10-Q 1 hesm-10q_20180930.htm 10-Q hesm-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10‑Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to       

Commission File Number 001‑38050

Hess Midstream Partners LP

(Exact name of Registrant as specified in its charter)

 

DELAWARE

36-4777695

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification Number)

 

 

1501 McKinney Street

77010

Houston, TX
(Address of principal executive offices)

(Zip Code)

 

(Registrant’s telephone number, including area code, is (713) 496-4200)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No 

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).  Yes      No 

At September 30, 2018, the registrant had 27,297,031 common units and 27,279,654 subordinated units outstanding.

 

 

 

 


 

HESS MIDSTREAM PARTNERS LP

FORM 10-Q

TABLE OF CONTENTS

 

Item

 

 

 

Page

No.

 

 

 

Number

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

 

 

1.

 

Financial Statements (unaudited)

 

 

 

 

Consolidated Balance Sheets at September 30, 2018 and December 31, 2017

 

2

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

 

3

 

 

Consolidated Statements of Changes in Partners’ Capital for the nine months ended September 30, 2018 and 2017

 

4

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

 

5

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

25

4.

 

Controls and Procedures

 

26

 

 

 

 

 

 

 

PART II—OTHER INFORMATION

 

 

 

 

 

 

 

1.

 

Legal Proceedings

 

27

1A.

 

Risk Factors

 

27

6.

 

Exhibits

 

28

 

 

 

 

 

 

 

Signatures

 

29

 

 

Certifications

 

 

 

 

 

 

 

 

 

 

 


PART I—FINANCIAL INFORMATION

HESS MIDSTREAM PARTNERS LP

Table of Contents

CONSOLIDATED BALANCE SHEETS

Item 1.

Financial Statements

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

(in millions, except unit amounts)

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

34.6

 

 

$

47.2

 

Accounts receivable—affiliate:

 

 

 

 

 

 

 

From contracts with customers

 

65.4

 

 

 

58.5

 

Other receivables

 

0.1

 

 

 

1.3

 

Other current assets

 

5.1

 

 

 

4.4

 

Total current assets

 

105.2

 

 

 

111.4

 

Equity investments

 

67.3

 

 

 

-

 

Property, plant and equipment, net

 

2,630.5

 

 

 

2,520.5

 

Other noncurrent assets

 

2.4

 

 

 

3.2

 

Total assets

$

2,805.4

 

 

$

2,635.1

 

Liabilities

 

 

 

 

 

 

 

Accounts payable—trade

$

12.8

 

 

$

12.2

 

Accounts payable—affiliate

 

23.3

 

 

 

22.5

 

Accrued liabilities

 

70.2

 

 

 

32.7

 

Other current liabilities

 

5.5

 

 

 

7.0

 

Total current liabilities

 

111.8

 

 

 

74.4

 

Other noncurrent liabilities

 

6.0

 

 

 

5.4

 

Total liabilities

 

117.8

 

 

 

79.8

 

Partners' capital

 

 

 

 

 

 

 

Common unitholders—public (17,014,377 and 16,997,000 units issued

   and outstanding as of September 30, 2018 and December 31, 2017)

 

357.6

 

 

 

357.7

 

Common unitholders—affiliate (10,282,654 units issued and outstanding

   as of September 30, 2018 and December 31, 2017)

 

40.2

 

 

 

40.5

 

Subordinated unitholders—affiliate (27,279,654 units issued and outstanding

   as of September 30, 2018 and December 31, 2017)

 

106.6

 

 

 

107.8

 

General partner

 

14.9

 

 

 

14.8

 

Total Hess Midstream Partners LP partners' capital

 

519.3

 

 

 

520.8

 

Noncontrolling interest

 

2,168.3

 

 

 

2,034.5

 

Total partners' capital

 

2,687.6

 

 

 

2,555.3

 

Total liabilities and partners' capital

$

2,805.4

 

 

$

2,635.1

 

See accompanying notes to unaudited consolidated financial statements.

 

 

2

 


PART I—FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(in millions, except per unit amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliate services

 

$

169.3

 

 

$

146.7

 

 

$

490.6

 

 

$

415.3

 

Other income

 

 

0.2

 

 

 

-

 

 

 

0.6

 

 

 

-

 

Total revenues

 

 

169.5

 

 

 

146.7

 

 

 

491.2

 

 

 

415.3

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance expenses (exclusive of depreciation

   shown separately below)

 

 

39.4

 

 

 

39.6

 

 

 

111.1

 

 

 

117.3

 

Depreciation expense

 

 

30.6

 

 

 

28.5

 

 

 

90.8

 

 

 

83.8

 

General and administrative expenses

 

 

2.4

 

 

 

1.7

 

 

 

7.9

 

 

 

5.6

 

Total costs and expenses

 

 

72.4

 

 

 

69.8

 

 

 

209.8

 

 

 

206.7

 

Income from operations

 

 

97.1

 

 

 

76.9

 

 

 

281.4

 

 

 

208.6

 

Interest expense, net

 

 

0.3

 

 

 

0.4

 

 

 

1.0

 

 

 

0.9

 

Net income

 

 

96.8

 

 

 

76.5

 

 

 

280.4

 

 

 

207.7

 

Less: Net income prior to the IPO on April 10, 2017

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68.2

 

Less: Net income attributable to noncontrolling interest

 

 

78.0

 

 

 

61.5

 

 

 

226.8

 

 

 

113.1

 

Net income attributable to Hess Midstream Partners LP

 

 

18.8

 

 

 

15.0

 

 

 

53.6

 

 

 

26.4

 

Less: General partner's interest in net income attributable

   to Hess Midstream Partners LP

 

 

0.5

 

 

 

0.3

 

 

 

1.2

 

 

 

0.5

 

Limited partners' interest in net income attributable to

   Hess Midstream Partners LP

 

$

18.3

 

 

$

14.7

 

 

$

52.4

 

 

$

25.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Hess Midstream Partners LP per

   limited partner unit (basic and diluted):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

$

0.34

 

 

$

0.27

 

 

$

0.96

 

 

$

0.48

 

Subordinated

 

$

0.34

 

 

$

0.27

 

 

$

0.96

 

 

$

0.48

 

Weighted average limited partner units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

27.3

 

 

 

27.3

 

 

 

27.3

 

 

 

26.7

 

Subordinated

 

 

27.3

 

 

 

27.3

 

 

 

27.3

 

 

 

26.7

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

27.4

 

 

 

27.3

 

 

 

27.4

 

 

 

26.7

 

Subordinated

 

 

27.3

 

 

 

27.3

 

 

 

27.3

 

 

 

26.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash distributions declared per unit (*)

 

$

0.3575

 

 

$

0.3107

 

 

$

1.0360

 

 

$

0.5810

 

(*) Represents cash distributions declared during the month following the end of each respective quarterly period. See Note 13, Subsequent Event.

See accompanying notes to unaudited consolidated financial statements.

 

3

 


PART I—FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS’ CAPITAL

(UNAUDITED)

 

Partners' Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Limited Partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

Unitholders

Public

 

 

Common

Unitholders

Affiliate

 

 

Subordinated

Unitholders

Affiliate

 

 

General

Partner

 

 

Noncontrolling

Interest

 

 

Net Parent

Investment

Predecessor

 

 

Total

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

2,238.4

 

 

$

2,238.4

 

Net income prior to the IPO on

   April 10, 2017

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

68.2

 

 

 

68.2

 

Other contributions from

   parent, net, prior to the IPO on

   April 10, 2017

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

225.0

 

 

 

225.0

 

Contribution of net assets to

   Hess Midstream Partners LP

 

-

 

 

 

134.6

 

 

 

357.2

 

 

 

14.6

 

 

 

2,025.2

 

 

 

(2,531.6

)

 

 

-

 

IPO proceeds, net of

   underwriters' discounts

 

365.5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

365.5

 

Offering costs

 

(10.7

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10.7

)

Distribution of IPO proceeds

 

-

 

 

 

(95.7

)

 

 

(253.8

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(349.5

)

Net income subsequent to the IPO

   on April 10, 2017

 

8.1

 

 

 

4.9

 

 

 

12.9

 

 

 

0.5

 

 

 

113.1

 

 

 

-

 

 

 

139.5

 

Unit-based compensation

 

0.2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.2

 

Distributions to unitholders

 

(4.6

)

 

 

(2.8

)

 

 

(7.4

)

 

 

(0.3

)

 

 

-

 

 

 

-

 

 

 

(15.1

)

Distributions to noncontrolling

   interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(170.7

)

 

 

-

 

 

 

(170.7

)

Contribution from noncontrolling

   interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

70.8

 

 

 

-

 

 

 

70.8

 

Balance at September 30, 2017

$

358.5

 

 

$

41.0

 

 

$

108.9

 

 

$

14.8

 

 

$

2,038.4

 

 

$

-

 

 

$

2,561.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

357.7

 

 

$

40.5

 

 

$

107.8

 

 

$

14.8

 

 

$

2,034.5

 

 

$

-

 

 

$

2,555.3

 

Net income

 

16.3

 

 

 

9.9

 

 

 

26.2

 

 

 

1.2

 

 

 

226.8

 

 

 

-

 

 

 

280.4

 

Unit-based compensation

 

0.7

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

0.7

 

Distributions to unitholders

 

(17.1

)

 

 

(10.2

)

 

 

(27.4

)

 

 

(1.1

)

 

 

-

 

 

 

-

 

 

 

(55.8

)

Distributions to noncontrolling

   interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(149.2

)

 

 

-

 

 

 

(149.2

)

Contributions from noncontrolling

   interest

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

56.2

 

 

 

-

 

 

 

56.2

 

Balance at September 30, 2018

$

357.6

 

 

$

40.2

 

 

$

106.6

 

 

$

14.9

 

 

$

2,168.3

 

 

$

-

 

 

$

2,687.6

 

See accompanying notes to unaudited consolidated financial statements.


4

 


PART I—FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

(in millions)

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

280.4

 

 

$

207.7

 

Adjustments to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

90.8

 

 

 

83.8

 

Amortization of deferred financing costs

 

 

0.8

 

 

 

0.4

 

Unit-based compensation expense

 

 

0.7

 

 

 

0.2

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable – affiliate

 

 

(5.7

)

 

 

(15.1

)

Other current and noncurrent assets

 

 

(0.7

)

 

 

1.9

 

Accounts payable – trade

 

 

0.6

 

 

 

(21.2

)

Accounts payable – affiliate

 

 

0.8

 

 

 

23.5

 

Accrued liabilities

 

 

2.5

 

 

 

(3.1

)

Other current and noncurrent liabilities

 

 

(2.8

)

 

 

0.9

 

Net cash provided by (used in) operating activities

 

 

367.4

 

 

 

279.0

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Payments for equity investments

 

 

(67.3

)

 

 

-

 

Additions to property, plant and equipment

 

 

(163.9

)

 

 

(98.1

)

Net cash provided by (used in) investing activities

 

 

(231.2

)

 

 

(98.1

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Cash distributions to parent prior to the IPO on April 10, 2017

 

 

-

 

 

 

(95.3

)

Cash contributions from parent prior to the IPO on April 10, 2017

 

 

-

 

 

 

67.1

 

IPO proceeds, net of underwriters' discounts

 

 

-

 

 

 

365.5

 

Cash offering costs

 

 

-

 

 

 

(2.1

)

Distribution of IPO proceeds to Hess and GIP

 

 

-

 

 

 

(349.5

)

Financing costs

 

 

-

 

 

 

(3.9

)

Distributions to unitholders

 

 

(55.8

)

 

 

(15.1

)

Distributions to noncontrolling interest

 

 

(149.2

)

 

 

(170.7

)

Contributions from noncontrolling interest

 

 

56.2

 

 

 

70.8

 

Net cash provided by (used in) financing activities

 

 

(148.8

)

 

 

(133.2

)

Increase (decrease) in cash and cash equivalents

 

 

(12.6

)

 

 

47.7

 

Cash and cash equivalents, beginning of period

 

 

47.2

 

 

 

0.3

 

Cash and cash equivalents, end of period

 

$

34.6

 

 

$

48.0

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Contributions to settle accounts payable – affiliate

 

 

-

 

 

 

253.2

 

Removal of historical capitalized offering costs

 

 

-

 

 

 

8.6

 

See accompanying notes to unaudited consolidated financial statements.

 

 

5

 


PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

Note 1.  Description of Business

Hess Midstream Partners LP (the “Partnership”) is a fee‑based, growth oriented traditional master limited partnership formed by Hess Infrastructure Partners LP (“Hess Infrastructure Partners”), a midstream joint venture with a 50% ownership interest held by affiliates of Hess Corporation (collectively “Hess”) and a 50% ownership interest held by GIP II Blue Holding Partnership LP (“GIP”), to own, operate, develop and acquire a diverse set of midstream assets to provide services to Hess and third‑party customers.

On April 10, 2017, the Partnership completed its initial public offering (“IPO”) of 16,997,000 common units, which included 2,217,000 common units issued pursuant to the exercise of the underwriters’ over‑allotment options, representing 30.5% limited partner interests in the Partnership at a price to the public of $23.00 per common unit. In connection with the Partnership’s IPO, Hess Infrastructure Partners contributed a 20% controlling economic interest in each of (i) Hess North Dakota Pipelines Operations LP (“Gathering Opco”), which owns crude oil and natural gas gathering pipelines and compressor stations in North Dakota, (ii) Hess TGP Operations LP (“HTGP Opco”) which owns the Tioga Gas Plant (“TGP”), a natural gas processing and fractionation plant, including a residue gas pipeline in North Dakota, and (iii) Hess North Dakota Export Logistics Operations LP (“Logistics Opco”), which owns a crude oil and natural gas liquids (“NGL”) rail loading facility, crude oil rail cars and a crude oil pipeline and truck receipt terminal in North Dakota, and a 100% ownership interest in Hess Mentor Storage Holdings LLC (“Mentor Storage Terminal”), which owns a propane storage cavern and related rail and truck loading and unloading and storage terminal in Minnesota, (collectively, the “Contributed Businesses”) to the Partnership.

On January 25, 2018, we entered into a 50/50 joint venture with Targa Resources Corp. to construct a new 200 million standard cubic feet per day gas processing plant called Little Missouri Four (“LM4”). Our 50% interest in the joint venture is held through HTGP Opco, in which we own a 20% controlling economic interest and Hess Infrastructure Partners owns the remaining 80% economic interest. Targa Resources Corp. manages the construction of LM4 and will operate the plant.

The terms “we,” “our” and “us” as used in this report refer to the Partnership, unless the context suggests otherwise. These terms are used for convenience only and are not intended as a precise description of any separate legal entity within the Partnership. The term “parent” refers to Hess Infrastructure Partners.

Our assets and operations are organized into the following three segments: (1) gathering, (2) processing and storage and (3) terminaling and export (see Note 12, Segments).

Note 2.  Basis of Presentation

Presentation.  The consolidated financial statements included in this report reflect all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of our consolidated financial position at September 30, 2018 and December 31, 2017, the consolidated results of operations for the three and nine months ended September 30, 2018 and 2017, and consolidated cash flows for the nine months ended September 30, 2018 and 2017. The unaudited results of operations for the interim periods reported are not necessarily indicative of results to be expected for the full year.

The consolidated financial statements were prepared in accordance with the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain notes or other financial information that are normally required by U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted from these interim consolidated financial statements. These financial statements, therefore, should be read in conjunction with the financial statements and related notes included in the Partnership’s annual report on Form 10‑K for the year ended December 31, 2017.


6

 


PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

Consolidation.  We consolidate the activities of Gathering Opco, HTGP Opco and Logistics Opco, which qualify as variable interest entities (“VIE”) under U.S. GAAP. We have concluded that we are the primary beneficiary of each VIE, as defined in the accounting standards, since we have the power through our general partner interests to direct those activities that most significantly impact the economic performance of the Contributed Businesses and have a right to receive benefits and an obligation to absorb losses that could potentially be significant. All financial statement activities associated with VIEs are captured within gathering, processing and storage, and terminaling and export segments (see Note 12, Segments). We reflect a noncontrolling interest representing the retained limited partner interest owned by Hess Infrastructure Partners in the Contributed Businesses in the consolidated financial statements of the Partnership. All intercompany transactions and balances within the Partnership have been eliminated.

Equity Investments.  We account for our investment in LM4 under the equity method of accounting, as we do not control, but have a significant influence over, its operations. As of September 30, 2018, we have contributed $67.3 million of cash for our gross interest in LM4. We do not have a basis difference between the amount at which the investment is carried and the amount of underlying equity in net assets of the investee.

Income Taxes.  We are not a separate taxable entity for U.S. Federal and state income tax purposes; therefore, we do not provide for income tax benefit or expense. Each partner is subject to income taxes on its share of the Partnership’s earnings.

Comprehensive Income.  We have not reported comprehensive income, since there were no items of other comprehensive income during the periods presented in this report.

Summary of Significant Accounting Policies

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014‑09, Revenue from Contracts with Customers, as a new Accounting Standards Codification (ASC) Topic, ASC 606. We adopted ASC 606 as of January 1, 2018 using the modified retrospective method that requires application of the new standard prospectively from the date of adoption. The adoption of ASC 606 did not have a material impact on the timing or amount of revenue recognition for our uncompleted contracts at January 1, 2018 based on the requirements of the standard and, as a result, no cumulative effect adjustment was required to be recorded to our partners’ capital balance as of January 1, 2018. Accounts receivable from contracts with customers are presented separately in the consolidated balance sheet with the prior year balance recast to conform to the current period presentation.

Revenue Recognition—Contracts with Customers.  We earn 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 do not own or take title to the volumes that we handle. Effective January 1, 2014, we entered into i) gas gathering, ii) crude oil gathering, iii) gas processing and fractionation, iv) storage services, and v) terminal and export services fee‑based commercial agreements with certain subsidiaries of Hess. Our responsibilities to provide each of the above services under each of the commercial agreements are considered separate, distinct performance obligations.

We recognize revenues for each performance obligation under our commercial agreements over‑time as services are rendered using the output method, measured using the amount of volumes serviced during the period. The minimum volume commitments are subject to fluctuation based on nominations covering substantially all of Hess’s production and projected third-party volumes that will be purchased in the Bakken. As the minimum volume commitments are subject to fluctuation, and these commercial agreements contain fee inflation escalators and fee recalculation mechanisms, substantially all of the transaction price, as this term is defined in ASC 606, is variable at inception of each of the commercial agreements. As the variability is resolved prior to the recognition of revenue, we do not apply a constraint to the transaction price at the inception of the commercial agreements. We elected the practical expedient to recognize revenue in the amount to which we have a right to invoice as permitted under ASC 606. Due to this election and as the transaction price allocated to our unsatisfied performance obligations is entirely variable, we have elected the exemption provided by ASC 606 from the disclosure of revenue recognizable in future periods as our unsatisfied performance obligations are fulfilled. There are no significant financing components in any of our commercial agreements.

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PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

The minimum volumes that Hess provides to our assets under our commercial agreements include dedicated production covering substantially all of Hess’s existing and future owned or controlled production in the Bakken and projected third-party volumes owned or controlled by Hess through dedicated third-party contracts. If Hess delivers volumes less than the applicable minimum volume commitments under our commercial agreements during any quarter, Hess is obligated to pay us a shortfall fee equal to the volume deficiency multiplied by the related gathering, processing and/or terminaling fee, as applicable. Our responsibility to stand-ready to service a minimum volume over each quarterly commitment period represents a separate, distinct performance obligation. Currently, and for the remainder of the Initial Term of each commercial agreement as described in Note 3 below, volume deficiencies are measured quarterly and recognized as revenue in the same period, as any associated shortfall payments are not subject to future reduction or offset. During the Secondary Term of each commercial agreement as described in Note 3 below, Hess will be entitled to receive a credit, calculated in barrels or Mcf, as applicable, with respect to the amount of any shortfall fee paid by Hess, which will initially be reported in deferred revenue. Hess may apply such credit against the fees payable for any volumes delivered to us under the applicable agreement in excess of Hess’ nominated volumes up to four quarters after such credit is earned. Unused credits by Hess will be recognized as revenue when they expire after four quarters. However, Hess will not be entitled to receive any such credit with respect to crude oil terminaling services under our terminal and export services agreement.

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.

Refer to Note 12, Segments, for the presentation of our revenues on a disaggregated basis. All Affiliate services revenue which reflects activity associated with our commercial agreements with Hess, represents revenue from contracts with customers under the scope of ASC 606.

Accounts Receivable.  We record affiliate accounts receivable upon performance of services to affiliated companies. Generally, we receive payments from affiliated companies on a monthly basis, shortly after performance of services. There were no doubtful accounts written off, nor have we provided an allowance for doubtful accounts, as of September 30, 2018 and December 31, 2017.

New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016‑02, Leases, as a new ASC Topic, ASC 842. The new standard supersedes ASC 840 and will require the recognition of right-of-use assets and lease liabilities for all leases with lease terms greater than one year, including leases currently treated as operating leases under ASC 840. ASC 842 is effective for us beginning in the first quarter of 2019, with early adoption permitted. We have elected to adopt ASC 842 on January 1, 2019 using the modified retrospective method which allows application of the new standard prospectively from the date of adoption with a cumulative effect adjustment, if any, recorded to partners’ capital at the date of adoption. Accordingly, comparative financial statements for periods prior to the adoption date of ASC 842 will not be affected. In addition, we have elected to apply the ‘package’ of practical expedients allowing us to avoid reassessing whether existing contracts are (or contain) leases, whether the lease classification for existing leases would differ under ASC 842, and whether initial direct costs incurred for existing leases are capitalizable under ASC 842. Finally, we have elected to apply the practical expedient allowing us to avoid reassessing land easements that were not previously accounted for as leases under ASC 840. We have not elected the ‘hindsight’ practical expedient when determining lease term. As part of our ASC 842 implementation project, we continue to evaluate contracts, monitor standard setting activity, and evaluate our internal controls to comply with the accounting and disclosure requirements of ASC 842.

Note 3.  Related Party Transactions

Commercial Agreements

Effective January 1, 2014, we entered into i) gas gathering, ii) crude oil gathering, iii) gas processing and fractionation, iv) storage services, and v) terminal and export services fee‑based commercial agreements with certain subsidiaries of Hess. Under these commercial agreements, we provide gathering, compression, processing, fractionation, storage, terminaling, loading and transportation services to Hess, for which we receive a fee per barrel of crude oil, Mcf of natural gas, or Mcf equivalent of NGLs, as applicable, delivered during each month, and Hess is obligated to provide us with minimum volumes of crude oil, natural gas and NGLs. These agreements also include inflation escalators and fee recalculation mechanisms that allow fees to be adjusted annually.


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PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

On September 17, 2018, we amended and restated our gas gathering and gas processing and fractionation agreements with Hess to enable us to provide certain services to Hess in respect of volumes to be delivered to and processed at the LM4 plant. Effective January 1, 2019, Hess will pay us a combined processing fee per Mcf of natural gas, or Mcf equivalent of NGLs, as applicable, for aggregate volumes processed at LM4 and Tioga Gas Plant. Except with regard to a certain gathering sub-system as described below, each of our commercial agreements with Hess retains its initial 10‑year term (“Initial Term”) and we have the unilateral right to extend each commercial agreement for one additional 10‑year term (“Secondary Term”).  The amended and restated gas gathering agreement also extends the Initial Term of the gathering agreement with respect to a certain gathering sub-system by 5 years to provide for a 15-year Initial Term and decreases the Secondary Term for that gathering sub-system by 5 years to provide for a 5-year Secondary Term. In addition, the fee recalculation mechanism continues to apply to the amended and restated agreements and, effective January 1, 2019, will incorporate the revenues received and expected to be received by Hess from sourcing third-party dedicated production in order to further align the interests of us and Hess in promoting the growth of third-party volumes on our Bakken assets.

For the three and nine months ended September 30, 2018 and 2017, approximately 100% of our revenues were attributable to our fee‑based commercial agreements with Hess, including revenues from third‑party volumes contracted with Hess and delivered to us under these agreements. Together with Hess, we are pursuing strategic relationships with third‑party producers and other midstream companies with operations in the Bakken in order to maximize our utilization rates.

During the three and nine months ended September 30, 2018, we earned $11.5 million and $40.9 million, respectively, of minimum volume shortfall fee payments (2017: $13.4 million and $48.5 million, respectively). In addition, during the three and nine months ended September 30, 2018, we recognized, as part of affiliate revenues, $4.5 million and $12.1 million, respectively, of reimbursements from Hess related to third‑party rail transportation costs (2017: $3.4 million and $13.4 million, respectively). Finally, during the three and nine months ended September 30, 2018, we recognized, as part of affiliate revenues, $6.7 million and $20.1 million, respectively, of reimbursements from Hess related to electricity fees (2017: $6.6 million and $18.3 million, respectively). The related third-party transportation costs and electricity fees were included in Operating and maintenance expenses in the accompanying unaudited consolidated statements of operations.

Omnibus and Employee Secondment Agreements

Under our omnibus and employee secondment agreements, Hess provides substantial operational and administrative services to us in support of our assets and operations. For the three and nine months ended September 30, 2018 and 2017, we had the following charges from Hess. The classification of these charges between operating and maintenance expenses and general and administrative expenses is based on the fundamental nature of the services being performed for our operations.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and maintenance expenses

 

$

11.7

 

 

$

13.7

 

 

$

34.6

 

 

$

41.2

 

General and administrative expenses

 

 

1.7

 

 

 

1.4

 

 

 

4.9

 

 

 

4.3

 

Total

 

$

13.4

 

 

$

15.1

 

 

$

39.5

 

 

$

45.5

 

 

Contribution Agreement

Under our contribution, conveyance and assumption agreement, Hess Infrastructure Partners agreed to bear the cost of certain maintenance capital projects associated with the Contributed Businesses. During the nine months ended September 30, 2018, Hess Infrastructure Partners contributed $2.4 million to us related to the reimbursement for those maintenance capital projects (2017: $9.2 million).


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PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

Note 4.  Property, Plant and Equipment

Property, plant and equipment, at cost, is as follows:

 

 

Estimated useful lives

 

September 30, 2018

 

 

December 31, 2017

 

(in millions, except for number of years)

 

 

 

 

 

 

 

 

 

 

Gathering assets

 

 

 

 

 

 

 

 

 

 

Pipelines

 

22 years

 

$

930.9

 

 

$

890.8

 

Compressors, pumping stations and terminals

 

22 to 25 years

 

 

555.8

 

 

 

535.5

 

Gas plant assets

 

 

 

 

 

 

 

 

 

 

Pipelines, pipes and valves

 

22 to 25 years

 

 

460.0

 

 

 

460.0

 

Equipment

 

12 to 30 years

 

 

428.2

 

 

 

428.2

 

Buildings

 

35 years

 

 

182.3

 

 

 

182.3

 

Processing and fractionation facilities

 

25 years

 

 

184.8

 

 

 

158.4

 

Logistics facilities and railcars

 

20 to 25 years

 

 

382.7

 

 

 

371.1

 

Storage facilities

 

20 to 25 years

 

 

19.5

 

 

 

19.5

 

Other

 

20 to 25 years

 

 

10.6

 

 

 

9.2

 

Construction-in-progress

 

N/A

 

 

170.1

 

 

 

69.5

 

Total property, plant and equipment, at cost

 

 

 

 

3,324.9

 

 

 

3,124.5

 

Accumulated depreciation

 

 

 

 

(694.4

)

 

 

(604.0

)

Property, plant and equipment, net

 

 

 

$

2,630.5

 

 

$

2,520.5

 

 

Note 5.  Accrued Liabilities

Accrued liabilities are as follows:

 

 

September 30, 2018

 

 

December 31, 2017

 

(in millions)

 

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

57.8

 

 

$

22.8

 

Other accruals

 

 

12.4

 

 

 

9.9

 

Total

 

$

70.2

 

 

$

32.7

 

 

Note 6.  Debt and Interest Expense

Revolving Credit Facility

On March 15, 2017, we entered into a four‑year, $300.0 million senior secured revolving credit facility that became available to us upon the closing of the IPO on April 10, 2017. Borrowings on the credit facility generally bear interest at the London Interbank Offered Rate (LIBOR) plus an applicable margin of 1.275%. The interest rate is subject to adjustment based on the Partnership’s leverage ratio, which is calculated as total debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined in the credit agreement). Facility fees accrue at 0.275% per annum and are paid quarterly. If the Partnership obtains credit ratings, pricing levels will be based on our credit ratings in effect from time to time. The Partnership is subject to customary covenants in the credit agreement, including a financial covenant that generally requires a leverage ratio of no more than 4.5 to 1.0 for the prior four fiscal quarters. As of September 30, 2018, the revolving credit facility remained undrawn. The credit facility is secured by first priority perfected liens on substantially all directly owned assets of the Partnership and its wholly‑owned subsidiaries, including equity interests in subsidiaries, subject to certain customary exclusions.


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PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

Note 7.  Distributions

Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash to unitholders of record on the applicable record date. The following table details the distributions declared and/or paid for the periods presented:

Period

 

Record Date

 

Distribution Date

 

Distribution per Common and Subordinated Unit

 

Second Quarter 2017(1)

 

August 4, 2017

 

August 14, 2017

 

$

0.2703

 

Third Quarter 2017

 

November 3, 2017

 

November 13, 2017

 

$

0.3107

 

Fourth Quarter 2017

 

February 2, 2018

 

February 13, 2018

 

$

0.3218

 

First Quarter 2018

 

May 4, 2018

 

May 14, 2018

 

$

0.3333

 

Second Quarter 2018

 

August 2, 2018

 

August 13, 2018

 

$

0.3452

 

Third Quarter 2018(2)

 

November 5, 2018

 

November 13, 2018

 

$

0.3575

 

 

(1) The distribution for the second quarter 2017 was prorated from the closing of the Partnership’s IPO on April 10, 2017 and equated to a minimum quarterly distribution of $0.3000 per unit on a full quarter basis.

(2) For more information, see Note 13, Subsequent Event.

Note 8.  Unit‑Based Compensation

In 2017, the Partnership adopted the Hess Midstream Partners LP 2017 Long‑Term Incentive Plan (the “LTIP”). Awards under the LTIP are available for officers, directors and employees of our general partner or its affiliates, and any individuals who perform services for the Partnership. The LTIP provides the Partnership with the flexibility to grant unit awards, restricted units, phantom units, unit options, unit appreciation rights, distribution equivalent rights, profits interest units and other unit‑based awards. The LTIP initially limits the number of common units that may be delivered pursuant to vested awards to 3,000,000 common units.

Under the LTIP, we granted awards of phantom units with distribution equivalent rights to certain officers, employees and directors. These phantom units and distribution equivalent rights vest ratably over a three‑year period for officers and employees, and vest after one year for directors. Cash distributions on the phantom units accumulate and are paid upon vesting. Fair value of phantom units is based on the fair value of the Partnership’s common units on the grant date.

Unit‑based award activity for the nine months ended September 30, 2018 was as follows:

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Award Date

 

 

 

Number of Units

 

 

Fair Value

 

Outstanding and unvested units at December 31, 2017

 

 

44,127

 

 

$

22.85

 

Granted

 

 

90,594

 

 

 

20.51

 

Forfeited

 

 

(3,107

)

 

 

21.73

 

Vested

 

 

(17,377

)

 

 

22.63

 

Outstanding and unvested units at September 30, 2018

 

 

114,237

 

 

$

21.06

 

As of September 30, 2018, $1.8 million of compensation cost related to unvested phantom units awarded under the LTIP remains to be recognized over an expected weighted‑average period of 2.1 years.

Note 9.  Net Income per Limited Partner Unit

Net income per limited partner unit is computed by dividing the respective limited partners’ interest in net income attributable to Hess Midstream Partners LP by the weighted average number of common and subordinated units outstanding. Because we have more than one class of participating securities, we use the two‑class method when calculating net income per limited partner unit. The classes of participating securities include common units, subordinated units, general partner units and incentive distribution rights.


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PART I – FINANCIAL INFORMATION (CONT’D)

HESS MIDSTREAM PARTNERS LP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents

The following table illustrates the Partnership’s calculation of net income per limited partner unit:

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in millions, except per unit amounts)

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income

$

96.8

 

 

$

76.5

 

 

$

280.4

 

 

$

207.7

 

Less: Net income prior to the IPO on April 10, 2017

 

-

 

 

 

-

 

 

 

-

 

 

 

68.2

 

Less: Net income attributable to noncontrolling interest

 

78.0

 

 

 

61.5

 

 

 

226.8

 

 

 

113.1

 

Net income attributable to Hess Midstream Partners LP

 

18.8

 

 

 

15.0

 

 

 

53.6

 

 

 

26.4

 

Less: General partner's interest in net income attributable

   to Hess Midstream Partners LP

 

0.5