technology failures, constraints or disruptions and cyber-attacks;
•any limitations on our ability to access debt or capital markets on terms that we deem acceptable, including as a result of weakness in the oil and gas industry or negative outcomes within commodity and financial markets;
•liability resulting from litigation; and
•other factors described in Item 1A—Risk Factors in our Annual Report on Form 10-K, as well as any additional risks described in our other filings with the Securities and Exchange Commission.
As and when made, we believe that our forward-looking statements are reasonable. However, given these risks and uncertainties, caution should be taken not to place undue reliance on any such forward-looking statements since such statements speak only as of the date when made and there can be no assurance that such forward-looking statements will occur and actual results may differ materially from those contained in any forward-looking statement we make. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise.
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