Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Rice Midstream Partners LPexhibit322093016rmp.htm
EX-32.1 - EXHIBIT 32.1 - Rice Midstream Partners LPexhibit321093016rmp.htm
EX-31.2 - EXHIBIT 31.2 - Rice Midstream Partners LPexhibit31293016rmp.htm
EX-31.1 - EXHIBIT 31.1 - Rice Midstream Partners LPexhibit311093016rmp.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from_______ to_______              
Commission File Number: 001-36789
Rice Midstream Partners LP
(Exact name of registrant as specified in its charter)
Delaware
 
47-1557755
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2200 Rice Drive
Canonsburg, Pennsylvania
 
15317
(Address of principal executive offices)
 
(Zip code)
 
 
 
 (724) 271-7200

(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes ¨No
 
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þYes ¨No
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small 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 þ
Non-accelerated filer ¨
 
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨Yes þNo
 
 
 
At November 1, 2016, there were 101,902,856 units (consisting of 73,149,233 common units and 28,753,623 subordinated units) outstanding.


1


RICE MIDSTREAM PARTNERS LP
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS


2


Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains “forward-looking statements.” All statements, other than statements of historical fact included in this Quarterly Report, regarding our strategy, future operations, financial position, estimated revenues and income/losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Quarterly Report, the words “could,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential,” or “continue,” and similar expressions are used to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events. You are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a complete statement of all potential risks and uncertainties. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”), our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 (the “March 31, 2016 Quarterly Report”) and in this Quarterly Report, each on file with the Securities and Exchange Commission (the “SEC”).
Forward-looking statements may include statements about:
the benefits of the Vantage Midstream Asset Acquisition (defined herein);
our future financial performance following the Vantage Midstream Asset Acquisition;
the ability of Rice Energy or our other customers to meet their drilling and development plans on a timely basis or at all;
our business strategy;
realized natural gas, natural gas liquids (“NGLs”) and oil prices;
competition and government regulations;
actions taken by third-party producers, operators, processors and transporters;
pending legal or environmental matters;
costs of conducting our gathering and compression and water services operations;
general economic conditions;
credit and capital markets;
operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
uncertainty regarding our future operating results; and
plans, objectives, expectations and intentions contained in this Quarterly Report that are not historical.

We caution you that these forward-looking statements are subject to all of the risks and uncertainties, most of which are difficult to predict and many of which are beyond our control, incident to our gathering and compression and water services businesses. These risks include, but are not limited to, commodity price volatility; inflation; environmental risks; regulatory changes; the uncertainty inherent in projecting future throughput volumes, cash flow and access to capital; the timing of development expenditures of Rice Energy or our other customers; and the other risks described under “Item 1A. Risk Factors” in the 2015 Annual Report, the March 31, 2016 Quarterly Report and in this Quarterly Report.
Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements, expressed or implied, included in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue.
Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Quarterly Report.


3


Commonly Used Defined Terms
As used in the Quarterly Report, unless the context indicates or otherwise requires, the following terms have the following meanings:
“Rice Midstream Partners LP,” the “Partnership,” “we,” “our,” “us” or like terms refers to Rice Midstream Partners LP and its consolidated subsidiaries;
“our general partner” refers to Rice Midstream Management LLC, a subsidiary of Rice Energy;
“Rice Energy” refers to Rice Energy Inc. and its consolidated subsidiaries;
“GP Holdings” refers to Rice Midstream GP Holdings LP, a subsidiary of Rice Energy;
“PA Water” refers to Rice Water Services (PA) LLC, a wholly-owned subsidiary of Rice Midstream Partners LP;
“OH Water” refers to Rice Water Services (OH) LLC, a wholly-owned subsidiary of Rice Midstream Partners LP;
“Vantage” refers collectively to Vantage Energy, LLC and Vantage Energy II, LLC; and
“Vantage Midstream Entities” refers collectively to Vantage Energy II Access, LLC and Vista Gathering, LLC.




4


PART I

Rice Midstream Partners LP
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Current assets:
 
 
 
Cash
$
7,634

 
$
7,597

Accounts receivable
8,831

 
9,926

Accounts receivable - affiliate
10,636

 
6,438

Prepaid expenses, deposits and other
104

 
192

Total current assets
27,205

 
24,153

 
 
 
 
Property and equipment, net
644,625

 
578,026

Deferred financing costs, net
2,002

 
2,310

Goodwill
39,142

 
39,142

Intangible assets, net
44,937

 
46,159

Total assets
$
757,911

 
$
689,790

 
 
 
 
Liabilities and partners’ capital
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,587

 
$
13,484

Accrued capital expenditures
12,270

 
15,277

Other accrued liabilities
6,396

 
3,067

Total current liabilities
21,253

 
31,828

 
 
 
 
Long-term liabilities:
 
 
 
Long-term debt

 
143,000

       Other long-term liabilities
3,283

 
3,128

Total liabilities
24,536

 
177,956

 
 
 
 
Partners’ capital:
 
 
 
Common units (52,432,851 and 42,163,749 issued and outstanding at September 30, 2016 and December 31, 2015, respectively)
830,135

 
624,557

Subordinated units (28,753,623 issued and outstanding at September 30, 2016 and December 31, 2015)
(96,760
)
 
(112,723
)
Total partners’ capital
733,375

 
511,834

Total liabilities and partners’ capital
$
757,911

 
$
689,790


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5


Rice Midstream Partners LP
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except unit data)
 
2016
 
2015
 
2016
 
2015
Operating revenues:
 
 
 
 
 
 
 
 
Affiliate
 
$
28,260

 
$
23,947

 
$
105,267

 
$
72,289

Third-party
 
12,807

 
6,128

 
36,890

 
12,857

Total operating revenues
 
41,067

 
30,075

 
142,157

 
85,146

 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
Operation and maintenance expense
 
4,596

 
4,421

 
17,348

 
10,028

General and administrative expense (1) (2)
 
4,945

 
5,242

 
15,408

 
13,638

Incentive unit (income) expense (3)
 

 
(75
)
 

 
1,048

Depreciation expense
 
5,489

 
4,417

 
17,714

 
10,454

Acquisition costs
 

 

 
73

 

Amortization of intangible assets
 
411

 
407

 
1,222

 
1,223

       Other expense (income)
 
90

 
(347
)
 
239

 
492

Total operating expenses
 
15,531

 
14,065

 
52,004

 
36,883

 
 
 
 
 
 
 
 
 
Operating income
 
25,536

 
16,010

 
90,153

 
48,263

Other income
 

 
2

 

 
11

Interest expense (4)
 
(402
)
 
(814
)
 
(2,369
)
 
(2,070
)
Amortization of deferred finance costs
 
(145
)
 
(144
)
 
(433
)
 
(432
)
Income before income taxes
 
24,989

 
15,054

 
87,351

 
45,772

Income tax expense
 

 
(1,794
)
 

 
(5,796
)
Net income
 
$
24,989

 
$
13,260

 
$
87,351

 
$
39,976

 
 
 
 
 
 
 
 
 
Calculation of limited partner interest in net income:
 
 
 
 
 
 
 
 
Net income
 
$
24,989

 
$
13,260

 
$
87,351

 
$
39,976

Less: Pre-acquisition net income allocated to general partner
 

 
990

 

 
6,306

Less: General partner interest in net income attributable to incentive distribution rights
 
427

 

 
540

 

Limited partner net income
 
$
24,562


$
12,270

 
$
86,811

 
$
33,670

 
 
 
 
 
 
 
 
 
Net income per limited partner unit:(5)
 
 
 
 
 
 
 
 
Common units (basic)

$
0.30

 
$
0.21

 
$
1.15

 
$
0.59

Common units (diluted)
 
$
0.30

 
$
0.21

 
$
1.14

 
$
0.58

Subordinated units (basic and diluted)

$
0.30

 
$
0.21

 
$
1.17

 
$
0.59

 
 
 
 
 
 
 
 
 
Cash distributions declared per limited partner unit:
 
 
 
 
 
 
 
 
Common units
 
$
0.2370

 
$
0.1935

 
$
0.6705

 
$
0.5715

Subordinated units
 
$
0.2370

 
$
0.1935

 
$
0.6705

 
$
0.5715

(1)
Equity-based compensation expense related to phantom unit awards of $0.6 million and $2.7 million is included in general and administrative expense for the three and nine months ended September 30, 2016, respectively. Equity-based compensation expense related to phantom unit awards of $1.1 million and $3.3 million is included in general and administrative expense for the three and nine months ended September 30, 2015, respectively.

6


(2)
General and administrative expense includes charges from Rice Energy of $4.4 million and $3.6 million for the three months ended September 30, 2016 and 2015, respectively, and $12.7 million and $8.8 million for the nine months ended September 30, 2016 and 2015, respectively.
(3)
Incentive unit expense for the three and nine months ended September 30, 2015 was allocated from Rice Energy.
(4)
Interest expense includes charges from Rice Energy of $0.3 million and $0.7 million for the three and nine months ended September 30, 2015, respectively.
(5)
Net income per limited partner unit does not include results attributable to PA Water and OH Water (collectively, the “Water Assets”) prior to their acquisition as these results are not attributable to limited partners of the Partnership.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7


Rice Midstream Partners LP
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
(in thousands)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
87,351

 
$
39,976

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation expense
17,714

 
10,454

Amortization of intangibles
1,222

 
1,223

Amortization of deferred financing costs
433

 
432

Incentive unit expense

 
1,048

Equity compensation expense
2,672

 
3,316

Deferred income tax benefit

 
5,796

Changes in operating assets and liabilities:
 
 
 
Increase in accounts receivable and receivable from affiliate
(3,102
)
 
(8,852
)
Increase in prepaid expenses and other assets
(5
)
 
(407
)
Increase in accounts payable and payable to affiliate
26

 
3,764

Increase in accrued liabilities and other
3,193

 
280

Net cash provided by operating activities
109,504

 
57,030

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(97,679
)
 
(178,104
)
Net cash used in investing activities
(97,679
)
 
(178,104
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from borrowings
43,000

 
72,000

Repayments of borrowings
(186,000
)
 

Proceeds from ATM program, net
15,713

 

Proceeds from June 2016 equity offering, net
164,029

 

Costs related to IPO

 
(129
)
Additions to deferred financing costs
(206
)
 
(21
)
Contributions from parent
39

 
69,182

Employee tax withholding for settlement of common unit award vestings
(1,280
)
 

Distributions to related parties
(18,228
)
 
(11,456
)
Distributions to public unitholders
(28,855
)
 
(11,454
)
Net cash (used in) provided by financing activities
(11,788
)
 
118,122

 
 
 
 
Net increase (decrease) in cash
37

 
(2,952
)
Cash at the beginning of the year
7,597

 
26,834

Cash at the end of the period
$
7,634

 
$
23,882


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

8


Rice Midstream Partners LP
Condensed Consolidated Statements of Partners Capital
(Unaudited)
 
 
 
Limited Partners
 
 
(in thousands)
Parent Net Equity
 
Common
 
Subordinated & Incentive Distribution Right Holders
 
Total
Balance, January 1, 2015
$
36,594

 
$
442,451

 
$
(49,101
)

$
429,944

Contributions from parent
69,182

 

 

 
69,182

Incentive unit expense
1,048

 

 

 
1,048

Equity compensation expense
356

 
2,898

 

 
3,254

Offering costs related to the IPO

 
(129
)
 

 
(129
)
Distributions to unitholders

 
(11,455
)
 
(11,455
)
 
(22,910
)
Pre-acquisition net income attributable to the general partner
6,306

 

 

 
6,306

Net income

 
16,835

 
16,835

 
33,670

Balance, September 30, 2015
$
113,486

 
$
450,600

 
$
(43,721
)
 
$
520,365

 
 
 
 
 
 
 
 
Balance, January 1, 2016
$

 
$
624,557

 
$
(112,723
)
 
$
511,834

Contributions from parent

 

 
39

 
39

Equity compensation expense

 
1,492

 

 
1,492

Distributions to unitholders

 
(28,855
)
 
(18,228
)
 
(47,083
)
Common units issued in June equity 2016, net of offering costs

 
164,029

 

 
164,029

Common units issued in ATM program, net of offering costs

 
15,713

 

 
15,713

Net income

 
53,199

 
34,152

 
87,351

Balance, September 30, 2016
$

 
$
830,135

 
$
(96,760
)
 
$
733,375


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

9


Rice Midstream Partners LP
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1.
Basis of Presentation
Rice Midstream Partners LP (the “Partnership”) is a Delaware limited partnership formed by Rice Energy Inc. (“Rice Energy”) in August 2014. References in these unaudited condensed consolidated financial statements to Rice Energy refer collectively to “Rice Energy” and its consolidated subsidiaries, other than the Partnership and its consolidated subsidiaries.
The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared by the Partnership’s management in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The unaudited condensed consolidated financial statements included herein contain all adjustments which are, in the opinion of management, necessary to present fairly the Partnership’s financial position as of September 30, 2016 and December 31, 2015 and its condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 and of cash flows for the nine months ended September 30, 2016 and 2015.
On February 17, 2016, Rice Energy, Rice Midstream Holdings LLC, a Delaware limited liability company (“Rice Midstream Holdings”) and subsidiary of Rice Energy, and Rice Midstream GP Holdings LP (“GP Holdings”), entered into a securities purchase agreement with EIG Energy Fund XVI, L.P., EIG Energy Fund XVI-E, L.P., and EIG Holdings (RICE) Partners, LP (collectively, the “Purchasers”) pursuant to which, among other things, GP Holdings agreed to sell common units representing an 8.25% limited partner interest in GP Holdings to the Purchasers (the “Midstream Holdings Investment”). The transaction closed on February 22, 2016 and had no direct impact on the Partnership’s condensed consolidated financial statements. Prior to the closing of the transaction, Rice Midstream Holdings assigned all of its equity interests in the Partnership, consisting of 3,623 common units, 28,753,623 subordinated units and all of its incentive distribution rights in the Partnership, to GP Holdings.
2.
Long-Term Debt
On December 22, 2014, Rice Midstream OpCo LLC (“Rice Midstream OpCo”) entered into a revolving credit agreement (as amended, the “revolving credit facility”) with Wells Fargo Bank, N.A., as administrative agent, and a syndicate of lenders. As of September 30, 2016, the revolving credit facility had a maximum credit amount of $450.0 million with an additional $200.0 million of commitments available under an accordion feature subject to lender approval. The credit facility provides for a letter of credit sublimit of $50.0 million. As of September 30, 2016, Rice Midstream OpCo had no borrowings outstanding and no letters of credit under this facility. The average daily outstanding balance of the credit facility was approximately $96.5 million and interest was incurred on the facility at a weighted average interest rate of 3.3% during the nine months ended September 30, 2016. The revolving credit facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions, to repurchase units and for general partnership purposes. The Partnership is the guarantor of the obligations under the revolving credit facility, which matures on December 22, 2019.
In connection with the completion of the Partnership’s acquisition from Rice Energy of the entities owning the midstream assets associated with Rice Energy’s acquisition of Vantage Energy, LLC and Vantage Energy II, LLC (collectively, “Vantage”) and their subsidiaries (the “Vantage Acquisition”) (the “Vantage Midstream Asset Acquisition”), on October 19, 2016, Rice Midstream OpCo entered into a second amendment (the “Second Amendment”) to its credit agreement to, among other things, (i) permit the completion of the Vantage Midstream Asset Acquisition, (ii) increase the Partnership’s ability to borrow under the facility from $450.0 million (with an additional $200.0 million of commitments available under an accordion feature) to $850.0 million and (iii) adjust the interest rate payable on amounts borrowed thereunder (as described below). The Partnership completed the Vantage Midstream Asset Acquisition on October 19, 2016. See Note 11 for additional information.
Principal amounts borrowed are payable on the maturity date, and interest is payable quarterly for base rate loans and at the end of the applicable interest period for Eurodollar loans. Rice Midstream OpCo may elect to borrow in Eurodollars or at the base rate. Following the effectiveness of the Second Amendment, Eurodollar loans bear interest at a rate per annum equal to the applicable LIBOR Rate plus an applicable margin ranging from 200 to 300 basis points, depending on the leverage ratio then in effect, and base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Eurodollar loans plus 100 basis points, plus an applicable margin ranging from 100 to 200 basis points, depending on the leverage ratio then in effect. The carrying amount of the revolving credit facility is comprised of borrowings for which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value as of September 30, 2016 and represents a Level 2 measurement.

10


Following the effectiveness of the Second Amendment, Rice Midstream OpCo also pays a commitment fee based on the undrawn commitment amount ranging from 37.5 to 50 basis points.
The Partnership’s revolving credit facility also contains certain financial covenants and customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the revolving credit facility to be immediately due and payable. The Partnership was in compliance with its covenants and ratios effective as of September 30, 2016.
Interest paid in cash was approximately $0.4 million and $2.7 million for the three and nine months ended September 30, 2016, respectively.
3.
Commitments and Contingencies
From time to time the Partnership is party to various legal and/or regulatory proceedings arising in the ordinary course of business. While the ultimate outcome and impact to the Partnership cannot be predicted with certainty, the Partnership believes that all such matters are without merit and involve amounts which, if resolved unfavorably, either individually or in the aggregate, will not have a material adverse effect on its financial condition, results of operations or cash flows. When it is determined that a loss is probable of occurring and is reasonably estimable, the Partnership accrues an undiscounted liability for such contingencies based on its best estimate using information available at the time. The Partnership discloses contingencies where an adverse outcome may be material, or in the judgment of management, the matter should otherwise be disclosed.
Lease Obligations
The Partnership has lease obligations for compression equipment under existing contracts with third parties. Rent expense included in operation and maintenance expense for the three and nine months ended September 30, 2016 was $0.4 million and $1.2 million, respectively, and for the three and nine months ended September 30, 2015 was $0.4 million and $1.3 million, respectively. Future payments for this equipment as of September 30, 2016 totaled $4.2 million (remainder of 2016: $0.7 million; 2017: $0.9 million; 2018: $0.9 million; 2019: $0.8 million; 2020: $0.3 million and thereafter: $0.6 million).
4.
Partners’ Capital
On June 13, 2016, the Partnership completed an underwritten public offering of an aggregate of 9,200,000 common units representing limited partner interests in the Partnership at a price to the public of $18.50 per unit, which included 1,200,000 common units sold pursuant to the exercise of the underwriters’ option to purchase additional units. After deducting underwriting discounts and commissions of approximately $6.0 million and transaction costs, the Partnership received net proceeds of approximately $164.1 million. The Partnership used a portion of the net proceeds to repay outstanding debt and intends to use the remainder for general partnership purposes, including acquisitions and capital expenditures.
During the second quarter of 2016, the Partnership entered into an equity distribution agreement that established an at-the-market common unit offering program (the “ATM program”), pursuant to which the Partnership may sell from time to time through a group of managers, acting as the Partnership’s sales agents, the Partnership’s common units having an aggregate offering price of up to $100.0 million. As of September 30, 2016, the Partnership had issued and sold 944,700 common units at an average price per unit of $17.21 through its ATM program. The Partnership intends to use the net proceeds of $15.8 million for general partnership purposes, including repayment of outstanding debt, acquisitions and capital expenditures.
The following table presents the Partnership’s common and subordinated units issued from December 31, 2015 through September 30, 2016:
 
Limited Partners
 
 
 
Common
 
Subordinated
 
Total
Balance, December 31, 2015
42,163,749

 
28,753,623

 
70,917,372

Equity offering in June 2016
9,200,000

 

 
9,200,000

Common units issued under ATM program
944,700

 

 
944,700

Vested phantom units, net
124,402

 

 
124,402

Balance, September 30, 2016
52,432,851

 
28,753,623

 
81,186,474

As of September 30, 2016, GP Holdings owned approximately 35% of the Partnership consisting of 3,623 common units, 28,753,623 subordinated units and all of the incentive distribution rights. Rice Energy owned 91.75% of the limited partnership interest in GP Holdings as of September 30, 2016.

11


5.
Phantom Unit Awards
The Partnership’s general partner can grant phantom unit awards under the Rice Midstream Partners LP 2014 Long Term Incentive Plan (the “LTIP”) to certain non-employee directors of the Partnership and executive officers and employees of Rice Energy that provide services to the Partnership under an omnibus agreement (the “Omnibus Agreement”). Pursuant to the LTIP, the maximum aggregate number of common units that may be issued pursuant to any and all awards under the LTIP shall not exceed 5,000,000 common units, subject to adjustment due to recapitalization or reorganization, or related to forfeitures or the expiration of awards, as provided under the LTIP.
The equity-based awards are valued at the date of issuance and the related compensation cost is recognized into earnings on a straight-line basis over the vesting period. The equity-based awards will cliff vest at the end of the requisite service period from one to two years. Included in general and administrative expense is $0.6 million and $2.6 million of equity compensation cost related to these awards in the three and nine months ended September 30, 2016, respectively, and $1.0 million and $3.0 million of equity compensation cost related to these awards in the three and nine months ended September 30, 2015, respectively. Total unrecognized compensation cost expected to be recognized over the remaining vesting periods as of September 30, 2016 is $0.8 million for these awards.
6.
Net Income per Limited Partner Unit and Cash Distributions
The Partnership’s net income is allocated to the limited partners, including subordinated unitholders, in accordance with their respective ownership percentages and, when applicable, giving effect to the incentive distribution rights held by GP Holdings. The allocation of undistributed earnings, or net income in excess of distributions, to the incentive distribution rights is limited to cash available for distribution for the period. The Partnership’s net income allocable to the limited partners is allocated between common and subordinated unitholders by applying the provisions of the Partnership’s partnership agreement that govern actual cash distributions as if all earnings for the period had been distributed. Any common units issued during the period are included on a weighted-average basis for the days in which they were outstanding. Net income attributable to the Water Assets for the periods prior to their acquisition was not allocated to the limited partners for purposes of calculating net income per limited partner unit as these results are not attributable to limited partners of the Partnership.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as awards under the LTIP, were exercised, settled or converted into common units. When it is determined that potential common units should be included in diluted net income per limited partner unit calculation, the impact is reflected by applying the treasury stock method.

12


The following table presents Partnership’s calculation of net income per limited partner unit for common and subordinated limited partner units.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands, except unit data)
2016
 
2015
 
2016
 
2015
Net income
$
24,989

 
$
13,260

 
$
87,351

 
$
39,976

Less: Pre-acquisition net income allocated to general partner (1)

 
990

 

 
6,306

Less: General partner interest in net income attributable to incentive distribution rights
427

 

 
540

 

Limited partner net income
$
24,562

 
$
12,270

 
$
86,811

 
$
33,670

 
 
 
 
 
 
 
 
Net income allocable to common units
$
15,862

 
$
6,135

 
$
53,199

 
$
16,835

Net income allocable to subordinated units
8,700

 
6,135

 
33,612

 
16,835

Limited partner net income
$
24,562

 
$
12,270

 
$
86,811

 
$
33,670

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding - basic:
 
 
 
 
 
 
 
Common units
52,419,942

 
28,753,623

 
46,376,896

 
28,753,623

Subordinated units
28,753,623

 
28,753,623

 
28,753,623

 
28,753,623

Total
81,173,565

 
57,507,246

 
75,130,519

 
57,507,246

 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding - diluted:
 
 
 
 
 
 
 
Common units (2)
52,641,582

 
28,899,075

 
46,637,415

 
28,844,202

Subordinated units
28,753,623

 
28,753,623

 
28,753,623

 
28,753,623

Total
81,395,205

 
57,652,698

 
75,391,038

 
57,597,825

 
 
 
 
 
 
 
 
Net income per limited partner unit - basic:
 
 
 
 
 
 
 
Common units
$
0.30

 
$
0.21

 
$
1.15

 
$
0.59

Subordinated units
0.30

 
0.21

 
1.17

 
0.59

Total
$
0.30


$
0.21

 
$
1.16

 
$
0.59

 
 
 
 
 
 
 
 
Net income per limited partner unit - diluted:
 
 
 
 
 
 
 
Common units
$
0.30

 
$
0.21

 
$
1.14

 
$
0.58

Subordinated units (3)
0.30

 
0.21

 
1.17

 
0.59

Total
$
0.30


$
0.21

 
$
1.15

 
$
0.58

 
 
 
 
 
 
 
 
Cash distributions declared per limited partner unit: (4)
 
 
 
 
 
 
 
Common units
$
0.2370

 
$
0.1935

 
$
0.6705

 
$
0.5715

Subordinated units
0.2370

 
0.1935

 
0.6705

 
0.5715

Total
$
0.2370

 
$
0.1935

 
$
0.6705

 
$
0.5715

(1)
Pre-acquisition net income allocated to the general partner relates to operations of the Water Assets for the period prior to their acquisition.
(2)
Diluted weighted-average limited partner common units includes the effect of 221,640 and 260,519 units for the three and nine months ended September 30, 2016, respectively, and 145,452 and 90,579 units for the three and nine months ended September 30, 2015, respectively, in each case related to phantom units.
(3)
Diluted income per limited partner unit is presented as if all earnings for the period had been distributed, and while it appears that more income is allocated to the subordinated unitholders than the common unitholders based on the dilution of the common units from the LTIP

13


for the nine months ended September 30, 2016, our partnership agreement prevents us from making a distribution to the subordinated unitholders in excess of those to the common unitholders.
(4)
See below for further discussion of cash distributions declared for the period presented.
Subordinated Units
GP Holdings owns all of the Partnership’s subordinated units. The principal difference between the Partnership’s common units and subordinated units is that, for any quarter during the “subordination period,” holders of the subordinated units will not be entitled to receive any distribution from operating surplus 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. Subordinated units will not accrue arrearages. When the subordination period ends, each outstanding subordinated unit will convert into one common unit, which will then participate pro rata with the other common units in distributions.
Incentive Distribution Rights
All of the incentive distribution rights are held by GP Holdings. Incentive distribution rights represent the right to receive increasing percentages (15%, 25% and 50%) of quarterly distributions from operating surplus after the minimum quarterly distribution and the target distribution levels (described below) have been achieved.
For any quarter in which the Partnership has distributed cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum distribution, then the Partnership will distribute any additional available cash from operating surplus for that quarter among the unitholders and the incentive distribution rights holders in the following manner:
 
 
 
Marginal Percentage Interest in Distributions
 
Total Quarterly Distribution Per Unit
 
Unitholders
 
Incentive Distribution Rights Holders
Minimum Quarterly Distribution
$0.1875
 
100%
 
—%
First Target Distribution
above $0.1875 up to $0.2156
 
100%
 
—%
Second Target Distribution
above $0.2156 up to $0.2344
 
85%
 
15%
Third Target Distribution
above $0.2344 up to $0.2813
 
75%
 
25%
Thereafter
above $0.2813
 
50%
 
50%
On August 11, 2016, a cash distribution of $0.2235 per common and subordinated unit was paid to the Partnership’s unitholders related to the second quarter of 2016. On October 20, 2016, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders for the third quarter of 2016 of $0.2370 per common and subordinated unit. The cash distribution will be paid on November 10, 2016 to unitholders of record at the close of business on November 1, 2016. Also on November 10, 2016, a cash distribution of $0.4 million will be made to GP Holdings related to its incentive distribution rights in the Partnership based upon the level of distribution paid per common and subordinated unit.
7.
Financial Information by Business Segment
The Partnership operates in two business segments: (i) gathering and compression and (ii) water services. The gathering and compression segment provides natural gas gathering and compression services for Rice Energy and third parties in the Appalachian Basin. The water services segment is engaged in the provision of water services to support well completion activities and to collect and recycle or dispose of flowback and produced water for Rice Energy and third parties in the Appalachian Basin.
Business segments are evaluated for their contribution to the Partnership’s consolidated results based on operating income, which is defined as segment operating revenues less operating expenses. Other income and expenses, interest and income taxes are managed on a consolidated basis. The segment accounting policies are the same as those described in Note 1 to the Partnership’s 2015 Annual Report.

14


The operating results and assets of the Partnership’s reportable segments were as follows for the three months ended September 30, 2016.
 
Three Months Ended September 30, 2016
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Total operating revenues
$
33,503

 
$
7,564

 
$
41,067

Total operating expenses
8,833

 
6,698

 
15,531

Operating income
$
24,670

 
$
866

 
$
25,536

 
 
 
 
 
 
Depreciation expense
$
2,406

 
$
3,083

 
$
5,489

Capital expenditures for segment assets
$
21,399

 
$
1,261

 
$
22,660

The operating results of the Partnership’s reportable segments were as follows for the three months ended September 30, 2015.
 
Three Months Ended September 30, 2015
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Total operating revenues
$
20,142

 
$
9,933

 
$
30,075

Total operating expenses
7,173

 
6,892

 
14,065

Operating income
$
12,969

 
$
3,041

 
$
16,010

 
 
 
 
 
 
Depreciation expense
$
1,597

 
$
2,820

 
$
4,417

Capital expenditures for segment assets
$
44,544

 
$
23,759

 
$
68,303

The operating results of the Partnership’s reportable segments were as follows for the nine months ended September 30, 2016.
 
Nine Months Ended September 30, 2016
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Total operating revenues
$
90,339

 
$
51,818

 
$
142,157

Total operating expenses
26,015

 
25,989

 
52,004

Operating income
$
64,324

 
$
25,829

 
$
90,153

 
 
 
 
 
 
Depreciation expense
$
7,026

 
$
10,688

 
$
17,714

Capital expenditures for segment assets
$
93,100

 
$
4,579

 
$
97,679


15


The operating results of the Partnership’s reportable segments were as follows for the nine months ended September 30, 2015.
 
Nine Months Ended September 30, 2015
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Total operating revenues
$
56,039

 
$
29,107

 
$
85,146

Total operating expenses
20,535

 
16,348

 
36,883

Operating income
$
35,504

 
$
12,759

 
$
48,263

 
 
 
 
 
 
Depreciation expense
$
4,531

 
$
5,923

 
$
10,454

Capital expenditures for segment assets
$
91,451

 
$
86,653

 
$
178,104

The assets of the Partnership’s reportable segments were as follows as of September 30, 2016.
 
As of September 30, 2016
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Segment assets
$
622,162

 
$
135,749

 
$
757,911

Goodwill
$
39,142

 
$

 
$
39,142

The assets of the Partnership’s reportable segments were as follows as of December 31, 2015.
 
As of December 31, 2015
(in thousands)
Gathering and Compression
 
Water Services
 
Consolidated Total
Segment assets
$
547,810

 
$
141,980

 
$
689,790

Goodwill
$
39,142

 
$

 
$
39,142

8.
Income Taxes
The Partnership is not subject to federal and state income taxes as a result of its limited partner structure. For federal and state income tax purposes, all income, expenses, gains, losses and tax credits generated by the Partnership flow through to the unitholders. As such, the Partnership does not record a provision for income taxes in the current period. Prior to the Partnership’s initial public offering in December 2014 (the “IPO”), the Partnership’s income was included as part of Rice Energy’s consolidated federal tax return.
Prior to the acquisition of the Water Assets, the operations of the Water Assets were subject to income taxes and were included as part of Rice Energy’s consolidated federal tax return. Accordingly, the income tax effects associated with the operations of the Water Assets continued to be subject to income taxes until the Water Assets were acquired by the Partnership. Tax expense related to the Water Assets of $1.8 million and $5.8 million for the three and nine months ended September 30, 2015, respectively, was recorded in the unaudited condensed consolidated statement of operations, resulting in an effective tax rate of approximately 12% and 13% for the three and nine months ended September 30, 2015, respectively.
The assignment of the common and subordinated units in the Midstream Holdings Investment resulted in the sale or exchange of more than 50 percent or more of its capital and profits interests of the Partnership within 12 months. Accordingly, the Partnership is considered to have “technically terminated” as a partnership for U.S. federal income tax purposes. The technical termination will not affect the Partnership’s consolidated financial statements, nor will it affect the Partnership’s classification as a partnership or the nature or extent of its “qualifying income” for U.S. federal income tax purposes. The taxable year for all unitholders ended on February 22, 2016 and will result in a deferral of depreciation deductions that were otherwise allowable in computing the taxable income of the Partnership’s unitholders for the period from January 1, 2016 through February 22, 2016.

16


The Vantage Acquisition completed on October 19, 2016 resulted in a second technical termination of the Partnership. The taxable year for all unitholders ended on October 19, 2016 and will result in a deferral of depreciation deductions that were otherwise allowable in computing the taxable income of the Partnership’s unitholders for the period February 23, 2016 through October 19, 2016.
9.
Related Party Transactions
In the ordinary course of business, the Partnership has transactions with affiliated companies. During the nine months ended September 30, 2016 and 2015, related parties included Rice Energy and certain of its subsidiaries. On December 22, 2014, upon completion of the IPO, the Partnership entered into the Omnibus Agreement with its general partner, Rice Energy, Rice Poseidon Midstream LLC and Rice Midstream Holdings. Pursuant to the Omnibus Agreement, Rice Energy performs centralized corporate and general and administrative services for the Partnership, such as financial and administrative, information technology, legal, health, safety and environmental, human resources, procurement, engineering, business development, investor relations, insurance and tax. In exchange, the Partnership reimburses Rice Energy for the expenses incurred in providing these services, except for any expenses associated with Rice Energy’s long-term incentive programs.
The expenses for which the Partnership reimburses Rice Energy and its subsidiaries related to corporate and general and administrative services may not necessarily reflect the actual expenses that the Partnership would incur on a stand-alone basis. The Partnership is unable to estimate what the costs would have been with an unrelated third party.
Also upon completion of the IPO, the Partnership entered into a 15 year, fixed-fee gas gathering and compression agreement (the “Gas Gathering and Compression Agreement”) with Rice Drilling B LLC, a wholly-owned subsidiary of Rice Energy, and Alpha Shale Resources, LP, pursuant to which the Partnership gathers Rice Energy’s natural gas and provides compression services on the Partnership’s gathering systems located in Washington County and Greene County, Pennsylvania. Pursuant to the Gas Gathering and Compression Agreement, the Partnership charges Rice Energy a gathering fee of $0.30 per Dth and a compression fee of $0.07 per Dth per stage of compression, each subject to annual adjustment for inflation based on the Consumer Price Index (“CPI”). The Gas Gathering and Compression Agreement covers substantially all of Rice Energy’s acreage position in the dry gas core of the Marcellus Shale in southwestern Pennsylvania as of September 30, 2016 and any future acreage it acquires within Washington County and Greene County, Pennsylvania, excluding the first 40 MDth/d of Rice Energy’s production from approximately 18,000 gross acres subject to a pre-existing third-party dedication.
In connection with the closing of the acquisition of the Water Assets, the Partnership entered into Amended and Restated Water Services Agreements (the “Water Services Agreements”) with Rice Energy, whereby the Partnership has agreed to provide certain fluid handling services to Rice Energy, including the exclusive right to provide fresh water for well completions operations in the Marcellus and Utica Shales and to collect and recycle or dispose of flowback and produced water for Rice Energy within areas of dedication in defined service areas in Pennsylvania and Ohio. The initial terms of the Water Services Agreements are until December 22, 2029 and from month to month thereafter. Under the agreements, Rice Energy pays the Partnership (i) a variable fee, based on volumes of water supplied, for freshwater deliveries by pipeline directly to the well site, subject to annual CPI adjustments and (ii) a produced water hauling fee of actual out-of-pocket cost incurred by the Partnership, plus a 2% margin.
For periods subsequent to the IPO, no equity compensation expense has been allocated to the Partnership by Rice Energy; however, equity compensation expense includes amounts allocated to the Water Assets by Rice Energy prior to their acquisition. Equity compensation expense recorded in general and administrative expense of $0.1 million and $0.4 million was allocated to the Water Assets by Rice Energy for the three and nine months ended September 30, 2015, respectively.
Prior to Rice Energy’s initial public offering on January 29, 2014, the only long-term incentives offered to certain executives and employees were through grants of incentive units, which were profits interests representing an interest in the future profits (once a certain level of proceeds has been generated) of Rice Energy’s predecessor parent entity Rice Energy Appalachia, LLC (“REA”) and granted pursuant to the limited liability company agreement of REA. The compensation expense recognized in these unaudited consolidated financial statements is a non-cash charge, with the settlement obligation resting on NGP Rice Holdings LLC (“NGP Holdings”) and Rice Energy Holdings LLC (“Rice Holdings”). Payments on the incentive units are made by Rice Holdings and NGP Holdings and not by Rice Energy or the Partnership, and as such, are not dilutive to Rice Energy or the Partnership. For periods subsequent to the IPO, no incentive unit expense has been allocated to the Partnership by Rice Energy; however, incentive unit expense was allocated to the Water Assets by Rice Energy prior to their acquisition. Incentive unit (income) expense allocated to the Water Assets by Rice Energy was $(0.1) million and $1.0 million for the three and nine months ended September 30, 2015, respectively.
10.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” or ASU 2014-09. The FASB created Topic 606 which supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry-specific guidance throughout the Industry Topics of the Codification. The FASB and International Accounting Standards Board initiated this joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for both U.S. GAAP and International Financial Reporting Standards. ASU 2014-09 will enhance comparability of revenue recognition practices across

17


entities, industries and capital markets compared to existing guidance. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing.” In May 2016, the FASB issued ASU 2016-11, “Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) – Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606) – Narrow Scope Improvements and Practical Expedients.” These updates do not change the core principle of the guidance in Topic 606 (as amended by ASU 2014-09), but rather provide further guidance with respect to implementation of ASU 2014-09. The effective date for ASU 2016-10, 2016-11, 2016-12 and ASU 2014-09, as amended by ASU 2015-14, is for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Partnership has not yet selected a transition method and is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.
In April 2015, the FASB issued ASU, 2015-03, “Interest—Imputation of Interest (Subtopic 835-30): Simplification of Debt Issuance Costs.” ASU 2015-03 was issued to simplify the presentation of debt issuance costs by requiring debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. ASU 2015-03 is effective for periods beginning after December 15, 2015. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASU 2015-15 clarifies the guidance in ASU 2015-03 regarding presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. The Securities and Exchange Commission (“SEC”) staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Partnership adopted ASU 2015-15 in the first quarter of 2016 and presents debt issuance costs associated with the Partnership’s revolving credit facility (defined in Note 2) as deferred financing costs, net in our unaudited condensed consolidated balance sheets. Additionally, the Partnership will utilize the guidance in ASU 2015-03 for the presentation of debt issuance costs that are the result of an issuance of future debt.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” ASU 2016-02 requires, among other things, that lessees recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Partnership has not yet selected a transition method and is currently evaluating the impact of the new guidance on its financial statements.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions, which include: (i) income tax consequences, (ii) classification of awards as either equity or liabilities, (iii) classification on the statement of cash flows and (iv) forfeiture rate calculations. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Partnership is currently evaluating the impact of this guidance on its consolidated financial statements, but does not intend to early adopt this standard.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduce the current diversity in practice. ASU 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Partnership does not anticipate that this guidance will have a material impact on its consolidated financial statements.
11.
Subsequent Events
On September 26, 2016, the Partnership entered into a Purchase and Sale Agreement relating to the Vantage Midstream Asset Acquisition, as amended, (the “Midstream Purchase Agreement”) by and between the Partnership and Rice Energy. Pursuant to the terms of the Midstream Purchase Agreement, and following the close of the Vantage Acquisition, on October 19, 2016, the Partnership acquired from Rice Energy all of the outstanding membership interests of Vantage Energy II Access, LLC and Vista Gathering, LLC (collectively, the “Vantage Midstream Entities”) (the “Midstream Closing”). The Vantage Midstream Entities, which became wholly-owned subsidiaries of Rice Energy in connection with the Vantage Acquisition, own midstream assets, including approximately 30 miles of dry gas gathering and compression assets. In consideration for the Vantage

18


Midstream Asset Acquisition, the Partnership paid Rice Energy $600.0 million in aggregate consideration, which the Partnership paid in cash with the net proceeds of its private placement of common units (the “Private Placement”) of $441.0 million and borrowings under its revolving credit facility of $159.0 million. The preliminary purchase price allocation, which was performed at the Rice Energy level, ascribed approximately $158.0 million to gas gathering and compression assets and $442.0 million to goodwill. The Partnership’s acquisition of the Vantage Midstream Entities from Rice Energy is accounted for as a combination of entities under common control at historical cost. The final purchase price allocation will be determined by the Partnership subsequent to closing the Vantage Midstream Asset Acquisition. The final purchase price allocation may differ from these estimates and could differ materially from the preliminary allocation described above until Rice Energy has completed the detailed valuations and necessary calculations.

The following unaudited pro forma combined financial information presents the Partnership’s results as though the acquisition of the Vantage Midstream Entities and the Private Placement had been completed at January 1, 2016 and 2015.
 
 
Nine Months Ended September 30,
(in thousands, except per share data)
 
2016
 
2015
Pro forma operating revenues
 
$
191,871

 
$
112,152

Pro forma limited partner net income
 
$
115,626

 
$
47,860

Pro forma earnings per common unit (basic)
 
$
1.20

 
$
0.61

Pro forma earnings per common unit (diluted)
 
$
1.20

 
$
0.61

On October 7, 2016, the Partnership issued 20,930,233 common units representing limited partner interests in the Partnership in the Private Placement for gross proceeds of approximately $450.0 million, or $21.50 per unit. The Partnership used the proceeds of the Private Placement to fund a portion of the Vantage Midstream Asset Acquisition and for general partnership purposes. After giving effect to the Private Placement, GP Holdings owns approximately 28% of the Partnership, consisting of 3,623 common units, 28,753,623 subordinated units and all of the incentive distribution rights.
On October 19, 2016, Rice Midstream OpCo, as borrower, and the Partnership, as parent guarantor, entered into the Second Amendment to its credit agreement, dated October 19, 2016, among Rice Midstream OpCo, the Partnership, Wells Fargo Bank, N.A., as administrative agent and each of the lenders party thereto, which became effective concurrently with the Midstream Closing. The Second Amendment, among other things, (i) increased the aggregate commitments of the lenders under the credit agreement from $450.0 million (with an additional $200.0 million of commitments available under an accordion feature) to $850.0 million in connection with the Vantage Midstream Asset Acquisition and (ii) adjusted the interest rate payable on amounts borrowed thereunder.
On October 20, 2016, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders for the third quarter of 2016 of $0.2370 per common and subordinated unit. The cash distribution will be paid on November 10, 2016 to unitholders of record at the close of business on November 1, 2016. Also on November 10, 2016, a cash distribution of $0.4 million will be made to GP Holdings related to its incentive distribution rights in the Partnership.


19


Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” contained in our 2015 Annual Report, as well as the condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please read “Cautionary Statement Regarding Forward-Looking Statements.” Also, please read the risk factors and other cautionary statements described under the heading “Item 1A.-Risk Factors” included elsewhere in this Quarterly Report. We do not undertake any obligation to publicly update any forward-looking statements except as otherwise required by applicable law.
Overview
We are a fee-based, growth-oriented limited partnership formed by Rice Energy (NYSE: RICE) to own, operate, develop and acquire midstream assets in the Appalachian Basin. Our assets consist of natural gas gathering, compression and water services assets servicing high quality producers in the rapidly developing dry gas cores of the Marcellus and Utica Shales. We provide our services under long-term, fee-based contracts, primarily to Rice Energy in its core operating areas. We believe that our strategically located assets, high quality customers and relationship with Rice Energy position us to become a leading midstream energy company in the Appalachian Basin.
We operate in two business segments: (i) gathering and compression and (ii) water services. The gathering and compression segment provides natural gas gathering and compression services for Rice Energy and third parties in the Appalachian Basin. The water services segment is engaged in the provision of water services to support well completion activities and to collect and recycle or dispose of flowback and produced water for Rice Energy and third parties in the Appalachian Basin.
Recent Developments
Vantage Midstream Asset Acquisition
On September 26, 2016, we entered into a Purchase and Sale Agreements relating to the acquisition from Rice Energy of the entities owning the midstream assets associated with Rice Energy’s acquisition of Vantage Energy, LLC and Vantage Energy II, LLC (collectively, “Vantage”) and their subsidiaries (the “Vantage Acquisition”) (“Vantage Midstream Asset Acquisition”), as amended, (the “Midstream Purchase Agreement”) by and between us and Rice Energy. Pursuant to the terms of the Midstream Purchase Agreement, and following the close of the Vantage Acquisition, on October 19, 2016, we acquired from Rice Energy all of the outstanding membership interests of Vantage Energy II Access, LLC and Vista Gathering, LLC (collectively, the “Vantage Midstream Entities”). The Vantage Midstream Entities, which became wholly-owned subsidiaries of Rice Energy in connection with the Vantage Acquisition, own midstream assets, including approximately 30 miles of dry gas gathering and compression assets. In consideration for the acquisition of the Vantage Midstream Asset Acquisition, we paid Rice Energy $600.0 million in aggregate consideration, which we paid in cash with the net proceeds from our private placement of common units (the “Private Placement”) and borrowings under our revolving credit facility.
Our Operations
Gas Gathering and Compression
Our gas gathering and compression assets are located within highly-concentrated acreage positions in the dry gas core of the Marcellus Shale and, as of September 30, 2016, consisted of a 3.3 MMDth/d high-pressure dry gas gathering system and associated compression in Washington County, Pennsylvania and an 840 MDth/d high-pressure dry gas gathering system in Greene County, Pennsylvania. The dry gas core of the Marcellus Shale in southwestern Pennsylvania is characterized by a combination of low development cost, consistently high production volumes and access to multiple takeaway pipelines, resulting in what Rice Energy believes to be among the highest rate of return wells in the Appalachian Basin.
We contract with Rice Energy and other producers to gather natural gas from wells and well pads located in our dedicated areas and/or near our gathering systems. The natural gas that we gather generally requires no processing or treating prior to delivery into interstate takeaway pipelines, and as of September 30, 2016, required only minimal compression. Over time, we expect to provide associated compression services on our gathering systems to Rice Energy and third parties.
We generate all of our gas gathering and compression revenues pursuant to long-term, fixed-fee contracts with Rice Energy and other leading Appalachian Basin producers. We generate revenue primarily by charging fixed fees for volumes of natural gas that we gather and compress through our systems. Our assets have been sized to accommodate the projected future production growth of Rice Energy and third parties, as well as to allow us to pursue volumes from additional third parties.

20


The following provides a summary of the key terms of our gas gathering and compression agreements as of September 30, 2016.
 
 
Remaining Term (Years)
 
Gathering Fee
 
Compression Fee (1)
 
Escalation /Adjustment Mechanism (2)
 
Dedicated Acres
Rice Energy
 
14
 
$0.30 / Dth
 
$0.07 / stage / Dth
 
Yes
 
Washington and Greene Counties (3)
Third Parties (4)
 
10
 
$0.41 / Dth
 
varies
 
Yes
 
66,000 acres in Washington County
 
(1)
Compression fees under our gas gathering and compression agreements with Rice Energy and third parties are typically derived on a per stage basis. However, under certain of our third-party agreements, the per stage fees charged for compression varies depending on line pressure as opposed to being a flat fee per stage. Accordingly, the third-party compression fee is shown on a weighted average based on historical throughput.
(2)
The gathering and compression fees we receive under our gathering and compression agreements will be annually escalated based upon changes in the Consumer Price Index (“CPI”).
(3)
The dedicated area from Rice Energy excludes the first 40 MDth/d of Rice Energy’s Marcellus Shale dry gas production from an area roughly encompassing three townships in southwestern Greene County under an existing dedication to a third party in which Rice Energy owned approximately 18,000 gross acres as of September 30, 2016.
(4)
Amounts shown for third parties represent weighted averages based on historical throughput in the case of remaining term, gathering fee and compression fee (based on the period January 1, 2015 through September 30, 2016), and in the case of dedications, aggregate acres.
As we do not take ownership of the natural gas we gather and compress, we generally do not have direct exposure to fluctuations in commodity prices and basis differentials. However, we have some indirect exposure to commodity prices and basis differentials in that persistently low realized sales prices by our customers may cause them to delay drilling or shut-in production, which would reduce the volumes of natural gas available for gathering and compression on our systems. Please read “Item 3. —Quantitative and Qualitative Disclosures about Market Risk.”
Water Services
Our water services assets located in Washington and Greene Counties, Pennsylvania, and Belmont County, Ohio are engaged in the provision of water services to support well completion activities and to collect and recycle or dispose of flowback and produced water for us and third parties in the Appalachian Basin. As of September 30, 2016, our Pennsylvania assets provided access to 10.1 MMgal/d of fresh water from the Monongahela River and several other regional water sources, and our Ohio assets provided access to 14.0 MMgal/d of fresh water from the Ohio River and several other regional sources, both for distribution to the Rice Energy Exploration and Production segment and third parties. Pursuant to the terms of the Purchase and Sale Agreement by and between us and Rice Energy, Rice Energy has granted us until December 31, 2025, (i) the exclusive right to develop water treatment facilities in the areas of dedication defined in the Water Services Agreements (defined below) and (ii) an option to purchase any water treatment facilities acquired by Rice Energy in such areas at its acquisition cost.
In connection with the closing of the acquisition of the Water Assets, we entered into an amended and restated water services agreements with Rice Energy (the “Water Services Agreements”), whereby we agreed to provide certain fluid handling services to Rice Energy, including the exclusive right to provide fresh water for well completions operations in the Marcellus and Utica Shales and to collect and recycle or dispose of flowback and produced water for Rice Energy within areas of dedication in defined service areas in Pennsylvania and Ohio. The initial terms of the Water Services Agreements are until December 22, 2029 and from month to month thereafter. Under the agreements, Rice Energy pays us (i) a variable fee, based on volumes of water supplied, for freshwater deliveries by pipeline directly to the well site, subject to annual CPI adjustments and (ii) a produced water and flowback hauling fee of actual out-of-pocket cost incurred by the Partnership, plus a 2% margin.

21


Results of Operations
The following table sets forth selected consolidated operating data for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015:
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
(in thousands)
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Statement of operations data
 
 
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Affiliate
$
28,260

 
$
23,947

 
$
4,313

 
$
105,267

 
$
72,289

 
$
32,978

Third-party
12,807

 
6,128

 
6,679

 
36,890

 
12,857

 
24,033

Total operating revenues
41,067

 
30,075

 
10,992

 
142,157

 
85,146

 
57,011

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Operation and maintenance expense
4,596

 
4,421

 
175

 
17,348

 
10,028

 
7,320

General and administrative expense
4,945

 
5,242

 
(297
)
 
15,408

 
13,638

 
1,770

Incentive unit (income) expense

 
(75
)
 
75

 

 
1,048

 
(1,048
)
Depreciation expense
5,489

 
4,417

 
1,072

 
17,714

 
10,454

 
7,260

Acquisition costs

 

 

 
73

 

 
73

Amortization of intangible assets
411

 
407

 
4

 
1,222

 
1,223

 
(1
)
       Other expense (income)
90

 
(347
)
 
437

 
239

 
492

 
(253
)
Total operating expenses
15,531

 
14,065

 
1,466

 
52,004

 
36,883

 
15,121

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
25,536

 
16,010

 
9,526

 
90,153

 
48,263

 
41,890

Other income

 
2

 
(2
)
 

 
11

 
(11
)
Interest expense
(402
)
 
(814
)
 
412

 
(2,369
)
 
(2,070
)
 
(299
)
Amortization of deferred finance costs
(145
)
 
(144
)
 
(1
)
 
(433
)
 
(432
)
 
(1
)
Income before income taxes
24,989

 
15,054

 
9,935

 
87,351

 
45,772

 
41,579

Income tax expense

 
(1,794
)
 
1,794

 

 
(5,796
)
 
5,796

Net income
$
24,989

 
$
13,260

 
$
11,729

 
$
87,351

 
$
39,976

 
$
47,375

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Total operating revenues. The $11.0 million increase in operating revenues period-over-period primarily relates to an $8.2 million increase in gathering and compression revenues associated with our existing third-party contracts and a $5.1 million increase in gathering and compression revenues associated with our gathering and compression services agreement with Rice Energy. Our water services revenues related to our third-party contracts and our Water Services Agreements decreased $1.6 million and $0.8 million, respectively, period-over-period due to a decrease in fresh water throughput volumes.
Operation and maintenance expense. The $0.2 million increase in operation and maintenance expense period-over-period was primarily due to increased contract labor expenses.
General and administrative expense. General and administrative expense for the three months ended September 30, 2016, were $4.9 million, which included $4.4 million related to costs associated with Rice Energy personnel that provide us support pursuant to our omnibus agreement with Rice Energy (the “Omnibus Agreement”). For the three months ended September 30, 2015, general and administrative expenses were $5.2 million, which included $2.3 million of general and administrative expenses allocated to us by Rice Energy and $1.3 million of general and administrative expenses allocated by Rice Energy to the Water Assets. Included in general and administrative expense is equity compensation expense of $0.6 million and $1.1 million for the three months ended September 30, 2016 and 2015, respectively.
Depreciation expense. Depreciation expense increased $1.1 million period-over-period due to additional assets being in service in the current period as compared to the previous period.

22


Interest expense. Interest expense decreased $0.4 million period-over-period. Interest expense for the three months ended September 30, 2016 of $0.4 million was incurred in connection with our revolving credit facility. For the three months ended September 30, 2015, interest expense included $0.5 million incurred in connection with our revolving credit facility and $0.3 million allocated by Rice Energy to the Water Assets.
Income tax expense. Following our initial public offering, we are not subject to U.S. federal income tax and certain state income taxes due to our status as a partnership. The $1.8 million income tax expense for the three months ended September 30, 2015 was allocated to the Water Assets by Rice Energy prior to their acquisition.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Total operating revenues. The $57.0 million increase in operating revenues period-over-period primarily relates to a $22.0 million increase in gathering and compression revenues associated with our existing third-party contracts as well as a $12.3 million increase in affiliate gathering and compression revenues associated with our gathering and compression services agreement with Rice Energy. Additionally, the increase relates to a $20.7 million increase in affiliate water service revenues associated with our Water Services Agreements and a $2.0 million increase in third-party water service revenues that relate to third-party contracts that were not in place during the nine months ended September 30, 2015.
Operation and maintenance expense. The $7.3 million increase in operation and maintenance expense period-over-period was primarily due to an increase in water transfer costs and water procurement in addition to increased contract labor expenses.
General and administrative expense. General and administrative expenses for the nine months ended September 30, 2016 were $15.4 million, which included $12.7 million related to costs associated with Rice Energy personnel that provide us support pursuant to the Omnibus Agreement. For the nine months ended September 30, 2015, general and administrative expenses were $13.6 million, which included $5.9 million of general and administrative expenses allocated to us by Rice Energy and $2.9 million of general and administrative expenses allocated by Rice Energy to the Water Assets. Included in general and administrative expense is equity compensation expense of $2.7 million and $3.3 million for the nine months ended September 30, 2016 and 2015, respectively.
Incentive unit expense. Incentive unit expense for the nine months ended September 30, 2015 was $1.0 million. These costs were allocated to the Water Assets by Rice Energy prior to their acquisition. The payment obligation as it relates to the incentive units is with Rice Energy Irrevocable Trust and NGP Holdings and will not be borne by Rice Energy or by us.
Depreciation expense. Depreciation expense increased $7.3 million period-over-period due to additional assets being in service in the current period as compared to the previous period.
Interest expense. Interest expense increased $0.3 million period-over-period. Interest expense incurred in the nine months ended September 30, 2016 of $2.4 million was incurred in connection with our revolving credit facility. For the nine months ended September 30, 2015, interest expense included $1.4 million incurred in connection with our revolving credit facility and $0.7 million allocated by Rice Energy to the Water Assets.
Income tax expense. The $5.8 million income tax expense for the nine months ended September 30, 2015 was allocated to the Water Assets by Rice Energy prior to their acquisition. Following our initial public offering, we are not subject to U.S. federal income tax and certain state income taxes due to our status as a partnership.


23


Business Segment Results of Operations
We operate in two business segments: (i) gathering and compression and (ii) water services. We evaluate our business segments based on their contribution to our consolidated results based on operating income. Please see “Item 1. Financial Statements—Notes to Condensed Consolidated Financial Statements—7. Financial Information by Business Segment” for a reconciliation of each segment’s operating income to our consolidated operating income.
The following table sets forth selected operating data for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015:
Gathering and Compression Segment
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Operating data:
 
 
 
 
 
 
 
 
 
 
 
Gathering volumes: (in MDth/d)
 
 
 
 
 
 
 
 
 
 
 
Affiliate
647

 
559

 
88

 
648

 
537

 
111

Third-party
310

 
112

 
198

 
261

 
92

 
169

Total gathering volumes
957

 
671

 
286

 
909

 
629

 
280

 
 
 
 
 
 
 
 
 
 
 
 
Compression volumes: (in MDth/d)
 
 
 
 
 
 
 
 
 
 
 
Affiliate
435

 
34

 
401

 
258

 
41

 
217

Third-party
310

 
5

 
305

 
230

 
12

 
218

Total compression volumes
745

 
39

 
706

 
488

 
53

 
435

 
 
 
 
 
 
 
 
 
 
 
 
Statement of income data: (in thousands)
 
 
 
 
 
 
 
 
 
 
 
Gathering revenues:
 
 
 
 
 
 
 
 
 
 
 
Affiliate
$
17,882

 
$
15,203

 
$
2,679

 
$
52,092

 
$
43,358

 
$
8,734

Third-party
10,591

 
4,519

 
6,072

 
28,316

 
11,087

 
17,229

Total gathering revenues
28,473

 
19,722

 
8,751

 
80,408

 
54,445

 
25,963

 
 
 
 
 
 
 
 
 
 
 
 
Compression revenues:
 
 
 
 
 
 
 
 
 
 
 
Affiliate
2,814

 
375

 
2,439

 
4,968

 
1,387

 
3,581

Third-party
2,216

 
45

 
2,171

 
4,963

 
207

 
4,756

Total compression revenues
5,030

 
420

 
4,610

 
9,931

 
1,594

 
8,337

Total operating revenues
33,503

 
20,142

 
13,361

 
90,339

 
56,039

 
34,300

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Operation and maintenance expense
1,960

 
1,727

 
233

 
5,125

 
3,985

 
1,140

General and administrative expense
4,056

 
3,789

 
267

 
12,420

 
10,304

 
2,116

Depreciation expense
2,406

 
1,597

 
809

 
7,026

 
4,531

 
2,495

Acquisition costs

 

 

 
73

 

 
73

Amortization of intangible assets
411

 
407

 
4

 
1,222

 
1,223

 
(1
)
Other (income) expense

 
(347
)
 
347

 
149

 
492

 
(343
)
Total operating expenses
8,833

 
7,173

 
1,660

 
26,015

 
20,535

 
5,480

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
24,670

 
$
12,969

 
$
11,701

 
$
64,324

 
$
35,504

 
$
28,820


24


Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Total operating revenues. The $13.4 million increase in operating revenues period-over-period primarily relates to an $8.2 million increase in gathering and compression revenues associated with our existing third-party contracts and a $5.1 million increase in gathering and compression revenues associated with our gathering and compression services agreement with Rice Energy.
Operation and maintenance expense. The $0.2 million increase in operation and maintenance expense period-over-period was primarily due to an increase in contract labor expenses.
General and administrative expense. The $0.3 million increase in general and administrative expenses period-over-period was primarily the result of increases in the allocation of costs from Rice Energy to the gathering and compression segment associated with additional employees and associated indirect costs incurred to operate the gathering and compression assets. Included in general and administrative expense is equity compensation expense of $0.5 million and $1.0 million for the three months ended September 30, 2016 and 2015, respectively.
Depreciation expense. Depreciation expense increased $0.8 million period-over-period due to additional assets being in service in the current period as compared to the previous period.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Total operating revenues. The $34.3 million increase in operating revenues period-over-period primarily relates to a $22.0 million increase in gathering and compression revenues associated with our existing third-party contracts as well as a $12.3 million increase in affiliate gathering and compression revenues associated with our gathering and compression services agreement with Rice Energy.
Operation and maintenance expense. The $1.1 million increase in operation and maintenance expense period-over-period was primarily due to an increase in contract labor expenses.
General and administrative expense. The $2.1 million increase in general and administrative expenses period-over-period was primarily the result of increases in the allocation of costs from Rice Energy to the gathering and compression segment associated with additional employees and associated indirect costs incurred to operate the gathering and compression assets. Included in general and administrative expense is equity compensation expense of $2.1 million and $3.0 million for the nine months ended September 30, 2016 and 2015, respectively.
Depreciation expense. Depreciation expense increased $2.5 million period-over-period due to additional assets being in service in the current period as compared to the previous period.


25


Water Services Segment
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Operating data:
 
 
 
 
 
 
 
 
 
 
 
Water services volumes: (in MMgal)
 
 
 
 
 
 
 
 
 
 
 
Affiliate
135

 
167

 
(32
)
 
800

 
516

 
284

Third-party

 
60

 
(60
)
 
132

 
59

 
73

Total water services volumes
135

 
227

 
(92
)
 
932

 
575

 
357

 
 
 
 
 
 
 
 
 
 
 
 
Statement of income data: (in thousands)
 
 
 
 
 
 
 
 
 
 
 
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
Affiliate
$
7,564

 
$
8,369

 
$
(805
)
 
$
48,207

 
$
27,544

 
$
20,663

Third-party

 
1,564

 
(1,564
)
 
3,611

 
1,563

 
2,048

Total operating revenues
7,564

 
9,933

 
(2,369
)
 
51,818

 
29,107

 
22,711

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Operation and maintenance expense
2,636

 
2,694

 
(58
)
 
12,223

 
6,043

 
6,180

General and administrative expense
889

 
1,453

 
(564
)
 
2,988

 
3,334

 
(346
)
Incentive unit expense

 
(75
)
 
75

 

 
1,048

 
(1,048
)
Depreciation expense
3,083

 
2,820

 
263

 
10,688

 
5,923

 
4,765

Other expense
90

 

 
90

 
90

 

 
90

Total operating expenses
6,698

 
6,892

 
(194
)
 
25,989

 
16,348

 
9,641

 
 
 
 
 
 
 
 
 
 
 
 
Operating income
$
866

 
$
3,041

 
$
(2,175
)
 
$
25,829

 
$
12,759

 
$
13,070

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015
Operating revenues. Our water services revenues related to our third-party contracts and our Water Services Agreements decreased $1.6 million and $0.8 million, respectively, period-over-period due to a decrease in fresh water throughput volumes.
Operation and maintenance expense. The $0.1 million decrease in operation and maintenance expense period-over-period was primarily due to a decrease in overall water services operations associated with fewer wells supported for completion activities in the third quarter of 2016.
General and administrative expense. The $0.6 million decrease in general and administrative expense period-over-period was primarily the result of a portion of general and administrative expense being allocated to projects in 2016. Included in general and administrative expenses is equity compensation expense of $0.1 million for the three months ended September 30, 2016 and 2015, respectively.
Depreciation expense. The $0.3 million increase in depreciation expense period-over-period was primarily due to additional assets being in service in the current period as compared to the previous period.
Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015
Operating revenues. The $22.7 million increase in operating revenues period-over-period primarily relates to a $20.7 million increase in affiliate water service revenues associated with our Water Services Agreements and a $2.0 million increase in third-party water service revenues that relate to third-party contracts that were not in place during the nine months ended September 30, 2015.
Operation and maintenance expense. The $6.2 million increase in operation and maintenance expense period-over-period was primarily due to increased expenses associated with on and off pad water transfer and water procurement costs.
General and administrative expenses. The $0.3 million decrease in general and administrative expenses period-over-period was primarily the result of a portion of general and administrative expense being allocated to projects in 2016. Included

26


in general and administrative expense is equity compensation expense of $0.6 million and $0.4 million for the nine months ended September 30, 2016 and 2015, respectively.
Incentive unit expense. Incentive unit expense for the nine months ended September 30, 2015 was $1.0 million. These costs were allocated to the Water Assets by Rice Energy prior to their acquisition. The payment obligation as it relates to the incentive units is with Rice Energy Irrevocable Trust and NGP Holdings and will not be borne by Rice Energy or by us.
Depreciation expense. The $4.8 million increase in depreciation expense period-over-period was primarily due to additional assets being in service in the current period as compared to the previous period.
Capital Resources and Liquidity
Sources and Uses of Cash
We expect that capital resources and liquidity will be provided by operating cash flow, proceeds from equity and debt financings and borrowings under our revolving credit facility, as discussed below. We expect cash flow from operations to continue to contribute to our liquidity in the future. However, other sources of liquidity may include borrowing capacity under our revolving credit facility and proceeds from the issuance of additional equity or debt securities. We expect the combination of these capital resources will be adequate to meet our short-term working capital requirements, long-term capital expenditures program and expected quarterly cash distributions.
We expect our future cash requirements relating to working capital, maintenance capital expenditures and quarterly cash distributions, including incentive distribution rights, to our partners will be funded from cash flows internally generated from our operations. Our expansion capital expenditures will be funded by borrowings under our revolving credit facility or from potential capital market transactions.
Cash Flow Provided by Operating Activities
Net cash provided by operating activities was $109.5 million for the nine months ended September 30, 2016 compared to net cash provided by operating activities of $57.0 million for the nine months ended September 30, 2015. The increase in cash flow from operations period-over-period was primarily the result of increased cash flow generated from our gathering, compression and water services contracts with Rice Energy and third parties during the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015.
Cash Flow Used in Investing Activities
Prior to the acquisition of the Water Assets, capital expenditures associated with the Water Assets were funded by Rice Energy.
Cash flows used in investing activities totaled $97.7 million and $178.1 million for the nine months ended September 30, 2016 and 2015, respectively. Capital expenditures for the gathering and compression segment were $93.1 million and $91.5 million for the nine months ended September 30, 2016 and 2015, respectively. The increase period-over-period was primarily attributable to the build-out of our compression and gathering systems. Capital expenditures for the water services segment were $4.6 million and $86.7 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease period-over-period was primarily attributable to the substantial majority of the capital expenditures related to our water service assets being built in the prior year.
Cash Flow Provided by Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2016 of $11.8 million was primarily comprised of net paydowns on the revolving credit facility and distributions to our unitholders related to the first and second quarters of 2016, offset by proceeds from common unit issuances and net proceeds from borrowings under our revolving credit facility. Net cash provided by financing activities for the nine months ended September 30, 2015 of $118.1 million was primarily the result of proceeds on borrowings under the revolving credit facility and contributions from Rice Energy for the Water Assets, offset by distributions to our unitholders related to the first and second quarters of 2015.
Capital Requirements
The midstream business is capital intensive, requiring significant investment for the maintenance of existing assets and the development of new systems and facilities. We categorize our capital expenditures as either:
Expansion capital expenditures: Expansion capital expenditures are cash expenditures to construct new midstream infrastructure and those expenditures incurred in order to extend the useful lives of our assets, reduce costs,

27


increase revenues or increase system capacity from current levels, including well connections that increase existing volumes. Examples of expansion capital expenditures include the construction, development or acquisition of additional gas gathering and water pipelines, compressor stations, pumping stations and impoundment facilities, in each case to the extent such capital expenditures are expected to expand our capacity or our operating income. In the future, if we make acquisitions that increase system throughput or capacity or our operating income, the associated capital expenditures may also be considered expansion capital expenditures.
Maintenance capital expenditures: Maintenance capital expenditures are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, our capacity or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to connect new wells and water sources, to maintain gathering, compression and impoundment facilities, to maintain equipment reliability, integrity and safety and to address environmental laws and regulations.
Our future expansion capital expenditures may vary significantly from period to period based on the investment opportunities available to us. We expect our future cash requirements relating to working capital, maintenance capital expenditures and quarterly cash distributions to our partners will be funded from cash flows internally generated from our operations. Our growth or expansion capital expenditures will be funded by borrowings under our revolving credit facility or from potential capital market transactions.
Debt Agreements and Contractual Obligations
Revolving Credit Facility
We, as guarantor, and Rice Midstream OpCo, as borrower, entered into a revolving credit facility in connection with the closing of our initial public offering. As of September 30, 2016, our revolving credit facility provided for lender commitments of $450.0 million, with an additional $200.0 million of commitments available under an accordion feature subject to lender approval. The credit facility provides for a letter of credit sublimit of $50.0 million. As of September 30, 2016, Rice Midstream OpCo had no borrowings and no letters of credit outstanding under the revolving credit facility. The average daily outstanding balance of the credit facility was approximately $96.5 million and interest was incurred on the facility at a weighted average annual interest rate of 3.3% during the nine months ended September 30, 2016. The revolving credit facility is available to fund working capital requirements and capital expenditures, to purchase assets, to pay distributions and repurchase units and for general partnership purposes. The credit facility matures on December 22, 2019.
In connection with the completion of the Vantage Midstream Asset Acquisition, on October 19, 2016, Rice Midstream OpCo entered into a second amendment (the “Second Amendment”) to its credit agreement to, among other things, (i) permit the completion of the Vantage Midstream Asset Acquisition, (ii) increase our ability to borrow under the facility from $450.0 million (with an additional $200.0 million of commitments available under an accordion feature) to $850.0 million and (iii) adjust the interest rate payable on amounts borrowed thereunder (as described below). We completed the Vantage Midstream Asset Acquisition on October 19, 2016. See Note 11 for additional information.
Principal amounts borrowed are payable on the maturity date, and interest is payable quarterly for base rate loans and at the end of the applicable interest period for Eurodollar loans. Rice Midstream OpCo may elect to borrow in Eurodollars or at the base rate. Following the effectiveness of the Second Amendment, Eurodollar loans bear interest at a rate per annum equal to the applicable LIBOR Rate plus an applicable margin ranging from 200 to 300 basis points, depending on the leverage ratio then in effect and base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Eurodollar loans plus 100 basis points, plus an applicable margin ranging from 100 to 200 basis points, depending on the leverage ratio then in effect. The carrying amount of the revolving credit facility is comprised of borrowings for which interest accrues under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value as of September 30, 2016 and represents a Level 2 measurement. Following the effectiveness of the Second Amendment, Rice Midstream OpCo also pays a commitment fee based on the undrawn commitment amount ranging from 37.5 to 50 basis points.
Our revolving credit facility is secured by mortgages and other security interests on substantially all of our properties and guarantees from us and our restricted subsidiaries.
Our revolving credit facility also contains certain financial covenants and customary events of default. If an event of default occurs and is continuing, the lenders may declare all amounts outstanding under the revolving credit facility to be immediately due and payable. We were in compliance with its covenants and ratios effective as of September 30, 2016.

28


Private Placement
On October 7, 2016, we issued 20,930,233 common units representing limited partner interests in us in a Private Placement for gross proceeds of approximately $450.0 million, or $21.50 per unit. We used the proceeds of the Private Placement to fund a portion of the Vantage Midstream Asset Acquisition and for general partnership purposes. After giving effect to the Private Placement, GP Holdings owns approximately 28% of the Partnership, consisting of 3,623 common units, 28,753,623 subordinated units and all of the incentive distribution rights.
Distributions
On August 11, 2016, a cash distribution of $0.2235 per common and subordinated unit was paid to our unitholders related to the second quarter of 2016. On October 20, 2016, the Board of Directors of our general partner declared a cash distribution to our unitholders for the third quarter of 2016 of $0.2370 per common and subordinated unit. The cash distribution will be paid on November 10, 2016 to unitholders of record at the close of business on November 1, 2016. Also on November 10, 2016, a cash distribution of $0.4 million will be made to GP Holdings related to its incentive distribution rights in the Partnership.
Critical Accounting Policies and Estimates
Our critical accounting policies are described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our 2015 Annual Report. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the notes to our unaudited condensed consolidated financial statements contained in this Quarterly Report. The application of our critical accounting policies may require management to make judgments and estimates about the amounts reflected in the Condensed Consolidated Financial Statements. Management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined by the SEC. In the ordinary course of business, we enter into various commitment agreements and other contractual obligations, some of which are not recognized in our unaudited condensed consolidated financial statements in accordance with GAAP. See Note 3 to our unaudited condensed consolidated financial statements for a description of our commitments and contingencies.

29


Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in commodity prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.
Commodity Price Risk
Our gas gathering and compression agreement with Rice Energy provides for fixed-fee structures, and we intend to continue to pursue additional fixed-fee opportunities with Rice Energy and third parties in order to avoid direct commodity price exposure. However, to the extent that our future contractual arrangements with Rice Energy or third parties do not provide for fixed-fee structures, we may become subject to commodity price risk. Moreover, we have some indirect exposure to commodity prices and basis differentials in that persistently low realized sales prices by our customers may cause them to delay drilling or shut in production, which would reduce the volumes of natural gas available for gathering and compression on our systems. Please read “Item 1A. Risk Factors—Risks Related to Our Business—Our exposure to commodity price risk may change over time” in our 2015 Annual Report.
Interest Rate Risk
As of September 30, 2016, Rice Midstream OpCo had no borrowings and no letters of credit outstanding under the revolving credit facility. Under the revolving credit facility, Rice Midstream OpCo may elect to borrow in Eurodollars or at the base rate. Eurodollar loans will bear interest at a rate per annum equal to the applicable LIBOR Rate plus an applicable margin ranging from 200 to 300 basis points, depending on the leverage ratio then in effect. Base rate loans bear interest at a rate per annum equal to the greatest of (i) the agent bank’s reference rate, (ii) the federal funds effective rate plus 50 basis points and (iii) the rate for one month Eurodollar loans plus 100 basis points, plus an applicable margin ranging from 100 to 200 basis points, depending on the leverage ratio then in effect.
Our primary interest rate risk exposure results from our revolving credit facility, which has a floating interest rate. The annual weighted average interest rate incurred on our revolving credit facility during the nine months ended September 30, 2016 was approximately 3.3%. A 1.0% increase in each of the applicable average interest rates