NOBLE MIDSTREAM PARTNERS LP The following discussion should be read in conjunction with the consolidated financial statements and accompanying notes included in Part II, Item 8 of this Annual Report. This section of this Annual Report generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Partnership's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a narrative about our business from the perspective of our management. Our MD&A is presented in the following major sections: • Executive Overview and Operating Outlook ; • Results of Operations ; • Liquidity and Capital Resources ; and • Critical Accounting Policies and Estimates . MD&A is the Partnership's analysis of its financial performance and of significant trends that may affect future performance. It should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. It contains forward-looking statements and readers are cautioned that such forward-looking statements should be read in conjunction with the Partnership's disclosures under "Disclosure Regarding Forward-Looking Statements" in this Form 10-K. EXECUTIVE OVERVIEW AND OPERATING OUTLOOK Impact of COVID-19 and Declining Commodity Prices Our business was highly impacted by the COVID-19 pandemic and the decline in commodity prices. COVID-19 Ongoing containment measures and responsive actions to the COVID-19 pandemic continue to contribute to severe declines in general economic activity and energy demand. As a result, the global economy has experienced a slowing of economic growth, disruption of global manufacturing supply chains, stagnation of crude oil and natural gas consumption and interference with workforce continuity. The virus continues to impact the global demand for commodities, a trend we expect to continue into 2021. Additionally, the risks associated with COVID-19 have impacted our workforce and the way we meet our business objectives. In response to this, we executed the following actions: •Remote workforce - Due to concerns over health and safety, much of our workforce continues to work remotely until further notice. Throughout 2020, working remotely did not significantly impact our ability to maintain operations, including use of financial reporting systems, nor did it significantly impact our internal control environment. In addition, certain of our employees and contractors work in remote field locations. We implemented various health and safety protocols including, among others, reduction of certain operational workloads to critical maintenance and personnel, mandating use of certain secure travel options, review of critical medical supplies and procedures and implementation of other safeguards to protect operational personnel. We have not incurred, and in the future do not expect to incur, significant expenses related to business continuity as employees work from home. •Mobilized a Crisis Management Team ("CMT") - Our corporate CMT is responsible for ensuring the organization implements our corporateEmployee Health and Wellness plan elements pertaining to pandemic response. This plan follows theCenters for Disease Control and Prevention ("CDC"), national, state and local guidance in preparing and responding to COVID-19. The CMT implemented communication protocols should an employee become sick, and we continue to followCDC guidance, which is subject to change in the future. Throughout 2020, we did not experience significant business or operational interruption due to workforce health or safety concerns pertaining to COVID-19. The rapid and unprecedented decreases in energy demand have continued to impact certain elements of our distribution channels. For example, the significant decline in energy demand has resulted in downstream market impacts as refineries reduced activity or declared force majeure. Additionally, inventory surpluses have, at times, overwhelmedU.S. storage capacity, leading to a further strain on the supply chain. Commodity Prices The COVID-19 pandemic has continued to cause unprecedented and prolonged declines in the global demand for crude oil and natural gas. While relaxing of certain containment measures resulted in increased demand and commodity prices in the second half of 2020, demand continues to be significantly lower than levels experienced prior to the COVID-19 pandemic. Additional outbreaks and/or a return of more stringent containment measures or further restrictions could negatively impact commodity prices in the near future. The continuing uncertainty regarding the longevity and severity of the impacts of COVID-19 to the crude oil and natural gas industry, including the reduced demand for crude oil and natural gas commodities and its resulting impact on commodity prices, may continue until vaccines or alternative treatments are made widely available across the globe. 46
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Index to Financial Statements Contemporaneously with the COVID-19 pandemic, the crude oil and natural gas industry continues to be impacted by excess supply in the global marketplace.The Organization of Petroleum Exporting Countries ("OPEC") and certain non-OPEC producers agreed to production cuts beginning inMay 2020 that extend through first quarter 2022. While these production cuts have proven unable to sufficiently offset the ongoing decreases in demand caused by COVID-19, production from these producers has fallen to its lowest levels in decades. These factors caused a number of producers to reduce capital spending levels and shut-in production at certain fields for a portion of 2020. These temporary shut-ins served to lower inventory levels and thereby alleviate some of the crude oil storage constraints experienced in the beginning of second quarter 2020; however, by third quarter 2020, a number of producers brought back online previously shut-in production. Inventory levels, and resulting storage constraints, could be impacted as producers continue bringing production back online with relatively higher commodity prices. In addition to theU.S. crude oil market, theU.S. domestic natural gas market continues to be oversupplied and has contributed to depressed pricing. We expect that if development activity remains at lower levels in theU.S. leading to reduced crude oil and associated natural gas production,U.S. domestic natural gas prices will adjust as supply and demand levels equalize. The sustained decline in commodity prices adversely affected shale producers in theU.S. , including our customers. In response, certain of our customers reduced their capital investment programs and temporarily shut-in production. Collectively these actions by our customers have resulted in decreased throughput volumes on our gathering systems and significant decreases in fresh water deliveries due to decreases in well completion activity. The commodity price environment is expected to remain depressed based on sustained decreases in demand, over-supply and global economic instability caused by COVID-19, discussed further below. In addition, we expect downstream capacity and storage constraints to continue to have a negative impact on the ability to transport production. If constraints continue such that storage becomes unavailable to our customers or commodity prices remain depressed, they may be forced or elect to further shut-in production and delay or discontinue drilling plans, which would result in a further decline in demand for our services. In this market environment, we are focused on protecting our balance sheet. In response, starting with the first quarter of 2020, the Board of Directors of ourGeneral Partner approved a 73% reduction of the quarterly distribution to$0.1875 per unit. We intend to utilize funds from our distribution reduction and maintenance to reduce our debt levels. Our Board of Directors of ourGeneral Partner will continue reviewing the quarterly distribution in context of market conditions. Global Economic Instability COVID-19, coupled with the drop in commodity prices, has contributed to equity market volatility and what experts have now concluded amounted to a recession in first quarter 2020. Estimated ranges of the duration of these impacts to equity markets and the global economy vary widely, especially given the continued impacts of COVID-19 are unknown. Throughout 2020, theU.S. government passed a series of stimulus packages which, collectively, have provided the largest relief packages inU.S. history. These packages include various provisions intended to provide relief to individuals and businesses in the form of tax changes, loans and grants, among others. At this time, we do not believe these stimulus measures will have a material impact on the Partnership; however, we do believe they could aid the economy by providing relief to certain individuals and smaller businesses. The decline in our unit price and corresponding reduction in our market capitalization were sustained throughout most of 2020, a condition that is consistent across our sector. We do not have any debt covenants or other lending arrangements that depend upon our unit price. Throughout 2020, we remained in compliance with the covenants contained in our revolving credit facility and term loans, which provide that our consolidated leverage ratio as of the end of each fiscal quarter may not exceed 5.00 to 1.0, and our consolidated interest coverage ratio as of the end of each fiscal quarter to be no less than 3.00 to 1.0. The consolidated leverage ratio and consolidated interest coverage ratio are defined in the respective agreements. As cities, states and countries continue relaxing confinement restrictions, the risk for the resurgence and recurrence of COVID-19 remains. The reinstatement of containment measures could potentially lead to an extended period of reduced demand for crude oil and natural gas commodities, as well as assert further pressure on the global economy. Potential Future Impacts Impairment testing involves uncertainties related to key assumptions such as expectations of our customers' development and capital spending plans, among others, and a significant number of interdependent variables are derived from these key assumptions. There is a high degree of complexity in their application in determining use and value in recovery tests and fair value determinations. We performed impairment assessments as ofMarch 31, 2020 and fully impaired our goodwill during first quarter 2020. See Item 1. Financial Statements - Note 2. Summary of Significant Accounting Policies and Basis of Presentation . We performed impairment assessments throughout 2020, including assessments of property, plant and equipment, customer-related intangible assets, and equity method investments and did not identify any impairment indicators based on these procedures. Given the inherent volatility of the current market conditions driven by the COVID-19 pandemic and the oil and gas supply dynamics, the potential for future conditions to deviate from our current assumptions exists. For example, further erosion in 47
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Index to Financial Statements consumer energy demand, lower crude oil and natural gas development and production, and/or lower commodity prices could trigger future impairments of our assets or non-compliance with the financial covenants in our revolving credit facility and term loans. Workforce Adjustments As previously disclosed, the officers of ourGeneral Partner manage our operations and activities. In 2020, Noble engaged in corporate restructuring activities, resulting in reductions in its employee and contractor work forces. Additionally, certain employees were participating in furlough and part-time work programs implemented in first quarter 2020 and continued into third quarter 2020. Certain employees that support our operations were impacted by these activities. Additionally, Noble lowered executive leadership salaries by 10% to 20%. Certain officers of ourGeneral Partner were impacted by the salary reductions. The aforementioned actions did not significantly impact our ability to maintain operations, including use of financial reporting systems, nor have they significantly impacted our internal control environment. 2020 Significant Results We accomplished the following significant transactional and financial results for the year endedDecember 31, 2020 . Significant Transactional Highlights Include: •exercised our 20% option on Saddlehorn, which provided$24.2 million of income and$25.0 million in distributions sinceFebruary 2020 ; •Delaware Crossing began delivering crude oil into all connection points inApril 2020 ; •EPIC Y-Grade transitioned back to NGL service beginning inMay 2020 , with completion of its first new build fractionator in June; and •EPIC Crude entered full service inApril 2020 ; Significant Financial Highlights Include: •net income of$94.9 million , a decrease of 61% as compared with 2019; •net cash provided by operating activities of$376.6 million , a decrease of 2% as compared with 2019; •Adjusted EBITDA (non-GAAP financial measure) of$425.8 million , an increase of 10% as compared with 2019; •Adjusted EBITDA (non-GAAP financial measure) attributable to the partnership of$392.9 million , an increase of 54% as compared with 2019; and •distributable cash flow (non-GAAP financial measure) of$326.2 million , an increase of 53% as compared with 2019. For additional information regarding our non-GAAP financial measures, see Adjusted EBITDA (Non-GAAP Financial Measure), Distributable Cash Flow (Non-GAAP Financial Measure) and Reconciliation of Non-GAAP Financial Measures , below In addition to our transactional and financial achievements, we remained focused on environmental, social and governance initiatives by identifying opportunities to reduce environmental impact, improve safety and support the communities in which we operate through social investment. In 2020, we reduced flaring intensity in theDelaware Basin by 53% compared to 2019, while reducing overall emissions and increasing natural gas throughput from the field. 2021 Capital Program Organic Capital Program Our 2021 organic capital program will accommodate a net investment level of approximately$65 to$85 million . Our 2021 organic capital program will primarily be focused on affiliate and third-party well connections in the DJ and Delaware Basins. The level of capital spending will be evaluated throughout the year based on the following factors, among others, and their effect on project financial returns: •pace of our customers' development; •operating and construction costs and our ability to achieve additional contractual supplier cost savings; •impact of new laws and regulations on our business practices; •indebtedness levels; and •availability of financing or other sources of funding. We plan to fund our capital program with cash on hand, from cash generated from operations, and borrowings under our revolving credit facility. Investment Capital Program Our 2021 investment capital program will accommodate a net investment level of approximately$15 to$25 million to complete projects at EPIC Crude and EPIC Y-Grade. 48
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Index to Financial Statements
RESULTS OF OPERATIONS
Results of operations were as follows:
Year Ended December 31,
(in thousands) 2020 2019
Revenues
Midstream Services - Affiliate$ 389,192 $ 417,835 Midstream Services - Third Party 94,228 96,194 Crude Oil Sales - Third Party 281,205 189,772 Total Revenues 764,625 703,801 Costs and Expenses Cost of Crude Oil Sales 270,678 181,390 Direct Operating 92,387 116,675 Depreciation and Amortization 105,697 96,981 General and Administrative 24,721 25,777 Goodwill Impairment 109,734 - Other Operating (Income) Expense 4,698 (488) Total Operating Expenses 607,915 420,335 Operating Income 156,710 283,466 Other Expense (Income) Interest Expense, Net of Amount Capitalized 26,570 16,236 Investment Loss (Income) 34,891 17,748 Total Other Expense (Income) 61,461 33,984 Income Before Income Taxes 95,249 249,482 Tax Provision 383 4,015 Net Income 94,866 245,467 Less: Net Income Prior to the Drop-Down and Simplification - 12,929 Net Income Subsequent to the Drop-Down and Simplification 94,866 232,538
Less: Net (Loss) Income Attributable to Noncontrolling Interests (39,165)
72,542
Net Income Attributable to Noble Midstream Partners LP $ 134,031 $ 159,996 Adjusted EBITDA (1) Attributable to
$ 254,586
Distributable Cash Flow (1) of
$ 213,442 (1)Adjusted EBITDA and Distributable Cash Flow are not measures as determined by GAAP and should not be considered an alternative to, or more meaningful than, net income, net cash provided by operating activities or any other measure as reported in accordance with GAAP. For additional information regarding our non-GAAP financial measures, see - Adjusted EBITDA (Non-GAAP Financial Measure), Distributable Cash Flow (Non-GAAP Financial Measure) and Reconciliation of Non-GAAP Financial Measures , below. 49
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Index to Financial Statements
Throughput and Crude Oil Sales Volumes
The amount of revenue we generate primarily depends on the volumes of crude oil,
natural gas and water for which we provide midstream services as well as the
crude oil volumes we sell to customers. These volumes are affected primarily by
the level of drilling and completion activity by our customers in our areas of
operations, and by changes in the supply of and demand for crude oil, natural
gas and NGLs in the markets served directly or indirectly by our assets.
Our customers' willingness to engage in drilling and completion activity is
determined by a number of factors, the most important of which are the
prevailing and projected prices of crude oil and natural gas, the cost to drill
and operate a well, expected well performance, the availability and cost of
capital, and environmental and government regulations. We generally expect the
level of drilling to positively correlate with long-term trends in commodity
prices. Similarly, production levels nationally and regionally generally tend to
positively correlate with drilling activity.
Our customers have dedicated acreage to us based on the services we provide. Our
commercial agreements with Noble provide that, in addition to our existing
dedicated acreage, any future acreage that is acquired by Noble in the IDP
areas, and that is not subject to a pre-existing third-party commitment, will be
included in the dedication to us for midstream services.
Throughput and crude oil sales volumes related to our Gathering Systems
reportable segment and throughput volumes related to our Fresh Water Delivery
reportable segment were as follows:
Year Ended December 31,
2020 2019
DJ Basin
Crude Oil Sales Volumes (Bbl/d) 16,964 9,354
Crude Oil Gathering Volumes (Bbl/d) 174,644
182,121
Natural Gas Gathering Volumes (MMBtu/d) 503,794
476,605
Natural Gas Processing Volumes (MMBtu/d) 41,511
50,039
Produced Water Gathering Volumes (Bbl/d) 35,190
39,629
Fresh Water Delivery Volumes (Bbl/d) 91,886
164,524
Crude Oil Gathering Volumes (Bbl/d) 54,347
49,842
Natural Gas Gathering Volumes (MMBtu/d) 166,032
155,155
Produced Water Gathering Volumes (Bbl/d) 138,449
148,886
Total Gathering Systems Crude Oil Sales Volumes (Bbl/d) 16,964
9,354
Crude Oil Gathering Volumes (Bbl/d) 228,991
231,963
Natural Gas Gathering Volumes (MMBtu/d) 669,826
631,760
Total Barrels of Oil Equivalent (Boe/d) (1) 314,866
322,312
Natural Gas Processing Volumes (MMBtu/d) 41,511
50,039
Produced Water Gathering Volumes (Bbl/d) 173,639
188,515
Total Fresh Water Delivery Fresh Water Services Volumes (Bbl/d) 91,886
164,524
(1)Includes crude oil sales volumes that are transported on our gathering systems and sold to third-party customers.
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Revenues
Revenues from our Gathering System and Fresh Water Delivery reportable segments
were as follows:
Increase (Decrease)
(in thousands) 2020 2019 from Prior Year
Year Ended December 31 ,
Gathering and Processing - Affiliate $ 328,411 $ 337,086 (3) %
Gathering and Processing - Third Party 78,654 76,645
3 %
Fresh Water Delivery - Affiliate 57,834 77,566 (25) %
Fresh Water Delivery - Third Party 7,680 12,591 (39) %
Crude Oil Sales - Third Party 281,205 189,772 48 %
Other - Affiliate 2,947 3,183 (7) %
Other - Third Party 7,894 6,958 13 %
Total Midstream Services Revenues
9 % Revenues Trend Analysis Revenues increased during 2020 as compared with 2019. The changes in revenues by reportable segment were as follows: Gathering Systems Gathering Systems revenues increased by$85.5 million during 2020 as compared with 2019 due to the following: •an increase of$91.4 million in crude oil sales due to increased activity associated with the fulfillment of our transportation commitments, which was partially offset by decreased commodity prices during 2020; •an increase of$9.0 million in crude oil and natural gas gathering services revenues driven by an increase in throughput volumes resulting from an increase in wells connected to our gathering systems in the Mustang IDP area; •an increase of$5.3 million in crude oil and natural gas gathering services revenues driven by an increase in throughput volumes in theDelaware Basin resulting from an increase in the number of wells connected to our gathering systems; partially offset by: •a decrease of$12.7 million in crude oil, natural gas and produced water gathering services revenues driven by decreased throughput on our gathering systems resulting from temporary well shut-ins by our customer in the Wells Ranch IDP area; and •a decrease of$5.2 million in crude oil gathering services revenues driven by decreased throughput on our gathering systems resulting from temporary well shut-ins by our customers in the Black Diamond area. Fresh Water Delivery Fresh Water Delivery revenues decreased by$24.6 million during 2020 as compared with 2019 due to decreased fresh water deliveries in 2020 in theDJ Basin resulting from reduced well completion activity by our customers. Costs and Expenses Costs and Expenses Trend Analysis Costs and expenses were as follows: Increase (Decrease) (in thousands) 2020 2019 from Prior Year Year EndedDecember 31 , Cost of Crude Oil Sales$ 270,678 $ 181,390 49 % Direct Operating 92,387 116,675 (21) % Depreciation and Amortization 105,697 96,981 9 % General and Administrative 24,721 25,777 (4) % Goodwill Impairment 109,734 - N/M Other Operating (Income) Expense 4,698 (488) N/M Total Operating Expenses$ 607,915 $ 420,335 45 % N/M Amount is not meaningful 51
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Index to Financial Statements Cost of Crude Oil Sales Cost of crude oil sales is recorded within our Gathering Systems reportable segment. Cost of crude oil sales increased$89.3 million during 2020 as compared with 2019. The increase was primarily attributable to increased purchases of crude oil to meet our crude oil transportation commitments. Direct Operating Expenses Direct operating expenses decreased during 2020 as compared with 2019. The changes in direct operating expenses by reportable segment were as follows: Gathering Systems Gathering Systems direct operating expenses decreased$15.5 million during 2020 as compared with 2019 due to our ability to capture cost efficiencies as well as defer non-essential program work due to COVID-19 and decreased use of third party providers for produced water logistics services resulting from reduced well completion activity and temporary well shut-ins by our customer in the Wells Ranch IDP area. Fresh Water Delivery Fresh Water Delivery direct operating expenses decreased$10.0 million during 2020 as compared with 2019 primarily due to the decreased use of third-party providers for fresh water logistics services in theDJ Basin resulting from reduced well completion activity by our customers. Corporate Corporate direct operating expenses increased$1.2 million during 2020 as compared with 2019 primarily due to increased insurance expense. Depreciation and Amortization Depreciation and amortization expense increased during 2020 as compared with 2019. The changes by reportable segment were as follows: Gathering Systems Gathering Systems depreciation and amortization expense increased$8.3 million during 2020 as compared with 2019 primarily due to assets placed in service in 2020. Assets placed in service were associated with the Mustang gathering system, the expansion of theDelaware Basin infrastructure, and the continued development of the Black Diamond assets. Fresh Water Delivery Fresh Water Delivery depreciation and amortization expense remained consistent during 2020 as compared with 2019 due to our fresh water delivery infrastructure being substantially completed prior to 2019. General and Administrative Expense General and administrative expense is recorded within our Corporate reportable segment. General and administrative expense decreased$1.1 million during 2020 as compared with 2019. The decrease was primarily attributable to decreased transaction expenses associated with the Drop-Down and Simplification Transaction. The decrease was substantially offset by an increase in the fixed annual fee payable under our omnibus agreement which became effective March 1, 2020. See Item 8. Financial Statements and Supplementary Data - Note 3. Transactions with Affiliates. Goodwill Impairment During first quarter 2020, we fully impaired our goodwill. See Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Basis of Presentation and Management's Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview and Operating Outlook. Other Operating Expense (Income) Other operating expense (income) is recorded within our Gathering Systems reportable segment. Other operating expenses during 2020 primarily related to impairments and losses incurred associated with the sale of miscellaneous assets. Other Expense (Income) Trend Analysis Increase (Decrease) (in thousands) 2020 2019 from Prior Year Year EndedDecember 31 , Interest Expense$ 32,030 $ 33,723 (5) % Capitalized Interest (5,460) (17,487) (69) % Interest Expense, Net 26,570 16,236 64 % Investment Loss, Net 34,891 17,748 97 % Total Other Expense, Net$ 61,461 $ 33,984 81 % Interest Expense, Net Interest expense is recorded within our Corporate reportable segment. Interest expense represents interest incurred in connection with our revolving credit facility and term loan credit facilities. Our interest expense includes interest on outstanding balances on the facilities and commitment fees on the undrawn portion of our revolving credit facility as well as the non-cash amortization of origination fees. A portion of the interest expense is capitalized based upon construction-in-progress activity as well as our investments in equity method investees engaged in construction activities during the year. See Item 8. Financial Statements and Supplementary Data - Note 5. Property, Plant and Equipment for our construction-in-progress balances as of December 31, 2020 and 2019 and See Item 8. Financial Statements and Supplementary Data - Note 6. Investments. 52
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Index to Financial Statements Interest expense decreased$1.7 million during 2020 as compared with 2019. The decrease was primarily due to higher interest rates during 2019, partially offset by higher outstanding long-term balances during 2020. Capitalized interest decreased$12.0 million during 2020 as compared with 2019. The decrease is primarily attributable to decreased construction-in-progress balances during 2020 as well as no longer capitalizing interest associated with our capital contributions toDelaware Crossing , EPIC Crude and EPIC Y-Grade. As the aforementioned investments have commenced planned, principal operations, we no longer capitalize interest associated with our capital contributions. Investment Loss, Net Investment loss is recorded within our Investments in Midstream Entities reportable segment and increased$17.1 million during 2020 as compared with 2019. Our Investment loss, net is driven by increased losses from EPIC Crude and EPIC Y-Grade investments. The losses are primarily attributable to expenses incurred prior to commencement and the gradual ramp of throughput volumes. The losses were partially offset by earnings from our investment in Saddlehorn. Income Tax Provision We are not a taxable entity forUnited States federal income tax purposes or for the majority of states that impose an income tax. Taxes are generally borne by our partners through the allocation of taxable income and we do not record deferred taxes related to the aggregate difference in the basis of our assets for financial and tax reporting purposes. We are subject to aTexas margin tax due to our operations in theDelaware Basin , and we recorded a de minimis state tax provision for the years endedDecember 31, 2020 andDecember 31, 2019 . For periods prior to the Drop-Down and Simplification Transaction, our consolidated financial statements include a provision for tax expense on income related to the assets contributed to the Partnership. See Item 8. Financial Statements and Supplementary Data - Note 15. Income Taxes for a discussion of the changes in our income tax provision and effective tax rates. Adjusted EBITDA (Non-GAAP Financial Measure) Adjusted EBITDA should not be considered an alternative to net income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA excludes some, but not all, items that affect net income or net cash, and these measures may vary from those of other companies. As a result, our Adjusted EBITDA may not be comparable to similar measures of other companies in our industry. For a reconciliation of Adjusted EBITDA to its most comparable measures calculated and presented in accordance with GAAP, see Reconciliation of Non-GAAP Financial Measures, below. We define "Adjusted EBITDA" as net income before income taxes, net interest expense, depreciation and amortization and certain other items that we do not view as indicative of our ongoing performance. Additionally, Adjusted EBITDA reflects the adjusted earnings impact of our equity method investments by adjusting our equity earnings or losses from our equity method investments to reflect our proportionate share of the EBITDA of such equity method investments. Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess: •our operating performance as compared with those of other companies in the midstream energy industry, without regard to financing methods, historical cost basis or capital structure; •the ability of our assets to generate sufficient cash flow to make distributions to our unitholders; •our ability to incur and service debt and fund capital expenditures; and •the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities. We believe that the presentation of Adjusted EBITDA provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjusted EBITDA are net income and net cash provided by operating activities. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income, net cash provided by operating activities or any other measure as reported in accordance with GAAP. Distributable Cash Flow (Non-GAAP Financial Measure) Distributable cash flow should not be considered an alternative to net income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Distributable cash flow excludes some, but not all, items that affect net income or net cash provided by operating activities, and these measures may vary from those of other companies. As a result, our distributable cash flow may not be comparable to similar measures of other companies in our industry. For a reconciliation of distributable cash flow to its most comparable measures calculated and presented in accordance with GAAP, see Reconciliation of Non-GAAP Financial Measures, below. We define distributable cash flow as Adjusted EBITDA plus distributions received from our equity method investments less our proportionate share of Adjusted EBITDA from such equity method investments, estimated maintenance capital expenditures and cash interest paid. 53
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Index to Financial Statements Distributable cash flow does not reflect changes in working capital balances. Our partnership agreement requires us to distribute all available cash on a quarterly basis, and distributable cash flow is one of the factors used by the board of directors of ourGeneral Partner to help determine the amount of cash that is available to our unitholders for a given period. Therefore, we believe distributable cash flow provides information useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to distributable cash flow are net income and net cash provided by operating activities. Distributable cash flow should not be considered an alternative to, or more meaningful than, net income, net cash provided by operating activities or any other measure as reported in accordance with GAAP. Reconciliation of Non-GAAP Financial Measures The following tables present reconciliations of Adjusted EBITDA and distributable cash flow to net income and net cash provided by operating activities, the most directly comparable GAAP financial measures, for each of the periods indicated. Reconciliation of Net Income to Adjusted EBITDA and Distributable Cash Flow Year Ended December 31, (in thousands) 2020 2019 Reconciliation from Net Income Net Income$ 94,866 $ 245,467
Add:
Depreciation and Amortization 105,697 96,981 Interest Expense, Net of Amount Capitalized 26,570 16,236
Proportionate Share of Equity Method Investment EBITDA Adjustments 82,363
16,160
Goodwill Impairment 109,734 -
Other 6,531 11,104
Adjusted EBITDA 425,761 385,948
Less:
Adjusted EBITDA Prior to Drop-Down and Simplification - 26,629
Adjusted EBITDA Subsequent to Drop-Down and Simplification 425,761 359,319
Less:
Adjusted EBITDA Attributable to Noncontrolling Interests 32,835 104,733 Adjusted EBITDA Attributable to Noble Midstream Partners LP 392,926 254,586
Add:
Distribution from Equity Method Investments Attributable to
25,574 10,135
Less:
Proportionate Share of Equity Method Investment EBITDA Attributable
to
31,583 (6,275)
Cash Interest Paid 31,251 32,984
Maintenance Capital Expenditures 29,474 24,570
Distributable Cash Flow of Noble Midstream Partners LP $ 326,192 $ 213,442
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Index to Financial Statements
Reconciliation of Net Cash Provided by Operating Activities to Adjusted EBITDA
and Distributable Cash Flow
Year Ended December 31,
(in thousands) 2020 2019Reconciliation from Net Cash Provided by Operating Activities Net Cash Provided by Operating Activities
$ 376,629 $ 385,143
Add:
Interest Expense, Net of Amount Capitalized 26,570 16,236 Changes in Operating Assets and Liabilities 16,144 (4,165) Equity Method Investment EBITDA Adjustments 7,664 (16,413) Other (1,246) 5,147 Adjusted EBITDA 425,761 385,948
Less:
Adjusted EBITDA Prior to Drop-Down and Simplification - 26,629
Adjusted EBITDA Subsequent to Drop-Down and Simplification 425,761
359,319
Less:
Adjusted EBITDA Attributable to Noncontrolling Interests 32,835 104,733
Adjusted EBITDA Attributable to
254,586
Add:
Distribution from Equity Method Investments Attributable to
25,574 10,135
Less:
Proportionate Share of Equity Method Investment EBITDA
Attributable to
31,583 (6,275)
Cash Interest Paid 31,251 32,984
Maintenance Capital Expenditures 29,474 24,570
Distributable Cash Flow of
$ 213,442 LIQUIDITY AND CAPITAL RESOURCES Financing Strategy Our primary sources include cash generated from operations, borrowings under our revolving credit facility, and equity or debt offerings. We believe that cash generated from these sources will be sufficient to meet our short-term working capital requirements, long-term capital expenditure requirements and quarterly cash distributions. We do not have any commitment from Noble or ourGeneral Partner or any of their respective affiliates to fund our cash flow deficits or provide other direct or indirect financial assistance to us. 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 our revolving credit facility and the issuance of debt and equity securities, to fund acquisitions and our expansion capital expenditures. During 2020, we utilized external financing sources to fund portions of our construction activities and capital contributions to our investments. See Item 8. Financial Statements and Supplementary Data - Note 6. Investments. 55
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Index to Financial Statements
Available Liquidity
Our operating cash flows are a significant source of liquidity. Additional
sources of funding were available through debt and equity financing activities,
as described below. Year-end liquidity was as follows:
December 31,
(in thousands) 2020 2019
Cash, Cash Equivalents, and Restricted Cash (1) $ 16,332 $ 12,726
Amount Available to be Borrowed Under Our Revolving Credit
Facility (2) 440,000 555,000
Available Liquidity $ 456,332 $ 567,726
(1) See Item 8. Financial Statements and Supplementary Data - Note 2. Summary
of Significant Accounting Policies and Basis of Presentation.
(2) See Item 8. Financial Statements and Supplementary Data - Note 8.
Long-Term Debt.
Term Loan Credit Facility Maturity
Our $500 million term loan credit facility matures on July 31, 2021 . We are
assessing various options and expect to address the maturity prior to July 31,
2021 .
Revolving Credit Facility
Our revolving credit facility is available to fund working capital requirements,
acquisitions and expansion capital expenditures. In 2020, we utilized our
revolving credit facility to fund our capital contributions to Saddlehorn,
Delaware Crossing , EPIC Crude, EPIC Y-Grade and EPIC Propane . As of December 31,
2020, $710 million was outstanding under our revolving credit facility. See
Item 8. Financial Statements and Supplementary Data - Note 8. Long-Term Debt.
Cash Flows
Summary cash flow information was as follows:
Year Ended December 31,
(in thousands) 2020 2019
Total Cash Provided By (Used in) Operating Activities$ 376,629 $ 385,143 Investing Activities (427,554) (872,593) Financing Activities 54,531 484,464
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities Net cash provided by operating activities decreased during 2020 as compared with 2019. The decrease was attributable to decreased midstream services revenues resulting from a decrease in throughput volumes, an increase in net interest expense, and changes in working capital. The decrease was partially offset by a decrease in direct operating expenses as well as an increase in distributions from equity method investees. Investing Activities Cash used in investing activities decreased during 2020 as compared with 2019 primarily due to decreased capital contributions to our equity method investments as well as decreased capital expenditures in 2020. Our decreased capital contributions toDelaware Crossing , EPIC Crude and EPIC Y-Grade were partially offset by our capital contributions toSaddlehorn and EPIC Propane . Financing Activities Cash provided by financing activities decreased during 2020 as compared with 2019 primarily due to decreases in net long-term borrowings, proceeds from the preferred equity issuance and other equity offerings. The decrease was partially offset by the cash outflow associated with the Drop-Down and Simplification Transaction during 2019 as well as an increase in contributions from noncontrolling interest holders. Off-Balance Sheet Arrangements As ofDecember 31, 2020 , our material off-balance sheet arrangements that we have entered into include our transportation commitments, undrawn letters of credit and guarantees. 56
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Index to Financial Statements Contractual Obligations The following table summarizes certain contractual obligations as ofDecember 31, 2020 that are reflected in the consolidated balance sheets and/or disclosed in the accompanying notes. 2026 and Obligation Note Reference (1) 2021 2022 and 2023 2024 and 2025 Beyond Total (in thousands) Long-Term Debt (2) Note 8$ 500,000 $ 1,110,000 $ - $ -$ 1,610,000 Long-Term Debt Interest Payments and Revolving Credit Facility Commitment Fee (3) Note 8 21,512 18,128 - -
39,640
Asset Retirement Obligations (4) Note 9 - - 8,431 33,141 41,572 Finance Lease Obligations (5) Note 14 2,063 - - - 2,063 Operating Lease Obligations (6) Note 14 260 - - -
260
Purchase Obligations (7) Note 14 2,064 - - -
2,064
Transportation Fees (8) Note 14 34,101 69,074 72,530 26,072
201,777
Surface Lease Obligations (9) Note 14 217 352 352 3,698
4,619
Total Contractual Obligations$ 560,217
(1)References are to the Notes accompanying Item 8. Financial Statements and Supplementary Data . (2)Long-term debt includes our revolving credit facility and term loan credit facility balances based on the maturity dates of the facilities. (3)Interest payments are based on the outstanding balance, scheduled maturity and interest rate in effect atDecember 31, 2020 . The commitment fee is associated with the unused portion of the revolving credit facility and is based on the unused capacity as ofDecember 31, 2020 ,$440 million , for all periods presented and assumes no borrowing capacity increases. (4)Asset retirement obligations are discounted. (5)Annual capital lease payments exclude regular maintenance and operational costs. (6)Operating lease obligations represent non-cancelable leases for equipment used in our daily operations. Amounts have not been discounted. (7)Purchase obligations represent contractual agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including: fixed and minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. (8)Our transportation fees include fixed fees for the transportation of crude oil. We have entered into long-term agreements with unaffiliated third parties to satisfy a substantial portion of our transportation commitment. (9)Surface lease obligations represent annual payments to landowners. In addition to the above contractual obligations, an affiliate of Black Diamond enters into agreements to purchase crude oil from producers at market-based prices. The agreements do not contain provisions regarding fixed or minimum quantities of crude oil to be purchased. Omnibus Agreement Our omnibus agreement contractually requires us to pay a fixed annual fee for certain administrative and support services being provided to us. The omnibus agreement generally remains in full force and effect so long as Noble controls ourGeneral Partner and is redetermined annually. The current rate is$15.7 million and became effectiveMarch 1, 2020 . DuringFebruary 2021 , we completed the annual redetermination process and have established an annual rate of$18.0 million , effectiveMarch 1, 2021 . Preferred Equity We can redeem the preferred equity in whole or in part at any time for cash at a predetermined redemption price. The predetermined redemption price is the greater of (i) an amount necessary to achieve a 12% internal rate of return or (ii) an amount necessary to achieve a 1.375x multiple on invested capital. GIP can request redemption of the preferred equity on or afterMarch 25, 2025 . The preferred equity is perpetual and has a 6.5% annual dividend rate, payable quarterly in cash, with the ability to accrue unpaid dividends during the first two years following the closing. See Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Basis of Presentation and Note 4. Offerings and Acquisition. Letters of Credit In the ordinary course of business, we maintain letters of credit in support of certain performance obligations of our subsidiaries. Outstanding letters of credit, including Black Diamond, totaled approximately$39.0 million atDecember 31, 2020 . 57
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Index to Financial Statements
Capital Requirements
Capital Expenditures and Planned 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. Based on the nature of the expenditure, we
categorize our capital expenditures as either:
•maintenance capital expenditures, which are additions to property, plant and
equipment made to maintain, over the long term, our production and/or operating
income. We use an estimate of maintenance capital expenditures to determine our
operating surplus, for purposes of determining cash available for distributions;
or
•expansion capital expenditures, which are additions to property, plant and
equipment made 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.
Our planned expansion capital expenditures, driven primarily by our customers'
planned well completions and production growth on our dedicated acreage, will
consist primarily of well connections and gathering line additions. We expect to
fund at least a portion of future expansion capital expenditures with borrowings
under our revolving credit facility. We expect our maintenance capital
expenditures to be funded primarily from cash flows from operations.
Capital expenditures and other investing activities (on an accrual basis) were
as follows:
Year Ended December 31,
(in thousands) 2020 2019
Gathering System Expenditures $ 70,118 $ 257,066
Fresh Water Delivery System Expenditures -
7,330
Other 523
1,068
Total Capital Expenditures (1)$ 70,641 $
265,464
Additions to Investments (1)(2)(3)$ 317,229 $
611,325
(1)Total capital expenditures and additions to investments represent the consolidated expenditures of the Partnership and include the portion of expenditures funded by noncontrolling interest owners. (2)Additions to investments include capitalized interest of approximately$4.6 million and$13.0 million for the years endedDecember 31, 2020 andDecember 31, 2019 , respectively. (3)Additions to investments for the year endedDecember 31, 2020 include our$22.5 million loan to EPIC Y-Grade. DuringJuly 2020 , the loan plus accrued interest was converted to equity and treated as a capital contribution to EPIC Y-Grade. At the time of conversion, the loan plus accrued interest totaled$23.4 million . See Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Basis of Presentation. For the year endedDecember 31, 2020 , gathering system expenditures were primarily associated with well connections in the Wells Ranch IDP and Mustang IDP areas, well connections in the Black Diamond dedication area and the expansion of gathering infrastructure in theDelaware Basin . Our additions to investments were primarily related to our capital contribution to Saddlehorn as well as our other equity method investments. See Item 8. Financial Statements and Supplementary Data - Note 6 Investments . For the year endedDecember 31, 2019 , gathering system expenditures were primarily associated with well connections in the Mustang IDP area, Black Diamond dedication area and theDelaware Basin as well as expansion of the Mustang gathering system. Fresh water delivery system expenditures were primarily associated with the expansion of the Greeley Crescent fresh water delivery system. Our additions to investments were primarily related to our capital contributions for theDelaware Crossing , EPIC Y-Grade and EPIC Crude. See Item 8. Financial Statements and Supplementary Data - Note 6 Investments . Cash Distributions Our partnership agreement requires that we distribute all of our available cash quarterly. Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on the applicable record date. OnJanuary 22, 2021 , the Board of ourGeneral Partner declared a quarterly cash distribution of$0.1875 per limited partner unit. The distribution will be paid onFebruary 12, 2021 , to unitholders of record onFebruary 5, 2021 . 58
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Index to Financial Statements CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the consolidated financial statements requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. When alternatives exist among various accounting methods, the choice of accounting method can have a significant impact on reported amounts. The following is a discussion of the accounting policies, estimates and judgments which management believes are most significant in the application ofU.S. GAAP used in the preparation of the consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of our subsidiaries and variable interest entities ("VIEs"), of which we are the primary beneficiary. A VIE is required to be consolidated by its primary beneficiary, which is generally defined as the party who has (i) the power to direct the activities that most significantly impact the VIE's economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We evaluate our relationships with each VIE, which includeGunnison River DevCo LP and Black Diamond, on an ongoing basis to determine whether we continue to be the primary beneficiary. Affiliate or third-party ownership interests in our consolidated VIEs are presented as noncontrolling interests. See Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Basis of Presentation. We use the equity method of accounting for investments in entities that we do not control but over which we exert significant influence. For certain entities, we serve as the operator and exert significant influence over the day-to-day operations. For other entities, we do not serve as the operator; however, our voting position on management committees or the board of directors allows us to exert significant influence over decisions regarding capital investments, budgets, turnarounds, maintenance, monetization decisions and other project matters. As a result, our investments in Advantage,Delaware Crossing , EPIC Crude, EPIC Y-Grade,EPIC Propane and Saddlehorn do not require consolidation under the VIE consolidation model. See Item 8. Financial Statements and Supplementary Data - Note 2. Summary of Significant Accounting Policies and Basis of Presentation and See Item 8. Financial Statements and Supplementary Data - Note 6. Investments. Impairment of Long-Lived Assets Property, plant and equipment and intangible assets are periodically evaluated for potential impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable from expected undiscounted cash flows from the use and eventual disposition of an asset. If the carrying amount of the asset is not expected to be recoverable from future undiscounted cash flows, an impairment may be recognized. Any impairment is measured as the excess of the carrying amount of the asset over its estimated fair value. In assessing long-lived assets for impairments, our management evaluates changes in our business and economic conditions and their implications for recoverability of the assets' carrying amounts. A substantial portion of our revenues arise from services provided to Noble. Therefore, sustained decreases in commodity prices, significant changes in our customer's future development plans, to the extent they affect our operations, may necessitate assessment of the carrying amount of our affected assets for recoverability. In addition, an increase in our construction or operating costs may also necessitate an assessment. Such assessment requires application of judgment regarding the use and ultimate disposition of the asset, long-range revenue and expense estimates, global and regional economic conditions, including commodity prices and drilling activity by our customers, as well as other factors affecting estimated future net cash flows. The measure of impairments to be recognized, if any, depends upon management's estimate of the asset's fair value, which may be determined based on the estimates of future net cash flows or values at which similar assets were transferred in the market in recent transactions, if such data is available. See Item 8. Financial Statements and Supplementary Data - Note 5. Property, Plant and Equipment and See Item 8. Financial Statements and Supplementary Data - Note 7. Intangible Assets. 59
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Index to Financial Statements
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