Item 2. Management’s Discussion and Analysis
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, 2023 (our “2023 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. References to “Partnership” refer to Hess Midstream Operations LP.
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 2023 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.
On February 8, 2024, GIP sold an aggregate of 11,500,000 of our Class A Shares representing limited partner interests in the Company (“Class A Shares”), inclusive of the underwriters’ option to purchase up to 1,500,000 of additional shares, which was fully exercised, in an underwritten public offering at a price of $33.10 per Class A Share, less underwriting discounts. GIP received net proceeds from the offering of approximately $377.5 million, after deducting underwriting discounts. The Company did not receive any proceeds from the offering transaction. The offering transaction was conducted pursuant to a registration rights agreement among us and the Sponsors.
On March 14, 2024, the Partnership purchased directly from the Sponsors 2,816,901 Class B units representing limited partner interests in the Partnership (“Class B Units”) for an aggregate purchase price of approximately $100 million. The purchase price per Class B Unit was $35.50, the closing price of the Class A shares on March 11, 2024. The repurchase transaction was funded using borrowings under the Partnership’s existing revolving credit facility.
As a result of the equity offering and unit repurchase transactions described above, our public ownership increased from approximately 29.8% at December 31, 2023, to approximately 35.3% at March 31, 2024, on a consolidated basis.
We utilized the excess free cash flow beyond our growing distributions to provide increased return of capital to our shareholders through an immediate 1.5% increase in our quarterly distribution level per Class A Share in the first quarter of 2024 in addition to the quarterly 1.2% increase per Class A Share consistent with our target of at least 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.
First Quarter Results
Significant financial and operating highlights for the first quarter of 2024 included:
• Consolidated net income of $161.9 million;
• Net income attributable to Hess Midstream LP after deduction for noncontrolling interest of $44.6 million, or $0.60 basic earnings per Class A Share;
• Net cash provided by operating activities of $185.3 million;
• Adjusted EBITDA of $275.8 million;
• Cash distribution of $0.6516 per Class A Share declared on April 22, 2024, an approximate 2.7% increase in the quarterly distribution per Class A Share for the first quarter of 2024 as compared with the fourth quarter of 2023. The increase consists of an approximate 1.5% increase in the Company’s distribution level per Class A Share in addition to the quarterly 1.2% increase per Class A Share consistent with its target of at least 5% growth in annual distributions per Class A Share.
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Revenues and other income in the first quarter of 2024 were $355.6 million compared with $305.0 million in the prior-year quarter. First quarter 2024 revenues and other income were up $50.6 million compared to the prior-year quarter primarily due to higher physical volumes, partially offset by lower shortfall fees due to the 2023 transition to actual physical volumes that are at or above MVCs. Total operating costs and expenses in the first quarter of 2024 were $133.6 million, compared with $116.3 million in the prior-year quarter. The increase was primarily attributable to higher maintenance expenses, pass-through expenses and higher depreciation expense for additional assets placed in service. Interest expense in the first quarter of 2024 was $48.5 million, up from $41.6 million in the prior-year quarter, primarily attributable to higher interest rates on our credit facilities and higher borrowings on our revolving credit facility. Income tax expense increased $7.8 million resulting from ownership changes following secondary equity offering transactions and Class B Unit repurchases. As a result, consolidated net income increased $19.7 million and Adjusted EBITDA increased $36.8 million for the first quarter of 2024 compared with the first quarter of 2023.
Throughput volumes increased 16% for gas gathering and gas processing in the first quarter of 2024 compared with the first quarter of 2023, primarily due to higher production, including third-party volumes, and higher gas capture. Throughput volumes increased 14% for crude oil gathering and 13% for terminaling in the first quarter of 2024 compared with the first quarter of 2023, primarily due to higher production and higher third-party volumes. Water gathering volumes increased 47%, reflecting higher crude oil production and increased utilization of our water gathering infrastructure.
For additional discussion of the results of operations at the segment level, see “ Results of Operations ” below. For additional information regarding Adjusted EBITDA, our non‑GAAP financial measure, see “ How We Evaluate Our Operations ” and “ Reconciliation of Non‑GAAP Financial Measure ” below.
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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 had an initial 10-year term. We exercised our renewal options to extend each of these commercial agreements for one additional 10-year term (“Secondary Term”) effective January 1, 2024, 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 this gathering sub-system, the initial term is 15 years effective January 1, 2014, and the Secondary Term is 5 years. For the water services agreements the initial term is 14 years effective January 1, 2019, and the Secondary Term is 10 years. We have the sole option to renew these remaining agreements for their Secondary Term that is exercisable at a later date. Upon the expiration of the Secondary Term, if any, the agreements will automatically renew for subsequent one-year periods unless terminated by either party no later than 180 days prior to the end of the applicable Secondary Term.
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 is replaced by an inflation-based fee structure. See Note 3, Related Party Transactions for additional description of our commercial agreements.
Our revenues also include revenues from (i) third-party volumes contracted directly with us, (ii) third-party volumes contracted with Hess and delivered to us under the commercial agreements with Hess described above, and (iii) 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.
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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, and (iii) Adjusted EBITDA.
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.
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. 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 use Adjusted EBITDA to analyze our performance and liquidity.
Adjusted EBITDA is a non‑GAAP supplemental financial measure 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 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 provides useful information to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA are net income (loss) and net cash provided by (used in) operating activities. Adjusted EBITDA should not be considered as an alternative 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 has important limitations as an analytical tool because it excludes some but not all items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA may be defined differently by other companies in our industry, our definition of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, thereby diminishing its utility.
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Results of Operations
Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023
Results of operations for the three months ended March 31, 2024 and 2023 are presented below (in millions, unless otherwise noted).
For the Three Months Ended March 31, 2024
Gathering
Processing and Storage
Terminaling and Export
Interest and Other
Consolidated Hess Midstream LP
Revenues
Affiliate services
$
186.6
$
135.4
$
27.4
$
-
$
349.4
Third-party services
1.5
3.7
0.1
-
5.3
Other income
-
-
0.9
-
0.9
Total revenues
188.1
139.1
28.4
-
355.6
Costs and expenses
Operating and maintenance expenses (exclusive
of depreciation shown separately below)
46.3
25.2
6.6
-
78.1
Depreciation expense
30.8
14.7
4.3
-
49.8
General and administrative expenses
2.1
1.2
0.2
2.2
5.7
Total operating costs and expenses
79.2
41.1
11.1
2.2
133.6
Income (loss) from operations
108.9
98.0
17.3
(2.2
)
222.0
Income from equity investments
-
2.7
-
-
2.7
Interest expense, net
-
-
-
48.5
48.5
Income (loss) before income tax expense
108.9
100.7
17.3
(50.7
)
176.2
Income tax expense
-
-
-
14.3
14.3
Net income (loss)
108.9
100.7
17.3
(65.0
)
161.9
Less: Net income (loss) attributable to
noncontrolling interest
72.5
67.3
11.4
(33.9
)
117.3
Net income (loss) attributable to Hess Midstream LP
$
36.4
$
33.4
$
5.9
$
(31.1
)
$
44.6
Throughput volumes
Gas gathering (MMcf/d)
404
404
Crude oil gathering (MBbl/d)
106
106
Gas processing (MMcf/d)
393
393
Crude oil terminaling (MBbl/d)
117
117
NGL loading (MBbl/d)
14
14
Water gathering (MBbl/d)
116
116
(1) Million cubic feet per day
(2) Thousand barrels per day
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PART I – FINANCIAL INFORMATION (CONT’D)
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For the Three Months Ended March 31, 2023
Gathering
Processing and Storage
Terminaling and Export
Interest and Other
Consolidated Hess Midstream LP
Revenues
Affiliate services
$
164.4
$
113.8
$
25.2
$
-
$
303.4
Third-party services
0.3
0.6
-
-
0.9
Other income
-
-
0.7
-
0.7
Total revenues
164.7
114.4
25.9
-
305.0
Costs and expenses
Operating and maintenance expenses (exclusive
of depreciation shown separately below)
38.4
20.2
3.9
-
62.5
Depreciation expense
28.8
14.5
4.1
-
47.4
General and administrative expenses
2.4
1.2
0.3
2.5
6.4
Total operating costs and expenses
69.6
35.9
8.3
2.5
116.3
Income (loss) from operations
95.1
78.5
17.6
(2.5
)
188.7
Income from equity investments
-
1.6
-
-
1.6
Interest expense, net
-
-
-
41.6
41.6
Income (loss) before income tax expense
95.1
80.1
17.6
(44.1
)
148.7
Income tax expense
-
-
-
6.5
6.5
Net income (loss)
95.1
80.1
17.6
(50.6
)
142.2
Less: Net income (loss) attributable to
noncontrolling interest
77.7
65.6
14.3
(36.1
)
121.5
Net income (loss) attributable to Hess Midstream LP
$
17.4
$
14.5
$
3.3
$
(14.5
)
$
20.7
Throughput volumes
Gas gathering (MMcf/d)
347
347
Crude oil gathering (MBbl/d)
93
93
Gas processing (MMcf/d)
338
338
Crude oil terminaling (MBbl/d)
104
104
NGL loading (MBbl/d)
9
9
Water gathering (MBbl/d)
79
79
(1) Million cubic feet per day
(2) Thousand barrels per day
Gathering
Revenues and other income increased $23.4 million in the first quarter of 2024 compared to the first quarter of 2023, of which $14.2 million is attributable to higher gas gathering volumes that were above MVCs in the first quarter of 2024 and 2023, $6.0 million is attributable to higher water gathering and disposal revenue, $4.0 million is attributable to higher pass‑through revenue, and $2.5 million is attributable to higher crude oil gathering volumes that were above MVCs in the first quarter of 2024 and above MVC levels of the first quarter of 2023. Additionally, $1.2 million of the increase is attributable to services provided directly to third parties. These revenue increases were partially offset by $4.5 million attributable to lower crude oil tariff rates.
Operating and maintenance expenses increased $7.9 million, of which $4.0 million is attributable to higher pass-through costs, including produced water trucking and disposal and electricity fees, $2.9 million is attributable to compressor stations overhauls and other maintenance activities, and $1.0 million is attributable to higher employee costs allocated to us under our omnibus and employee secondment agreements. Depreciation expense increased $2.0 million due to new compressors and other new gathering assets brought into service.
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Processing and Storage
Revenues and other income increased $24.7 million in the first quarter of 2024 compared to the first quarter of 2023, of which $14.3 million is attributable to higher gas processing volumes that were above MVCs in the first quarter of 2024 and 2023, $7.4 million is attributable to higher tariff rates, and $3.0 million is primarily attributable to services provided directly to third parties.
Operating and maintenance expenses increased $5.0 million, of which $2.6 million is attributable to higher maintenance activity, $1.8 million is attributable to higher third-party processing fees, and $0.6 million is attributable to all other costs.
Income from equity investments increased $1.1 million in the first quarter of 2024 compared to the first quarter of 2023 primarily due to higher volumes processed at the LM4 plant.
Terminaling and Export
Revenues and other income increased $2.5 million in the first quarter of 2024 compared to the first quarter of 2023, of which $2.1 million is attributable to higher crude oil terminaling volumes that were above MVCs in the first quarter of 2024 and above MVC levels of the first quarter of 2023, and $2.1 million is primarily attributable to pass-through revenue. These revenue increases were partially offset by $1.7 million attributable to lower tariff rates.
Operating and maintenance expenses increased $2.7 million in the first quarter of 2024 compared to the first quarter of 2023, of which $1.8 million is attributable to rail transportation pass-through costs and $0.9 million is attributable to other maintenance expenses.
Interest and Other
Interest expense, net of interest income, increased $6.9 million in the first quarter of 2024 compared to the first quarter of 2023, primarily attributable to higher interest rates on our credit facilities and higher borrowings on our revolving credit facility. Income tax expense increased $7.8 million in the same period driven by increased ownership of the Partnership by Hess Midstream LP following equity offering and unit repurchase transactions in 2023 and 2024.
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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.
The throughput volumes at our facilities depend primarily on the volumes of crude oil and natural gas produced by Hess and third parties in the Bakken, which, in turn, are ultimately dependent on Hess’ and third parties’ 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 our customers’ control, including the domestic and global supply of and demand for crude oil, natural gas and NGLs. Sustained periods of low prices for oil and natural gas could materially and adversely affect the quantities of oil and natural gas that Hess and third parties 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. 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. 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.
The majority of our systems entered the Secondary Term of our commercial agreements, which includes a fixed fee structure based on the average fees paid by Hess during 2021-2023 adjusted annually for inflation up to 3% a year. Such a fee structure may provide less downside risk protection in the future compared to the fee structure we had during the initial term of the commercial agreements. For our terminaling and water gathering systems, the rates will continue to be reset through our annual rate redetermination process through 2033. For all of our systems, MVCs will continue to provide downside risk protection through 2033. Generally, all of our volumes are expected to be above currently established MVC levels in 2024, 2025 and 2026.
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Reconciliation of Non‑GAAP Financial Measure
The following table presents a reconciliation of Adjusted EBITDA 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 March 31,
(in millions)
2024
2023
Reconciliation of Adjusted EBITDA and to net income:
Net income
$
161.9
$
142.2
Plus:
Depreciation expense
49.8
47.4
Proportional share of equity affiliates' depreciation
1.3
1.3
Interest expense, net
48.5
41.6
Income tax expense
14.3
6.5
Adjusted EBITDA
$
275.8
$
239.0
Reconciliation of Adjusted EBITDA to net cash
provided by operating activities:
Net cash provided by operating activities
$
185.3
$
198.7
Changes in assets and liabilities
44.0
1.1
Amortization of deferred financing costs
(2.1
)
(2.1
)
Proportional share of equity affiliates' depreciation
1.3
1.3
Interest expense, net
48.5
41.6
Distribution from equity investments
(3.5
)
(2.6
)
Income from equity investments
2.7
1.6
Other
(0.4
)
(0.6
)
Adjusted EBITDA
$
275.8
$
239.0
(1) Excludes amortization of deferred financing costs.
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Capital Resources and Liquidity
We expect our ongoing sources of liquidity to include:
• cash on hand;
• 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 April 22, 2024, we declared a quarterly cash distribution of $0.6516 per Class A Share, to be paid on May 14, 2024 to shareholders of record on May 2, 2024. Simultaneously, the Partnership will make a distribution of $0.6516 per Class B Unit of the Partnership to the Sponsors.
Fixed‑Rate Senior Notes
As of March 31, 2024, the Partnership had:
• $400.0 million aggregate principal amount of 5.500% fixed‑rate senior unsecured notes due 2030 that were issued to qualified institutional investors. Interest is payable semi‑annually on April 15 and October 15.
• $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.
• $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.
• $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 March 31, 2024, 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 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.
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Credit Facilities
As of March 31, 2024, the Partnership had $1.4 billion senior secured credit facilities (the “Credit Facilities”) consisting of a $1.0 billion 5-year revolving credit facility and a $400.0 million 5‑year Term Loan A facility. The 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. As of March 31, 2024, borrowings of $455.0 million were drawn and outstanding under the Partnership’s revolving credit facility, and borrowings of $395.0 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 March 31, 2024, we were in compliance with these financial covenants.
Cash Flows
Operating Activities. Net cash provided by operating activities decreased $13.4 million for the three months ended March 31, 2024, compared to the same period in 2023. The change in operating cash flows resulted primarily from an increase in cash used by changes in working capital of $42.9 million, an increase in expenses, other than depreciation and other non-cash gains and losses of $22.0 million, partially offset by an increase in revenue and other income of $50.6 million and an increase in distributions received from equity investments of $0.9 million.
Investing Activities. Net cash used in investing activities decreased $9.5 million for the three months ended March 31, 2024, compared to the same period in 2023 driven by lower payments for additions to property, plant, and equipment.
Financing Activities. Net cash used in financing activities decreased $2.2 million for the three months ended March 31, 2024, compared to the same period in 2023. In the first three months of 2024, we paid higher distributions to shareholders and noncontrolling interests of $6.9 million and paid higher transactions costs of $0.4 million as compared to the same period in 2023. Our net proceeds from bank borrowings were $9.5 million higher in the first three months of 2024 compared to the same period in 2023.
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.
The following table sets forth a summary of capital expenditures and reconciles capital expenditures on an accrual basis to additions to property, plant and equipment on a cash basis:
Three Months Ended March 31,
2024
2023
(in millions)
Total capital expenditures
35.2
57.3
(Increase) decrease in accrued capital expenditures
15.2
2.2
(Increase) decrease in capital expenditures included
in accounts payable - affiliate
4.4
4.8
Additions to property, plant and equipment
$
54.8
$
64.3
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Capital expenditures in 2024 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 compressor stations and associated pipeline infrastructure, which are expected to be placed in service in 2025. Capital expenditures in 2023 were also attributable to continued expansion of our compression capacity.
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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 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;
• changes in global economic conditions and the effects of a global economic downturn or inflation 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 health and safety, such as spills, releases, pipeline integrity and measures to limit greenhouse gas emissions and climate change;
• 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;
• risks and uncertainties associated with Hess’ proposed merger with Chevron Corporation (“Chevron”), including the following:
o the risk that regulatory approvals are not obtained or are obtained subject to conditions that are not anticipated by Chevron and Hess;
o potential delays in consummating the potential transaction, including as a result of regulatory approvals or the ongoing arbitration proceedings regarding preemptive rights in the Stabroek Block joint operating agreement;
o risks that such ongoing arbitration is not satisfactorily resolved and the potential transaction fails to be consummated;
o Chevron’s ability to integrate Hess’ operations in a successful manner and in the expected time period;
o the possibility that any of the anticipated benefits and projected synergies of the potential transaction will not be realized or will not be realized within the expected time period;
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o the occurrence of any event, change or other circumstance that could give rise to the termination of the Chevron merger agreement;
o risks that the anticipated tax treatment of the potential transaction is not obtained, or other unforeseen or unknown liabilities;
o customer, shareholder, regulatory and other stakeholder approvals and support, or unexpected future capital expenditures;
o potential litigation relating to the potential transaction that could be instituted against Chevron and Hess or their respective directors, and the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
o the effect of the announcement, pendency or completion of the potential transaction on the parties’ business relationships and business generally, and the risks that the potential transaction disrupts current plans and operations of Chevron or Hess and potential difficulties in Hess employee retention as a result of the transaction, as well as the risk of disruption of Chevron’s or Hess’ management and business disruption during the pendency of, or following, the potential transaction;
o the receipt of required Chevron board of directors’ authorizations to implement capital allocation strategies, including future dividend payments, and uncertainties as to whether the potential transaction will be consummated on the anticipated timing or at all, or if consummated, will achieve its anticipated economic benefits, including as a result of risks associated with third-party contracts containing material consent, anti-assignment, transfer, other provisions that may be related to the potential transaction which are not waived or otherwise satisfactorily resolved or changes in commodity prices;
o negative effects of the announcement of the transaction, and the pendency or completion of the proposed acquisition on the market price of Chevron’s or Hess’ common stock and/or operating results;
o rating agency actions and Chevron’s and Hess’ ability to access short- and long-term debt markets on a timely and affordable basis; 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.
Item 3. Quantitative and Qualitati ve Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We generally do not take ownership of the crude oil, natural gas or NGLs that we currently gather, process, terminal, store or transport for our customers. Because we generate substantially all of our revenues by charging fees under long-term commercial agreements with Hess with minimum volume commitments, Hess bears the risks associated with fluctuating commodity prices and we have minimal direct exposure to commodity prices.
In the normal course of our business, we are exposed to market risks related to changes in interest rates. Our financial risk management activities may include transactions designed to reduce risk by reducing our exposure to interest rate movements. Interest rate swaps may be used to convert interest payments on certain long‑term debt. At March 31, 2024, we did not have in place any derivative instruments to hedge any exposure to changes in interest rates.
At March 31, 2024, our total debt had a carrying value of $3,325.4 million and a fair value of approximately $3,249.1 million, based on Level 2 inputs in the fair value measurement hierarchy. A 15% increase or decrease in interest rates would decrease or increase the fair value of our fixed rate debt by approximately $78.6 million or $76.4 million, respectively. The carrying value of the amounts under our Term Loan A facility and revolving credit facility at the quarter-end approximated their fair value. Any changes in interest rates do not impact cash outflows associated with fixed rate interest payments or settlement of debt principal, unless a debt instrument is repurchased prior to maturity. Our exposure to market risk related to changes in interest rates has not materially changed from what we previously disclosed in our 2023 Annual Report.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.