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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 7, 2016

Registration No. 333-207560

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 8

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

NOBLE MIDSTREAM PARTNERS LP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   4932   47-3011449

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

1001 Noble Energy Way

Houston, Texas 77070

(281) 872-3100

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

 

 

John F. Bookout, IV

Chief Financial Officer

1001 Noble Energy Way

Houston, Texas 77070

(281) 872-3100

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

 

 

Copies to:

 

G. Michael O’Leary

George Vlahakos

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

(713) 220-4200

 

Douglas E. McWilliams

Julian J. Seiguer

Vinson & Elkins L.L.P.

1001 Fannin St., Suite 2500

Houston, Texas 77002

(713) 758-2222

 

 

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

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

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

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

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

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

 

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

 

 

 


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Index to Financial Statements

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 jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, September 7, 2016

PROSPECTUS

 

 

 

LOGO

Noble Midstream Partners LP

12,500,000 Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of common units representing limited partner interests in Noble Midstream Partners LP. We were formed by Noble Energy, Inc., or Noble, and 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. Our common units have been approved for listing on the New York Stock Exchange under the symbol “NBLX.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012, or the JOBS 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 at the time of any requested certification in the future, your common units may be subject to redemption.

Investing in our common units involves risk. Please read “Risk Factors” beginning on page 27.

These risks include the following:

 

 

We derive substantially all of our revenue from Noble. If Noble changes its business strategy, alters its current drilling and development plan on our dedicated acreage, or otherwise significantly reduces the volumes of crude oil, natural gas, saltwater or fresh water with respect to which we perform midstream services, our revenue would decline and our business, 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 make the payment of the minimum quarterly distribution to our unitholders.

 

 

Our general partner and its affiliates, including Noble, 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 Noble, and Noble is under no obligation to adopt a business strategy that favors us.

 

 

Unitholders have very limited voting rights and, even if they are dissatisfied, they will have limited ability to remove our general partner.

 

 

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.

 

 

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

 

 

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

 

     Per Common Unit      Total  

Price to the public

   $                    $                

Underwriting discounts and commissions(1)

   $                    $                

Proceeds to Noble Midstream Partners LP (before expenses)

   $                    $                

 

(1) Excludes an aggregate structuring fee equal to 0.65% of the gross proceeds from this offering payable to Barclays Capital Inc. and Robert W. Baird & Co. Incorporated. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to an additional 1,875,000 common units from us on the same terms and conditions as set forth above if the underwriters sell more than 12,500,000 common units in this offering.

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.

The underwriters expect to deliver the common units on or about                     , 2016.

 

 

Lead Book-Running Managers

 

Barclays   Baird   J.P. Morgan

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Citigroup   Deutsche Bank Securities   DNB Markets

 

Mizuho Securities   MUFG   Wells Fargo Securities

 

 

Co-Managers

 

BB&T Capital Markets   BNP PARIBAS   CIBC   Fifth Third Securities

 

PNC Capital Markets LLC   Scotia Howard Weil   SOCIETE GENERALE   SMBC Nikko   TD Securities

Prospectus dated                     , 2016


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Index to Financial Statements

 

 

LOGO

 

 


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

Overview

     1   

Our Assets, ROFRs and ROFO

     4   

Business Strategies

     9   

Competitive Strengths

     10   

Noble Energy, Inc.

     11   

Our Emerging Growth Company Status

     12   

Risk Factors

     13   

The Transactions

     14   

Ownership and Organizational Structure

     15   

Management of Noble Midstream Partners LP

     17   

Principal Executive Offices and Internet Address

     17   

Summary of Conflicts of Interest and Duties

     17   

The Offering

     19   

Summary Historical and Pro Forma Financial Data

     25   

RISK FACTORS

     27   

Risks Related to Our Business

     27   

Risks Inherent in an Investment in Us

     46   

Tax Risks

     58   

USE OF PROCEEDS

     63   

CAPITALIZATION

     64   

DILUTION

     65   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     66   

General

     66   

Our Minimum Quarterly Distribution

     68   

Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December  31, 2015 and Twelve Months Ended June 30, 2016

     70   

Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2017

     73   

Significant Forecast Assumptions

     76   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     82   

Distributions of Available Cash

     82   

Operating Surplus and Capital Surplus

     83   

Capital Expenditures

     85   

Subordinated Units and Subordination Period

     86   

Distributions of Available Cash from Operating Surplus During the Subordination Period

     88   

Distributions of Available Cash from Operating Surplus After the Subordination Period

     88   

Incentive Distribution Rights

     88   

Percentage Allocations of Available Cash from Operating Surplus

     89   

Noble’s Right to Reset Incentive Distribution Levels

     89   

Distributions from Capital Surplus

     92   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     92   

Distributions of Cash Upon Liquidation

     93   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL 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 Revenue

     100   

How We Evaluate Our Operations

     101   

Factors Affecting the Comparability of Our Financial Results

     104   

Other Factors Impacting Our Business

     106   

 

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     Page  

Results of Operations

     107   

Capital Resources and Liquidity

     109   

Off-Balance Sheet Arrangements

     113   

Critical Accounting Policies

     113   

Contractual Obligations

     115   

Qualitative and Quantitative Disclosures About Market Risk

     115   

INDUSTRY OVERVIEW

     116   

General

     116   

Crude Oil Midstream Industry

     116   

Natural Gas Midstream Industry

     117   

Water Services Industry

     118   

Market Fundamentals

     118   

Overview of the DJ Basin

     125   

Overview of the Permian Basin

     127   

BUSINESS

     129   

Overview

     129   

Our Assets, ROFRs and ROFO

     132   

Noble Energy, Inc.

     138   

Our Midstream Operations

     139   

Access to Downstream Markets

     149   

Our Acreage Dedication

     149   

Right of First Refusal on Assets and Services

     152   

Right of First Offer on Retained Interests

     154   

Our Commercial Agreements with Noble

     154   

Title to Our Properties

     157   

Seasonality

     157   

Competition

     158   

Regulation of Operations

     158   

Environmental Matters

     162   

Employees

     167   

Insurance

     167   

Legal Proceedings

     168   

MANAGEMENT

     169   

Management of Noble Midstream Partners LP

     169   

Committees of the Board of Directors

     170   

Directors, Director Nominee and Executive Officers of Noble Midstream GP LLC

     171   

Board Leadership Structure

     172   

Board Role in Risk Oversight

     173   

Reimbursement of Expenses

     173   

Compensation of Our Officers and Directors

     173   

Our Long-Term Incentive Plan

     174   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     177   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     179   

Distributions and Payments to Our General Partner and Its Affiliates

     179   

Agreements with our Affiliates in Connection with the Transactions

     180   

Procedures for Review, Approval and Ratification of Related Person Transactions

     185   

CONFLICTS OF INTEREST AND DUTIES

     187   

Conflicts of Interest

     187   

Duties of Our General Partner

     193   

DESCRIPTION OF OUR COMMON UNITS

     197   

Our Common Units

     197   

Transfer Agent and Registrar

     197   

 

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     Page  

Transfer of Common Units

     197   

Exchange Listing

     198   

OUR PARTNERSHIP AGREEMENT

     199   

Organization and Duration

     199   

Purpose

     199   

Capital Contributions

     199   

Voting Rights

     199   

Limited Liability

     201   

Issuance of Additional Partnership Interests

     202   

Amendment of Our Partnership Agreement

     202   

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

     204   

Termination and Dissolution

     205   

Liquidation and Distribution of Proceeds

     205   

Withdrawal or Removal of Our General Partner

     206   

Transfer of General Partner Interest

     207   

Transfer of Ownership Interests in Our General Partner

     207   

Transfer of Incentive Distribution Rights

     207   

Change of Management Provisions

     207   

Limited Call Right

     207   

Possible Redemption of Ineligible Holders

     208   

Meetings; Voting

     208   

Status as Limited Partner

     209   

Indemnification

     209   

Reimbursement of Expenses

     210   

Books and Reports

     210   

Right to Inspect Our Books and Records

     210   

Registration Rights

     211   

Applicable Law; Exclusive Forum

     211   

UNITS ELIGIBLE FOR FUTURE SALE

     212   

Rule 144

     212   

Our Partnership Agreement and Registration Rights

     212   

Lock-Up Agreements

     213   

Registration Statement on Form S-8

     213   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     214   

Partnership Status

     215   

Limited Partner Status

     216   

Tax Consequences of Unit Ownership

     217   

Tax Treatment of Operations

     223   

Disposition of Common Units

     223   

Uniformity of Units

     226   

Tax-Exempt Organizations and Other Investors

     226   

Administrative Matters

     227   

INVESTMENT IN NOBLE MIDSTREAM PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     231   

General Fiduciary Matters

     231   

Prohibited Transaction Matters

     232   

Plan Asset Issues

     232   

UNDERWRITING

     233   

Commissions and Expenses

     233   

Option to Purchase Additional Common Units

     234   

Lock-Up Agreements

     234   

Directed Unit Program

     235   

Offering Price Determination

     235   

 

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     Page  

Indemnification

     235   

Stabilization, Short Positions and Penalty Bids

     235   

Listing on the New York Stock Exchange

     236   

Stamp Taxes

     236   

Other Relationships

     236   

Direct Participation Plan Requirements

     237   

Selling Restrictions

     237   

VALIDITY OF THE COMMON UNITS

     239   

EXPERTS

     239   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     240   

FORWARD-LOOKING STATEMENTS

     241   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A—FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF NOBLE 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 prepared by us or on behalf of us or to which we have referred 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. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common units. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                     , 2016 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

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

Industry and Market Data

The data included in this prospectus regarding the midstream crude oil and natural gas industry, including descriptions of trends in the market, are based on a variety of sources, including independent industry publications, government publications and other published independent sources and publicly available information, as well as our good faith estimates, which have been derived from management’s knowledge and experience in our industry. Although we have not independently verified the accuracy or completeness of the third-party information included in this prospectus, based on management’s knowledge and experience, we believe that the third-party sources are reliable and that the third-party information included in this prospectus or in our estimates is accurate and complete as of the dates presented.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors” and the historical and unaudited pro forma financial statements and related notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units. You should read “Risk Factors” beginning on page 27 for more information about important factors that you should consider before purchasing our common units.

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

Noble Midstream Partners LP

Overview

We are a growth-oriented Delaware master limited partnership formed by our sponsor, Noble, to own, operate, develop and acquire a wide range of domestic midstream infrastructure assets. We currently provide crude oil, natural gas, and water-related midstream services for Noble in the Denver-Julesburg, or DJ Basin, in Colorado, through long-term, fixed-fee contracts. Our areas of focus are in the DJ Basin, one of the premier liquid hydrocarbon basins in the United States, and in the Delaware Basin within the prolific Permian Basin in Texas.

Noble intends for us to become its primary vehicle for domestic midstream operations in the onshore United States outside of the Marcellus Shale in the northeastern United States. We have acreage dedications spanning approximately 300,000 acres in the DJ Basin (with over 265,000 dedicated acres from Noble and the balance from a third party) and approximately 40,000 acres in Reeves County in the Delaware Basin for which we are currently, or intend to, provide crude oil, natural gas, and water-related midstream services under long-term, fixed fee contracts. In addition to our existing operations and acreage dedications, Noble has granted us rights of first refusal, or ROFRs, on a combination of midstream assets retained, developed or acquired by Noble and services not already dedicated to us in the DJ Basin, Eagle Ford Shale in Texas and Delaware Basin, including approximately 85,000 additional acres in the DJ Basin, approximately 31,000 acres in Webb and Dimmit Counties in South Texas, including the Eagle Ford Shale, and approximately 40,000 acres in the Delaware Basin. Noble has also granted us a ROFR on certain future acquired acreage that is onshore in the United States outside of the Marcellus Shale. See “Business—Rights of First Refusal on Assets and Services.”

We believe we are well positioned to (i) develop our infrastructure in a manner and on a timeline that will allow us to handle increasing volumes that we anticipate will result from Noble’s drilling programs on these dedicated properties, and (ii) attract third-party customers in the DJ Basin, Delaware Basin and future areas of operation as we continue to expand our existing and build out new midstream systems and facilities. During the second quarter of 2016, we secured our first third party customer in the DJ Basin with an approximately 33,000 net acre dedication for crude oil gathering and water services through a series of long-term, fee-based commercial arrangements with services expected to commence in the third quarter of 2017. We intend to

 

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continue to seek similar commercial arrangements with others by leveraging our existing midstream footprint. We anticipate that our strategically located midstream infrastructure assets, as well as our relationship with Noble, will continue to position us as a leading midstream service provider.

The commercial agreements that we have in place are all fee-based and include dedications of production in the DJ Basin and the Delaware Basin, each with an initial term ending in either 2030 or 2032. See “Business—Our Acreage Dedication.” These long-term, fee-based commercial agreements are intended to mitigate direct commodity price exposure and enhance the stability of our cash flows.

DJ Basin Overview

Noble is our primary customer and one of the largest producers of liquids in the DJ Basin, where it produced, on average, 115 MBoe/d of crude oil, condensate, natural gas and NGLs in the six months ended June 30, 2016, with 66% of such volumes being crude oil and NGLs.

Noble commenced horizontal drilling in the DJ Basin in 2010 in order to increase recoveries of liquid-rich hydrocarbons. This shift to a horizontal drilling program has created an opportunity for more efficient gathering of crude oil, natural gas, NGLs and water, which is the core of our business. Noble continues to refine a number of drilling and completion techniques to increase efficiencies and ultimate recovery while enhancing the overall value of its DJ Basin position. Noble accelerated its extended reach lateral well program to approximately 62% of wells drilled in 2016. In the six months ended June 30, 2016, the majority of Noble’s wells in the DJ Basin were completed using enhanced slickwater completion techniques, requiring increased volumes of fresh water to be delivered to the drill site, further strengthening Noble’s demand for our water services. During the first half of 2016, Noble spud 50 horizontal wells, of which 31 were extended reach lateral wells, and 61 wells initiated production. Since January 2010, Noble has spud over 1,100 horizontal wells, covering over five million lateral feet.

The table below shows Noble’s DJ Basin drilling activities for the periods presented.

 

     Year Ended
December 31,
     Year
to Date
 
     2013      2014      2015      June 30, 2016  

Number of horizontal wells spud

     285         303         171         50   

Approximate average lateral feet per horizontal well

     4,400         5,600         6,200         7,700   

 

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The graph below shows Noble’s net DJ Basin production and drilling activity from January 1, 2010 through June 30, 2016, and demonstrates the impact that the horizontal drilling program has had on Noble’s DJ Basin production. A number of factors impact Noble’s production and drilling activity, including the number of drilling rigs that Noble operates on its acreage. See “Risk Factors—Risks Related to Our Business.”

 

LOGO

Our midstream operations in the DJ Basin were established in order to service Noble’s growing production associated with its horizontal drilling program. Since our Predecessor’s operations began in October 2013, Noble’s overall horizontal production in the DJ Basin has grown from an average of 64 net Mboe/d for the three months ended December 31, 2013 to 92 net Mboe/d for the six months ended June 30, 2016, an increase of 43%, which represents a compound annual growth rate of approximately 16% over the time period.

In the areas of the DJ Basin where Noble is focused and where we have infrastructure, Noble’s combined volumes associated with its horizontal drilling program averaged nearly 61 net MBoe/d in the six months ended June 30, 2016, up 29% compared to the six months ended June 30, 2015. We provide crude oil and natural gas gathering services with respect to the majority of Noble’s horizontal production in these areas, and, as a result, our gathered volumes averaged 61 MBoe/d in the six months ended June 30, 2016, up 67% compared to the six months ended June 30, 2015. For the third quarter of 2016, we expect our gathered volumes to average approximately 63.5 MBoe/d. For the six months ended June 30, 2016, our gathered volumes represented approximately 51% of Noble’s DJ Basin gross horizontal production, up from approximately 30% for the six months ended June 30, 2015. Our acreage dedications from Noble along with our commercial agreements and operating footprint will allow us to capture the majority of incremental production volumes associated with Noble’s horizontal drilling program in these areas and throughout the DJ Basin.

The graph below shows Noble’s gross horizontal production in the DJ Basin from January 1, 2010 through June 30, 2016, along with our gathered volumes since our Predecessor’s operations initiated in the fourth quarter of 2013. Noble’s crude oil and natural gas volumes produced prior to the fourth quarter of 2013 were not connected to our assets; as Noble continues to develop its acreage in the DJ Basin and legacy production continues to decline, we anticipate that we will continue to service an increasing percentage of Noble’s volumes in the DJ Basin.

 

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LOGO

Texas Overview

Noble entered the Delaware Basin and Eagle Ford Shale in 2015 through its merger with Rosetta Resources Inc. Noble’s current focus is on approximately 88,000 net acres in these areas, of which Noble has dedicated to us approximately 40,000 net acres in the Delaware Basin for crude oil and produced water services. Noble has already demonstrated improvements in well performance in the year since acquiring this acreage with the application of its unconventional completion expertise. We are working with Noble in the Delaware Basin to implement a centralized facility concept and to apply the expertise and knowledge refined over the last several years in the DJ Basin to the Delaware Basin. The infrastructure will support crude oil and produced water related services which is expected to generate revenue in the Delaware Basin by the second quarter of 2017 and coincides with the expiration or termination of existing water dedications.

The Delaware Basin has significantly evolved over the last several years with multi-bench development, completion improvements and longer laterals, transforming it into one of the most commercial basins in the US. These advancements supported economic development through the recent price cycle. For example, the Southern Delaware Basin has experienced a significant growth in activity since 2012, with monthly crude oil and natural gas production in Reeves County, Texas increasing 512% from January 2012 through April 2016 according to the Railroad Commission of Texas. As producers continue to refine horizontal drilling techniques, the Delaware Basin is expected to experience further growth with additional improvements in completion design and development optimization.

Our Assets, ROFRs and ROFOs

Through our development companies, we operate and own interests in crude oil gathering pipelines, crude oil treating facilities, natural gas gathering pipelines, a centralized gathering facility, or CGF and future assets currently under development. In the DJ Basin, we also provide Noble with water-related services that are critical to Noble’s upstream operations, including the storage and distribution of fresh water for use in drilling and

 

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completion operations and collecting, cleaning and disposing of flowback and produced water, which we refer to collectively as saltwater, through our interests in pipelines and facilities (or under contracts with third parties).

The majority of our existing facilities are located in two areas of Weld County, Colorado, that we refer to as the Wells Ranch integrated development plan area, or Wells Ranch IDP, and the East Pony integrated development plan area, or East Pony IDP. In the DJ Basin, Noble operates through integrated development plans, or IDP areas, through a comprehensive design for well pad facilities that support horizontal drilling allowing us to efficiently gather production and provide other related midstream services to these areas with reduced truck traffic, emissions and overall surface footprint. Each IDP area consists of a large block of Noble’s contiguous acreage, allowing us to build and operate midstream infrastructure that we believe is more efficient in terms of capital invested per mile of pipe and service provided.

In addition to our assets in the Wells Ranch IDP and East Pony IDP, we have dedications with respect to development that is expected to occur in the future from Noble and a third party, a ROFR from Noble on certain assets and services and a right of first offer, or ROFO, from Noble with respect to its retained interests in the development companies through which we conduct our midstream services. We believe that our assets and the ROFR and ROFO agreements granted to us by Noble will continue to position us as a leading midstream service provider.

Our Assets

Substantially all of our current cash flows are generated by our assets owned by the Colorado River DevCo LP in which we own an initial 80% controlling interest. We expect these assets to be key contributors to our growth as Noble continues to increase its production in the DJ Basin through the execution of its horizontal drilling plan.

The majority of the assets owned by Colorado River DevCo LP consist of gathering systems in the Wells Ranch IDP that collect crude oil, natural gas and saltwater from facilities located at or near the wellhead and provide gathering to the Wells Ranch CGF or other delivery points within the IDP area. At the Wells Ranch CGF, we provide certain integral services, including separation, treatment, cleaning and storage of the incoming liquid stream into pipeline-quality crude oil and saltwater suitable for disposal operations. At the tailgate of the Wells Ranch CGF, we deliver the hydrocarbons to a third party for additional transportation, gathering and processing and we collect and clean the saltwater and prepare it for treating and disposal. We expect these systems and others that we may develop will continue to provide us and Noble many benefits, including increased capital and operating efficiencies. Our assets servicing the Wells Ranch IDP include:

 

   

approximately 35 miles of liquids pipelines that carry both crude oil and saltwater to the Wells Ranch CGF, which has storage capacity for up to 96,000 Bbls of crude oil and 32,000 Bbls of saltwater as of June 30, 2016, and these liquids pipelines had, during the six months ended June 30, 2016:

 

  ¡    

average daily throughput of approximately 25,000 Bbl/d of crude oil (increased 68% from 14,900 Bbl/d during the first half of 2015); and

 

  ¡    

average daily throughput of approximately 9,800 Bbl/d of saltwater (increased 206% from 3,200 Bbl/d during the first half of 2015);

 

   

approximately 40 miles of natural gas gathering pipelines servicing the Wells Ranch IDP, which had average daily throughput of approximately 91,200 Mcf/d during the six months ended June 30, 2016 (increased 38% from 65,900 Mcf/d during the first half of 2015); and

 

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approximately 20 miles of fresh water pipelines servicing the Wells Ranch IDP that delivered an average of approximately 33,500 Bbl/d of fresh water during the six months ended June 30, 2016 (increased 661% from 4,400 Bbl/d during the first half of 2015) and storage capacity of approximately 500,000 Bbls of fresh water as of June 30, 2016.

In addition to our assets servicing the Wells Ranch IDP, the Colorado River DevCo LP owns the following assets:

 

   

approximately 25 miles of crude oil gathering pipelines servicing the East Pony IDP, which came online in March 2015 and which had average daily throughput of approximately 20,400 Bbl/d of crude oil during the six months ended June 30, 2016; and

 

   

the Briggsdale and Platteville crude oil treating facilities, which have an annual operating capacity of 2,740,000 Bbls and 1,825,000 Bbls, respectively.

The remainder of our assets are held by five development companies in which we own initial controlling interests in the percentages as set forth in the parentheticals below. We believe this tiered ownership structure will allow us to maintain flexibility to adjust to Noble’s development decisions. The following are descriptions of our five development companies:

 

   

Green River DevCo LP (25%) has assets located in the Mustang IDP, consisting of a fresh water storage pond with a storage capacity of approximately 230,000 Bbls of water, rights-of-way and surface rights on which we are constructing additional components of the fresh water system and on which we plan to construct crude oil, natural gas and additional water infrastructure in order to provide services under our dedications. We anticipate the first centralized facility servicing the Mustang IDP and the related gathering infrastructure to be in operation by the end of 2017.

 

   

Blanco River DevCo LP (25%) has dedications from Noble for crude oil gathering and produced water services in the Delaware Basin. Construction of the crude oil and produced water infrastructure required to support Noble’s planned development in the Delaware Basin will begin in 2016. We anticipate the gathering system and initial facility to be in operation during the second quarter of 2017.

 

   

Laramie River DevCo LP (100%) has dedications from Noble and a third party for crude oil gathering and water services in the Greeley Crescent IDP. We are in the process of obtaining rights of way and procuring long lead items for a third party crude oil trunk line running from central Greeley Crescent to multiple downstream outlets near Platteville, CO, which will service third party dedicated acreage as well as potential Noble production on its remaining acreage within this IDP area in the future. Construction of this infrastructure will begin in 2016, and we anticipate the gathering systems to be in operation by mid-2017.

 

   

San Juan River DevCo LP (25%) has assets in the East Pony IDP, which consist of rights-of-way, surface rights and fresh water systems consisting of approximately 9 miles of fresh water pipelines and a storage capacity of approximately 550,000 Bbls of fresh water as of June 30, 2016 and a dedication from Noble for all water services in the East Pony IDP. We currently provide produced water services through third party transportation providers and saltwater disposal facilities, and may provide additional produced water services in the future.

 

   

Gunnison River DevCo LP (5%) has assets in the Bronco IDP, which consist of dedications from Noble for crude oil gathering and water services.

We also own a 3.33% ownership interest in White Cliffs Pipeline, L.L.C., or White Cliffs LLC, which entitles us to distributions based on our pro rata share of monthly net cash flow generated by the operation of the White Cliffs Pipeline. The White Cliffs Pipeline system consists of two 527-mile crude oil pipelines that extend

 

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from the DJ Basin to the Cushing, Oklahoma market that had a capacity of approximately 215,000 Bbl/d of crude oil as of June 30, 2016. See “Business—Our Assets, ROFRs and ROFO—Our Assets.”

The following table provides a summary of our assets, services and dedicated net acreage (as of June 30, 2016, unless otherwise indicated) along with our ownership of these assets as of the closing of this offering.

 

DevCo

 

Areas Served

 

NBLX Dedicated Service

 

Current Status

of Asset

 

Dedicated Net

Acreage

 

NBLX
Ownership

Colorado River DevCo LP

 

•  Wells Ranch IDP

 

 

•  Crude Oil Gathering

•  Natural Gas Gathering

•  Water Services

 

 

•  Operational

 

 

•  79,000(4)

 

 

80%

 

 

•  East Pony IDP

 

•  All Noble DJ Basin Acreage

 

•  Crude Oil Gathering

 

•  Crude Oil Treating

 

•  Operational

 

•  Operational

 

•  44,000

 

•  N/A(1)

 

Green River DevCo LP

 

Mustang IDP(2)

 

 

•  Crude Oil Gathering

•  Natural Gas Gathering

•  Water Services

 

 

•  Under Construction

•  Under Construction

•  Partially Operational

 

 

75,000

 

 

25%

 

Blanco River DevCo

 

Delaware Basin

 

•  Crude Oil Gathering

•  Produced Water Services

 

 

Planning

 

 

40,000(5)

 

 

25%

 

Laramie River DevCo LP

 

Greeley Crescent IDP(3)

 

 

•  Crude Oil Gathering

•  Water Services

 

 

Under Construction

 

 

65,000(3)

 

 

100%

 

San Juan River DevCo LP

 

East Pony IDP(6)

 

 

•  Water Services

 

 

Operational

 

 

44,000

 

 

25%

 

Gunnison River DevCo LP

 

Bronco IDP(2)

 

 

•  Crude Oil Gathering

•  Water Services

 

 

Future Development

 

 

36,000(4)

 

 

5%

 

 

(1) The fee for crude oil treating services is not acreage based. We receive a monthly fee for each Noble-operated well producing in paying quantities in the DJ Basin that is not connected to our crude oil gathering systems during each month, which was 4,480 wells as of June 30, 2016.
(2) We currently have limited midstream infrastructure assets in the Mustang IDP and no midstream infrastructure assets in the Bronco IDP. Our assets in these IDP areas currently consist primarily of dedications to us from Noble for future production in these IDP areas. In the Mustang IDP, we also own one fresh water storage pond and certain rights-of-way and surface rights. See “Business—Our Assets, ROFRs and ROFO.” We anticipate the first centralized facility servicing the Mustang IDP and related gathering infrastructure to be in service by the end of 2017.
(3) Our assets in this IDP area currently consist of dedications to us from Noble and an unaffiliated third party. See “Business—Our Assets, ROFRs and ROFO.” On May 3, 2016, Noble announced a sale of approximately 33,000 net acres to such third party, which acreage is in the Greeley Crescent IDP. On June 14, 2016, the first closing in respect of such sale closed pursuant to which the non-producing acreage was conveyed out of Noble and the second closing is expected to occur in the future. As a result of the first closing and the acreage that Noble retained, all of the acreage in the Greeley Crescent IDP remains subject to the dedications in favor of us for crude oil gathering, produced water services and fresh water services.
(4) On June 15, 2016, Noble entered into an acreage swap pursuant to which Noble will increase its holdings in the Wells Ranch IDP by approximately 11,700 net acres in exchange for reducing its interest in the Bronco IDP by approximately 13,500 net acres. Upon completion, all of the outbound acreage in the Bronco IDP was released from the prior dedications to us, and the inbound acreage in the Wells Ranch IDP became dedicated to us. After giving effect to this acreage swap, the dedication in the Wells Ranch IDP is approximately 79,000 net acres and our dedication in the Bronco IDP is approximately 36,000 net acres.

 

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(5) Includes acreage currently dedicated to other providers for produced water services and committed to us upon expiration of existing dedications. The majority of these dedications will expire or are expected to be terminated by Noble by the time our planned infrastructure is operational in 2017.
(6) We currently provide produced water services through third party transportation providers and saltwater disposal facilities, and may provide additional produced water services in the future.

Rights of First Refusal

Noble has granted us a ROFR on the right to provide midstream services on certain acreage described below and on the right to acquire certain midstream assets. The following describes how these ROFRs are applicable in our primary geographic areas:

 

   

East Pony Natural Gas Gathering and Northern Colorado Natural Gas Processing. The services ROFR gives us the right to provide natural gas processing and natural gas gathering services on approximately 44,000 net acres located in East Pony IDP in the event Noble elects to obtain such services from a third party. Today, Noble provides these services for itself, using the assets described below. Noble has granted us a ROFR on the right to buy these assets in the event Noble elects to sell them:

 

  ¡    

Approximately 233 miles of natural gas gathering pipelines, which had average daily throughput of approximately 36,600 Mcf/d during the six months ended June 30, 2016 (increased 11% from 33,000 Mcf/d during the first half of 2015).

 

  ¡    

Two natural gas processing plants, Lilli and Keota, with combined existing processing capacity of 48,000 Mcf/d. Keota is permitted for an 15,000 Mcf/d expansion to handle approximately 45,000 Mcf/d (bringing total combined processing capacity to 63,000 Mcf/d). Daily processing volumes for Lilli and Keota combined averaged approximately 33,200 Mcf/d during the six months ended June 30, 2016 (increased 85% from 18,000 Mcf/d during the first half of 2015).

 

   

Eagle Ford Shale. The services ROFR gives us the right to provide crude oil gathering, natural gas gathering and water services on approximately 31,000 net acres in Dimmit and Webb Counties in the event Noble elects to offer these services to a third party. In addition, in the event that Noble elects to sell to a third party the crude oil, natural gas and water gathering systems that currently service Noble’s operated acreage in the Eagle Ford, the ROFR gives us the right to purchase these assets that had an average daily throughput of approximately 12.2 MBbl/d of crude oil, 239.3 MMcf/d of natural gas, and 4.2 MBbl/d of water, respectively, during the six months ended June 30, 2016.

 

   

DJ Basin. The services ROFR gives us the right to provide crude oil gathering, natural gas gathering and water services on approximately 85,000 net acres in the DJ Basin that are not already dedicated to us, and with respect to the acreage already under dedications for certain services, the right to provide the other midstream services in our areas of specialty, if they become available.

 

   

Delaware Basin. The services ROFR gives us the right to provide natural gas gathering, natural gas processing and fresh water services on the same acreage that is dedicated to us for crude oil and produced water gathering, which is approximately 40,000 net acres in the Delaware Basin.

 

   

Future acquired acreage in the onshore United States. The services ROFR gives us the right to provide crude oil gathering, natural gas gathering and water services on all acreage that Noble acquires after the date of the Closing that is onshore in the United States (outside of the Marcellus Shale).

Please read “Business — Acreage Dedication — Right of First Refusal on Assets and Services” for additional information regarding our rights of first refusal.

 

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The following table provides a summary of the ROFR assets and ROFR services and the net acreage covered by our ROFR, to the extent known as of June 30, 2016, granted to us by Noble.

 

Areas Served

 

NBLX ROFR Service

 

Current Status

of Asset

 

ROFR Net

Acreage

Northern Colorado

 

•      Natural Gas Processing

•      Natural Gas Gathering

 

Operational

 

N/A

Eagle Ford Shale

 

•      Crude Oil Gathering

•      Natural Gas Gathering

•      Water Services

 

 

Operational

 

31,000

DJ Basin (other than
dedicated above)

 

To the extent not already covered in dedication in the prior chart:

•      Crude Oil Gathering

•      Natural Gas Gathering

•      Water Services

 

 

N/A

 

85,000

Delaware Basin

 

•      Natural Gas Processing

•      Natural Gas Gathering

•      Fresh Water Services

 

 

Planning

 

40,000

All future-acquired onshore acreage in U.S. (outside of Marcellus Shale)

 

•      Crude Oil Gathering

•      Natural Gas Gathering

•      Water Services

 

N/A

 

N/A

Rights of First Offer

Noble has granted us a ROFO with respect to its retained interests in the development companies through which we conduct our midstream services. Please read “Business — Acreage Dedication — Right of First Offer on Retained Interests” for additional information regarding our rights of first offer.

Business Strategies

Our principal business objectives are to generate stable cash flows and increase the quarterly cash distributions that we pay to our unitholders over time while ensuring the ongoing stability of our business by providing outstanding service to our upstream customers. We expect to achieve these objectives through the following business strategies:

 

   

Acting as the primary provider of midstream services in Noble’s dedicated areas. Our midstream infrastructure currently serves Noble’s production on its substantial acreage in the DJ Basin, from which Noble produced an average of 115 net MBoe/d of crude oil, condensate, natural gas and NGLs during the first half of 2016, 61 net Mboe/d of which was attributable to Noble’s horizontal drilling program in our current areas of operation, Wells Ranch IDP and East Pony IDP. We provide crude oil and natural gas gathering services on the majority of Noble’s horizontal production in these areas, and, as a result, our gathered volumes averaged 61 MBoe/d for the first half of 2016, up 67% compared to the first half of 2015. Our acreage dedications from Noble along with our operating footprint will allow us to capture the majority of incremental production volumes associated with Noble’s horizontal drilling program in these areas and throughout the DJ Basin. In addition, we plan to service Noble’s Delaware Basin acreage after the expiration or termination of certain pre-existing dedications to third parties and installation of appropriate infrastructure. We expect Noble’s production volumes to grow from its future horizontal drilling activities, which we anticipate will help us maintain and grow throughput on our crude oil, natural gas and saltwater midstream infrastructure and increase demand for our fresh water services. We are strategically positioned to expand our delivery of midstream services within the areas dedicated to us as Noble executes on its drilling and development plans.

 

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Pursuing accretive acquisitions from Noble. After this offering, Noble will be the sole owner of our general partner and will own a 60.7% limited partner interest in us, consisting of 3,402,584 common units and all of our subordinated units and incentive distribution rights and its retained non-controlling interests in our operating assets and dedications. Noble has granted us a right of first offer, or ROFO, on its retained interests in the development companies that hold our assets and has granted us ROFRs to provide certain midstream services and to acquire certain midstream assets onshore in the United States (other than in the Marcellus Shale). We expect Noble to be strongly incentivized to help us grow our business, including by offering us the opportunity to acquire midstream assets it has retained, develops or acquires in the future and elects to sell.

 

   

Attracting additional third-party business. In addition to becoming an integral provider of midstream services for Noble’s production in the DJ Basin and Delaware Basin, we intend to continue to market our services to, and pursue strategic relationships with, third-party producers over the long term. We believe that our portfolio of assets and our execution and operational capabilities will position us favorably to compete for additional third-party production. For example, we recently contracted with an unaffiliated third party customer in the DJ Basin through a series of commercial arrangements with expected services to commence in the third quarter of 2017.

 

   

Focusing on long-term, fixed-fee arrangements to mitigate direct commodity price exposure and enhance the stability of our cash flows. Our commercial agreements are structured as long-term, fixed-fee arrangements, and we intend to continue to pursue additional long-term, fixed-fee arrangements with Noble and third parties. The commercial agreements that we have in place are all fee-based and establish dedications in our favor with an initial term ending in either 2030 or 2032. We will pursue additional long-term commitments from customers, which may include throughput-based charges, reservation-based charges, or acreage dedications. None of our existing commercial agreements contain minimum volume commitments.

Competitive Strengths

We believe we are well-positioned to successfully execute our business strategies because of the following competitive strengths:

 

   

Strategic relationship with Noble. We have a strategic relationship with Noble, one of the leading producers of crude oil, condensate, natural gas and NGLs in North America. As the owner of our general partner, all of our incentive distribution rights, a 60.7% limited partner interest in us and its retained, non-controlling interests in the development companies that hold our assets, we believe Noble will be incentivized to promote and support our business plan and to pursue projects that enhance the overall value of our business. Through our long-term commercial agreements with Noble, we have a well-capitalized, investment grade commercial counterparty initially responsible for all of our revenues and expect that our additional third party customer will contribute to our revenue by the third quarter of 2017. In addition, Noble has granted us substantial dedications, a ROFR on significant midstream assets, a ROFR on the right to provide future midstream services in areas key to Noble’s development and a ROFO on its retained interests in the development companies that hold our assets. See “Business—Our Acreage Dedication” and “Business—Right of First Refusal on Assets and Services.” We believe that our relationship with Noble will provide us with a stable base of cash flows and significant growth opportunities.

 

   

Strategically located assets. Our initial midstream infrastructure assets are located on and around Noble’s significant, contiguous acreage in the DJ Basin and serve Noble’s current and future production on this acreage. Both the DJ Basin and the Delaware Basin, where we will begin to construct midstream infrastructure assets during the second half of 2016, have been focus areas for extensive industry activity over the last several years. We expect producers, including Noble, to continue to invest substantial capital to develop crude oil and natural gas production in these regions, which will in turn

 

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require substantial investment in midstream infrastructure. Noble’s concentrated development is intended to centrally locate production and midstream infrastructure rather than replicate services and infrastructure at each wellhead, which we believe will allow us to efficiently gather Noble’s production from centralized wellhead equipment. In addition, we believe our customers’ contiguous acreage in the DJ Basin and Delaware Basin will provide us opportunities to deliver fresh water in connection with well completion activities and collect, clean and dispose of saltwater. We believe that our existing footprint, coupled with our long-term dedications, positions us to capitalize on midstream growth opportunities on and around our customers’ contiguous acreage in the DJ Basin and Delaware Basin.

 

   

Long-term, fixed-fee contracts to support cash flows. We service Noble’s liquids-rich production in the DJ Basin pursuant to long-term, fixed-fee contracts. For the twelve months ended June 30, 2016, Noble represented all of our gathered volumes. We have secured dedications from Noble under which we will provide our crude oil, natural gas and water services and we have secured dedications from an unaffiliated third party under which we will provide crude oil gathering and water services, in both cases, pursuant to fixed-fee contracts, inclusive of automatic year-over-year fee increases, with initial terms expiring in 2030 for DJ Basin dedications and 2032 for Delaware Basin dedications. We believe that Noble’s horizontal drilling activity and potential new third-party customers will drive the stable growth of our midstream operations. Our contract structure mitigates our direct exposure to commodity price risk and will likely contribute to long-term cash flow stability.

 

   

Financial flexibility and strong capital structure. At the closing of this offering, we expect to have $350 million of availability under our new, undrawn revolving credit facility, which can be increased by an additional $350 million as long as we are in compliance with the covenants contained in our credit agreement and subject to requisite commitments from existing or new lenders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.” We believe that our available borrowing capacity and our expected ability to access debt and equity capital markets provide us with the financial flexibility necessary to execute our business and growth strategies.

 

   

Experienced management and operating teams. Our executive management team has combined experience of over 57 years in designing, acquiring, building, operating, financing and otherwise managing large-scale midstream and other energy assets. In addition, through our omnibus agreement and operational services and secondment agreement with Noble, we employ engineering, construction and operations teams that have significant experience in designing, constructing and operating large scale midstream and other energy assets.

Noble Energy, Inc.

Overview

Noble is a global independent oil and natural gas exploration and production company, with total proved reserves of 1.4 billion Boe at year-end 2015. Noble’s diverse resource base includes positions in four premier unconventional U.S. onshore plays - the DJ Basin, Delaware Basin, Eagle Ford Shale and Marcellus Shale - and offshore in the U.S. Gulf of Mexico, Eastern Mediterranean and West Africa. Noble is listed on the NYSE under the symbol “NBL” and had a market capitalization of approximately $15.5 billion as of August 29, 2016.

Noble is one of the largest producers of liquids in the DJ Basin, where it produced, on average, 115 MBoe/d of crude oil, condensate, natural gas and NGLs during 2015, with 67% of such volumes being crude oil and NGLs. Noble’s sales volumes in the DJ Basin averaged 115 MBoe/d in the six months ended June 30, 2016, with 66% of such volumes being crude oil and NGLs.

Noble entered the Delaware Basin and Eagle Ford Shale in 2015 through its merger with Rosetta Resources Inc. Noble’s current focus is on approximately 88,000 net acres in these areas, of which Noble has dedicated to

 

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us approximately 40,000 net acres in the Delaware Basin, certain of which acres are subject to preexisting dedications with respect to produced water services that expire or will be terminated in 2017 and 2018. We are constructing infrastructure to provide crude oil and water midstream services by the end of the third quarter of 2017. Noble has already demonstrated improvements in well performance in the year since acquiring the position with the application of its unconventional completion expertise. The unique combination of an operated and consolidated acreage position has enabled the redesign of the field optimized for long lateral development. As a result of this redesign the current operated undrilled average lateral length is approximately 7,000 feet. Noble has partnered with us in the Delaware Basin to implement the central facility development and to take advantage of the expertise and knowledge developed over the last several years in the DJ Basin. The remainder of Noble’s acreage in Texas will continue to be serviced under existing arrangements, subject to the ROFR Noble has granted to us.

Our Relationship with Noble

One of our principal strengths is our relationship with Noble. In connection with the completion of this offering, we will (i) issue 3,402,584 common units and 15,902,584 subordinated units to Noble, representing an aggregate 60.7% limited partner interest in us (or an aggregate 54.8% limited partner interest in us if the underwriters exercise in full their option to purchase additional common units), (ii) issue a non-economic general partner interest in us to our general partner and issue all of our incentive distribution rights to Noble and (iii) use a portion of the net proceeds from this offering to make a distribution of approximately $228.1 million to Noble. Please read “—The Offering,” “Use of Proceeds,” “Security Ownership of Certain Beneficial Owners and Management” and “Certain Relationships and Related Party Transactions—Distributions and Payments to Our General Partner and Its Affiliates.”

Given Noble’s significant ownership interest in us following this offering and its intent to use us as its primary domestic midstream service provider in areas that have not previously been dedicated to other ventures, we believe that Noble will be incentivized to promote and support the successful execution of our business strategies; however, we can provide no assurances that we will benefit from our relationship with Noble. While our relationship with Noble 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.”

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 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 this prospectus;

 

   

deferral of 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.

 

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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 $1.0 billion in annual revenue, (iii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period and (iv) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act.

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

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

Risk Factors

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. Below is a summary of certain key risk factors that you should consider in evaluating an investment in our common units. However, this list is not exhaustive. Please read “Risk Factors” and “Forward-Looking Statements.”

Risks Related to Our Business

 

   

We derive substantially all of our revenue from Noble. If Noble changes its business strategy, alters its current drilling and development plan on our dedicated acreage, or otherwise significantly reduces the volumes of crude oil, natural gas, saltwater or fresh water with respect to which we perform midstream services, our revenue would decline and our business, 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 make the payment of the minimum quarterly distribution to our unitholders.

 

   

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.

 

   

We cannot predict the rate at which our customers will develop acreage that is dedicated to us or the areas they will decide to develop.

Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including Noble, 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 Noble, and Noble is under no obligation to adopt a business strategy that favors us.

 

   

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

 

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Affiliates of our general partner and Noble may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us except with respect to dedications contained in our commercial agreements and rights of first refusal and rights of first offer contained in our omnibus agreement.

 

   

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.

 

   

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.

Tax Risks

 

   

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the Internal Revenue Service, or IRS, were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

 

   

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

 

   

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

The Transactions

We were formed in December 2014 by Noble. In connection with this offering, Noble will contribute to us the percentages of the development companies we do not currently own that will operate our assets described under “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Contribution Agreement.”

In addition, in connection with this offering, we will:

 

   

issue 3,402,584 common units and 15,902,584 subordinated units to Noble, representing an aggregate 60.7% limited partner interest in us;

 

   

issue all of our incentive distribution rights to Noble;

 

   

issue 12,500,000 common units to the public, representing a 39.3% limited partner interest in us, and we will apply the net proceeds as described under “Use of Proceeds;”

 

   

enter into a new $350 million revolving credit facility;

 

   

have long-term, fixed-fee commercial agreements with Noble;

 

   

enter into an omnibus agreement with Noble and our general partner; and

 

   

enter into an operational services and secondment agreement with Noble.

The number of common units to be issued to Noble 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 held by Noble 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

 

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to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to Noble at the expiration of the option period for no additional consideration. Any additional common units issued to Noble upon the expiration of the underwriters’ option to purchase additional common units will be issued pursuant to the exemption from registration provided under Section 4(a)(2) of the Securities Act. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units to make a cash distribution to Noble.

Ownership and Organizational Structure

After giving effect to the transactions described above, assuming the underwriters’ option to purchase additional common units from us is not exercised, our partnership interests will be held as follows:

 

Public common units

     39.3

Noble common units

     10.7

Noble subordinated units

     50.0

Noble incentive distribution rights

     —   %(1) 

General partner interest

     —   %(2) 
  

 

 

 

Total

     100.0
  

 

 

 

 

  (1) Incentive distribution rights represent a variable interest in distributions and thus are not expressed as a fixed percentage. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Incentive Distribution Rights.” Distributions with respect to the incentive distribution rights will be classified as distributions with respect to equity interests. All of our incentive distribution rights will be issued to Noble.
  (2) Our general partner owns a non-economic general partner interest in us. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash—General Partner Interest.”

 

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The following simplified diagram depicts our organizational structure after giving effect to the transactions described above.

 

LOGO

 

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Management of Noble Midstream Partners LP

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

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, our development companies. 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 has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by Noble. In addition, pursuant to the operational services and secondment agreement that will be entered into at the closing of this offering, certain of Noble’s employees will be seconded to our general partner to provide certain management and all operational services with respect to our business under the direction and control of our general partner. 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 and its affiliates, including Noble, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

Principal Executive Offices and Internet Address

Our principal executive offices are located at 1001 Noble Energy Way, Houston, Texas, 77070, and our telephone number is (281) 872-3100. Following the completion of this offering, our website will be located at www.NBLMidstream.com. We expect to make our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission, or the SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is not adverse to the interests of our partnership. However, because our general partner is a wholly owned subsidiary of Noble, the officers and directors of our general partner have a duty to manage the business of our general partner in a manner that is in the best interests of Noble. As a result of this relationship, conflicts of interest may arise in the future between us or our unitholders, on the one hand, and our general partner or its affiliates, including Noble, 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 Noble, as the initial holder of our incentive distribution rights, receives incentive cash 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. Please read “Conflicts of Interest and Duties.”

Delaware law provides that a Delaware limited partnership may, in its partnership agreement, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the

 

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partnership. 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 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 Noble and its affiliates, 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 dedications contained in our commercial agreements and rights of first refusal contained in our omnibus agreement. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and, pursuant to the terms of our partnership agreement, each holder of common units 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 Our General Partner” and “Certain Relationships and Related Party Transactions.”

 

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The Offering

 

Common units offered to the public

12,500,000 common units (or 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

15,902,584 common units and 15,902,584 subordinated units, each representing an aggregate 50% limited 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 Noble at the expiration of the option period 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 $230.4 million from the sale of 12,500,000 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 page of this prospectus), after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units is not exercised. We intend to use the net proceeds from this offering (i) to make a distribution of approximately $228.1 million to Noble; (ii) to pay approximately $2.3 million of origination fees and expenses related to our new revolving credit facility; and (iii) for general partnership purposes. Please read “Use of Proceeds.”

 

  If the underwriters exercise in full their option to purchase additional common units, we expect to receive additional net proceeds of approximately $35.1 million, after deducting underwriting discounts and commissions and the structuring fee. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units to make a cash distribution to Noble.

 

Cash distributions

We intend to make a minimum quarterly distribution of $0.3750 per unit 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. 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.”

 

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  We do not expect to make distributions for the period that began on July 1, 2016 and ends on the day prior to the closing of this offering. Our distribution for the period ending December 31, 2016 will be adjusted by an amount that covers the period from the closing of this offering through September 30, 2016 based on the actual number of days in that period.

 

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

 

   

first, 100% to the holders of common units, until each common unit has received a minimum quarterly distribution of $0.375 plus any arrearages from prior quarters;

 

   

second, 100% to the holders of subordinated units, until each subordinated unit has received a minimum quarterly distribution of $0.375; and

 

   

third, 100% to all unitholders, pro rata, until each unit has received a distribution of $0.4313.

 

  If cash distributions to our unitholders exceed $0.4313 per unit in any quarter, Noble, as the initial holder of our incentive distribution rights, will receive increasing percentages, up to 50%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, Noble 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—Incentive Distribution Rights.”

 

  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, 2015 and the twelve months ended June 30, 2016, was approximately $54.1 million and $71.4 million, respectively. The amount of distributable cash flow we must generate to pay the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering is approximately $47.7 million (or an average of approximately $11.9 million per quarter).

 

 

We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions—Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2017,” that we will generate sufficient distributable cash flow to pay the aggregate minimum quarterly distributions of $47.7 million on all of our common units and subordinated units for the twelve months ending

 

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September 30, 2017. 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 “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

Following the completion of this offering, Noble will 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, 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 end on the first business day after the date that we have earned and paid distributions of at least (i) $1.5000 (the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units for each of three consecutive, non-overlapping four quarter periods ending on or after September 30, 2019 or (ii) $2.2500 (150% of the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the distributions on the incentive distribution rights for any four-quarter period ending on or after September 30, 2017, 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 partnership interests

Our partnership agreement authorizes us to issue an unlimited number of additional partnership interests and options, rights, warrants and appreciation rights relating to the partnership interests for any partnership purpose at any time and from time to time to such persons for such consideration and on such terms and conditions as our general partner shall determine in its sole discretion, all without the approval of any limited partners. Our unitholders 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 Partnership Interests.”

 

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Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed unless such removal is both (i) for cause and (ii) approved by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Following the completion of this offering, Noble will own 60.7% of our total outstanding units on an aggregate basis (or 54.8% of our total outstanding units on an aggregate basis if the underwriters exercise in full their option to purchase additional common units). As a result, our public unitholders initially will not have the ability to remove 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 (i) 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 (ii) 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. Following 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 21.4% of our common units (excluding any common units purchased by the directors, director nominee and executive officers of our general partner and certain other individuals as selected by general partner under our directed unit program). At the end of the subordination period (which could occur as early as the quarter ending September 30, 2017), 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 60.7% of our outstanding common units (excluding any common units purchased by the directors, director nominee and executive officers of our general partner, and certain other individuals as selected by our general partner under our directed unit program) and therefore would not be able to exercise the call right at that time. Please read “Our Partnership Agreement—Limited Call Right.”

 

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Possible redemption of ineligible holders

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. Units held by persons who our general partner determines are not “eligible holders” at the time of any requested certification in the future may be subject to redemption. “Eligible holders” are limited partners whose (or whose owners’) (i) U.S. federal income tax status or lack of proof of U.S. federal income tax status does not have and is not reasonably likely to have, as determined by our general partner, a material adverse effect on the rates that can be charged to customers by us or our subsidiaries with respect to assets that are subject to regulation by the Federal Energy Regulatory Commission or similar regulatory body and (ii) nationality, citizenship or other related status does not create and is not reasonably likely to create, as determined by our general partner, a substantial risk of cancellation or forfeiture of any property in which we have an interest.

 

  The aggregate redemption price for redeemable interests will be an amount equal to the current market price (the date of determination of which will be the date fixed for redemption) of limited partner interests of the class to be so redeemed multiplied by the number of limited partner interests of each such class included among the redeemable interests. For these purposes, the “current market price” means, as of any date for any class of limited partner interests, the average of the daily closing prices per limited partner interest of such class for the 20 consecutive trading days immediately prior to such date. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. The units held by any person the general partner determines is not an eligible holder will not be entitled to voting rights.

 

  Please read “Our Partnership Agreement—Possible Redemption of Ineligible Holders.”

 

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, 2019, 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 $1.50 per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $0.30 per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Ratio of Taxable Income to Distributions.”

 

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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 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 the directors, director nominee and executive officers of our general partner and certain other individuals as selected by our general partner. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting—Directed Unit Program.”

 

Exchange listing

Our common units have been approved for listing on the NYSE under the symbol “NBLX.”

 

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Summary Historical and Pro Forma Financial Data

The following table presents summary historical financial data of Noble Midstream Partners LP Predecessor, our predecessor for accounting purposes, or our Predecessor, and summary unaudited pro forma financial data of Noble Midstream Partners LP for the periods and as of the dates indicated. The following summary historical financial data of our Predecessor consists of all of the assets and operations of our Predecessor on a 100% basis. In connection with the completion of this offering, Noble will contribute to us the percentages of the midstream systems described under “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Contribution Agreement.” However, as required by U.S. generally accepted accounting principles, or GAAP, we will continue to consolidate 100% of the assets and operations of our development companies in our financial statements.

The summary historical financial data of our Predecessor as of and for the year ended December 31, 2015 and 2014 and as of June 30, 2016 and for the six months ended June 30, 2016 and 2015 are derived from the audited and unaudited financial statements of our Predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical audited and unaudited interim and pro forma 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 financial data presented in the following table for the year ended December 31, 2015 and the six months ended June 30, 2016 are derived from the unaudited pro forma condensed combined financial statements included elsewhere in this prospectus. The unaudited pro forma condensed combined balance sheet assumes the offering and the related transactions occurred as of June 30, 2016, and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2015 and the six months ended June 30, 2016 assume the offering and the related transactions occurred as of January 1, 2015. These transactions include, and the unaudited pro forma condensed combined financial statements give effect to, the following:

 

   

Our ownership of the percentages of the development companies that operate our assets as described under “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Contribution Agreement;”

 

   

our long-term, fixed-fee commercial agreements with Noble;

 

   

our entry into a new $350 million revolving credit facility;

 

   

our entry into an operational services and secondment agreement and omnibus agreement with Noble;

 

   

the consummation of this offering and our issuance of (i) 12,500,000 common units to the public, (ii) a non-economic general partner interest to our general partner and (iii) 3,402,584 common units, 15,902,584 subordinated units and all our incentive distribution rights to Noble; and

 

   

the application of the net proceeds of this offering as described in “Use of Proceeds.”

 

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The unaudited pro forma condensed combined financial statements do not give effect to (i) an estimated $6.7 million in incremental general and administrative expenses that we expect to incur annually as a result of being a publicly traded partnership, (ii) variable general and administrative costs we will incur under the operational services and secondment agreement that we will enter into with Noble as of the closing of this offering or (iii) reimbursable costs that will be due to Noble under the omnibus agreement to be entered into with Noble as of the closing of this offering.

 

    Noble Midstream Partners
LP Predecessor Historical
    Noble Midstream Partners
LP Pro Forma
 
    Year Ended
December 31,
    Six
Months Ended
June 30,
    Year Ended
December 31,
2015
    Six
Months  Ended
June 30,

2016
 
    2015     2014     2016     2015      
               

(unaudited)

    (unaudited)  
   

(in thousands, except per unit data)

 

Statement of Operations Data

           

Revenues

           

Midstream Services—Related Party

  $ 87,837      $ 2,086      $ 65,092      $ 29,063      $ 108,467      $ 65,092   

Income from Investments

    4,621        3,798        2,439        2,358        4,621        2,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

    92,458        5,884        67,531        31,421        113,088        67,531   

Costs and Expenses

           

Direct Operating

    16,933        8,538        12,573        7,670        27,449        12,573   

Depreciation, Depletion and Amortization

    6,891        11,315        4,363        3,057        6,891        4,363   

General and Administrative

    2,771        6,734        4,823        1,511        7,336        4,823   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expense

    26,595        26,587        21,759        12,238        41,676        21,759   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income (Loss)

    65,863        (20,703     45,772        19,183        71,412        45,772   

Other Expense

           

Interest Expense, Net of Amount Capitalized

    4,595        3,566        645        2,471        700        350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expense

    4,595        3,566        645        2,471        700        350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) Before Income Taxes

    61,268        (24,269     45,127        16,712        70,712        45,422   

Income Tax Provision (Benefit)

    23,226        (9,178     17,182        6,218        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss) including non-controlling interests

  $ 38,042      $ (15,091     27,945        10,494      $ 70,712        45,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests(1)

    —          —          —          —          17,086        10,447   

Net income attributable to Noble Midstream Partners LP

  $ 38,042      $ (15,091   $ 27,945      $ 10,494      $ 53,626      $ 34,975   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

           

Common units

            1.69        1.10   

Subordinated units

            1.69        1.10   

Balance Sheet Data (at period end):

           

Total Property, Plant and Equipment, Net

  $ 250,933      $ 195,513      $ 253,005          $ 253,005   

Total Assets

    305,318        216,512        293,367            295,667   

Net Parent Investment/Partners’ Capital

    263,539        213,673        250,119            282,742   

Statement of Cash Flows Data

           

Net Cash Provided by (Used in) Operating Activities

  $ 69,394      $ (12,534   $ 47,009      $ 49,659       

Net Cash Used in Investing Activities

    (54,461     (79,904     (16,718     (47,220    

Net Cash Provided by Financing Activities

    11,679        92,438        (41,445     17,220       

Other Data

           

Capital expenditures(2)

  $ 53,259      $ 80,466      $ 17,120        46,297       

EBITDA(3)

    72,754        (9,388     50,135        22,240      $ 78,303        50,135   

EBITDA attributable to Noble Midstream Partners LP(3)

            59,480        38,628   

 

(1) Represents 20%, 75%, 0%, 95%, 75% and 75% non-controlling interests in the development companies that hold our operating assets that have been retained by Noble as described under “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Contribution Agreement.”
(2) Represents additions to property, plant and equipment within the combined statement of cash flows.
(3) For our definition of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Financial Data—Non-GAAP Financial Measure.”

 

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RISK FACTORS

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. You should carefully consider the following risk factors together with all of the other information included in this prospectus, including the matters addressed under “Forward-Looking Statements,” in evaluating an investment in our common units.

If any of the following risks were to occur, our business, financial condition, results of operations, cash flows and ability to make cash distributions could be materially adversely affected. In that case, we may not be able to pay the minimum quarterly distribution on our common units, the trading price of our common units could decline and you could lose all or part of your investment.

Risks Related to Our Business

We derive substantially all of our revenue from Noble. If Noble changes its business strategy, alters its current drilling and development plan on our dedicated acreage, or otherwise significantly reduces the volumes of crude oil, natural gas, saltwater or fresh water with respect to which we perform midstream services, our revenue would decline and our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected.

Substantially all of our commercial agreements are with Noble or its affiliates. Accordingly, because we expect to initially derive substantially all of our revenue from our commercial agreements with Noble, we are subject to the operational and business risks of Noble, the most significant of which include the following:

 

   

a reduction in or slowing of Noble’s drilling and development plan on our dedicated acreage, which would directly and adversely impact demand for our midstream services;

 

   

the volatility of crude oil, natural gas and NGL prices, which could have a negative effect on Noble’s drilling and development plan on our dedicated acreage or Noble’s ability to finance its operations and drilling and completion costs on our dedicated acreage;

 

   

the availability of capital on an economic basis to fund Noble’s exploration and development activities;

 

   

drilling and operating risks, including potential environmental liabilities, associated with Noble’s operations on our dedicated acreage;

 

   

downstream processing and transportation capacity constraints and interruptions, including the failure of Noble to have sufficient contracted processing or transportation capacity; and

 

   

adverse effects of increased or changed governmental and environmental regulation or enforcement of existing regulation.

In addition, we are indirectly subject to the business risks of Noble generally and other factors, including, among others:

 

   

Noble’s financial condition, credit ratings, leverage, market reputation, liquidity and cash flows;

 

   

Noble’s ability to maintain or replace its reserves;

 

   

adverse effects of governmental and environmental regulation on Noble’s upstream operations; and

 

   

losses from pending or future litigation.

Further, we have no control over Noble’s business decisions and operations, and Noble is under no obligation to adopt a business strategy that is favorable to us. Thus, we are subject to the risk of cancellation of planned development, breach of commitments with respect to future dedications; and other non-payment or non-performance by Noble, including with respect to our commercial agreements, which do not contain minimum

 

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volume commitments. For example, the number of drilling rigs that Noble is operating in the DJ Basin decreased from nine rigs in the fourth quarter of 2014 to three rigs in the fourth quarter of 2015 to two rigs in the first quarter of 2016. A further decrease in the number of drilling rigs that Noble operates on our dedicated acreage could result in lower throughput on our midstream infrastructure. Furthermore, we cannot predict the extent to which Noble’s businesses would be impacted if conditions in the energy industry were to deteriorate nor can we estimate the impact such conditions would have on Noble’s ability to execute its drilling and development plan on our dedicated acreage or to perform under our commercial agreements. Any material non-payment or non-performance by Noble under our commercial agreements would have a significant adverse impact on our business, financial condition, results of operations and cash flows and could therefore materially adversely affect our ability to make cash distributions to our unitholders at the minimum quarterly distribution rate or at all. Our long-term commercial agreements with Noble carry initial terms ending in either 2030 or 2032, and there is no guarantee that we will be able to renew or replace these agreements on equal or better terms, or at all, upon their expiration. Our ability to renew or replace our commercial agreements following their expiration at rates sufficient to maintain our current revenues and cash flows could be adversely affected by activities beyond our control, including the activities of our competitors and Noble.

In addition to our commercial agreements with Noble, we expect to begin developing infrastructure for crude oil and water related services for an unaffiliated, non-investment grade third party customer, with expected services to commence in the third quarter of 2017. We may engage in significant business with this or other new third party customers or enter into material commercial contracts with customers for which we do not have material commercial arrangements or commitments today and who may not have investment grade credit ratings. To the extent we derive substantial income from or commit to capital projects to service new or existing customers, each of the risks indicated above would apply to such arrangements and customers.

In the event any customer, including Noble, elects to sell acreage that is dedicated to us to a third party, the third party’s financial condition could be materially worse than the customer with whom we have contracted, and thus we could be subject to the nonpayment or nonperformance by the third party.

In the event a customer, including Noble, elects to sell acreage that is dedicated to us to a third party, the third party’s financial condition could be materially worse than the original contracting customer. In such a case, we may be subject to risks of loss resulting from nonpayment or nonperformance by the third party, which risks may increase during periods of economic uncertainty. Furthermore, the third party may be subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. Any material nonpayment or nonperformance by the third party could reduce our ability to make distributions to our unitholders.

Contracts with customers, including Noble, are subject to additional risk in the event of a bankruptcy proceeding.

To the extent any of our customers is in financial distress or commences bankruptcy proceedings, our contracts with them, including provisions relating to dedications of production, may be subject to renegotiation or rejection under applicable provisions of the United States Bankruptcy Code. If a contract with a customer is altered or rejected in bankruptcy proceedings, we could lose some or all of the expected revenues associated with that contract, which could cause the market price of our common units to decline.

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

In order to make the payment of the minimum quarterly distribution of $0.3750 per unit per quarter, or $1.5000 per unit on an annualized basis, we must generate distributable cash flow of approximately $11.9 million per quarter, or approximately $47.7 million per year, based on the number of common units and subordinated units to be outstanding immediately after the completion of this offering. We may not generate sufficient distributable cash flow to make the payment of the minimum quarterly distribution to our unitholders.

 

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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 natural gas we gather, the volumes of crude oil we gather, the volumes of saltwater we collect, clean or dispose of and the volumes of fresh water we distribute and store and the number of wells that have access to our crude oil treating facilities;

 

   

market prices of crude oil, natural gas and NGLs and their effect on our customers’ drilling and development plan on our dedicated acreage and the volumes of hydrocarbons that are produced on our dedicated acreage and for which we provide midstream services;

 

   

our customers’ ability to fund its drilling and development plan on our dedicated acreage;

 

   

downstream processing and transportation capacity constraints and interruptions, including the failure of our customers to have sufficient contracted processing or transportation capacity;

 

   

the levels of our operating expenses, maintenance expenses and general and administrative expenses;

 

   

regulatory action affecting: (i) the supply of, or demand for, crude oil, natural gas, NGLs and water, (ii) the rates we can charge for our midstream services, (iii) the terms upon which we are able to contract to provide our midstream services, (iv) our existing gathering and other commercial agreements or (v) our operating costs or our operating flexibility;

 

   

the rates we charge third parties for our midstream services;

 

   

prevailing economic conditions; and

 

   

adverse weather conditions.

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

 

   

the level and timing of our capital expenditures;

 

   

our debt service requirements and other liabilities;

 

   

our ability to borrow under our debt agreements to fund our capital expenditures and operating expenditures and to pay distributions;

 

   

fluctuations in our working capital needs;

 

   

restrictions on distributions contained in any of our debt agreements;

 

   

the cost of acquisitions, if any;

 

   

the fees and expenses of our general partner and its affiliates (including Noble) that we are required to reimburse;

 

   

the amount of cash reserves established by our general partner; and

 

   

other business risks affecting our cash levels.

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 September 30, 2017. 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.

 

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The forecast of our expenses and revenues include estimates of expenses to be incurred and revenues to be received attributable to providing services to our customers that will require us to build out our infrastructure assets, and a failure to timely construct and develop these assets may result in expenses or revenues that differ materially from our forecast.

The forecast of our expenses and revenues include estimates of expenses to be incurred and revenues to be received. In order to realize any potential revenues from an expansion into new areas or the addition of new customers, we will need to construct new pipelines and facilities in an area where we do not currently have existing facilities or acquire such pipelines and facilities from competitors. The construction of new facilities may require us to obtain new rights-of-way, surface use agreements or other real estate agreements prior to constructing new pipelines or facilities. Additionally, we may be unable to timely obtain such rights-of-way to connect new crude oil, natural gas and water sources to our existing infrastructure. Any delay in construction or increased cost resulting from the addition to our assets could result in increased expenses, decreased revenues and, in certain cases, a termination of the dedication impacting the affected acreage.

The demand for our midstream services, and therefore our cash flow, is affected by crude oil and natural gas prices, which fluctuate based on factors that are out of our control.

The level and pace of our customers’ exploration and production activity is, in part, driven by commodity prices for crude oil and natural gas. Because our customers’ demand for our midstream services is tied to their production levels, we are also indirectly exposed to commodity price risk. Beginning in the fourth quarter of 2014, crude oil and natural gas prices significantly declined and remained low through the end of 2015. High and low daily average prices for monthly contracts for crude oil and high and low contract expirations prices for natural gas during the year ended December 31, 2015 and the six months ended June 30, 2016 were as follows:

 

     Average Settlement
Price for Prompt
Month Contracts
 
     High      Low  

Year Ended December 31, 2015

     

NYMEX

     

Crude Oil—WTI (Per Bbl)

   $ 59.83       $ 37.33   

Natural Gas—Henry Hub (Per MMBtu)

     3.19         2.03   

Six Months Ended June 30, 2016

     

NYMEX

     

Crude Oil—WTI (Per Bbl)

   $ 48.85       $ 30.62   

Natural Gas—Henry Hub (Per MMBtu)

     2.37         1.71   

A reduction in rig count, combined with reduction of cash flow resulting from lower commodity prices, a reduction in our customers available capital and lack of availability of debt or equity financing could result in a significant reduction of our customers’ spending for crude oil and natural gas drilling and development activity, which could result in a lower utilization rate of our midstream systems. If we are not able to obtain new supplies of crude oil and natural gas to replace the declines resulting from reductions in drilling and development activity, the utilization rates of our midstream assets will decline, which could have a material adverse effect on our business, results of operations, financial position and cash flows and our ability to make cash distributions.

Because of the natural decline in production from existing wells, our success, in part, depends on our ability to maintain or increase hydrocarbon throughput volumes on our midstream systems, which depends on our customers’ levels of development and completion activity on our dedicated acreage.

The level of crude oil and natural gas volumes handled by our midstream systems depends on the level of production from crude oil and natural gas wells dedicated to our midstream systems, which may be less than expected and which will naturally decline over time. In order to maintain or increase throughput levels on our

 

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midstream systems, we must obtain production from wells completed by Noble and any third party customers on acreage dedicated to our midstream systems or execute agreements with other third parties in our areas of operation.

We have no control over Noble’s or other producers’ levels of development and completion 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 Noble or other producers or their exploration and development decisions, which may be 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;

 

   

geologic considerations;

 

   

changes in the strategic importance our customers assign to development in the DJ Basin or the Delaware Basin as opposed to its other operations, which could adversely affect the financial and operational resources our customers are willing to devote to development of our dedicated acreage;

 

   

increased levels of taxation related to the exploration and production of crude oil, natural gas and NGLs in our areas of operation;

 

   

environmental or other governmental regulations, including the availability of permits, the regulation of hydraulic fracturing and a governmental determination that multiple facilities are to be treated as a single source for air permitting purposes; and

 

   

the costs of producing crude oil, natural gas and NGLs and the availability and costs of drilling rigs and other equipment.

Due to these and other factors, even if reserves are known to exist in areas served by our midstream assets, producers, including Noble, may choose not to develop those reserves. If producers choose not to develop their reserves, or they choose to slow their development rate, in our areas of operation, utilization of our midstream systems will be below anticipated levels. Our inability to provide increased services resulting from reductions in development activity, coupled with the natural decline in production from our current dedicated acreage, would result in our inability to maintain the then-current levels of utilization of our midstream assets, which could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

If Noble does not maintain its drilling activities on our dedicated acreage, the demand for our fresh water services could be reduced, which could have a material adverse effect on our results of operations, cash flows and ability to make distributions to our unitholders.

The fresh water services we provide to Noble assist in Noble’s drilling activities. If Noble does not maintain its drilling activities on our dedicated acreage, its demand for our fresh water services will be reduced regardless of whether we continue to provide our other midstream services on Noble’s production. If the demand for our fresh water services declines for this or any other reason, our results of operations, cash flows and ability to make distributions to our unitholders could be materially adversely affected. As we begin to provide fresh water services to a third party, which are expected to commence in the third quarter of 2017, the same risks will pertain to such third party.

 

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Substantially all of our assets are controlling ownership interests in our development companies. Because our interests in our development companies represent almost all of our cash-generating assets, our cash flow will depend entirely on the performance of our development companies and their ability to distribute cash to us.

We have a holding company structure, and the primary source of our earnings and cash flow consists exclusively of the earnings of and cash distributions from our development companies. Therefore, our ability to make quarterly distributions to our unitholders will be almost entirely dependent upon the performance of our development companies and their ability to distribute funds to us. We are the sole member of the general partner of each of our development companies, and we control and manage our development companies through our ownership of our development companies’ respective general partners.

The limited partnership agreement governing each development company requires that the general partner of such development company cause such development company to distribute all of its available cash each quarter, less the amounts of cash reserves that such general partner determines are necessary or appropriate in its reasonable discretion to provide for the proper conduct of such development company’s business.

The amount of cash each development company generates from its operations will fluctuate from quarter to quarter based on events and circumstances and the actual amount of cash each development company will have available for distribution to its partners, including us, also will depend on certain factors. For a description of the events, circumstances and factors that may affect the cash distributions from our development companies please read “—We may not generate sufficient distributable cash flow to make the payment of the minimum quarterly distribution to our unitholders.”

Our midstream assets are currently exclusively located in the DJ Basin in Colorado, making us vulnerable to risks associated with operating in a single geographic area.

Our midstream assets are currently located exclusively in the DJ Basin in Colorado. As a result of this concentration, we will be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in this area caused by governmental regulation, market limitations, water shortages, drought related conditions or other weather-related conditions or interruption of the processing or transportation of crude oil and natural gas. If any of these factors were to impact the DJ Basin more than other producing regions, our business, financial condition, results of operations and ability to make cash distributions could be adversely affected relative to other midstream companies that have a more geographically diversified asset portfolio.

Certain proposed ballot measures considered in Colorado seek to vastly expand the right of local governments to regulate and dictate location parameters of future crude oil and natural gas exploration and development activities, and/or limit or prohibit crude oil and natural gas production and development activities in their jurisdictions. If these measures are approved and implemented, they could have material adverse effects on our operations in Colorado and the value of our DJ Basin assets and development activities.

Certain interest groups in Colorado opposed to crude oil and natural gas development generally, and hydraulic fracturing in particular, have advanced various ballot initiatives designed to significantly limit or prevent crude oil and natural gas development. The state of Colorado approved for signature gathering four ballot measures which would adversely impact our Colorado operations. A measure that would grant local communities certain additional rights to self-governance, including ability to ban certain businesses from operating in their jurisdictions, was withdrawn. Other measures would establish a constitutional right to a healthy environment and obligate local governments to protect the environment, grant local governments control over crude oil and natural gas development and require that all new crude oil and natural gas facilities be located 2,500 feet from occupied structures and an expansive list of landscape features called “areas of special concern.” All of these measures were available for signature gathering until August 8, 2016 to qualify for the November 2016 ballot, and

 

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proponents submitted signatures for two of the four initiatives, beginning the process of signature validation. On August 29, 2016, the Colorado Secretary of State announced that the proponents of these measures did not secure the required number of valid signatures. As a result, none of these measures have met the criteria for inclusion on the November 2016 ballot. However, the process is subject to appeal and we cannot predict with absolute certainty the outcome of any such appeal.

We cannot predict the rate at which our customers will develop acreage that is dedicated to us or the areas they will decide to develop.

Our acreage dedication and commitments from Noble cover midstream services in a number of areas that are at the early stages of development, in areas that Noble is still determining whether to develop, and in areas where we may have to acquire operating assets from third parties. In addition, Noble owns acreage in areas that are not dedicated to us. We cannot predict which of these areas Noble will determine to develop and at what time. Noble may decide to explore and develop areas in which we have a smaller operating interest in the midstream assets that service that area, or where the acreage is not dedicated to us, rather than areas in which we have a larger operating interest in the midstream assets that service that area. Noble’s decision to develop acreage that is not dedicated to us or that we have a smaller operating interest in may adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions. Likewise, we have no ability to influence when or where an unaffiliated third party customer elects to develop acreage that is dedicated to us.

While we have been granted a right of first refusal to provide midstream services on certain acreage in the DJ Basin and Eagle Ford Shale that Noble currently owns and on all acreage that Noble acquires onshore in the United States (other than in the Marcellus Shale), portions of this acreage may be subject to preexisting dedications that may require Noble to use third parties for midstream services.

Although Noble has granted us a ROFR to provide the midstream services covered by our commercial agreements as well as natural gas processing on all of the dedicated acreage where not all of such services are currently provided, on all of its currently owned acreage in the DJ Basin that has not yet been dedicated, on certain of its currently owned acreage in the Eagle Ford Shale and on all of its future acquired acreage onshore in the United States (other than in the Marcellus Shale), portions of this acreage may be subject to preexisting dedications, rights of first refusal, rights of first offer and other preexisting encumbrances that require Noble to use third parties for midstream services, and, as a result, Noble may be precluded from offering us the opportunity to provide these midstream services on this acreage. Because we do not have visibility as to which acreage Noble may acquire or divest, and what existing dedications, rights of first refusal, rights of first offer or other overriding rights may exist on such acreage, we are unable to predict the value, if any, of our ROFR to provide midstream services on Noble’s acreage onshore in the United States.

We may not be able to economically accept an offer from Noble for us to provide services or purchase assets with respect to which we have a right of first refusal.

Noble is required to offer us, prior to contracting for such opportunity with a third party, the opportunity to provide the midstream services covered by our commercial agreements, which includes crude oil gathering, natural gas gathering, produced water gathering, fresh water services and crude oil treating, as well as services of a type provided at natural gas processing plants on certain acreage located in the United States that Noble currently owns or in the future acquires or develops. In addition, Noble is required to offer us, prior to contracting for such opportunity with a third party, the ownership interest in any midstream assets that are located on the acreage for which Noble has granted us a ROFR to provide services. The acreage and assets subject to this ROFR may be located in areas far from our existing infrastructure or may otherwise be undesirable in the context of our business. In addition, we can make no assurances that the terms at which Noble offers us the opportunity to provide these services or purchase these assets will be acceptable to us. Furthermore, another midstream service provider or third party may be willing to accept an offer from Noble that we are unwilling to accept. Our inability to take advantage of the opportunities with respect to such acreage or assets could adversely affect our growth strategy or our ability to maintain or increase our cash distribution level.

 

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We may be unable to grow by acquiring the non-controlling interests in our development companies owned by Noble or midstream assets retained, acquired or developed by Noble, which could limit our ability to increase our distributable cash flow.

Part of our strategy for growing our business and increasing distributions to our unitholders is dependent upon our ability to make acquisitions that increase our distributable cash flow. Part of the acquisition component of our growth strategy is based upon our expectation of future divestitures by Noble to us of retained, acquired or developed midstream assets and portions of its retained, non-controlling interests in our development companies. We have only a ROFO pursuant to our omnibus agreement that requires Noble to allow us to make an offer with respect to Noble’s retained non-controlling interests in our development companies to the extent Noble elects to sell these interests. In addition, Noble has granted us a ROFR with respect to opportunities to (1) provide services covered by our commercial agreements as well as services of a type provided at natural gas processing plants on certain acreage located in the United State that Noble currently owns or in the future acquires or develops and (2) purchase ownership interests in any assets currently owned by Noble, or in the future developed or acquired by Noble, for the purpose of providing the services described in (1); provided, that, such assets are located onshore in the United States and are not used to provide services with respect to production from the Marcellus Shale. Noble is under no obligation to sell its retained interests in our development companies or offer to sell us additional assets, we are under no obligation to buy any additional interests or assets from Noble and we do not know when or if Noble will decide to sell its retained interests in our development companies or make any offers to sell assets to us. We may never purchase all or any portion of the non-controlling interests in our development companies or any of Noble’s retained, acquired or developed midstream assets onshore in the United States (other than in the Marcellus Shale) for several reasons, including the following:

 

   

Noble may choose not to sell these non-controlling interests or assets;

 

   

we may not accept offers for these assets or make acceptable offers for these equity interests;

 

   

we and Noble may be unable to agree to terms acceptable to both parties;

 

   

we may be unable to obtain financing to purchase these non-controlling interests or assets on acceptable terms or at all; or

 

   

we may be prohibited by the terms of our debt agreements (including our credit facility) or other contracts from purchasing some or all of these non-controlling interests or assets, and Noble may be prohibited by the terms of its debt agreements or other contracts from selling some or all of these non-controlling interests or assets. If we or Noble must seek waivers of such provisions or refinance debt governed by such provisions in order to consummate a sale of these non-controlling interests or assets, we or Noble may be unable to do so in a timely manner or at all.

We do not know when or if Noble will decide to sell all or any portion of its non-controlling interests or will offer us any portion of its assets, and we can provide no assurance that we will be able to successfully consummate any future acquisition of all or any portion of such non-controlling interests in our development companies or assets. Furthermore, if Noble reduces its ownership interest in us, it may be less willing to sell to us its retained non-controlling interests in our development companies or its retained assets. In addition, except for our ROFO and ROFR, there are no restrictions on Noble’s ability to transfer its non-controlling interests in our development companies or its retained assets to a third party or non-controlled affiliate. If we do not acquire all or a significant portion of the non-controlling interests in our development companies held by Noble or midstream assets from Noble, our ability to grow our business and increase our cash distributions to our unitholders may be significantly limited.

We may not be able to attract dedications of additional third-party volumes, in part because our industry is highly competitive, which could limit our ability to grow and increase our dependence on Noble.

Part of our long-term growth strategy includes diversifying our customer base by identifying additional opportunities to offer services to third parties in our areas of operation. To date and over the near term,

 

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substantially all of our revenues have been and will be earned from Noble relating to its operated wells on our dedicated acreage. Our ability to increase throughput on our midstream systems and any related revenue from third parties is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when requested by third parties. Any lack of available capacity on our systems for third-party volumes will detrimentally affect our ability to compete effectively with third-party systems for crude oil and natural gas from reserves associated with acreage other than our then-current dedicated acreage. In addition, some of our competitors for third-party volumes have greater financial resources and access to larger supplies of crude oil and natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do.

Our efforts to attract additional third parties as customers may be adversely affected by our relationship with Noble and the fact that a substantial majority of the capacity of our midstream systems will be necessary to service its production on our dedicated acreage and our desire to provide services pursuant to fee-based agreements. As a result, we may not have the capacity to provide services to additional third parties and/or potential third-party customers may prefer to obtain services pursuant to other forms of contractual arrangements under which we would be required to assume direct commodity exposure. In addition, potential third-party customers who are significant producers of crude oil and natural gas may develop their own midstream systems in lieu of using our systems. All of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition, cash flows and ability to make cash distributions to our unitholders.

To maintain and grow our business, we will be required to make substantial capital expenditures. If we are unable to obtain needed capital or financing on satisfactory terms, our ability to make cash distributions may be diminished or our financial leverage could increase.

In order to maintain and grow our business, we will need to make substantial capital expenditures to fund our share of growth capital expenditures associated with our operating interests in our development companies, to purchase or construct new midstream systems, or to fulfill our commitments to service acreage committed to us by our customers. If we do not make sufficient or effective capital expenditures, we will be unable to maintain and grow our business and, as a result, we may be unable to maintain or raise the level of our future cash distributions over the long term. To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell additional common units or other equity securities. Using cash from our operations will reduce cash available for distribution to our unitholders. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. Also, due to our relationship with Noble, our ability to access the capital markets, or the pricing or other terms of any capital markets transactions, may be adversely affected by any impairment to the financial condition of Noble or adverse changes in Noble’s credit ratings. Any material limitation on our ability to access capital as a result of such adverse changes to Noble could limit our ability to obtain future financing under favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes affecting Noble could negatively impact our unit price, limiting our ability to raise capital through equity issuances or debt financing, or could negatively affect our ability to engage in, expand or pursue our business activities, or could also prevent us from engaging in certain transactions that might otherwise be considered beneficial to us. We will also rely on Noble to make its portion of capital expenditures on our assets, and to the extent that Noble is unable or unwilling to make these capital expenditures, we may not be able to grow at our expected rate or at all.

Even if we are successful in obtaining the necessary funds to support our growth plan, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain the then current distribution rate, which could materially decrease our ability to pay distributions at

 

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the then prevailing distribution rate. While we have historically received funding from Noble, none of Noble, our general partner or any of their respective affiliates is committed to providing any direct or indirect financial support to fund our growth.

The amount of cash we have available for distribution to our unitholders depends primarily on our cash flow and not solely on our profitability, which may prevent us from making distributions, even during periods in which we record net income.

The amount of cash we have available for distribution depends primarily upon our cash flow and not solely on our profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record a net loss for financial accounting purposes, and conversely, we might fail to make cash distributions during periods when we record net income for financial accounting purposes.

Increased competition from other companies that provide midstream services, or from alternative fuel sources, could have a negative impact on the demand for our services, which could adversely affect our financial results.

Our ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of our competitors. Our systems compete for third-party customers primarily with other crude oil and natural gas gathering systems and fresh and saltwater service providers. Some of our competitors have greater financial resources and may now, or in the future, have access to greater supplies of crude oil and natural gas than we do. Some of these competitors may expand or construct gathering systems that would create additional competition for the services we would provide to third-party customers. In addition, potential third-party customers may develop their own gathering systems instead of using ours. Moreover, Noble and its affiliates are not limited in their ability to compete with us outside of our dedicated area. See “Conflicts of Interest and Duties.”

Further, hydrocarbon fuels compete with other forms of energy available to end-users, including electricity and coal. Increased demand for such other forms of energy at the expense of hydrocarbons could lead to a reduction in demand for our services.

All of these competitive pressures could make it more difficult for us to retain our existing customers or attract new customers as we seek to expand our business, which could have a material adverse effect on our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders. In addition, competition could intensify the negative impact of factors that decrease demand for natural gas in the markets served by our systems, such as adverse economic conditions, weather, higher fuel costs and taxes or other governmental or regulatory actions that directly or indirectly increase the cost or limit the use of natural gas.

Our construction of new midstream assets may not result in revenue increases and may be subject to regulatory, environmental, political, contractual, legal and economic risks, which could adversely affect our cash flows, results of operations and financial condition and, as a result, our ability to distribute cash to unitholders.

The construction of additions or modifications to our existing systems and the expansion into new production areas to service Noble or our third party customer involve numerous regulatory, environmental, political and legal uncertainties beyond our control, may require the expenditure of significant amounts of capital, and we may not be able to construct in certain locations due to setback requirements or expand certain facilities that are deemed to be part of a single source. Regulations clarifying when crude oil and natural gas sites should be aggregated for purposes of air permitting were proposed in 2016, and compliance with such regulations could increase our costs. Financing may not be available on economically acceptable terms or at all. As we build infrastructure to meet our customers’ needs, we may not be able to complete such projects on schedule, at the budgeted cost or at all.

 

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Our revenues may not increase immediately (or at all) upon the expenditure of funds on a particular project. For instance, to accommodate development plans of our unaffiliated third party customer, we will begin to make capital expenditures in the second half of 2016, with construction of new infrastructure to meet our obligations under our commercial agreements continuing through 2017, and we may not receive any material increases in revenues until the project is completed or at all, for any number of reasons including if the development schedule of such customer is not executed as planned. We may construct facilities to capture anticipated future production growth from Noble or another customer in an area where such growth does not materialize. As a result, new midstream assets may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Further, our investments in the Delaware Basin may not result in increased revenue or such revenue may be delayed if Noble, for any reason, including with our consent, does not terminate the existing dedications to third parties in a timely manner. In addition, in preparation for providing services to Noble in the Delaware Basin to acreage previously serviced under dedications to third parties or to acreage not yet developed, we will begin making capital investments in the second half of 2016, and we may not succeed in developing sufficient infrastructure to be in a position to take over the midstream operations required to service this acreage as the existing dedications to third party providers expire. If we fail to complete our capital improvements prior to the expiration of such existing dedications, or fail to secure required permits, rights of way or other access, Noble may extend the term of its existing dedications to incumbent third party providers to accommodate our delays, or may be released entirely from dedications to us. In these cases, we may not receive revenues until such extended terms expire or at all. We cannot predict what terms, including length of extension, our customers can secure with other providers or predict whether they would exercise their rights to be released from our dedications. In these circumstances, we may expend significant capital developing infrastructure for which we do not generate revenue.

The construction of additions to our existing assets may require us to obtain new rights-of-way, surface use agreements or other real estate agreements prior to constructing new pipelines or facilities. We may be unable to timely obtain such rights-of-way to connect new crude oil, natural gas and water sources to our existing infrastructure or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to expand or renew existing rights-of-way, leases or other agreements, and our fees may only be increased above the annual year-over-year increase by mutual agreement between us and our customer. If the cost of renewing or obtaining new agreements increases, our cash flows could be adversely affected.

We are subject to regulation by multiple governmental agencies, which could adversely impact our business, results of operations and financial condition.

We are subject to regulation by multiple federal, state and local governmental agencies. Proposals and proceedings that affect the midstream industry are regularly considered by Congress, as well as by state legislatures and federal and state regulatory commissions, agencies and courts. We cannot predict when or whether any such proposals or proceedings may become effective or the magnitude of the impact changes in laws and regulations may have on our business. However, additions to the regulatory burden on our industry can increase our cost of doing business and affect our profitability.

The rates of our regulated assets are subject to review and reporting by federal regulators, which could adversely affect our revenues.

Currently, only the crude oil gathering system servicing the East Pony IDP transports crude oil in interstate commerce. Pipelines that transport crude oil in interstate commerce are, among other things, subject to rate regulation by the Federal Energy Regulatory Commission, or the FERC, unless such rate requirements are waived. We applied for and received a waiver of the FERC’s tariff requirements. This temporary waiver is

 

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subject to revocation. We are required to inform the FERC of any change in circumstances upon which the waiver was granted. Should the pipeline’s circumstances change, the FERC could find that transportation on the East Pony IDP no longer qualifies for a waiver. In the event that the FERC were to determine that the crude oil gathering system servicing the East Pony IDP no longer qualified for the waiver, we would likely be required to comply with the tariff and reporting requirements, including filing a tariff with the FERC and providing a cost justification for the transportation rates, and providing service to all potential shippers, without undue discrimination. A revocation of the temporary waiver for this pipeline could adversely affect the results of our revenues.

We may also be required to respond to requests for information from government agencies, including compliance audits conducted by the FERC.

The FERC’s ratemaking policies are subject to change and may impact the rates charged and revenues received on White Cliffs Pipeline and East Pony IDP in the event the temporary waiver does not remain in effect, and any other natural gas or liquids pipeline that is determined to be under the jurisdiction of the FERC. In July 2016, the United States Court of Appeals for the District of Columbia Circuit issued its opinion in United Airlines, Inc., et al. v. FERC, finding that FERC had acted arbitrarily and capriciously when it failed to demonstrate that permitting an interstate petroleum products pipeline organized as a limited partnership to include an income tax allowance in the cost of service underlying its rates in addition to the discounted cash flow return on equity would not result in the pipeline partnership owners double-recovering their income taxes. The court vacated FERC’s order and remanded to FERC to consider mechanisms for demonstrating that there is no double recovery as a result of the income tax allowance. There is not likely to be definitive resolution of these issues for some time, and the ultimate outcome of this proceeding is not certain and could result in changes going forward to the FERC’s treatment of income tax allowances in the cost of service or to the discounted cash flow return on equity. Depending upon the resolution of these issues, the cost of service rates of any interstate natural gas pipelines and interstate liquids pipeline could be affected to the extent it proposes new rates or changes its existing rates or if its rates are subject to complaint or challenged by the FERC.

Federal and state legislative and regulatory initiatives relating to pipeline safety that require the use of new or more stringent safety controls or result in more stringent enforcement of applicable legal requirements could subject us to increased capital costs, operational delays and costs of operation.

The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, also known as the Pipeline Safety and Job Creations Act, is the most recent federal legislation to amend the Natural Gas Pipeline Safety Act of 1968, or NGPSA, and the Hazardous Liquids Pipeline Safety Act of 1979, or HLPSA, which are pipeline safety laws, requiring increased safety measures for natural gas and hazardous liquids pipelines. Among other things, the Pipeline Safety and Job Creations Act directs the Secretary of Transportation to promulgate regulations relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation, material strength testing, and verification of the maximum allowable pressure of certain pipelines. The Pipeline Safety and Job Creations Act also increases the maximum penalty for violation of pipeline safety regulations from $100,000 to $200,000 per violation per day of violation and from $1.0 million to $2.0 million for a related series of violations. In addition, in 2016, the Pipeline and Hazardous Materials Safety Administration, or PHMSA, announced a proposal to expand integrity management requirements and impose new pressure testing requirements on regulated pipelines. The proposal would also significantly expand the regulation of gathering lines, subjecting previously unregulated pipelines to requirements regarding damage prevention, corrosion control, public education programs, maximum allowable operating pressure limits, and other requirements. The safety enhancement requirements and other provisions of the Pipeline Safety and Job Creations Act as well as any implementation of PHMSA, rules thereunder could require us to install new or modified safety controls, pursue additional capital projects, or conduct maintenance programs on an accelerated basis, any or all of which tasks could result in our incurring increased operating costs that could have a material adverse effect on our results of operations or financial position.

 

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Our ownership interest in White Cliffs LLC could require us to make capital contributions from time to time, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

We currently own a 3.33% non-operating interest in White Cliffs LLC. Because we do not operate or control White Cliffs LLC, we do not have control over decisions to make maintenance and growth capital expenditures on the White Cliffs Pipeline. Furthermore, White Cliffs LLC is subject to many of the same environmental and regulatory risks that our assets are subject to, including regulation by the FERC. To the extent that the operator of White Cliffs LLC decides to make capital expenditures for White Cliffs LLC or White Cliffs LLC becomes subject to regulatory assessments, we could be required to contribute additional capital to White Cliffs LLC, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders.

If third-party pipelines or other facilities interconnected to our midstream systems become partially or fully unavailable, or if the volumes we gather or treat do not meet the quality requirements of such pipelines or facilities, our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders could be adversely affected.

Our midstream systems are connected to other pipelines or facilities, the majority of which are owned by third parties. The continuing operation of such third-party pipelines or facilities is not within our control. If any of these pipelines or facilities becomes unable to transport, treat or process natural gas or crude oil, or if the volumes we gather or transport do not meet the quality requirements of such pipelines or facilities, our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders could be adversely affected.

Our exposure to commodity price risk may change over time and we cannot guarantee the terms of any existing or future agreements for our midstream services with third parties or with Noble.

We currently generate the majority of our revenues pursuant to fee-based agreements under which we are paid based on volumetric fees, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows have little direct exposure to commodity price risk. However, Noble is exposed to commodity price risk, and extended reduction in commodity prices could reduce the production volumes available for our midstream services in the future below expected levels. Although we intend to maintain fee-based pricing terms on both new contracts and existing contracts for which prices have not yet been set, our efforts to negotiate such terms may not be successful, which could have a materially adverse effect on our business.

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

We expect to enter into a new revolving credit facility prior to or in connection with the closing of this offering. We expect our new revolving credit facility will limit our ability to, among other things:

 

   

incur or guarantee additional debt;

 

   

redeem or repurchase units or make distributions under certain circumstances;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

   

merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

 

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We expect our new revolving credit facility will also contain covenants requiring us to maintain certain financial ratios.

The provisions of our new revolving credit facility may affect our ability to obtain future financing and to 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 new revolving credit facility could result in a default or an event of default that could enable our lenders to declare the outstanding principal of that debt, together with accrued and unpaid interest, to be immediately due and payable. If the payment of our debt is accelerated, our assets may be insufficient to repay such debt in full, and our unitholders could experience a partial or total loss of their investment. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity.”

Increased regulation of hydraulic fracturing could result in reductions or delays in crude oil and natural gas production by our customers, which could reduce the throughput on our gathering and other midstream systems, which could adversely impact our revenues.

We do not conduct hydraulic fracturing operations, but substantially all of Noble’s crude oil and natural gas production on our dedicated acreage is developed from unconventional sources that require hydraulic fracturing as part of the completion process. The majority of our fresh water services business is related to the storage and transportation of water for use in hydraulic fracturing. Hydraulic fracturing is a well stimulation process that utilizes large volumes of water and sand combined with fracturing chemical additives that are pumped at high pressure to crack open previously impenetrable rock to release hydrocarbons. Hydraulic fracturing is typically regulated by state oil and gas commissions and similar agencies. Some states and local governments, including those in which we operate, have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure or well construction requirements on hydraulic fracturing operations, or otherwise seek to ban some or all of these activities. Recently, however, several federal agencies have asserted jurisdiction over the process. For example, the Environmental Protection Agency, or EPA, has moved forward with various regulatory actions, including the issuance of new regulations requiring green completions for hydraulically fractured wells, emission requirements for certain midstream equipment, and an Advanced Notice of Proposed Rulemaking seeking comment on its intent to develop regulations under the Toxic Substances and Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. Also, in June 2016, the EPA finalized rules which prohibit the discharge of wastewater from hydraulic fracturing operations to publicly owned wastewater treatment plants. Certain environmental groups have also suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process. We cannot predict whether any such legislation will be enacted and if so, what its provisions would be. Additional levels of regulation and permits required through the adoption of new laws and regulations at the federal, state or local level could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of crude oil and natural gas that move through our gathering systems and decrease demand for our water services, which in turn could materially adversely impact our revenues.

We, Noble or any third-party customers may incur significant liability under, or costs and expenditures to comply with, environmental and worker health and safety regulations, which are complex and subject to frequent change.

As an owner and operator of gathering systems, we are subject to various federal, state and local laws and regulations relating to the discharge of materials into, and protection of, the environment and worker health and safety. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring costly response actions. These laws and regulations may impose numerous obligations that are applicable to our and our customers’ operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our or our customers’ operations, the imposition of specific standards addressing worker protection, and the imposition of substantial liabilities and

 

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remedial obligations for pollution or contamination resulting from our and our customers’ operations. Failure to comply with these laws, regulations and permits may result in joint and several or strict liability or the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, or the issuance of injunctions or administrative orders limiting or preventing some or all of our operations. Private parties, including the owners of the properties through which our gathering systems pass, 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 our operations and limit our growth and revenues, which in turn could affect the amount of cash we have available for distribution. We cannot provide any assurance that changes in or additions to public policy regarding the protection of the environment and worker health and safety will not have a significant impact on our operations and the amount of cash we have available for distribution.

Our operations also pose risks of environmental liability due to leakage, migration, releases or spills to surface or subsurface soils, surface water or groundwater. Certain environmental laws impose strict as well as joint and several liability for costs required to remediate and restore sites where hazardous substances, hydrocarbons or solid wastes have been stored or released. We may be required to remediate contaminated properties currently or formerly operated by us regardless of whether such contamination resulted from the conduct of others or from consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. In addition, claims for damages to persons or property, including natural resources, may result from the environmental, health and safety impacts of our operations. Moreover, public interest in the protection of the environment has increased dramatically in recent years. The trend of more expansive and stringent environmental legislation and regulations applied to the crude oil and natural gas industry could continue, potentially resulting in increased costs of doing business and consequently affecting the amount of cash we have available for distribution. Please read “Business—Regulation of Operations.”

Climate change laws and regulations restricting emissions of greenhouse gases could result in increased operating costs and reduced demand for the crude oil and natural gas that we gather while potential physical effects of climate change could disrupt Noble’s and our other customers’ production and cause us to incur significant costs in preparing for or responding to those effects.

In response to findings that emissions of carbon dioxide, methane and other greenhouse gases, or GHGs, present an endangerment to public health and the environment, the EPA has adopted regulations under existing provisions of the federal Clean Air Act, or CAA, that, among other things, establish Prevention of Significant Deterioration, or PSD, construction and Title V operating permit reviews for certain large stationary sources that emit GHGs. Facilities required to obtain PSD permits for their GHG emissions also will be required to meet “best available control technology” standards that will be established by the states or, in some cases, by the EPA on a case-by-case basis. These EPA rulemakings could adversely affect our operations and restrict or delay our ability to obtain air permits for new or modified sources. In addition, the EPA has adopted rules requiring the monitoring and reporting of GHG emissions from specified onshore crude oil and natural gas production sources in the U.S. on an annual basis.

Climate and related energy policy, laws and regulations could change quickly, and substantial uncertainty exists about the nature of many potential developments that could impact the sources and uses of energy. In December 2015, the United States and 194 other participating countries adopted the Paris Agreement, which calls for each participating country to establish their own nationally determined standards for reducing carbon output. The Paris Agreement is intended to succeed the Kyoto Protocol and must be ratified by the 55 countries that produce 55% of the world’s GHGs before it becomes fully effective. Towards that end, the United States committed to achieve an economy-wide target of reducing its GHG emissions by 26-28% less than the 2005 level in 2025 and to use best efforts to reach a 28% reduction. To obtain those reductions, the EPA has been proposing and issuing various rules, including a rule issued in May 2016 to control methane air emissions from crude oil and natural gas sources. These regulations could result in increased costs for our operations and for the

 

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operations our customers. Many states also are pursuing climate requirements either directly or indirectly through such measures as alternative fuel mandates. These measures may reduce the future demand for our products, particularly crude oil. And, in February 2014, Colorado’s Air Quality Control Commission approved comprehensive changes to rules governing crude oil and natural gas activities in the state, including the nation’s first-ever regulations designed to detect and reduce methane emissions.

Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. Substantial limitations on GHG emissions could also adversely affect demand for the crude oil and natural gas we gather. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our operations or our customer’s exploration and production operations, which in turn could affect demand for our services. Please read “Business—Regulation of Operations.”

Certain plant or animal species are or could be designated as endangered or threatened, which could have a material impact on our and Noble’s operations.

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. Such protections, and the designation of previously undesignated species under such laws, may affect our and Noble’s operations by imposing additional costs, approvals and accompanying delays.

A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of our assets, which may cause our operating expenses to increase, limit the rates we charge for certain services and decrease the amount of cash we have available for distribution.

Although the FERC has not made a formal determination with respect to the facilities we consider to be natural gas gathering pipelines, we believe that our natural gas gathering pipelines meet the traditional tests that the FERC has used to determine that a pipeline is a gathering pipeline and are therefore 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 the FERC determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of our gathering facilities is subject to change based on future determinations by the FERC, the courts or Congress. If the FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the NGA and that the facility provides interstate service, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by the FERC under the NGA or the Natural Gas Policy Act, or NGPA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, 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 NGPA, this could result in the imposition of substantial civil penalties, as well as a requirement to disgorge revenues collected for such services in excess of the maximum rates established by the FERC.

Our natural gas gathering pipelines are exempt from the jurisdiction of the FERC under the NGA, but FERC regulation may indirectly impact gathering services. The FERC’s policies and practices across the range of its crude oil and natural gas regulatory activities, including, for example, its policies on interstate open access transportation, ratemaking, capacity release, and market center promotion may indirectly affect intrastate markets. In recent years, the FERC has pursued pro-competitive policies in its regulation of interstate crude oil and natural gas pipelines. However, we cannot assure you that the FERC will continue to pursue this approach as

 

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it considers matters such as pipeline rates and rules and policies that may indirectly affect the natural gas gathering services.

Natural gas gathering may receive greater regulatory scrutiny at the state level; therefore, our natural gas gathering operations could be adversely affected should they become subject to the application of state regulation of rates and services. Our gathering operations could also be subject to safety and operational regulations relating to the design, construction, testing, operation, replacement and maintenance of gathering facilities. We cannot predict what effect, if any, such changes might have on our operations, but we could be required to incur additional capital expenditures and increased costs depending on future legislative and regulatory changes.

In addition, certain of our crude oil gathering pipelines do not provide interstate services and therefore are not subject to regulation by the FERC pursuant to the ICA. The distinction between FERC-regulated interstate pipeline transportation, on the one hand, and intrastate pipeline transportation, on the other hand, also is a fact-based determination. The classification and regulation of these crude oil gathering pipelines are subject to change based on future determinations by the FERC, federal courts, Congress or by regulatory commissions, courts or legislatures in the states in which our crude oil gathering pipelines are located. We cannot provide assurance that the FERC will not in the future, either at the request of other entities or on its own initiative, determine that some or all of our gathering pipeline systems and the services we provide on those systems are within the FERC’s jurisdiction. If it was determined that more or all of our crude oil gathering pipeline systems are subject to the FERC’s jurisdiction under the ICA, and are not otherwise exempt from any applicable regulatory requirements, the imposition of possible cost-of-service rates and common carrier requirements on those systems could adversely affect the results of our operations on those systems.

Our business involves many hazards and operational risks, some of which may not be fully covered by insurance. The occurrence of a significant accident or other event that is not fully insured could curtail our operations and have a material adverse effect on our ability to make cash distributions and, accordingly, the market price for our common units.

Our operations are subject to all of the hazards inherent in the gathering of crude oil, natural gas and saltwater and the delivery and storage of fresh water, including:

 

   

damage to pipelines, centralized gathering facilities, pump stations, related equipment and surrounding properties caused by design, installation, construction materials or operational flaws, natural disasters, acts of terrorism or acts of third parties;

 

   

leaks of crude oil, natural gas or NGLs or losses of crude oil, natural gas or NGLs as a result of the malfunction of, or other disruptions associated with, equipment or facilities;

 

   

fires, ruptures and explosions; and

 

   

other hazards that could also result in personal injury and loss of life, pollution and suspension of operations.

Any of these risks could adversely affect our ability to conduct operations or result in substantial loss to us as a result of claims for:

 

   

injury or loss of life;

 

   

damage to and destruction of property, natural resources and equipment;

 

   

pollution and other environmental damage;

 

   

regulatory investigations and penalties;

 

   

suspension of our operations; and

 

   

repair and remediation costs.

 

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We may elect not to obtain insurance for any or all of these risks if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. The occurrence of an event that is not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

We do not own in fee any of the land on which our pipelines and facilities are located, which could result in disruptions to our operations.

We do not own in fee any of the land on which our midstream systems have been constructed. Our only interests in these properties are rights granted under surface use agreements, rights-of-way, surface leases or other easement rights, which may limit or restrict our rights or access to or use of the surface estates. Accommodating these competing rights of the surface owners may adversely affect our operations. In addition, we are subject to the possibility of more onerous terms or increased costs to retain necessary land use if we do not have valid rights-of-way, surface leases or other easement rights or if such usage rights lapse or terminate. We may obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew rights-of-way, surface leases or other easement rights or otherwise, could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

A shortage of equipment and skilled labor could reduce equipment availability and labor productivity and increase labor and equipment costs, which could have a material adverse effect on our business and results of operations.

Our gathering and other midstream services require special equipment and laborers who are skilled in multiple disciplines, such as equipment operators, mechanics and engineers, among others. If we experience shortages of necessary equipment or skilled labor in the future, our labor and equipment costs and overall productivity could be materially and adversely affected. If our equipment or labor prices increase or if we experience materially increased health and benefit costs for employees, our business and results of operations could be materially and adversely affected.

The loss of key personnel could adversely affect our ability to operate.

We depend on the services of a relatively small group of our general partner’s senior management. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of our general partner’s senior management, including Terry R. Gerhart, our Chief Executive Officer, John F. Bookout, IV, our Chief Financial Officer, Thomas W. Christensen, our Chief Accounting Officer, and John C. Nicholson, our Chief Operating Officer could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

We do not have any officers or employees and rely on officers of our general partner and employees of Noble.

We are managed and operated by the board of directors and executive officers of our general partner. Our general partner has no employees and relies on the employees of Noble to conduct our business and activities.

Noble conducts businesses and activities of its own in which we have no economic interest. As a result, there could be material competition for the time and effort of the officers and employees who provide services to both our general partner and Noble. If our general partner and the officers and employees of Noble do not devote sufficient attention to the management and operation of our business and activities, our business, financial condition, results of operations, cash flows and ability to make cash distributions could be materially adversely affected.

 

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Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.

Our future level of debt could have important consequences to us, including the following:

 

   

our ability to obtain additional financing, if necessary, for working capital, capital expenditures (including building additional gathering pipelines needed for required connections and building additional centralized gathering facilities pursuant to our gathering agreements) or other purposes may be impaired or such financing may not be available on favorable terms;

 

   

our funds available for operations, future business opportunities and distributions to unitholders will be reduced by that portion of our cash flow required to make interest payments on our debt;

 

   

we may be more vulnerable to competitive pressures or a downturn in our business or the economy generally; and

 

   

our flexibility in responding to changing business and economic conditions may be limited.

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.

Increases in interest rates could adversely affect our business.

We will have exposure to increases in interest rates. After the consummation of this offering on a pro forma basis, we do not expect to have any outstanding indebtedness. However, in connection with the completion of this offering we expect to enter into a new revolving credit facility. Assuming our average debt level of $62.9 million, comprised of funds drawn on our new revolving credit facility, an increase of one percentage point in the interest rates will result in an increase in annual interest expense of $0.6 million. As a result, our results of operations, cash flows and financial condition and, as a result, our ability to make cash distributions to our unitholders, could be materially adversely affected by significant increases in interest rates.

Terrorist attacks or cyber-attacks could have a material adverse effect on our business, financial condition or results of operations.

Terrorist attacks or cyber-attacks may significantly affect the energy industry, including our operations and those of Noble and our other potential customers, as well as general economic conditions, consumer confidence and spending and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States. Our insurance may not protect us against such occurrences. Consequently, 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.

A cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.

The oil and gas industry has become increasingly dependent on digital technologies to conduct day-to-day operations including certain midstream activities. For example, software programs are used to manage gathering and transportation systems and for compliance reporting. The use of mobile communication devices has increased rapidly. Industrial control systems such as SCADA (supervisory control and data acquisition) now control large scale processes that can include multiple sites and long distances, such as oil and gas pipelines.

 

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We depend on digital technology, including information systems and related infrastructure as well as cloud applications and services, to process and record financial and operating data and to communicate with our employees and business partners. Our business partners, including vendors, service providers, and financial institutions, are also dependent on digital technology. The technologies needed to conduct midstream activities make certain information the target of theft or misappropriation.

As dependence on digital technologies has increased, cyber incidents, including deliberate attacks or unintentional events, also has increased. A cyber attack could include gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption, or result in denial-of-service on websites. SCADA-based systems are potentially vulnerable to targeted cyber attacks due to their critical role in operations.

Our technologies, systems, networks, and those of our business partners may become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of proprietary and other information, or other disruption of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period.

A cyber incident involving our information systems and related infrastructure, or that of our business partners, could disrupt our business plans and negatively impact our operations in the following ways, among others:

 

   

a cyber attack on a vendor or service provider could result in supply chain disruptions which could delay or halt development of additional infrastructure, effectively delaying the start of cash flows from the project;

 

   

a cyber attack on downstream pipelines could prevent us from delivering product at the tailgate of our facilities, resulting in a loss of revenues;

 

   

a cyber attack on a communications network or power grid could cause operational disruption resulting in loss of revenues;

 

   

a deliberate corruption of our financial or operational data could result in events of non-compliance which could lead to regulatory fines or penalties; and

 

   

business interruptions could result in expensive remediation efforts, distraction of management, damage to our reputation, or a negative impact on the price of our units.

Our implementation of various controls and processes, including globally incorporating a risk-based cyber security framework, to monitor and mitigate security threats and to increase security for our information, facilities and infrastructure is costly and labor intensive. Moreover, there can be no assurance that such measures will be sufficient to prevent security breaches from occurring. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including Noble, have conflicts of interest with us and our partnership agreement eliminates their default fiduciary duties to us and our unitholders and replaces them with contractual standards that may allow our general partner and its affiliates to favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of Noble, and Noble is under no obligation to adopt a business strategy that favors us.

Following the completion of this offering, Noble will directly own an aggregate 60.7% limited partner interest in us (or an aggregate 54.8% limited partner interest in us if the underwriters exercise in full their option

 

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to purchase additional common units). In addition, Noble will own and control our general partner. Although our general partner has a duty to manage us in a manner that is not adverse to the interests of our partnership, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is in the best interests of its owner, Noble. Conflicts of interest may arise between Noble and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including Noble, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

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

 

   

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

 

   

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

 

   

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, among other things, cash expenditures, borrowings and repayments of indebtedness, the issuance of additional partnership interests, the creation, increase or reduction in cash reserves in any quarter and asset purchases and sales, each of which can affect the amount of cash that is available for distribution to unitholders;

 

   

our general partner will determine the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash 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 $45.0 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 Noble in respect of the incentive distribution rights;

 

   

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

 

   

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

 

   

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

 

   

our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates, including our gathering agreements with Noble, the ROFR and ROFO;

 

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

 

   

Noble, 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 the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our common unitholders. This election could result in lower distributions to our common unitholders in certain situations.

Neither our partnership agreement nor our omnibus agreement will prohibit Noble 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 Noble and executive officers and directors of our general partner. 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. Consequently, Noble and other affiliates of our general partner may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets (except to the extent the ROFR or ROFO pertain to such assets). As a result, competition from Noble and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow. 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 “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Omnibus Agreement” and “Conflicts of Interest and Duties.”

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

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

Our general partner will be required to deduct estimated maintenance capital expenditures from our operating surplus, which may result in less cash available for distribution to unitholders from operating surplus than if actual maintenance capital expenditures were deducted.

Maintenance capital expenditures are those capital expenditures made to maintain, over the long term, our operating capacity or operating income. Our partnership agreement requires our general partner to deduct

 

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estimated, rather than actual, maintenance capital expenditures from operating surplus in determining cash available for distribution from operating surplus. The amount of estimated maintenance capital expenditures deducted from operating surplus will be subject to review and change by our general partner’s board of directors at least once a year, provided that any change is approved by the conflicts committee of our general partner’s board of directors. Our partnership agreement does not cap the amount of maintenance capital expenditures that our general partner may estimate. In years when our estimated maintenance capital expenditures are higher than actual maintenance capital expenditures, the amount of cash available for distribution to unitholders from operating surplus will be lower than if actual maintenance capital expenditures had been deducted from operating surplus. On the other hand, if our general partner underestimates the appropriate level of estimated maintenance capital expenditures, we will have more cash available for distribution from operating surplus in the short term but will have less cash available for distribution from operating surplus in future periods when we have to increase our estimated maintenance capital expenditures to account for the previous underestimation.

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 a Delaware limited partnership may, in its partnership agreement, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership, provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing. This implied covenant is a judicial doctrine utilized by Delaware courts in connection with interpreting ambiguities in partnership agreements and other contracts, and does not form the basis of any separate or independent fiduciary duty in addition to the express contractual duties set forth in our partnership agreement. Under the implied contractual covenant of good faith and fair dealing, a court will enforce the reasonable expectations of the partners where the language in the partnership agreement does not provide for a clear course of action.

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. 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 Our General Partner.”

Our partnership agreement restricts the remedies available to holders of our units and 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 not adverse to the 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;

 

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

 

   

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

In connection with a situation involving a transaction with an affiliate or a conflict of interest, our partnership agreement provides that any determination by our general partner must be made in good faith, and that our conflicts committee and the board of directors of our general partner are entitled to a presumption that they acted in good faith. In any proceeding brought by or on behalf of any limited partner or the partnership, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption. Please read “Conflicts of Interest and Duties.”

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

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement and operational services and secondment agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement, we will be required to reimburse Noble for the provision of certain administrative support services to us. Under our operational services and secondment agreement, we will be required to reimburse Noble for the provision of certain operation services and related management services in support of our operations. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. The costs and expenses for which we will reimburse our general partner and its affiliates may include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. 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. Please read “Cash Distribution Policy and Restrictions on Distributions—Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2017.” 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 will have limited ability to remove our general partner.

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by its sole member, which is owned by Noble. 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.

Our general partner may not be removed unless such removal is both (i) for cause and (ii) approved by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner

 

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and its affiliates, voting together as a single class. “Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business. Following the completion of this offering, Noble will own 60.7% of our total outstanding common units and subordinated units on an aggregate basis (or 54.8% of our total outstanding common units and subordinated units on an aggregate basis if the underwriters exercise in full their option to purchase additional common units). As a result, our public unitholders will have limited ability to remove our general partner.

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

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

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

Our general partner may transfer its general partner interest in us 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 Noble to transfer its membership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices.

The incentive distribution rights held by Noble may be transferred to a third party without unitholder consent.

Noble may transfer our incentive distribution rights to a third party at any time without the consent of our unitholders. If Noble transfers our incentive distribution rights to a third party but retains its ownership of our general partner interest, it may not have the same incentive to grow our partnership and increase quarterly distributions to unitholders over time as it would if it had retained ownership of our incentive distribution rights. For example, a transfer of incentive distribution rights by Noble could reduce the likelihood of Noble selling or contributing additional midstream assets to us, as Noble would have less of an economic incentive to grow our business, which in turn would impact our ability to grow our asset base.

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

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

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

   

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

 

   

the ratio of taxable income to distributions may increase;

 

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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 Noble:

 

   

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 except with respect to rights of first refusal contained in our omnibus agreement.

Noble 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, Noble will hold 3,402,584 common units and 15,902,584 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 Noble with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

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

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

Affiliates of our general partner, including Noble, may compete with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us except with respect to dedications contained in our commercial agreements and rights of first refusal and rights of first offer contained in our omnibus agreement.

None of our partnership agreement, our omnibus agreement, our commercial agreements or any other agreement in effect as of the date of this offering will prohibit Noble 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 Noble and executive officers and directors of our general partner. 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 except with respect to dedications contained in our commercial agreements and rights of first refusal and rights of first offer contained in our omnibus agreement. 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. Consequently, Noble and other affiliates of our general partner may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from Noble and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow.

 

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

If at any time our general partner and its affiliates own more than 80% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. Following 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 21.4% of our common units (excluding any common units purchased by the directors, director nominee and executive officers of our general partner and certain other individuals as selected by our general partner under our directed unit program). At the end of the subordination period (which could occur as early as the quarter ending September 30, 2017), 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 60.7% of our outstanding common units (excluding any common units purchased by the directors, director nominee and executive officers of our general partner and certain other individuals as selected by our general partner under our directed unit program) and therefore would not be able to exercise the call right at that time. Please read “Our Partnership Agreement—Limited Call Right.”

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

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

Prior to this offering, there has been no public market for our common units. After this offering, there will be only publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, following the completion of this offering, Noble will own 19,305,168 common units and subordinated units, representing an aggregate 60.7% limited partner interest (or 17,430,168 common units and subordinated units, representing an aggregate 54.8% limited partner interest, if the underwriters exercise in full their option to purchase additional common units). 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.

 

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Noble, 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 our common unitholders. This election could result in lower distributions to our common unitholders in certain situations.

Noble, as the initial holder of our incentive distribution rights, 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 (50%) 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 Noble elects to reset the target distribution levels, it will be entitled to receive a number of common units. The number of common units to be issued to Noble 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 on the incentive distribution rights in such two quarters. We anticipate that Noble would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that Noble 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, Noble has the right to transfer all or any portion of our incentive distribution rights at any time, and such transferee will have the same rights as Noble 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—Noble’s Right to Reset Incentive Distribution Levels.”

Units held by persons who our general partner determines are not “eligible holders” at the time of any requested certification in the future may be subject to redemption.

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. Units held by persons who our general partner determines are not “eligible holders” at the time of any requested certification in the future may be subject to redemption. “Eligible holders” are limited partners whose (or whose owners’) (i) U.S. federal income tax status or lack of proof of U.S. federal income tax status does not have and is not reasonably likely to have, as determined by our general partner, a material adverse effect on the rates that can be charged to customers by us or our subsidiaries with respect to assets that are subject to regulation by the Federal Energy Regulatory Commission or similar regulatory body and (ii) nationality, citizenship or other related status does not create and is not reasonably likely to create, as determined by our general partner, a substantial risk of cancellation or forfeiture of any property in which we have an interest. The aggregate redemption price for redeemable interests will be an amount equal to the current market price (the date of determination of which will be the date fixed for redemption) of limited partner interests of the class to be so redeemed multiplied by the number of limited partner interests of each such class included among the redeemable interests. For these purposes, the “current market price” means, as of any date for any class of limited partner interests, the average of the daily closing prices per limited partner interest of such class for the 20 consecutive trading days immediately prior to such date. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. The units held by any person the general partner determines is not an eligible holder will not be entitled to voting rights. Please read “Our Partnership Agreement—Possible Redemption of Ineligible Holders.”

 

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Our partnership agreement will designate the Court of Chancery of the State of Delaware as the exclusive forum for certain types of actions and proceedings that may be initiated by our unitholders, which would limit our unitholders’ ability to choose the judicial forum for disputes with us or our general partner’s directors, officers or other employees. Our partnership agreement also provides that any unitholder bringing an unsuccessful action will be obligated to reimburse us for any costs we have incurred in connection with such unsuccessful action.

Our partnership agreement will provide that, with certain limited exceptions, the Court of Chancery of the State of Delaware (or, if such court does not have subject matter jurisdiction thereof, any other court located in the State of Delaware with subject matter jurisdiction) shall be the exclusive forum for any claims, suits, actions or proceedings (i) arising out of or relating in any way to our partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our partnership agreement or the duties, obligations or liabilities among our partners, or obligations or liabilities of our partners to us, or the rights or powers of, or restrictions on, our partners or us), (ii) brought in a derivative manner on our behalf, (iii) asserting a claim of breach of a duty owed by any of our, or our general partner’s, directors, officers, or other employees, or owed by our general partner, to us or our partners, (iv) asserting a claim against us arising pursuant to any provision of the Delaware Act or (v) asserting a claim against us governed by the internal affairs doctrine.

If any person brings any of the aforementioned claims, suits, actions or proceedings (including any claims, suits, actions or proceedings arising out of this offering) and such person does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then such person shall be obligated to reimburse us and our affiliates for all fees, costs and expenses of every kind and description, including but not limited to all reasonable attorneys’ fees and other litigation expenses, that the parties may incur in connection with such claim, suit, action or proceeding. In addition, our partnership agreement provides that each limited partner irrevocably waives the right to trial by jury in any such claim, suit, action or proceeding. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction of the Court of Chancery of the State of Delaware (or such other court) in connection with any such claims, suits, actions or proceedings. These provisions may have the effect of discouraging lawsuits against us and our general partner’s directors and officers. Please read “Our Partnership Agreement—Applicable Law; Exclusive Forum.”

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

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

If we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes- Oxley Act of 2002, and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a publicly traded partnership, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures

 

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on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. To comply with the requirements of being a publicly traded partnership, we may need to implement additional internal controls, reporting systems and procedures and hire additional accounting, finance and legal staff. Furthermore, while we generally must comply with Section 404 of the Sarbanes-Oxley Act of 2002 for our fiscal year ending December 31, 2017, we are not required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our first annual report subsequent to our ceasing to be an “emerging growth company” within the meaning of Section 2(a)(19) of the Securities Act. Accordingly, we may not be required to have our independent registered public accounting firm attest to the effectiveness of our internal controls until our annual report for the fiscal year ending December 31, 2019. Once it is required to do so, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed, operated or reviewed.

If we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential unitholders could lose confidence in our financial reporting, which would harm our business and the trading price of our units.

Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and operate successfully as a public company. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. We cannot be certain that our efforts to develop and maintain our internal controls will be successful, that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002. Any failure to develop or maintain effective internal controls, or difficulties encountered in implementing or improving our internal controls, could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which would likely have a negative effect on the trading price of our 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.

We are classified as an “emerging growth company” under the JOBS Act. For as long as we are an “emerging growth company,’ which may be up to five full fiscal years, unlike other public companies, we will not be required to, among other things, (1) 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(b) of the Sarbanes-Oxley Act, (2) comply 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, (3) provide certain disclosure regarding executive compensation required of larger public companies or (4) hold nonbinding advisory votes on executive compensation. 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, become a large accelerated filer or issue more than $1.0 billion of non-convertible debt over a three-year period.

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.

We will incur increased costs as a result of being a publicly-traded partnership.

We have no history operating as a publicly-traded partnership. As a publicly-traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the

 

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Sarbanes-Oxley Act of 2002, as well as rules implemented by the SEC and the NYSE, require publicly-traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay or reserve cash for our expenses, including the costs of being a publicly-traded partnership. As a result, the amount of cash we have available for distribution to our unitholders will be affected by the costs associated with being a publicly-traded partnership.

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Exchange Act. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly-traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our SEC reporting requirements.

We also expect to incur significant expense in order to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for us to attract and retain qualified persons to serve on our board or as executive officers.

We estimate that we will incur approximately $6.7 million of incremental costs per year associated with being a publicly-traded partnership; however, it is possible that our actual incremental costs of being a publicly-traded partnership will be higher than we currently estimate.

If we are deemed an “investment company” under the Investment Company Act of 1940, it would adversely affect the price of our common units and could have a material adverse effect on our business.

Our initial assets will consist of direct and indirect ownership interests in our development companies as well as ownership interests in other midstream ventures. If a sufficient amount of our assets, such as our ownership interests in other midstream ventures, now owned or in the future acquired, are deemed to be “investment securities” within the meaning of the Investment Company Act of 1940, or the Investment Company Act, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or modify our organizational structure or our contract rights to fall outside the definition of an investment company. In that event, it is possible that our ownership of these interests, combined with our assets acquired in the future, could result in our being required to register under the Investment Company Act if we were not successful in obtaining exemptive relief or otherwise modifying our organizational structure or applicable contract rights. Treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes in which case we would be treated as a corporation for federal income tax purposes. As a result, we would pay federal income tax on our taxable income at the corporate tax rate, distributions to you would generally be taxed again as corporate distributions and none of our 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 an investment company would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units. Please read “Material Federal Income Tax Consequences—Partnership Status.”

Moreover, registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase of additional interests in our midstream systems from Noble, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates. The occurrence of some or all of these events would adversely affect the price of our common units and could have a material adverse effect on our business.

 

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Tax Risks

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

Our tax treatment depends on our status as a partnership for federal income tax purposes. If the IRS were to treat us as a corporation for federal income tax purposes, which would subject us to entity-level taxation, or if we were otherwise subjected to a material amount of entity-level taxation, then our distributable cash flow to our unitholders would be substantially reduced.

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

Despite the fact that we are a limited partnership under Delaware law, we will be treated as a corporation for 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 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 federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced.

In addition, recently enacted legislation applicable to partnership tax years beginning after 2017 changes the audit procedures for large partnerships and in certain circumstances would permit the IRS to assess and collect taxes (including any applicable penalties and interest) resulting from partnership-level federal income tax audits directly from us in the year in which the audit is completed. If we are required to make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced.

Moreover, changes in current state law may subject us to entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Therefore, if we were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be 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 federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

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

The present 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 interpretation at any time. For

 

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example, from time to time, the President and members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships, including elimination of partnership tax treatment for publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible for us to meet the exception to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences—Partnership Status.”

On May 5, 2015, the U.S. Treasury Department and the IRS released proposed regulations, or the Proposed Regulations, regarding qualifying income under Section 7704(d)(1)(E) of the Code. The U.S. Treasury Department and the IRS have requested comments from industry participants regarding the standards set forth in the Proposed Regulations. The Proposed Regulations provide an exclusive list of industry-specific activities and certain limited support activities that generate qualifying income, including water-related activities when provided for use in drilling and hydraulic fracturing activities.

Although the Proposed Regulations adopt a narrow interpretation of the water-related activities that generate qualifying income, we believe the income that we treat as qualifying satisfies these requirements and our counsel will rely on the Proposed Regulations to treat income from certain of our water-related activities as qualifying income and to meet the exception for us to be treated as a partnership for federal income tax purposes.

However, the Proposed Regulations could be changed before they are finalized and could take a position that is contrary to our interpretation. In the event that we do not satisfy the standards set forth in the final regulations for the water-related services or other income that we treat as qualifying, we anticipate being able to continue to treat income from these activities as qualifying income for ten years, provided that the final regulations include the special transition rules currently available in the Proposed Regulations.

We are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in 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 federal income tax purposes, the minimum quarterly distribution and the target distribution levels may be adjusted to reflect the impact of that law on us.

Our unitholders’ share of our income will be taxable to them for federal income tax purposes even if they do not receive any cash distributions from us.

Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow 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, and the IRS’s positions may ultimately be sustained. 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 and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. Moreover, recently enacted legislation applicable to partnership tax years beginning after 2017 changes the audit procedures

 

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for large partnerships and in certain circumstances would permit the IRS to assess and collect taxes (including any applicable penalties and interest) resulting from partnership-level federal income tax audits directly from us in the year in which the audit is completed. If we are required to make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce our distributable cash flow.

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

If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units a unitholder sells will, in effect, become taxable income to the unitholder if it sells such common units at a price greater than its tax basis in those common units, even if the price received is less than its original cost. Furthermore, a substantial portion of the amount realized on any sale of your common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. Thus, a unitholder may recognize both ordinary income and capital loss from the sale of common units if the amount realized on a sale of the common units is less than the unitholder’s adjusted basis in common units. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, a unitholder that sells common units may incur a tax liability in excess of the amount of cash received from the sale. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss.”

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

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

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

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Andrews Kurth LLP is unable to opine as to the validity of such filing positions. 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 tax return audit adjustments. Please read “Material Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election.”

We will prorate our items of income, gain, loss and deduction for federal income tax purposes 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 for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each

 

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month, instead of on the basis of the date a particular unit is transferred. Although recently issued final Treasury Regulations allow publicly traded partnerships to use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders, these Treasury Regulations do not specifically authorize all aspects of the proration method we currently plan to adopt. Accordingly, Andrews Kurth LLP is unable to opine on the validity of our method of allocating income, gain, loss and deduction among transferor and transferee unitholders. If the IRS were to successfully 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 Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, he would no longer be treated for federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for federal income tax purposes as a partner with respect to those common 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 to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those common units could be fully taxable as ordinary income. Andrews Kurth LLP has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units; therefore, our unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

We will adopt 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, and such a challenge could adversely affect the value of our common units.

In determining the items of income, gain, loss and deduction allocable to our unitholders, in certain circumstances, including when we issue additional units, we must 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 ourselves using a methodology based on the market value of our common units as a means to determine the fair market value of our assets. The IRS may challenge these valuation methods and the resulting allocations of income, gain, loss and deduction for federal income tax purposes.

A successful IRS challenge to these methods or allocations could adversely affect the amount, character and timing of our taxable income or loss and a unitholder’s distributive share of these items. 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 our common units or result in audit adjustments to our items of income, gain, loss and deduction and a unitholder’s distributive share of these items 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 technically terminated our 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 twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our technical 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 (and our unitholders could receive two Schedules K-1 if the relief discussed below is not available) for one fiscal year and could result in a deferral

 

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of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code and could be subject to penalties if we are unable to determine that a termination occurred. Moreover, a technical termination might either accelerate the application of, or subject us to, any tax legislation enacted before the termination. The IRS has announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination.”

As a result of investing in our common units, you may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire properties.

In addition to federal income taxes, our unitholders will likely be subject to other taxes, including 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 control property now or in the future, even if they do not live in any of those jurisdictions. Our unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with those requirements. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state or local tax consequences of an investment in our common units. Please consult your tax advisor.

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $230.4 million from the sale of 12,500,000 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 page of this prospectus), after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units is not exercised. We intend to use the net proceeds from this offering (i) to make a distribution of approximately $228.1 million to Noble, (ii) to pay approximately $2.3 million of origination fees and expenses related to our new revolving credit facility; and (iii) for general partnership purposes.

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 such exercise will be issued to the public and the remainder of the 1,875,000 additional common units, if any, will be issued to Noble at the expiration of the option period. Any such common units issued to Noble will be issued for no additional consideration. If the underwriters exercise in full their option to purchase additional common units, we expect to receive net proceeds of approximately $35.1 million, after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units to make a cash distribution to Noble.

If we choose to sell fewer common units in this offering, the number of common units to be held by Noble after consummation of this offering will be increased by an amount equivalent to such decrease in the number of units sold. Likewise, if we choose to sell more common units in this offering, the number of common units to be held by Noble after consummation of this offering will be reduced by an amount equivalent to such increase in the number of units sold. Additionally, the initial public offering price may be greater or less than the assumed initial public offering price. The actual initial public offering price is subject to market conditions and negotiations between us and the underwriters. A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per common unit would increase (decrease) the net proceeds to us from this offering by approximately $11.7 million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the underwriters do not exercise their option to purchase additional common units, and after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. Any such change in the net proceeds to us would increase or decreases, as the case may be, the amount of the distribution to be paid to Noble.

 

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CAPITALIZATION

The following table sets forth:

 

   

the historical cash and cash equivalents and capitalization of our Predecessor as of June 30, 2016; and

 

   

our pro forma capitalization as of June 30, 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 from this offering in the manner described under “Use of Proceeds” and the other transactions described under “Prospectus Summary—The Transactions.”

The following table assumes that the underwriters do not exercise their option to purchase additional common units. 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 such exercise will be issued to the public and the remainder of the 1,875,000 additional common units, if any, will be issued to Noble at the expiration of the option period. Any such common units will be issued for no additional consideration.

This table is derived from, should be read together with and is qualified in its entirety by reference to the historical financial statements and the accompanying notes and the unaudited pro forma combined financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Prospectus Summary—The Transactions,” “Use of Proceeds,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of June 30,
2016
 
     Historical      Pro Forma  
     (in thousands)  

Cash and cash equivalents

   $ 15,458       $ 17,887   
  

 

 

    

 

 

 

Long-term debt:

     

Revolving credit facility(1)

   $ —         $ —     
  

 

 

    

 

 

 

Total long-term debt (including current maturities)

     —           —     
  

 

 

    

 

 

 

Net parent investment / partners’ capital:

     

Net parent investment

     250,119         —     

Held by public:

     

Common units

        230,400   

Held by Noble:

     

Common units

        (2,133

Subordinated units

        (9,968

General partner interest(2)

     —           —     
  

 

 

    

 

 

 

Total equity

     250,119         218,299   

Non-controlling interest

        64,443   

Total partners’ capital

        282,742   
  

 

 

    

 

 

 

Total capitalization

   $ 250,119       $ 282,742   
  

 

 

    

 

 

 

 

(1) In connection with the completion of this offering, we expect to enter into a new $350 million revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”
(2) Upon completion of this offering, our general partner will own a non-economic general partner interest in us.

 

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DILUTION

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per common unit after the offering. On a pro forma basis as of June 30, 2016, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $282.7 million, or $8.89 per common 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)

  $ 14.53     

Less: Distribution to Noble(3)

    (11.82  

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

  $ 6.18     

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

      8.89   
   

 

 

 

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

    $ 11.11   
   

 

 

 

 

(1) Represents the mid-point of the price range set forth on the cover page of this prospectus.
(2) Determined by dividing the number of units (3,402,584 common units and 15,902,584 subordinated 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 $280.4 million.
(3) Determined by dividing the number of units (3,402,584 common units and 15,902,584 subordinated units) to be issued to Noble for its contribution of assets and liabilities to us. At the closing of this offering, we intend to make a distribution of $228.1 million to Noble.
(4) Determined by dividing the number of units to be outstanding after this offering (15,902,584 common units and 15,902,584 subordinated units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds from this offering, of $230.4 million.
(5) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $11.74 and $10.48, respectively.
(6) Because the total number of units outstanding following this offering will not be impacted by any exercise of the underwriters’ option to purchase additional common units and any net proceeds from such exercise will not be retained by us, there will be no change to the dilution in net tangible book value per common unit to purchasers in this offering due to any such exercise of the option.

The following table sets forth the partnership interests that we will issue and the total consideration contributed to us by our general partner and its affiliates in respect of their partnership interests 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)
     %  

Noble and its affiliates(1)(2)(3)

     19,305,168         60.7   $ 52,342         17.3

Purchasers in this offering

     12,500,000         39.3     250,000         82.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     31,805,168         100.0   $ 302,342         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Upon the completion of this offering, Noble will own 3,402,584 common units and 15,902,584 subordinated units.
(2) Assumes the underwriters’ option to purchase additional common units is not exercised.
(3) The assets contributed by Noble were recorded at historical cost in accordance with GAAP. Book value of the consideration provided by our general partner and its affiliates, as of June 30, 2016 was $280.4 million (excludes deferred taxes). At the closing of this offering, we intend to make a distribution of $228.1 million to Noble.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

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

For additional information regarding our historical and pro forma results of operations, please refer to our historical financial statements and the accompanying notes and the unaudited pro forma condensed 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 $0.3750 per unit, or $1.5000 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves (including estimated maintenance capital expenditures) and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and the board of directors of our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, the board of directors of 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 the sum of (i) all cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) if the board of directors of our general partner so determines, all or any portion of additional 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 the board of directors 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:

 

   

We expect that our cash distribution policy will be subject to restrictions on cash distributions under our new revolving credit facility. We expect that one such restriction would prohibit us from making cash distributions while an event of default has occurred and is continuing under our new revolving credit 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 the board of directors of our general partner, taking into consideration the terms of our partnership

 

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agreement. Specifically, the board of directors of our general partner will have the authority to establish cash reserves to provide for the proper conduct of our business, comply with applicable law or any agreement to which we are a party or by which we are bound or our assets are subject and provide funds 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 the board of directors of our general partner in good faith will be binding on our unitholders.

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period, our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. 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. Following the completion of this offering, Noble will own our general partner, 3,402,584 common units and 15,902,584 subordinated units, representing an aggregate 60.7% limited partner interest (or common units and subordinated units, representing an aggregate 54.8% limited partner interest, if the underwriters exercise in full their option to purchase additional common units).

 

   

Under Section 17-607 of 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 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 the cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions—Distributions of Available Cash.”

 

   

Our ability to make cash distributions to our unitholders depends on the performance of our development companies and their ability to distribute cash to us.

 

   

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. 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 new revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. While we have historically received funding

 

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from Noble, we do not have any commitment from Noble, our general partner or any of their respective affiliates to fund our cash flow deficits or provide other direct or indirect financial assistance to us following the closing of this offering. Following the completion of this offering, Noble will directly own a 60.7% limited partner interest in us (or a 54.8% limited partner interest in us if the underwriters exercise in full their option to purchase additional common units). In addition, Noble will wholly own our general partner and all of our incentive distribution rights. Given Noble’s significant ownership interests in us following the closing of this offering, we believe Noble will be incentivized to promote and support the successful execution of our business strategies.

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 may 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 new 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 new revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.” To the extent we issue additional partnership interests, the payment of distributions on those additional partnership interests may increase the risk that we will be unable to maintain or increase our cash distributions per common unit. There are no limitations in our partnership agreement on our ability to issue additional partnership interests, including partnership interests ranking senior to our common units, and our common unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional partnership interests. If we incur additional debt (under our new 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. Please read “Risk Factors—Risks Related to Our Business—Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $0.3750 per unit for each whole quarter, or $1.5000 per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “—General—Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which such distributions are made. We do not expect to make distributions for the period that began on July 1, 2016 and ends on the day prior to the closing of this offering. Our distribution for the period ending December 31, 2016 will be adjusted by an amount that covers the period from the closing of this offering through December 31, 2016 based on the actual number of days in that period.

The table below sets forth the amount of common units and subordinated units that will be outstanding immediately after this offering, assuming the underwriters do not exercise their option to purchase additional common units, and the cash available for distribution needed to pay the aggregate minimum quarterly distribution on all of such units for a single fiscal quarter and a four quarter period:

 

            Minimum Quarterly Distributions  
     Number of Units          One Quarter              Annualized      

Common units held by the public(1)

     12,500,000       $ 4,687,500       $ 18,750,000   

Common units held by Noble(1)

     3,402,584         1,275,969         5,103,876   

Subordinated units held by Noble

     15,902,584         5,963,469         23,853,876   
  

 

 

    

 

 

    

 

 

 

Total

     31,805,168       $ 11,926,938       $ 47,707,752   
  

 

 

    

 

 

    

 

 

 

 

(1) Assumes no exercise of the underwriters’ option to purchase additional common units. Please read “Use of Proceeds” for a description of the impact of an exercise of the option on the common unit ownership.

 

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Noble will initially hold all of our incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 50%, of the cash we distribute in excess of $0.4313 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 not adverse to the interests of our partnership. In making such determination, our general partner may take into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us. Please read “Conflicts of Interest and Duties.”

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

Additionally, the board of directors of our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our partnership 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—Noble’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 $1.5000 per unit for the twelve months ending September 30, 2017. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2015 and Twelve Months Ended June 30, 2016,” in which we present the amount of EBITDA and distributable cash flow we would have generated on a pro forma basis for the year ended December 31, 2015 and the twelve months ended June 30, 2016, derived from our unaudited pro forma condensed financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

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“Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2017,” in which we provide our estimated forecast of our ability to generate sufficient EBITDA and distributable cash flow to pay the minimum quarterly distribution on all common units and subordinated units for the twelve months ending September 30, 2017.

Unless otherwise specifically noted, the amounts set forth in the following sections reflect the pro forma historical and forecasted results attributable to 100% of the assets and operations of our development companies and are not adjusted to reflect Noble’s retained non-controlling interests in our development companies. In connection with the completion of this offering, Noble will contribute to us controlling interests ranging from 5% to 100% in the development companies that own our operating assets and dedications, and Noble will retain non-controlling interests ranging from 0% to 95% in the development companies that own our operating assets and dedications. Please read “Prospectus Summary—The Transactions” and “Prospectus Summary—Ownership and Organizational Structure.” Following the completion of this offering, we will consolidate the results of operations of our development companies and then record a non-controlling interest deduction for Noble’s retained interests in our development companies.

Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2015 and Twelve Months Ended June 30, 2016

If we had completed the transactions contemplated in this prospectus on January 1, 2015, pro forma distributable cash flow generated for the year ended December 31, 2015 and the twelve months ended June 30, 2016 would have been approximately $54.1 million and $71.4 million, respectively. These amounts would have been sufficient to pay the minimum quarterly distribution of $0.3750 per unit per quarter ($1.5000 per unit on an annualized basis) on all of our common units and subordinated units for each period. We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, distributable cash flow is primarily a cash accounting concept, while our unaudited pro forma condensed financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma distributable cash flow only as a general indication of the amount of distributable cash flow that we might have generated had we been formed on January 1, 2015.

The following table illustrates, on a pro forma basis, for the year ended December 31, 2015 and the twelve months ended June 30, 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, 2015.

 

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Noble Midstream Partners LP

Unaudited Pro Forma EBITDA and Distributable Cash Flow

 

     Year Ended
December 31,
2015
    Twelve Months
Ended
June 30,

2016
 
($ in millions, except per unit amounts)             

Revenues

    

Midstream Services Revenue—Related Party

   $ 108.5      $ 131.6   

Income from Investments

     4.6        4.7   
  

 

 

   

 

 

 

Total Revenue

     113.1        136.3   

Expenses

    

Direct Operating

     27.5        25.8   

Depreciation, Depletion and Amortization

     6.9        8.2   

General and Administrative(1)

     7.3        8.5   
  

 

 

   

 

 

 

Total Expenses

     41.7        42.5   
  

 

 

   

 

 

 

Operating Income (Loss)

     71.4        93.8   

Interest Expense(2)

     0.7        0.7   
  

 

 

   

 

 

 

Income Before Income Taxes

     70.7        93.1   

Income Tax Benefit

     —          —     
  

 

 

   

 

 

 

Pro Forma Net Income (Loss)

   $ 70.7      $ 93.1   

Less:

    

Net Income Attributable to Noble-Retained Interests(3)

     17.1        21.2   
  

 

 

   

 

 

 

Net Income Attributable to Noble Midstream Partners LP

   $ 53.6      $ 71.9   

Add:

    

Net Income Attributable to Noble-Retained Interests

     17.1        21.2   

Depreciation

     6.9        8.2   

Interest Expense

     0.7        0.7   

Income Tax Expense

     —          —     
  

 

 

   

 

 

 

Pro Forma EBITDA

     78.3        102.0   

Less:

    

EBITDA Attributable to Noble-Retained Interests(4)

     18.8        23.2   
  

 

 

   

 

 

 

Pro Forma EBITDA Attributable to Noble Midstream Partners LP

   $ 59.5      $ 78.8   
  

 

 

   

 

 

 

Less:

    

Cash Interest Expense(5)

     —          —     

Maintenance Capital Expenditures(6)

     5.4        7.4   

Expansion Capital Expenditures(7)

     40.0        16.7   
  

 

 

   

 

 

 

Add:

    

Capital Contributions from Noble to Fund Expansion Capital Expenditures(8)

     40.0        16.7   
  

 

 

   

 

 

 

Pro Forma Distributable Cash Flow Attributable to Noble Midstream Partners LP

   $ 54.1      $ 71.4   
  

 

 

   

 

 

 

Pro Forma Cash Distributions:

    

Distributions to Public Common Unitholders

   $ 18.8      $ 18.8   

Distributions to Noble:

    

Common Units Held by Noble

     5.1        5.1   

Subordinated Units Held by Noble

     23.8        23.8   
  

 

 

   

 

 

 

Total Distributions to Noble

     28.9        28.9   
  

 

 

   

 

 

 

Aggregate Quarterly Distributions

   $ 47.7      $ 47.7   
  

 

 

   

 

 

 

Excess of Distributable Cash Flow Over Aggregate Annualized Minimum Quarterly Distribution

     6.4        23.7   

Percent of Aggregate Annualized Minimum Quarterly Distribution Payable to Common Unitholders

     100     100

Percent of Aggregate Annualized Minimum Quarterly Distribution Payable to Subordinated Unitholders

     100     100

 

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(1) We expect to incur approximately $6.7 million of estimated annual incremental general and administrative expenses as a result of being a publicly traded partnership.
(2) Represents non-cash amortization of origination fees and commitment fees on the undrawn portion of our new revolving credit facility that we expect to have in place at the closing of this offering (assuming no amounts have been drawn on the revolving credit facility).
(3) Represents net income attributable to Noble’s non-controlling interests in our development companies.
(4) Represents EBITDA attributable to Noble’s non-controlling interests in our development companies, calculated as follows:

 

     Year Ended
December 31,
2015
     Twelve  Months
Ended

June 30,
2016
 

Net income attributable to Noble’s non-controlling interest in our operating subsidiaries

   $ 17.1       $ 21.2   

Add:

     

Depreciation expense attributable to Noble’s non-controlling interest in our operating subsidiaries

     1.7         2.0   

Interest expense attributable to Noble’s non-controlling interest in our operating subsidiaries

     —           —     
  

 

 

    

 

 

 

EBITDA attributable to Noble’s non-controlling interest in our operating subsidiaries

   $ 18.8       $ 23.2   
  

 

 

    

 

 

 

 

(5) Represents commitment fees on the undrawn portion of our new revolving credit facility that we expect to have in place at the closing of this offering (assuming no amounts have been drawn on the revolving credit facility).
(6) Represents estimated maintenance capital expenditures attributable to our controlling interests in our development companies. Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures; however, for the purposes of the presentation of “Unaudited Pro Forma EBITDA and Distributable Cash Flow,” we have estimated that approximately $5.4 million and $7.4 million of our capital expenditures would have constituted maintenance capital expenditures for the pro forma year ended December 31, 2015 and the twelve months ended June 30, 2016, respectively. The estimated maintenance capital expenditures attributable to Noble’s retained interests are listed below:

 

     Year Ended
December 31,
2015
     Twelve  Months
Ended

June 30,
2016
 

Maintenance Capital Expenditures Attributable to Noble Midstream Partners LP

   $ 5.4       $ 7.4   

Maintenance Capital Expenditures Attributable to Noble—Retained Interest

   $ 1.3       $ 1.9   
  

 

 

    

 

 

 

Total Maintenance Capital Expenditures Attributable to Our Development Companies

   $ 6.7       $ 9.3   
  

 

 

    

 

 

 

 

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(7) Represents estimated expansion capital expenditures attributable to our controlling interests in our development companies. The estimated expansion capital expenditures attributable to Noble’s retained interest are listed below:

 

     Year Ended
December 31,
2015
     Twelve Months
Ended
June 30,

2016
 

Expansion Capital Expenditures Attributable to Noble Midstream Partners LP

   $ 40.0       $ 16.7   

Expansion Capital Expenditures Attributable to Noble—Retained Interest

   $ 14.5       $ 2.1   
  

 

 

    

 

 

 

Total Expansion Capital Expenditures Attributable to Our Development Companies

   $ 54.5       $ 18.8   
  

 

 

    

 

 

 

 

(8) Expansion capital expenditures have been funded by Noble directly or by choosing to forgo cash distributions.

Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2017

We forecast estimated EBITDA and distributable cash flow attributable to Noble Midstream Partners LP for the twelve months ending September 30, 2017 will be approximately $63.9 million and $54.9 million, respectively. In order to pay the aggregate annualized minimum quarterly distribution to all of our unitholders for the twelve months ending September 30, 2017, we must generate EBITDA and distributable cash flow of at least $56.7 million and $47.7 million, respectively.

We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated EBITDA and distributable cash flow for the twelve months ending September 30, 2017, and related assumptions set forth below, to substantiate our belief that we will have sufficient EBITDA and distributable cash flow to pay the aggregate annualized minimum quarterly distribution to all our unitholders for the twelve months ending September 30, 2017. Please read “—Significant Forecast Assumptions.” Due to the rate of development of our assets and our dependence on Noble’s exploration and production schedule for our revenue, our cash flows may vary from quarter to quarter. However, we believe that we will generate sufficient cash flow from operations to support the minimum quarterly distribution during each of the four quarters in the twelve months ending September 30, 2017. This forecast is a forward-looking statement and should be read together with our historical and unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient EBITDA and distributable cash flow to pay the minimum quarterly distribution to all unitholders and our general partner for the forecasted period. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

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

 

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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 EBITDA and 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.

 

    Twelve  Months
Ending
September  30,
2017
    Three Months Ending  
($ in millions, except per unit amounts)(i)     December 31,
2016
    March 31,
2017
    June
30,
2017
    September 30,
2017
 

Revenues

         

Midstream Services Revenue

         

Colorado River DevCo LP

  $ 99.8      $ 25.3      $ 24.9      $ 23.0      $ 26.5   

Green River DevCo LP

    —          —          —          —          —     

Gunnison River DevCo LP

    —          —          —          —          —     

Laramie River DevCo LP

    1.4        —          —          —          1.4   

San Juan River DevCo LP

    14.8        1.1        3.4        5.7        4.8   

Blanco River DevCo LP

    1.6        —          0.1        0.5        1.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Midstream Services Revenue

  $ 117.6      $ 26.4      $ 28.4      $ 29.1      $ 33.7   

Income from Investments

    6.1        1.5        1.5        1.5        1.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

  $ 123.8      $ 27.9      $ 29.9      $ 30.7      $ 35.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

         

Direct Operating

  $ 30.9      $ 6.8      $ 7.5      $ 7.9      $ 8.7   

General and Administrative(1)

    13.6        3.4        3.4        3.4        3.4   

Depreciation, Depletion and Amortization

    9.6        2.2        2.3        2.5        2.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

  $ 54.1      $ 12.4      $ 13.2      $ 13.8      $ 14.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

  $ 69.7      $ 15.5      $ 16.8      $ 16.9      $ 20.6   

Interest Expense(2)

    2.3        0.3        0.5        0.7        0.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax Expense

  $ 67.4      $ 15.2      $ 16.3      $ 16.2      $ 19.8   

Income Tax Expense

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 67.4      $ 15.2      $ 16.3      $ 16.2      $ 19.8   

Less:

         

Net Income Attributable to Noble-Retained Interests(3)

  $ (13.0   $ (1.9   $ (2.8   $ (3.9   $ (4.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Attributable to Noble Midstream Partners LP

  $ 54.4      $ 13.3      $ 13.4      $ 12.3      $ 15.3   

Add:

         

Net Income Attributable to Noble-Retained Interests

  $ 13.0      $ 1.9      $ 2.8      $ 3.9      $ 4.4   

Depreciation

    9.6        2.2        2.3        2.5        2.6   

Interest Expense

    2.3        0.3        0.5        0.7        0.8   

Income Tax Expense

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 79.3      $ 17.7      $ 19.0      $ 19.4      $ 23.2   

Less:

         

EBITDA Attributable to Noble-Retained Interests(4)

  $ (15.4   $ (2.4   $ (3.4   $ (4.5   $ (5.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA Attributable to Noble Midstream Partners LP

  $ 63.9      $ 15.3      $ 15.7      $ 14.9      $ 18.1   

Less:

         

Cash Interest Expense(5)

  $ (2.3   $ (0.3   $ (0.5   $ (0.7   $ (0.8

Estimated Maintenance Capital Expenditures(6)

    (6.7     (1.7     (1.6     (1.5     (1.9

Expansion Capital Expenditures(7)

    (103.5     (24.8     (32.9     (23.2     (22.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Add:

         

Borrowings to Fund Expansion Capital Expenditures

    103.5        24.8        32.9        23.2        22.6   

Cash Used to Fund Expansion Capital Expenditures

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Estimated Distributable Cash Flow Attributable to Noble Midstream Partners LP

  $ 54.9      $ 13.3      $ 13.6      $ 12.6      $ 15.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to Public Common Unitholders

  $ 18.8      $ 4.7      $ 4.7      $ 4.7      $ 4.7   

Distributions to Noble:

         

Common Units Held by Noble

    5.1        1.3        1.3        1.3        1.3   

Subordinated Units Held by Noble

    23.9        6.0        6.0        6.0        6.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Distributions to Noble

  $ 29.0      $ 7.2      $ 7.2      $ 7.2      $ 7.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aggregate Quarterly Distributions

  $ 47.7      $ 11.9      $ 11.9      $ 11.9      $ 11.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess of Distributable Cash Flow Over Minimum Quarterly Distribution

  $ 7.2      $ 1.4      $ 1.6      $ 0.7      $ 3.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

 

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(1) Our general and administrative expense will consist of direct general and administrative expenses incurred by us (including $6.7 million of incremental expenses we expect to incur as a result of becoming a publicly traded partnership) and payments we make to Noble in exchange for the provision of general and administrative services.
(2) Forecasted interest expense includes (i) interest on amounts outstanding under our new revolving credit facility; (ii) amortization of origination fees and (iii) commitment fees on the unused portion of our new revolving credit facility.
(3) Represents net income attributable to Noble’s non-controlling interests in our development companies.
(4) Represents EBITDA attributable to Noble’s non-controlling interests in our development companies, calculated as follows:

 

Net income attributable to Noble’s non-controlling interests in our development companies

   $ 13.0   

Add:

  

Depreciation expense attributable to Noble’s non-controlling interests in our development companies

     2.4   
  

 

 

 

EBITDA attributable to Noble’s non-controlling interests in our development companies

   $ 15.4   
  

 

 

 

 

(5) Forecasted cash interest expense includes (i) interest on amounts outstanding under our new revolving credit facility and (ii) commitment fees on the unused portion of our new revolving credit facility.
(6) Represents estimated maintenance capital expenditures attributable to our controlling interests in our development companies. The estimated maintenance capital expenditures attributable to Noble’s retained interests are listed below:

 

Maintenance Capital Expenditures Attributable to Noble Midstream Partners LP

   $ 6.7   

Maintenance Capital Expenditures Attributable to Noble—Retained Interest

     2.7   
  

 

 

 

Total Maintenance Capital Expenditures Attributable to Our Development Companies

   $ 9.4   
  

 

 

 

 

(7) Represents estimated expansion capital expenditures attributable to our controlling interests in our development companies. The estimated expansion capital expenditures attributable to Noble’s retained interest are listed below:

Forecasted Twelve Months Ending

September 30, 2017

 

     Expansion  Capital
Expenditures
Attributable

to Noble Midstream
Partners LP
     Expansion  Capital
Expenditures
Attributable

to Noble—
Retained Interest
     Total
Expansion  Capital
Expenditures
 

Expansion Capital Expenditures

        

Colorado River DevCo LP

   $ 38.6       $ 9.7       $ 48.3   

Green River DevCo LP

     7.3         21.8         29.0   

Gunnison River DevCo LP

     —           —           —     

Laramie River DevCo LP

     47.5         —           47.5   

San Juan River DevCo LP

     2.5         7.6         10.1   

Blanco River DevCo LP

     7.6         22.9         30.6   

White Cliffs

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Expansion Capital Expenditures

   $ 103.5       $ 61.9       $ 165.5   
  

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2017. 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

Our Predecessor’s historical results of operations include all of the results of operations of Noble Midstream LP Predecessor on a 100% basis, which includes 100% of the results of our each of our development companies, in which we own percentages varying from 5% to 100%. See “Business—Our Assets, ROFRs and ROFO.” In connection with the completion of this offering, Noble will contribute to us an 80% controlling interest in Colorado River DevCo LP, a 3.33% ownership interest in White Cliffs LLC, and 25% controlling interest in Green River DevCo LP, a 5% controlling interest in Gunnison River DevCo LP, a 100% controlling interest in Laramie River DevCo LP, a 25% controlling interest in San Juan River DevCo LP and a 25% controlling interest in the Blanco River DevCo LP. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting the Comparability of Our Financial Results” and “Certain Relationships and Related Party Transactions—Agreements with our Affiliates in Connection with the Transactions—Contribution Agreement.” Substantially all of our revenue will be derived from long-term, fixed-fee gathering agreements with Noble.

 

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Results and Volumes

The following table summarizes the pro forma revenues, volumes and EBITDA for our midstream services, which include 100% of the results of each of our development companies, for the year ended December 31, 2015 and the six months ended June 30, 2016 as well as our forecast regarding those same amounts for the twelve months ending September 30, 2017. EBITDA excludes general and administrative expenses for comparative purposes.

 

    Pro Forma
Year Ended
December 31,
2015
    Pro Forma
Six Months
Ended
June 30,

2016
    Forecasted
Twelve  Months
Ending
September 30,
2017
 

Colorado River DevCo

     

Crude oil gathering volumes (Bbl/d)

    33,979        45,414        36,137   

Natural gas gathering volumes (MMBtu/d)

    87,601        120,604        137,845   

Fresh water services volumes (Bbl/d)

    29,647        33,549        18,645   

Saltwater services volumes (Bbl/d)

    5,153        9,831        6,826   

Total Revenues ($ in millions)

  $ 91.0       $ 57.1       $ 99.8   

Pre G&A EBITDA ($ in millions)

  $ 70.0       $ 46.5       $ 78.1   

Laramie River DevCo

     

Crude oil gathering volumes (Bbl/d)

    n/a        n/a        76   

Fresh water services volumes (Bbl/d)

    n/a        n/a        2,986   

Saltwater services volumes (Bbl/d)

    n/a        n/a        84   

Total Revenues ($ in millions)

    n/a        n/a       $ 1.4   

Pre G&A EBITDA ($ in millions)

  $ n/a       $ n/a       $ (0.1

San Juan River DevCo

     

Fresh water services volumes (Bbl/d)

    20,410        10,799        20,632   

Total Revenues ($ in millions)

  $ 17.5       $ 3.8       $ 14.8   

Pre G&A EBITDA ($ in millions)

  $ 11.1       $ 2.5       $ 9.0   

Blanco River DevCo

     

Crude oil gathering volumes (Bbl/d)

    n/a        n/a        1,669   

Saltwater services volumes (Bbl/d)

    n/a        n/a        2,519   

Total Revenues ($ in millions)

    n/a        n/a       $ 1.6   

Pre G&A EBITDA ($ in millions)

    n/a        n/a       $ (0.2

Other

     

Total Revenues ($ in millions)

  $ 4.6       $ 6.6       $ 6.1   

Pre G&A EBITDA ($ in millions)

  $ 4.6       $ 5.9       $ 6.1   

Total

     

Crude oil gathering volumes (Bbl/d)

    33,979        45,414        37,882   

Natural gas gathering volumes (MMBtu/d)

    87,601        120,604        137,845   

Fresh water services volumes (Bbl/d)

    50,058        57,735        42,263   

Saltwater services volumes (Bbl/d)

    5,153        9,831        9,428   

Total Revenues ($ in millions)

  $ 113.1       $ 67.5       $ 123.8   

Pre G&A EBITDA ($ in millions)

  $ 85.6       $ 54.9       $ 92.8   

Revenue

We estimate that total revenues for the twelve months ending September 30, 2017 will be approximately $123.8 million compared to approximately $113.1 million for the pro forma year ended December 31, 2015, primarily due to increased throughput on our gathering systems. As a result of well completions, in addition to production from existing wells on our systems, we estimate that our average daily throughput for the twelve

 

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months ending September 30, 2017 will be 37.9 Mbbl/d of crude oil and 137.8 BBtu/d of natural gas. Our forecasted increase in volumes over the year ended December 31, 2015 is based on our expectation that Noble will complete the drilling and completion activities on our dedicated acreage consistent with their current development plan. Please read “Business—Our Commercial Agreements with Noble.”

Our revenues are, in part, affected by commodity prices, which drive the level and pace of Noble’s exploration and production activities. See “Risk Factors—Risks Related to Our Business—The demand for our midstream services, and therefore our cash flow, is affected by crude oil and natural gas prices, which fluctuate based on factors that are out of our control.” Noble’s exploration and production activities are driven by a number of variables that make the determination of the impact on our cash flows of different drilling and development plans difficult. However, we estimate that, if commodity prices were to fall to a level where all of our customers halted drilling activities as of the beginning of the forecast period, we would be able to make the minimum quarterly distribution on all of our common and subordinated units for the forecast period.

Operating Expense

We estimate that total operating expense for the twelve months ending September 30, 2017 will be $30.9 million compared to approximately $27.5 million for the pro forma year ended December 31, 2015 and approximately $25.8 million for the pro forma twelve months ended June 30, 2016. Our increase in operating expense is primarily due to our significantly higher operating levels, resulting in higher:

 

   

natural gas gathering throughput on our dedicated acreage;

 

   

maintenance and contract service costs;

 

   

regulatory and compliance costs;

 

   

operating costs associated with increased pipeline mileage and additional centralized gathering facilities; and

 

   

ad valorem taxes.

General and Administrative Expenses

Our general and administrative expenses will consist of (i) direct general and administrative expenses incurred by us, (ii) reimbursements to Noble of certain general and administrative expenses under the omnibus agreement and the operational services and secondment agreement and (iii) fixed-fee payments we make to Noble for the provision of general and administrative services under our omnibus agreement.

We expect total general and administrative expenses for the twelve months ending September 30, 2017 will be $13.6 million as compared to $7.3 million for the pro forma year ended December 31, 2015 and approximately $8.5 million for the pro forma twelve months ended June 30, 2016. The forecast period includes the $6.7 million of annual incremental publicly traded partnership expenses we expect to incur. The increase in general and administrative expenses primarily relates to increased personnel and associated administrative expenses due to our projected growth.

Depreciation

We estimate that depreciation for the twelve months ending September 30, 2017 will be $9.6 million as compared to approximately $6.9 million for the pro forma year ended December 31, 2015 and approximately $8.2 million for the pro forma twelve months ended June 30, 2016. Our expected increase is primarily attributable to the effect of depreciation on the new infrastructure constructed and to be constructed during the twelve months ending September 30, 2017.

 

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Capital Expenditures

The midstream energy business is capital intensive, requiring the maintenance of existing gathering systems and other midstream assets and facilities and the acquisition or construction and development of new gathering systems and other midstream assets and facilities. Our partnership agreement will require that we categorize our capital expenditures as either:

 

   

Estimated maintenance capital expenditures, which 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 and/or operating income. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations. In addition, we designate a portion of our capital expenditures to connect new wells to maintain gathering throughput as maintenance capital to the extent such capital expenditures are necessary to maintain, over the long term, our operating capacity, operating income or revenue; or

 

   

Expansion capital expenditures, which are cash expenditures to construct new midstream infrastructure and those expenditures incurred in order to extend the useful lives of our assets, reduce costs, increase revenues or increase system throughput or capacity from current levels, including well connections that increase existing system throughput. Examples of expansion capital expenditures include the construction, development or acquisition of additional gathering pipelines and centralized gathering facilities, in each case to the extent such capital expenditures are expected to expand our operating capacity, operating income or revenue. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures may also be considered expansion capital expenditures.

We generally categorize specific capital expenditures as either expansion capital expenditures or maintenance capital expenditures based on the nature of the expenditure. However, a portion of our capital expenditures relate to the connection of our gathering systems to new wells. While these capital expenditures could generally be considered expansion capital expenditures because they will result in increased throughput or cash flows produced by our midstream systems, we categorize a portion of these capital expenditures as maintenance capital expenditures because they are necessary to offset the natural production declines Noble will experience on all of its wells over time.

In allocating expenditures between maintenance capital expenditures and expansion capital expenditures for new well connections during the twelve months ending September 30, 2017, we first estimate the number of new well connections needed to offset the natural production decline and maintain the average throughput volume on our systems during the forecast period. We then allocate to maintenance capital the estimated new well connection expenditures based on a per well connection cost estimate. We estimate that total capital expenditures attributable to our development companies for the twelve months ending September 30, 2017 will be $165.5 million ($103.5 million net to our ownership interests in our development companies) based on the following assumptions.

Because Noble has retained a non-controlling interest in each of the development companies that hold our assets, Noble will be required to fund its allocable portion of our maintenance and expansion capital expenditures. See “Risk Factors—Risks Inherent in an Investment in Us—Our general partner and its affiliates, including Noble, 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 Noble, and Noble is under no obligation to adopt a business strategy that favors us.”

We estimate that maintenance capital expenditures will be $9.4 million ($6.7 million net to our ownership interests in our development companies) for the twelve months ending September 30, 2017. We expect to fund our allocated portion of these maintenance capital expenditures with cash generated by our operations. Because

 

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our midstream systems are relatively new, having been substantially built within the last three years, we believe that the capital expenditures necessary to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations during the twelve months ending September 30, 2017 will be relatively low. The majority of our maintenance capital expenditures included in the forecast period represent that portion of our estimated capital expenditures associated with the connection of new wells to our gathering systems that we believe will be necessary to offset the natural production declines Noble will experience on all of their wells over time. The methodology we use to categorize these capital expenditures is described above.

Expansion Capital Expenditures

We estimate that expansion capital expenditures for the twelve months ending September 30, 2017 will be $165.5 million ($103.5 million net to our ownership interests in our development companies). During the twelve months ending September 30, 2017, we have assumed that we will fund our allocated portion of expansion capital expenditures with borrowings under our new revolving credit facility. In general, our expansion capital expenditures are necessary to increase the size and scope of our midstream infrastructure in order to continue servicing Noble’s drilling and completion schedule and increasing production on our dedicated acreage. A majority of Noble’s planned well completions and production growth on our dedicated acreage during the twelve months ending September 30, 2017 will drive our need for expansion capital expenditures. These expansion capital expenditures are primarily comprised of the following expansion capital projects that we intend to pursue during the twelve months ending September 30, 2017:

 

   

Colorado River DevCo LP: We expect to spend approximately $38.6 million in expansion capital expenditures (net to our ownership interests) related to well connections and gathering line additions, including $17.0 million related to crude oil gathering, $12.4 million related to natural gas gathering, $1.3 million related to saltwater gathering and $7.9 million related to freshwater delivery.

 

   

Green River DevCo LP: We expect to spend approximately $7.3 million in expansion capital expenditures (net to our ownership interests) related to well connections and gathering line additions, including $2.6 million related to crude oil gathering, $3.4 million related to natural gas gathering, $0.1 million related to saltwater gathering and $1.2 million related to freshwater delivery.

 

   

Laramie River DevCo LP: We expect to spend approximately $47.5 million in expansion capital expenditures (net to our ownership interests) related to well connections and gathering line additions, including $30.4 million related to crude oil gathering, $6.8 million related to saltwater gathering, and $10.3 million related to freshwater delivery.

 

   

San Juan River DevCo LP: We expect to spend approximately $2.5 million in expansion capital expenditures (net to our ownership interests) related to freshwater delivery.

 

   

Blanco River DevCo LP: We expect to spend approximately $7.6 million in expansion capital expenditures (net to our ownership interests) related to well connections and gathering line additions, including $5.4 million related to crude oil gathering and $2.2 million related to saltwater gathering.

Regulatory, Industry and Economic Factors

Our forecast of EBITDA and distributable cash flow for the twelve months ending September 30, 2017 is also based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

Noble will not default under 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;

 

   

the locations of Noble’s planned well development will not be determined uneconomic by us;

 

   

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

 

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

 

   

there will not be a shortage of skilled labor; and

 

   

there will not be any material adverse changes in the midstream energy industry, commodity prices, capital markets or overall economic conditions.

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

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

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending December 31, 2016, we distribute all of our available cash to unitholders of record on the applicable record date. Our distribution for the period ending December 31, 2016 will be adjusted by an amount that covers the period from the closing of this offering through December 31, 2016, based on the actual number of days in that 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 and for anticipated future credit needs);

 

   

comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which we or any of our subsidiaries is a party or by which we or such subsidiary is bound or we or such subsidiary’s assets are subject; 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 pursuant to this bullet point if the effect of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

   

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

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings incurred under a credit facility, commercial paper facility or similar financing arrangement that are used solely for working capital purposes or to pay distributions to our partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Revolving Credit Facility.”

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 $.3750 per unit, or $1.5000 per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee

 

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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.

General Partner Interest

Our general partner owns a non-economic general partner interest in us, which does not entitle it to receive cash distributions. However, our general partner may in the future own common units or other equity securities in us that will entitle it to receive distributions.

Incentive Distribution Rights

Noble currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50%, of the available cash we distribute from operating surplus (as defined below) in excess of $0.4313 per unit per quarter. The maximum distribution of 50% does not include any distributions that Noble or its affiliates may receive on common units or subordinated units that it owns.

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:

 

   

$45.0 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 scheduled settlement or 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

 

   

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 twelve-month period with the proceeds of additional working capital borrowings; less

 

   

any cash loss realized on disposition of an investment capital expenditure (which is a capital expenditure other than a maintenance capital expenditure or an expansion capital expenditure).

 

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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 $45.0 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 twelve-month period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) 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, (ii) issuances of equity securities, (iii) 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 (iv) capital contributions received.

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 its scheduled settlement or termination date 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 an interest rate hedge contract or a commodity hedge contract will be amortized over the life of such interest rate hedge contract or commodity hedge contract), estimated 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);