Edgar Filing: Rice Energy Inc.

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2015

¨ 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: 001-36273

Rice Energy Inc.

(Exact name of registrant as specified in its charter)



Delaware		46-3785773
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
400 Woodcliff Drive Canonsburg, Pennsylvania		15317
(Address of principal executive offices)		(Zip code)

(724) 746-6720
(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 (§232.405 of this chapter) 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 ¨
Non-accelerated filer þ		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

Number of shares of the registrant’s common stock outstanding at November 2, 2015: 136,383,510 shares

RICE ENERGY INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS



	Page
Cautionary Statement Regarding Forward-Looking Statements	3
Commonly Used Defined Terms	4

PART I
Item 1. Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3. Quantitative and Qualitative Disclosures about Market Risk	53
Item 4. Controls and Procedures	55

PART II
Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 6. Exhibits	56

Signatures	57
Exhibit Index	58
Glossary of Oil and Natural Gas Terms	59

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (the “Quarterly Report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 “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, 2014 (the “2014 Annual Report”) on file with the Securities and Exchange Commission (the “SEC”).

Forward-looking statements may include statements about our:


•	business strategy;


•	reserves;


•	financial strategy, liquidity and capital required for our development program;


•	realized natural gas, NGLs and oil prices;


•	timing and amount of future production of natural gas, NGLs and oil;


•	hedging strategy and results;


•	future drilling plans;


•	competition and government regulations;


•	pending legal or environmental matters;


•	marketing of natural gas, NGLs and oil;


•	leasehold or business acquisitions;


•	costs of developing our properties and conducting our gathering and other midstream operations;


•	consummation of our planned midstream joint venture with Gulfport Energy Corporation (“Gulfport”);


•	operations of Rice Midstream Partners LP;


•	general economic conditions;


•	credit and capital markets;


•	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 the exploration for and development, production, gathering and sale of natural gas, NGLs and oil. These risks include, but are not limited to: commodity price volatility; inflation; lack of availability of drilling and production equipment and services; environmental risks; drilling and other operating risks; regulatory changes; the uncertainty inherent in estimating natural gas reserves and in projecting future rates of production, cash flow and access to capital; the timing of development expenditures; and the other risks described under the heading “Item 1A. Risk Factors” in our 2014 Annual Report.

Reserve engineering is a process of estimating underground accumulations of natural gas, NGLs and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, the interpretation of such data and price and cost assumptions made by reserve engineers. In addition, the results of drilling, testing and production activities may justify revisions of estimates that were made previously. If significant, such revisions could change the schedule of any further production and development drilling. Accordingly, reserve estimates may differ significantly from the quantities of natural gas, and NGLs and oil that are ultimately recovered.

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.

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 Energy,” the “Company,” “we,” “our,” “us” or like terms refer collectively to Rice Energy Inc. and its consolidated subsidiaries, including Rice Drilling B;


•	“Rice Drilling B” refers to Rice Drilling B LLC, a wholly-owned subsidiary of Rice Energy;


•	“RMP” or the “Partnership” refer to Rice Midstream Partners LP (NYSE: RMP);


•	“Rice Midstream OpCo” refers to Rice Midstream OpCo LLC, a wholly-owned subsidiary of RMP;


•	“Midstream Holdings” refers to Rice Midstream Holdings LLC, a wholly-owned subsidiary of Rice Energy; and


•	“Marcellus joint venture” refers collectively to Alpha Shale Resources, LP and its general partner, Alpha Shale Holdings, LLC.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Rice Energy Inc.

Condensed Consolidated Balance Sheets

(Unaudited)



(in thousands)	September 30, 2015		December 31, 2014
Assets
Current assets:
Cash	$	216,084	$	256,130
Accounts receivable	224,336		199,900
Prepaid expenses and other	5,874		3,427
Derivative assets	157,476		133,034
Total current assets	603,770		592,491

Gas collateral account	4,036		3,995
Property, plant and equipment, net	3,101,313		2,461,331
Deferred financing costs, net	30,078		25,103
Goodwill	334,050		334,050
Intangible assets, net	46,568		47,791
Derivative assets	105,795		63,188
Total assets	$	4,225,610	$	3,527,949

Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt	$	—	$	680
Accounts payable	125,633		152,329
Royalties payable	54,141		37,172
Accrued capital expenditures	98,686		108,290
Accrued interest	38,645		9,375
Leasehold payable	21,907		30,702
Deferred tax liabilities	63,486		54,688
Other accrued liabilities	46,403		43,439
Total current liabilities	448,901		436,675

Long-term liabilities:
Long-term debt	1,521,128		900,000
Leasehold payable	7,010		4,279
Deferred tax liabilities	214,716		209,218
Other long-term liabilities	16,528		12,609
Total liabilities	2,208,283		1,562,781

Stockholders’ equity:
Common stock, $0.01 par value; authorized - 650,000,000 shares; issued and outstanding - 136,383,293 shares and 136,280,766 shares, respectively	1,364		1,363
Preferred stock, $0.01 par value; authorized - 50,000,000 shares; none issued	—		—
Additional paid in capital	1,422,590		1,368,001
Accumulated earnings	142,767		153,346
Stockholders’ equity before noncontrolling interest	1,566,721		1,522,710
Noncontrolling interests in consolidated subsidiaries	450,606		442,458
Total liabilities and stockholders’ equity	$	4,225,610	$	3,527,949

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

Rice Energy Inc.

Condensed Consolidated Statements of Operations

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except share data)	2015			2014			2015			2014
Operating revenues:
Natural gas, oil and natural gas liquids (“NGL”) sales	$	130,145		$	67,831		$	327,947		$	246,816
Firm transportation sales, net	88			9,733			3,353			11,851
Gathering, compression and water distribution	13,388			1,563			34,755			2,878
Total operating revenues	143,621			79,127			366,055			261,545

Operating expenses:
Lease operating	12,325			4,553			35,006			16,406
Gathering, compression and transportation	24,248			7,992			55,510			22,464
Production taxes and impact fees	1,955			1,114			5,103			2,624
Exploration	830			623			1,925			1,582
Midstream operation and maintenance	4,831			1,729			10,963			3,564
Incentive unit (income) expense	(686		)	26,418			45,870			101,695
Stock compensation expense	4,214			2,058			11,681			3,274
Acquisition expense	—			2,246			—			2,246
General and administrative	24,113			10,458			62,028			36,733
Depreciation, depletion and amortization	89,275			33,853			227,996			91,912
Amortization of intangible assets	408			408			1,224			748
Other (income) expense	(265		)	—			3,624			—
Total operating expenses	161,248			91,452			460,930			283,248

Operating loss	(17,627		)	(12,325		)	(94,875		)	(21,703		)
Interest expense	(23,949		)	(15,754		)	(63,437		)	(38,737		)
Gain on purchase of Marcellus joint venture	—			—			—			203,579
Other income (loss)	698			(216		)	1,894			180
Gain on derivative instruments	127,072			36,935			184,729			5,357
Amortization of deferred financing costs	(1,313		)	(707		)	(3,722		)	(1,728		)
Loss on extinguishment of debt	—			(790		)	—			(3,934		)
Write-off of deferred financing costs	—			—			—			(6,896		)
Equity loss of joint ventures	—			—			—			(2,656		)
Income before income taxes	84,881			7,143			24,589			133,462
Income tax expense	(19,797		)	(14,005		)	(18,335		)	(18,787		)
Net income (loss)	65,084			(6,862		)	6,254			114,675
Less: Net income attributable to noncontrolling interests	(6,134		)	—			(16,833		)	—
Net income (loss) attributable to Rice Energy Inc.	$	58,950		$	(6,862	)	$	(10,579	)	$	114,675

Weighted average number of shares of common stock—basic	136,381,909			132,269,081			136,330,198			125,411,524
Weighted average number of shares of common stock—diluted	136,521,828			132,269,081			136,330,198			125,678,095
Earnings (loss) per share—basic	$	0.43		$	(0.05	)	$	(0.08	)	$	0.91
Earnings (loss) per share—diluted	$	0.43		$	(0.05	)	$	(0.08	)	$	0.91

Pro forma income tax benefit										$	5,560
Pro forma net income										$	120,235
Pro forma earnings per share—basic										$	0.96
Pro forma earnings per share—diluted										$	0.96

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

Rice Energy Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)



	Nine Months Ended September 30,
(in thousands)	2015			2014
Cash flows from operating activities:
Net income	$	6,254		$	114,675
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	227,996			91,912
Amortization of deferred financing costs	3,722			1,728
Amortization of intangibles	1,224			748
Incentive unit expense	45,870			101,695
Write-off of deferred financing costs	—			6,896
Loss on extinguishment of debt	—			3,934
Stock compensation expense	11,681			3,274
Derivative instruments fair value gain	(184,729		)	(5,357		)
Cash receipts (payments) for settled derivatives	117,680			(20,782		)
Deferred income tax expense	14,296			18,787
Fair value gain on purchase of Marcellus joint venture	—			(203,579		)
Equity loss of joint ventures	—			2,656
Changes in operating assets and liabilities:
(Increase) in accounts receivable	(24,408		)	(87,410		)
(Increase) in prepaid expenses and other assets	(3,200		)	(2,165		)
(Decrease) in accounts payable	(2,136		)	(6,799		)
Increase in accrued liabilities and other	39,177			37,861
Increase in royalties payable	16,969			11,605
Net cash provided by operating activities	270,396			69,679

Cash flows from investing activities:
Capital expenditures for property and equipment	(919,906		)	(642,408		)
Acquisition of Marcellus joint venture, net of cash acquired	—			(82,766		)
Acquisition of Momentum assets	—			(111,447		)
Acquisition of Greene County assets	—			(329,469		)
Proceeds from sale of interest in gas properties	10,201			11,542
Net cash used in investing activities	(909,705		)	(1,154,548		)

Cash flows from financing activities:
Proceeds from borrowings	635,932			900,000
Repayments of debt obligations	(16,390		)	(498,983		)
Restricted cash for convertible debt	—			8,268
Debt issuance costs	(8,696		)	(19,401		)
Offering costs related to the Partnership’s IPO	(129		)	—
Distributions to the Partnership’s public unitholders	(11,454		)	—
Costs relating to IPO	—			(1,412		)
Proceeds from conversion of warrants	—			1,975
Proceeds from issuance of common stock sold in IPO, net of underwriting fees	—			598,500
Costs relating to August 2014 Equity Offering	—			(784		)



Proceeds from issuance of common stock in August 2014 Equity Offering, net of underwriting fees	—			197,072
Net cash provided by financing activities	599,263			1,185,235

Net (decrease) increase in cash	(40,046		)	100,366
Cash at the beginning of the year	256,130			31,612
Cash at the end of the period	$	216,084		$	131,978

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

Rice Energy Inc.

Condensed Consolidated Statements of Equity

(Unaudited)



(in thousands)	Common Stock ($0.01 par)		Additional Paid-In Capital			Accumulated (Deficit) Earnings			Total
Balance, January 1, 2014	$	880	$	362,875		$	(65,108	)	$	298,647
Shares of common stock issued in IPO, net of offering costs	300		593,113			—			593,413
Shares of common stock issued in purchase of Marcellus joint venture	95		221,905			—			222,000
Conversion of restricted units into shares of common stock at IPO	—		36,306			—			36,306
Conversion of convertible debentures into shares of common stock after IPO	6		6,599			—			6,605
Conversion of warrants into shares of common stock after IPO	7		1,968			—			1,975
Shares of common stock issued in August 2014 Equity Offering, net of offering costs	75		196,213			—			196,288
Incentive unit compensation	—		101,695			—			101,695
Stock compensation	—		3,274			—			3,274
Tax impact of initial public offering and corporate reorganization	—		(162,320		)	—			(162,320		)
Consolidated net income	—		—			114,675			114,675
Balance, September 30, 2014	$	1,363	$	1,361,628		$	49,567		$	1,412,558



(in thousands)	Common Stock ($0.01 par)		Additional Paid-In Capital		Accumulated (Deficit) Earnings			Stockholders Equity before Non-Controlling Interest			Non-Controlling Interest			Total
Balance, January 1, 2015	$	1,363	$	1,368,001	$	153,346		$	1,522,710		$	442,458		$	1,965,168
Incentive unit compensation	—		45,870		—			45,870			—			45,870
Stock compensation	1		8,719		—			8,720			2,898			11,618
Distributions to the Partnership's public unitholders	—		—		—			—			(11,454		)	(11,454		)
Offering costs related to the Partnership’s IPO	—		—		—			—			(129		)	(129		)
Consolidated net income (loss)	—		—		(10,579		)	(10,579		)	16,833			6,254
Balance, September 30, 2015	$	1,364	$	1,422,590	$	142,767		$	1,566,721		$	450,606		$	2,017,327

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

Rice Energy Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)


1.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Rice Energy Inc. (the “Company”) have been prepared by the Company’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 Company’s financial position as of September 30, 2015 and December 31, 2014 and its condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 and of cash flows for the nine months ended September 30, 2015 and 2014.

A corporate reorganization occurred concurrently with the completion of the Company’s initial public offering (“IPO”) on January 29, 2014. As a part of this corporate reorganization, the Company acquired all of the outstanding membership interests in Rice Energy Appalachia LLC (“Rice Appalachia”) and Rice Drilling B LLC (“Rice Drilling B”) (other than those already held by Rice Appalachia) in exchange for shares of the Company’s common stock. This reorganization constituted a common control transaction and the accompanying consolidated financial statements are presented as though this reorganization had occurred for the earliest period presented.

The consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. Rice Midstream Holdings LLC, a wholly-owned subsidiary of the Company (“Rice Midstream Holdings”), owns a 50.0% interest in Rice Midstream Partners LP, a publicly-traded subsidiary of the Company (the “Partnership”). The financial results of the Partnership are consolidated and the remaining 50.0% interest in the Partnership is reflected as noncontrolling interest in the condensed consolidated financial statements. All intercompany transactions have been eliminated in consolidation.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes therein for the year ended December 31, 2014, as filed with the Securities and Exchange Commission (“SEC”) by the Company in its Annual Report on Form 10-K (the “2014 Annual Report”). Certain prior period financial statement amounts have been reclassified to conform to current period presentation.


2.	Accounts Receivable

Accounts receivable are primarily from the Company’s joint interest partners and natural gas marketers. The Company extends credit to parties in the normal course of business based upon management’s assessment of their creditworthiness. A valuation allowance is provided for those accounts for which collection is estimated as doubtful; uncollectible accounts are written off and charged against the allowance. In estimating the allowance, management considers, among other things, how recently and how frequently payments have been received and the financial position of the party. There was no allowance recorded for any of the periods presented in the condensed consolidated financial statements. Accounts receivable as of September 30, 2015 and December 31, 2014 are detailed below.



(in thousands)	September 30, 2015		December 31, 2014
Joint interest	$	133,062	$	125,300
Natural gas sales	84,236		72,206
Other	7,038		2,394
Total accounts receivable	$	224,336	$	199,900


3.	Long-Term Debt

Long-term debt consists of the following as of September 30, 2015 and December 31, 2014:



(in thousands)	September 30, 2015		December 31, 2014
Long-term Debt
Senior Notes Due 2022 ^(a)	$	900,000	$	900,000
Senior Notes Due 2023 ^(b)	397,128		—
Senior Secured Revolving Credit Facility ^(c)	—		—
Midstream Holdings Revolving Credit Facility ^(d)	152,000		—
RMP Revolving Credit Facility ^(e)	72,000		—
Other	—		680
Total debt	$	1,521,128	$	900,680
Less current portion	—		680
Long-term debt	$	1,521,128	$	900,000

Senior Notes

6.25% Senior Notes Due 2022 (a)

On April 25, 2014, the Company issued $900.0 million in aggregate principal amount of 6.25% senior notes due 2022 (the “2022 Notes”) in a private placement to eligible purchasers under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the “Securities Act”), which resulted in net proceeds of $882.7 million, after deducting expenses and the initial purchasers’ discounts of approximately $17.3 million. The 2022 Notes will mature on May 1, 2022, and interest is payable on the 2022 Notes on each May 1 and November 1. At any time prior to May 1, 2017, the Company may redeem up to 35% of the 2022 Notes at a redemption price of 106.25% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings so long as the redemption occurs within 180 days of completing such equity offering and at least 65% of the aggregate principal amount of the 2022 Notes remains outstanding after such redemption. Prior to May 1, 2017, the Company may redeem some or all of the notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. Upon the occurrence of a Change of Control (as defined in the indenture governing the 2022 Notes), unless the Company has given notice to redeem the 2022 Notes, the holders of the 2022 Notes will have the right to require the Company to repurchase all or a portion of the 2022 Notes at a price equal to 101% of the aggregate principal amount of the 2022 Notes, plus any accrued and unpaid interest to the date of purchase. On or after May 1, 2017, the Company may redeem some or all of the 2022 Notes at redemption prices (expressed as percentages of principal amount) equal to 104.688% for the twelve-month period beginning on May 1, 2017, 103.125% for the twelve-month period beginning May 1, 2018, 101.563% for the twelve-month period beginning on May 1, 2019 and 100.000% beginning on May 1, 2020, plus accrued and unpaid interest to the redemption date.

7.25% Senior Notes Due 2023 (b)

On March 26, 2015, the Company issued $400.0 million in aggregate principal amount of 7.25% senior notes due 2023 (the “2023 Notes”) in a private placement to eligible purchasers under Rule 144A and Regulation S of the Securities Act, which resulted in net proceeds of $389.3 million, after deducting expenses and the initial purchasers’ discounts of approximately $10.7 million. The Company used a portion of the net proceeds for general corporate purposes, including capital expenditures, and intends to use the remaining net proceeds for general corporate purposes, including capital expenditures. The original issuance discount of $3.1 million related to the 2023 Notes is recorded as a reduction of the principal amount. For the three and nine months ended September 30, 2015, the Company recorded $0.1 million and $0.2 million, respectively, of amortization of the debt discount as interest expense using the effective interest method and a rate of 7.345%.

The 2023 Notes will mature on May 1, 2023, and interest is payable on the 2023 Notes on each May 1 and November 1, commencing on November 1, 2015. At any time prior to May 1, 2018, the Company may redeem up to 35% of the 2023 Notes at a redemption price of 107.250% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings so long as the redemption occurs within 180 days of completing such equity offering and at least 65% of the aggregate principal amount of the 2023 Notes remains outstanding after such redemption. Prior to May 1, 2018, the Company may redeem some or all of the notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. Upon the occurrence of a Change of Control (as defined in the indenture governing the 2023 Notes), unless the Company has given notice to redeem the 2023 Notes,

the holders of the 2023 Notes will have the right to require the Company to repurchase all or a portion of the 2023 Notes at a price equal to 101% of the aggregate principal amount of the 2023 Notes, plus any accrued and unpaid interest to the date of purchase. On or after May 1, 2018, the Company may redeem some or all of the 2023 Notes at redemption prices (expressed as percentages of principal amount) equal to 105.438% for the twelve-month period beginning on May 1, 2017, 103.625% for the twelve-month period beginning May 1, 2019, 101.813% for the twelve-month period beginning on May 1, 2020 and 100.000% beginning on May 1, 2021, plus accrued and unpaid interest to the redemption date.

In connection with the issuance and sale of the 2023 Notes, the Company and the Company’s restricted subsidiaries (the “Guarantors”) entered into a registration rights agreement with the initial purchasers, dated March 26, 2015. Pursuant to the registration rights agreement, the Company and the Guarantors have agreed to file a registration statement with the SEC so that holders of the 2023 Notes can exchange the 2023 Notes for registered notes with substantially identical terms. The Company and the Guarantors will use commercially reasonable efforts to cause the exchange to be completed within 365 days after the issuance of the 2023 Notes. The Company and the Guarantors are required to pay additional interest if they fail to comply with their obligations to register the 2023 Notes within the specified time periods.

The 2022 Notes and the 2023 Notes (collectively, the “Notes”) are the Company’s senior unsecured obligations, rank equally in right of payment with all of the Company’s existing and future senior debt, and will rank senior in right of payment to all of the Company’s future subordinated debt. The Notes will be effectively subordinated to all of the Company’s existing and future secured debt to the extent of the value of the collateral securing such indebtedness.

The Notes are jointly and severally, fully and unconditionally, guaranteed by the Guarantors. The indentures governing the Notes provide that the guarantees of the Notes will be released under certain circumstances, including:


•	in connection with any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary (as defined in the indentures governing the Notes) of the Company;

•

in connection with any sale or other disposition of the capital stock of that Guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a Restricted Subsidiary of the Company, such that, immediately after giving effect to such transaction, such Guarantor would no longer constitute a subsidiary of the Company;


•	if the Company designates any Restricted Subsidiary that is a Guarantor to be an unrestricted subsidiary in accordance with the indentures governing the Notes;


•	upon legal defeasance or satisfaction and discharge of the indentures governing the Notes; or


•	if such Guarantor ceases to guarantee any other indebtedness of the Company or a Guarantor under a credit facility, provided no Event of Default (as defined in the indentures governing the Notes) has occurred and is continuing.

The indentures governing the Notes restrict the Company’s ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional debt or issue certain types of preferred stock; (ii) pay dividends on capital stock or redeem, repurchase or retire the Company’s capital stock or subordinated debt; (iii) make certain investments; (iv) incur liens; (v) enter into transactions with affiliates; (vi) merge or consolidate with another company; (vii) transfer and sell assets; and (viii) create unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications. If at any time when the Notes are rated investment grade by both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services and no default (as defined in the indentures governing the Notes) has occurred and is continuing, many of such covenants will terminate and the Company and its restricted subsidiaries will cease to be subject to such covenants.

The indentures governing the Notes contain customary events of default, including:


•	default in any payment of interest on any Note when due, continued for 30 days;


•	default in the payment of principal of or premium, if any, on any Note when due;


•	failure by the Company to comply with its other obligations under the indentures governing the Notes, in certain cases subject to notice and grace periods;


•	payment defaults and accelerations with respect to other indebtedness of the Company and its Restricted Subsidiaries (as defined in the indentures governing the Notes) in the aggregate principal amount of $25.0 million or more;


•	certain events of bankruptcy, insolvency or reorganization of the Company or a Significant Subsidiary (as defined in the indentures governing the Notes) or group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary;


•	failure by the Company or Restricted Subsidiary to pay certain final judgments aggregating in excess of $25.0 million within 60 days; and


•	any guarantee of the Notes by a Guarantor ceases to be in full force and effect, is declared null and void in a judicial proceeding or is denied or disaffirmed by its maker.

Senior Secured Revolving Credit Facility (c)

In April 2013, the Company entered into a Senior Secured Revolving Credit Facility (the “Senior Secured Revolving Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent, and a syndicate of lenders. As of September 30, 2015, the borrowing base under the Third Amended and Restated Credit Agreement (as amended, the “Amended Credit Agreement”) governing the Senior Secured Revolving Credit Facility was $650.0 million and the sublimit for letters of credit was $175.0 million. The Company had zero borrowings outstanding and $125.4 million in letters of credit outstanding under its Amended Credit Agreement as of September 30, 2015, resulting in availability of $524.6 million. On October 30, 2015, a scheduled redetermination occurred as a result of which the borrowing base of the Senior Secured Revolving Credit Facility was increased from $650.0 million to $750.0 million and the sublimit for letters of credit increased from $175.0 million to $250.0 million. The next redetermination of the borrowing base is scheduled for April 1, 2016. The maturity date of the Senior Secured Revolving Credit Facility is January 29, 2019.

Eurodollar loans under the Senior Secured Revolving Credit Facility bear interest at a rate per annum equal to LIBOR plus an applicable margin ranging from 150 to 250 basis points, depending on the percentage of borrowing base utilized. 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 50 to 150 basis points, depending on the percentage of borrowing base utilized.

The Amended Credit Agreement is secured by liens on at least 80% of the proved oil and gas reserves of the Company and its subsidiaries (other than any subsidiary that is designated as an unrestricted subsidiary, including Rice Midstream Holdings and its subsidiaries), as well as significant unproved acreage and substantially all of the personal property of the Company and such restricted subsidiaries, and the Company’s obligations under the Amended Credit Agreement are guaranteed by such restricted subsidiaries. The Amended Credit Agreement contains restrictive covenants that limit the ability of the Company and its restricted subsidiaries to, among other things:


•	incur additional indebtedness;


•	sell assets;


•	make loans to others;


•	make investments;


•	enter into mergers;


•	make or declare dividends;


•	hedge future production or interest rates;


•	incur liens; and


•	engage in certain other transactions without the prior consent of the lenders.

The Amended Credit Agreement also requires the Company to maintain certain financial ratios, which are measured at the end of each calendar quarter:


•	a current ratio, which is the ratio of consolidated current assets (including unused commitments under the Amended Credit Agreement and excluding non-cash derivative assets) to consolidated current liabilities (excluding current maturities under the Amended Credit Agreement and non-cash derivative liabilities), of not less than 1.0 to 1.0; and


•	a minimum interest coverage ratio, which is the ratio of consolidated EBITDAX (as such term is defined in the Amended Credit Agreement) based on the trailing 12 month period to consolidated interest expense, of not less than 2.5 to 1.0.

The Company was in compliance with such covenants and ratios effective as of September 30, 2015.

Midstream Holdings Revolving Credit Facility (d)

On December 22, 2014, Rice Midstream Holdings LLC (“Rice Midstream Holdings”) entered into a revolving credit facility (the “Midstream Holdings Revolving Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent, and a syndicate of lenders with a maximum credit amount of $300.0 million and a sublimit for letters of credit of $25.0 million. As of September 30, 2015, Rice Midstream Holdings had $152.0 million of borrowings outstanding and $0.1 million letters of credit under this facility. The credit facility is available to fund working capital requirements and capital expenditures and to purchase assets and matures on December 22, 2019.

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. Under the revolving credit facility, Rice Midstream Holdings may elect to borrow in Eurodollars or at the base rate. Eurodollar loans bear interest at a rate per annum equal to the applicable LIBOR Rate plus an applicable margin ranging from 225 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 125 to 200 basis points, depending on the leverage ratio then in effect. Rice Midstream Holdings also pays a commitment fee based on the undrawn commitment amount ranging from 37.5 to 50 basis points.

The Midstream Holdings Revolving Credit Facility is secured by mortgages and other security interests on substantially all of the properties of, and guarantees from, Rice Midstream Holdings and its restricted subsidiaries (which do not include the Partnership, Rice Midstream Management LLC, a Delaware limited liability company and general partner of the Partnership, or the Company and its subsidiaries other than Rice Midstream Holdings).

The Midstream Holdings Revolving Credit Facility limits the ability of Rice Midstream Holdings and its restricted subsidiaries to, among other things:


•	incur or guarantee additional debt;


•	redeem or repurchase units or make distributions under certain circumstances;


•	make certain investments and acquisitions;


•	incur certain liens or permit them to exist;


•	enter into certain types of transactions with affiliates;


•	merge or consolidate with another company; and


•	transfer, sell or otherwise dispose of assets.

The Midstream Holdings Revolving Credit Facility also requires Rice Midstream Holdings to maintain the following financial ratios:


•	an interest coverage ratio, which is the ratio of Rice Midstream Holding’s consolidated EBITDA (as defined within the Midstream Holdings Revolving Credit Facility) to its consolidated current interest expense of at least 2.50 to 1.0 at the end of each fiscal quarter; and


•	a consolidated total leverage ratio, which is the ratio of consolidated debt to consolidated EBITDA, of not more than 4.25 to 1.0.

Rice Midstream Holdings was in compliance with such covenants and ratios effective as of September 30, 2015.

RMP Revolving Credit Facility (e)

On December 22, 2014, Rice Midstream OpCo LLC, a wholly-owned subsidiary of the Partnership (“Rice Midstream OpCo”), entered into a revolving credit facility (the “RMP Revolving Credit Facility”) with Wells Fargo Bank, N.A., as administrative agent, and a syndicate of lenders with 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 RMP Revolving Credit Facility provides for a letter of credit sublimit of $50.0 million. As of September 30, 2015, Rice Midstream OpCo had $72.0 million of borrowings outstanding and no letters of credit under this facility. The RMP 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 and matures on December 22, 2019.

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. Under the revolving credit facility, the Partnership may elect to borrow in Eurodollars or at the base rate. Eurodollar loans bears interest at a rate per annum equal to the applicable LIBOR Rate plus an applicable margin ranging from 175 to 275 basis points, depending on the leverage ratio then in effect. Base rate loans bears 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 75 to 175 basis points, depending on the leverage ratio then in effect. The Partnership also pays a commitment fee based on the undrawn commitment amount ranging from 35 to 50 basis points.

The RMP Revolving Credit Facility is secured by mortgages and other security interests on substantially all of the properties of, and guarantees from, the Partnership and its restricted subsidiaries.

The RMP Revolving Credit Facility limits the ability of the Partnership and its restricted subsidiaries to, among other things:


•	incur or guarantee additional debt;


•	redeem or repurchase units or make distributions under certain circumstances;


•	make certain investments and acquisitions;


•	incur certain liens or permit them to exist;


•	enter into certain types of transactions with affiliates;


•	merge or consolidate with another company; and


•	transfer, sell or otherwise dispose of assets.

The RMP Revolving Credit Facility also requires the Partnership to maintain the following financial ratios:


•	an interest coverage ratio, which is the ratio of the Partnership’s consolidated EBITDA (as defined within the RMP Revolving Credit Facility) to its consolidated current interest expense of at least 2.50 to 1.0 at the end of each fiscal quarter;


•	a consolidated total leverage ratio, which is the ratio of consolidated debt to consolidated EBITDA, of not more than 4.75 to 1.0, and after electing to issue senior unsecured notes, a consolidated total leverage ratio of not more than 5.25 to 1.0, and, in each case, with certain increases in the permitted total leverage ratio following the completion of a material acquisition; and


•	if the Partnership elects to issue senior unsecured notes, a consolidated senior secured leverage ratio, which is the ratio of consolidated senior secured debt to consolidated EBITDA, of not more than 3.50 to 1.0.

The Partnership was in compliance with such covenants and ratios effective as of September 30, 2015.

Expected Aggregate Maturities

Expected aggregate maturities of the notes payable as of September 30, 2015 are as follows (in thousands):



Remainder of Year Ending December 31, 2015	$	—
Year Ending December 31, 2016	—
Year Ending December 31, 2017	—
Year Ending December 31, 2018	—
Year Ending December 31, 2019 and Beyond	1,521,128
Total	$	1,521,128

Interest paid in cash was approximately $2.8 million and $33.9 million for the three and nine months ended September 30, 2015, respectively, and $1.2 million and $10.9 million for the three and nine months ended September 30, 2014, respectively.


4.	Derivative Instruments

The Company uses derivative commodity instruments that are placed with major financial institutions whose creditworthiness is regularly monitored. The Company’s derivative counterparties share in the Amended Credit Agreement collateral. The Company’s hedging activities are intended to support natural gas prices at targeted levels and to manage its exposure to natural gas price fluctuations. To mitigate the potential negative impact on the Company’s cash flow caused by changes in natural gas prices, the Company has entered into financial commodity derivative contracts in the form of swaps, zero cost collars, calls, puts and basis swaps to ensure that it receives minimum prices for a portion of its future natural gas production when management believes that favorable future prices can be secured.

The Company’s derivative commodity instruments have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in income currently. As of September 30, 2015, the Company has entered into derivative instruments with various financial institutions, fixing the price it receives for a portion of its natural gas through December 31, 2022, as summarized in the following table:



Swap Contract Expiration	MMBtu/day	Weighted Average Price
Year ending December 31, 2015:
NYMEX	220,000	$	4.08
TCO	42,000	$	3.30
Dominion South	58,000	$	2.45

Year ending December 31, 2016:
NYMEX	363,000	$	3.74
Dominion South	31,000	$	2.62

Year ending December 31, 2017:
NYMEX	140,000	$	3.70

Year ending December 31, 2018:
NYMEX	5,000	$	3.60

Year ending December 31, 2019:
NYMEX	20,000	$	3.23



Collar Contract Expiration	MMBtu/day	Floor/Ceiling
Year ending December 31, 2015:
NYMEX	183,000	$3.97/$4.65

Year ending December 31, 2016:
NYMEX	50,000	$2.91/$3.60

Year ending December 31, 2017:
NYMEX	220,000	$3.13/$3.61

Year ending December 31, 2018:
NYMEX	280,000	$3.16/$3.62

Year ending December 31, 2019:
NYMEX	130,000	$3.09/$3.60



Basis Contract Expiration	MMBtu/day	Swap ($/MMBtu)
Year ending December 31, 2015:
TCO	40,000	$	(0.33	)
Dominion South	11,000	$	(1.12	)
M2	12,000	$	(0.94	)
TETCO ELA	61,000	$	(0.11	)
MichCon	3,000	$	(0.04	)

Year ending December 31, 2016:
TCO	44,000	$	(0.32	)
Dominion South	45,000	$	(1.10	)
M2	40,000	$	(1.08	)
TETCO ELA	110,000	$	(0.10	)
MichCon	24,000	$	(0.01	)
Chicago	40,000	$	(0.05	)
ANR SE	35,000	$	(0.10	)

Year ending December 31, 2017:
TCO	27,000	$	(0.33	)
Dominion South	75,000	$	(0.94	)
M2	65,000	$	(1.01	)
TETCO ELA	80,000	$	(0.09	)
MichCon	4,000	$	(0.04	)
Chicago	10,000	$	(0.16	)

Year ending December 31, 2018:
TCO	19,000	$	(0.40	)
Dominion South	75,000	$	(0.70	)
TETCO ELA	40,000	$	(0.08	)
MichCon	4,000	$	(0.04	)
Chicago	10,000	$	(0.19	)

Year ending December 31, 2019:
TCO	10,000	$	(0.38	)
Dominion South	60,000	$	(0.61	)
TETCO ELA	10,000	$	(0.10	)
MichCon	20,000	$	(0.12	)

The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under netting arrangements with counterparties and the resulting net amounts presented in the condensed consolidated balance sheets for the periods presented, all at fair value (refer to Note 5 for derivative instruments at fair value):



	As of September 30, 2015
(in thousands)	Derivative instruments, recorded in the Condensed Consolidated Balance Sheet, gross		Derivative instruments subject to master netting arrangements			Derivative instruments, net
Derivative assets	$	337,629	$	(74,358	)	$	263,271

	As of December 31, 2014
(in thousands)	Derivative instruments, recorded in the Condensed Consolidated Balance Sheet, gross		Derivative instruments subject to master netting arrangements			Derivative instruments, net
Derivative assets	$	201,775	$	(5,553	)	$	196,222


5.	Fair Value of Financial Instruments

The Company determines fair value on a recurring basis for derivative instruments as these instruments are required to be recorded at fair value for each reporting amount. Fair value is based on quoted market prices, where available. If quoted market prices are not available, fair value is based upon models that use as inputs market-based parameters, including but not limited to forward curves, discount rates, broker quotes, volatilities and nonperformance risk.

The Company has categorized its fair value measurements into a three-level fair value hierarchy, based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company’s fair value measurements relating to derivative instruments are included in Level 2. Since the adoption of fair value accounting, the Company has not made any changes to its classification of financial instruments in each category.

Items included in Level 3 are valued using internal models that use significant unobservable inputs. Items included in Level 2 are valued using management’s best estimate of fair value corroborated by third-party quotes.

The following assets and liabilities were measured at fair value on a recurring basis during the period (refer to Note 4 for details relating to derivative instruments):



	As of September 30, 2015
			Fair Value Measurements at Reporting Date Using
(in thousands)	Carrying Value		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivative instruments, at fair value	$	263,271	$	263,271	$	—	$	263,271	$	—
Total assets	$	263,271	$	263,271	$	—	$	263,271	$	—



	As of December 31, 2014
			Fair Value Measurements at Reporting Date Using
(in thousands)	Carrying Value		Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Derivative instruments, at fair value	$	196,222	$	196,222	$	—	$	196,222	$	—
Total assets	$	196,222	$	196,222	$	—	$	196,222	$	—

The carrying value of cash equivalents approximates fair value due to the short maturity of the instruments. The Company’s non-financial assets, such as property, plant and equipment, goodwill and intangible assets are recorded at fair value upon business combination and are remeasured at fair value only if an impairment charge is recognized. To the extent necessary, the Company applies unobservable inputs and management judgment due to the absence of quoted market prices (Level 3) to the valuation methodologies for these non-financial assets.

The estimated fair value and carrying amount of long-term debt as reported on the condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 is shown in the table below (refer to Note 3 for details relating to the debt instruments). The fair value was estimated using Level 2 inputs based on rates reflective of the remaining maturity as well as the Company’s financial position.



	As of September 30, 2015				As of December 31, 2014
Long-Term Debt (in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Senior Notes Due 2022	$	900,000	$	807,750	$	900,000	$	839,250
Senior Notes Due 2023	397,128		375,000		—		—
Midstream Holdings Revolving Credit Facility	152,000		152,000		—		—
RMP Revolving Credit Facility	72,000		72,000		—		—
Other	—		—		680		680
Total	$	1,521,128	$	1,406,750	$	900,680	$	839,930


6.	Financial Information by Business Segment

The Company operates in two business segments: exploration and production and midstream. The exploration and production segment is responsible for the acquisition, exploration and development of natural gas, oil and NGL properties in the Appalachian Basin. The midstream segment is engaged in the gathering and compression of natural gas, oil and NGL production, and in the provision of water services to support the well completion activities, of Rice Energy and third parties. The midstream segment includes the financial results of the Partnership as well as the Company’s 50.0% limited partner interest and incentive distribution rights in the Partnership.

Business segments are evaluated for their contribution to the Company’s consolidated results based on operating income, which is defined as segment operating revenues less 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 Company’s Consolidated Financial Statements for the year ended December 31, 2014 contained in its 2014 Annual Report.

The operating results and assets of the Company’s reportable segments were as follows as of and for the three months ended September 30, 2015:



(in thousands)	Exploration and Production			Midstream			Elimination of Intersegment Transactions			Consolidated Total
Operating revenues:
Natural gas, oil and NGL sales	$	130,145		$	—		$	—		$	130,145
Firm transportation sales, net	88			—			—			88
Gathering, compression and water distribution	—			38,766			(25,378		)	13,388
Total operating revenues	$	130,233		$	38,766		$	(25,378	)	$	143,621

Operating expenses:
Lease operating	12,325			—			—			12,325
Gathering, compression and transportation	41,654			—			(17,406		)	24,248
Production taxes and impact fees	1,955			—			—			1,955
Exploration	830			—			—			830
Midstream operation and maintenance	—			4,831			—			4,831
Incentive unit income	(453		)	(233		)	—			(686		)
Stock compensation expense	2,657			1,557			—			4,214
General and administrative	18,592			5,521			—			24,113
Depreciation, depletion and amortization	84,408			5,345			(478		)	89,275
Amortization of intangible assets	—			408			—			408
Other income	(71		)	(194		)	—			(265		)
Total operating expenses	$	161,897		$	17,235		$	(17,884	)	$	161,248

Operating (loss) income	$	(31,664	)	$	21,531		$	(7,494	)	$	(17,627	)

Capital expenditures for segment assets	$	185,897		$	119,184		$	(7,972	)	$	297,109

The operating results and assets of the Company’s reportable segments were as follows for the three months ended September 30, 2014:



(in thousands)	Exploration and Production			Midstream			Elimination of Intersegment Transactions			Consolidated Total
Operating revenues:
Natural gas, oil and NGL sales	$	67,831		$	—		$	—		$	67,831
Firm transportation sales, net	9,733			—			—			9,733
Gathering, compression and water distribution	—			1,620			(57		)	1,563
Total operating revenues	$	77,564		$	1,620		$	(57	)	$	79,127

Operating expenses:
Lease operating	4,553			—			—			4,553
Gathering, compression and transportation	8,049			—			(57		)	7,992
Production taxes and impact fees	1,114			—			—			1,114
Exploration	623			—			—			623
Midstream operation and maintenance	—			1,729			—			1,729
Incentive unit expense	19,468			6,950			—			26,418
Stock compensation expense	1,786			272			—			2,058
General and administrative	10,342			116			—			10,458
Depreciation, depletion and amortization	32,854			999			—			33,853
Acquisition costs	762			1,484			—			2,246
Amortization of intangible assets	—			408			—			408
Total operating expenses	$	79,551		$	11,958		$	(57	)	$	91,452

Operating loss	$	(1,987	)	$	(10,338	)	$	—		$	(12,325	)

Capital expenditures for segment assets	$	17,942		$	182,817		$	—		$	200,759

The operating results and assets of the Company’s reportable segments were as follows as of and for the nine months ended September 30, 2015:



(in thousands)	Exploration and Production			Midstream		Elimination of Intersegment Transactions			Consolidated Total
Operating revenues:
Natural gas, oil and NGL sales	$	327,947		$	—	$	—		$	327,947
Firm transportation sales, net	3,353			—		—			3,353
Gathering, compression and water distribution	—			103,025		(68,270		)	34,755
Total operating revenues	$	331,300		$	103,025	$	(68,270	)	$	366,055

Operating expenses:
Lease operating	35,006			—		—			35,006
Gathering, compression and transportation	102,021			—		(46,511		)	55,510
Production taxes and impact fees	5,103			—		—			5,103
Exploration	1,925			—		—			1,925
Midstream operation and maintenance	—			10,963		—			10,963
Incentive unit expense	43,930			1,940		—			45,870
Stock compensation expense	7,889			3,792		—			11,681
General and administrative	48,007			14,021		—			62,028
Depreciation, depletion and amortization	216,665			12,341		(1,010		)	227,996
Amortization of intangible assets	—			1,224		—			1,224
Other expense	2,979			645		—			3,624
Total operating expenses	$	463,525		$	44,926	$	(47,521	)	$	460,930

Operating (loss) income	$	(132,225	)	$	58,099	$	(20,749	)	$	(94,875	)

Capital expenditures for segment assets	$	638,539		$	303,126	$	(21,759	)	$	919,906

The operating results and assets of the Company’s reportable segments were as follows for the nine months ended September 30, 2014:



(in thousands)	Exploration and Production		Midstream			Elimination of Intersegment Transactions			Consolidated Total
Operating revenues:
Natural gas, oil and NGL sales	$	246,816	$	—		$	—		$	246,816
Firm transportation sales, net	11,851		—			—			11,851
Gathering, compression and water distribution	—		3,080			(202		)	2,878
Total operating revenues	$	258,667	$	3,080		$	(202	)	$	261,545

Operating expenses:
Lease operating	16,406		—			—			16,406
Gathering, compression and transportation	22,666		—			(202		)	22,464
Production taxes and impact fees	2,624		—			—			2,624
Exploration	1,582		—			—			1,582
Midstream operation and maintenance	—		3,564			—			3,564
Incentive unit expense	90,032		11,663			—			101,695
Stock compensation expense	2,871		403			—			3,274
Acquisition expense	762		1,484			—			2,246
General and administrative	29,340		7,393			—			36,733
Depreciation, depletion and amortization	89,316		2,596			—			91,912
Amortization of intangible assets	—		748			—			748
Total operating expenses	$	255,599	$	27,851		$	(202	)	$	283,248

Operating income (loss)	$	3,068	$	(24,771	)	$	—		$	(21,703	)

Capital expenditures for segment assets	$	412,234	$	230,174		$	—		$	642,408



As of September 30, 2015: (in thousands)	Exploration and Production		Midstream		Elimination of Intersegment Transactions			Consolidated Total
Segment assets	$	3,303,477	$	943,892	$	(21,759	)	$	4,225,610
Goodwill	$	294,908	$	39,142	$	—		$	334,050



As of December 31, 2014: (in thousands)	Exploration and Production		Midstream		Elimination of Intersegment Transactions		Consolidated Total
Segment assets	$	2,935,814	$	592,135	$	—	$	3,527,949
Goodwill	$	294,908	$	39,142	$	—	$	334,050


7.	Commitments and Contingencies

On October 14, 2013, the Company entered into a Development Agreement and Area of Mutual Interest Agreement (collectively, the “Utica Development Agreements”) with Gulfport Energy Corporation (“Gulfport”) covering approximately 50,000 aggregate net acres in the Utica Shale in Belmont County, Ohio. Pursuant to the Utica Development Agreements, the Company had approximately 68.7% participating interest in acreage currently owned or to be acquired by the Company or Gulfport located within Goshen and Smith Townships (the “Northern Contract Area”) and an approximately 48.2% participating interest in acreage currently owned or to be acquired by the Company or Gulfport located within Wayne and Washington Townships (the “Southern Contract Area”), each within Belmont County, Ohio. The remaining participating interests are held by

Gulfport. The participating interests of the Company and Gulfport in each of the Northern and Southern Contract Areas approximated the Company’s then-current relative acreage positions in each area.

The Utica Development Agreements have terms of ten years and are terminable upon 90 days’ notice by either party; provided that, with respect to interests included within a drilling unit, such interests shall remain subject to the applicable joint operating agreement and the Company and Gulfport shall remain operators of drilling units located in the Northern and Southern Contract Areas, respectively, following such termination.

The Company has commitments for gathering and firm transportation under existing contracts with third parties. Future payments under these contracts as of September 30, 2015 totaled $4.8 billion (remainder of 2015 - $27.9 million, 2016 - $117.2 million, 2017 - $151.4 million, 2018 - $226.9 million, 2019 - $222.5 million, 2020 - $222.3 million and thereafter - $3.9 billion).

The Company has three horizontal rigs under contract, of which one expires in 2016 and two expire in 2017. The Company also has two tophole drilling rigs under contract, of which one expires in 2016 and one expires in 2018. Future payments under these contracts as of September 30, 2015 totaled $53.8 million (remainder of 2015 - $10.7 million, 2016 - $28.9 million, 2017 - $12.1 million and 2018 - $2.1 million). Any other rig performing work for the Company is performed on a well-by-well basis and therefore can be released without penalty at the conclusion of drilling on the current well. These types of drilling obligations have not been included in the amounts above. The values above represent the gross amounts that the Company is committed to pay without regard to its proportionate share based on its working interest.

The Company is involved in various litigation matters arising in the normal course of business. Management is not aware of any actions that are expected to have a material adverse effect on its financial position or results of operations.


8.	Stockholders’ Equity

On January 29, 2014, pursuant to the Master Reorganization Agreement among the Company, Rice Drilling B, Rice Appalachia, Rice Energy Holdings LLC (“Rice Holdings”), Rice Energy Family Holdings, LP (“Rice Partners”), NGP Rice Holdings, LLC (“NGP Holdings”), NGP RE Holdings, L.L.C., (“NGP RE Holdings”) NGP RE Holdings II, L.L.C. (“NGP RE II” and, together with NGP RE Holdings, “Natural Gas Partners”), Mr. Daniel J. Rice III, Rice Merger LLC (“Merger Sub”) and each of the persons holding incentive units representing interests in Rice Appalachia (collectively, the “Incentive Unitholders”) dated as of January 23, 2014, (i) (a) Rice Partners contributed a portion of its interests in Rice Appalachia to Rice Holdings, (b) Natural Gas Partners contributed its interests in Rice Appalachia to NGP Holdings and (c) the Incentive Unitholders contributed a portion of their incentive units to Rice Holdings and NGP Holdings, in each case in return for substantially similar incentive units in such entities; (ii) NGP Holdings, Rice Holdings and Mr. Daniel J. Rice III contributed their respective interests in Rice Appalachia to the Company in exchange for 43,452,550, 20,300,923 and 2,356,844 shares of common stock, respectively; (iii) Rice Partners contributed its remaining interest in Rice Appalachia to the Company in exchange for 20,000,000 shares of common stock; (iv) the Incentive Unitholders contributed their remaining interests in Rice Appalachia to the Company in exchange for 160,831 shares of common stock, each of which were issued by the Company in connection with the closing of the IPO. In connection with the IPO, in the first quarter of 2014, the Company recognized non-cash compensation expense of $3.4 million for these 160,831 shares.

In addition, on January 29, 2014, pursuant to the Agreement and Plan of Merger among the Company, Rice Drilling B and Merger Sub dated as of January 23, 2014, the Company issued 1,728,852 shares of common stock to the members of Rice Drilling B (other than Rice Appalachia) in exchange for their units in Rice Drilling B.

In August 2014, the Company completed a public offering (the “August 2014 Equity Offering”) of 13,729,650 shares of common stock at $27.30 per share, which included 7,500,000 shares sold by the Company and 6,229,650 shares sold by NGP Holdings and an affiliate of Alpha Natural Resources, Inc. (the “Selling Stockholders”). After deducting underwriting discounts and commissions of $7.7 million and transaction costs, the Company received net proceeds of $196.3 million. The Company received no proceeds from the sale of shares by the Selling Stockholders. The net proceeds from this offering were used to fund a portion of the Company’s 2014 capital budget.

On December 22, 2014, the Partnership completed an initial public offering (the “RMP IPO”) of 28,750,000 common units representing limited partner interests in the Partnership, which represented 50% of the Partnership’s outstanding equity. The Company retained a 50% limited partner interest in the Partnership, consisting of 3,623 common units and 28,753,623 subordinated units. In connection with the RMP IPO, the Company contributed to the Partnership 100% of Rice Poseidon Midstream, LLC. A wholly-owned subsidiary of the Company serves as the general partner of the Partnership. The Company continues to consolidate the results of the Partnership and records an income tax provision only as to its ownership percentage. The Company records the noncontrolling interest of the public limited partners in its condensed consolidated financial statements.

On May 12, 2015, the Company and NGP Holdings entered into an Underwriting Agreement with Goldman, Sachs & Co.

and Citigroup Global Markets Inc., relating to the offer and sale by NGP Holdings (the “Secondary Offering”) of 6,000,000 shares of common stock at a price to the public of $24.20 per share ($23.99 per share net of underwriting discounts and commissions). The Secondary Offering closed on May 15, 2015. The Company did not receive any proceeds from the sale of shares of common stock by NGP Holdings.

The Company’s Board of Directors did not declare or pay a dividend for the three or nine months ended September 30, 2015 or 2014. On August 13, 2015, a cash distribution of $0.1905 per common and subordinated unit was paid by the Partnership to the Partnership’s unitholders related to the second quarter of 2015. On October 23, 2015, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders for the third quarter of 2015 of $0.1935 per common and subordinated unit. The cash distribution will be paid on November 12, 2015 to unitholders of record at the close of business on November 3, 2015.


9.	Incentive Units

In connection with the IPO and the related corporate reorganization, the Rice Appalachia incentive unit holders contributed their Rice Appalachia incentive units to NGP Holdings and Rice Holdings in return for (i) incentive units in such entities that, in the aggregate, were substantially similar to the Rice Appalachia incentive units they previously held and (ii) shares of common stock in the amount of $3.4 million related to the extinguishment of the incentive burden attributable to Mr. Daniel J. Rice III. No payments were made in respect of incentive units prior to the completion of the Company’s IPO. As a result of the IPO, the payment likelihood related to the NGP Holdings and Rice Holdings incentive units was deemed probable, requiring the Company to recognize compensation expense. The compensation expense related to these interests is treated as additional paid in capital from NGP Holdings and Rice Holdings in our financial statements and is not deductible for federal or state income tax purposes. The compensation expense recognized is a non-cash charge, with the settlement obligation resting on NGP Holdings and Rice Holdings, and as such are not dilutive to Rice Energy Inc.

NGP Holdings

The NGP Holdings incentive units are considered a liability-based award and are adjusted to fair market value on a quarterly basis until all payments have been made. The recognized and unrecognized compensation expense related to the NGP Holdings incentive units is sensitive to certain assumptions, including the estimated timing of NGP Holdings’ sale of the Company’s common stock. Compensation (income) expense relative to the NGP Holdings incentive units was $(7.7) million and $(8.6) million for the three and nine months ended September 30, 2015, respectively, and $7.5 million and $47.1 million for the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, the estimated unrecognized compensation expense related to the NGP Holdings interests is approximately $13.9 million.

In the first quarter of 2014, NGP Holding’s distribution thresholds with regard to certain classes (tiers) of incentive units were satisfied as a result of NGP Holdings’ distribution of net proceeds from its sale of the Company’s common stock in the IPO, and NGP Holdings made cash distributions to its members, including holders of incentive units, in an aggregate amount of $4.4 million. As a result of the Company’s August 2014 Equity Offering, NGP Holdings paid approximately $12.0 million in the third quarter of 2014 to holders of certain classes of incentive units. The sale of the Company’s stock by NGP Holdings in the Secondary Offering triggered a payment to holders of certain classes of incentive units in May 2015, which resulted in approximately $26.7 million expense for the nine months ended September 30, 2015.

Rice Holdings

The Rice Holdings incentive units are considered an equity-based award with the fair value of the award determined at the grant date and amortized over the service period of the award using the straight-line method. Compensation expense relative to the Rice Holdings incentive units was $7.1 million and $27.7 million for the three and nine months ended September 30, 2015, respectively, and $6.9 million and $34.7 million for the three and nine months ended September 30, 2014, respectively. The Company will recognize approximately $45.1 million of additional compensation expense over the remaining expected service period related to the Rice Holdings incentive units.

In August 2014, the triggering event for the Rice Holdings incentive units was achieved. As a result, in September 2014 and September 2015, Rice Holdings distributed one quarter and one third, respectively, of its then-remaining assets (consisting solely of shares of the Company’s common stock) to its members pursuant to the terms of its limited liability company agreement. In addition, in September 2016 and 2017, Rice Holdings will distribute one half and all, respectively, of its then-remaining assets (consisting solely of shares of the Company’s common stock) to its members pursuant to the terms of its limited liability company agreement. As a result, over time, the shares of the Company’s common stock held by Rice Holdings will be transferred in their entirety to Rice Energy Irrevocable Trust and the incentive unitholders.

Total compensation (income) expense relative to the NGP Holdings and Rice Holdings incentive units was $(0.7) million and $45.9 million for the three and nine months ended September 30, 2015, respectively, and $26.4 million and $101.7 million for the three and nine months ended September 30, 2014, respectively. Of the total compensation (income) expense recognized for the three and nine months ended September 30, 2015, approximately $1.7 million and $12.8 million, respectively, related to changes in certain service condition assumptions.

Three tranches of the incentive units have a time vesting feature. A roll forward of those units from December 31, 2014 to September 30, 2015 is included below.



Vested Units Balance, December 31, 2014	1,800,911
Vested During Period	793,440
Forfeited During Period	—
Granted During Period	—
Canceled During Period	—
Vested Units Balance, September 30, 2015	2,594,351

Four tranches of the incentive units do not have a time vesting feature, and their payouts are triggered upon a future payment condition. As such, none of these awards have legally vested as of September 30, 2015. The fair value of the incentive units was estimated using a Monte Carlo simulation valuation model with the following assumptions:



Rice Holdings
Valuation Date	1/29/2014
Dividend Yield	0.00	%
Expected Volatility	47.00	%
Risk-Free Rate	1.11	%
Expected Life (Years)	4.0



Rice Holdings
Valuation Date	4/14/2014
Dividend Yield	0.00	%
Expected Volatility	45.19	%
Risk-Free Rate	1.13	%
Expected Life (Years)	3.8



Rice Holdings
Valuation Date	4/16/2014
Dividend Yield	0.00	%
Expected Volatility	44.32	%
Risk-Free Rate	1.18	%
Expected Life (Years)	3.8



NGP Holdings
Valuation Date	9/30/2015
Dividend Yield	0.00	%
Expected Volatility	47.86	%
Risk-Free Rate	0.33	%
Expected Life (Years)	1.0


10.	Stock-Based Compensation

During the year ended December 31, 2014 and the nine months ended September 30, 2015, the Company granted stock compensation awards to certain non-employee directors and employees under the Company’s long-term incentive plan. The awards consisted of restricted stock units, which vest upon the passage of time, and performance stock units, which vest based upon attainment of specified performance criteria. Stock compensation expense related to these awards was $3.3 million and $8.7 million for the three and nine months ended September 30, 2015, respectively, and $2.1 million and $3.3 million for the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, the Company has unrecognized compensation expense related to these equity awards of $23.4 million.

Stock compensation expense also includes phantom unit awards granted in connection with the closing of the Partnership’s IPO to certain non-employee directors of the Partnership and executive officers and employees of Rice Energy. The Partnership recorded $1.0 million and $3.0 million of equity compensation expense related to these awards in the three and nine months ended September 30, 2015, respectively. As of September 30, 2015, the Partnership has unrecognized compensation expense related to these awards of $3.8 million.


11.	Earnings Per Share

Basic earnings per share (“EPS”) is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share takes into account the dilutive effect of potential common stock that could be issued by the Company in conjunction with stock awards that have been granted to directors and employees. The following is a calculation of the basic and diluted weighted-average number of shares of common stock outstanding and EPS for the three and nine months ended September 30, 2015 and 2014. As indicated in Note 1, the Company’s corporate reorganization was considered a transaction amongst entities under common control. Therefore, the weighted average shares used in the Company’s EPS calculation assume that the Rice Energy Inc. corporate structure was in place for all periods presented.



	Three Months Ended September 30,					Nine Months Ended September 30,
(in thousands, except share data)	2015		2014			2015			2014
Income (numerator):
Net income (loss)	$	58,950	$	(6,862	)	$	(10,579	)	$	114,675

Weighted-average number of shares of common stock (denominator):
Basic	136,381,909		132,269,081			136,330,198			125,411,524
Diluted	136,521,828		132,269,081			136,330,198			125,678,095

Earnings (loss) per share:
Basic	$	0.43	$	(0.05	)	$	(0.08