S-1 1 d772672ds1.htm S-1 S-1
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Index to Financial Statements

As filed with the Securities and Exchange Commission on September 24, 2014

Registration No. 333-                    

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Hess Midstream Partners LP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   1311   36-4777695

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

  (I.R.S. Employer Identification Number)

1501 McKinney Street

Houston, TX 77010

(713) 496-4200

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Timothy B. Goodell

General Counsel and Secretary

Hess Midstream Partners GP LLC

1501 McKinney Street

Houston, TX 77010

(713) 496-4200

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

William N. Finnegan IV

Brett E. Braden

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

G. Michael O’Leary

Stephanie C. Beauvais

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

(713) 220-4200

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨   Accelerated filer  ¨   Non-accelerated filer  x    Smaller reporting company  ¨
                  (Do not check if a smaller reporting company)   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

   Proposed
Maximum
Aggregate
Offering Price(1)(2)
  

Amount of

Registration Fee

Common units representing limited partner interests

   $250,000,000    $32,200

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated September 24, 2014

Prospectus

Common Units

Representing Limited Partner Interests

Hess Midstream Partners LP

 

 

This is an initial public offering of common units representing limited partner interests of Hess Midstream Partners LP. We were recently formed by Hess Corporation, and no public market currently exists for our common units. We are offering          common units in this offering. We expect that the initial public offering price will be between $         and $         per common unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “HESM.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act.

As a result of certain laws and regulations to which we are or may in the future become subject, we may require owners of our common units to certify that they are both U.S. citizens and subject to U.S. federal income taxation on our income. If you are not an eligible holder, your common units may be subject to redemption.

 

 

Investing in our common units involves a high degree of risk. Before buying any common units, you should carefully read the discussion of material risks of investing in our common units in “Risk Factors” beginning on page 24. These risks include the following:

 

    Hess currently accounts for substantially all of our revenues. If Hess changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes delivered to or processed or stored at our assets, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.

 

    We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to our unitholders.

 

    On a pro forma basis, we would not have generated sufficient distributable cash flow to pay the full minimum quarterly distribution on all of our units for the twelve months ended June 30, 2014 or the year ended December 31, 2013.

 

    Hess may suspend, reduce or terminate its obligations under our commercial agreements in certain circumstances, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

 

    Because of the natural decline in production from existing wells in our areas of operation, our success depends, in part, on Hess and other producers replacing declining production and also on our ability to secure new sources of natural gas and crude oil. Any decrease in the volumes of natural gas or crude oil that we handle could adversely affect our business and operating results.

 

    Our general partner and its affiliates, including Hess, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of Hess, and Hess is under no obligation to adopt a business strategy that favors us.

 

    Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

 

    Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or if we become subject to entity-level taxation for state tax purposes, our cash available for distribution to our unitholders would be substantially reduced.

 

    Even if our unitholders do not receive any cash distributions from us, they will be required to pay taxes on their share of our taxable income.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Common Unit
     Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $         $     

Proceeds to Hess Midstream Partners LP, before expenses

   $         $     

 

(1) Excludes an aggregate structuring fee equal to     % of the gross proceeds of this offering payable to Goldman, Sachs & Co. and Morgan Stanley & Co. LLC. Please read “Underwriting.”

The underwriters may also purchase up to an additional          common units at the initial public offering price, less the underwriting discounts and commissions and structuring fee payable by us, within 30 days from the date of this prospectus.

The underwriters are offering the common units as set forth under “Underwriting.” Delivery of the common units will be made on or about             ,    .

 

 

 

Goldman, Sachs & Co.    Morgan Stanley


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LOGO


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Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

Overview

     1   

Business Strategies

     3   

Business Strengths

     4   

Our Relationship with Hess

     5   

Our Business

     6   

Right of First Offer Assets

     9   

Our Emerging Growth Company Status

     10   

Risk Factors

     11   

The Transactions

     11   

Organizational Structure After the Transactions

     12   

Management of Hess Midstream Partners LP

     13   

Principal Executive Offices and Internet Address

     13   

Summary of Conflicts of Interest and Duties

     13   

THE OFFERING

     15   

SUMMARY HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

     21   

RISK FACTORS

     24   

Risks Related to Our Business

     24   

Risks Inherent in an Investment in Us

     38   

Tax Risks

     46   

USE OF PROCEEDS

     51   

CAPITALIZATION

     52   

DILUTION

     53   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     54   

General

     54   

Our Minimum Quarterly Distribution

     56   

Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended June  30, 2014 and the Year Ended December 31, 2013

     58   

Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015

     60   

Significant Forecast Assumptions

     63   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     64   

Distributions of Available Cash

     64   

Operating Surplus and Capital Surplus

     65   

Capital Expenditures

     67   

Subordinated Units and Subordination Period

     68   

Distributions of Available Cash From Operating Surplus During the Subordination Period

     69   

Distributions of Available Cash From Operating Surplus After the Subordination Period

     70   

General Partner Interest and Incentive Distribution Rights

     70   

Percentage Allocations of Available Cash from Operating Surplus

     71   

General Partner’s Right to Reset Incentive Distribution Levels

     71   

 

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     Page  

Distributions from Capital Surplus

     74   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     75   

Distributions of Cash Upon Liquidation

     76   

SELECTED HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

     79   

Non-GAAP Financial Measure

     82   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     83   

Overview

     83   

How We Generate Revenues

     84   

How We Evaluate Our Operations

     84   

Factors Affecting the Comparability of Our Financial Results

     86   

Other Factors Expected To Significantly Affect Our Future Results

     88   

Results of Operations

     90   

Capital Resources and Liquidity

     95   

Critical Accounting Policies and Estimates

     99   

Qualitative and Quantitative Disclosures about Market Risk

     101   

INDUSTRY OVERVIEW

     102   

General

     102   

Natural Gas Industry Overview

     102   

Natural Gas Midstream Services

     102   

Natural Gas Supply Chain

     104   

Compressed Natural Gas and Liquefied Natural Gas

     104   

Crude and Other Liquids Midstream Services

     105   

Crude Oil Supply Chain

     106   

Overview of the Williston Basin and the Bakken Shale Formation

     106   

BUSINESS

     108   

Overview

     108   

Business Strategies

     110   

Business Strengths

     110   

Our Relationship with Hess

     112   

Our Business

     114   

Processing and Storage

     117   

Logistics

     119   

Right of First Offer Assets

     121   

Potential Expansion Opportunities

     121   

Our Commercial Agreements with Hess

     122   

Other Agreements with Hess

     125   

Competition

     127   

Seasonality

     127   

Insurance

     128   

Environmental Regulation

     128   

Other Regulation

     131   

Title to Properties and Permits

     134   

Employees

     135   

Legal Proceedings

     135   

 

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     Page  

MANAGEMENT

     136   

Management of Hess Midstream Partners LP

     136   

Directors and Executive Officers of Hess Midstream Partners GP LLC

     137   

Board Leadership Structure

     139   

Board Role in Risk Oversight

     139   

Compensation of Our Officers and Directors

     140   

SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     144   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     145   

Distributions and Payments to Our General Partner and Its Affiliates

     145   

Agreements Governing the Transactions

     147   

Procedures for Review, Approval and Ratification of Related Person Transactions

     151   

CONFLICTS OF INTEREST AND DUTIES

     152   

Conflicts of Interest

     152   

Duties of the General Partner

     159   

DESCRIPTION OF THE COMMON UNITS

     162   

The Units

     162   

Transfer Agent and Registrar

     162   

Transfer of Common Units

     162   

OUR PARTNERSHIP AGREEMENT

     164   

Organization and Duration

     164   

Purpose

     164   

Capital Contributions

     164   

Voting Rights

     165   

Limited Liability

     166   

Issuance of Additional Securities

     167   

Amendment of Our Partnership Agreement

     168   

Merger, Consolidation, Conversion, Sale or Other Disposition of Assets

     170   

Termination and Dissolution

     171   

Liquidation and Distribution of Proceeds

     171   

Withdrawal or Removal of Our General Partner

     171   

Transfer of General Partner Interest

     173   

Transfer of Ownership Interests in Our General Partner

     173   

Transfer of Incentive Distribution Rights

     173   

Change of Management Provisions

     173   

Limited Call Right

     173   

Redemption of Ineligible Holders

     174   

Meetings; Voting

     175   

Status as Limited Partner

     175   

Indemnification

     176   

Reimbursement of Expenses

     176   

Books and Reports

     176   

Right to Inspect Our Books and Records

     177   

Registration Rights

     177   

Applicable Law; Exclusive Forum

     177   

 

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     Page  

UNITS ELIGIBLE FOR FUTURE SALE

     179   

Rule 144

     179   

Our Partnership Agreement and Registration Rights

     179   

Lock-up Agreements

     180   

Registration Statement on Form S-8

     180   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     181   

Taxation of the Partnership

     181   

Tax Consequences of Unit Ownership

     183   

Tax Treatment of Operations

     187   

Disposition of Units

     188   

Uniformity of Units

     191   

Tax-Exempt Organizations and Other Investors

     191   

Administrative Matters

     192   

INVESTMENT IN HESS MIDSTREAM PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     195   

UNDERWRITING

     197   

Commissions and Expenses

     197   

Option to Purchase Additional Common Units

     198   

Discretionary Sales

     198   

New York Stock Exchange

     198   

Lock-Up Agreements

     198   

Stabilization, Short Positions and Penalty Bids

     199   

Relationships

     199   

Indemnification

     199   

Offering Price Determination

     199   

Internet Distribution

     200   

Directed Unit Program

     200   

FINRA

     200   

Selling Restrictions

     200   

VALIDITY OF THE COMMON UNITS

     202   

EXPERTS

     202   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     202   

FORWARD-LOOKING STATEMENTS

     203   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF HESS MIDSTREAM PARTNERS LP

     A-1   

APPENDIX B Glossary of Terms

     B-1   

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.

 

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Through and including                     ,          (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. Please read “Risk Factors” and “Forward-Looking Statements.”

Industry and Market Data

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications or other published independent sources. Some data are also based on our good faith estimates.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. It does not contain all the information you should consider before investing in our common units. You should carefully read the entire prospectus, including “Risk Factors” and the historical combined and unaudited pro forma condensed combined financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (1) an initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus) and (2) that the underwriters do not exercise their option to purchase additional common units.

Unless the context otherwise requires, references in this prospectus to “Hess Midstream Partners LP,” the “Partnership,” “we,” “our,” “us,” or like terms, when used in a historical context, refer to Hess Midstream Partners LP Predecessor, our predecessor for accounting purposes, also referred to as “our Predecessor,” and when used in the present tense or prospectively, refer to Hess Midstream Partners LP and its subsidiaries. References in this prospectus to “our general partner” refer to Hess Midstream Partners GP LLC. References in this prospectus to “Hess” refer collectively to Hess Corporation and its subsidiaries, other than us, our subsidiaries and our general partner. We have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

Hess Midstream Partners LP

Overview

We are a fee-based, growth-oriented, traditional master limited partnership formed in January 2014 by Hess to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third-party crude oil and natural gas producers. Our assets are primarily located in the Bakken and Three Forks shale plays in the Williston Basin area of North Dakota, which we refer to collectively as the Bakken, one of the fastest-growing, most prolific producing basins in North America.

We generate substantially all of our revenues by charging fees for processing natural gas and fractionating natural gas liquids, or NGLs; terminaling and loading crude oil and NGLs; transporting crude oil by rail car; and storing and terminaling propane. We will enter into multiple 10-year, fee-based commercial agreements with Hess prior to the closing of this offering that will include minimum volume commitments based on dedicated production, inflation escalators and fee redetermination mechanisms. We believe these commercial agreements will provide us with stable and predictable cash flows. We have minimal direct exposure to commodity prices, and we generally do not take ownership of the crude oil, natural gas or NGLs that we process, terminal, store or transport for our customers. Our initial assets consist of the following:

Processing and Storage.    Our processing and storage business consists of a 30% economic interest in Hess TGP Operations LP, or HTGP Opco, and a 100% interest in Hess Mentor Storage Holdings LLC, or Mentor Holdings, which own the following assets, respectively:

 

    Tioga Gas Plant.    HTGP Opco owns a natural gas processing plant located in Tioga, North Dakota, which we refer to as the Tioga Gas Plant, with a nameplate processing capacity of 250 MMcf/d; and

 

    Mentor Storage Terminal.    Mentor Holdings owns a 328 MBbl propane storage cavern and rail and truck transloading facility located in Mentor, Minnesota, which we refer to as the Mentor Storage Terminal.

 

 

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Logistics.    Our logistics business consists of a 50% economic interest in Hess North Dakota Export Logistics Operations LP, or Logistics Opco, which owns each of the following assets:

 

    Tioga Rail Terminal.    A 140 MBbl/d crude oil and 30 MBbl/d NGL rail loading terminal in Tioga, North Dakota, which we refer to as the Tioga Rail Terminal;

 

    Crude Oil Rail Cars.    Nine crude oil unit trains, each consisting of 104 crude oil rail cars, and an additional 26 spare rail cars, all of which were constructed to American Association of Railroads, or AAR, Petition 1577 (CPC-1232) safety standards; and

 

    Ramberg Truck Facility.    A crude oil truck and pipeline receipt terminal located in Williams County, North Dakota, which we refer to as the Ramberg Truck Facility that is capable of delivering up to an aggregate of 130 MBbl/d of crude oil into an interconnecting pipeline for transportation to the Tioga Rail Terminal and to multiple third-party pipelines and storage facilities.

We refer to the Tioga Gas Plant, the Tioga Rail Terminal, the crude oil rail cars and the Ramberg Truck Facility in this prospectus as our “joint interest assets.”

We intend to expand our business by acquiring additional midstream assets from Hess and third parties, including our right of first offer assets described below, capitalizing on organic growth opportunities in the Bakken and pursuing opportunities to add additional Hess and third-party throughput volumes in the future. Hess has agreed that, during the 10-year period following the closing of this offering, it will offer us the right to acquire certain midstream assets retained by Hess following this offering or that may be constructed or acquired by Hess in the future. We refer to this right as our right of first offer. Our right of first offer assets include the following:

 

    Hess’s retained interests in our joint interest assets;

 

    Hess’s crude oil and natural gas gathering pipeline systems in the Bakken; and

 

    any additional crude oil or NGL rail cars that Hess acquires in the future for use in the Bakken.

Hess is under no obligation to offer to sell us any additional assets (other than our right of first offer assets, and then only if Hess decides to dispose of such assets), and we are under no obligation to buy any additional assets from Hess. As of June 30, 2014, the aggregate book value of the assets to be contributed to us by Hess in connection with the closing of this offering, including our interests in our joint interest assets, was approximately $470.0 million, and the aggregate book value of our right of first offer assets retained by Hess, including Hess’s retained interests in our joint interest assets, was approximately $1.4 billion. For a further description of our right of first offer assets, please read “—Right of First Offer Assets.”

Our relationship with Hess is one of our principal strengths. Hess is a global exploration and production, or E&P, company that explores for, develops, produces, purchases, transports and sells crude oil, natural gas and NGLs and is one of the leading crude oil and natural gas producers in the Bakken. Hess’s net Bakken production averaged 67 MBoe/d for the year ended December 31, 2013, an increase of approximately 20% over full year 2012 production. Hess expects that full year 2014 net production from its Bakken operations will average between 80 MBoe/d and 90 MBoe/d, and it has announced that it expects to grow its net Bakken production to 150 MBoe/d by 2018, which represents an estimated annual compound production growth rate of approximately 17.5% from 2013 net production. Hess expects its Bakken operations to be the largest contributor to its total production growth through 2018. For the year ended December 31, 2013, Hess sold a total of 83 MBbl/d of crude oil, 6 MBbl/d of NGLs and 48 MMcf/d of natural gas through its midstream facilities in the Bakken,

 

 

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which included volumes that Hess purchased from Hess’s working interest and royalty owners and other third parties. We believe our strategically located assets are integral to the success of Hess’s upstream operations in the Bakken and position us to become a leading provider of midstream services in the Bakken.

Hess has stated that it intends to use us as the primary midstream vehicle to support its Bakken production growth. Following the completion of this offering, Hess will also retain a significant interest in us through its sole ownership of our general partner, a     % limited partner interest in us and all of our incentive distribution rights. We believe that Hess will be incentivized to offer us the opportunity to purchase additional Bakken midstream assets that it currently owns, including our right of first offer assets, or that it may acquire or develop in the future to support its Bakken production growth.

For the year ended December 31, 2013 and the six months ended June 30, 2014, on a pro forma basis, we had revenues of $279.2 million and $105.7 million, net income (loss) of $34.0 million and $(1.2) million, and Adjusted EBITDA of $48.5 million and $17.5 million, respectively. The Tioga Gas Plant was shut down from late November 2013 to late March 2014 to complete an expansion, refurbishment and optimization project, and the plant commenced expanded operations in late March 2014. Hess accounted for approximately 100% of our pro forma revenues for each of the year ended December 31, 2013 and the six months ended June 30, 2014. After excluding Hess’s retained interests in our joint interest assets, our pro forma Adjusted EBITDA was $25.9 million and $9.5 million and our pro forma net income was $18.6 million and $2.1 million for those same periods, respectively. Please read “Selected Historical and Pro Forma Condensed Combined Financial and Operating Data” for the definition of the term Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated and presented in accordance with U.S. generally accepted accounting principles, or GAAP.

Business Strategies

Our primary business objectives are to generate stable and predictable cash flows and increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:

 

    Focus on Midstream Services Supported by Long-Term Contracts with Fee-Based Cash Flows.    We are focused on providing midstream services to Hess and third parties that are supported by long-term contracts with fee-based cash flows. We will enter into multiple 10-year, fee-based commercial agreements with Hess prior to the closing of this offering that will include minimum volume commitments based on dedicated production, inflation escalators and fee redetermination mechanisms, all of which are intended to provide us with cash flow stability and growth and minimize our direct commodity price exposure.

 

   

Increase Utilization of Our Assets by Supporting Hess’s Growing Production and Pursuing Third-Party Business.    We intend to increase utilization of our existing assets by handling additional throughput volumes that we expect to result from the growth of Hess’s Bakken operations. We also intend to pursue throughput volumes from third parties in our areas of operation. While we currently provide substantially all of our midstream services exclusively to Hess, we are actively marketing our midstream services to, and are pursuing strategic relationships with, third-party producers and commodity purchasers with operations in the Bakken in order to maximize our utilization rates and diversify our customer base. We believe that the strategic location of our existing assets, their importance to Hess’s E&P operations in the Bakken and their direct connections to multiple interstate pipelines and to the BNSF

 

 

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Railway provide us with a competitive advantage that will result in additional Hess and third-party throughput volumes at our assets.

 

    Grow Through Acquisitions from Hess and Third Parties.    We plan to pursue acquisitions of complementary midstream assets from Hess as well as third parties. In support of this strategy, Hess has provided us with a right of first offer on certain of its midstream assets, including Hess’s retained interests in our joint interest assets, and we believe Hess will be incentivized to offer us the opportunity to purchase additional Bakken midstream assets that it currently owns or that it may acquire or develop in the future. Our third-party acquisition strategy will include midstream assets both within our existing geographic footprint and in new areas.

 

    Pursue Attractive Organic Growth Opportunities.    We believe that the current high levels of crude oil and natural gas development and production activity in the Bakken will present us with significant opportunities for organic growth within our existing geographic footprint. For example, Hess has announced that it is currently evaluating a debottlenecking project at the Tioga Gas Plant to increase the plant’s processing capacity from 250 MMcf/d to 300 MMcf/d. We are also constructing a compressed natural gas, or CNG, terminal at the Tioga Gas Plant that, when completed, will allow for the compression of 2.5 MMcf/d of residue gas into 17,000 diesel equivalent gallons per day of CNG. We will also evaluate and pursue organic investment opportunities in new areas both within and outside of the Bakken that provide attractive returns.

Business Strengths

We believe that we are well positioned to execute our business strategies based on the following business strengths:

 

    Strategic Relationship with Hess.    We have a strategic relationship with Hess, one of the leading producers of crude oil and natural gas in the Bakken. As the owner of our general partner, all of our incentive distribution rights, and a     % limited partner interest in us, we believe Hess is incentivized to promote and support our business plan and to pursue projects that enhance the overall value of our business. Through our long-term commercial contracts with Hess, we have a well-capitalized, investment grade commercial counterparty initially providing substantially all of our revenues. Hess also owns other significant midstream assets, including our right of first offer assets in the Bakken. We believe that our relationship with Hess and its stated intent to use us as its primary midstream vehicle to support the growth of its Bakken production will provide us with a stable base of cash flows and significant growth opportunities.

 

    Strategically Located Assets.    Our initial assets are primarily located in the Bakken and serve Hess and third-party crude oil and natural gas development and production operations in the Bakken. Hess first commenced operations in North Dakota in 1951 and currently holds one of the largest acreage positions in the Bakken. The Bakken has been the focus of extensive industry activity over the last several years, and we expect producers to continue to invest substantial capital to develop crude oil and natural gas production in this region, which will in turn require substantial investment in midstream infrastructure. We believe that our existing footprint and connectivity to gathering systems and third-party pipeline and rail takeaway capacity will position us to capitalize on midstream growth opportunities in the Bakken.

 

   

Stable and Predictable Cash Flows Supported by Long-Term Fee-Based Contracts.    Our assets primarily consist of processing, storage, terminaling and transloading facilities that generate stable revenues by providing fee-based services. We expect that we will initially generate substantially all of our revenues under multiple 10-year, fee-based commercial

 

 

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agreements with Hess that will include minimum volume commitments based on dedicated production, inflation escalators and fee redetermination mechanisms, all of which are intended to provide us with cash flow stability and growth and minimize our direct commodity price exposure. We believe these agreements will provide us with stable and predictable cash flows.

 

    High-Quality, Modern Asset Base.    Substantially all of our assets have been constructed or have undergone extensive renovations within the past five years. For example, in March 2014, Hess completed a large-scale expansion, refurbishment and optimization of the Tioga Gas Plant, resulting in a state-of-the-art cryogenic processing plant and one of the largest natural gas processing plants in the Bakken based on nameplate processing capacity. We continually invest in the maintenance and integrity of our assets and have developed various programs to help us efficiently monitor and maintain them. We employ a rigorous integrity program that combines risk analysis, inspection and preventive maintenance to enhance the safety, reliability and efficiency of our operations.

 

    Financial Flexibility.    Following the completion of this offering, we expect to have in place a revolving credit facility with a term of up to five years and approximately $         million in available capacity. We expect to have no outstanding debt immediately following the closing of this offering. We believe that we will have access to the debt and equity capital markets which, together with the available borrowing capacity under our revolving credit facility, will provide us with the financial flexibility to effectively execute our growth strategy.

 

    Experienced Management Team with a Commitment to Safe, Reliable and Efficient Operations.    Our management team has substantial experience and an established record of safety and reliability in the development, management and operation of processing, storage and terminaling facilities and other midstream assets. Our management team also has expertise in acquiring and integrating midstream assets as well as in developing growth strategies in the midstream sector. Our senior management team includes several of Hess’s most senior officers, who average over 20 years of experience in the energy industry. The Hess personnel who will direct the provision of operational services in support of our assets have an average of over eight years of experience with Hess’s midstream operations. Our management team is committed to maintaining and improving the safety, reliability and efficiency of our operations, which we believe are key components in generating stable cash flows. We will also continue to utilize Hess’s strong internal safety review program and maintain a comprehensive employee safety training program.

Our Relationship with Hess

One of our principal strengths is our relationship with Hess. Hess is a global E&P company that explores for, develops, produces, purchases, transports and sells crude oil and natural gas. Hess’s common stock trades on the New York Stock Exchange, or NYSE, under the ticker symbol “HES.” Hess is a Fortune 500 company and had a total market capitalization of approximately $30.0 billion as of June 30, 2014.

In the first quarter of 2013, Hess announced plans to fully exit its marketing and refining businesses and sell certain mature and lower margin E&P assets in order to continue its transformation into a more focused pure play E&P company. Excluding production from divested assets, Hess had pro forma total crude oil and gas production of 285 MBoe/d for the year ended December 31, 2013, and expects total average compound annual production growth of approximately 5% to 8% through 2017. Hess had total E&P sales and other operating revenues of approximately $11.9 billion for the year ended December 31, 2013 and $5.5 billion for the six months ended June 30, 2014. At December 31, 2013, Hess had proved reserves of approximately 1.4 billion Boe, approximately 46% of which were

 

 

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located in the United States. At December 31, 2013, Hess had $42.8 billion of total assets, including $1.8 billion of cash and cash equivalents, total equity of $24.8 billion and a debt-to-capitalization ratio of 19%.

During 2013, Hess invested approximately $2.2 billion in its Bakken operations, which represented almost 60% of its total capital and exploratory expenditures in the United States for that year and included significant investments in midstream assets. During 2013, Hess operated 14 rigs in the Bakken and drilled 195 wells, completed 181 wells and commenced production on 168 wells, bringing the total number of Hess-operated production wells in North Dakota to 722 as of December 31, 2013. In 2014, Hess expects to operate 17 rigs in the Bakken and commence production on an additional 225 wells, including 83 wells that commenced production during the first six months of the year.

We believe Hess will promote and support the successful execution of our business strategies given its significant ownership in us following this offering, its stated intent to use us as its primary vehicle to grow its midstream business and the importance of our initial assets to Hess’s E&P operations in the Bakken. In addition to our right of first offer assets, we believe that Hess will offer us the opportunity to purchase additional Bakken midstream assets that it currently owns or that it may acquire or develop in the future to support its Bakken production growth. However, Hess is under no obligation to offer to sell us any additional assets (other than our right of first offer assets, and then only if Hess decides to dispose of such assets), and we are under no obligation to buy any additional assets from Hess or participate in such opportunities.

While our relationship with Hess and its affiliates is a significant strength, it is also a source of potential risks and conflicts. Please read “Risk Factors—Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties” for a discussion of these potential conflicts and the risks that they present to our limited partners.

Our Business

We conduct our business through two reportable segments: (1) processing and storage and (2) logistics.

Processing and Storage.    Our processing and storage business consists of the following assets:

 

    Tioga Gas Plant.    We own a 30% economic interest in HTGP Opco, which owns the Tioga Gas Plant, a natural gas processing plant located in Tioga, North Dakota. The plant currently has a cryogenic processing capacity of 250 MMcf/d and integrated fractionation capacity (including ethane) of 60 MBbl/d. Hess has announced that it is currently evaluating a debottlenecking project to increase the plant’s processing capacity from 250 MMcf/d to 300 MMcf/d. Additionally, we are also constructing a CNG terminal at the Tioga Gas Plant that, when completed, will have a CNG compression capacity of 17,000 diesel equivalent gallons per day. The plant includes the North Dakota Natural Gas Pipeline, an approximately 60-mile, 10.75-inch residue gas pipeline that connects to the interstate Northern Border Pipeline at Cherry Creek, North Dakota, and has a maximum capacity of 65 MMcf/d at the Northern Border Pipeline interconnection.

 

    Mentor Storage Terminal.    We own a 100% interest in Mentor Holdings, which owns the Mentor Storage Terminal, a propane storage cavern and rail and truck transloading facility located in Mentor, Minnesota, with approximately 328 MBbls of working storage capacity.

 

 

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The following tables set forth certain information regarding our processing and storage assets, each of which will have an associated long-term commercial agreement with Hess:

Processing and Storage Assets

 

Asset

 

Commodity

 

Description

 

Throughput
Capacity

 

Storage
Capacity

 

Significant Third-Party

and Affiliate Connections

Tioga Gas Plant(1)

  Natural gas   Cryogenic   250 MMcf/d(2)    

Inbound pipelines:

Hess gathering systems

         

Outbound residue gas pipelines:

Northern Border Pipeline;
Alliance Pipeline; Williston Basin
Interstate Pipeline

  NGLs   Fractionation  

60 MBbl/d

  87 MBbls(3)  

Outbound NGL pipelines:

Alliance Pipeline (propane);

Vantage Pipeline (ethane)

  CNG(4)   Compression   17 MGal/d(5)    

Mentor Storage Terminal

  Propane  

Storage; rail

and truck transloading

  6 MBbl/d   328 MBbls(6)   BNSF Railway

 

(1) Shown on a 100% basis. We own a 30% economic interest in HTGP Opco, which owns the Tioga Gas Plant.
(2) Hess has announced that it is currently evaluating a debottlenecking project to increase the processing capacity of the Tioga Gas Plant from 250 MMcf/d to 300 MMcf/d.
(3) Represents the aggregate above-ground shell storage capacity of storage tanks at the Tioga Gas Plant.
(4) We are constructing a CNG terminal at the Tioga Gas Plant that we expect to be in operation during the first half of 2015.
(5) Represents diesel equivalent gallons.
(6) Represents a working storage capacity of 324 MBbls at the storage cavern and an aggregate shell capacity of 4 MBbls of above-ground storage tanks at the Mentor Storage Terminal.

Logistics.    Our logistics business consists of our 50% economic interest in Logistics Opco, which owns each of the following assets:

 

    Tioga Rail Terminal.    A crude oil and NGL rail loading facility located in Tioga, North Dakota. This terminal consists of a dual loop track designed to load two crude oil unit trains per day, or approximately 140 MBbl/d. The terminal also consists of ladder tracks designed to load 30 MBbl/d of NGLs with track space for over 250 rail cars and three crude oil storage tanks with a combined shell storage capacity of 287 MBbls.

 

    Crude Oil Rail Cars.    Nine crude oil unit trains, each consisting of 104 crude oil rail cars, and an additional 26 spare rail cars, all of which were constructed to AAR Petition 1577 (CPC-1232) safety standards. The unit trains are used to transport crude oil for Hess from the Tioga Rail Terminal to various delivery points in the East Coast, West Coast and Gulf Coast regions of the United States.

 

    Ramberg Truck Facility.    A crude oil truck and pipeline receipt terminal located in Williams County, North Dakota that is capable of delivering up to an aggregate of 130 MBbl/d of crude oil into an interconnecting pipeline for transportation to the Tioga Rail Terminal and to multiple third-party pipelines and storage facilities.

 

 

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The following table sets forth certain information regarding our logistics assets, each of which will have an associated long-term commercial agreement with Hess:

Logistics Assets

 

Asset

 

Commodity

 

Description

 

Throughput
Capacity

 

Storage
Capacity

 

Significant Third-Party

and Affiliate Connections

Tioga Rail Terminal(1)

 

Crude oil

 

Dual loop

 

140 MBbl/d

 

287 MBbls(2)

 

BNSF Railway

  NGLs   Ladder track   30 MBbl/d   (3)  

Crude oil rail cars(1)

  Crude oil  

AAR Petition 1577 (CPC-1232)

standards

  (4)   (5)  

Ramberg Truck Facility(1)

  Crude oil  

Truck unloading

bays(6);

pipeline connections

  130 MBbl/d(7)   39 MBbls(8)  

Inbound pipelines:

Hess gathering systems

 

Outbound pipelines:

Tesoro High Plains;

Enbridge North Dakota System; Enbridge Bakken Expansion Pipeline;

Tioga Rail Terminal connection

 

(1) Shown on a 100% basis. We own a 50% economic interest in Logistics Opco, which owns the Tioga Rail Terminal, the crude oil rail cars and the Ramberg Truck Facility.
(2) Represents the aggregate above-ground shell storage capacity of storage tanks at the Tioga Rail Terminal.
(3) Operational storage is provided by the Tioga Gas Plant.
(4) Capacity varies based on round-trip time, which is primarily based on shipper destination and average rail speed.
(5) We own nine unit trains, each consisting of 104 crude oil rail cars, and an additional 26 spare rail cars. These rail cars have a shell capacity of 743 Bbls per car and an effective loading capacity of 96%, or approximately 713 Bbls per car, resulting in an aggregate working capacity of approximately 667 MBbls.
(6) Four truck unloading bays at the Ramberg Truck Facility are currently operational. We are constructing 10 additional truck unloading bays that we expect to enter into service by the end of 2014.
(7) Represents the aggregate redelivery capacity of the Ramberg Truck Facility.
(8) Represents the aggregate above-ground shell storage capacity of storage tanks at the Ramberg Truck Facility.

 

 

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We will enter into multiple 10-year, fee-based commercial agreements with Hess prior to the closing of this offering that will include minimum volume commitments based on dedicated production, inflation escalators and fee redetermination mechanisms, all of which are intended to provide us with cash flow stability and growth and minimize our direct commodity price exposure. Under these commercial agreements, which we expect will be dated effective January 1, 2014, we will provide processing, storage, terminaling, rail car and logistics services to Hess, and Hess will provide us with minimum volumes of crude oil, natural gas and NGLs. The following table sets forth additional information regarding our commercial agreements with Hess:

Our Commercial Agreements with Hess

 

Agreement

   Initial
Term
(years)(2)
     Renewal
Term
(years)(3)
     Hess Minimum Volume
Commitment(1)
         2015    2016    2017

Gas Processing Agreement

     10         10            

Processing and Fractionation (MMcf/d)

              

Transportation (MMcf/d)(4)

              

Terminal and Export Services Agreement(5)

     10         10            

Terminaling (MBbl/d)

              

Crude Oil Loading (MBbl/d)

              

NGL Rail Loading (MBbl/d)

              

Crude Oil Transportation (MBbl/d)

              

Propane Storage Services Agreement

     10         10            

Storage (MBbl/d)(6)

              

 

(1) Beginning in 2015, Hess’s minimum volume commitments under our gas processing agreement and terminal and export services agreement will be equal to 80% of Hess’s nominations in each development plan and apply on a three-year rolling basis. For more information related to Hess’s development plan and Hess’s nominations thereunder, please read “Business—Our Commercial Agreements with Hess.”
(2) We expect that each of our commercial agreements will be dated effective January 1, 2014.
(3) We may renew each commercial agreement for an additional 10-year term at our sole option. Thereafter, each commercial agreement will renew automatically for successive annual periods until terminated by either party.
(4) Reflects transportation on the Tioga Gas Plant’s North Dakota Natural Gas Pipeline.
(5) The terminal and export services agreement covers the Tioga Rail Terminal, the Ramberg Truck Facility and our crude oil rail cars.
(6) Represents a firm capacity reservation commitment under our propane storage services agreement for 90% of the storage capacity at our Mentor Storage Terminal which approximates a minimum volume commitment of      MBbl/d.

For more information related to our commercial agreements with Hess, as well as the revenues we expect to receive in connection with these agreements for the twelve months ending December 31, 2015, please read “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions” and “Business—Our Commercial Agreements with Hess.”

Right of First Offer Assets

Upon the closing of this offering, we will enter into an omnibus agreement with Hess under which Hess will grant us a right of first offer for a period of ten years after the closing of this offering to acquire various midstream assets retained by Hess after this offering or that may be constructed or acquired by Hess in the future. Our right of first offer assets are processing, gathering and logistics assets that primarily support Hess’s production operations in the Bakken. Our right of first offer assets include the following:

 

    Hess’s 70% retained interest in HTGP Opco;

 

    Hess’s 50% retained interest in Logistics Opco;

 

 

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    Hess’s Red Sky/Nesson crude oil and natural gas gathering system located in Williams, Mountrail, Divide and Burke counties in North Dakota;

 

    Hess’s Hawkeye crude oil and natural gas gathering system located in McKenzie County, North Dakota;

 

    Hess’s Goliath crude oil and natural gas gathering system located in Williams County, North Dakota; and

 

    any additional crude oil and NGL rail cars acquired by Hess in the future for use for the Bakken.

For more information relating to HTGP Opco and Logistics Opco, please read “—Our Business.”

The consideration to be paid by us for our right of first offer assets, as well as the consummation and timing of any acquisition by us of those assets, would depend upon, among other things, the timing of Hess’s decision to sell those assets and our ability to successfully negotiate a price and other mutually agreeable purchase terms for those assets. Please read “Risk Factors—Risks Related to Our Business—If we are unable to make acquisitions on economically acceptable terms from Hess or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.” Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement” for more information regarding our right of first offer.

Our Emerging Growth Company Status

As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:

 

    the presentation of only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in the registration statement of which this prospectus is a part;

 

    exemption from the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting;

 

    exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

    exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

    reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1 billion in annual revenue, (iii) the date on which we have more than $700 million in market value of our common units held by non-affiliates and (iv) the date on which we issue more than $1 billion of non-convertible debt over a three-year period.

 

 

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We have elected to take advantage of all of the applicable JOBS Act provisions, except that we will elect to opt out of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards. This election is irrevocable.

Accordingly, the information that we provide you may be different than what you may receive from other public companies in which you hold equity interests.

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully consider the risks described in “Risk Factors” and the other information in this prospectus before investing in our common units. Please also read “Forward-Looking Statements.”

The Transactions

We were formed in January 2014 by Hess to serve as Hess’s primary midstream vehicle for supporting the growth of its Bakken production. In connection with this offering, Hess will contribute to us each of the following:

 

    a 30% economic interest in HTGP Opco;

 

    a 50% economic interest in Logistics Opco; and

 

    a 100% interest in Mentor Holdings.

Additionally, each of the following transactions have occurred or will occur in connection with this offering:

 

    Hess will enter into multiple long-term commercial agreements with us;

 

    we will issue          common units and         subordinated units to Hess, representing an aggregate     % limited partner interest in us, and a 2% general partner interest in us and all of our incentive distribution rights to our general partner;

 

    we will issue         common units to the public in this offering, representing a     % limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;

 

    we will enter into a new $         million revolving credit facility; and

 

    Hess will enter into an omnibus agreement, an operational services agreement and a secondment agreement with us.

 

 

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Organizational Structure After the Transactions

After giving effect to the transactions described above under “—The Transactions,” assuming the underwriters’ option to purchase additional common units from us is not exercised, our ownership will be held as follows:

 

Public common units

         

Hess common units

         

Hess subordinated units

     49

General partner interest

     2
  

 

 

 

Total

     100
  

 

 

 

The following diagram depicts our organizational structure after giving effect to the transactions described above under “—The Transactions,” assuming the underwriters’ option to purchase additional common units from us is not exercised.

 

LOGO

 

 

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Management of Hess Midstream Partners LP

We are managed and operated by the board of directors and executive officers of Hess Midstream Partners GP LLC, our general partner. Hess is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the NYSE. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of Hess. For more information about the directors and executive officers of our general partner, please read “Management—Directors and Executive Officers of Hess Midstream Partners GP LLC.”

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, various operating subsidiaries. We may, in certain circumstances, contract with third parties to provide personnel in support of our operations. However, neither we nor our subsidiaries will have any employees. Our general partner is responsible for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Hess, its affiliates or third parties. Substantially all of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us. Please read “Management.”

Principal Executive Offices and Internet Address

Our principal executive offices are located at 1501 McKinney Street, Houston, Texas 77010, and our telephone number is (713) 496-4200. Following the completion of this offering, our website will be located at www.             .com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or the SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is in the best interests of our partnership. However, because our general partner is a wholly owned subsidiary of Hess, the officers and directors of our general partner also have a duty to manage the business of our general partner in a manner that they believe is in the best interests of Hess. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including Hess, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive distributions. In addition, our general partner may determine to manage our business in a way that directly benefits Hess’s businesses, rather than indirectly benefitting Hess solely through its ownership interests in us. All of these actions are permitted under our partnership agreement and will not be a breach of any duty (fiduciary or otherwise) of our general partner.

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that partnership agreements may not eliminate the implied

 

 

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contractual covenant of good faith and fair dealing. Our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to our unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including Hess, are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement and consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties—Duties of the General Partner” for a description of the fiduciary duties imposed on our general partner by Delaware law, the replacement of those duties with contractual standards under our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units. For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Party Transactions.”

 

 

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THE OFFERING

 

Common units offered to the public

                 common units.

 

                   common units, if the underwriters exercise in full their option to purchase additional common units from us.

 

Units outstanding after this offering

                 common units and                  subordinated units, each representing a 49% limited partner interest in us. The general partner will own a 2% general partner interest in us.

 

Use of proceeds

We expect to receive net proceeds of approximately $         million from the sale of common units offered by this prospectus based on the assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. We intend to use the net proceeds as follows:

 

    $         million will be used to repay amounts outstanding under an affiliate loan facility with Hess that were used to fund capital expenditures and other payments related to our Tioga Gas Plant’s expansion, refurbishment and optimization project;

 

    approximately $         million will be distributed to Hess to reimburse Hess for certain capital expenditures it incurred with respect to the assets that Hess will contribute to us in connection with this offering; and

 

    $         million will be used to pay revolving credit facility origination fees.

 

  If the underwriters exercise in full their option to purchase additional common units from us, we expect to receive additional net proceeds of approximately $         million. The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be used to redeem from Hess a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Please read “Underwriting.”
 

 

Cash distributions

We intend to make a minimum quarterly distribution of $         per unit ($         per unit on an annualized basis) to the extent we have sufficient cash at the end of each quarter after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We refer to this cash as “available cash.” Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors

 

 

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described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

 

  For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through             ,             , based on the actual length of that period.

 

  In general, we will pay any cash distributions we make each quarter in the following manner:
 

 

    first, 98% to the holders of common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $         plus any arrearages from prior quarters;

 

    second, 98% to the holders of subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $        ; and

 

    third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $        .

 

  If cash distributions to our unitholders exceed $         per unit on all common and subordinated units in any quarter, our unitholders and our general partner, as the holder of our incentive distribution rights, will receive distributions according to the following percentage allocations:

 

     Marginal Percentage Interest
in Distributions
 

Total Quarterly Distribution

Target Amount

   Unitholders     General
Partner (as
holder of
incentive
distribution
rights)
 

above $         up to $        

     85.0     15.0

above $         up to $        

     75.0     25.0

above $         up to $        

     50.0     50.0

 

  We refer to the additional increasing distributions to our general partner as “incentive distributions.” In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions.”

 

  If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

 

 

Pro forma distributable cash flow that was generated during the twelve months ended June 30, 2014 and the year ended

 

 

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December 31, 2013 was $9.7 million and $17.2 million, respectively. The amount of distributable cash flow we must generate to support the payment of the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distributions on our general partner’s 2% interest is approximately $         million (or an average of approximately $         million per quarter). The amount of distributable cash flow we generated during the twelve months ended June 30, 2014 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest and none of the aggregate minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. The amount of distributable cash flow we generated during the year ended December 31, 2013 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest and none of the aggregate minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended June 30, 2014 and the Year Ended December 31, 2013.”

 

  We believe that, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015,” we will generate sufficient distributable cash flow to support the payment of the aggregate minimum quarterly distribution of $         million on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% interest for the twelve months ending December 31, 2015. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Risk Factors” and “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Hess will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that for any quarter during the subordination period, holders of the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum

 

 

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quarterly distribution from prior quarters during the subordination period. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will begin on the closing date of this offering and will extend until the first business day following the date that we have earned and paid distributions of at least (1) $         (the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest for each of three consecutive, non-overlapping four quarter periods ending on or after                     , 2017, or (2) $         (150% of the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest and incentive distribution rights for any four-quarter period ending on or after                     , 2015, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.

 

  When the subordination period ends, each outstanding subordinated unit will convert into one common unit, and common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

 

Issuance of additional units

Our partnership agreement authorizes us to issue an unlimited number of additional units, including units senior to the common units, without the approval of our unitholders. Holders of our common and subordinated units will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement—Issuance of Additional Securities.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed except for cause by a vote of the holders of at least 66 23% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. In addition, any vote to remove our general partner during the subordination period must provide for the election of a successor general partner by the holders of a majority of the common units and a majority of the subordinated units, voting as separate classes. Upon consummation of this offering, Hess will own an aggregate of     % of our common and subordinated units (or     % of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give Hess the ability to

 

 

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prevent the removal of our general partner. Please read “Our Partnership Agreement—Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (1) the average of the daily closing price of our common units over the 20 trading days preceding the date that is three business days before notice of exercise of the call right is first mailed and (2) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. At the completion of this offering and assuming the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our common units (excluding any common units purchased by officers and directors of our general partner and Hess under our directed unit program). At the end of the subordination period (which could occur as early as within the quarter ending             ,         ), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units) and the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own     % of our outstanding common units (excluding any common units purchased by directors and executive officers of our general partner and Hess under our directed unit program) and therefore would not be able to exercise the call right at that time. Please read “Our Partnership Agreement—Limited Call Right.”

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending             , you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions” for the basis of this estimate.

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material U.S. Federal Income Tax Consequences.”

 

 

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Directed Unit Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to     % of the common units being offered by this prospectus for sale to certain officers and directors of Hess and our general partner. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting—Directed Unit Program.”

 

Exchange listing

We intend to apply to list our common units on the New York Stock Exchange under the symbol “HESM.”

 

 

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SUMMARY HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

The following table shows summary historical combined financial and operating data of Hess Midstream Partners LP Predecessor, our predecessor for accounting purposes, or our Predecessor, and summary unaudited pro forma condensed combined financial and operating data of Hess Midstream Partners LP for the periods and as of the dates indicated. The following historical financial and operating data of our Predecessor include all of the assets and operations of HTGP Opco, Mentor Holdings and Logistics Opco on a combined basis. In connection with the closing of this offering, Hess will contribute to us a 30% controlling economic interest in HTGP Opco, a 100% interest in Mentor Holdings and a 50% controlling economic interest in Logistics Opco. Following the closing of this offering, we will consolidate HTGP Opco, Mentor Holdings and Logistics Opco in our financial statements and reflect a noncontrolling interest adjustment for Hess’s retained 70% noncontrolling economic interest in HTGP Opco and 50% noncontrolling economic interest in Logistics Opco.

The summary historical condensed combined financial data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited combined financial statements of our Predecessor appearing elsewhere in this prospectus. The summary historical unaudited condensed combined financial data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited condensed combined financial statements of our Predecessor appearing elsewhere in this prospectus. The following tables should be read together with, and are qualified in their entirety by reference to, the historical combined and unaudited pro forma condensed combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary unaudited pro forma condensed combined financial and operating data presented in the following table for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014 are derived from the unaudited pro forma condensed combined financial statements included elsewhere in this prospectus. The unaudited pro forma condensed combined balance sheet assumes the offering and the related transactions occurred as of June 30, 2014, and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014 assumes the offering and the related transactions occurred as of January 1, 2013.

The unaudited pro forma condensed combined financial statements give effect to the following:

 

    Hess’s contribution of our Predecessor’s assets and operations to us, including adjusting for Hess’s retained interests in HTGP Opco and Logistics Opco and retention of certain related party indebtedness;

 

    our issuance of          common units and          subordinated units to Hess;

 

    our issuance of a 2% general partner interest in us and all of our incentive distribution rights to our general partner;

 

    our issuance of          common units, representing a     % limited partner interest in us, to the public in connection with this offering, and our receipt of $         in net proceeds from this offering;

 

    our entry into a new $         million revolving credit facility, which we have assumed was not drawn during the pro forma periods presented;

 

 

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    the consummation of this offering and application of the net proceeds of this offering, as described in “Use of Proceeds”;

 

    our entry into an omnibus agreement, an operational services agreement and a secondment agreement with Hess; and

 

    our execution of multiple long-term commercial agreements with Hess, including the recognition of incremental revenues under those agreements that were not recognized by our Predecessor and the adjustment of certain revenues previously recognized by our Predecessor.

The unaudited pro forma condensed combined financial statements do not give effect to an estimated $4.4 million of incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

For the years ended December 31, 2013 and 2012, our assets were part of the integrated operations of Hess, and our Predecessor generally recognized only the costs, but not the revenue, associated with certain of the services provided to Hess on an intercompany basis. Accordingly, the revenues in our Predecessor’s historical combined financial statements relate only to amounts received from third parties for these services and amounts received from Hess with respect to transactions for which there are governing contractual arrangements. For this reason, as well as the other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results,” our future results of operations will not be comparable to our Predecessor’s historical results.

The following table presents the non-GAAP financial measure of Adjusted EBITDA, which we use in evaluating the performance of our business. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Condensed Combined Financial and Operating Data—Non-GAAP Financial Measure.”

 

 

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     Hess Midstream Partners LP
Predecessor Historical
    Hess Midstream Partners LP
Pro Forma
 
     Six Months Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended
June 30,
    Year Ended
December 31,
 
     2014     2013     2013     2012     2014     2013  
(in millions, except per unit data and operating
information)
   (unaudited)                 (unaudited)  

Combined statements of income:

            

Revenues

            

Third-party

   $      $ 66.7      $ 142.3      $ 4.7      $      $   

Affiliate

     105.3        61.8        127.4        165.0        105.7        279.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     105.3        128.5        269.7        169.7        105.7        279.2   

Costs and expenses

            

Third-party product purchases

            27.0        65.8        20.9                 

Affiliate product purchases

            61.5        124.5        66.5                 

Operating and maintenance expenses

     85.9        98.9        217.7        130.3        85.9        217.7   

Depreciation expense

     17.6        7.2        12.5        14.3        17.6        12.5   

General and administrative expenses

     2.3        6.5        13.0        11.6        2.3        13.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     105.8        201.1        433.5        243.6        105.8        243.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (0.5     (72.6     (163.8     (73.9     (0.1     36.0   

Interest expense

     1.1                             1.1        2.0   

Income tax expense

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (1.6     (72.6     (163.8     (73.9     (1.2     34.0   

Less: Net income (loss) attributable to Hess

                                 (3.3     15.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Midstream Partners LP

   $ (1.6   $ (72.6   $ (163.8   $ (73.9   $ 2.1      $ 18.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General partner interest in net income (loss)

           $        $     

Limited partner interest in net income (loss)

            

Net income (loss) per limited partner unit (basic and diluted):

            

Common units

           $        $     

Subordinated units

           $        $     

Weighted average number of limited partner units outstanding (basic and diluted):

            

Common units

            

Subordinated units

            

Combined balance sheet data (at period end):

            

Cash and cash equivalents

   $        $      $      $     

Property, plant and equipment, net

     1,342.4          1,260.1        789.2        1,342.4     

Total assets

     1,365.5          1,268.7        789.8        1,368.1     

Total liabilities

     1,072.0          998.4        554.0        111.8     

Combined statements of cash flows data:

            

Net cash from (used in):

            

Operating activities

   $ (1.9   $ (69.6   $ (135.4   $ (53.3    

Investing activities

     (150.2     (228.0     (473.2     (347.5    

Financing activities

     152.1        297.6        608.6        400.8       

Other financial data:

        

Adjusted EBITDA

   $ 17.1      $ (65.4   $ (151.3   $ (59.6   $ 17.5      $ 48.5   

Adjusted EBITDA attributable to Hess Midstream Partners LP

             9.5        25.9   

Capital expenditures:

            

Maintenance

   $ 2.1      $ 2.1      $ 9.2      $ 4.0       

Expansion

     148.1        225.9        464.0        343.5       

Volumes:

            

Tioga Gas Plant

            

NGL processing sales (MBbl/d)

       10        11        6       

Natural gas processing sales (MMcf/d)

       68        71        44       

Natural gas inlet (MMcf/d)(1)

    
63
  
         

Mentor Storage Terminal

            

Propane throughput (MBbl/d)

     1        1        1        1       

Tioga Rail Terminal

            

Crude oil throughput (MBbl/d)

     36        52        49        31       

NGL throughput (MBbl/d)(2)

     3        5        5        3       

Ramberg Truck Facility

            

Crude oil throughput (MBbl/d)

     19        2        3        9       

 

(1) Beginning January 1, 2014, our Tioga Gas Plant revenues are based on natural gas inlet volumes at the plant. Please read “Management’s Discussion and Analysis—Factors Affecting the Comparability of our Financial Results.”
(2) Historically, NGLs were loaded onto rail cars at the Tioga Gas Plant. We expect to transition rail loading of NGLs to the Tioga Rail Terminal during the third quarter of 2014.

 

 

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RISK FACTORS

Investing in our common units involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common units. Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose part or all of your investment.

Risks Related to Our Business

Hess currently accounts for substantially all of our revenues. If Hess changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes delivered to or processed or stored at our assets, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.

For the year ended December 31, 2013 and the six months ended June 30, 2014, Hess accounted for approximately 47% and 100%, respectively, of our revenues. Following this offering, we expect that we will continue to derive substantially all of our revenues under multiple commercial agreements with Hess and any event, whether in our areas of operation or elsewhere, that materially and adversely affects Hess’s financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of Hess, the most significant of which include the following:

 

    the effects of changing commodity prices and production margins;

 

    Hess’s ability to successfully increase its Bakken production;

 

    the inherent uncertainties of future production rates and the possibility that actual Bakken production may be lower than estimated;

 

    the effects of domestic and worldwide political and economic developments could materially reduce Hess’s profitability and cash flows;

 

    the substantial period of time required to complete large capital projects, during which market conditions could deteriorate significantly, negatively impacting project returns;

 

    significant losses resulting from the hazards and risks of operations may not be fully covered by insurance, and could adversely affect Hess’s operations and financial results;

 

    disruptions due to catastrophic events, whether naturally occurring or man-made, may materially affect Hess’s operations and financial condition;

 

    increased regulation of hydraulic fracturing could result in reductions or delays in domestic production of crude oil and natural gas, which could adversely impact Hess’s results of operations;

 

    any decision by Hess to change its production plan or otherwise temporarily or permanently curtail or shut down its operations and, as a result, reduce or terminate its obligations under our commercial agreements;

 

    a deterioration in Hess’s credit profile could increase Hess’s costs of borrowing money and limit Hess’s access to the capital markets and commercial credit;

 

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    state and federal environmental, economic, health and safety, energy and other policies and regulations, and any changes in those policies and regulations; and

 

    environmental incidents and violations and related remediation costs, fines and other liabilities.

Please read “Business—Our Commercial Agreements with Hess” for a detailed description of each of these commercial agreements.

We may not generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution to our unitholders.

In order to support the payment of the minimum quarterly distribution of $         per unit per quarter, or $         per unit on an annualized basis, we must generate distributable cash flow of approximately $         million per quarter, or approximately $         million per year, based on the number of common units and subordinated units and the general partner interest to be outstanding immediately after completion of this offering. We may not generate sufficient distributable cash flow each quarter to support the payment of the minimum quarterly distribution. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

    the volumes of crude oil, natural gas and NGLs that we process, terminal and store;

 

    the fees with respect to volumes that we process, terminal and store;

 

    the level of competition from other midstream energy companies in our geographic markets; and

 

    outages at our facilities caused by mechanical failure and maintenance, construction and other similar activities.

In addition, the actual amount of distributable cash flow we generate will also depend on other factors, some of which are beyond our control, including:

 

    the amount of our operating expenses and general and administrative expenses, including reimbursements to Hess, which are not subject to any caps or other limits, in respect of those expenses;

 

    the application by Hess of credit amounts under our commercial agreements, which may be applied towards deficiency payments in future periods;

 

    the level of capital expenditures we make;

 

    the cost of acquisitions, if any;

 

    fluctuations in our working capital needs;

 

    our ability to borrow funds and access capital markets;

 

    restrictions contained in our revolving credit facility and other debt instruments;

 

    our debt service requirements and other liabilities;

 

    the amount of cash reserves established by our general partner;

 

    changes in commodity prices; and

 

    other business risks affecting our cash levels.

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Cash Distribution Policy and Restrictions on Distributions.”

 

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On a pro forma basis, we would not have generated sufficient distributable cash flow to pay the full minimum quarterly distribution on all of our units for the twelve months ended June 30, 2014 or the year ended December 31, 2013.

We must generate approximately $         million of distributable cash flow to pay the aggregate minimum quarterly distributions for four quarters on all units that will be outstanding immediately following this offering. The amount of distributable cash flow that we generated during the twelve months ended June 30, 2014 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest, and none of the aggregate minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. In addition, the amount of distributable cash flow that we generated during the year ended December 31, 2013 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest, and none of the aggregate minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under “Cash Distribution Policy and Restrictions on Distributions.” If we are not able to generate additional distributable cash flow in future periods, we may not be able to pay the full minimum quarterly distribution or any amount on our common or subordinated units and the corresponding distributions on our general partner’s 2% interest, in which event the market price of our common units may decline materially.

The assumptions underlying the forecast of distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual distributable cash flow to differ materially from our forecast.

The forecast of distributable cash flow set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our results of operations and distributable cash flow for the twelve months ending December 31, 2015. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” Our financial forecast has been prepared by management, and we have neither received nor requested an opinion or report on it from our or any other independent auditor.

Hess may suspend, reduce or terminate its obligations under our commercial agreements in certain circumstances, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

Our commercial agreements with Hess will include provisions that permit Hess to suspend or terminate its obligations under the applicable agreement if certain events occur. These events include our failure to perform or comply with a material warranty, covenant or obligation under the applicable commercial agreement following the expiration of a specified cure period. In addition, Hess may suspend or reduce its obligations under our commercial agreements if a force majeure event prevents us from performing required services under the applicable agreement. Hess has the discretion to make such decisions notwithstanding the fact that they may significantly and adversely affect us. Any such reduction or suspension or termination of Hess’s obligations would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to our unitholders. Please read “Business—Our Commercial Agreements with Hess.”

 

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Because of the natural decline in production from existing wells in our areas of operation, our success depends, in part, on Hess and other producers replacing declining production and also on our ability to secure new sources of natural gas and crude oil. Any decrease in the volumes of natural gas or crude oil that we handle could adversely affect our business and operating results.

The natural gas and crude oil volumes that support our business depend on the level of production from natural gas and crude oil wells connected to our facilities, which may be less than expected and will naturally decline over time. As a result, our cash flows associated with these wells will also decline over time. In order to maintain or increase throughput levels at our facilities, we must obtain new sources of natural gas and crude oil. The primary factors affecting our ability to obtain non-dedicated sources of natural gas and crude oil include (i) the level of successful drilling activity in our areas of operation, (ii) our ability to compete for volumes from successful new wells and (iii) our ability to compete successfully for volumes from sources connected to other pipelines.

We have no control over the level of drilling activity in our areas of operation, the amount of reserves associated with wells connected to our systems or the rate at which production from a well declines. In addition, we have no control over Hess or other producers or their drilling or production decisions, which are affected by, among other things:

 

    the availability and cost of capital;

 

    prevailing and projected oil, natural gas and NGL prices;

 

    demand for oil, natural gas and NGLs;

 

    levels of reserves;

 

    geological considerations;

 

    environmental or other governmental regulations, including the timely availability of drilling permits and the regulation of hydraulic fracturing and flaring; and

 

    the availability of drilling rigs and other costs of production and equipment.

Fluctuations in energy prices can also greatly affect the development of crude oil and natural gas reserves. Drilling and production activity generally decreases as crude oil and natural gas prices decrease. Declines in crude oil and natural gas prices could have a negative impact on exploration, development and production activity, and if sustained, could lead to a material decrease in such activity. Sustained reductions in exploration or production activity in our areas of operation could lead to reduced utilization of our assets.

Because of these and other factors, even if crude oil and natural gas reserves are known to exist in areas served by our assets, producers may choose not to develop those reserves. If reductions in drilling activity result in our inability to maintain the current levels of throughput on our systems, those reductions could reduce our revenues and cash flow and adversely affect our ability to make cash distributions to our unitholders.

Our success depends on our ability to attract and maintain customers in a limited number of geographic areas.

The majority of our assets are located in the Bakken, and we initially intend to focus our future capital expenditures largely on developing our business in that area. As a result, our financial condition, results of operations and cash flows are significantly dependent upon the demand for our services in that area. Due to our focus on the Bakken, an adverse development in crude oil or natural gas production from that area would have a significantly greater impact on our financial condition and

 

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results of operations than if we spread expenditures more evenly over a wider geographic area. For example, a change in the rules and regulations governing operations in or around the Bakken could cause Hess or other producers to reduce or cease drilling or to permanently or temporarily shut-in their production within the area, which could lead to a decrease in the volumes of natural gas and crude oil that we handle and have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

Seasonal weather conditions may adversely affect our customers’ ability to conduct drilling activities in some of the areas where we operate and our ability to operate our facilities and to construct additional facilities.

Oil and natural gas operations in North Dakota are adversely affected by seasonal weather conditions. In the Bakken, drilling and other crude oil and natural gas activities can be adversely affected during the winter months. Severe winter weather conditions limit and may reduce or temporarily halt our customers’ ability to operate during such conditions, leading to the decrease in drilling activity and the potential shut-in of producing wells which the producers are unable to service. This could result in a decrease in the volumes of crude oil, natural gas and NGLs supplied to our facilities. In addition, seasonal weather conditions during the winter months may adversely impact the operations of our facilities, by causing temporary delays and shutdowns. These constraints and the resulting impacts could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

Our operations and Hess’s Bakken production operations are subject to many risks and operational hazards, some of which may result in business interruptions and shutdowns of our or Hess’s operations and damages for which we may not be fully covered by insurance. If a significant accident or event occurs that results in a business interruption or shutdown for which we are not adequately insured, our operations and financial results could be materially and adversely affected.

Our operations are subject to all of the risks and operational hazards inherent in terminaling, processing and storing crude oil, natural gas and NGLs, including:

 

    damages to pipelines, terminals and facilities, related equipment and surrounding properties caused by earthquakes, tornados, floods, fires, severe weather, explosions and other natural disasters and acts of terrorism;

 

    maintenance, repairs, mechanical or structural failures at our or Hess’s facilities or at third-party facilities on which our or Hess’s operations are dependent, including electrical shortages, power disruptions and power grid failures;

 

    damages to and loss of availability of interconnecting third-party pipelines, railroads, terminals and other means of delivering crude oil, natural gas and NGLs;

 

    crude oil tank car derailments, fires, explosions and spills;

 

    disruption or failure of information technology systems and network infrastructure due to various causes, including unauthorized access or attack;

 

    curtailments of operations due to severe seasonal weather;

 

    riots, strikes, lockouts or other industrial disturbances; and

 

    other hazards.

These risks could result in substantial losses due to personal injury and/or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, as well as business interruptions or shutdowns of our facilities. Any such event or unplanned shutdown

 

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could have a material adverse effect on our business, financial condition and results of operations. In addition, Hess’s Bakken production operations, on which our operations are substantially dependent, are subject to similar operational hazards and risks inherent in producing crude oil and natural gas. A serious accident at our facilities or at Hess’s facilities could result in serious injury or death to our employees or contractors or those of Hess or its affiliates and could expose us to significant liability for personal injury claims and reputational risk. We have no control over the operations at Hess’s Bakken operations and their associated facilities.

We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. We carry separate policies for certain property damage and third-party liabilities, which includes sudden and accidental pollution liabilities, and are also insured under certain of Hess’s liability policies and are subject to Hess’s policy limits under these policies. The occurrence of an event that is not fully covered by insurance or failure by one or more insurers to honor its coverage commitments for an insured event could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to make acquisitions on economically acceptable terms from Hess or third parties, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

A portion of our strategy to grow our business and increase distributions to unitholders is dependent on our ability to make acquisitions that result in an increase in distributable cash flow per unit. The acquisition component of our growth strategy is based, in large part, on our expectation of ongoing divestitures of midstream assets by industry participants, including Hess. Hess has provided us with a right of first offer to acquire various midstream assets retained by Hess after this offering or that may be constructed or acquired by Hess in the future. Our right of first offer assets are processing, gathering and logistics assets that primarily support Hess’s production operations in the Bakken. The consummation and timing of any future acquisitions of these assets will depend upon, among other things, Hess’s willingness to offer these assets for sale, our ability to negotiate acceptable purchase agreements and commercial agreements with respect to the assets and our ability to obtain financing on acceptable terms, and we can offer no assurance that we will be able to successfully consummate any future acquisition of our right of first offer assets. For more information about our right of first offer, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement—Right of first offer.”

If we are unable to make acquisitions from Hess or third parties, because (i) there is a material decrease in divestitures of midstream assets, (ii) we are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, (iii) we are unable to obtain financing for these acquisitions on economically acceptable terms, (iv) we are outbid by competitors or (v) for any other reason, our future growth and ability to increase distributions will be limited. Furthermore, even if we do consummate acquisitions that we believe will be accretive, they may in fact result in a decrease in distributable cash flow per unit as a result of incorrect assumptions in our evaluation of such acquisitions or unforeseen consequences or other external events beyond our control. If we consummate any future acquisitions, unitholders will not have the opportunity to evaluate the economic, financial and other relevant information that we will consider in evaluating any such acquisitions.

We may not be able to significantly increase our third-party revenues due to competition and other factors, which could limit our ability to grow and extend our dependence on Hess.

Part of our growth strategy includes diversifying our customer base by identifying opportunities to offer services to third parties with our existing assets or by constructing or acquiring new assets

 

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independently from Hess. Our ability to increase our third-party revenues is subject to numerous factors beyond our control, including competition from third parties and the extent to which we lack available capacity when third-party customers require it. For example, our Tioga Gas Plant is subject to competition from existing and future third-party natural gas processing plants in the Bakken. To the extent that we have available capacity at our Tioga Gas Plant for third-party volumes, we may not be able to compete effectively with third-party gas processing plants for additional natural gas production in the area. To the extent that we have available capacity at our terminals available for third-party volumes, competition from other existing or future terminals owned by third parties may limit our ability to utilize this available capacity.

We have historically provided processing, terminaling and storage services to third parties on only a limited basis, and we can provide no assurance that we will be able to attract any material third-party service opportunities. Our efforts to attract new unaffiliated customers may be adversely affected by our relationship with Hess and our desire to provide services pursuant to fee-based contracts. Our potential customers may prefer to obtain services under other forms of contractual arrangements under which we would be required to assume direct commodity exposure.

Our expansion of existing assets, including the planned debottlenecking of our Tioga Gas Plant, and construction of new assets may not result in revenue increases and will be subject to regulatory, environmental, political, legal and economic risks, which could adversely affect our operations and financial condition.

In order to optimize our existing asset base, we intend to evaluate and capitalize on organic opportunities for expansion projects in order to increase revenue at our processing, terminaling and storage facilities. For example, Hess has announced that it is currently evaluating a debottlenecking project at the Tioga Gas Plant to increase the plant’s processing capacity from 250 MMcf/d to 300 MMcf/d, and we expect to further explore increasing the plant’s processing capacity to more than 300 MMcf/d. The expansion of an existing facility or the construction of a new plant, terminal or storage asset, involves numerous regulatory, environmental, political and legal uncertainties, most of which are beyond our control. If we undertake these projects, they may not be completed on schedule or at all or at the budgeted cost. Moreover, we may not receive sufficient long-term contractual commitments from customers to provide the revenue needed to support such projects. Even if we receive such commitments, we may not realize an increase in revenue for an extended period of time. As a result, new facilities may not be able to attract enough throughput to achieve our expected investment return, which could materially and adversely affect our results of operations and financial condition and our ability in the future to make distributions to our unitholders.

Our industry is highly competitive, and increased competitive pressure could adversely affect our business and operating results.

We compete with other similarly sized midstream companies in our areas of operation. In addition, some of our competitors have assets in closer proximity to oil and natural gas supplies and have available idle capacity in existing assets that would not require new capital investments for use. Some of our competitors are large companies that have greater financial, managerial and other resources than we do. Our competitors may expand or construct processing plants, terminals or storage facilities that would create additional competition for the services we provide to our customers. Our customers may also elect to transport crude oil on third-party pipeline systems instead of on our crude oil rail cars. Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenue and cash flow could be adversely affected by the activities of our competitors and our customers. All of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

 

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Our exposure to direct commodity price risk may increase in the future.

Following the closing of this offering, we expect that we will initially generate substantially all of our revenues under fee-based commercial agreements with Hess under which we are paid based on the volumes of crude oil, natural gas and NGLs that we handle and the ancillary services we provide, rather than the value of the commodities themselves. As a result, our operations and cash flows generally will have minimal direct exposure to commodity price risk. We may acquire or develop additional assets in the future or enter into transactions that have a greater exposure to fluctuations in commodity price risk than our current operations. In addition, our efforts to negotiate contractual arrangements to minimize our direct exposure to commodity price risk in the future may not be successful. Increased exposure to the volatility of crude oil, natural gas and NGL prices in the future could have a material adverse effect on our revenues and cash flow and our ability to make distributions to our unitholders.

We do not own all of the land on which certain of the pipelines connecting our facilities are located, which could result in disruptions to our operations.

We do not own all of the land on which certain of the pipelines connecting our facilities are located, and we are, therefore, subject to the possibility of more onerous terms and increased costs to retain necessary land use if we do not have valid leases or rights-of-way or if such rights-of-way lapse or terminate. We obtain the rights to construct and operate the pipelines connecting our facilities on land owned by third parties and governmental agencies, and some of our agreements may grant us those rights for only a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

We utilize contract operator services at certain of our assets, and we may face higher costs associated with terminal services in the future.

We utilize contract operator services at certain of our assets. For example, we utilize contract operator services at our Tioga Rail Terminal under a rail and transload services agreement with a third-party operator that expires in November 2016. Under the terms of the agreement, third-party contract personnel supervised by Hess employees control, monitor, record and report on the operation of the Tioga Rail Terminal. Contract personnel also provide inspection, crude oil loading, railroad consulting, inventory management, repair, data reporting, general maintenance and technical support and safety compliance services. Under this agreement, we are liable for any losses resulting from actions of the third-party operator unless such losses resulted from the negligence of the third-party operator. If disputes arise over the operation of the terminal, or if the third-party operator fails to provide the services contracted under contract operator services agreements, our business, results of operation, and financial condition could be adversely affected. Upon the expiration of our existing agreement in 2016, we will be required to either negotiate the renewal of the terms of this agreement, negotiate a similar arrangement with Hess or another third party or hire and train personnel to operate the terminal. Costs of these services under a negotiated renewal of our existing agreement or a similar agreement may increase relative to historical costs. Any such increased costs associated with terminal operation services will decrease the amount of cash available for distribution to our unitholders to the extent we are not indemnified for these costs by Hess under our omnibus agreement. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.

We will be dependent upon the earnings and cash flow generated by our operations in order to meet any debt service obligations and to allow us to make cash distributions to our unitholders. In

 

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connection with this offering, we expect to enter into a new revolving credit facility, which we expect will contain various operating and financial restrictions and covenants. The operating and financial restrictions and covenants in our new revolving credit facility and any future financing agreements could restrict our ability to finance our future operations or capital needs or to expand or pursue our business activities, which may, in turn, limit our ability to make cash distributions to our unitholders.

We expect that the provisions of our revolving credit facility could affect our ability to obtain future financing and pursue attractive business opportunities and our flexibility in planning for, and reacting to, changes in business conditions. In addition, a failure to comply with the provisions of our revolving credit facility could result in an event of default which would enable our lenders to declare the outstanding principal of that debt, together with accrued interest, to be immediately due and payable. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our assets may be insufficient to repay such debt in full, and the holders of our units could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity” for additional information about our revolving credit facility.

Hess’s level of indebtedness, the terms of its borrowings and its credit ratings could adversely affect our ability to grow our business and our ability to make cash distributions to our unitholders. Our ability to obtain credit in the future may also be adversely affected by Hess’s credit rating.

Hess must devote a portion of its cash flows from operating activities to service its indebtedness, and therefore cash flows may not be available for use in pursuing its growth strategy. Furthermore, a higher level of indebtedness at Hess in the future would increase the risk that it may default on its obligations to us under our commercial agreements. As of June 30, 2014, Hess had total indebtedness of $6.1 billion. The covenants contained in the agreements governing Hess’s outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may directly or indirectly impact our operations in a similar manner. Furthermore, if Hess were to default under certain of its debt obligations, there is a risk that Hess’s creditors would attempt to assert claims against our assets during the litigation of their claims against Hess. The defense of any such claims could be costly and could materially impact our financial condition, even absent any adverse determination. If these claims were successful, our ability to meet our obligations to our creditors, make distributions and finance our operations could be materially and adversely affected.

Hess’s long-term credit ratings are currently investment grade. If these ratings are lowered in the future, the interest rate and fees Hess pays on its credit facilities may increase. In addition, although we will not have any indebtedness rated by any credit rating agency at the closing of this offering, we may have rated debt in the future. Credit rating agencies will likely consider Hess’s debt ratings when assigning ours because of Hess’s ownership interest in us, the significant commercial relationships between Hess and us, and our reliance on commercial agreements with Hess for substantially all of our revenues. If one or more credit rating agencies were to downgrade the outstanding indebtedness of Hess, we could experience an increase in our borrowing costs or difficulty accessing the capital markets. Such a development could adversely affect our ability to grow our business and to make cash distributions to our unitholders.

Our assets and operations are subject to federal, state, and local laws and regulations relating to environmental protection and safety that could require us to make substantial expenditures.

Our assets and operations pose risks of environmental liability due to, for example, spills, leaks and discharges of substances to the environment. To address these and other risks, we are subject to

 

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stringent federal, state, and local laws and regulations relating to environmental protection and safety. Multiple governmental authorities, such as the Environmental Protection Agency, or EPA, and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly response actions. These laws and regulations may impose numerous obligations that are applicable to our and our customer’s operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our or our customers’ operations, the imposition of specific standards addressing worker protection, and the imposition of substantial liabilities and remedial obligations for pollution or contamination resulting from our and our customer’s operations. Failure to comply with these laws, regulations and permits may result in joint and several, strict liability and the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and the issuance of injunctions limiting or preventing some or all of our operations. Private parties may also have the right to pursue legal actions to enforce compliance, as well as to seek damages for non-compliance, with environmental laws and regulations or for personal injury or property damage. We may not be able to recover all or any of these costs from insurance. In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt operations, and limit growth and revenues, which in turn could affect our profitability.

The loading and transportation of crude oil and NGLs involves inherent risks of spills and releases from our facilities. We have contracted with various spill response service companies in the areas in which we load, transport or store crude oil and NGLs; however, these companies may not be able to adequately contain a “worst case discharge” in all instances, and we cannot ensure that all of their services would be available at any given time.

Changes in laws or standards affecting the transportation of North American crude oil by rail or any disruption in the operation of railroads could reduce volumes throughput at our facilities, and as a result our revenues could decline, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

Recent rail car derailments in Lac-Megantic, Quebec; Aliceville, Alabama; Casselton, North Dakota; and Lynchburg, Virginia, resulting in fires have led to increased regulatory scrutiny over the safety of transporting Bakken crude oil by rail. All of these incidents involved trains carrying Bakken crude oil from the Williston Basin. In the wake of the derailments described above, the Federal Railroad Administration, or FRA, of the U.S. Department of Transportation, or DOT, and the DOT’s Pipeline Hazardous Materials Safety Administration, or PHMSA, have issued several Safety Advisories and Emergency Orders encouraging offerors and rail carriers to take additional precautionary measures to enhance the safe shipment of bulk quantities of crude oil. For example, on August 2, 2013, the FRA issued an Emergency Order imposing new standards on railroads for properly securing rolling equipment; a proposed rule was later released on September 9, 2014. Also on August 2, 2013, the FRA and PHMSA issued a Safety Advisory making similar safety-related recommendations to railroads. Also in August 2013, the FRA and PHMSA began conducting sampling and testing of crude oil from the Bakken formation to ensure cargo is properly classified to railroads and emergency responders. In November 2013, the Association of American Railroads, or AAR, submitted comments in response to a PHMSA advance notice of proposed rulemaking to require that rail cars used to transport flammable liquids, including crude oil, be constructed to AAR Petition 1577 (CPC-1232) safety standards for jacketed rail cars with insulation, retrofitted to that standard or phased out. In January 2014, the Secretary of Transportation and the heads of PHMSA, the Federal Motor Carrier Safety Administration and FRA, met with oil and rail industry leaders to develop strategies to prevent train derailments and reduce the risk of fire. As a result of those meetings, the DOT and railroads agreed in February 2014 to certain voluntary measures designed to enhance the safety of crude oil shipments by rail, which include lowering speed limits for crude oil trains traveling in high-risk areas,

 

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studying the potential for modifying routes to avoid such high-risk areas, increasing the frequency of track inspections and improving the training of railroad employees and certain emergency responders.

On February 25, 2014, the DOT issued an Emergency Restriction/Prohibition Order, as amended and restated on March 6, 2014, or the Order, immediately requiring all carriers who transport crude oil from the Bakken region by rail to ensure that the product is properly tested and classified in accordance with federal safety regulations, and further requiring that all crude oil shipments be designated in the two highest risk categories. Any person failing to comply with the Order is subject to potential civil penalties up to $175,000 for each violation or for each day they are found to be in violation, as well as potential criminal prosecution. On May 7, 2014, the DOT issued another Emergency Restriction/Prohibition Order immediately requiring railroads operating trains carrying more than one million gallons of Bakken crude oil to notify State Emergency Response Commissions regarding the estimated volume, frequency, and transportation route of those shipments. Also on May 7, 2014, the FRA and PHMSA issued a joint Safety Advisory to the rail industry encouraging those shipping or offering Bakken crude oil to select and use rail car designs with the highest level of integrity reasonably available within their rail car fleets, and to limit the use of older legacy DOT Specification 111 or CTC 111 rail cars to the extent practicable.

On July 23, 2014, the DOT issued a Notice of Proposed Rule Making, or NOPR, proposing revisions to the Hazardous Materials Regulations that establish requirements for “high-hazard flammable trains.” The NOPR addresses a number of issues impacting the rail transportation of crude oil, including proposed enhanced tank car standards, certain speed restrictions, improved braking controls, and new sampling and testing requirements. Public comments to the NOPR are being accepted through September 30, 2014. In conjunction with the NOPR, PHMSA and FRA released a report finding that, based on the results of their sampling and testing conducted from August 2013 to May 2014, Bakken crude oil is more volatile than most other types of crude oil, and thus subject to an increased risk for a significant accident.

Moreover, any disruptions in the operations of railroads, including those due to shortages of rail cars, locomotives or labor, weather-related problems, flooding, drought, derailments, mechanical difficulties, strikes, lockouts or bottlenecks, or other force majeure events could adversely impact our customers’ ability to move their product and, as a result, could affect our business.

Changes in laws or standards affecting crude oil tank cars could require retrofitting our existing car fleet, and as a result we would incur additional maintenance costs and reduced revenues while the rail cars were out of service, which would have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

Our assets include rail tank cars that transport crude oil, all of which were constructed to AAR Petition 1577 (CPC-1232) safety standards. On May 7, 2014, the FRA and PHMSA issued a joint Safety Advisory to the rail industry advising those shipping or offering Bakken crude oil to use rail car designs with the highest available level of integrity, and to avoid using older legacy DOT Specification 111 or CTC 111 rail cars to the extent practicable. In the first half of 2014, the U.S. Senate Committee on Commerce, Science, and Transportation held hearings regarding enhanced rail safety. On July 23, 2014, the DOT issued the NOPR, which proposed enhanced tank car standards, a classification and testing program for mined gases and liquids and enhanced braking systems and new operations requirements for high-hazard flammable trains. The NOPR recommended that rail cars not meeting the enhanced standard would be required to be retired, repurposed, or operated under speed restrictions. As a result, the DOT and FRA are expected to issue new regulations and design standards for DOT 111 rail cars used to transport crude oil. The adoption of new federal rail car regulations could affect our business by requiring the future retrofitting of our current rail tank car fleet to meet such new

 

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standards or their retirement if such upgrades are not possible to achieve. The upgrade costs and increased maintenance costs and the related loss of revenues while the rail cars are out of service during retrofit could adversely affect our financial position and cash flows.

Evolving environmental laws and regulations on climate change could adversely affect our financial performance.

Potential additional regulations regarding climate change could affect our operations. Currently, various U.S. legislative and regulatory agencies and bodies are considering measures to address greenhouse gas emissions. These measures include EPA programs that require the crude oil and natural gas industry to report and to control greenhouse gas emissions, and state actions to develop statewide or regional programs, each of which could impose reductions in greenhouse gas emissions. These actions could result in increased (1) costs to operate and maintain our facilities, (2) capital expenditures to install new emission controls on our facilities and (3) costs to administer and manage any potential greenhouse gas emissions regulations or carbon trading or tax programs. These developments also could have an indirect adverse effect on our business if Hess’s Bakken operations are adversely affected due to increased regulation of Hess’s facilities or reduced demand for crude oil, natural gas and NGLs, and a direct adverse effect on our business from increased regulation of our facilities. Please read “Business—Environmental Regulation—Air Emissions and Climate Change.”

We or Hess may be unable to obtain or renew permits necessary for our respective operations, which could inhibit our ability to do business and adversely affect our financial performance.

Our facilities and those of Hess that provide volumes to our facilities operate under a number of federal, state and local permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. All of these permits, licenses, approval limits and standards require a significant amount of monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval limit or standard. Noncompliance or incomplete documentation of our compliance status may result in the imposition of fines, penalties and injunctive relief. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations and on our financial condition, results of operations and cash flows.

Evolving environmental laws and regulations on hydraulic fracturing could have an indirect effect on our financial performance.

We do not conduct hydraulic fracturing operations, but Hess’s and our other customers’ crude oil and natural gas production operations often require hydraulic fracturing as part of the completion process. Hydraulic fracturing is an important and common practice that is used to stimulate production of crude oil and/or natural gas from dense subsurface rock formations. The process is typically regulated by state agencies. However, federal agencies have also asserted regulatory authority over the process. For example, in May 2014, the EPA released an Advanced Notice of Proposed Rulemaking seeking public comment on its plans to issue regulations under the Toxic Substances Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. If adopted, companies will have to use “green completions” at hydraulically fractured wells beginning in 2015. In addition, Congress has in the past and may in the future consider legislation that gives the EPA direct authority to regulate hydraulic fracturing under the Safe Drinking Water Act. Many states have already adopted laws and/or regulations that require disclosure of the chemicals used in hydraulic fracturing, and are considering legal requirements that could impose more stringent permitting, disclosure and well construction requirements on crude oil and/or natural gas drilling activities. We do not believe current or future regulations will have a direct effect on our operations, but because crude oil and/or natural gas production using hydraulic fracturing is growing rapidly in the

 

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United States, if new or more stringent federal, state or local legal restrictions relating to such drilling activities or to the hydraulic fracturing process are adopted in areas where Hess and our other customers operate, Hess and our other customers could incur potentially significant added costs to comply with such requirements and experience delays or curtailment in the pursuit of production or development activities, which could reduce demand for our midstream services.

Certain plant or animal species could be designated as endangered or threatened, which could limit our ability to expand some of our existing operations or limit our customers’ ability to develop new crude oil and natural gas wells.

The federal Endangered Species Act, or ESA, restricts activities that may affect endangered or threatened species or their habitats. Many states have analogous laws designed to protect endangered or threatened species. The designation of previously unidentified endangered or threatened species under such laws may affect our and our customers’ operations.

Terrorist or cyber-attacks and threats, or escalation of military activity in response to these attacks, could have a material adverse effect on our business, financial condition or results of operations.

Terrorist attacks and threats, cyber-attacks, escalation of military activity or acts of war may have significant effects on general economic conditions, fluctuations in consumer confidence and spending and market liquidity, each of which could materially and adversely affect our business. Strategic targets, such as energy-related assets and transportation assets, may be at greater risk of future terrorist attacks than other targets in the United States. We do not maintain specialized insurance for possible liability or loss resulting from a terrorist attack or cyber-attack on our assets that may shut down all or part of our business. It is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

Computers and telecommunication systems have become an integral part of our business. We use these systems to analyze and store financial and operating data and to communicate within our company and with outside business partners. Cyber-attacks could compromise our computer and telecommunications systems and result in disruptions to our business operations, the loss or corruption of our data and proprietary information and communications interruptions. In addition, computers control oil and gas distribution systems globally and are necessary to deliver our production to market. A cyber-attack impacting these distribution systems, or the networks and infrastructure on which they rely, could damage critical production, distribution and/or storage assets, delay or prevent delivery to markets and make it difficult or impossible to accurately account for production and settle transactions. Our systems and procedures for protecting against such attacks and mitigating such risks may prove to be insufficient and such attacks could have an adverse impact on our business and operations.

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results timely and accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We prepare our financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with

 

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our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting.

Although we will be required to disclose changes made in our internal control and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until our annual report for the fiscal year ending December 31, 2015.

Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a material adverse effect on the trading price of our common units.

For as long as we are an emerging growth company, we will not be required to comply with certain disclosure requirements that apply to other public companies.

In April 2012, President Obama signed the JOBS Act into law. For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to provide an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control over financial reporting pursuant to Section 404 and reduced disclosure obligations regarding executive compensation in our periodic reports. We will remain an emerging growth company for up to five years, although we will lose that status sooner if we have more than $1.0 billion of revenues in a fiscal year, have more than $700 million in market value of our limited partner interests held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.

In addition, the JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to “opt out” of this exemption and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

To the extent that we rely on any of the exemptions available to emerging growth companies, you will receive less information about our executive compensation and internal control over financial reporting than issuers that are not emerging growth companies. If some investors find our common units to be less attractive as a result, there may be a less active trading market for our common units and our trading price may be more volatile.

 

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Risks Inherent in an Investment in Us

Our general partner and its affiliates, including Hess, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of Hess, and Hess is under no obligation to adopt a business strategy that favors us.

Following this offering, Hess will own a 2% general partner interest and a     % limited partner interest in us (or     % if the underwriters’ option to purchase additional common units is exercised in full) and will own and control our general partner. Although our general partner has a duty to manage us in a manner that is in the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is in the best interests of its owner, Hess. Conflicts of interest may arise between Hess and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Hess, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

    neither our partnership agreement nor any other agreement requires Hess to pursue a business strategy that favors us or utilizes our assets, which could involve decisions by Hess to increase or decrease production, shut down or reconfigure its assets, pursue and grow particular markets or undertake acquisition opportunities for itself. Hess’s directors and officers have a fiduciary duty to make these decisions in the best interests of the stockholders of Hess;

 

    Hess may be constrained by the terms of its debt instruments from taking actions, or refraining from taking actions, that may be in our best interests;

 

    our partnership agreement replaces the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing its duties, limiting our general partner’s liabilities and restricting the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;

 

    except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

    our general partner will determine the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and the creation, reduction or increase of cash reserves, each of which can affect the amount of cash that is distributed to our unitholders;

 

    our general partner will determine the amount and timing of many of our cash expenditures and whether a cash expenditure is classified as an expansion capital expenditure, which would not reduce operating surplus, or a maintenance capital expenditure, which would reduce our operating surplus. This determination can affect the amount of available cash from operating surplus that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units;

 

    our general partner will determine which costs incurred by it are reimbursable by us;

 

    our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period;

 

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    our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights;

 

    our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;

 

    our general partner intends to limit its liability regarding our contractual and other obligations;

 

    our general partner may exercise its right to call and purchase all of the common units not owned by it and its affiliates if it and its affiliates own more than 80% of the common units;

 

    our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including our commercial agreements with Hess;

 

    our general partner decides whether to retain separate counsel, accountants or others to perform services for us; and

 

    our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our unitholders. This election may result in lower distributions to our common unitholders in certain situations.

Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, does not apply to our general partner or any of its affiliates, including its executive officers, directors and owners. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Conflicts of Interest and Duties.”

Our partnership agreement requires that we distribute all of our available cash, which could limit our ability to grow and make acquisitions.

Our partnership agreement requires that we distribute all of our available cash to our unitholders. As a result, we expect to rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. Therefore, to the extent we are unable to finance our growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units as to distributions or in liquidation or that have special voting rights and other rights, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. The incurrence of additional

 

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commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, may reduce the amount of cash that we have available to distribute to our unitholders.

Our partnership agreement replaces our general partner’s fiduciary duties to holders of our common units with contractual standards governing its duties.

Delaware law provides that Delaware limited partnerships may, in their partnership agreements, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that partnership agreements may not eliminate the implied contractual covenant of good faith and fair dealing. As permitted by Delaware law, our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders other than the implied contractual covenant of good faith and fair dealing. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties—Duties of the General Partner.”

Our partnership agreement restricts the remedies available to holders of our common and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

    provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the determination or the decision to take or decline to take such action was in the best interests of our partnership, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

    provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith;

 

    provides that our general partner and its officers and directors will not be liable for monetary damages to us or our limited partners resulting from any act or omission unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or its officers and directors, as the case may be, acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and

 

    provides that our general partner will not be in breach of its obligations under our partnership agreement or its fiduciary duties to us or our limited partners if a transaction with an affiliate or the resolution of a conflict of interest is approved in accordance with, or otherwise meets the standards set forth in, our partnership agreement.

In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our general partner must be made in good

 

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faith, and that our conflicts committee and the board of directors of our general partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

If you are not an eligible holder, your common units may be subject to redemption.

We have adopted certain requirements regarding those investors who may own our common and subordinated units. Eligible holders are limited partners whose (a) federal income tax status is not reasonably likely to have a material adverse effect on the rates that can be charged by us on assets that are subject to regulation by the Federal Energy Regulatory Commission, or FERC, or an analogous regulatory body and (b) nationality, citizenship or other related status would not create a substantial risk of cancellation or forfeiture of any property in which we have an interest, in each case as determined by our general partner with the advice of counsel. If you are not an eligible holder, in certain circumstances as set forth in our partnership agreement, your units may be redeemed by us. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. Please read “Our Partnership Agreement—Redemption of Ineligible Holders.”

Cost reimbursements, which will be determined in our general partner’s sole discretion, and fees due our general partner and its affiliates for services provided will be substantial and will reduce the amount of cash we have available for distribution to you.

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement and operational services agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be required to reimburse Hess for the provision of certain operational and administrative support services to us. Under our operational services agreement, we will be required to reimburse Hess for the provision of certain maintenance, operating, administrative and construction services in support of our operations. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. The costs and expenses for which we are required to reimburse our general partner and its affiliates are not subject to any caps or other limits. Payments to our general partner and its affiliates will be substantial and will reduce the amount of cash we have available to distribute to unitholders.

Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot remove our general partner without its consent.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by the member of our general partner, which is a wholly owned subsidiary of Hess. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of the offering to be able

 

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to prevent its removal. In addition, our general partner may only be removed for cause. “Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding the general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the termination of the subordination period. Even if cause for removal exists, the vote of the holders of at least 66 23% of all outstanding common units and subordinated units voting together as a single class is required to remove our general partner. At closing, excluding any common units purchased by directors and executive officers of our general partner and Hess under our directed unit program, our general partner and its affiliates will own     % of our total outstanding common units and subordinated units on an aggregate basis (or     % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters’ option to purchase additional common units is exercised in full).

Furthermore, unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees, and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot vote on any matter.

Our partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

Our general partner interest or the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of Hess to transfer its membership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices. In addition, our omnibus agreement would potentially terminate. As a result, we could lose the provision of certain general and administrative services by Hess and its affiliates, our right of first offer to acquire our right of first offer assets and our license to use certain Hess trademarks.

We may issue additional units without unitholder approval, which would dilute unitholder interests.

At any time, we may issue an unlimited number of general partner interests or limited partner interests of any type without the approval of our unitholders and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such general partner interests or limited partner interests. Further, there are no limitations in our partnership agreement on our ability to issue equity securities that rank equal or senior to our common units as to distributions or in liquidation or that have special voting rights and other rights. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

    our unitholders’ proportionate ownership interest in us will decrease;

 

    the amount of cash we have available to distribute on each unit may decrease;

 

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    because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

    the ratio of taxable income to distributions may increase;

 

    the relative voting strength of each previously outstanding unit may be diminished; and

 

    the market price of our common units may decline.

The issuance by us of additional general partner interests may have the following effects, among others, if such general partner interests are issued to a person who is not an affiliate of Hess:

 

    management of our business may no longer reside solely with our current general partner; and

 

    affiliates of the newly admitted general partner may compete with us, and neither that general partner nor such affiliates will have any obligation to present business opportunities to us.

Hess may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the completion of this offering, assuming that the underwriters do not exercise their option to purchase additional common units, Hess will hold              common units and              subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide Hess with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

Our general partner’s discretion in establishing cash reserves may reduce the amount of cash we have available to distribute to unitholders.

Our partnership agreement requires our general partner to deduct from operating surplus the cash reserves that it determines are necessary to fund our future operating expenditures. In addition, the partnership agreement permits the general partner to reduce available cash by establishing cash reserves for the proper conduct of our business, to comply with applicable law or agreements to which we are a party, or to provide funds for future distributions to partners. These cash reserves will affect the amount of cash we have available to distribute to unitholders.

Affiliates of our general partner, including Hess, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us.

Neither our partnership agreement nor our omnibus agreement will prohibit Hess or any other affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to our general partner or any of its affiliates, including Hess. Any such entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Consequently, Hess and other affiliates of our general partner may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from Hess and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow.

 

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Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.

If at any time our general partner and its affiliates own more than 80% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our common units (excluding any common units purchased by directors and executive officers of our general partner and Hess under our directed unit program). At the end of the subordination period (which could occur as early as within the quarter ending             ,         ), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units) and the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our outstanding common units (excluding any common units purchased by directors and executive officers of our general partner and Hess under our directed unit program) and therefore would not be able to exercise the call right at that time. For additional information about our general partner’s call right, please read “Our Partnership Agreement—Limited Call Right.”

Unitholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and you could lose all or part of your investment.

Prior to this offering, there has been no public market for our common units. After this offering, there will be only publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, Hess will own              common units and              subordinated units, representing an aggregate     % limited partner interest in us (or     % if the underwriters’ option to purchase additional common units is exercised in full). We do not know the extent to which investor interest will lead to the development of an active trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the

 

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market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price.

Our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or the holders of our common units. This could result in lower distributions to holders of our common units.

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48%, in addition to distributions paid on its 2% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and to maintain its 2% general partner interest. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in such two quarters. Our general partner will also be entitled to maintain its general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

Increases in interest rates could adversely impact our unit price and our ability to issue additional equity, to incur debt to capture growth opportunities or for other purposes, or to make cash distributions at our intended levels.

If interest rates rise, the interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our units, and a rising interest rate environment could have an adverse impact on our unit price and our ability to issue additional equity, to incur debt to expand or for other purposes, or to make cash distributions at our intended levels.

 

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The NYSE does not require a publicly traded limited partnership like us to comply with certain of its corporate governance requirements.

We intend to apply to list our common units on the NYSE. Because we will be a publicly traded limited partnership, the NYSE does not require us to have a majority of independent directors on our general partner’s board of directors or to establish a compensation committee or a nominating and corporate governance committee. Additionally, any future issuance of additional common units or other securities, including to affiliates, will not be subject to the NYSE’s shareholder approval rules that apply to a corporation. Accordingly, unitholders will not have the same protections afforded to certain corporations that are subject to all of the NYSE corporate governance requirements. Please read “Management—Management of Hess Midstream Partners LP.”

Tax Risks

In addition to reading the following risk factors, you should read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.

Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as us not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, or if we become subject to entity-level taxation for state tax purposes, our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for federal income tax purposes.

Despite the fact that we are organized as a limited partnership under Delaware law, we would be treated as a corporation for U.S. federal income tax purposes unless we satisfy a “qualifying income” requirement. Based upon our current operations, we believe we satisfy the qualifying income requirement. We have requested a private letter ruling from the IRS to the effect that income derived from certain agreements with affiliates of Hess constitutes qualifying income. However, this offering is not contingent upon that request. Failing to meet the qualifying income requirement or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay U.S. federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for U.S. federal, state, local or foreign income tax purposes, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law or interpretation on us. At the state level, several states have been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Specifically, we will initially own assets and conduct business in Minnesota and North Dakota,

 

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neither of which currently imposes an income, franchise tax or other similar form of taxation on partnerships. In the future, we may expand our operations. Imposition of state, local or foreign taxes on us in these jurisdictions or other jurisdictions that we may expand to could substantially reduce our cash available for distribution to you.

The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.

The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. One such legislative proposal would have eliminated the qualifying income exception to the treatment of all publicly traded partnerships as corporations upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. In addition, changes to U.S. federal income tax laws affecting persons other than publicly traded partnerships could adversely impact the value of our units. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes. For a discussion of the importance of our treatment as a partnership for federal income purposes, please read “Material U.S. Federal Income Tax Consequences—Taxation of the Partnership—Partnership Status” for a further discussion.

If the IRS were to contest the federal income tax positions we take, it may adversely impact the market for our common units, and the costs of any such contest would reduce cash available for distribution to our unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. Moreover, the costs of any contest between us and the IRS will result in a reduction in cash available for distribution to our unitholders and thus will be borne indirectly by our unitholders.

Even if our unitholders do not receive any cash distributions from us, they will be required to pay taxes on their share of our taxable income.

You will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax due from you with respect to that income.

Tax gain or loss on disposition of our common units could be more or less than expected.

If you sell your common units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those common units. Because distributions in excess of your

 

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allocable share of our net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be subject to withholding taxes at the highest effective tax rate applicable to such non-U.S. persons, and each non-U.S. person will be required to file U.S. federal tax returns and pay tax on its share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.

We will treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we adopted.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department has issued proposed Treasury Regulations that provide a safe harbor pursuant to which a publicly-traded partnership may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our

 

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unitholders. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Units—Allocations Between Transferors and Transferees.”

A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered to have disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.

Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered to have disposed of the loaned units. In that case, the unitholder may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a securities loan are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.

We may adopt certain valuation methodologies that could result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In the event of a successful IRS challenge to our methods, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Immediately following this offering, Hess will own     % of the total interests in our capital and profits. Therefore, a transfer by Hess of all or a portion of its interests in us could, in conjunction with the trading of common units held by the public, result in a termination of our partnership for federal income tax purposes. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once.

 

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Our termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns for one calendar year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in taxable income for the unitholder’s taxable year that includes our termination. Our termination would not affect our classification as a partnership for federal income tax purposes, but it would result in our being treated as a new partnership for U.S. federal income tax purposes following the termination. If we were treated as a new partnership, we would be required to make new tax elections and could be subject to penalties if we were unable to determine that a termination occurred. The IRS has announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to provide only a single Schedule K-1 to unitholders for the two short tax periods included in the year in which the termination occurs. Please read “Material U.S. Federal Income Tax Consequences —Disposition of Units—Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.

Our unitholders will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where they do not live as a result of investing in our common units.

In addition to U.S. federal income taxes, our unitholders may be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. We will initially own assets and conduct business in Minnesota and North Dakota, each of which currently imposes a personal income tax on individuals, corporations and other entities and requires us to report certain tax information for unitholders. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose a personal income tax. It is each unitholder’s responsibility to file all U.S. federal, foreign, state and local tax returns. Further, our unitholders may be subject to penalties for failure to comply with those requirements. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $         million from the sale of common units offered by this prospectus based on an assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts, structuring fees and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units from us is not exercised. We intend to use the net proceeds from this offering as follows:

 

    $         million will be used to partially repay amounts outstanding under an affiliate loan facility with Hess that were used to fund capital expenditures and other payments related to our Tioga Gas Plant’s expansion, refurbishment and optimization project;

 

    approximately $         million will be distributed to Hess to partially reimburse Hess for certain capital expenditures it incurred with respect to the assets that Hess will contribute to us in connection with this offering; and

 

    $         million will be used to pay revolving credit facility origination fees.

On April 29, 2013, our Predecessor entered into an affiliate loan facility with Hess, which was amended on December 19, 2013. This facility matures on October 15, 2015. Our Predecessor used the proceeds from borrowings under this facility to both refinance existing affiliate payables and to fund additional capital expenditures, in each case exclusively related to the Tioga Gas Plant’s recent expansion, refurbishment and optimization project. Interest on this facility accrued at the applicable federal rate, or AFR, published by the Internal Revenue Service, with semiannual compounding. At the closing of this offering, we expect to assume $         million of outstanding borrowings under this loan facility, to repay that amount in full with the proceeds of this offering, and to terminate our participation in this loan facility.

For more information regarding our affiliate loan facilities with Hess, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Capital Resources and Liquidity—Affiliate Loan Facilities with Hess.”

If the underwriters exercise in full their option to purchase additional common units from us, we expect to receive additional net proceeds of approximately $         million. The net proceeds from any exercise by the underwriters of their option to purchase additional common units from us will be used to redeem from Hess a number of common units equal to the number of common units issued upon exercise of the option at a price per common unit equal to the net proceeds per common unit in this offering before expenses but after deducting underwriting discounts and the structuring fee. Please read “Underwriting.”

An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from this offering, after deducting underwriting discounts, structuring fees and offering expenses, to increase or decrease by approximately $         million (or $         million if the underwriters’ option to purchase additional common units is exercised in full).

 

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CAPITALIZATION

The following table shows:

 

    the historical cash and cash equivalents and capitalization of our Predecessor as of June 30, 2014; and

 

    our pro forma capitalization as of June 30, 2014, giving effect to the pro forma adjustments described in our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds” and the other transactions described under “Prospectus Summary—The Transactions.”

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical combined financial statements and the accompanying notes and the unaudited pro forma condensed combined financial statements and the accompanying notes included elsewhere in this prospectus.

 

     As of June 30, 2014  

(in millions)

   Historical     Pro forma(1)  

Cash and cash equivalents

   $      $                
  

 

 

   

 

 

 

Debt:

    

Long-term debt—affiliate (including current maturities)

     960.2 (2)   

Revolving credit facility

         
  

 

 

   

 

 

 

Total debt

     960.2     
  

 

 

   

 

 

 

Net parent investment / partners’ capital(3):

    

Net parent investment

     293.5     

Held by public:

    

Common units

         

Held by Hess:

    

Common units

         

Subordinated units

         

General Partner interest

         

Noncontrolling interest

         
  

 

 

   

 

 

 

Total net parent investment / partners’ capital

     293.5     
  

 

 

   

 

 

 

Total capitalization

   $ 1,253.7      $     
  

 

 

   

 

 

 

 

(1) Assumes the mid-point of the price range set forth on the cover of this prospectus.
(2) Represents borrowings under our Predecessor’s unsecured affiliate loan facilities with Hess. At the closing of this offering, we expect to assume $             million of outstanding borrowings under one of our Predecessor’s affiliate loan facilities, repay that amount in full with a portion of the proceeds of this offering and terminate our participation in that affiliate loan facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Affiliate Loan Facilities with Hess.”
(3) Assumes the underwriters’ option to purchase additional common units from us is not exercised.

 

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DILUTION

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of         ,         , after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $         million, or $         per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

      $                

Pro forma net tangible book value per unit before this offering(2)

   $                   

Less: Distribution to subsidiary of Hess(3)

     

Increase in net tangible book value per unit attributable to purchasers in this offering

     
  

 

 

    

Less: Pro forma net tangible book value per unit after this offering(4)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in this offering(5)(6)

      $                
     

 

 

 

 

(1) The mid-point of the price range set forth on the cover of this prospectus.
(2) Determined by dividing the number of units (         common units,         subordinated units and the 2% general partner interest, which has a dilutive effect equivalent to         units) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities, of $         million.
(3) Determined by dividing our expected distribution of $         million to Hess in connection with this offering by the number of units (         common units,          subordinated units and the 2% general partner interest) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us.
(4) Determined by dividing the number of units to be outstanding after this offering (         common units,         subordinated units and the 2% general partner interest, which has a dilutive effect equivalent to         units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering, of $         million.
(5) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $         and $        , respectively.
(6) Assumes the underwriters’ option to purchase additional common units from us is not exercised. If the underwriters’ option to purchase additional common units from us is exercised in full, the immediate dilution in net tangible book value per common unit to purchasers in this offering would be $        .

The following table sets forth the number of units that we will issue and the total consideration contributed to us by the general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units acquired     Total consideration  
     Number    %     Amount      %  
                (in millions)         

General partner and its affiliates(1)(2)(3)

               $                          

Purchasers in this offering

                        
  

 

  

 

 

   

 

 

    

 

 

 

Total

        100   $                      100
  

 

  

 

 

   

 

 

    

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own              common units,              subordinated units and a 2% general partner interest having a dilutive effect equivalent to         units.
(2) Assumes the underwriters’ option to purchase additional common units from us is not exercised.
(3) The assets contributed by the general partner and its affiliates were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of         ,         , was $         million. At the closing of this offering, we intend to make a distribution of $         million to Hess.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

The following discussion of our cash distribution policy should be read in conjunction with the specific assumptions included in this section. In addition, “Forward-Looking Statements” and “Risk Factors” should be read for information regarding statements that do not relate strictly to historical or current facts and regarding certain risks inherent in our business.

For additional information regarding our historical and pro forma results of operations, please refer to our historical combined financial statements and the accompanying notes and the unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it, because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is our (1) cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (2) cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from our operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

Our cash distribution policy will be subject to restrictions on cash distributions under our revolving credit facility, which we expect will prohibit us, until such time that we have an investment grade credit rating, from making cash distributions while an event of default has occurred and is continuing under the facility, notwithstanding our cash distribution policy.

 

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Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”

 

    The amount of cash that we distribute and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. Specifically, our general partner will have the authority to establish cash reserves for the prudent conduct of our business and for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by our general partner in good faith will be binding on our unitholders.

 

    While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. For a description of these limited circumstances, please read “Our Partnership Agreement—Amendment of Our Partnership Agreement—No unitholder approval.” However, after the subordination period has ended, our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the closing of this offering, Hess will own our general partner and will indirectly own     % of our total outstanding common units and subordinated units on an aggregate basis (or     % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters’ option to purchase additional common units is exercised in full).

 

    Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

    We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating and maintenance or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our available cash is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

    Our ability to make cash distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make cash distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.

 

    If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

To the extent that our general partner determines not to distribute the full minimum quarterly distribution on our common units with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid on the common units with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any

 

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distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. The subordinated units will not accrue any arrearages. Any shortfall in the payment of the minimum quarterly distribution on the common units with respect to any quarter during the subordination period may decrease the likelihood that our quarterly distribution rate would increase in subsequent quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.”

Our Ability to Grow Is Dependent on Our Ability to Access External Expansion Capital

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon our cash reserves and external financing sources, including borrowings under our revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy will significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. We expect that our revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors—Risks Related to Our Business—Restrictions in our revolving credit facility could adversely affect our business, financial condition, results of operations, ability to make cash distributions to our unitholders and the value of our units.” To the extent we issue additional units, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our cash distributions per unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to our common units, and our unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional units. If we incur additional debt (under our revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders.

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which such distributions are made. We do not expect to make distributions for the period that begins on        ,         , and ends on the day prior to the closing of this offering. We will adjust the amount of our first distribution for the period from the closing of this offering through         ,         , based on the actual length of the period.

 

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The amount of available cash needed to pay the minimum quarterly distribution on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% interest immediately after this offering for one quarter and on an annualized basis (assuming no exercise and full exercise of the underwriters’ option to purchase additional common units) is summarized in the table below:

 

     No exercise of option to purchase
additional common units
     Full exercise of option to purchase
additional common units
 
     Aggregate minimum quarterly
distributions
     Aggregate minimum
quarterly distributions
 
     Number of
units
   One
quarter
     Annualized
(four quarters)
     Number of
units
   One
quarter
     Annualized
(four quarters)
 
          (in millions)           (in millions)  

Publicly held common units

      $                    $                       $                    $                

Common units held by Hess

                 

Subordinated units held by Hess

                 

General partner interest

                 
  

 

  

 

 

    

 

 

    

 

  

 

 

    

 

 

 

Total

      $         $            $         $     
  

 

  

 

 

    

 

 

    

 

  

 

 

    

 

 

 

As of the date of this offering, our general partner will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner’s initial 2% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2% general partner interest. Our general partner will also initially hold all of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48%, of the cash we distribute in excess of $         per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Subordinated Units and Subordination Period.” We cannot guarantee, however, that we will pay distributions on our common units at our minimum quarterly distribution rate or at any other rate in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is in the best interests of our partnership. In making such determination, our general partner may take into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us. Please read “Conflicts of Interest and Duties.”

The provision in our partnership agreement requiring us to distribute all of our available cash quarterly may not be modified without amending our partnership agreement; however, as described above, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business, the amount of reserves our general partner establishes in accordance with our partnership agreement and the amount of available cash from working capital borrowings.

 

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Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution is also subject to adjustment if the holder(s) of the incentive distribution rights (initially only our general partner) elect to reset the target distribution levels related to the incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—General Partner’s Right to Reset Incentive Distribution Levels.”

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $         per unit for the twelve months ending December 31, 2015. In those sections, we present two tables, consisting of:

 

    “Unaudited Pro Forma Distributable Cash Flow,” in which we present the amount of distributable cash flow we would have generated on a pro forma basis for the twelve months ended June 30, 2014 and the year ended December 31, 2013, derived from our unaudited pro forma condensed combined financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

    “Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015,” in which we provide our estimated forecast of our ability to generate sufficient distributable cash flow to support the payment of the minimum quarterly distribution on all units and the corresponding distributions on our general partner’s 2% interest for the twelve months ending December 31, 2015.

Unaudited Pro Forma Distributable Cash Flow for the Twelve Months Ended June 30, 2014

and the Year Ended December 31, 2013

If we had completed the transactions contemplated in this prospectus on January 1, 2013, pro forma distributable cash flow for the twelve months ended June 30, 2014 and the year ended December 31, 2013 would have been $9.7 million and $17.2 million, respectively. The amount of distributable cash flow we generated during the twelve months ended June 30, 2014 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest and none of the aggregate minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. The amount of distributable cash flow we generated during the year ended December 31, 2013 on a pro forma basis would have been sufficient to pay     % of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest and none of the aggregate minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period.

We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had

 

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the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma condensed combined financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma distributable cash flow only as a general indication of the amount of distributable cash flow that we might have generated had we been formed on January 1, 2013. Actual distributable cash may differ from pro forma distributable cash flows.

The following table illustrates, on a pro forma basis, for the twelve months ended June 30, 2014 and the year ended December 31, 2013, the amount of cash that would have been available for distribution to our unitholders and our general partner, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated on January 1, 2013.

Hess Midstream Partners LP

Unaudited Pro Forma Distributable Cash Flow

 

     Twelve Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 
(in millions)             

Pro forma net income (loss)(1)

   $ 2.1      $ 34.0   

Less:

    

Net income (loss) attributable to Hess(2)(3)

     (5.3     15.4   
  

 

 

   

 

 

 

Pro forma net income (loss) attributable to Hess Midstream Partners LP(4)

     7.4        18.6   

Plus:

    

Net income (loss) attributable to Hess(2)(3)

     (5.3     15.4   

Depreciation expense

     22.8        12.5   

Interest expense(5)

     2.0        2.0   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA(4)

     26.9        48.5   

Less:

    

Pro forma Adjusted EBITDA attributable to Hess(2)(3)

     8.9        22.6   
  

 

 

   

 

 

 

Pro forma Adjusted EBITDA attributable to Hess Midstream Partners LP

     18.0        25.9   

Less:

    

Cash interest paid(5)

     1.5        1.5   

Maintenance capital expenditures(6)(7)

     2.9        2.8   

Expansion capital expenditures(6)(7)

     128.0        149.2   

Incremental costs of being a separate publicly traded partnership(8)

     4.4        4.4   

Plus:

    

Adjustments related to minimum volume commitments(9)

     0.5          

Funding for expansion capital expenditures(10)

     128.0        149.2   
  

 

 

   

 

 

 

Pro forma Distributable Cash Flow attributable to Hess Midstream Partners LP

   $ 9.7      $ 17.2   
  

 

 

   

 

 

 

Distributions to public unitholders

   $        $     

Distributions to Hess—common units

    

Distributions to Hess—subordinated units

    

Distributions to our general partner

    
  

 

 

   

 

 

 

Total distributions

    
  

 

 

   

 

 

 

 

(1) See our unaudited pro forma condensed combined financial statements included elsewhere in this prospectus for an explanation of the adjustments used to derive pro forma net income (loss). Pro forma net income for the periods presented reflects reduced operations at our Tioga Gas Plant, which was shut down from late November 2013 to late March 2014 for a large-scale expansion, refurbishment and optimization project. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of our Financial Results—Tioga Gas Plant Expansion.”
(2) Reflects Hess’s 70% noncontrolling economic interest in the net income (loss) of HTGP Opco and 50% noncontrolling economic interest in the net income (loss) of Logistics Opco. See our unaudited pro forma condensed combined financial statements and Adjusted EBITDA reconciliation below for further discussion.

 

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(3) The following table reconciles net income (loss) attributable to Hess to Adjusted EBITDA attributable to Hess. These adjustments exclude interest expense and certain incremental costs of being a publicly traded partnership discussed in footnotes (5) and (8) below. Under the limited partnership agreements that govern our joint interest assets with Hess, these costs are assumed to be our responsibility and do not reduce the earnings to Hess associated with Hess’ retained ownership interests in HTGP Opco and Logistics Opco.

 

    Twelve Months Ended
June 30, 2014
    Year Ended
December 31, 2013
 
(in millions)   HTGP
Opco
    Logistics
Opco
    Combined     HTGP
Opco
    Logistics
Opco
    Combined  

Net income (loss) attributable to Hess

  $ (20.7   $ 15.4      $ (5.3   $ (6.1   $ 21.5      $ 15.4   

Add:

           

Depreciation expense

    9.8        4.4        14.2        3.3        3.9        7.2   

Interest expense

                                         

Income tax expense

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA attributable to Hess

  $ (10.9   $ 19.8      $ 8.9      $ (2.8   $ 25.4      $ 22.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(4) For a definition of the non-GAAP financial measure of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Condensed Combined Financial and Operating Data—Non-GAAP Financial Measure.”
(5) Interest expense and cash interest paid both include commitment fees that would have been paid by our Predecessor had our revolving credit facility been in place during the periods presented. Interest expense also includes the amortization of origination fees under our revolving credit facility. We do not expect to have any borrowings under our new revolving credit facility immediately following the closing of this offering.
(6) Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures in exactly the same way as will be required under our partnership agreement. We believe that the amount of maintenance capital expenditures shown above approximates, but may not precisely reflect, the maintenance capital expenditures we would have recorded in accordance with our partnership agreement for the twelve months ended June 30, 2014 or the year ended December 31, 2013. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”
(7) Calculated after taking into account our 30% controlling economic interest in HTGP Opco and 50% controlling economic interest in Logistics Opco.
(8) Reflects an adjustment for estimated incremental general and administrative expense we expect that we will incur as a publicly traded partnership, including expenses associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, listing our common units on the NYSE, independent auditor fees, registrar and transfer agent fees, directors and officers insurance and director compensation.
(9) Under each of our commercial agreements with Hess other than our propane storage services agreement, Hess will be obligated to provide minimum volumes of crude oil, natural gas and NGLs, as applicable, to our assets on a quarterly basis. Beginning in 2015, Hess’s minimum volume commitments under these commercial agreements will be equal to 80% of Hess’s nominations in each development plan and apply on a three-year rolling basis. If Hess fails to deliver its applicable minimum volume commitment under any commercial agreement during any quarter, then Hess will pay us a deficiency payment equal to the volume of the deficiency multiplied by the relevant fee under such commercial agreement. The amount of any deficiency payment paid by Hess may be applied as a credit for any volumes delivered to us under such commercial agreement in excess of Hess’s nominated volumes during any of the following four quarters after such credit is earned, after which time any unused credits will expire. For purposes of calculating estimated distributable cash flow, the quarterly deficiency payment is included in distributable cash flow when we receive the cash, rather than when it is recognized in revenues in accordance with GAAP.
(10) Assumes expansion capital expenditures were funded with capital contributions by Hess.

Estimated Distributable Cash Flow for the Twelve Months Ending December 31, 2015

We forecast our estimated distributable cash flow for the twelve months ending December 31, 2015, will be approximately $         million. This amount would exceed by $         million the amount needed to pay the aggregate minimum annual distribution of $         million on all of our outstanding common and subordinated units and the corresponding distributions on our general partner’s 2% interest for the twelve months ending December 31, 2015.

 

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We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated distributable cash flow for the twelve months ending December 31, 2015, and related assumptions set forth below to substantiate our belief that we will have sufficient available cash to pay the minimum quarterly distribution to all our unitholders and the corresponding distributions on our general partner’s 2% interest for the twelve months ending December 31, 2015. Please read below under “—Significant Forecast Assumptions” for further information as to the assumptions we have made for the financial forecast. This forecast is a forward-looking statement and should be read together with our historical and unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient distributable cash flow to pay the minimum quarterly distribution to all unitholders and our general partner for the forecasted period. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

The prospective financial information included in this registration statement has been prepared by, and is the responsibility of, our management. Ernst & Young LLP has neither compiled nor performed any procedures with respect to the accompanying prospective financial information and, accordingly, Ernst & Young LLP does not express an opinion or any other form of assurance with respect thereto. The Ernst & Young LLP report included in this registration statement relates to our historical financial information. It does not extend to the prospective financial information and should not be read to do so.

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated distributable cash flow.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.

 

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Hess Midstream Partners LP

Estimated Distributable Cash Flow

 

(in millions)    Twelve Months Ending
December 31, 2015(1)

Revenues

   $            

Costs and expenses:

  

Operating and maintenance expense

  

Depreciation expense

  

General and administrative expense(2)

  
  

 

Total costs and expenses

  
  

 

Operating income (loss)

  

Interest expense(3)

  
  

 

Net income (loss)

  

Less:

  

Net income (loss) attributable to Hess(4)(5)

  
  

 

Net income (loss) attributable to Hess Midstream Partners LP

  

Plus:

  

Net income (loss) attributable to Hess(4)(5)

  

Depreciation expense

  

Interest expense(3)

  
  

 

Estimated Adjusted EBITDA(6)

  

Less:

  

Estimated Adjusted EBITDA attributable to Hess(4)(5)

  
  

 

Estimated Adjusted EBITDA attributable to Hess Midstream Partners LP

  

Less:

  

Cash interest paid(3)

  

Maintenance capital expenditures(7)

  

Expansion capital expenditures(7)

  

Plus:

  

Borrowings to fund expansion capital expenditures

  
  

 

Estimated Distributable Cash Flow attributable to Hess Midstream Partners LP

   $            

Distributions to public unitholders

  

Distributions to Hess — common units

  

Distributions to Hess — subordinated units

  

Distributions to our general partner

  
  

 

Total distributions

   $            
  

 

Excess of Estimated Distributable Cash Flow over aggregate minimum annual distributions

   $            

 

(1) Unless otherwise noted, amounts represent 100% of the results of operations of our Processing and Storage and our Logistics businesses. See our Predecessor’s combined financial statements for further discussion related to our controlling interests in HTGP Opco and Logistics Opco.
(2) Includes approximately $4.4 million of estimated incremental general and administrative expenses that we expect to incur as a result of being a publicly traded partnership.
(3) Interest expense and cash interest paid both include the commitment fees and the interest on the borrowings under our revolving credit facility that we expect to enter into in connection with this offering. Interest expense also includes the amortization of origination fees under our new revolving credit facility.
(4) Reflects Hess’s 70% noncontrolling economic interest in the net income of HTGP Opco and 50% noncontrolling economic interest in Logistics Opco. See our unaudited condensed combined pro forma financial statements and Adjusted EBITDA reconciliation below for further discussion.

 

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(5) The following table reconciles net income (loss) attributable to Hess to Adjusted EBITDA attributable to Hess. These adjustments exclude certain incremental costs of being a publicly traded partnership and the interest expense discussed in footnotes (2) and (3) above. Under the limited partnership agreements that govern our joint interest assets with Hess, these costs are assumed to be our responsibility and do not reduce the earnings to Hess associated with Hess’ retained ownership interests in HTGP Opco and Logistics Opco.

 

(in millions)    HTGP Opco      Logistics Opco      Combined  

Net income (loss) attributable to Hess

   $                    $                    $                

Add:

        

Depreciation expense

        

Interest expense

                       

Income tax expense

                       
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA attributable to Hess

   $                    $                    $                
  

 

 

    

 

 

    

 

 

 

 

(6) For a definition of the non-GAAP financial measure of Adjusted EBITDA, please read “Selected Historical and Pro Forma Condensed Combined Financial and Operating Data—Non-GAAP Financial Measure.”
(7) Reflects our 30% controlling economic interest in HTGP Opco and 50% controlling economic interest in Logistics Opco.

Significant Forecast Assumptions

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2015. The forecast is based on a number of assumptions that are subject to change. Please read “Risk Factors—Risks Related to Our Business—Hess currently accounts for substantially all of our revenues. If Hess changes its business strategy, is unable for any reason, including financial or other limitations, to satisfy its obligations under our commercial agreements or significantly reduces the volumes delivered to or stored at our assets, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders would be materially and adversely affected.”

While the assumptions discussed below are not all-inclusive, they include those that we believe are material to our forecasted results of operations, and any assumptions not discussed below were not deemed to be material. We believe we have a reasonable, objective basis for these assumptions. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

General Considerations

As discussed in this prospectus, substantially all of our revenues and a significant portion of our expenses will be determined by contractual arrangements that we will enter into with Hess at the closing of this offering. Accordingly, our forecasted results are not directly comparable with historical periods. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results.” Substantially all of our revenues will be derived from long-term, fee-based commercial agreements with Hess that include minimum volume commitments. Please read “Business—Our Commercial Agreements with Hess.”

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending             ,             , we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from the closing of this offering through             ,             , based on the actual length of the period.

Definition of available cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

    less, the amount of cash reserves established by our general partner to:

 

    provide for the proper conduct of our business (including reserves for our future capital expenditures, future acquisitions, anticipated future debt service requirements and refunds of collected rates reasonably likely to be refunded as a result of a settlement or hearing related to FERC rate proceedings or rate proceedings under applicable law subsequent to that quarter);

 

    comply with applicable law, any of our or our subsidiaries’ debt instruments or other agreements; or

 

    provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions if the effect of the establishment of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

    plus, if our general partner so determines, all or any portion of the cash on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made subsequent to the end of such quarter.

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings that are made under a credit facility, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

Intent to distribute the minimum quarterly distribution

Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our

 

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general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility” for a discussion of the restrictions included in our revolving credit facility that may restrict our ability to make distributions.

General partner interest and incentive distribution rights

Initially, our general partner will be entitled to 2% of all quarterly distributions from inception that we make prior to our liquidation. This general partner interest will be represented by a 2% general partner interest. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest (other than the issuance of common units upon any exercise by the underwriters of their option to purchase additional common units in this offering).

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48%, of the available cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48% does not include any distributions that our general partner or its affiliates may receive on common or subordinated units or the 2% general partner interest that they own. Please read “—General Partner Interest and Incentive Distribution Rights” for additional information.

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating surplus

We define operating surplus as:

 

    $         million (as described below); plus

 

    all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below), provided that cash receipts from the termination of a commodity hedge or interest rate hedge prior to its specified termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge; plus

 

    working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

    cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; less

 

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    all of our operating expenditures (as defined below) after the closing of this offering; less

 

    the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

    all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such 12-month period with the proceeds of additional working capital borrowings.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures (as described below) and thus reduce operating surplus when repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the twelve-month period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (1) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (2) sales of equity securities, and (3) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of our general partner and its affiliates, officer, director and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to the expiration of its settlement or termination date specified therein will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of a rate hedge contract or a commodity hedge contract will be amortized at the life of such rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

    repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

    payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

    expansion capital expenditures;

 

    payment of transaction expenses (including taxes) relating to interim capital transactions;

 

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    distributions to our partners;

 

    repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans); or

 

    any other expenditures or payments using the proceeds of this offering that are described in “Use of Proceeds.”

Capital surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

    borrowings other than working capital borrowings;

 

    sales of our equity and debt securities;

 

    sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets; and

 

    capital contributions received.

Characterization of cash distributions

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed by us since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. We anticipate that distributions from operating surplus will generally not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $         million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.

Capital Expenditures

Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, our operating capacity or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace processing, terminaling and storage facilities, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional processing, terminaling or storage capacity, to the extent such capital expenditures are expected to expand our long-term operating capacity or operating income. Expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of expansion capital expenditures in respect of the period from the

 

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date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date that such capital improvement commences commercial service and the date that such capital improvement is abandoned or disposed of.

Capital expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures or expansion capital expenditures by our general partner.

Subordinated Units and Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters. Furthermore, no arrearages will accrue or be payable on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, during the subordination period, there will be available cash to be distributed on the common units.

Subordination period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the first business day following the distribution of available cash in respect of any quarter beginning after             ,             , that each of the following tests are met:

 

    distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest equaled or exceeded $         (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

    the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest during those periods on a fully diluted basis; and

 

    there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early termination of the subordination period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter, beginning with the quarter ending             ,             , that each of the following tests are met:

 

    distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest equaled or exceeded $         (150% of the annualized minimum quarterly distribution), plus the related distributions on the incentive distribution rights, for the four-quarter period immediately preceding that date;

 

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    the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (1) $         (150% of the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% interest during that period on a fully diluted basis and (2) the corresponding distributions on the incentive distribution rights; and

 

    there are no arrearages in payment of the minimum quarterly distributions on the common units.

Expiration of the subordination period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.

Adjusted operating surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

    operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet under the caption “—Operating Surplus and Capital Surplus—Operating surplus” above); less

 

    any net increase in working capital borrowings with respect to that period; less

 

    any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

    any net decrease in working capital borrowings with respect to that period; plus

 

    any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus

 

    any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Distributions of Available Cash From Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

    first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

    second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

    third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

 

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The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

Distributions of Available Cash From Operating Surplus After the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

    first, 98% to all unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and

 

    thereafter, in the manner described in “—General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

General Partner Interest and Incentive Distribution Rights

Our partnership agreement provides that our general partner initially will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest if we issue additional units. Our general partner’s 2% interest, and the percentage of our cash distributions to which it is entitled from such 2% interest, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon any exercise by the underwriters of their option to purchase additional common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. Our general partner may instead fund its capital contribution by the contribution to us of common units or other property.

Incentive distribution rights represent the right to receive an increasing percentage (13%, 23% and 48%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest.

The following discussion assumes that our general partner maintains its 2% general partner interest, and that our general partner continues to own the incentive distribution rights.

If for any quarter:

 

    we have distributed available cash from operating surplus to the common unitholders and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

    we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

    first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

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    second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

    third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

    thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total quarterly distribution per unit target amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2% general partner interest, our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

    

Total quarterly
distribution per unit
target amount

   Marginal percentage interest in
distributions
 
      Unitholders     General Partner  

Minimum Quarterly Distribution

   $                                 98     2

First Target Distribution

   above $         up to $              98     2

Second Target Distribution

   above $         up to $              85     15

Third Target Distribution

   above $         up to $              75     25

Thereafter

   above $                                 50     50

General Partner’s Right to Reset Incentive Distribution Levels

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to our general partner would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distributions for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter. If our general partner and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher

 

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than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that the holder of the incentive distribution rights will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period. In addition, our general partner will maintain its general partner’s interest in us immediately prior to the reset election.

The number of common units that our general partner (or the then-holder of the incentive distribution rights, if other than our general partner) would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

    first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives an amount equal to 115% of the reset minimum quarterly distribution for that quarter;

 

    second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives an amount per unit equal to 125% of the reset minimum quarterly distribution for the quarter;

 

    third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives an amount per unit equal to 150% of the reset minimum quarterly distribution for the quarter; and

 

    thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

 

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The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $        .

 

        Marginal percentage
interest in distributions
   

Quarterly

distribution
per unit
following

hypothetical reset

   

Quarterly
distribution

per unit
prior to reset

  Common
unitholders
    General
partner
interest
    Incentive
distribution
rights
   

Minimum Quarterly Distribution

              $                      2                  $             

First Target Distribution

  above $         up to $                      2          above $         up to $        (1)

Second Target Distribution

  above $         up to $                      2     13   above $         up to $        (2)

Third Target Distribution

  above $         up to $                      2     23   above $         up to $        (3)

Thereafter

  above $                      2     48   above $        (3)

 

(1) This amount is 115% of the hypothetical reset minimum quarterly distribution.
(2) This amount is 125% of the hypothetical reset minimum quarterly distribution.
(3) This amount is 150% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be common units outstanding, our general partner’s 2% interest has been maintained, and the average distribution to each common unit would be $         per quarter for the two consecutive non-overlapping quarters prior to the reset.

 

   

Quarterly

distribution per

unit prior to reset

  Cash
distributions
to common
unitholders
prior to
reset
    Cash distribution to general
partner prior to reset
    Total
distributions
 
        Common
units
    2%
General
partner
interest
    Incentive
distribution
rights
    Total    

Minimum Quarterly Distribution

          $           $                   $                   $                   $                   $                   $                

First Target Distribution

  above $         up to $                    

Second Target Distribution

  above $         up to $                    

Third Target Distribution

  above $         up to $                    

Thereafter

  above $                    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $        $        $        $        $        $     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the general partner, including in respect of incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that, as a result of the reset, there would be             common units outstanding, our general partner has maintained its 2% general partner interest, and that the average distribution to each common unit would be $        . The number of common units issued as a result of the reset was calculated by dividing (x) $         as the average of the amounts received by the general partner in respect of its incentive distribution rights for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, by (y) the average of the cash distributions made on each common unit per quarter for the two consecutive non-overlapping quarters prior to the reset as shown in the table above, or $        .

 

   

Quarterly
distribution per
unit after reset

  Cash
distributions
to common
unitholders
after reset
    Cash distribution to general
partner after reset
    Total
distributions
 
      Common
units
    2%
General
partner
interest
    Incentive
distribution
rights
    Total    

Minimum Quarterly Distribution

  $           $                   $                   $                   $                   $                   $                

First Target Distribution

  above $         up to $                    

Second Target Distribution

  above $         up to $                    

Third Target Distribution

  above $         up to $                    

Thereafter

  above $                    
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $        $        $        $        $        $     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

Distributions from Capital Surplus

How distributions from capital surplus will be made

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

    first, 98% to all unitholders, pro rata, and 2% to our general partner, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price in this offering;

 

    second, 98% to all unitholders, pro rata, and 2% to our general partner, until we distribute for each common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the outstanding common units; and

 

    thereafter, as if they were from operating surplus.

The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

Effect of a distribution from capital surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a

 

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distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution after any of these distributions are made, the effects of distributions of capital surplus may make it easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero. Then, after distributing an amount of capital surplus for each common unit equal to any unpaid arrearages of the minimum quarterly distributions on outstanding common units, we will then make all future distributions from operating surplus, with 50% being paid to the unitholders, pro rata, and 2% to our general partner and 48% to the holder of our incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

    the minimum quarterly distribution;

 

    target distribution levels;

 

    the unrecovered initial unit price; and

 

    the arrearages per common unit in payment of the minimum quarterly distribution on the common units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level, and each subordinated unit would be split into two units. We will not make any adjustment by reason of the issuance of additional units for cash or property (including additional common units issued under any compensation or benefit plans).

In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference may be accounted for in subsequent quarters.

 

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Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.

Manner of adjustments for gain

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to our partners in the following manner:

 

    first, to our general partner to the extent of any negative balance in its capital account;

 

    second, 98% to the common unitholders, pro rata, and 2% to our general partner, until the capital account for each common unit is equal to the sum of:

(1) the unrecovered initial unit price;

(2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and

(3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

    third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until the capital account for each subordinated unit is equal to the sum of:

(1) the unrecovered initial unit price; and

(2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

    fourth, 98% to all unitholders, pro rata, and 2% to our general partner, until we allocate under this paragraph an amount per unit equal to:

(1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less

(2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98% to the unitholders, pro rata, and 2% to our general partner, for each quarter of our existence;

 

    fifth, 85% to all unitholders, pro rata, and 15% to our general partner, until we allocate under this paragraph an amount per unit equal to:

(1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less

 

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(2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85% to the unitholders, pro rata, and 15% to our general partner for each quarter of our existence;

 

    sixth, 75% to all unitholders, pro rata, and 25% to our general partner, until we allocate under this paragraph an amount per unit equal to:

(1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less

(2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75% to the unitholders, pro rata, and 25% to our general partner for each quarter of our existence; and

 

    thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

The percentages set forth above are based on the assumption that our general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.

Manner of adjustments for losses

If our liquidation occurs before the end of the subordination period, after making allocations of loss to the general partner and the unitholders in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, we will generally allocate any loss to our general partner and unitholders in the following manner:

 

    first, 98% to the holders of subordinated units in proportion to the positive balances in their capital accounts and 2% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

    second, 98% to the holders of common units in proportion to the positive balances in their capital accounts and 2% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

    thereafter, 100% to our general partner.

The percentages set forth above are based on the assumption that our general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to capital accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital

 

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accounts resulting from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA CONDENSED COMBINED FINANCIAL AND OPERATING DATA

The following table shows selected historical combined financial and operating data of our Predecessor, and selected unaudited pro forma condensed combined financial and operating data of Hess Midstream Partners LP for the periods and as of the dates indicated. The following historical financial and operating data of our Predecessor include all of the assets and operations of HTGP Opco, Mentor Holdings and Logistics Opco on a combined basis. In connection with the closing of this offering, Hess will contribute to us a 30% controlling economic interest in HTGP Opco, a 100% interest in Mentor Holdings and a 50% controlling economic interest in Logistics Opco. Following the closing of this offering, we will consolidate HTGP Opco, Mentor Holdings and Logistics Opco in our financial statements and reflect a noncontrolling interest adjustment for Hess’s retained 70% noncontrolling economic interest in HTGP Opco and 50% noncontrolling economic interest in Logistics Opco.

The selected historical condensed combined financial data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited combined financial statements of our Predecessor appearing elsewhere in this prospectus. The summary historical unaudited condensed combined financial data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited condensed combined financial statements of our Predecessor appearing elsewhere in this prospectus. The following tables should be read together with, and are qualified in their entirety by reference to, the historical combined and unaudited pro forma condensed combined financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The selected unaudited pro forma condensed combined financial and operating data presented in the following table for the year ended December 31, 2013 and as of and for the six months ended June 30, 2014 are derived from the unaudited pro forma condensed combined financial statements included elsewhere in this prospectus. The unaudited pro forma condensed combined balance sheet assumes the offering and the related transactions occurred as of June 30, 2014, and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014 assumes the offering and the related transactions occurred as of January 1, 2013.

The unaudited pro forma condensed combined financial statements give effect to the following:

 

    Hess’s contribution of our Predecessor’s assets and operations to us, including adjusting for Hess’s retained interests in HTGP Opco and Logistics Opco and retention of certain related party indebtedness;

 

    our issuance of         common units and         subordinated units to Hess;

 

    our issuance of a 2% general partner interest in us and all of our incentive distribution rights to our general partner;

 

    our issuance of         common units, representing a     % limited partner interest in us, to the public in connection with this offering, and our receipt of $         in net proceeds from this offering;

 

    our entry into a new $         million revolving credit facility, which we have assumed was not drawn during the pro forma periods presented;

 

    the consummation of this offering and application of the net proceeds of this offering, as described in “Use of Proceeds”;

 

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    our entry into an omnibus agreement, an operational services agreement and a secondment agreement with Hess; and

 

    our execution of multiple long-term commercial agreements with Hess, including the recognition of incremental revenues under those agreements that were not recognized by our Predecessor and the adjustment of certain revenues previously recognized by our Predecessor.

The unaudited pro forma condensed combined financial statements do not give effect to an estimated $4.4 million of incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

For the years ended December 31, 2013 and 2012, our assets were part of the integrated operations of Hess, and our Predecessor generally recognized only the costs, but not the revenues, associated with certain of the services provided to Hess on an intercompany basis. Accordingly, the revenues in our Predecessor’s historical combined financial statements relate only to amounts received from third parties for these services and amounts received from Hess with respect to transactions for which there are governing contractual arrangements. For this reason, as well as the other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results,” our future results of operations will not be comparable to our Predecessor’s historical results.

The following table presents the non-GAAP financial measure of Adjusted EBITDA, which we use in evaluating the performance of our business. For a definition of Adjusted EBITDA and a reconciliation to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “—Non-GAAP Financial Measure” below.

 

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     Hess Midstream Partners LP Predecessor
Historical
    Hess Midstream Partners LP
Pro Forma
 
     Six Months
Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended
June 30,
    Year Ended
December 31,
 
     2014     2013       2013         2012       2014     2013  
(in millions, except per unit data and operating information)    (unaudited)                 (unaudited)  

Combined statements of income:

            

Revenues

            

Third-party

   $      $ 66.7      $ 142.3      $ 4.7      $      $   

Affiliate

     105.3        61.8        127.4        165.0        105.7        279.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     105.3        128.5        269.7        169.7        105.7        279.2   

Costs and expenses

            

Third-party product purchases

            27.0        65.8        20.9                 

Affiliate product purchases

            61.5        124.5        66.5                 

Operating and maintenance expenses

     85.9        98.9        217.7        130.3        85.9        217.7   

Depreciation expense

     17.6        7.2        12.5        14.3        17.6        12.5   

General and administrative expenses

     2.3        6.5        13.0        11.6        2.3        13.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     105.8        201.1        433.5        243.6        105.8        243.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (0.5     (72.6     (163.8     (73.9     (0.1     36.0   

Interest expense

     1.1                             1.1        2.0   

Income tax expense

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (1.6     (72.6     (163.8     (73.9     (1.2     34.0   

Less: Net income (loss) attributable to Hess

                                 (3.3     15.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Midstream Partners LP

   $ (1.6   $ (72.6   $ (163.8   $ (73.9   $ 2.1      $ 18.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General partner interest in net income (loss)

           $        $     

Limited partner interest in net income (loss)

            

Net income (loss) per limited partner unit (basic and diluted):

            

Common units

           $        $     

Subordinated units

           $        $     

Weighted average number of limited partner units outstanding (basic and diluted):

            

Common units

            

Subordinated units

            

Combined balance sheet data (at period end):

            

Cash and cash equivalents

   $        $      $      $     

Property, plant and equipment, net

     1,342.4          1,260.1        789.2        1,342.4     

Total assets

     1,365.5          1,268.7        789.8        1,368.1     

Total liabilities

     1,072.0          998.4        554.0        111.8     

Combined statements of cash flows data:

            

Net cash from (used in):

            

Operating activities

   $ (1.9   $ (69.6   $ (135.4   $ (53.3    

Investing activities

     (150.2     (228.0     (473.2     (347.5    

Financing activities

     152.1        297.6        608.6        400.8       

Other financial data:

        

Adjusted EBITDA

   $ 17.1      $ (65.4   $ (151.3   $ (59.6   $ 17.5      $ 48.5   

Adjusted EBITDA attributable to Hess Midstream Partners LP

             9.5        25.9   

Capital expenditures:

            

Maintenance

   $ 2.1      $ 2.1      $ 9.2      $ 4.0       

Expansion

     148.1        225.9        464.0        343.5       

Volumes:

            

Tioga Gas Plant

            

NGL processing sales (MBbl/d)

       10        11        6       

Natural gas processing sales (MMcf/d)

       68        71        44       

Natural gas inlet (MMcf/d)(1)

    
63
  
         

Mentor Storage Terminal

            

Propane throughput (MBbl/d)

     1        1        1        1       

Tioga Rail Terminal

            

Crude oil throughput (MBbl/d)

     36        52        49        31       

NGL throughput (MBbl/d)(2)

     3        5        5        3       

Ramberg Truck Facility

            

Crude oil throughput (MBbl/d)

     19        2        3        9       

 

(1) Beginning January 1, 2014, our Tioga Gas Plant revenues are based on natural gas inlet volumes at the plant. Please read “Management’s Discussion and Analysis—Factors Affecting the Comparability of our Financial Results.”
(2) Historically, NGLs were loaded onto rail cars at the Tioga Gas Plant. We expect to transition rail loading of NGLs to the Tioga Rail Terminal during the third quarter of 2014.

 

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Non-GAAP Financial Measure

We define Adjusted EBITDA as net income (loss) plus interest expense, income tax expense and depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance, such as other income and other non-cash, non-recurring items, if applicable. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:

 

    our operating performance as compared to those of other companies in the midstream business, without regard to financing methods, historical cost basis or capital structure;

 

    the ability of our assets to generate sufficient cash flow to make distributions to our unitholders;

 

    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 in this prospectus provides information useful 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 an alternative to net income (loss), income 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 excludes some, but not all, items that affect net income, income from operations and net cash provided by (used in) operating activities, and these measures may vary among other companies. As a result, Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

The following table presents a reconciliation of Adjusted EBITDA, to net income (loss) and net cash provided by (used in) operating activities, the most directly comparable GAAP financial measures, on a historical basis and pro forma basis, as applicable, for each of the periods indicated.

 

     Hess Midstream Partners LP
Predecessor Historical
    Hess Midstream Partners LP
Pro Forma
 
     Six Months
Ended
June 30,
    Year Ended
December 31,
    Six Months
Ended
June 30,
    Year Ended
December 31,
 
     2014     2013     2013     2012     2014     2013  
(in millions)                                     

Reconciliation of Adjusted EBITDA to net income (loss):

            

Net income (loss)

   $ (1.6   $ (72.6   $ (163.8   $ (73.9   $ (1.2   $ 34.0   

Add:

            

Depreciation expense

     17.6        7.2        12.5        14.3        17.6        12.5   

Interest expense

     1.1                             1.1        2.0   

Income tax expense

                                          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 17.1      $ (65.4   $ (151.3   $ (59.6   $ 17.5      $ 48.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Adjusted EBITDA attributable to Hess

             8.0        22.6   
          

 

 

   

 

 

 

Adjusted EBITDA attributable to Hess Midstream Partners LP

           $ 9.5      $ 25.9   
          

 

 

   

 

 

 

Reconciliation of Adjusted EBITDA to net cash provided by (used in) operating activities:

            

Net cash from (used in) operating activities

   $ (1.9   $ (69.6   $ (135.4   $ (53.3    

Changes in assets and liabilities

     17.9        4.2        (15.9     (6.3    

Interest expense

     1.1                            
  

 

 

   

 

 

   

 

 

   

 

 

     

Adjusted EBITDA

   $ 17.1      $ (65.4   $ (151.3   $ (59.6    
  

 

 

   

 

 

   

 

 

   

 

 

     

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of the financial condition and results of operations for Hess Midstream Partners LP in conjunction with the historical combined financial statements of Hess Midstream Partners LP Predecessor, our predecessor for accounting purposes (our “Predecessor”), and the unaudited pro forma condensed combined financial statements for Hess Midstream Partners LP included elsewhere in this prospectus. Our Predecessor includes 100% of the operations of the Tioga Gas Plant, the Mentor Storage Terminal, the Tioga Rail Terminal and associated crude oil rail cars and the Ramberg Truck Facility, reflecting the historical ownership of these assets by Hess. Among other things, those historical and unaudited pro forma condensed combined financial statements include more detailed information regarding the basis of presentation for the following information.

Unless the context otherwise requires, references in this section to “we,” “us,” “our” or like terms, when used in a historical context, refer to our Predecessor and, when used in the present tense or future tense, these terms refer to Hess Midstream Partners LP and its subsidiaries. References to “our general partner” refer to Hess Midstream Partners GP LLC. References to “Hess” refer collectively to Hess Corporation and its subsidiaries, other than us, our subsidiaries and our general partner.

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 the section entitled “Risk Factors” included elsewhere in this prospectus.

Overview

We are a fee-based, growth-oriented, traditional master limited partnership formed in January 2014 by Hess to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third-party crude oil and natural gas producers. Our assets are primarily located in the Bakken and Three Forks shale plays in the Williston Basin area of North Dakota, which we refer to collectively as the Bakken, one of the fastest-growing, most prolific producing basins in North America.

We conduct our business through two reportable segments: (1) processing and storage and (2) logistics:

Processing and Storage.    Our processing and storage business consists of the following assets:

 

    Tioga Gas Plant.    We own a 30% controlling economic interest in HTGP Opco, which owns the Tioga Gas Plant, a natural gas processing plant located in Tioga, North Dakota. The plant currently has a cryogenic processing capacity of 250 MMcf/d and integrated fractionation capacity (including ethane) of 60 MBbl/d. Hess has announced that it is currently evaluating a debottlenecking project to increase the plant’s processing capacity from 250 MMcf/d to 300 MMcf/d. Additionally, we are also constructing a CNG terminal at the Tioga Gas Plant that, when completed, will have a CNG compression capacity of 17,000 diesel equivalent gallons per day. The plant includes the North Dakota Natural Gas Pipeline, an approximately 60-mile, 10.75-inch residue gas pipeline that connects to the interstate Northern Border Pipeline at Cherry Creek, North Dakota and has a maximum capacity of 65 MMcf/d at the Northern Border Pipeline interconnection.

 

    Mentor Storage Terminal.    We own a 100% interest in Mentor Holdings, which owns the Mentor Storage Terminal, a propane storage cavern and rail and truck transloading facility located in Mentor, Minnesota with approximately 328 MBbls of working storage capacity.

 

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Logistics.    Our logistics business consists of our 50% controlling economic interest in Logistics Opco, which owns each of the following assets:

 

    Tioga Rail Terminal.    A crude oil and NGL rail loading facility located in Tioga, North Dakota. This terminal consists of a dual loop track designed to load two crude oil unit trains per day, or approximately 140 MBbl/d. The terminal also consists of ladder tracks designed to load 30 MBbl/d of NGLs with track space for over 250 rail cars and three crude oil storage tanks with a combined shell storage capacity of 287 MBbls.

 

    Crude Oil Rail Cars.    Nine crude oil unit trains, each consisting of 104 crude oil rail cars, and an additional 26 spare rail cars, all of which were constructed to AAR Petition 1577 (CPC-1232) safety standards. The unit trains are used to transport crude oil for Hess from the Tioga Rail Terminal to various delivery points in the East Coast, West Coast and Gulf Coast regions of the United States.

 

    Ramberg Truck Facility.    A crude oil truck and pipeline receipt terminal located in Williams County, North Dakota that is capable of delivering up to an aggregate of 130 MBbl/d of crude oil into an interconnecting pipeline for transportation to the Tioga Rail Terminal and to multiple third-party pipelines and storage facilities.

We refer to our controlling interest in the Tioga Gas Plant, the Tioga Rail Terminal, the crude oil rail cars and the Ramberg Truck Facility in this prospectus as our “joint interest assets.”

How We Generate Revenues

We generate revenues by charging fees for processing natural gas and fractionating NGLs; terminaling and loading crude oil and NGLs; transporting crude oil by rail car; and storing and terminaling propane. We will enter into multiple 10-year fee-based commercial agreements with Hess prior to the closing of this offering that will include minimum volume commitments based on dedicated production, inflation escalators and fee redetermination mechanisms, all of which are intended to provide us with cash flow stability and growth and minimize our direct commodity price exposure. We expect that each of these commercial agreements will be dated effective January 1, 2014. For more information regarding our commercial agreements with Hess, please read “Business—Our Commercial Agreements with Hess.”

How we will generate revenues after the closing of this offering differs from how our Predecessor historically generated revenues. For more information, please read “—Factors Affecting the Comparability of our Financial Results.”

How We Evaluate Our Operations

Our management intends to use 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 and NGLs that we handle at our processing, terminaling, and storage 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. Although Hess will commit 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;

 

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    identify and execute expansion projects, and capture incremental throughput volumes from Hess and third parties for these expanded facilities; and

 

    increase throughput volumes at our Tioga Rail Terminal and Ramberg Truck Facility by contracting additional capacity commitments from new or existing gathering pipelines or by loading third-party trains, primarily driven by expected increased supply of and demand for crude oil produced in the Bakken.

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 labor expenses, 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 these expenses. We will 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) plus interest expense, income tax expense and depreciation and amortization, as further adjusted to eliminate the impact of certain items that we do not consider indicative of our ongoing operating performance, such as other income and other non-cash, non-recurring items, if applicable. We define Adjusted EBITDA attributable to Hess Midstream Partners LP as Adjusted EBITDA less Adjusted EBITDA attributable to Hess’s retained interests in our joint interest assets. Although we have not quantified distributable cash flow on a historical basis, after the closing of this offering, we intend to use distributable cash flow to analyze our liquidity and performance. We define distributable cash flow as Adjusted EBITDA attributable to Hess Midstream Partners less cash paid for interest and maintenance capital expenditures plus adjustments related to minimum volume commitments. Distributable cash flow will not reflect changes in working capital balances. Adjusted EBITDA and distributable cash flow are not presentations made in accordance with GAAP.

Adjusted EBITDA and distributable cash flow are non-GAAP supplemental financial measures that management and external users of our combined financial statements, such as industry analysts, investors, lenders and rating agencies, may use to assess:

 

    our operating performance as compared to other publicly traded partnerships 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 unitholders;

 

    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 in this prospectus 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) attributable to Hess Midstream Partners and net cash provided by (used in) operating activities, respectively. Adjusted EBITDA and distributable cash flow should not be considered as alternatives to GAAP net income, income from operations, net cash provided by 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

 

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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.

For a further discussion of the non-GAAP financial measure of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to its most comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Condensed Combined Financial and Operating Data—Non-GAAP Financial Measure.”

Factors Affecting the Comparability of Our Financial Results

Our future results of operations are not expected to be comparable to our Predecessor’s historical results of operations for the reasons described below:

Contribution of Controlling Interests in our Joint Interest Assets.    Our Predecessor’s results of operations included 100% of the revenues and expenses associated with the assets that will be contributed to us. At the closing of this offering, Hess will contribute to us a 30% controlling economic interest in the Tioga Gas Plant and a 50% controlling economic interest in each of our other joint interest assets. Following the closing of this offering, we will consolidate the financial position and results of operations of our joint interest assets and Hess’s retained interests in our joint interest assets will be reflected as noncontrolling interests in our financial statements.

Revenues.    There are differences between the sources of our Predecessor’s revenues prior to January 1, 2014, on the one hand, and the sources of our Predecessor’s revenues beginning January 1, 2014 and the sources of our revenues following the closing of this offering, on the other hand. Prior to January 1, 2014, our Predecessor earned revenues at our Tioga Gas Plant from percentage-of-proceeds, or POP, contracts under which our Predecessor purchased unprocessed natural gas from Hess and third-party producers, processed the natural gas and sold the residue gas and NGLs to Hess and third-party customers. Our Predecessor retained a percentage of the proceeds from such sales, plus certain additional fees, and remitted the remainder of the sales proceeds to the natural gas producer. Substantially all of the revenues in our Predecessor’s historical audited combined financial statements for the years ended December 31, 2013 and 2012 relate solely to the Tioga Gas Plant’s operations. Effective January 1, 2014, we generated revenues under fee-based arrangements with Hess and no longer generated revenues under POP contracts. Following the closing of this offering, we will earn revenues under our long-term commercial agreements with Hess.

Prior to January 1, 2014, the Mentor Storage Terminal and our logistics assets did not generate revenues, since these assets were part of the integrated operations of Hess and documented intercompany arrangements did not exist. As a result, our Predecessor recognized costs but did not record a significant amount of revenues associated with these assets. Our Mentor Storage Terminal did not generate any revenues during the years ended December 31, 2013 and 2012. Our logistics business did not generate any revenues for the year ended December 31, 2013, and generated only minimal third-party revenues during the year ended December 31, 2012. Beginning January 1, 2014, the revenues for all of our businesses are generated from fees paid to us by Hess and third-party customers for processing natural gas and fractionating NGLs; terminaling and loading crude oil and NGLs; transporting crude oil by rail car; and storing and terminaling propane. As a result, there are no revenues associated with our Mentor Storage Terminal in our audited historical financial statements for the years ended December 31, 2013 and 2012. Our logistics business generated an immaterial amount of revenues for the year ended December 31, 2012 and none for the year ended

 

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December 31, 2013. In contrast, there are associated revenues for all of our Predecessor businesses in our unaudited condensed combined financial statements for the six months ended June 30, 2014.

Product Purchases.    Our Predecessor took title to the commodities processed at our Tioga Gas Plant during the years ended December 31, 2013 and 2012, when our Predecessor earned revenues under POP contracts. As a result, our historical audited combined financial statements for the years ended December 31, 2013 and 2012 include product purchases, which are a percentage of the proceeds of the commodities sold, as remitted to producers, under the POP contracts. Effective January 1, 2014, we generated revenues under fee-based arrangements with Hess and no longer generated revenues under POP contracts. As a result, our Predecessor’s unaudited condensed combined financial statements for the six months ended June 30, 2014 do not include product purchases.

Tioga Gas Plant Expansion.    Commencing in the fourth quarter of 2013, our Tioga Gas Plant was shut down for a large-scale expansion, refurbishment and optimization project, during which a new cryogenic processing train was installed and processing capacity was increased to 250 MMcf/d from 120 MMcf/d. The Tioga Gas Plant’s expanded operations commenced in late March 2014. The expansion, refurbishment and optimization project was financed by an affiliate loan facility with Hess. At the closing of this offering, we expect to assume a portion of the affiliate loan facility, repay that amount in full with a portion of the net proceeds of this offering and terminate our participation in the affiliate loan facility. As a result of the expansion, we experienced an increase in depreciation in the second quarter of 2014 and expect to experience higher gas processing revenues during the second half of 2014. Hess has announced that it is currently evaluating a debottlenecking project at the Tioga Gas Plant to increase the plant’s processing capacity from 250 MMcf/d to 300 MMcf/d, and we expect to further explore increasing the plant’s processing capacity to more than 300 MMcf/d.

Operating Expenses.    In connection with this offering, we will enter into an operational services agreement with Hess under which we will pay fees to Hess with respect to certain operational services Hess will provide in support of our operations. Our Predecessor recorded direct costs of running our businesses as well as certain costs allocated from Hess. As such, we expect that there will be differences in the results of our operations between our Predecessor’s historical combined financial statements and our future financial statements.

General and Administrative Expenses.    Our Predecessor’s general and administrative expenses included direct monthly charges for the management and operation of our assets and certain expenses allocated by Hess for general corporate services, such as treasury, accounting, human resources and legal services. These expenses were charged or allocated to our Predecessor based on the nature of the expenses and our Predecessor’s proportionate share of employee time or capital expenditures and operating expense. Following the closing of this offering, we will reimburse Hess under our secondment agreement for the costs of certain employees seconded to our general partner in support of our operations, and Hess will charge us fees under our omnibus agreement for certain general and administrative services, such as treasury, accounting and legal services, that Hess will continue to provide to us. These fees will be based on an allocation of the costs associated with providing these services to us. For more information about our reimbursement of Hess and the fees and the services covered by it, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.” We also expect to incur an additional $4.4 million of incremental annual general and administrative expenses as a result of being a separate publicly-traded partnership that are not reflected in our Predecessor’s historical audited combined or unaudited condensed combined financial statements.

Financing.    There are differences in the way we will finance our operations as compared to the way our Predecessor historically financed our operations. Historically, our Predecessor’s operations were financed as part of Hess’s integrated operations and, other than interest under our Predecessor’s

 

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affiliate loan facilities with Hess, Hess did not charge our Predecessor for financing its operations. At the closing of this offering, we expect to assume a portion of one of our Predecessor’s affiliate loan facilities with Hess, repay that amount in full with a portion of the net proceeds of this offering and terminate our participation in the affiliate loan facility. Please read “—Capital Resources and Liquidity—Affiliate Loan Facilities with Hess.” Additionally, our Predecessor largely relied on internally-generated cash flows and capital contributions from Hess to satisfy its capital expenditure requirements. Following the closing of this offering, we intend to make cash distributions to our unitholders at an initial distribution rate of $         per unit per quarter ($         per unit on an annualized basis). Based on the terms of our cash distribution policy, we expect that we will distribute to our unitholders and our general partner most of the cash generated by our operations. As a result, we expect to fund future capital expenditures and acquisitions primarily from external sources, including borrowings under our revolving credit facility, under which we expect that no amounts will be drawn at the closing of the offering, and future issuances of equity and debt securities.

Income Taxes.    Our Predecessor determined income tax expense and related deferred tax balance sheet accounts on a separate return method for the years ended December 31, 2013 and 2012 and the six months ended June 30, 2014 and 2013. We did not record an income tax provision (benefit) for any of the presented periods due to our maintaining a full valuation allowance on net deferred tax assets primarily related to the income tax benefits from net operating losses. However, as a partnership, we will not be subject to income taxes following this offering and therefore our future financial statements will exclude income tax expense and deferred tax accounts.

Other Factors Expected To Significantly Affect Our Future Results

Supply and Demand for Crude Oil, Natural Gas and NGLs.    We currently generate the substantial majority of our revenues under fee-based agreements with Hess. These contracts should promote 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. Generally, drilling and production activity will increase as crude oil and natural gas prices increase. The throughput volumes at our assets 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’s 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’s control, including the domestic and global supply of and demand for crude oil, natural gas and NGLs. The commodities trading markets, as well as other supply and demand factors, may also influence the selling prices of crude oil, natural gas and NGLs. Furthermore, our ability to execute our growth strategy in the Bakken 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.

Acquisition Opportunities.    We plan to pursue acquisitions of complementary assets from Hess as well as third parties. We believe Hess will be incentivized to offer us the opportunity to purchase additional midstream assets that it currently owns or may acquire or develop in the future, and Hess has provided us with a right of first offer on certain of its processing, gathering and logistics assets that primarily support Hess’s production operations in the Williston Basin, including Hess’s retained interests in our joint interest assets. Please read “Business—Right of First Offer Assets.” We will focus our strategy on crude oil and natural gas gathering; natural gas processing; and crude oil, natural gas, and NGL logistics assets in the Bakken. In addition, we plan to pursue strategic acquisitions of midstream assets from third parties both within our existing geographic footprint and in new areas. We

 

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believe we will be well positioned to acquire such assets from Hess and third parties and, should such opportunities arise, identifying and executing acquisitions will be a key part of our strategy. However, if we are unable to make acquisitions on economically acceptable terms from Hess or third parties, our future growth may be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows and ability to make distributions to unitholders.

Third-Party Business.    We intend to increase utilization of our existing assets by pursuing additional throughput volumes from third parties. While we currently provide substantially all of our midstream services exclusively to Hess, we are actively marketing our midstream services to, and are pursuing strategic relationships with, third-party producers and commodity purchasers with operations in the Bakken in order to maximize our utilization rates and diversify our customer base. We believe the strategic location of our existing assets, including their direct connections to multiple interstate pipelines and to the BNSF Railway, provide us with a competitive advantage that will result in additional third-party throughput volumes at our assets. Substantially all of our revenues are currently generated by fees paid by Hess. Unless we are successful in attracting meaningful throughput volumes from third-party customers, our ability to increase throughput volumes on our assets will be dependent on Hess and its future growth.

 

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Results of Operations

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

The following table and discussion is a summary of our combined results of operations for the six months ended June 30, 2014 and 2013. The results of operations are discussed in further detail following this overview (in millions, unless otherwise noted).

 

    Six Months Ended
June 30,
 
    2014     2013  
    Processing and
storage
    Logistics     Combined
Hess Midstream
Partners LP
Predecessor
    Processing and
storage
    Logistics     Combined
Hess Midstream
Partners LP
Predecessor
 

Revenues

     

Third-party sales

  $      $      $        $ 65.0      $      $ 65.0   

Third-party services

                         1.7               1.7   

Affiliate sales

                         56.4               56.4   

Affiliate services

    29.7        75.6        105.3        5.4               5.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    29.7        75.6        105.3        128.5               128.5   

Costs and expenses

           

Third-party product purchases

                         27.0               27.0   

Affiliate product purchases

                         61.5               61.5   

Operating and maintenance expenses

    25.0        60.9        85.9        25.2        73.7        98.9   

Depreciation expense

    12.8        4.8        17.6        3.3        3.9        7.2   

General and administrative expenses

    2.1        0.2        2.3        6.2        0.3        6.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    39.9        65.9        105.8        123.2        77.9        201.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (10.2     9.7        (0.5     5.3        (77.9     (72.6

Interest expense

    1.1               1.1                        

Income tax expense (benefit)

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (11.3   $ 9.7      $ (1.6   $ 5.3      $ (77.9   $ (72.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Volumes:

           

Tioga Gas Plant

           

NGL processing sales (MBbl/d)

          10       

Natural gas processing sales (MMcf/d)

          68       

Natural gas inlet (MMcf/d)(1)

    63             

Mentor Storage Terminal

           

Propane throughput (MBbl/d)

    1            1       

Tioga Rail Terminal

           

Crude oil throughput (MBbl/d)

      36            52     

NGL throughput (MBbl/d)(2)

      3            5     

Ramberg Truck Facility

           

Crude oil throughput (MBbl/d)

      19            2     

 

(1) Beginning January 1, 2014, our Tioga Gas Plant revenues are based on natural gas inlet volumes at the plant. Please read “—Factors Affecting the Comparability of our Financial Results.”
(2) Historically, NGLs were loaded onto rail cars at the Tioga Gas Plant. We expect to transition rail loading of NGLs to the Tioga Rail Terminal during the third quarter of 2014.

 

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Processing and Storage

Revenues.    Revenues decreased $98.8 million to $29.7 million for the six months ended June 30, 2014 compared to $128.5 million for the six months ended June 30, 2013. The decrease was primarily attributable to:

 

    a decrease to third-party and affiliate sales revenues of $60.0 million due to the planned shutdown and transition of the Tioga Gas Plant from late November 2013 to late March 2014 in connection with its expansion, refurbishment and optimization project. The plant did not realize any revenues for the period that it was shut down;

 

    a decrease to third-party and affiliate sales revenues of $61.4 million due to a change in the Tioga Gas Plant’s customer contracts from POP contracts, under which we recorded gross product sales and purchases in connection with POP contracts during the six months ended June 30, 2013, to fee-based agreements during the six months ended June 30, 2014, under which we no longer purchase and sell products;

 

    a net increase to third-party and affiliate services revenues of $21.6 million due to a change in the Tioga Gas Plant’s customer contracts from POP contracts, under which we recorded gross product sales and purchases in connection with POP contracts during the six months ended June 30, 2013, to fee-based agreements the six months ended June 30, 2014, under which we earned processing fees based on volumes processed during 2014; and

 

    an increase to affiliate services revenues of $1.0 million at the Mentor Storage Terminal. Mentor Holdings did not generate revenues during the six months ended June 30, 2013 because it was part of the integrated operations of Hess, documented intercompany arrangements did not exist and we did not provide services to third parties. Please read “—Factors Affecting the Comparability of Our Financial Results.”

Product Purchases.    We did not incur any product purchases during the six months ended June 30, 2014, compared to $88.5 million of product purchases incurred during the six months ended June 30, 2013, as a result of a change in the Tioga Gas Plant’s customer contracts to fee-based arrangements from POP contracts as of January 1, 2014. Consequently, during the six months ended June 30, 2014, we did not take title to products, but instead realized fees based on volumes processed.

Operating and Maintenance Expense.    Operating and maintenance expense decreased $0.2 million to $25.0 million for the six months ended June 30, 2014 as compared to $25.2 million for the six months ended June 30, 2013. The increase was primarily attributable to the following changes in the Tioga Gas Plant expenses:

 

    an increase of $6.3 million in costs related to the planned turnaround of the Tioga Gas Plant;

 

    offset by a decrease in payments to a third-party gas processor for minimum volume commitments of $3.1 million; and

 

    a decrease in other operating expenses of $3.4 million due to the Tioga Gas Plant being shutdown through late March 2014 for the plant’s expansion, refurbishment and optimization project.

Depreciation Expense.    Depreciation expense increased $9.5 million to $12.8 million for the six months ended June 30, 2014 compared to $3.3 million for the six months ended June 30, 2013. Commencement of depreciation of the Tioga Gas Plant expansion expenditures upon restart of operations in March 2014 increased expenses by $11.5 million, offset by a reduction of $2.0 million related to legacy Tioga Gas Plant assets becoming fully depreciated during the second half of 2013.

 

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General and Administrative Expense.    General and administrative expense decreased $4.1 million to $2.1 million for the six months ended June 30, 2014 compared to $6.2 million for the six months ended June 30, 2013, primarily due to a reduction in overhead costs allocated to us from Hess.

Interest Expense.    Interest expense was $1.1 million for the six months ended June 30, 2014. Interest costs were fully capitalized during the six months ended June 30, 2013 during the Tioga Gas Plant expansion.

Logistics

Revenues.    Revenues was $75.6 million for the six months ended June 30, 2014. Our logistics assets did not generate revenues during the six months ended June 30, 2013 since these assets were part of the integrated operations of Hess, documented intercompany arrangements did not exist and we did not provide services to third parties. Please read “—Factors Affecting the Comparability of Our Financial Results.”

Product Purchases.    There were no product purchases during either the six months ended June 30, 2014 or 2013. Please read “—Factors Affecting the Comparability of Our Financial Results.”

Operating and Maintenance Expense.    Operating and maintenance expense decreased $12.8 million to $60.9 million for the six months ended June 30, 2014 as compared to $73.7 million for the six months ended June 30, 2013. The decrease was primarily attributable to a $11.9 million decrease in third-party rail transportation fees and a $0.9 million decrease in other operating costs.

Depreciation Expense.    Depreciation expense increased $0.9 million to $4.8 million for the six months ended June 30, 2014 compared to $3.9 million for the six months ended June 30, 2013, due to terminaling assets placed into service during the six months ended June 30, 2014.

General and Administrative Expense.    General and administrative expense decreased $0.1 million to $0.2 million for the six months ended June 30, 2014 compared to $0.3 million for the six months ended June 30, 2013, primarily due to a reduction in overhead costs allocated to us by Hess.

 

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Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

The following table and discussion is a summary of our combined results of operations for the year ended December 31, 2013 and 2012. The results of operations are discussed in further detail following this overview (in millions, unless otherwise noted).

 

    Year Ended
December 31,
 
    2013     2012  
    Processing and
storage
    Logistics     Combined
Hess Midstream
Partners LP
Predecessor
    Processing and
storage
    Logistics     Combined
Hess Midstream
Partners LP
Predecessor
 

Revenues

           

Third-party

  $ 142.3      $      $ 142.3      $ 2.4      $ 2.3      $ 4.7   

Affiliate

    127.4               127.4        165.0               165.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    269.7               269.7        167.4        2.3        169.7   

Costs and expenses

           

Third-party product purchases

    65.8               65.8        20.9               20.9   

Affiliate product purchases

    124.5               124.5        66.5               66.5   

Operating and maintenance expenses

    75.8        141.9        217.7        40.0        90.3        130.3   

Depreciation expense

    4.7        7.8        12.5        6.5        7.8        14.3   

General and administrative expenses

    12.3        0.7        13.0        11.5        0.1        11.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    283.1        150.4        433.5        145.4        98.2        243.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (13.4     (150.4     (163.8     22.0        (95.9     (73.9

Income tax expense (benefit)

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (13.4   $ (150.4 )   $ (163.8   $ 22.0      $ (95.9   $ (73.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Volumes:

       

Tioga Gas Plant

           

NGL processing sales (MBbl/d)

    11            6       

Natural gas processing sales (MMcf/d)

    71            44       

Natural gas inlet(1)

           

Mentor Storage Terminal

           

Propane throughput (MBbl/d)

    1            1       

Tioga Rail Terminal

           

Crude oil throughput (MBbl/d)

      49            31     

NGL throughput (MBbl/d)(2)

      5            3     

Ramberg Truck Facility

           

Crude oil throughput (MBbl/d)

      3            9     

 

(1) Beginning January 1, 2014, our Tioga Gas Plant revenues are based on natural gas inlet volumes at the plant. Please read “—Factors Affecting the Comparability of our Financial Results.”
(2) Historically, NGLs were loaded onto rail cars at the Tioga Gas Plant. We expect to transition rail loading of NGLs to the Tioga Rail Terminal during the third quarter of 2014.

 

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Processing and Storage

Revenues.    Revenues increased $102.3 million to $269.7 million in 2013 as compared to $167.4 million in 2012. The increase was primarily attributable to:

 

    an increase in NGL revenues of $47.0 million to $160.4 million in 2013 as compared to $113.4 million in 2012. Higher commodity volumes increased revenues by $88.2 million, while lower commodity prices reduced revenues by $41.2 million. Higher commodity volumes were primarily driven by the addition of third-party business at our Tioga Gas Plant during 2013;

 

    an increase in natural gas revenues of $51.6 million to $93.5 million in 2013 as compared to $41.9 million in 2012. Higher commodity volumes and prices increased revenues by $25.8 million and $23.9 million, respectively, as a result of the addition of third-party business at our Tioga Gas Plant during 2013. The remaining $1.9 million difference is related to an increase in revenues from profit sharing agreements; and

 

    an increase in other revenues of $3.7 million to $15.8 million in 2013 as compared to $12.1 million in 2012. Higher affiliate and third-party fees increased revenues by $3.2 million and $1.7 million, respectively, while decreased sulfur sales reduced revenues by $1.2 million.

Product Purchases.    Product purchases increased by $102.9 million to $190.3 million in 2013 as compared to $87.4 million in 2012. This increase was primarily attributable to:

 

    an increase in NGL purchases of $53.7 million to $108.5 million in 2013 as compared to $54.8 million in 2012. Higher commodity volumes and prices increased product purchases by $40.1 million and $13.6 million, respectively; and

 

    an increase in natural gas purchases of $49.2 million to $81.8 million in 2013 as compared to $32.6 million in 2012. Higher commodity volumes and prices increased product purchases by $19.7 million and $24.4 million, respectively. In addition, higher service fees that we paid in connection with product purchases, including transportation and gathering fees, increased product purchases by $5.1 million.

Operating and Maintenance Expense.    Operating and maintenance expense increased $35.8 million to $75.8 million in 2013 as compared to $40.0 million in 2012. The increase was primarily attributable to an increase of $14.5 million in costs associated with the planned turnaround of the Tioga Gas Plant, payments of $15.0 million to a third-party gas processor for minimum volume commitments in connection with new 2013 third-party business, and a $5.5 million increase in operating expenses allocated to us from Hess related to the Tioga Gas Plant, and a $0.8 million increase in other expenses. Please read “—Factors Affecting the Comparability of Our Financial Results.”

Depreciation Expense.    Depreciation expense decreased $1.8 million to $4.7 million in 2013, compared to $6.5 million in 2012, primarily attributable to assets becoming fully depreciated during 2013 at the Tioga Gas Plant.

General and Administrative Expense.    General and administrative expense increased $0.8 million to $12.3 million in 2013, compared to $11.5 million in 2012, primarily due to additional overhead costs allocated to us from Hess.

Logistics

Revenues.    Our logistics assets did not generate revenues during 2013, since these assets were part of the integrated operations of Hess and documented intercompany arrangements did not exist and we did not provide services to third parties. The $2.3 million in 2012 revenues were related to crude oil rail car transportation services provided to third parties that were not provided in 2013.

 

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Product Purchases.    There were no product purchases for our logistics business in 2013 or 2012. Please read “—Factors Affecting the Comparability of Our Financial Results.”

Operating and Maintenance Expense.    Operating and maintenance expense increased $51.6 million to $141.9 million in 2013 as compared to $90.3 million in 2012. The increase was primarily attributable to an increase in third-party rail transportation fees of $51.5 million due to increased crude oil rail car usage at our Tioga Rail Terminal and an increase in other costs of $0.1 million.

Depreciation Expense.    Depreciation expense was $7.8 million in 2013 and 2012.

General and Administrative Expense.    General and administrative expense increased $0.6 million to $0.7 million in 2013, compared to $0.1 million in 2012, primarily due to additional overhead costs allocated to us from Hess.

Capital Resources and Liquidity

Historically, our sources of liquidity were based on cash flow from operations and funding from Hess. We participated in Hess’s centralized cash management system; as a result, our Predecessor’s historical financial statements do not include cash or cash equivalents since cash receipts from all our Predecessor’s operations were deposited into Hess’s bank accounts and all cash disbursements were made from these accounts. In connection with this offering, we will establish our own cash management system that will be administered by Hess on our general partner’s behalf under our omnibus agreement.

We expect our ongoing sources of liquidity following this offering to include:

 

    cash generated from operations;

 

    borrowings under our revolving credit facility;

 

    issuances of additional equity securities; and

 

    issuances of debt securities.

We believe that, in the future, cash generated from these sources will be sufficient to meet our operating requirements, our planned short-term capital expenditure and debt service requirements and our quarterly cash distribution requirements. We believe that future internal growth projects or potential acquisitions will be funded primarily through borrowings under our revolving credit facility or through the issuance of debt and equity securities.

Following the completion of this offering, we intend to pay a minimum quarterly distribution of $         per unit, which equates to $         million per quarter, or $         million per year in the aggregate, based on the number of common, subordinated and general partner units to be outstanding immediately after completion of this offering. We do not have a legal obligation to pay this distribution, except as provided in our partnership agreement. Please read “Cash Distribution Policy and Restrictions on Distributions.”

Revolving Credit Facility

To provide additional liquidity following this offering, we anticipate entering into a new third-party revolving credit facility with a term of up to five years. At the closing of this offering, we expect this new credit facility to be undrawn