S-1/A 1 d101223ds1a.htm S-1/A S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on March 27, 2017

Registration No. 333-198896

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 11

to

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

Thomas G. Brandt

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

G. Michael O’Leary

Stephanie C. Beauvais

Andrews Kurth Kenyon 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     Smaller reporting company  

(Do not check if a smaller reporting company)

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to be
Registered(1)

 

Proposed
Maximum

Offering Price

Per Unit(2)

  Proposed
Maximum
Aggregate
Offering
Price(1)(2)
 

Amount of
Registration
Fee(3)

Common units representing limited partner interests

 

14,375,000

  $21.00   $301,875,000   $34,987

 

 

 

(1) Includes 1,875,000 common units issuable upon the exercise of the underwriters’ option to purchase additional common units.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3) The Registrant previously paid $32,200 of the total registration fee in connection with a previous filing of this Registration Statement.

 

 

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.

 

 

 


Table of Contents

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 March 27, 2017

Prospectus

12,500,000 Common Units

Representing Limited Partner Interests

LOGO

Hess Midstream Partners LP

 

 

This is an initial public offering of common units representing limited partner interests of Hess Midstream Partners LP. We were initially formed by Hess Corporation, and our current sponsors are Hess and Global Infrastructure Partners. No public market currently exists for our common units. We are offering 12,500,000 common units in this offering. We expect that the initial public offering price will be between $19.00 and $21.00 per common unit. We have been approved to list our common units on the New York Stock Exchange under the symbol “HESM,” subject to official notice of issuance. 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 29. 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, 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 aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2016, with a shortfall of approximately $10.5 million for that period. We would have had shortfalls for each of the four quarters during the year ended December 31, 2016.

 

    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 our Sponsors, 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 our Sponsors, and none of our Sponsors is under any obligation to adopt a business strategy that favors us.

 

    Unitholders have very limited voting rights and, even if they are dissatisfied, they cannot initially 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.

John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities have agreed to purchase approximately $             million of our common units in this offering at the initial public offering price. Any common units purchased by Mr. Hess or certain Hess family entities will be subject to the lock-up restrictions described in the section titled “Underwriting—Lock-Up Agreements.”

 

 

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 0.50% 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 1,875,000 common units at the initial public offering price, less the underwriting discounts and commissions, 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                             , 2017.

Joint Book-Running Managers

 

Goldman, Sachs & Co.   Morgan Stanley

 

Citigroup   J.P. Morgan   MUFG   Wells Fargo Securities

 

Co-Managers

ING   Scotia Howard Weil   SMBC Nikko   Barclays   HSBC   TD Securities

 

Prospectus dated                     , 2017.


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

Overview

     1  

Business Strategies

     3  

Business Strengths

     4  

Our Commercial Agreements with Hess

     6  

Our Relationship with Our Sponsors

     7  

Our Business

     8  

Right of First Offer Assets

     11  

Our Emerging Growth Company Status

     12  

Risk Factors

     13  

The Transactions

     13  

Organizational Structure After the Transactions

     15  

Management of Hess Midstream Partners LP

     16  

Principal Executive Offices and Internet Address

     16  

Summary of Conflicts of Interest and Duties

     17  

THE OFFERING

     18  

SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     26  

RISK FACTORS

     29  

Risks Related to Our Business

     29  

Risks Inherent in an Investment in Us

     46  

Tax Risks

     55  

USE OF PROCEEDS

     61  

CAPITALIZATION

     62  

DILUTION

     63  

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     64  

General

     64  

Our Minimum Quarterly Distribution

     66  

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December  31, 2016

     69  

Estimated Distributable Cash Flow for the Twelve Months Ending March 31, 2018

     72  

Significant Forecast Assumptions

     74  

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     81  

Distributions of Available Cash

     81  

Operating Surplus and Capital Surplus

     82  

Capital Expenditures

     84  

Subordinated Units and Subordination Period

     85  

Distributions of Available Cash From Operating Surplus During the Subordination Period

     86  

Distributions of Available Cash From Operating Surplus After the Subordination Period

     87  

General Partner Interest and Incentive Distribution Rights

     87  

Percentage Allocations of Available Cash from Operating Surplus

     88  

General Partner’s Right to Reset Incentive Distribution Levels

     88  

Distributions from Capital Surplus

     91  

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     92  

Distributions of Cash Upon Liquidation

     93  

 

i


Table of Contents
     Page  

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

     96  

Non-GAAP Financial Measure

     98  

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

     100  

Overview

     100  

How We Generate Revenues

     102  

How We Evaluate Our Operations

     102  

Factors Affecting the Comparability of Our Financial Results

     104  

Other Factors Expected To Significantly Affect Our Future Results

     105  

Results of Operations

     106  

Capital Resources and Liquidity

     108  

Contractual Obligations

     111  

Off-Balance Sheet Arrangements

     111  

Critical Accounting Policies and Estimates

     112  

Qualitative and Quantitative Disclosures about Market Risk

     114  

INDUSTRY OVERVIEW

     115  

General

     115  

Natural Gas Industry Overview

     115  

Natural Gas Midstream Services

     115  

Natural Gas Supply Chain

     117  

Compressed Natural Gas and Liquefied Natural Gas

     117  

Crude and Other Liquids Midstream Services

     118  

Crude Oil Supply Chain

     119  

Overview of the Williston Basin and the Bakken Shale Formation

     119  

BUSINESS

     121  

Overview

     121  

Business Strategies

     122  

Business Strengths

     123  

Our Commercial Agreements with Hess

     125  

Our Relationship with Our Sponsors

     125  

Our Business

     129  

Gathering

     129  

Processing and Storage

     131  

Terminaling and Export

     133  

Right of First Offer Assets

     136  

Potential Expansion Opportunities

     136  

Our Commercial Agreements with Hess

     137  

Other Agreements with Hess and Hess Infrastructure Partners

     144  

Competition

     146  

Seasonality

     146  

Insurance

     146  

Environmental Regulation

     147  

Other Regulation

     150  

Title to Properties and Permits

     156  

Employees

     157  

Legal Proceedings

     157  

 

ii


Table of Contents
     Page  

MANAGEMENT

     158  

Management of Hess Midstream Partners LP

     158  

Directors and Executive Officers of Hess Midstream Partners GP LLC

     160  

Board Leadership Structure

     163  

Board Role in Risk Oversight

     163  

Compensation of Our Officers and Directors

     163  

SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     167  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     170  

Distributions and Payments to Our General Partner and Its Affiliates

     170  

Agreements Governing the Transactions

     172  

Procedures for Review, Approval and Ratification of Related Person Transactions

     177  

CONFLICTS OF INTEREST AND DUTIES

     179  

Conflicts of Interest

     179  

Duties of the General Partner

     186  

DESCRIPTION OF THE COMMON UNITS

     190  

The Units

     190  

Transfer Agent and Registrar

     190  

Transfer of Common Units

     190  

OUR PARTNERSHIP AGREEMENT

     192  

Organization and Duration

     192  

Purpose

     192  

Capital Contributions

     192  

Voting Rights

     193  

Limited Liability

     194  

Issuance of Additional Securities

     195  

Amendment of Our Partnership Agreement

     196  

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

     198  

Termination and Dissolution

     199  

Liquidation and Distribution of Proceeds

     199  

Withdrawal or Removal of Our General Partner

     200  

Transfer of General Partner Interest

     201  

Transfer of Ownership Interests in Our General Partner

     201  

Transfer of Incentive Distribution Rights

     201  

Election to be Treated as a Corporation

     201  

Change of Management Provisions

     202  

Limited Call Right

     202  

Redemption of Ineligible Holders

     203  

Meetings; Voting

     204  

Status as Limited Partner

     204  

Indemnification

     205  

Reimbursement of Expenses

     205  

Books and Reports

     205  

Right to Inspect Our Books and Records

     206  

Registration Rights

     206  

Applicable Law; Exclusive Forum

     206  

UNITS ELIGIBLE FOR FUTURE SALE

     208  

Rule 144

     208  

 

iii


Table of Contents
     Page  

Our Partnership Agreement and Registration Rights

     208  

Lock-up Agreements

     209  

Registration Statement on Form S-8

     209  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     210  

Taxation of the Partnership

     211  

Tax Consequences of Unit Ownership

     212  

Tax Treatment of Operations

     218  

Disposition of Units

     218  

Uniformity of Units

     221  

Tax-Exempt Organizations and Other Investors

     221  

Administrative Matters

     223  

State, Local and Other Tax Considerations

     225  

INVESTMENT IN HESS MIDSTREAM PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     227  

UNDERWRITING

     229  

Commissions and Expenses

     229  

Option to Purchase Additional Common Units

     230  

Discretionary Sales

     230  

New York Stock Exchange

     230  

Lock-Up Agreements

     230  

Stabilization, Short Positions and Penalty Bids

     231  

Relationships

     231  

Indemnification

     232  

Offering Price Determination

     232  

Directed Unit Program

     232  

FINRA

     232  

VALIDITY OF THE COMMON UNITS

     233  

EXPERTS

     234  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     235  

FORWARD-LOOKING STATEMENTS

     236  

INDEX TO FINANCIAL STATEMENTS

     F-1  

APPENDIX A SECOND 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.

Through and including                     , 2017 (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.

 

iv


Table of Contents

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.

Certain Terms Used in This Prospectus

Unless the context otherwise requires, references in this prospectus to the following terms have the meanings set forth below:

“Global Infrastructure Partners” or “GIP” refers to GIP II Blue Holding Partnership, L.P., a Delaware limited partnership, which owns interests in us and in Hess Infrastructure Partners, which in turn indirectly owns our general partner, and the funds managed by Global Infrastructure Management, LLC, and such funds’ subsidiaries and affiliates, that hold interests in GIP II Blue Holding Partnership, L.P.;

“Hess” refers collectively to Hess Corporation and its consolidated subsidiaries other than Hess Infrastructure Partners, its subsidiaries and its general partner, and us, our subsidiaries and our general partner;

“Hess Infrastructure Partners” or “HIP” refers to Hess Infrastructure Partners LP, a Delaware limited partnership and midstream energy joint venture between Hess and GIP that, directly or indirectly, holds all of the interests in our general partner, and its subsidiaries, other than us and our subsidiaries;

“Hess Midstream Partners LP,” “HESM,” “our 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. When used in the present tense or future tense, these terms refer to Hess Midstream Partners LP, a Delaware limited partnership, and its subsidiaries;

our “general partner,” when used with respect to periods prior to the closing of this offering and the consummation of the related formation transactions, refers to Hess Midstream Partners GP LLC, a Delaware limited liability company and indirect wholly owned subsidiary of Hess Infrastructure Partners. When used with respect to periods following the closing of this offering and the consummation of the related formation transactions, refers to Hess Midstream Partners GP LP, a Delaware limited partnership and indirect wholly owned subsidiary of Hess Infrastructure Partners;

our “board of directors” refers to the board of directors of Hess Midstream Partners GP LLC, the general partner of our general partner;

our “Predecessor” refers to Hess Midstream Partners LP Predecessor, our predecessor for accounting purposes. Our Predecessor includes 100% of the operations of (i) Hess North Dakota Pipelines LLC, which owns our North Dakota natural gas gathering and compression system, the Hawkeye Gas Facility, our crude oil gathering system and the Hawkeye Oil Facility, (ii) Hess TGP Operations LP, which owns the Tioga Gas Plant, (iii) Hess North Dakota Export Logistics Operations LP, which owns the Ramberg Terminal Facility, the Tioga Rail Terminal and our crude oil rail cars, and (iv) Hess Mentor Storage Holdings LLC, which owns the Mentor Storage Terminal; and

 

v


Table of Contents

our “Sponsors” refers collectively to Hess and GIP and, unless the context otherwise requires, Hess Infrastructure Partners.

In addition, 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.

 

vi


Table of Contents

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 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 $20.00 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.

We consider ourselves to be a “traditional” master limited partnership in that our partnership agreement provides for the payment of a minimum quarterly distribution on our common units before distributions are paid on our subordinated units and our general partner owns incentive distribution rights that entitle it to receive an increasing percentage of our distributions when certain target distribution levels have been achieved. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

Hess Midstream Partners LP

Overview

We are a fee-based, growth-oriented, traditional master limited partnership initially formed by Hess in 2014 to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third-party customers. In mid-2015, Hess contributed certain of its existing midstream assets in the Bakken to Hess Infrastructure Partners, a midstream energy joint venture in which GIP purchased a 50% ownership interest for approximately $2.675 billion, representing an aggregate value for Hess Infrastructure Partners of approximately $5.35 billion. Hess Infrastructure Partners will contribute all of our initial assets to us at or prior to the closing of this offering. Our initial 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 most prolific crude oil producing basins in North America. Hess has stated that it intends to use us as the primary midstream vehicle to support the growth of its Bakken production assets and grow its midstream business.

We generate substantially all of our revenues by charging fees for gathering, compressing and processing natural gas and fractionating natural gas liquids, or NGLs; gathering, terminaling, loading and transporting crude oil and NGLs; and storing and terminaling propane. We have entered into long-term, fee-based commercial agreements with Hess, each of which has an initial 10-year term and is dated effective January 1, 2014. We have the unilateral right to renew each of these agreements for one additional 10-year term. These agreements include dedications covering substantially all of Hess’s existing and future owned or controlled production in the Bakken, minimum volume commitments, inflation escalators and fee recalculation mechanisms. We believe these commercial agreements provide us with stable and predictable cash flows and minimal direct exposure to commodity prices. For the year ended December 31, 2016, 100% of our revenues were attributable to our fee-based commercial agreements with Hess, including revenues from third-party volumes delivered under these agreements.

 



 

1


Table of Contents

We conduct our business through three operating segments: (1) gathering, (2) processing and storage and (3) terminaling and export. The following table summarizes certain information regarding our assets, which operate under long-term, fee-based commercial agreements with Hess:

 

Segment                             

 

            Assets            

  Ownership     Selected Historical Financial
Information

(millions)
    Commercial
Agreements

(years)
 
    HESM     HIP     Net
Income(1)
    Adjusted
EBITDA(2)
    Total
Assets(3)
    Initial
Term(4)
    Renewal
Term
 

Gathering

 

Natural gas gathering and compression;

Crude oil gathering

        20%               80%         $ 96.9     $ 136.8     $ 1,246.7       10       10  

Processing and Storage

 

Tioga Gas Plant;

 

Mentor Storage Terminal

   

 

20%    

 

100%    

 

 

 

   

 

80%    

 

—    

 

 

 

 

 

$

 

92.7

 

 

 

 

$

 

136.7

 

 

 

 

$

 

1,000.0

 

 

 

 

 

 

10

 

 

 

 

 

 

10

 

 

Terminaling and Export

 

Ramberg Terminal Facility;

Tioga Rail Terminal;

Crude oil rail cars;

Johnson’s Corner Header System (under construction)

    20%           80%         $ 16.7     $ 32.5     $ 327.7       10       10  

 

(1) Represents net income attributable to 100% of the operations of Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings for the year ended December 31, 2016.
(2) Represents Adjusted EBITDA attributable to 100% of the operations of Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings for the year ended December 31, 2016. 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 Combined Financial and Operating Data—Non-GAAP Financial Measure.”
(3) Represents 100% of the total assets of Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings as of December 31, 2016.
(4) Each of our commercial agreements with Hess is dated effective January 1, 2014 and has a remaining initial term of approximately seven years. Please read “—Our Commercial Agreements with Hess.”

 

    Gathering.    Our gathering business consists of a 20% controlling economic interest in Hess North Dakota Pipeline Operations LP, or Gathering Opco, which owns a natural gas gathering and compression system and a crude oil gathering system located primarily in McKenzie, Williams and Mountrail Counties.

 

    Processing and Storage.    Our processing and storage business consists of (i) a 20% controlling economic interest in Hess TGP Operations LP, or HTGP Opco, which owns a natural gas processing and fractionation plant located in Tioga, North Dakota, which we refer to as the Tioga Gas Plant, and (ii) a 100% ownership interest in Hess Mentor Storage Holdings LLC, or Mentor Holdings, which owns a propane storage cavern and rail and truck loading and unloading facility located in Mentor, Minnesota, which we refer to as the Mentor Storage Terminal.

 

    Terminaling and Export.    Our terminaling and export business consists of a 20% controlling economic interest in Hess North Dakota Export Logistics Operations LP, or Logistics Opco, which owns (i) a crude oil pipeline and truck receipt terminal located in Williams County, North Dakota, which we refer to as the Ramberg Terminal Facility; (ii) a crude oil and NGL rail loading terminal located in Tioga, North Dakota, which we refer to as the Tioga Rail Terminal, that is connected to the Tioga Gas Plant, the Ramberg Terminal Facility and our crude oil gathering system; (iii) a total of 550 crude oil rail cars, constructed to the most recent DOT-117 safety standards; and (iv) a crude oil pipeline header system located in McKenzie County, North Dakota, which we refer to as the Johnson’s Corner Header System. The Johnson’s Corner Header System is currently under construction and we expect it to enter into service in 2017.

 



 

2


Table of Contents

We refer to the assets owned by Gathering Opco, HTGP Opco and Logistics Opco in this prospectus as our “joint interest assets.”

We intend to expand our business by acquiring additional midstream assets from our Sponsors 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 Infrastructure Partners has agreed that, during the 10-year period following the closing of this offering, we will have the right to make an offer to purchase Hess Infrastructure Partners’ retained interests in our joint interest assets. We refer to this right as our right of first offer. Hess Infrastructure Partners 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 Infrastructure Partners decides to dispose of such assets), and we are under no obligation to buy any additional assets from Hess Infrastructure Partners. As of December 31, 2016, the aggregate gross book value of the assets to be contributed to us by Hess Infrastructure Partners in connection with the closing of this offering was approximately $601.9 million, and the aggregate gross book value of our right of first offer assets retained by Hess Infrastructure Partners was approximately $2.4 billion. For a further description of our right of first offer assets, please read “—Right of First Offer Assets.”

For the year ended December 31, 2016, our Predecessor had revenues of $509.8 million, net income of $206.3 million and Adjusted EBITDA of $306.0 million. After excluding Hess Infrastructure Partners’ retained interests in our joint interest assets, our pro forma net income was $40.8 million and our pro forma Adjusted EBITDA was $62.5 million for the year ended December 31, 2016. Please read “Selected Historical and Pro Forma 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 principal business objective is to increase the quarterly cash distributions per unit to our unitholders over time while ensuring the growth of our business and ongoing stability of our cash flow. We expect to achieve this objective through the following business strategies:

 

    Focus on Long-Term, Fee-Based Contracts Designed to Promote Cash Flow Stability. Our commercial agreements with Hess are structured as long-term, fee-based arrangements. Each agreement has an initial 10-year term, effective from January 1, 2014, which we have the unilateral right to renew for one additional 10-year term. The agreements include dedications covering substantially all of Hess’s existing and future owned or controlled production in the Bakken, minimum volume commitments, inflation escalators and fee recalculation mechanisms, all of which are intended to provide us with cash flow stability and growth, as well as downside risk protection. We intend to pursue additional long-term, fee-based arrangements with Hess and third parties as we continue to grow our business.

 

    Capitalize on Hess’s Growing Bakken Production. Our midstream infrastructure footprint services Hess’s leading acreage position in the Bakken, which includes more than 2,850 future operated drilling locations and represented approximately 33% of Hess’s average global production for the year ended December 31, 2016. We believe our volumes and investment opportunities will continue to expand as Hess drills new wells in the Bakken. Hess recently announced plans to increase its Bakken rig count from two to six rigs and to bring approximately 75 new wells online by the end of 2017. We intend to invest additional capital to continue extending and expanding our strategically positioned infrastructure to meet Hess’s current and future production growth.

 



 

3


Table of Contents
    Grow Through Accretive Acquisitions from Our Sponsors and Third Parties. We plan to pursue acquisitions of complementary midstream assets from our Sponsors as well as from third parties. Hess Infrastructure Partners has provided us with a right of first offer on its retained interests in our joint interest assets, and we believe that our Sponsors will be incentivized to offer us the opportunity to purchase additional midstream assets that they currently own, including our right of first offer assets, or may acquire or develop in the future. We also intend to pursue accretive midstream acquisitions from third parties that expand our existing geographic footprint, as well as potential opportunities to enter other basins where we believe we could have a competitive advantage, including through our relationship with Hess.

 

    Leverage Core Asset Base to Attract Additional Third-Party Business. In addition to providing midstream services to Hess, we believe that our strategic and extensive asset base in the core of the Bakken and our ability to provide attractive netbacks to customers will provide us with additional opportunities to interconnect and capture third-party volumes. We currently handle volumes from third-party producers and midstream companies under our commercial agreements with Hess, and we are pursuing both additional projects and strategic relationships with third-party customers with operations in the Bakken in order to maximize our utilization rates and diversify our revenue stream.

Business Strengths

We believe we are well positioned to execute our business strategies as a result of the following

business strengths:

 

    Our Strategic Relationship with Our Sponsors. We believe that, as a result of their significant ownership interests in us, our Sponsors are incentivized to support and promote our business plan and to encourage us to pursue projects that enhance the overall value of our business. We believe that our relationship with our Sponsors and Hess’s plan to use us as the primary midstream vehicle to support the growth of its Bakken production assets and grow its midstream business will provide us with a stable base of cash flows and significant growth opportunities for the foreseeable future. Furthermore, we anticipate that we will have opportunities to acquire additional midstream assets that our Sponsors currently own, including our right of first offer assets, or that they may acquire or develop in the future.

 

    Stable and Growing Cash Flows Supported by Long-Term, Fee-Based Contracts. Our commercial agreements with Hess provide us with an attractive and stable cash flow base with significant opportunities to grow our business. Our long-term, fee-based commercial contracts with Hess, a high-quality commercial counterparty, provide substantially all of our revenues and are based on broad Bakken production dedications with minimum volume commitments, annual inflation escalators and fee recalculation mechanisms, all of which are intended to provide us with cash flow stability and growth, as well as downside risk protection. Our 2016 results, which reflected an increase in total net income and Adjusted EBITDA compared to 2015, were supported by these contractual terms providing stability and growth, notwithstanding a reduction in Hess’s drilling activity and annual production in the Bakken.

 

   

Investment in Our High-Quality Infrastructure Base to Capture Growth. The majority of our assets were constructed or have undergone extensive renovations within the past five years. The cumulative capital investment in our assets was approximately $3.0 billion as of December 31, 2016. In March 2014, we completed a large-scale expansion and refurbishment of the Tioga Gas Plant. This state-of-the-art processing and fractionation facility is one of the largest natural gas processing and fractionation plants in the Bakken based on its current processing capacity of 250 MMcf/d, and we are planning a debottlenecking project to increase

 



 

4


Table of Contents
 

the plant’s processing capacity to a maximum of 300 MMcf/d. We have continued to invest in our uniquely positioned asset base to capture additional volumes resulting from Hess’s expected drilling activity. Over the past year, Hess Infrastructure Partners has invested in several major capital projects involving our initial assets, including the Hawkeye Gas Facility, the Hawkeye Oil Facility and the under-construction Johnson’s Corner Header System.

 

    Infrastructure in Core of Bakken Provides Competitive Advantage in Attracting Third-Party Volumes. Our assets are strategically located in the core of the Bakken and offer a diversified service offering, attractive netback pricing and access to a range of export options. We believe these factors provide us with a competitive advantage in capturing additional volumes from third parties, including producers that are seeking to grow production in the Bakken and reduce crude oil trucking and natural gas flaring. For example, we have recently executed multiple agreements with third parties to interconnect and gather crude oil and natural gas to fill and expand our existing gathering systems.

 

    Financial Strength and Capital Flexibility. We have entered into a four-year senior secured revolving credit facility with $300.0 million in available capacity. We expect to have no outstanding debt immediately following the closing of this offering. We believe that we will be able to fully fund our expansion requirements for the twelve months ending March 31, 2018 through borrowings under our revolving credit facility without accessing the debt or equity capital markets, and we believe that our financial flexibility will enable us to effectively execute our business and growth strategies in the future. In addition, Hess Infrastructure Partners maintains a separate capital structure that will allow it to develop additional midstream growth opportunities. We believe that, as a result of Hess Infrastructure Partners’ ownership of a 100% interest in our general partner and all of our incentive distribution rights, Hess Infrastructure Partners is incentivized to offer additional assets to us in the future.

 

    Experienced and Integrated Management Team with Strong Execution Track Record and Focus on Safety. Our management team has substantial experience and an established record of safety and reliability in the development, management and operation of our midstream assets. Our senior management team includes several of Hess’s most senior officers, who average over 20 years of experience in the energy industry, and we believe our close relationship with Hess will result in unique operational benefits and commercial opportunities. Our management team has led the implementation of lean manufacturing principles within Hess’s operations, which has increased organizational efficiencies and been a primary driver of an approximately 66% reduction in Hess’s Bakken drilling and completion costs over the past five years, and we apply a lean management philosophy to the operation of our assets. Our management team is integrated with Hess’s Bakken operating team and works closely with that team in the planning and execution of Hess’s Bakken development and infrastructure projects. Our management team is also committed to maintaining and improving the safety, reliability, integrity 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.

 



 

5


Table of Contents

Our Commercial Agreements with Hess

We have entered into long-term, fee-based commercial agreements with Hess, each of which has an initial 10-year term and is dated effective January 1, 2014. We have the unilateral right to extend each commercial agreement for one additional 10-year term. These agreements include dedications covering substantially all of Hess’s existing and future owned or controlled production in the Bakken, minimum volume commitments, inflation escalators and fee recalculation mechanisms, all of which are intended to provide us with cash flow stability and growth, as well as downside risk protection. Our 2016 results, which reflected an increase in total net income and Adjusted EBITDA compared to 2015, were supported by these contractual terms providing stability and growth, notwithstanding a reduction in Hess’s drilling activity and annual production in the Bakken.

Under these commercial agreements, we provide gathering, compression, processing, fractionation, storage, terminaling, loading and transportation services to Hess, and Hess is obligated to 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:

 

Agreement

  Hess Minimum Volume
Commitment(1)
    Initial
Term
(years)
    Remaining
Initial
Term
(years)(2)
    Renewal
Term
(years)(3)
 
  2017     2018     2019        
           

Gas Gathering Agreement (MMcf/d)

    223       238       201 (4)      10       7       10  

Crude Oil Gathering Agreement (MBbl/d)

    88       114       102       10       7       10  

Gas Processing and Fractionation Agreement (MMcf/d)

    209       220       195 (4)      10       7       10  

Terminal and Export Services Agreement(5)

          10       7       10  

Crude terminaling (MBbl/d)

    68       80       123        

NGL loading (MBbl/d)

    18       19       16 (4)       

Storage Services Agreement (MBbl/d)(6)

    1       1       1       10       7       10  

 

(1) Hess’s minimum volume commitments under our gathering agreements, gas processing and fractionation agreement and terminal and export services agreement are equal to 80% of Hess’s nominations in each development plan and apply on a three-year rolling basis. Hess’s minimum volume commitments are calculated quarterly, and the amounts reflected are annual averages of each year’s quarterly minimum volume commitments. For more information related to Hess’s development plan and Hess’s nominations thereunder, please read “Business—Our Commercial Agreements with Hess.”
(2) Each of our commercial agreements is effective as of January 1, 2014.
(3) We have the unilateral right to extend each commercial agreement for one additional 10-year term. Thereafter, each commercial agreement will renew automatically for successive annual periods until terminated by either party. Please read “Business—Our Commercial Agreements with Hess.”
(4) Minimum volume commitments for the year ending December 31, 2019 reflect an expected turnaround of our Tioga Gas Plant. Please read “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions.”
(5) The terminal and export services agreement covers the Ramberg Terminal Facility, the Tioga Rail Terminal, our crude oil rail cars and, when completed, the Johnson’s Corner Header System.
(6) Represents a firm capacity reservation commitment for the total working storage capacity of the storage cavern (324 MBbls) at our Mentor Storage Terminal expressed on a per-day basis. Please read “Business—Our Commercial Agreements with Hess—Storage Services Agreement.”

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 March 31, 2018, please read “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions” and “Business—Our Commercial Agreements with Hess.”

 



 

6


Table of Contents

Our Relationship with Our Sponsors

Our relationship with our Sponsors, and especially with Hess, is one of our principal strengths. Following the completion of this offering, our Sponsors will collectively own an aggregate 75.5% limited partner interest in us (or an aggregate 72.2% limited partner interest in us if the underwriters exercise in full their option to purchase additional common units) and, through their ownership interest in Hess Infrastructure Partners, an 80% noncontrolling interest in each of Gathering Opco, HTGP Opco and Logistics Opco, a 100% interest in our general partner and all of our incentive distribution rights.

Hess

Hess is a global 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 expects its Bakken operations to be the largest contributor to its total production growth through 2020, and Hess has stated that it intends to use us as the primary midstream vehicle to support the growth of its Bakken production assets and grow its midstream business. 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 had total E&P sales and other operating revenues of approximately $4.8 billion for the year ended December 31, 2016. As of December 31, 2016, Hess had proved reserves of approximately 1.1 billion Boe, approximately 49% of which were located in the United States, approximately $28.6 billion of total assets, including approximately $2.7 billion of cash and cash equivalents, total equity of approximately $15.6 billion and an approximate debt-to-capitalization ratio of 30.4%.

As of February 1, 2017, Hess holds approximately 569,000 net acres in the Bakken. During the year ended December 31, 2016, Hess invested approximately $429 million and $276 million in its upstream and midstream Bakken operations, respectively, which in the aggregate represented approximately 33% of its total global capital and exploratory expenditures for that period. Hess’s net Bakken production averaged approximately 105 MBoe/d for the year ended December 31, 2016. As of December 31, 2016, the total number of Hess-operated Bakken production wells was 1,272 and Hess recently announced plans to bring approximately 75 new wells online by the end of 2017. Hess has stated that it expects full-year 2017 Bakken production to be 95 to 105 MBoe/d, representing approximately 33% of total estimated Hess production for 2017. Hess has stated that it expects the Bakken to be a major contributor to Hess’s future production growth.

Hess’s midstream segment is comprised of our operations and those of Hess Infrastructure Partners. Beginning January 1, 2017, Hess’s midstream segment also includes Hess’s Permian Basin midstream assets, including its interest in a gas processing plant with an aggregate capacity of 280 MMcf/d and associated carbon dioxide assets, and its Bakken water handling assets.

GIP

GIP is managed by Global Infrastructure Management, LLC, an independent infrastructure fund manager, and its related persons (collectively, “GIM”), with approximately $40.6 billion in assets under management as of January 26, 2017 and offices in New York, London, Stamford (Connecticut) and an affiliated office in Sydney. GIM focuses on asset and corporate level investments in three core sectors: energy, transportation, and water/waste. GIM’s global team possesses deep experience in midstream energy and its other target infrastructure sectors, operations and finance. GIM’s significant energy expertise and deep financial resources are reflected in over $13 billion in equity invested in energy

 



 

7


Table of Contents

investments over the past decade, including, among others, general partner and limited partner interests in Access Midstream Partners, L.P., a natural gas and liquids gathering and processing master limited partnership that merged with Williams Partners L.P. in 2015; a joint venture with El Paso Corporation (and subsequently Kinder Morgan, Inc.) in Ruby Pipeline, a 680-mile natural gas pipeline from Wyoming to Oregon; a joint venture interest in Freeport LNG Development, L.P., which owns and operates a receiving and regasification facility and is developing an LNG export facility; a joint venture interest in FluxSwiss, which owns and operates Transitgas Pipeline, a 293-kilometer natural gas pipeline in Switzerland; a joint venture interest in Compañía Logística de Hidrocarburos, which is the leading company in Spain for transportation and storage of refined oil products; and a 20% equity interest in Gas Natural SDG, S.A., one of the largest energy infrastructure companies in the world with operations in more than 30 countries and over 23 million customers.

We believe that, as a result of our Sponsors’ significant ownership interests in us, our Sponsors are incentivized to support and promote our business plan and to encourage us to pursue projects that enhance the overall value of our business. In addition, we anticipate that we will have opportunities to acquire and develop additional midstream assets that our Sponsors currently own, including our right of first offer assets, or additional midstream assets that they may acquire or develop in the future to support Hess’s Bakken production growth.

While our relationship with our Sponsors 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 three reportable segments: (1) gathering, (2) processing and storage and (3) terminaling and export.

Gathering.    Our gathering business consists of a 20% controlling economic interest in Gathering Opco, which owns the following assets:

 

    Natural Gas Gathering and Compression.    A natural gas gathering and compression system located primarily in McKenzie, Williams and Mountrail Counties, North Dakota connecting Hess and third-party owned or operated wells to the Tioga Gas Plant and third-party pipeline facilities. This gathering system consists of approximately 1,211 miles of high and low pressure natural gas and NGL gathering pipelines with a current capacity of up to 345 MMcf/d, including an aggregate compression capacity of 174 MMcf/d. The system also includes the Hawkeye Gas Facility, which contributes 50 MMcf/d of the system’s current compression capacity. The capacity of our natural gas gathering and compression system can be increased through the installation of additional compression equipment.

 

    Crude Oil Gathering.    A crude oil gathering system located primarily in McKenzie, Williams and Mountrail Counties, North Dakota, connecting Hess and third-party owned or operated wells to the Ramberg Terminal Facility, the Tioga Rail Terminal and, when completed, the Johnson’s Corner Header System. The crude oil gathering system consists of approximately 365 miles of crude oil gathering pipelines with a current capacity of up to 161 MBbl/d. The system also includes the Hawkeye Oil Facility, which contributes 76 MBbl/d of the system’s current capacity. Our gathering system capacity can be increased through the installation of additional pumping equipment.

 



 

8


Table of Contents

The following table sets forth certain information regarding our gathering assets, which operate under long-term, fee-based commercial agreements with Hess:

Gathering Assets

 

Asset(1)

  Commodity     Description     Miles of
Pipeline
    Throughput
Capacity
   

Third-Party and Affiliate
Connections

Natural gas gathering pipelines

   
Natural gas
NGLs
 
 
   

Natural gas
and NGL
gathering
 
 
 
    1,211 miles       345 MMcf/d     Upstream: Hess and third-party wells
          Downstream: Tioga Gas Plant; third-party facilities

Natural gas compression

   
Natural gas
 
   
Gas
compression;
 
 
      174 MMcf/d(2)    
    NGLs      
NGL
extraction
 
 
     

Crude oil gathering pipelines

    Crude oil      
Crude oil
gathering
 
 
    365 miles       161 MBbl/d(3)    

Upstream: Hess and third-party wells

 

          Downstream: Ramberg Terminal Facility; Tioga Rail Terminal; Johnson’s Corner Header System (under construction)

Hawkeye Oil Facility

    Crude oil      

Pump
station; truck
unloading
 
 
 
      76 MBbl/d    

 

(1) Shown on a 100% basis. We own a 20% economic interest in Gathering Opco, which owns the natural gas gathering and compression assets and crude oil gathering assets. Hess Infrastructure Partners owns the remaining 80% economic interest in Gathering Opco.
(2) The 174 MMcf/d capacity of our natural gas compression assets includes 50 MMcf/d of capacity at the Hawkeye Gas Facility and represents a portion of the 345 MMcf/d aggregate natural gas gathering pipelines capacity noted above.
(3) Includes 76 MBbl/d of capacity at the Hawkeye Oil Facility.

Processing and Storage.    Our processing and storage business consists of a 20% controlling economic interest in HTGP Opco and a 100% ownership interest in Mentor Holdings, which own the following assets, respectively:

 

    Tioga Gas Plant.    A natural gas processing and fractionation plant located in Tioga, North Dakota, with a current processing capacity of 250 MMcf/d and fractionation capacity of 60 MBbl/d.

 

    Mentor Storage Terminal.    A propane storage cavern and rail and truck loading and unloading facility located in Mentor, Minnesota, with approximately 328 MBbls of working storage capacity.

 



 

9


Table of Contents

The following table sets forth certain information regarding our processing and storage assets, which operate under long-term, fee-based commercial agreements with Hess:

Processing and Storage Assets

 

Asset

  Commodity   Description   Throughput
Capacity
  Storage
Capacity
 

Third-Party

and Affiliate Connections

Tioga Gas Plant(1)

  Natural gas   Cryogenic   250 MMcf/d(2)     Upstream: Natural gas gathering systems
          Downstream: Third-party long-haul pipelines
  NGLs   Fractionation   60 MBbl/d   87 MBbls(3)   Downstream: Alliance Pipeline (propane); Vantage Pipeline (ethane); Tioga Rail Terminal; truck loading
  CNG   Compression   17 MGal/d(4)    

Upstream: Tioga Gas Plant

         

Downstream: Truck loading; light duty vehicles

Mentor Storage Terminal

  Propane   Storage; rail
and truck
loading and
unloading
  6 MBbl/d   328 MBbls(5)   BNSF Railway; truck loading

 

(1) Shown on a 100% basis. We own a 20% economic interest in HTGP Opco, which owns the Tioga Gas Plant. Hess Infrastructure Partners owns the remaining 80% economic interest in HTGP Opco.
(2) In connection with the next planned turnaround of the Tioga Gas Plant in 2019, we are planning a debottlenecking project to increase the plant’s processing capacity to a maximum of 300 MMcf/d.
(3) Represents the aggregate above-ground shell storage capacity of storage tanks at the Tioga Gas Plant.
(4) Represents diesel equivalent gallons.
(5) Represents a working storage capacity of 324 MBbls at the storage cavern and an aggregate working capacity of 4 MBbls of above-ground storage tanks at the Mentor Storage Terminal.

Terminaling and Export.    Our terminaling and export business consists of a 20% controlling economic interest in Logistics Opco, which owns each of the following assets:

 

    Ramberg Terminal Facility.    A crude oil pipeline and truck receipt terminal located in Williams County, North Dakota that is capable of delivering up to 282 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.

 

    Tioga Rail Terminal.    A 140 MBbl/d crude oil and 30 MBbl/d NGL rail loading terminal in Tioga, North Dakota that is connected to the Tioga Gas Plant, the Ramberg Terminal Facility and our crude oil gathering system. During the summer of 2016, Hess piloted five third-party NGL unit trains consisting of 60 NGL rail cars that originated at the Tioga Rail Terminal.

 

    Crude Oil Rail Cars.    A total of 550 crude oil rail cars, constructed to the most recent DOT-117 safety standards, which we operate as unit trains consisting of approximately 100 to 110 crude oil rail cars.

 

    Johnson’s Corner Header System.    We are currently constructing the Johnson’s Corner Header System, a crude oil pipeline header system located in McKenzie County, North Dakota that will receive crude oil by pipeline from Hess and third parties and deliver crude oil to third-party interstate pipeline systems. At commissioning, the facility will have a delivery capacity of approximately 100 MBbl/d of crude oil, which will be expandable up to 185 MBbl/d. We expect the Johnson’s Corner Header System to enter into service in 2017.

 



 

10


Table of Contents

The following table sets forth certain information regarding our terminaling and export assets, which operate under a long-term, fee-based commercial agreement with Hess:

Terminaling and Export Assets

 

Asset(1)

  Commodity   Description   Throughput
Capacity
  Storage
Capacity
 

Third-Party

and Affiliate Connections

Ramberg Terminal Facility   Crude oil   Truck
unloading

bays;
pipeline
connections

  282 MBbl/d(2)   39 MBbls(3)  

Upstream: Crude oil gathering system

Downstream: Tioga Rail Terminal connection; third-party long-haul pipelines

Tioga Rail Terminal   Crude oil
NGLs
  Dual loop
Ladder track
  140 MBbl/d

30 MBbl/d

  287 MBbls(4)
 

Upstream: Crude oil gathering system; Tioga Gas Plant; Ramberg Terminal Facility

Downstream: BNSF Railway

Crude oil rail cars   Crude oil   Rail cars(5)   37 MBbl/d(6)    

Johnson’s Corner Header System

 

 

Crude oil

 

 

Pipeline
connections

 

 

100 MBbl/d(7)

   

 

Upstream: Crude oil gathering system; third-party gathering systems

Downstream: Third-party long-haul pipelines

 

(1) Shown on a 100% basis. We own a 20% economic interest in Logistics Opco, which owns the Ramberg Terminal Facility, the Tioga Rail Terminal, the crude oil rail cars and the under-construction Johnson’s Corner Header System. Hess Infrastructure Partners owns the remaining 80% economic interest in Logistics Opco.
(2) Represents the aggregate redelivery capacity of the Ramberg Terminal Facility.
(3) Represents the aggregate above-ground shell storage capacity of storage tanks at the Ramberg Terminal Facility.
(4) Represents the aggregate above-ground shell storage capacity of storage tanks at the Tioga Rail Terminal.
(5) We own a total of 550 crude oil rail cars, which we operate as unit trains consisting of approximately 100 to 110 crude oil rail cars. Our crude oil rail cars have been constructed to DOT-117 standards, with the exception of electronically controlled pneumatic brakes that may be required to be added and, if applicable, can be added at a later date, prior to the regulation deadline, for a minimal cost.
(6) Based on an average round-trip duration of 10 days for the year ended December 31, 2016. Our crude oil rail cars have a shell capacity of 728 Bbls per car and an effective loading capacity of 93%, or approximately 677 Bbls per car.
(7) Represents the expected aggregate redelivery capacity of the under-construction Johnson’s Corner Header System, which we expect to enter into service in 2017.

Right of First Offer Assets

Upon the closing of this offering, we will enter into an omnibus agreement with Hess and Hess Infrastructure Partners under which Hess Infrastructure Partners will grant us a right of first offer, for a period of ten years after the closing of this offering, to acquire its retained interests in our joint interest assets. Our right of first offer assets include the following:

 

    Hess Infrastructure Partners’ 80% economic interest and 49% voting interest in Gathering Opco, which owns the natural gas gathering and compression system, the Hawkeye Gas Facility, the crude oil gathering system and the Hawkeye Oil Facility;

 

    Hess Infrastructure Partners’ 80% economic interest and 49% voting interest in HTGP Opco, which owns the Tioga Gas Plant; and

 

    Hess Infrastructure Partners’ 80% economic interest and 49% voting interest in Logistics Opco, which owns the Ramberg Terminal Facility, the Tioga Rail Terminal, our crude oil rail cars and, when completed, the Johnson’s Corner Header System.

 



 

11


Table of Contents

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 Infrastructure Partners’ 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 Infrastructure Partners 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, 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.

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.

 



 

12


Table of Contents

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 initially formed by Hess in January 2014 to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third-party customers. In mid-2015, Hess contributed certain of its existing midstream assets in the Bakken to Hess Infrastructure Partners, a midstream joint venture in which GIP purchased a 50% ownership interest for approximately $2.675 billion. At or prior to the closing of this offering, Hess Infrastructure Partners will contribute to us each of the following:

 

    a 20% economic interest and a 51% voting interest in Gathering Opco;

 

    a 20% economic interest and a 51% voting interest in HTGP Opco;

 

    a 20% economic interest and a 51% voting interest in Logistics Opco; and

 

    a 100% ownership interest in Mentor Holdings.

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

 

    Hess has entered into multiple long-term commercial agreements with us;

 

    we have entered into a four-year, $300.0 million senior secured revolving credit facility;

 

    we will issue 14,779,654 common units and 27,279,654 subordinated units to our Sponsors, representing an aggregate 75.5% limited partner interest in us;

 

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

 

    we will issue 12,500,000 common units to the public in this offering, representing a 22.5% limited partner interest in us, and will apply the net proceeds as described in “Use of Proceeds”;

 

    we will grant phantom units (with distribution equivalent rights) with an aggregate value of $935,000 to certain directors, executive officers and other key employees of our general partner;

 

    we will enter into an omnibus agreement with Hess and Hess Infrastructure Partners pursuant to which, among other things, (i) we will reimburse Hess for providing certain operational support and administrative services to us, (ii) Hess Infrastructure Partners will provide us with a right of first offer relating to its retained interests in our joint interest assets and (iii) the parties will agree to certain indemnification obligations; and

 

    our general partner will enter into an employee secondment agreement with Hess pursuant to which certain employees of Hess will be under the control of our general partner and render services to us or on our behalf.

 



 

13


Table of Contents

The number of common units to be issued to our Sponsors includes 1,875,000 common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise the option. Any exercise of the underwriters’ option to purchase additional common units would reduce the common units shown as issued to our Sponsors by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to our Sponsors at the expiration of the option period for no additional consideration. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to our Sponsors.

 



 

14


Table of Contents

Organizational Structure After the Transactions

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

 



 

15


Table of Contents

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:

 

Common Units—Public

     22.5

Common Units—Hess

     13.25

Subordinated Units—Hess

     24.5

Common Units—GIP

     13.25

Subordinated Units—GIP

     24.5

General partner interest

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

Management of Hess Midstream Partners LP

Because our general partner is a limited partnership, the board of directors and executive officers of its general partner, Hess Midstream Partners GP LLC, a wholly owned subsidiary of Hess Infrastructure Partners, will manage our operations and activities. Hess and GIP, through their right to elect the board of directors of the general partner of Hess Infrastructure Partners, have the right to elect the entire board of directors of Hess Midstream Partners GP LLC, including the independent directors. We refer to the board of directors and executive officers of Hess Midstream Partners GP LLC in this prospectus as our board of directors and our executive officers, and we sometimes refer to the directors elected by Hess and GIP as Hess directors and GIP directors, respectively.

At the closing of this offering, we expect that Hess Midstream Partners GP LLC will have at least six directors, three of whom will be Hess directors, two of whom will be GIP directors and one of whom will be independent. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or any of the members of our board of directors. Many of our executive officers and directors also currently serve as executive officers or employees of our Sponsors. For more information about our directors and executive officers, 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 (or by Hess Midstream Partners GP LLC on its behalf), 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.hessmidstream.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,

 



 

16


Table of Contents

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 Infrastructure Partners, our officers and directors also have a duty to manage the business of our general partner in a manner that they believe is in the best interests of our general partner and Hess Infrastructure Partners, in which each of Hess and GIP owns a 50% ownership interest. 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 our Sponsors, 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 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. 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 contractual covenant of good faith and fair dealing. As permitted by Delaware law, 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, GIP and their respective affiliates (including Hess Infrastructure Partners), are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us except with respect to our right of first offer contained in our omnibus agreement. 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 Sponsors and their respective affiliates, please read “Certain Relationships and Related Party Transactions.”

 



 

17


Table of Contents

THE OFFERING

 

Common units offered to the public

12,500,000 common units.

 

  14,375,000 common units, if the underwriters exercise in full their option to purchase additional common units from us.
 

 

Units outstanding after this offering

27,279,654 common units and 27,279,654 subordinated units, each representing a 49% limited partner interest in us. Our general partner will own a 2% general partner interest in us.

 

  The number of common units outstanding after this offering includes 1,875,000 common units that are available to be issued to the underwriters pursuant to their option to purchase additional common units from us. The number of common units purchased by the underwriters pursuant to any exercise of the option will be sold to the public. If the underwriters do not exercise their option to purchase additional common units, in whole or in part, any remaining common units not purchased by the underwriters pursuant to the option will be issued to our Sponsors at the expiration of the option for no additional consideration. Accordingly, any exercise of the underwriters’ option, in whole or in part, will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

Use of proceeds

We expect to receive net proceeds of approximately $231.9 million from the sale of common units offered by this prospectus based on the assumed initial public offering price of $20.00 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:

 

    approximately $218.1 million will be distributed to our Sponsors, in whole or in part as reimbursement of preformation capital expenditures;

 



 

18


Table of Contents
    approximately $10.0 million will be retained for general partnership purposes, including to fund expansion capital expenditures and our working capital needs; and

 

    $3.8 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 $35.1 million, after deducting underwriting discounts and structuring fees. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to our Sponsors.
 

 

Cash distributions

We intend to make a minimum quarterly distribution of $0.30 per unit ($1.20 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 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 June 30, 2017, 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 $0.30 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 $0.30; and

 

    third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.3450.

 



 

19


Table of Contents
  If cash distributions to our unitholders exceed $0.3450 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
 

above $0.3450 up to $0.3750

    85.0     15.0

above $0.3750 up to $0.4500

    75.0     25.0

above $0.4500

    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 year ended December 31, 2016 was $56.3 million. 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 $66.8 million (or an average of approximately $16.7 million per quarter). The amount of distributable cash flow we generated during the year ended December 31, 2016 on a pro forma basis would have been sufficient to pay 100.0% of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest and 68.5% of the aggregate

 



 

20


Table of Contents
 

minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. On a pro forma basis, we would have had a shortfall for each of the four quarters during the year ended December 31, 2016. Please read “Cash Distribution Policy and Restrictions on Distributions—Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2016.”

 

  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 March 31, 2018,” we will generate sufficient distributable cash flow to support the payment of the aggregate minimum quarterly distribution of approximately $65.5 million on all of our common units and subordinated units and the corresponding distributions of approximately $1.3 million on our general partner’s 2% interest for the twelve months ending March 31, 2018. 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 and GIP 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 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) $1.20 (the annualized minimum quarterly

 



 

21


Table of Contents
 

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 June 30, 2020, or (2) $1.80 (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 June 30, 2018, 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 any members of our board of 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

 



 

22


Table of Contents
 

and a majority of the subordinated units, voting as separate classes. Upon consummation of this offering, our Sponsors will own an aggregate of 77.1% of our common and subordinated units (or 73.7% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full). This will give our Sponsors the ability to 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 54.2% of our common units (excluding any common units purchased by our officers and directors and by the officers and directors of Hess under our directed unit program and any common units purchased by John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities). At the end of the subordination period (which could occur as early as within the quarter ending September 30, 2018), 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 77.1% of our outstanding common units (excluding any common units purchased by our directors and executive officers and by the officers and directors of Hess under our directed unit program and any common units purchased by John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain

 



 

23


Table of Contents
 

Hess family entities) 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 December 31, 2020, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be 20% or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $1.20 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.24 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.”

 

Directed Unit Program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the common units being offered by this prospectus for sale to our directors and executive officers and to certain directors, officers and employees of Hess. 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.”

 

Insider Participation in the Offering

John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities have agreed to purchase approximately $             million of our common units in this offering at the initial public offering price. Any

 



 

24


Table of Contents
 

common units purchased by Mr. Hess or certain Hess family entities will be subject to the lock-up restrictions described in the section titled “Underwriting—Lock-Up Agreements.”

 

Exchange listing

We have been approved to list our common units on the New York Stock Exchange under the symbol “HESM,” subject to official notice of issuance.

 



 

25


Table of Contents

SUMMARY HISTORICAL AND PRO FORMA 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 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 Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings on a combined basis. In connection with the closing of this offering, Hess Infrastructure Partners will contribute to us a 20% economic interest in each of Gathering Opco, HTGP Opco and Logistics Opco and a 100% ownership interest in Mentor Holdings. Following the closing of this offering, we will consolidate Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings in our financial statements and reflect a noncontrolling interest adjustment for Hess Infrastructure Partners’ retained 80% economic interest in Gathering Opco, HTGP Opco and Logistics Opco.

The summary historical combined financial data of our Predecessor as of and for the years ended December 31, 2016 and 2015 are derived from the audited 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 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 combined financial and operating data presented in the following table as of and for the year ended December 31, 2016 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The unaudited pro forma combined balance sheet assumes the offering and the related transactions occurred as of December 31, 2016, and the unaudited pro forma combined statement of operations for the year ended December 31, 2016 assumes the offering and the related transactions occurred as of January 1, 2016.

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

 

    Hess Infrastructure Partners’ contribution of our Predecessor’s assets and operations to us, including adjusting for Hess Infrastructure Partners’ retained 80% noncontrolling interests in Gathering Opco, HTGP Opco and Logistics Opco;

 

    our issuance of 14,779,654 common units and 27,279,654 subordinated units to our Sponsors, representing an aggregate 75.5% limited partner interest in us;

 

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

 

    our issuance of 12,500,000 common units, representing a 22.5% limited partner interest in us, to the public in connection with this offering, and our receipt of approximately $231.9 million in net proceeds from this offering;

 

    our entry into a new four-year, $300.0 million senior secured revolving credit facility, which we have assumed was not drawn during the pro forma period presented, and the commitment and origination fees that would have been paid by us had our revolving credit facility been in place as of and during the pro forma period presented;

 

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

 



 

26


Table of Contents
    our entry into the omnibus agreement and the employee secondment agreement as of the closing of this offering.

The unaudited pro forma combined financial statements do not give effect to an estimated $3.4 million of incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

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 Combined Financial and Operating Data—Non-GAAP Financial Measure.”

 

    Hess Midstream Partners LP
Predecessor Historical
    Hess Midstream
Partners LP
Pro Forma
 
    For the Year Ended
December 31,
    For the Year
Ended
December 31,
 
(in millions, except per unit data and operating information)         2016                 2015           2016  

Combined statements of operations:

     

Revenues

     

Affiliate

  $ 509.8     $ 565.1     $ 509.8  
 

 

 

   

 

 

   

 

 

 

Total revenues

    509.8       565.1       509.8  

Costs and expenses

     

Operating and maintenance expenses (exclusive of depreciation shown separately below)

    193.4       274.8       191.2  

Depreciation expense

    99.7       86.1       99.7  

General and administrative expenses

    10.4       9.3       10.4  
 

 

 

   

 

 

   

 

 

 

Total costs and expenses

    303.5       370.2       301.3  
 

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    206.3       194.9       208.5  

Interest expense

          1.5       1.8  
 

 

 

   

 

 

   

 

 

 

Net income (loss)

    206.3       193.4       206.7  

Less: Net income (loss) attributable to Hess Infrastructure Partners

                165.9  
 

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Midstream Partners LP

  $ 206.3     $ 193.4     $ 40.8  
 

 

 

   

 

 

   

 

 

 

General partner interest in net income (loss)

        0.8  

Limited partner interest in net income (loss)

        40.0  

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

     

Common units

        0.73  

Subordinated units

        0.73  

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

     

Common units

        27,279,654  

Subordinated units

        27,279,654  

Combined balance sheet data (at period end):

     

Cash

  $     $     $ 10.3  

Property, plant and equipment, net

  $ 2,518.6     $ 2,291.7     $ 2,518.6  

Total assets

  $ 2,574.4     $ 2,355.5     $ 2,580.1  

Total liabilities

  $ 336.3     $ 258.0     $ 110.1  

Combined statements of cash flows data:

     

Net cash provided by (used in):

     

Operating activities

  $ 387.7     $ 434.8    

Investing activities

  $ (263.6   $ (361.8  

Financing activities

  $ (124.1   $ (73.0  

Other financial data:

     

Adjusted EBITDA(1)

  $ 306.0     $ 281.0     $ 308.2  

Adjusted EBITDA attributable to Hess Midstream Partners LP(1)

      $ 62.5  

Capital expenditures:

     

Maintenance(2)

  $ 8.0     $ 18.5    

Expansion(2)

  $ 256.9     $ 274.3    

Operating volumes:

     

Gas gathering (MMcf/d)

    202       214    

Crude oil gathering (MBbl/d)

    57       39    

TGP processing (MMcf/d)

    188       194    

Crude terminaling (MBbl/d)

    59       73    

NGL loading (MBbl/d)

    13       13    

 

(1) 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 Combined Financial and Operating Data—Non-GAAP Financial Measure.”

 



 

27


Table of Contents
(2) Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures in the same way as will be required under our partnership agreement. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures” and “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions—Capital Expenditures” for a discussion of how we will be required to distinguish between maintenance capital expenditures and expansion capital expenditures under our partnership agreement and our capital expenditures for the twelve months ending March 31, 2018, compared to the year ended December 31, 2016, each on a pro forma basis.

 



 

28


Table of Contents

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, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders could be materially and adversely affected.

For the year ended December 31, 2016, 100% of our revenues were attributable to our fee-based commercial agreements with Hess, including revenues from third-party volumes delivered under these agreements. 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, temporarily or permanently curtail or shut down its operations or suspend or terminate its obligations under our commercial agreements in certain circumstances;

 

    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;

 

29


Table of Contents
    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 $0.30 per unit per quarter, or $1.20 per unit on an annualized basis, we must generate distributable cash flow of approximately $16.7 million per quarter, or approximately $66.8 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 handle on our assets;

 

    the fees with respect to volumes that we handle on our assets;

 

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

 

    outages at our facilities caused by mechanical failure, 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 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.”

 

30


Table of Contents

On a pro forma basis, we would not have generated sufficient distributable cash flow to pay the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2016, with a shortfall of approximately $10.5 million for that period. We would have had shortfalls for each of the four quarters during the year ended December 31, 2016.

We must generate approximately $66.8 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 year ended December 31, 2016 on a pro forma basis was approximately $56.3 million, which would have been sufficient to pay 100.0% of the aggregate minimum quarterly distribution on all of our common units and the corresponding distributions on our general partner’s 2% interest, and 68.5% of the aggregate minimum quarterly distributions on our subordinated units and the corresponding distributions on our general partner’s 2% interest for that period. On a pro forma basis, we would have had a shortfall for each of the four quarters during the year ended December 31, 2016. 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 March 31, 2018. 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 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 ability 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.”

 

31


Table of Contents

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, Hess and other producers for which we currently or in the future may handle volumes at our facilities must replace declining production, or 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 crude oil, natural gas and NGL prices;

 

    demand for crude 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 commodity 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. For example, as a result of the decline in crude oil prices beginning in late 2014, Hess reduced its rig count to two rigs in the Bakken by the end of 2016. Hess has recently announced that it plans to increase its rig count and operate six rigs in the Bakken by the end of 2017; however, total Bakken rig counts continue to fluctuate. 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.

Substantially all 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

 

32


Table of Contents

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 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 assets and to construct additional facilities.

Crude 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 assets. In addition, seasonal weather conditions during the winter months may adversely impact the operations of our assets and our ability to construct additional 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 gathering, compressing, processing, fractionating, terminaling, storing, loading and transporting 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;

 

33


Table of Contents
    protests, 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 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 insurance coverage for certain property damage and third-party liabilities, which includes sudden and accidental pollution liabilities. We are also insured under certain of Hess’s and Hess Infrastructure Partners’ liability policies and are subject to Hess’s and Hess Infrastructure Partners’ 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.

In May 2015, a crude oil unit train consisting of 107 CPC-1232 rail cars owned by our Predecessor derailed on a stretch of BNSF Railway near Heimdal, North Dakota. No injuries were reported in connection with the accident. The derailment also resulted in a release of crude oil that BNSF took the lead to remediate. The National Transportation Safety Board, or the NTSB, is investigating the cause of the accident, and that investigation is ongoing. Hess also conducted an independent safety review to identify any steps that can be taken to reduce the chances of a similar derailment in the future. Under our omnibus agreement, Hess Infrastructure Partners will indemnify us for any direct costs we incur relating to the derailment. We do not expect the accident to have a material impact on our business, financial condition and/or results of operations.

Additionally, although Hess Infrastructure Partners has agreed to indemnify us for certain environmental liabilities under the omnibus agreement, the indemnification is limited to $15 million (inclusive of any punitive, special, indirect or consequential damages) and may not be sufficient to cover any such liabilities that may arise. However, any costs we may incur as a result of the February 2013 Notice of Violation that Hess received from the North Dakota Department of Health will not be subject to the $15 million limit. Please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Omnibus Agreement.”

If we are unable to make acquisitions on economically acceptable terms from Hess Infrastructure Partners 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.

Part of our strategy to grow our business and increase our cash distributions per unit 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 Infrastructure Partners. Hess Infrastructure Partners has provided us with a right of first offer to acquire

 

34


Table of Contents

its retained interests in our joint interest assets. The consummation and timing of any future acquisitions of these right of first offer assets will depend upon, among other things, Hess Infrastructure Partners’ 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 Infrastructure Partners 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 our cash distributions per unit 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 independently from Hess. Our ability to increase our third-party revenues is subject to numerous factors beyond our control, including prevailing commodity prices, competition from third parties and the extent to which we lack available capacity when third-party customers require it. For example, the decline in crude oil prices beginning in late 2014 has caused producers to reduce exploration, development and production activities, which has resulted in a decrease in third-party volumes available to be handled by our assets. In addition, our natural gas and crude oil gathering systems and Tioga Gas Plant are subject to competition from existing and future third-party natural gas and crude oil gathering systems and natural gas processing and fractionation plants in the Bakken, while our terminals and crude oil rail cars compete with third-party terminals, pipelines and crude oil rail cars for available third-party volumes. To the extent that we have available capacity on our gathering systems or at our Tioga Gas Plant for third-party volumes, we may not be able to compete effectively with third-party gathering systems or processing plants for additional natural gas production in the area. To the extent that we have available capacity at our terminals or crude oil rail cars for third-party volumes, competition from other existing or future terminals or crude oil rail cars owned by third parties may limit our ability to utilize this available capacity.

We have historically provided midstream 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.

 

35


Table of Contents

The completion of capital projects by us 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.

As part of our growth strategy, we intend to increase utilization of our existing asset base and increase revenue at our facilities by handling additional volumes of natural gas and crude oil resulting from the completion of various capital projects by us. For example, we are nearing the completion of construction and reconfiguration of facilities and pipelines in McKenzie and Williams Counties that are expected to increase our throughput capacity for crude oil and natural gas originating from south of the Missouri River and moving northward to our natural gas processing and crude oil and NGL logistics assets in Tioga and Ramberg, and in connection with the next planned turnaround of the Tioga Gas Plant in 2019, we are planning a debottlenecking project to increase the plant’s processing capacity to a maximum of 300 MMcf/d.

There are inherent risks associated with undertaking these and other capital projects, including 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, or their completion may not result in the anticipated increase in volumes at our facilities, 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 crude 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 gathering systems processing plants, terminals or storage facilities that would create additional competition for the services we provide to our customers. 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.

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 prices 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.

 

36


Table of Contents

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 our pipelines 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 our pipelines 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 may be terminated by us with 90 days’ notice. 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 result 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. In September 2016, we extended the term of this agreement for three years and expanded services to include rail car qualification and maintenance management. Costs of these services under a negotiated renewal of the 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.

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. On March 15, 2017, in connection with this offering, we entered into a new four-year, $300.0 million senior secured revolving credit facility, which contains various operating and financial restrictions and covenants. The operating and financial restrictions and covenants in our new revolving credit facility restricts, and any future financing agreements could similarly 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.

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 would 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

 

37


Table of Contents

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.

The level and terms of Hess’s and Hess Infrastructure Partners’ indebtedness and any reduction in Hess’s 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 the credit ratings of Hess and Hess Infrastructure Partners.

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 December 31, 2016, Hess had total indebtedness (including indebtedness attributable to Hess Infrastructure Partners) of approximately $6.8 billion. In addition, the covenants in the agreements governing Hess Infrastructure Partners’ outstanding and future indebtedness may limit its ability to borrow additional funds for development and make certain investments and may also limit its ability to satisfy its funding obligations, if any, relating to our joint interest assets. Furthermore, if Hess Infrastructure Partners were to default under certain of its debt obligations, there is a risk that Hess Infrastructure Partners’ creditors would attempt to assert claims against our assets during the litigation of their claims against Hess Infrastructure Partners. 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.

Two of the three major credit rating agencies that rate Hess’s debt have assigned Hess an investment grade rating. If these credit ratings are lowered in the future, the interest rate and fees Hess pays on its credit facilities may increase. Hess Infrastructure Partners does not currently have any indebtedness rated by any credit rating agency. 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 may consider Hess’s and Hess Infrastructure Partners’ debt ratings when assigning ours because of their 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 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

 

38


Table of Contents

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 handling of crude oil, natural gas 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 gather, 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.

If our assets become subject to FERC regulation, or if federal, state or local regulations or policies change, or if we fail to comply with such regulations, our financial condition, results of operations and cash flows could be materially and adversely affected.

We believe that our natural gas gathering and transportation operations are exempt from regulation by the Federal Energy Regulatory Commission, or FERC, under the Natural Gas Act, or the NGA. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC under the NGA. Although FERC has not made any formal determinations with respect to all of our natural gas gathering facilities upstream of the Tioga Gas Plant, we believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish whether a pipeline is a gathering pipeline not subject to FERC jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services, however, has been the subject of substantial litigation, and FERC determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of our gathering facilities may be subject to change based on future determinations by FERC, the courts, or Congress. If FERC were to consider the status of an individual facility and determine that the facility is not exempt from FERC regulation under the NGA, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by FERC under the NGA or the Natural Gas Policy Act, or the NGPA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, could adversely affect our results of operations and cash flows. In addition, if any of our facilities were found to have provided services or otherwise operated in violation of the NGA or the NGPA, this could result in the imposition of administrative, civil or criminal penalties, as well as a requirement to disgorge charges collected for such services in excess of the rate established by FERC.

We believe that the crude oil and NGL pipelines in our gathering system are not subject to regulation by FERC under the Interstate Commerce Act because they do not provide interstate transportation. The distinction between FERC-regulated interstate crude or NGLs transportation is a case-by-case determination. If FERC were to determine that any of our crude oil or NGL pipelines were providing interstate transportation, we may be required to operate as a common carrier and the rates for, and terms and conditions of the transportation services provided by such pipelines would be subject to regulation by FERC under the ICA. Such FERC regulation could decrease revenue, increase operating costs, and, depending on the facility in question, could adversely affect our results of operations and cash flows. In addition, if any of our facilities were found to have provided services or otherwise operated in violation of the ICA, this could result in the imposition of administrative and criminal remedies and civil penalties.

 

39


Table of Contents

State regulation of gathering facilities and intrastate transportation pipelines generally includes various safety, environmental and, in some circumstances, nondiscriminatory take and common purchaser requirements, as well as complaint-based rate regulation. Other state regulations may not directly apply to our business, but may nonetheless affect the availability of natural gas, crude oil and NGLs for purchase, compression and sale.

Moreover, FERC’s natural gas regulation indirectly impacts our businesses and the markets for products derived from these businesses. FERC’s policies, including its policies on open access transportation, gas quality, capacity release and market center promotion, indirectly affect intrastate natural gas markets.

In addition, if we fail to comply with the NGA or NGPA, FERC rules, regulations and orders, we could be subject to substantial penalties and fines, which could have a material adverse effect on our results of operations and cash flows. FERC has civil penalty authority under the NGA and NGPA to impose penalties for current violations of up to $1,193,970 per day for each violation and disgorgement of profits associated with any violation.

We may incur significant costs and liabilities as a result of pipeline integrity management program testing and any related pipeline repair or preventative or remedial measures.

The United States Department of Transportation, or DOT, through the Pipeline and Hazardous Materials Safety Administration, or PHMSA, has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines located where a leak or rupture could do the most harm, in “high consequence areas.” The regulations require operators to:

 

    perform ongoing assessments of pipeline integrity;

 

    identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

    improve data collection, integration and analysis;

 

    repair and remediate the pipeline as necessary; and

 

    implement preventive and mitigating actions.

The Pipeline Safety, Regulatory Certainty and Job Creation Act of 2011, or the 2011 Pipeline Safety Act, among other things, increased the maximum civil penalty for pipeline safety violations and directed the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. Consistent with the 2011 Pipeline Safety Act, PHMSA finalized rules consistent with the signed act that increased the maximum administrative civil penalties for violations of the pipeline safety laws and regulations to $200,000 per violation per day, with a maximum of $2,000,000 for a related series of violations. Effective August 1, 2016, those maximum civil penalties were increased to $205,638 per violation per day, with a maximum of $2,056,380 for a series of violations, to account for inflation. Additionally, in May 2011, PHMSA published a final rule adding reporting obligations and integrity management standards to certain rural low-stress hazardous liquid pipelines that were not previously regulated in such manner. Should we fail to comply with DOT, PHMSA or comparable state regulations, we could be subject to substantial penalties and fines, which could impact our result of operations.

PHMSA regularly proposes revisions to existing regulations as well as new pipeline safety regulations. For example, in March 2015, PHMSA issued final rules applicable to natural gas and

 

40


Table of Contents

hazardous liquid (including crude oil and NGL) pipelines that, among other changes, impose new post-construction inspections, welding, gas component pressure testing requirements, as well as requirements for calculating pressure reductions for immediate repairs on liquid pipelines. In September 2015, PHMSA issued a rule indefinitely delaying the effective date for the portion of the rule addressing post-construction inspections. In October 2015, PHMSA issued a proposed rule for hazardous liquid pipelines that would significantly extend and expand the reach of certain PHMSA integrity management requirements (i.e., periodic assessments, leak detection and repairs), regardless of the pipeline’s proximity to a high consequence area. The proposal also mandated new reporting requirements for certain unregulated pipelines, including all gathering lines. In April 2016, pursuant to one of the requirements of the 2011 Pipeline Safety Act, PHMSA published a proposed rulemaking that would expand integrity management requirements and impose new pressure testing requirements on currently regulated gas transmission pipelines. The proposal would also significantly expand the regulation of gas gathering lines, subjecting previously unregulated pipelines to requirements regarding damage prevention, corrosion control, public education programs, maximum allowable operating pressure limits, and other requirements. PHMSA has not yet finalized such natural gas pipeline regulations. The scope and timing of such final natural gas pipeline regulations are uncertain at this time. On January 13, 2017, PHMSA issued a final rule amending its proposed hazardous liquid pipeline regulations, imposing stricter standards on operators for determining how to repair aging and high-risk infrastructure, and increasing the frequency of tests to assess the condition of pipelines. Under the final rule, the revised regulations are to take effect six months after the date of publication in the Federal Register. The final rule was not published in the Federal Register. On January 20, 2017, the Assistant to the President and Chief of Staff for the White House issued a memorandum to the heads of all federal executive departments and agencies instructing the agencies to withdraw regulations that have been sent to the Office of the Federal Register, but that have not yet been published, so that they can be reviewed and approved by the new administration. The memorandum permits agencies to seek an exception from the Director or Acting Director of the Office of Management and Budget for certain health and safety regulations. It is not clear at this time whether PHMSA will seek such an exception, whether further amendments will be made to the hazardous liquid pipeline regulations, and/or when such hazardous liquid pipeline regulations will be implemented.

The adoption of these and other laws or regulations that apply more comprehensive or stringent safety standards could require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated basis, all of which could require us to incur increased operational costs that could be significant. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and regulatory changes could have a material effect on our cash flow.

Changes in laws or standards affecting crude oil tank cars or the transportation of North American crude oil by rail could require retrofitting our existing car fleet and/or reduce volumes throughput at our facilities, and as a result our revenues could decline, which could have a material adverse effect on our financial condition, results of operations, cash flows and ability to make distributions to unitholders.

Rail car derailments in Canada and the United States have led to increased regulatory scrutiny over the safety of transporting Bakken crude oil by rail. In the wake of derailments several years ago, the Federal Railroad Administration, or FRA, of the DOT, and the DOT’s PHMSA, issued several Safety Advisories and Emergency Orders directing offerors and rail carriers to take additional precautionary measures to enhance the safe shipment of bulk quantities of crude oil. In May 2015, DOT finalized its rail safety rule for “high hazard flammable trains,” which focused on safety improvements designed to prevent accidents, mitigate consequences in the event of an accident, and support emergency response. The new rule specified technical requirements for new tank cars, denominated DOT-117s, used for the transportation of crude oil by rail. Challenges to the final rule

 

41


Table of Contents

have already been filed in federal court and with DOT, including a challenge by railroad industry groups. Currently, all of the rail cars in our fleet are DOT-117 rail cars that meet the technical requirements of the final DOT rule, with the exception of electronically controlled pneumatic brakes that may be required to be added and, if applicable, can be added at a later date, prior to the regulation deadline, for a minimal cost. In the event that Logistics Opco exercises the option under the contribution agreement to require Hess Infrastructure Partners to contribute additional rail cars and those rail cars do not comply with the new rule, we could incur substantial maintenance costs in order to retrofit or upgrade such rail cars. In addition, the adoption of additional federal, state or local laws or regulations, including any new voluntary measures by the rail industry regarding rail car design or crude oil and liquid hydrocarbon rail transport activities, or efforts by local communities to restrict or limit rail traffic involving crude oil, could similarly affect our business by increasing compliance costs and decreasing demand for our services, which could adversely affect our financial position and cash flows. 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. For a detailed discussion of existing and proposed rail car regulations, please read “Business—Other Regulation—Rail Regulation.” For a discussion of our option to obtain additional rail cars from Hess Infrastructure Partners, please read “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Contribution Agreement.”

Evolving environmental laws and regulations on crude oil stabilization could have an effect on our financial performance.

In December 2014, the North Dakota Industrial Commission, or NDIC, issued Order No. 25417, which requires producers in a Bakken, Bakken/Three Forks, Three Forks or Sanish pool, which the order refers to as the Bakken Petroleum System, effective April 1, 2015, to heat their produced fluids to a specified minimum temperature prior to separation in order to improve its marketability and facilitate its safe transportation. If producers cannot meet minimum heat treatment conditions, they must demonstrate that their crude oil has a vapor pressure no greater than 13.7 psi. The order also requires operators of transload rail facilities to notify the NDIC of any crude oil received from the Bakken Petroleum System that violates federal crude oil safety standards.

Given the volume of tight crude oil like Bakken crude that is currently shipped by rail, the U.S. Department of Energy, or DOE, tasked Sandia National Laboratories to study the properties of tight crude oils as they relate to potential combustion events in the rail transport environment. The Sandia Report, released in March 2015, concluded that there is a gap in relevant data and a lack of understanding of how crude oil properties influence the propensity for accidental ignition, combustion, or explosion. In its key findings, the Sandia Report noted that while it is likely that crude oil properties could be used to predict combustibility, the study released no objective data linking any known crude oil properties with the likelihood or severity of rail transport-related combustion events. In April 2015 the DOE announced an additional two-year study into how crude oil properties affect its combustibility in rail accidents. The second Sandia study is currently in Task 2, which is designed to determine what methods of sampling and analysis are suitable for characterizing the physical and chemical properties of crude oils with differing chemical and physical compositions.

On January 18, 2017, PHMSA published an Advanced Notice of Proposed Rulemaking (“ANPRM”) related to crude oil shipping. The ANPRM seeks comment on a range of questions associated with establishing a vapor pressure threshold for crude oil in transportation in order to evaluate the potential safety benefits of utilizing vapor pressure thresholds in the hazardous materials classification process. The ANPRM discusses potential restrictions on vapor pressure, briefly discusses the North Dakota conditioning regulations, and notes that prior PHMSA rulemakings

 

42


Table of Contents

deferred consideration of vapor pressure restrictions to a later date. The ANPRM could potentially be used as the basis for a future final rule on vapor pressure for crude by rail transportation.

Our commercial agreements with Hess contain product quality specification limits below the vapor pressure maximum. As noted above, the final rule requires offerors to develop and carry out sampling and testing programs for all unrefined petroleum-based products, including crude oil, and to certify that hazardous materials subject to the program are packaged in accordance with the test results, but does not require oil companies to process their products to make them less volatile before shipment. However, if new or more stringent federal, state or local legal restrictions relating to the quality specification of crude oil or to crude oil transportation 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.

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 federal and state legislative and regulatory 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. For example, in October 2015 the EPA finalized a rule to expand the Greenhouse Gas Reporting Rule to include emissions from gathering and boosting systems and blowdowns of natural gas transmission pipelines. 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.

Further, in May 2016 the EPA finalized new regulations that for the first time established methane emission standards for new and modified oil and natural gas production and natural gas processing and transmission facilities. And in November 2016, the Bureau of Land Management (“BLM”) also finalized a rule to address methane emissions from crude oil and natural gas sources subject to BLM jurisdiction by limiting venting, flaring and leaking. These rules are subject to pending litigation. Congress continues to periodically consider legislation on greenhouse gas emissions, which may include a delay in the implementation of greenhouse gas regulations by EPA or a limitation on EPA’s authority to regulate greenhouse gases, although the ultimate adoption and form of any federal legislation cannot presently be predicted. The impact of future regulatory and legislative developments, if adopted or enacted, including any cap-and-trade program, is likely to result in increased compliance costs, increased utility costs, additional operating restrictions on our business and an increase in the cost of products generally. Although such costs may impact our business directly or indirectly by impacting Hess’s facilities or operations, the extent and magnitude of that impact cannot be reliably or accurately estimated due to the present uncertainty regarding the additional measures and how they will be implemented.

In addition, in December 2015, over 190 countries, including the United States, reached an agreement to reduce global greenhouse gas emissions (“Paris Accord”). The Paris Accord entered into force in November 2016 after over 70 countries, including the United States, ratified the agreement or otherwise indicated their intent to be bound by the agreement. To the extent the United States and

 

43


Table of Contents

other countries implement this agreement or impose other climate change regulations on the oil and gas industry, it could have an adverse direct or indirect effect on our business.

Finally, many scientists have concluded that increasing concentrations of greenhouse gas emissions in the earth’s atmosphere may produce climate changes that have significant physical effects. To the extent any such effects were to occur, those effects any associated market changes could have an adverse effect on our financial condition and operations. Please read “Business—Environmental Regulation—Air Emissions and Climate Change.”

We or Hess may be unable to obtain or renew permits or approvals 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. 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 an adverse impact on Hess’s ability to produce crude oil and natural gas or on our ability to handle volumes of crude oil, natural gas or NGLs at our facilities. For example, if we are unable to satisfy all permit criteria applicable to expansion projects we have commenced at the Hawkeye Oil Facility and the Hawkeye Gas Facility, our ability to deliver volumes to the Ramberg Terminal Facility and the Tioga Gas Plant could be adversely affected. Additionally, noncompliance or incomplete documentation of our compliance status with respect to our existing permits or approvals may result in the imposition of fines, penalties and injunctive relief. Our ability to obtain or renew any material permit or approval, or comply with the terms of our existing permits or approvals, could have a material adverse effect on our financial condition, results of operations and cash flows.

Evolving environmental laws and regulations on hydraulic fracturing could have an 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. Beginning in August 2012, the EPA adopted a series of rules that subject crude oil and natural gas production, processing, transmission and storage operations to regulation under the New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants programs. 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 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.

 

44


Table of Contents

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 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

 

45


Table of Contents

over financial reporting pursuant to Section 404 until our annual report for the fiscal year ending December 31, 2018.

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, former 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.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including our Sponsors, 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 our Sponsors, and none of our Sponsors is under any obligation to adopt a business strategy that favors us.

Following this offering, our Sponsors will directly own an aggregate 75.5% limited partner interest in us (or 72.2% if the underwriters’ option to purchase additional common units is exercised in full) and will own and control our general partner and its 2% general partner interest in us. Hess Infrastructure Partners will also retain a significant ownership interest in our joint interest assets following the closing of this offering. 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, our directors and officers also have a duty to manage our general partner in a manner that is in the best interests of its owner, Hess Infrastructure Partners,

 

46


Table of Contents

which is owned by our Sponsors. Conflicts of interest may arise between our Sponsors and their respective affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, our general partner may favor its own interests and the interests of its affiliates, including our Sponsors, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

    neither our partnership agreement nor any other agreement requires our Sponsors 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;

 

    our Sponsors and Hess Infrastructure Partners may be constrained by the terms of their respective 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;

 

    our partnership agreement permits us to classify up to $65.0 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;

 

47


Table of Contents
    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, 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 our general partner’s incentive distribution rights without the approval of the conflicts committee of our board of directors, 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 our Sponsors, Hess Infrastructure Partners, our executive officers and directors. 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 borrowings under our revolving credit facility 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 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.

Affiliates of our general partner, including our Sponsors, 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 our Sponsors 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 our Sponsors and our executive officers and directors. Any such entity that becomes aware

 

48


Table of Contents

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, our Sponsors and other affiliates of our general partner, including Hess Infrastructure Partners, 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 our Sponsors and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow.

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 our 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 our 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

 

49


Table of Contents
 

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 faith, and that our conflicts committee and board of directors 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 to 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, our general partner determines the amount of these expenses. Under the terms of our omnibus agreement, we will be required to reimburse Hess for the provision of certain operational and administrative support services to us. 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 initially 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 any of the members of our board of directors and will have no right to elect our general partner or any of the members of our board of directors on an annual or other continuing basis. Our board of directors is chosen by Hess Infrastructure Partners, which is controlled by our Sponsors. 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.

 

50


Table of Contents

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 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 662/3% 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 our directors and executive officers and the directors and executive officers of Hess under our directed unit program and any common units purchased by John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities, our general partner and its affiliates will collectively own 77.1% of our total outstanding common units and subordinated units on an aggregate basis (or 73.7% 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 our 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 Infrastructure Partners to transfer all of the partnership interests in our general partner, or all of the membership interests in Hess Midstream Partners GP LLC, the general partner of our general partner, to a third party. The new owner of our general partner or Hess Midstream Partners GP LLC would then be in a position to replace our board of directors and officers with its own choices. As a result, we could lose the provision of certain operational support and administrative services by Hess and its affiliates, our right of first offer to acquire our right of first offer assets from Hess Infrastructure Partners and our license to use certain Hess trademarks.

Our general partner may elect to convert the Partnership to a corporation for U.S. federal income tax purposes without unitholder consent.

Under our partnership agreement, if, in connection with the enactment of U.S. federal income tax legislation or a change in the official interpretation of existing U.S. federal income tax legislation by a governmental authority, our general partner determines that (i) the Partnership should no longer be characterized as a partnership for U.S. federal or applicable state and local income tax purposes or (ii) common units held by unitholders other than the general partner and its affiliates should be converted into or exchanged for interests in a newly formed entity taxed as a corporation or an entity taxable at the entity level for U.S. federal or applicable state and local income tax purposes whose sole asset is

 

51


Table of Contents

interests in the Partnership (“parent corporation”), then our general partner may, without unitholder approval, cause the Partnership to be treated as an entity taxable as a corporation or subject to entity-level taxation for U.S. federal or applicable state and local income tax purposes, whether by election of the Partnership or conversion of the Partnership or by any other means or methods, or cause the common units held by unitholders other than the general partner and its affiliates to be converted into or exchanged for interests in the parent corporation. Any such event may be taxable or nontaxable to our unitholders, depending on the form of the transaction. The tax liability, if any, of a unitholder as a result of such an event may vary depending on the unitholder’s particular situation and may vary from the tax liability of our general partner and each of our Sponsors. In addition, if our general partner causes an interest in the Partnership to be held by a parent corporation, our Sponsors may choose to retain their partnership interests in us rather than convert their partnership interests into parent corporation shares. Please read “Our Partnership Agreement—Election to be Treated as a Corporation.”

We may issue an unlimited number of additional partnership interests without unitholder approval, which would dilute unitholder interests.

Under our partnership agreement, we may, at any time, 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. We have agreed that, for a period of 180 days from the date of this prospectus, we will not, without the prior written consent of Goldman, Sachs & Co. and Morgan Stanley & Co. LLC, sell, transfer or otherwise dispose of any common units or any securities convertible or exchangeable for our common units, except under certain circumstances. Please read “Underwriting—Lock-Up Agreements.”

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;

 

    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 Infrastructure Partners:

 

    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.

 

52


Table of Contents

Our Sponsors 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, our Sponsors will collectively hold 14,779,654 common units and 27,279,654 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 our Sponsors with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions.” 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, our 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. Any cash reserves established by our general partner will affect the amount of cash we have available to distribute to unitholders.

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 54.2% of our common units (excluding any common units purchased by our directors and executive officers and the directors and executive officers of Hess under our directed unit program and any common units purchased by John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities). At the end of the subordination period (which could occur as early as within the quarter ending September 30, 2018), 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 77.1% of our outstanding common units (excluding any common units purchased by our directors and executive officers and the directors and executive officers of Hess under our directed unit program and any common units purchased by John B. Hess, our Chairman of the Board and Chief Executive Officer, and certain Hess family entities) 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

 

53


Table of Contents

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 12,500,000 publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, our Sponsors will collectively own 14,779,654 common units and 27,279,654 subordinated units, representing an aggregate 75.5% limited partner interest in us (or 72.2% 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 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

 

54


Table of Contents

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 to the extent that one or more of the transferees collectively own a majority of the incentive distribution rights, such transferees 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.

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

We have applied 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 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.

 

55


Table of Contents

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 will 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. 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, neither of which currently imposes an income, franchise tax or other similar form of taxation on partnerships. In addition, we transport crude oil by rail car through a number of states, but do not anticipate being subjected to material entity-level income, franchise or similar tax in those states under current law. 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. 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. Although there is no current legislative proposal, a prior 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.

Any modification to the U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the exception for certain publicly traded partnerships to be

 

56


Table of Contents

treated as partnerships for U.S. federal income tax purposes. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any similar or future changes could negatively impact the value of an investment in our common units.

In addition, on January 24, 2017, final regulations regarding which activities give rise to qualifying income within the meaning of Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), were published in the Federal Register. We do not believe these final regulations affect our ability to be treated as a partnership for U.S. federal income tax purposes.

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.

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.

If the IRS makes audit adjustments to our income tax returns for tax years beginning after December 31, 2017, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us, in which case our cash available for distribution to our unitholders may be substantially reduced.

Pursuant to the Bipartisan Budget Act of 2015, for tax years beginning after December 31, 2017, if the IRS makes audit adjustments to our income tax returns, it (and some states) may assess and collect any taxes (including any applicable penalties and interest) resulting from such audit adjustment directly from us. Under our limited partnership agreement, our general partner is permitted to make elections under the new rules to either pay the taxes (including any applicable penalties and interest) directly to the IRS or, if we are eligible, issue a revised Schedule K-1 to each unitholder with

respect to an audited and adjusted return. Although our general partner may elect to have our unitholders take such audit adjustment into account in accordance with their interests in us during the tax year under audit, there can be no assurance that such election will be practical, permissible or effective in all circumstances. As a result, our current unitholders may bear some or all of the tax liability resulting from such audit adjustment, even if such unitholders did not own units during the tax year under audit. If, as a result of any such audit adjustment, we are required to make payments of taxes, penalties, and interest, our cash available for distribution to our unitholders might be substantially reduced. These rules are not applicable for tax years beginning on or prior to December 31, 2017.

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

 

57


Table of Contents

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. 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.

A substantial portion of the amount realized from the sale of your units, whether or not representing gain, may be taxed as ordinary income to you due to potential recapture items, including depreciation recapture. Thus, you may recognize both ordinary income and capital loss from the sale of your units if the amount realized on a sale of your units is less than your adjusted basis in the units. Net capital loss may only offset capital gains and, in the case of individuals, up to $3,000 of ordinary income per year. In the taxable period in which you sell your units, you may recognize ordinary income from our allocations of income and gain to you prior to the sale and from recapture items that generally cannot be offset by any capital loss recognized upon the sale of units. 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. Allocations and/or distributions to non-U.S. persons will be subject to withholding taxes imposed 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. Our counsel is unable to opine as to the validity of such filing positions. 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

 

58


Table of Contents

month (the “Allocation Date”), instead of on the basis of the date a particular unit is transferred. Nevertheless, we will allocate certain deductions for depreciation of capital additions, gain, or loss realized on a sale or other disposition of our assets and, in the discretion of the general partner, any other extraordinary item of income, gain, loss or deduction based upon ownership on the Allocation Date. The U.S. Department of the Treasury has adopted final Treasury Regulations allowing a similar monthly simplifying convention, but such regulations do not specifically authorize all aspects of our proration method. Accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our 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. Our counsel has not rendered an opinion regarding the treatment of a unitholder whose units are the subject of a securities loan; therefore, 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 have adopted certain valuation methodologies in determining a unitholder’s allocations of income, gain, loss and deduction. The IRS may challenge these methodologies or the resulting allocations, which could adversely affect the value of our common units.

In determining the items of income, gain, loss and deduction allocable to our unitholders, we must routinely determine the fair market value of our assets. Although we may, from time to time, consult with professional appraisers regarding valuation matters, we make many fair market value estimates using a methodology based on the market value of our common units as a means to measure the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction.

A successful IRS challenge to these methods or allocations could adversely affect the timing or 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 as a partnership 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 12-month period. Immediately following this offering, our Sponsors and our general partner will collectively own 77.5% of the total interests in our capital and profits, assuming the underwriters do not exercise

 

59


Table of Contents

their option to purchase additional common units. Therefore, a transfer by our Sponsors and our general partner of all or a portion of their 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.

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. In addition, we transport crude oil by rail car through a number of states, which may also seek to impose an income tax on individuals, corporations and other entities on income earned in those states and may require 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.

 

60


Table of Contents

USE OF PROCEEDS

We expect to receive net proceeds of approximately $231.9 million from the sale of common units offered by this prospectus based on an assumed initial public offering price of $20.00 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:

 

    approximately $218.1 million will be distributed to our Sponsors, in whole or in part as reimbursement of preformation capital expenditures;

 

    approximately $10.0 million will be retained for general partnership purposes, including to fund expansion capital expenditures and our working capital needs; and

 

    $3.8 million will be used to pay revolving credit facility origination fees.

If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to our Sponsors at the expiration of the option period for no additional consideration. If the underwriters exercise their option to purchase additional common units in full, the additional net proceeds to us would be approximately $35.1 million (based on the mid-point of the price range set forth on the cover of this prospectus), after deducting underwriting discounts and structuring fees. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make an additional cash distribution to our Sponsors.

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 $11.7 million (or approximately $13.4 million if the underwriters’ option to purchase additional common units is exercised in full). In the event of any such increase or decrease in the net proceeds from this offering, the cash distribution to our Sponsors from the proceeds of this offering will increase or decrease, as applicable, by a corresponding amount.

 

61


Table of Contents

CAPITALIZATION

The following table shows:

 

    the historical cash and cash equivalents and capitalization of our Predecessor as of December 31, 2016; and

 

    our pro forma capitalization as of December 31, 2016, giving effect to the pro forma adjustments described in our unaudited pro forma 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 combined financial statements and the accompanying notes included elsewhere in this prospectus.

 

     As of 
December 31, 2016
 
(in millions)    Historical      Pro forma(1)  
     (unaudited)  

Cash and cash equivalents

   $      $ 10.3  
  

 

 

    

 

 

 

Debt:

     

Long-term debt

             
  

 

 

    

 

 

 

Total debt

             
  

 

 

    

 

 

 

Net parent investment / partners’ capital(2):

     

Net parent investment

     2,238.1         

Held by public:

     

Common units

            223.5  

Held by Hess:

     

Common units

            47.1  

Subordinated units

            86.9  

Held by GIP:

     

Common units

            47.1  

Subordinated units

            86.9  

Held by Hess Infrastructure Partners:

     

General Partner interest

            7.0  

Noncontrolling interest

            1,971.5  
  

 

 

    

 

 

 

Total net parent investment / partners’ capital

     2,238.1        2,470.0  
  

 

 

    

 

 

 

Total capitalization

   $ 2,238.1      $ 2,470.0  
  

 

 

    

 

 

 

 

(1) Assumes the mid-point of the price range set forth on the cover of this prospectus.
(2) Assumes the underwriters’ option to purchase additional common units from us is not exercised.

 

62


Table of Contents

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 December 31, 2016, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $498.5 million, or $8.95 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)

     $ 20.00  

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

   $ 11.42    

Less: Distribution to Hess Infrastructure Partners(3)

     (5.05  

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

     2.58    
  

 

 

   

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

       8.95  
    

 

 

 

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

     $ 11.05  
    

 

 

 

 

(1) The mid-point of the price range set forth on the cover of this prospectus.
(2) Determined by dividing the number of units (14,779,654 common units, 27,279,654 subordinated units and the 2% general partner interest, which has a dilutive effect equivalent to 1,113,455 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 approximately $493.2 million.
(3) Determined by dividing our expected distribution of approximately $218.1 million to our Sponsors in connection with this offering by the number of units (14,779,654 common units, 27,279,654 subordinated units and the 2% general partner interest) to be issued to the general partner and its affiliates for its contribution of assets and liabilities to us.
(4) Determined by dividing our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering, of approximately $498.5 million, by the number of units to be outstanding after this offering (27,279,654 common units, 27,279,654 subordinated units and the 2% general partner interest, which has a dilutive effect equivalent to 1,113,455 units) and the application of the related net proceeds.
(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 $11.84 and $10.26, 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 $10.42.

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)

     43,172,763        77.5   $ 275.0        52.4

Purchasers in this offering

     12,500,000        22.5     250.0        47.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     55,672,763        100.0   $ 525.0        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own 14,779,654 common units, 27,279,654 subordinated units and a 2% general partner interest having a dilutive effect equivalent to 1,113,455 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 December 31, 2016, was approximately $493.2 million. At the closing of this offering, we intend to make a distribution of approximately $218.1 million to our Sponsors.

 

63


Table of Contents

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 $0.30 per unit, or $1.20 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. 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. Any quarterly distribution we make must generally be approved by our board of directors, including at least one Hess director and one GIP director; however, Hess and GIP have agreed that, in the unlikely event that we do not receive such approval, then our general partner may approve, by a simple majority vote of our board of directors, a distribution for such quarter in an amount that represents an increase in our per-unit distribution over the immediately preceding quarterly distribution, to the extent we have sufficient available cash. In such an event, the Hess directors have sufficient voting power to approve any such increase. Any such distribution would not necessarily be indicative of, or reflect a change in, our then-current cash distribution policy. 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

 

64


Table of Contents
 

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. 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.

 

    Any quarterly distribution we make must generally be approved by our board of directors, including at least one Hess director and one GIP director; however, Hess and GIP have agreed that, in the unlikely event that we do not receive such approval, then our general partner may approve, by a simple majority vote of our board of directors, a distribution for such quarter in an amount that represents an increase in our per-unit distribution over the immediately preceding quarterly distribution, to the extent we have sufficient available cash. In such an event, the Hess directors have sufficient voting power to approve any such increase. This agreement between Hess and GIP does not modify the provisions in our partnership agreement related to our distribution of available cash, and any such distribution would not necessarily be indicative of, or reflect a change in, our then-current cash distribution policy. We are not legally obligated to make a distribution in such increased amount or in any other amount in any quarter, subject to the obligation under our partnership agreement to distribute all of our available cash each quarter.

 

    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 Infrastructure Partners will own our general partner, and our Sponsors will collectively own 77.1% of our total outstanding common units and subordinated units on an aggregate basis (or 73.7% 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.”

 

65


Table of Contents
    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 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 $0.30 per unit for each whole quarter, or $1.20 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

 

66


Table of Contents

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 April 1, 2017, 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 June 30, 2017, based on the actual length of the period.

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) (i)           (in millions) (i)  

Publicly held common units

    12,500,000     $ 3.8     $ 15.0       14,375,000     $ 4.3     $ 17.3  

Common units held by Sponsors

    14,779,654       4.4       17.7       12,904,654       3.9       15.5  

Subordinated units held by Sponsors

    27,279,654       8.2       32.7       27,279,654       8.2       32.7  

General partner interest

    1,113,455       0.3       1.3       1,113,455       0.3       1.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    55,672,763     $ 16.7     $ 66.8       55,672,763     $ 16.7     $ 66.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(i) Components may not add to totals due to rounding.

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 $0.3450 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.”

 

67


Table of Contents

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.

Additionally, our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified or action is taken by our general partner as described under “Our Partnership Agreement—Election to be treated as a Corporation” 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 $1.20 per unit for the twelve months ending March 31, 2018. 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 year ended December 31, 2016, derived from our unaudited pro forma 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 March 31, 2018,” 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 March 31, 2018.

 

68


Table of Contents

Unaudited Pro Forma Distributable Cash Flow for the Year Ended December 31, 2016

If we had completed the transactions contemplated in this prospectus on January 1, 2016, pro forma distributable cash flow for the year ended December 31, 2016 would have been approximately $56.3 million. We must generate approximately $66.8 million of distributable cash flow to pay the aggregate minimum quarterly distribution on all of our outstanding common and subordinated units and the corresponding distributions on our general partner’s 2% interest following this offering. The amount of distributable cash flow we generated during the year ended December 31, 2016 on a pro forma basis would have been sufficient to pay 100.0% of the aggregate annualized minimum quarterly distribution of $1.20 per unit on our common units and the corresponding distributions on our general partner’s 2% interest and 68.5% of the aggregate annualized minimum quarterly distribution on our subordinated units and the corresponding distributions on our general partner’s 2% interest for such period. On a pro forma basis, we would have had a shortfall for each of the four quarters during the year ended December 31, 2016.

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 the transactions contemplated in this prospectus actually been completed as of the date indicated. In addition, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma 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 this offering and the other transactions contemplated in this prospectus been consummated on January 1, 2016.

 

69


Table of Contents

The following table illustrates, on a pro forma basis, for the year ended December 31, 2016, 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, 2016.

Hess Midstream Partners LP

Unaudited Pro Forma Distributable Cash Flow

 

     Year Ended
December 31,
2016
 
(in millions)(i)       

Pro forma net income(1)

   $ 206.7  

Less:

  

Net income attributable to Hess Infrastructure Partners(2)(3)

     165.9  
  

 

 

 

Pro forma net income attributable to Hess Midstream Partners LP

     40.8  

Plus:

  

Net income attributable to Hess Infrastructure Partners(2)(3)

     165.9  

Depreciation expense

     99.7  

Interest expense(4)

     1.8  
  

 

 

 

Pro forma Adjusted EBITDA(5)

     308.2  

Less:

  

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

     245.7  
  

 

 

 

Pro forma Adjusted EBITDA attributable to Hess Midstream Partners LP

     62.5  

Less:

  

Cash interest paid(4)

     0.8  

Maintenance capital expenditures(6)(7)

     1.6  

Expansion capital expenditures(6)(7)

     51.3  

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

     3.4  

Adjustments related to minimum volume commitments(9)

     0.4  

Plus:

  

Funding for expansion capital expenditures(10)

     51.3  
  

 

 

 

Pro forma Distributable Cash Flow attributable to Hess Midstream Partners LP

   $ 56.3  
  

 

 

 

Distributions to public unitholders

     15.0  

Distributions to Sponsors—common units

     17.7  

Distributions to Sponsors—subordinated units

     32.7  

Distributions to our general partner

     1.3  
  

 

 

 

Total distributions

   $ 66.8  
  

 

 

 

Excess (shortfall) of pro forma distributable cash flow over (below) aggregate minimum distributions

   $ (10.5

 

  (i) Components may not add to totals due to rounding.
(1) See our unaudited pro forma combined financial statements included elsewhere in this prospectus for an explanation of the adjustments used to derive pro forma net income. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of our Financial Results.”
(2) Reflects net income attributable to Hess Infrastructure Partners’ 80% retained economic interest in Gathering Opco, HTGP Opco and Logistics Opco. See our unaudited pro forma combined financial statements and Adjusted EBITDA reconciliation below for further discussion.
(3)

The following table reconciles net income attributable to Hess Infrastructure Partners to Adjusted EBITDA attributable to Hess Infrastructure Partners. These adjustments exclude interest expense and certain incremental costs of being a publicly traded partnership discussed in footnotes (4) and (8) below. These costs are assumed to be our responsibility and do not

 

70


Table of Contents
  reduce the earnings to Hess Infrastructure Partners associated with Hess Infrastructure Partners’ retained ownership interests in Gathering Opco, HTGP Opco and Logistics Opco:

 

    Year Ended December 31, 2016  
(in millions)   Gathering
Opco
    HTGP
Opco
    Logistics
Opco
    Combined  

Net income (loss) attributable to Hess Infrastructure Partners

  $ 78.4     $ 74.0     $ 13.5     $ 165.9  

Add:

       

Depreciation expense

    32.0       35.1       12.7       79.8  

Interest expense

                       
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA attributable to Hess Infrastructure Partners

  $ 110.4     $ 109.1     $ 26.2     $ 245.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(4) Interest expense and cash interest paid both include facility fees that would have been paid by our Predecessor had our revolving credit facility been in place during the year 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.
(5) 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 Combined Financial and Operating Data—Non-GAAP Financial Measure.”
(6) Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures in 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 year ended December 31, 2016. For a discussion of maintenance and expansion capital expenditures, please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures.”
(7) Represents capital expenditures attributable to our 20% economic interest in Gathering Opco, HTGP Opco and Logistics Opco and 100% interest in Mentor Holdings.
(8) Represents approximately $3.4 million in estimated incremental general and administrative expense we expect to incur as a publicly traded partnership, including expenses associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, NYSE listing fees, independent auditor fees, registrar and transfer agent fees, director and officer liability insurance premiums and independent director compensation.
(9) This adjustment reflects the expiration of aggregate shortfall credits related to 2015 minimum volume commitments of approximately $0.4 million attributable to our 20% economic interests in Gathering Opco and Logistics Opco, which we recognized as revenue in 2016 under our commercial agreements. As of December 31, 2016, we amended certain of our commercial agreements to remove the shortfall fee credit provision. Under the amended and restated commercial agreements, volume deficiencies are measured quarterly and recognized as revenue in the same period and any associated shortfall payments are not subject to future reduction or offset. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations.”
(10) Historically, expansion capital expenditures were funded by Hess Infrastructure Partners.

 

71


Table of Contents

Estimated Distributable Cash Flow for the Twelve Months Ending March 31, 2018

We forecast our estimated distributable cash flow for the twelve months ending March 31, 2018, will be approximately $76.8 million. This amount would exceed by $10.0 million the amount needed to pay the aggregate annualized minimum quarterly distribution of approximately $65.5 million on all of our outstanding common and subordinated units and the corresponding distributions of approximately $1.3 million on our general partner’s 2% interest for the twelve months ending March 31, 2018. The number of outstanding units on which we have based our belief does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the closing of this offering.

We have not historically made public projections as to future operations, earnings or other results. However, our management has prepared the forecast of estimated distributable cash flow for the twelve months ending March 31, 2018, 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 March 31, 2018. 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. It 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 view that we can generate sufficient distributable cash flow to pay the minimum quarterly distribution to all our unitholders and the corresponding distributions on our general partner’s 2% interest 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.

 

72


Table of Contents

Hess Midstream Partners LP

Estimated Distributable Cash Flow(1)

 

    Twelve
Months
Ending
March 31,
2018
    Three Months Ending  
     
(in millions)(i)     June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
 

Revenues(2)

  $ 572.2     $ 135.8     $ 142.0     $ 142.9     $ 151.5  

Costs and expenses

         

Operating and maintenance expenses (exclusive of depreciation shown separately below)

    161.1       41.4       41.4       37.6       40.7  

Depreciation expense

    116.5       28.5       28.8       29.2       30.0  

General and administrative expenses(3)

    11.8       2.8       2.7       2.7       3.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    289.4       72.7       72.9       69.5       74.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    282.8       63.1       69.1       73.4       77.2  

Interest expense, net of capitalized interest(4)

    2.2       0.4       0.5       0.6       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    280.6       62.7       68.6       72.8       76.5  

Less:

         

Net income attributable to Hess Infrastructure Partners(5)(6)

    228.0       51.0       55.7       59.1       62.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Hess Midstream Partners LP

    52.6       11.7       12.9       13.7       14.3  

Plus:

         

Net income attributable to Hess Infrastructure Partners(5)(6)

    228.0       51.0       55.7       59.1       62.2  

Depreciation expense

    116.5       28.5       28.8       29.2       30.0  

Interest expense, net of capitalized interest(4)

    2.2       0.4       0.5       0.6       0.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted EBITDA(7)

    399.3       91.6       97.9       102.6       107.2  

Less:

         

Estimated Adjusted EBITDA attributable to Hess Infrastructure Partners(5)(6)

    321.2       73.8       78.8       82.4       86.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Adjusted EBITDA attributable to Hess Midstream Partners LP

    78.1       17.8       19.1       20.2       21.0  

Less:

         

Cash interest paid(4)

    1.3       0.2       0.3       0.4       0.4  

Maintenance capital expenditures(8)

    3.9       1.5       1.6       0.3       0.5  

Expansion capital expenditures(8)

    24.6       9.7       8.4       3.6       2.9  

Plus:

         

Maintenance capital expenditures funded by Hess Infrastructure Partners(9)

    3.9       1.5       1.6       0.3       0.5  

Funding for expansion capital expenditures(10)

    24.6       9.7       8.4       3.6       2.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated distributable cash flow attributable to Hess Midstream Partners LP

  $ 76.8     $ 17.6     $ 18.8     $ 19.8     $ 20.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to public common unitholders(11)

    15.0       3.8       3.8       3.8       3.8  

Distributions to Sponsors—common units

    17.7       4.4       4.4       4.4       4.4  

Distributions to Sponsors—subordinated units

    32.7       8.2       8.2       8.2       8.2  

Distributions to our general partner

    1.3       0.3       0.3       0.3       0.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total distributions

  $ 66.8     $ 16.7     $ 16.7     $ 16.7     $ 16.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of Estimated Distributable Cash Flow over aggregate minimum quarterly distributions

  $ 10.0     $ 0.9     $ 2.1     $ 3.1     $ 3.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (i) Components may not add to totals due to rounding.
(1) Unless otherwise noted, amounts represent 100% of the results of operations of our gathering, processing and storage and terminaling and export businesses. See our Predecessor’s combined financial statements for further discussion related to our controlling interests in Gathering Opco, HTGP Opco and Logistics Opco.
(2)

Includes revenue from shortfall payments related to minimum volume commitments over the twelve months ending March 31, 2018. Under our commercial agreements Hess is obligated to deliver minimum volumes of crude oil, natural gas and NGLs, as applicable, to us on a quarterly basis. Hess’s minimum volume commitments under our gas gathering agreement, crude oil gathering agreement, gas processing and fractionation agreement and terminal and export services agreement are equal to 80% of Hess’s nominations in each development plan and apply on a three-year rolling basis. Approximately $13.7 million of our estimated distributable cash flow is related to aggregate shortfall fees attributable to our 20% economic interest in Gathering Opco, HTGP Opco and Logistics Opco.

 

73


Table of Contents
(3) Includes approximately $3.4 million in estimated incremental general and administrative expense we expect to incur as a publicly traded partnership, including expenses associated with SEC reporting requirements, tax return and Schedule K-1 preparation and distribution, NYSE listing fees, independent auditor fees, registrar and transfer agent fees, director and officer liability insurance premiums and independent director compensation.
(4) Interest expense and cash interest paid both include facility fees under our revolving credit facility, as well as interest expense on borrowings under our revolving credit facility to fund a portion of our expansion capital expenditures. Interest expense also includes the amortization of origination fees under our revolving credit facility. For the twelve months ending March 31, 2018, we estimate that we will incur approximately $22.5 million of borrowings under our revolving credit facility to fund expansion capital expenditures and working capital.
(5) Reflects net income attributable to Hess Infrastructure Partners’ 80% economic interest in Gathering Opco, HTGP Opco and Logistics Opco. See our unaudited pro forma combined financial statements included elsewhere in this prospectus and the Adjusted EBITDA reconciliation below for further discussion.
(6) The following table reconciles net income attributable to Hess Infrastructure Partners to Adjusted EBITDA attributable to Hess Infrastructure Partners. These adjustments exclude certain incremental costs of being a publicly traded partnership and the interest expense discussed in Notes (3) and (4) above, respectively. These costs are assumed to be our responsibility and do not reduce the earnings to Hess Infrastructure Partners associated with Hess Infrastructure Partners’ retained ownership interests in Gathering Opco, HTGP Opco and Logistics Opco.

 

     Twelve Months Ending March 31, 2018  
(in millions)    Gathering
Opco
     HTGP
Opco
     Logistics
Opco
     Combined  

Net income (loss) attributable to Hess Infrastructure Partners

   $ 113.5      $ 104.2      $ 10.3      $ 228.0  

Add:

           

Depreciation expense

     46.7        34.8        11.7        93.2  

Interest expense

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA attributable to Hess Infrastructure Partners

   $ 160.2      $ 139.0      $ 22.0      $ 321.2  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(7) For a definition of the non-GAAP financial measure of Adjusted EBITDA, please read “Selected Historical and Pro Forma Combined Financial and Operating Data—Non-GAAP Financial Measure.”
(8) Represents capital expenditures attributable to our 20% economic interest in Gathering Opco, HTGP Opco, Logistics Opco and 100% interest in Mentor Holdings.
(9) Under our contribution agreement, Hess Infrastructure Partners will agree to bear the full cost we expect to incur for maintenance capital projects during the twelve months ending March 31, 2018. For a discussion of our forecasted maintenance capital projects and Hess Infrastructure Partners’ reimbursement obligations, please read “—Significant Forecast Assumptions—Capital Expenditures” and “Certain Relationships and Related Party Transactions—Agreements Governing the Transactions—Contribution Agreement.”
(10) We expect to fund our expansion capital expenditures through a combination of the proceeds retained from this offering and borrowings under our revolving credit facility.
(11) The number of outstanding units on which we base our forecasted distributions to public common unitholders does not include any common units that may be issued under the long-term incentive plan that our general partner will adopt prior to the closing of this offering.

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 March 31, 2018. 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, our revenues would decline and our financial condition, results of operations, cash flows, and ability to make distributions to our unitholders could 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 and objective basis for these

 

74


Table of Contents

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 have entered into or will enter into with Hess as of the closing of this offering. Accordingly, our forecasted results are not directly comparable with our historical results. 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.”

Revenues

We estimate that we will generate revenues of $572.2 million for the twelve months ending March 31, 2018, compared with revenues of $509.8 million for the year ended December 31, 2016, each on a pro forma basis. This amount represents the forecasted revenues attributable to 100% of the operations of Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings following the closing of this offering. We own a 20% economic interest in Gathering Opco, HTGP Opco, Logistics Opco and a 100% ownership interest in Mentor Holdings. Based on our assumptions for the twelve months ending March 31, 2018, we expect substantially all of our revenues will be generated by fees paid by Hess under our commercial agreements. We expect approximately 96% of our forecasted revenues to be supported by Hess’s minimum volume commitments under our commercial agreements, excluding pass-through electricity fees and third-party rail transportation costs for which we recognize revenues by an amount equal to such fees and costs.

Our forecasted throughput volumes are based on Hess’s actual nominations under our commercial agreements as part of the 2017 development plan, as adjusted by our management for operational and other risks. The forecasted throughput volumes include volumes associated with Hess’s net entitlement in its operated properties, as well as volumes that we expect Hess will purchase from its working interest and royalty owners and other third parties. Our actual throughput volumes may deviate from the forecast based on, among other things, the effects of changing commodity prices and production margins, Hess’s and third parties’ ability to successfully increase their respective Bakken production and the inherent uncertainties of future production rates, and there is no assurance that Hess’s production outlook will not change during the forecast period or in subsequent periods. 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, our revenues would decline and our financial condition, results of operations, cash flows and ability to make distributions to our unitholders could be materially and adversely affected” and “Business—Our Commercial Agreements with Hess—Development and System Plans.”

 

75


Table of Contents

The following table compares forecasted throughput volumes for the twelve months ending March 31, 2018, to actual throughput volumes for the year ended December 31, 2016 and Hess’s minimum volume commitments under our commercial agreements for the twelve months ending March 31, 2018:

 

     Actual Throughput
Volumes for the Year
Ended December 31,
2016
     Forecasted Throughput
Volumes for the Twelve
Months Ending
March 31, 2018
     Hess’s Minimum Volume
Commitments for the
Twelve Months Ending
March 31, 2018
 

Gathering

        

Gas gathering (MMcf/d)

     202        210        231  

Crude oil gathering (MBbl/d)

     57        60        96  

Processing and Storage

        

TGP processing (MMcf/d)

     188        200        213  

Terminaling and Export

        

Crude terminaling (MBbl/d)

     59        60        70  

NGL loading (MBbl/d)

     13        14        19  

Our forecast assumes additional crude oil volumes through our Hawkeye Oil Facility to the Ramberg Terminal Facility and additional natural gas and NGL volumes through our Hawkeye Gas Facility to the Tioga Gas Plant through interconnecting pipelines beginning in the first quarter of 2018 when we expect to have satisfied all applicable permit criteria for associated expansion projects.

In the event we satisfy the permit criteria earlier than forecasted, we expect to deliver additional volumes to the Ramberg Terminal Facility and Tioga Gas Plant. In addition, upon commencement of operations at the Hawkeye Gas Facility, we may be able to deliver additional gas volumes to the Tioga Gas Plant prior to the startup of an interconnecting NGL pipeline. We may also have additional opportunities to interconnect and capture third-party throughput volumes as a result of increased drilling activity by producers in the Bakken. Each of these projects includes various contingencies and incremental volumes from these projects may not be sufficient for aggregate volumes to exceed Hess’s minimum volume commitments for the twelve months ending March 31, 2018. As a result, we have not forecasted any additional revenues attributable to any such volumes during such period.

Gathering.    We estimate that our total gathering revenues for the twelve months ending March 31, 2018 will be $269.9 million, compared with $212.8 million for the year ended December 31, 2016, each on a pro forma basis. The estimated increase in revenues is primarily attributable to increased minimum volume commitments and increased rates under our commercial agreements with Hess as well as an increase in volumes gathered through the Hawkeye Gas Facility and the Hawkeye Oil Facility beginning in the first quarter of 2018.

Processing and Storage.    We estimate that our total processing and storage revenues for the twelve months ending March 31, 2018 will be $230.4 million, compared with $196.7 million for the year ended December 31, 2016, each on a pro forma basis. The estimated increase in revenues is primarily attributable to increased natural gas gathering volumes, minimum volume commitments and increased rates under our commercial agreements with Hess.

Terminaling and Export.    We estimate that our terminaling and export revenues for the twelve months ending March 31, 2018 will be $71.9 million, compared with $100.3 million for the year ended December 31, 2016, each on a pro forma basis. The estimated decrease in revenues is attributable to an amendment to our terminal and export services agreement with Hess, which resulted in a single fee for crude oil terminaling and export services beginning on January 1, 2017, and is also attributable to a decrease in fees paid for third-party rail transportation services, which we currently pass directly through to our customers and for which we recognize revenues by an amount equal to such fees. The amendment to our terminal and export services agreement reduced our exposure to market variability

 

76


Table of Contents

for crude oil rail transportation services and was intended to provide additional long-term stability and growth for our cash flows. Prior to this amendment, our terminal and export services agreement included separate fees for crude oil terminaling, crude oil rail loading and crude oil rail transportation services.

Operating and Maintenance Expense

Our operating and maintenance expenses include expenses charged to us under our omnibus agreement and employee secondment agreement with Hess, as well as repairs and maintenance expenses, utility, power and other operating costs.

Gathering.    We estimate that we will incur operating and maintenance expense of $64.1 million for the twelve months ending March 31, 2018, compared with $67.6 million for the year ended December 31, 2016, each on a pro forma basis. The estimated decrease in operating and maintenance expenses is primarily attributable to lower unplanned maintenance costs, as well as lower costs from Hess under our omnibus agreement and employee secondment agreement. These decreases are partially offset by higher forecasted chemical purchases and power expenses.

Processing and Storage.    We estimate that we will incur operating and maintenance expense of $53.6 million for the twelve months ending March 31, 2018, compared with $57.3 million for the year ended December 31, 2016, each on a pro forma basis. The estimated decrease in operating and maintenance expense is primarily attributable to unplanned maintenance costs that occurred in 2016. This decrease is partially offset by higher forecasted power expenses.

Terminaling and Export.    We estimate that we will incur operating and maintenance expense of $43.4 million for the twelve months ending March 31, 2018, compared with $66.3 million for the year ended December 31, 2016, each on a pro forma basis. The estimated decrease in operating and maintenance expense for the twelve months ending March 31, 2018 compared to the year ended December 31, 2016 is attributable to lower rail terminal operating costs and lower rail car repairs and maintenance expense. In addition, the decrease also relates to the termination of certain rail car leases at the end of 2016, as well as lower costs from Hess under our omnibus agreement and employee secondment agreement. Finally, the decrease is also attributable to a decrease in pass-through fees paid for third-party rail transportation.

Depreciation Expense

Gathering.    We estimate that our depreciation expense will be $58.4 million for the twelve months ending March 31, 2018, compared with $39.9 million for the year ended December 31, 2016 on a pro forma basis. The estimated increase in depreciation expense is primarily attributable to the Hawkeye Gas Facility and other gathering assets placed into service during the twelve months ending March 31, 2018.

Processing and Storage.    We estimate that our depreciation expense will be $43.5 million for the twelve months ending March 31, 2018, compared with $44.0 million for the year ended December 31, 2016, each on a pro forma basis.

 

77


Table of Contents

Terminaling and Export.    We estimate that our depreciation expense will be $14.6 million for the twelve months ending March 31, 2018, compared with $15.8 million for the year ended December 31, 2016, each on a pro forma basis. The estimated decrease in depreciation expense is primarily attributable to cancellation of certain early stage capital projects.

General and Administrative Expenses

We estimate that our total general and administrative expenses will be $11.8 million for the twelve months ending March 31, 2018, compared with $10.4 million for the year ended December 31, 2016, each on a pro forma basis. The estimated increase in general and administrative expenses is expected to be attributable to approximately $3.4 million of estimated incremental annual expenses as a result of being a separate publicly traded partnership. These expenses include costs associated with SEC reporting requirements, tax returns, Schedule K-1 preparation and distribution, NYSE listing fees, independent auditor fees, registrar and transfer agent fees, director and officer liability insurance premiums and independent director compensation. These incremental annual expenses are partially offset by a decrease in the general and administrative expense allocation related to lower costs from Hess under our omnibus agreement and employee secondment agreement in 2017.

Financing

We estimate interest expense will be $2.2 million for the twelve months ending March 31, 2018 based on the following assumptions:

 

    we will incur interest expense attributable to borrowings under our revolving credit facility to fund a portion of our expansion capital expenditures during the twelve-month forecast period;

 

    our interest expense will include amortization of origination fees related to our revolving credit facility;

 

    our interest expense will include quarterly facility fees, based on the terms of our revolving credit facility, based on the capacity of our revolving credit facility; and

 

    we will remain in compliance with the financial and other covenants in our revolving credit facility.

Capital Expenditures

We estimate that our total capital expenditures, based on our 20% economic interest in Gathering Opco, HTGP Opco, Logistics Opco and our 100% interest in Mentor Holdings, will be $28.5 million for the twelve months ending March 31, 2018, compared with $52.9 million for the year ended December 31, 2016, each on a pro forma basis. This estimate is based on the following assumptions:

Maintenance capital expenditures.    We estimate that maintenance capital expenditures will be $3.9 million for the twelve months ending March 31, 2018 compared to $1.6 million for the year ended December 31, 2016 primarily attributable to the rescheduling of certain maintenance projects from the year ended December 31, 2016 to the twelve months ending March 31, 2018.

Under our contribution agreement, Hess Infrastructure Partners will agree to bear the full cost of capital expenditures related to certain identified uncompleted maintenance capital projects associated with our initial assets to the extent such projects are commenced prior to the second anniversary of the closing of this offering. Hess Infrastructure Partners will also agree to pay (i) all costs related to certain other identified maintenance capital projects related to our joint interest assets that are incurred prior to the second anniversary of the closing of this offering and do not exceed an aggregate maximum of $20 million and (ii) the costs of any unanticipated maintenance capital projects undertaken by

 

78


Table of Contents

Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings during the twelve months ending March 31, 2018, up to a maximum of $10 million on a 100% basis. As a result, we have forecasted that Hess Infrastructure Partners will bear the cost of all of the maintenance capital expenditures we expect to incur during the twelve months ending March 31, 2018.

Expansion capital expenditures.    We estimate that expansion capital expenditures will be $24.6 million for the twelve months ending March 31, 2018. Expansion capital expenditures were $51.3 million for the year ended December 31, 2016 and were primarily attributable to the construction of the Hawkeye Gas Facility and the Hawkeye Oil Facility, enhanced merchant capabilities at the Ramberg Terminal Facility and initial investments for expansion of NGL ladder tracks at the Tioga Rail Terminal.

We expect to make expansion capital expenditures during the twelve months ending March 31, 2018 to capture anticipated additional volumes attributable to Hess’s Bakken operations.

Specifically, we expect that our expansion capital expenditures for the twelve months ending March 31, 2018 will include the following:

 

    gathering system build out and third-party tie-ins.

 

    installation of an additional compressor at the Tioga Gas Plant to provide 19 MMcf/d of inlet gas compression capacity for increased plant reliability and throughput;

 

    initial investment for installation of additional compression capacity on our existing assets to provide additional residue compression capabilities and improve performance and increase gas gathering capacity and reliability;

 

    completion of expansion of rail car ladder tracks to accommodate increased NGL loading at the Tioga Rail Terminal to support an expected increase in the processing capacity of the Tioga Gas Plant;

 

    installation of a pipeline connection between the Johnson’s Corner Header System and our crude oil gathering system to facilitate up to 50 MBbl/d of flow between the systems; and

 

    reconfiguration or addition of transfer pumps to facilitate bi-directional flow of oil between the Ramberg Terminal Facility and the Tioga Rail Terminal to increase optionality for crude oil storage and exports.

During the twelve months ending March 31, 2018, we expect that we will fund expansion capital expenditures through a combination of the proceeds retained from this offering and borrowings under our revolving credit facility.

Regulatory, Industry, Economic and Other Factors

Our forecast of distributable cash flow for the twelve months ending March 31, 2018, is based on the following significant assumptions related to regulatory, industry, economic and other factors:

 

    there will not be any new federal, state or local regulation, or any interpretation of existing regulation, in the portions of the energy industries in which we, Hess or Hess Infrastructure Partners operate that will be materially adverse to our business;

 

    there will not be any material accidents, weather-related incidents, unscheduled downtime or similar unanticipated events with respect to our assets, Hess’s assets or Hess Infrastructure Partners’ assets;

 

    there will not be a shortage of skilled labor;

 

79


Table of Contents
    there will not be any material adverse changes in the midstream energy sector or market or overall economic conditions; and

 

    Hess will not default under any of our commercial agreements or reduce, suspend or terminate its obligations, nor will any events occur that would be deemed a force majeure event, under such agreements.

 

80


Table of Contents

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 June 30, 2017, 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 June 30, 2017, 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 (i) 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 or (ii) available to be borrowed as a working capital borrowing as of the date of determination of available cash with respect to 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 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 $0.30 per unit, or $1.20 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash

 

81


Table of Contents

reserves and the payment of costs and expenses, including reimbursements of expenses to our 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 $0.3450 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:

 

    $65.0 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) and the termination of hedge contracts, 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

 

82


Table of Contents
    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 $65.0 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 12-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) issuances of equity securities, (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, and (4) capital contributions received by us and our subsidiaries.

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;

 

83


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

 

    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 $65.0 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, operating income or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish or replace existing assets, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.

Expansion capital expenditures are cash expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity, operating income or revenue over the long term. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional capacity, to the extent such capital expenditures are expected to expand our long-term operating capacity, operating income or revenue. Expansion

 

84


Table of Contents

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 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 between maintenance capital expenditures and expansion capital expenditures as determined 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 $0.30 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 with the quarter ending June 30, 2020, 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 $1.20 (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 $1.20 (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 June 30, 2018, 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

 

85


Table of Contents
    equaled or exceeded $1.80 (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;

 

    the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (1) $1.80 (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;

 

86


Table of Contents
    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.

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

 

87


Table of Contents
    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 $0.3450 per unit for that quarter (the “first target distribution”);

 

    second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $0.3750 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 $0.4500 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

               $0.30         98     2

First Target Distribution

   above $0.30      up to $0.3450        98     2

Second Target Distribution

   above $0.3450      up to $0.3750        85     15

Third Target Distribution

   above $0.3750      up to $0.4500        75     25

Thereafter

   above $0.4500         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

 

88


Table of Contents

be exercised, without approval of our unitholders or our 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 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.

 

89


Table of Contents

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 $0.60.

 

    Quarterly
distribution per unit
prior to reset
  Marginal percentage
interest in distributions
    Quarterly
distribution
per unit
following

hypothetical reset
    Common
unitholders
    General
partner
interest
    Incentive
distribution
rights
   

Minimum Quarterly Distribution

    $0.30     98     2           $0.60

First Target Distribution

  above $ 0.30         up to   $0.3450     98     2           above $0.60         up to   $0.6900(1)

Second Target Distribution

  above $ 0.3450     up to   $0.3750     85     2     13     above $0.6900     up to   $0.7500(2)

Third Target Distribution

  above $ 0.3750     up to   $0.4500     75     2     23     above $0.7500     up to   $0.9000(3)

Thereafter

    above $0.4500       50     2     48     above $0.9000(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 54,559,308 common units outstanding, our general partner’s 2% interest has been maintained, and the average distribution to each common unit would be $0.60 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

      $0.30     $ 16,367,792     $     $ 334,037     $ 0     $ 334,037     $ 16,701,829  

First Target Distribution

  above $ 0.30           up to   $0.3450       2,455,169             50,105       0       50,105       2,505,274  

Second Target Distribution

  above $ 0.3450       up to   $0.3750       1,636,779             38,512       250,331       288,843       1,925,623  

Third Target Distribution

  above $ 0.3750       up to   $0.4500       4,091,948             109,119       1,254,864       1,363,983       5,455,931  

Thereafter

      above $0.4500       8,183,896         327,356       7,856,540       8,183,896       16,367,792  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $ 32,735,585     $     $ 859,129     $ 9,361,735     $ 10,220,864     $ 42,956,449  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 $0.60. The number of

 

90


Table of Contents

common units issued as a result of the reset was calculated by dividing (x) $9,361,735, 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 $0.60.

 

    Quarterly
distribution per
unit prior to reset
    Cash
distributions
to common

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

Minimum Quarterly Distribution

    $ 0.60           $ 32,735,585     $ 9,361,735     $ 859,129     $ 0     $ 10,220,864     $ 42,956,449  

First Target Distribution

  above $ 0.60         up to   $ 0.6900                                        

Second Target Distribution

  above $ 0.6900     up to   $ 0.7500                                      

Third Target Distribution

  above $ 0.7500     up to   $ 0.9000                                      

Thereafter

    above $ 0.9000                                      
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $ 32,735,585     $ 9,361,735     $ 859,129     $ 0     $ 10,220,864     $ 42,956,449  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

91


Table of Contents

time a 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 or if action is taken by our general partner as described under “Our Partnership Agreement—Election to be Treated as a Corporation”, 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.

 

92


Table of Contents

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

 

93


Table of Contents
  (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

 

94


Table of Contents

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 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.

 

95


Table of Contents

SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL AND OPERATING DATA

The following table shows selected historical combined financial and operating data of our Predecessor and selected unaudited pro forma 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 Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings on a combined basis. In connection with the closing of this offering, Hess Infrastructure Partners will contribute to us a 20% economic interest in Gathering Opco, a 20% economic interest in HTGP Opco, a 20% economic interest in Logistics Opco and a 100% ownership interest in Mentor Holdings. Following the closing of this offering, we will consolidate Gathering Opco, HTGP Opco, Logistics Opco and Mentor Holdings in our financial statements and reflect a noncontrolling interest adjustment for Hess Infrastructure Partners’ retained 80% economic interest in Gathering Opco, 80% economic interest in HTGP Opco and 80% economic interest in Logistics Opco.

The selected historical combined financial data of our Predecessor as of December 31, 2016 and for the years ended December 31, 2016 and 2015 are derived from the audited 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 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 combined financial and operating data presented in the following table as of and for year ended December 31, 2016 are derived from the unaudited pro forma combined financial statements included elsewhere in this prospectus. The unaudited pro forma combined balance sheet assumes the offering and the related transactions occurred as of December 31, 2016, and the unaudited pro forma combined statement of operations for the year ended December 31, 2016 assumes the offering and the related transactions occurred as of January 1, 2016.

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

 

    Hess Infrastructure Partners’ contribution of our Predecessor’s assets and operations to us, including adjusting for Hess Infrastructure Partners’ retained 80% noncontrolling interests in Gathering Opco, HTGP Opco and Logistics Opco;

 

    our issuance of 14,779,654 common units and 27,279,654 subordinated units to our Sponsors, representing an aggregate 75.5% limited partner interest in us;

 

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

 

    our issuance of 12,500,000 common units, representing a 22.5% limited partner interest in us, to the public in connection with this offering, and our receipt of $231.9 million in net proceeds from this offering;

 

    our entry into a new four-year, $300.0 million senior secured revolving credit facility, which we have assumed was not drawn during the pro forma period presented, and the commitment and origination fees that would have been paid by us had our revolving credit facility been in place during the pro forma period presented;

 

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

 

    our entry into the omnibus agreement and the employee secondment agreement as of the closing of this offering.

 

96


Table of Contents

The unaudited pro forma combined financial statements do not give effect to an estimated $3.4 million of incremental general and administrative expenses that we expect to incur annually as a result of being a separate publicly traded partnership.

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.

 

     Hess Midstream Partners LP
Predecessor Historical
    Hess Midstream
Partners LP
Pro Forma
 
     For the Year Ended
December 31,
    For the Year
Ended
December 31,
 
(in millions, except per unit data and operating information)            2016                     2015             2016  

Combined statements of operations:

      

Revenues

      

Affiliate

   $ 509.8     $ 565.1     $ 509.8  
  

 

 

   

 

 

   

 

 

 

Total revenues

     509.8       565.1       509.8  

Costs and expenses

      

Operating and maintenance expenses (exclusive of depreciation shown separately below)

     193.4       274.8       191.2  

Depreciation expense

     99.7       86.1       99.7  

General and administrative expenses

     10.4       9.3       10.4  
  

 

 

   

 

 

   

 

 

 

Total costs and expenses

     303.5       370.2       301.3  
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     206.3       194.9       208.5  
  

 

 

   

 

 

   

 

 

 

Interest expense

           1.5       1.8  
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     206.3       193.4       206.7  

Less: Net income (loss) attributable to Hess Infrastructure Partners

                 165.9  
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Hess Midstream Partners LP

   $ 206.3     $ 193.4     $ 40.8  
  

 

 

   

 

 

   

 

 

 

General partner interest in net income (loss)

         0.8  

Limited partner interest in net income (loss)

         40.0  

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

      

Common units

         0.73  

Subordinated units

         0.73  

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

      

Common units

         27,279,654  

Subordinated units

         27,279,654  

Combined balance sheet data (at period end):

      

Cash

   $     $     $ 10.3  

Property, plant and equipment, net

   $ 2,518.6     $ 2,291.7     $ 2,518.6  

Total assets

   $ 2,574.4     $ 2,355.5     $ 2,580.1  

Total liabilities

   $ 336.3     $ 258.0     $ 110.1  

Combined statements of cash flows data:

      

Net cash provided by (used in):

      

Operating activities

   $ 387.7     $ 434.8    

Investing activities

   $ (263.6   $ (361.8  

Financing activities

   $ (124.1   $ (73.0  

Other financial data:

      

Adjusted EBITDA(1)

   $ 306.0       281.0     $ 308.2  

Adjusted EBITDA attributable to Hess Midstream Partners LP(1)

       $ 62.5  

Capital expenditures:

      

Maintenance(2)

   $ 8.0     $ 18.5    

Expansion(2)

   $ 256.9     $ 274.3    

Operating volumes:

      

Gas gathering (MMcf/d)

     202       214    

Crude oil gathering (MBbl/d)

     57       39    

TGP processing (MMcf/d)

     188       194    

Crude terminaling (MBbl/d)

     59       73    

NGL loading (MBbl/d)

     13       13    

 

(1) 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.”

 

97


Table of Contents
(2) Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures in the same way as will be required under our partnership agreement. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Capital Expenditures” and “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions—Capital Expenditures” for a discussion of how we will be required to distinguish between maintenance capital expenditures and expansion capital expenditures under our partnership agreement and our capital expenditures for the twelve months ending March 31, 2018, compared to the year ended December 31, 2016, each on a pro forma basis.

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 non-cash equity compensation, 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.

 

98


Table of Contents

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
 
     For the Year Ended
December 31,
    For the Year
Ended
December 31,
 
(in millions)        2016             2015         2016  

Reconciliation of Adjusted EBITDA to net income (loss):

      

Net income (loss)

   $ 206.3     $ 193.4     $ 206.7  

Add:

      

Depreciation expense

     99.7       86.1       99.7  

Interest expense

           1.5       1.8  

Adjusted EBITDA

   $ 306.0     $ 281.0     $ 308.2  

Less: Adjusted EBITDA attributable to Hess Infrastructure Partners

         245.7  

Adjusted EBITDA attributable to Hess Midstream Partners LP

       $ 62.5  

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

      

Net cash provided (used in) operating activities

   $ 387.7     $ 434.8    

Changes in assets and liabilities

     (81.7     (155.3  

Interest expense

           1.5    

Adjusted EBITDA

   $ 306.0     $ 281.0    

 

99


Table of Contents

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”). Our Predecessor includes 100% of the operations of the gathering systems, the Tioga Gas Plant, the Ramberg Terminal Facility, the Tioga Rail Terminal and associated crude oil rail cars and the Mentor Storage Terminal, reflecting the historical ownership of these assets by Hess. Among other things, those historical 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 (i) “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; (ii) “our general partner,” when used with respect to periods prior to the closing of this offering and the consummation of the related formation transactions, refer to Hess Midstream Partners GP LLC, and when used with respect to periods following the closing of this offering and the consummation of the related formation transactions, refer to Hess Midstream Partners GP LP; (iii) “Hess” refer collectively to Hess Corporation and its consolidated subsidiaries other than Hess Infrastructure Partners, its subsidiaries and its general partner, and us, our subsidiaries and our general partner; (iv) “GIP” refer to GIP II Blue Holding Partnership, L.P., which owns interests in us and in Hess Infrastructure Partners, which in turn indirectly owns our general partner, and the funds managed by Global Infrastructure Management, LLC, and such funds’ subsidiaries and affiliates, that hold interests in GIP II Blue Holding Partnership, L.P.; (v) “Hess Infrastructure Partners” refer to Hess Infrastructure Partners LP, a midstream joint venture between Hess and GIP that, directly or indirectly, holds all of the interests in our general partner, and its subsidiaries, other than us and our subsidiaries; and (vi) “parent” refer to Hess when used with respect to periods prior to July 1, 2015, and refer to Hess Infrastructure Partners when used with respect to periods commencing July 1, 2015.

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 initially formed by Hess in 2014 to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third-party customers. In mid-2015, Hess contributed certain of its existing midstream assets in the Bakken to Hess Infrastructure Partners, a midstream joint venture in which GIP purchased a 50% ownership interest in Hess Infrastructure Partners for approximately $2.675 billion, representing an aggregate value for Hess Infrastructure Partners of approximately $5.35 billion. Our initial 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. Hess Infrastructure Partners will contribute all of our initial assets to us at or prior to the closing of this offering.

Our assets and operations are organized into the following three reportable segments: (1) gathering, (2) processing and storage and (3) terminaling and export.

 

100


Table of Contents

Gathering.    Upon completion of this offering, we will own a 20% controlling economic interest in Hess North Dakota Pipeline Operations LP, or Gathering Opco, which owns the following assets:

 

    Natural Gas Gathering and Compression.    A natural gas gathering and compression system located primarily in McKenzie, Williams and Mountrail Counties, North Dakota connecting Hess and third-party owned or operated wells to the Tioga Gas Plant and third-party pipeline facilities. This gathering system consists of approximately 1,211 miles of high and low pressure natural gas and NGL gathering pipelines with a current capacity of up to 345 MMcf/d, including an aggregate compression capacity of 174 MMcf/d. The system also includes the Hawkeye Gas Facility, which contributes 50 MMcf/d of the system’s current compression capacity.

 

    Crude Oil Gathering: A crude oil gathering system located primarily in McKenzie, Williams and Mountrail Counties, North Dakota, connecting Hess and third-party owned or operated wells to the Ramberg Terminal Facility, the Tioga Rail Terminal and, when completed, the Johnson’s Corner Header System. The crude oil gathering system consists of approximately 365 miles of crude oil gathering pipelines with a current capacity of up to 161 MBbl/d. The system also includes the Hawkeye Oil Facility, which contributes 76 MBb/d of the system’s current capacity.

Processing and Storage.    Upon completion of this offering, we will own a 20% controlling economic interest in Hess TGP Operations LP, or HTGP Opco, and a 100% ownership interest in Hess Mentor Storage Holdings LLC, or Mentor Holdings, which own the following assets, respectively:

 

    Tioga Gas Plant.    A natural gas processing and fractionation plant located in Tioga, North Dakota, with a current processing capacity of 250 MMcf/d and fractionation capacity of 60 MBbl/d.

 

    Mentor Storage Terminal.    A propane storage cavern and rail and truck loading and unloading facility located in Mentor, Minnesota, with approximately 328 MBbls of working storage capacity.

Terminaling and Export.    Upon completion of this offering, we will own a 20% controlling economic interest in Hess North Dakota Export Logistics Operations LP, or Logistics Opco, which owns each of the following assets:

 

    Ramberg Terminal Facility.    A crude oil pipeline and truck receipt terminal located in Williams County, North Dakota that is capable of delivering up to 282 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.

 

    Tioga Rail Terminal.    A 140 MBbl/d crude oil and 30 MBbl/d NGL rail loading terminal in Tioga, North Dakota that is connected to the Tioga Gas Plant, the Ramberg Terminal Facility and our crude oil gathering system. During the summer of 2016, Hess piloted five third-party NGL unit trains consisting of 60 NGL rail cars that originated at the Tioga Rail Terminal.

 

    Crude Oil Rail Cars.    A total of 550 crude oil rail cars, constructed to the most recent DOT-117 safety standards, which we operate as unit trains consisting of approximately 100 to 110 crude oil rail cars.

 

    Johnson’s Corner Header System.    We are currently constructing the Johnson’s Corner Header System, a crude oil pipeline header system located in McKenzie County, North Dakota that will receive crude oil by pipeline from Hess and third parties and deliver crude oil to third-party interstate pipeline systems. At commissioning, the facility will have a delivery capacity of approximately 100 MBbl/d of crude oil, which will be expandable up to 185 MBbl/d. We expect the Johnson’s Corner Header System to enter into service in 2017.

We refer to the assets owned by Gathering Opco, HTGP Opco and Logistics Opco collectively as our “joint interest assets.”

 

101


Table of Contents

How We Generate Revenues

We generate substantially all of our revenues by charging fees for gathering, compressing and processing natural gas and fractionating NGLs; gathering, terminaling, loading and transporting crude oil and NGLs; and storing and terminaling propane. We have entered into long-term, fee-based commercial agreements with Hess, each of which has an initial 10-year term and is dated effective January 1, 2014. We have the unilateral right to renew each of these agreements for one additional 10-year term. These agreements include dedications covering substantially all of Hess’s existing and future owned or controlled production in the Bakken, minimum volume commitments, inflation escalators and fee recalculation mechanisms, all of which are intended to provide us with cash flow stability and growth, as well as downside risk protection. In particular, Hess’s minimum volume commitments under our commercial agreements provide minimum levels of cash flows and the fee recalculation mechanisms under the agreements allow fees to be adjusted annually to provide us with cash flow stability. For more information regarding our commercial agreements with Hess, please read “Business—Our Commercial Agreements with Hess.” Our revenues also include pass-through third-party rail transportation costs and electricity fees for which we recognize revenues in an amount equal to the costs.

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 gathering, 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, including events such as the recent decline in crude oil prices, which may further affect volumes delivered by Hess. Although Hess has committed to minimum volumes under our commercial agreements described above, our results of operations will be impacted by our ability to:

 

    utilize the remaining uncommitted capacity on, or add additional capacity to, our existing assets, and optimize our existing assets;

 

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

 

    increase throughput volumes at our Ramberg Terminal Facility, Tioga Rail Terminal and the Johnson’s Corner Header System by interconnecting with new or existing third-party gathering pipelines or by loading third-party rail cars; and

 

    increase throughput volumes at our Tioga Gas Plant by interconnecting with new or existing third-party gathering pipelines.

Operating and Maintenance Expenses.    Our management seeks to maximize the profitability of our operations by effectively managing operating and maintenance expenses. These expenses are comprised primarily of costs charged to us under our omnibus agreement and employee secondment agreement, third-party contractor costs, utility costs, insurance premiums, third-party service provider costs, related property taxes and other non-income taxes and maintenance expenses, such as expenditures to repair, refurbish and replace storage facilities and to maintain equipment reliability, integrity and safety. These expenses generally remain relatively stable across broad ranges of throughput volumes but can fluctuate from period to period depending on the mix of activities

 

102


Table of Contents

performed during that period and the timing of substantial expenses, such as gas plant turnarounds. 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 (benefit) 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 non-cash equity compensation, 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 Infrastructure Partners’ 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 LP 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 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 LP 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 (loss), income (loss) from operations, net cash provided by (used in) operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and distributable cash flow have important limitations as analytical tools because they exclude some but not all items that affect net income and net cash provided by operating activities. You should not consider Adjusted EBITDA or distributable cash flow in isolation or as a substitute for analysis of our results as reported under GAAP. Additionally, because Adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry, our definition of Adjusted EBITDA and distributable cash flow may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.

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 Combined Financial and Operating Data—Non-GAAP Financial Measure.”

 

103


Table of Contents

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 Infrastructure Partners will contribute to us a 20% controlling economic interest in Gathering Opco, HTGP Opco and Logistics Opco. Following the closing of this offering, we will consolidate the financial position and results of operations of our joint interest assets and Hess Infrastructure Partners’ retained interests in our joint interest assets will be reflected as noncontrolling interests in our consolidated 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 also expect to incur an additional $3.4 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 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 our parent’s integrated operations and, other than interest under our Predecessor’s affiliate loan facilities with Hess, our Predecessor was not charged for financing its operations. On June 30, 2015, our affiliate loan facilities were terminated and we were released from all obligations thereunder. Please read “—Capital Resources and Liquidity—Affiliate Loan Facilities with Hess.” Our Predecessor largely relied on internally-generated cash flows and loans 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 $0.30 per unit per quarter ($1.20 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 expansion 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 this offering, and the issuance of debt and equity securities. Following the completion of this offering, we intend to have no debt and an available borrowing capacity of $300.0 million.

Income Taxes.    For periods prior to July 1, 2015, our Predecessor determined income tax expense and related deferred tax balance sheet accounts on a separate return method. We did not record an income tax provision (benefit) for any period presented prior to July 1, 2015 due to our maintaining a full valuation allowance on net deferred tax assets primarily related to the income tax benefits from net operating losses. On June 18, 2015, our Predecessor was transferred to Hess Infrastructure Partners and on July 1, 2015, GIP purchased a 50% ownership interest in Hess Infrastructure Partners. Hess Infrastructure Partners is a partnership for federal and certain U.S. state income tax purposes and is not subject to income taxes. Therefore, our Predecessor is not subject to income taxes for periods commencing July 1, 2015 and is no longer subject to taxes related to periods it was part of the Hess’s U.S. consolidated federal or combined state income tax returns.

 

104


Table of Contents

Other Factors Expected To Significantly Affect Our Future Results

Supply and Demand for Crude Oil, Natural Gas and NGLs.    We currently generate substantially all of our revenues under fee-based agreements with Hess, including through contractual arrangements with affiliates of Hess and third parties. 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. As a result of the decline in crude oil prices beginning in late 2014, Hess reduced its rig count to two rigs in the Bakken during 2016. During this time, minimum volume commitments provided minimum levels of cash flows and the fee recalculation mechanisms under the agreements allowed fees to be adjusted to provide cash flow stability. As a result of rise in crude oil prices in late 2016, Hess announced in January 2017 plans to increase its Bakken rig count from two to six rigs by the end of 2017. Generally, drilling and production activity are expected to increase as crude oil and natural gas prices increase. The throughput volumes at our facilities depend primarily on the volumes of crude oil and natural gas produced by Hess in the Bakken, which, in turn, is ultimately dependent on Hess’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 global and regional 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 midstream assets from our Sponsors, as well as from third parties.

We believe that, as a result of our Sponsors’ retained ownership interests in us, our Sponsors are incentivized to support and promote our business plan and to encourage us to pursue projects that enhance the overall value of our business. In addition, we anticipate that we will have opportunities to acquire and develop additional midstream assets that our Sponsors currently own, including our right of first offer assets, or additional midstream assets they may acquire or develop in the future to support Hess’s Bakken production growth. Please read “Business—Right of First Offer Assets.” We will focus our strategy on crude oil and natural gas gathering; natural gas processing and fractionation; 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 believe we will be well positioned to acquire such assets from Hess Infrastructure Partners, 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 Infrastructure Partners, 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.    Third-party volumes may increase our revenues if delivered under our commercial agreements with Hess to the extent we invest additional capital to interconnect these volumes into our systems, or if we have entered into contractual arrangements with third-party customers directly. While substantially all of our third-party volumes are currently through contractual arrangements with affiliates of Hess, we expect to pursue both capital projects and direct strategic relationships with, third-party customers 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

 

105


Table of Contents

assets, including direct connections to multiple oil and gas interstate pipelines and to the Burlington Northern Santa Fe Corporation Railway provide us with a competitive advantage that will result in additional third-party throughput volumes at our facilities. Expansion of our customer base will allow us to diversify the growth of our revenue stream, which currently is primarily dependent on Hess and its future growth.

Results of Operations

The following tables summarize our Predecessor’s combined results of operations for the years ended December 31, 2016 and 2015. The results of operations are discussed in further detail following this overview (in millions, unless otherwise noted).

 

For the Year Ended December 31, 2016    Gathering      Processing
and Storage
     Terminaling
and Export