S-1 1 d737338ds1.htm S-1 S-1
Table of Contents
Index to Financial Statements

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON August 25, 2014

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CONE MIDSTREAM PARTNERS LP

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   4922   47-1054194

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

1000 CONSOL Energy Drive

Canonsburg, Pennsylvania 15317

(724) 485-4000

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

 

 

David M. Khani

Chief Financial Officer

1000 CONSOL Energy Drive

Canonsburg, Pennsylvania 15317

(724) 485-4000

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

 

 

Copies to:

 

William N. Finnegan IV

Brett E. Braden

Latham & Watkins LLP

811 Main Street, Suite 3700

Houston, Texas 77002

(713) 546-5400

 

G. Michael O’Leary

George Vlahakos

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, Texas 77002

(713) 220-4200

 

David P. Oelman

Jeffery K. Malonson

Vinson & Elkins L.L.P.

1001 Fannin, Suite 2500

Houston, Texas 77002

(713) 758-2222

 

 

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

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

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

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

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

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

 

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)(2)

 

Amount of

Registration Fee

Common units representing limited partner interests

  $350,000,000   $45,080

 

 

(1) Includes common units issuable upon exercise of the underwriters’ option to purchase additional common units.

 

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents
Index to Financial Statements

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PROSPECTUS    SUBJECT TO COMPLETION, DATED AUGUST 25, 2014  

 

 

LOGO

CONE Midstream Partners LP

Common Units

Representing Limited Partner Interests

 

 

This is the initial public offering of common units representing limited partner interests in CONE Midstream Partners LP. We were recently formed by CONSOL Energy Inc. and Noble Energy, Inc., whom we refer to as our Sponsors. We are offering             common units in this offering. We expect that the initial public offering price will be between $             and $             per common unit. Prior to this offering, there has been no public market for our common units. We have applied to list our common units on the New York Stock Exchange under the symbol “CNNX.” We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act.

As a result of certain laws and regulations to which we are or may in the future become subject, we may require owners of our common units to certify that they are both U.S. citizens and subject to U.S. federal income taxation on our income. If you are not an eligible holder at the time of any requested certification in the future, your common units may be subject to redemption.

 

 

Investing in our common units involves risk. Please read “Risk Factors” beginning on page 22.

These risks include the following:

 

 

Our Sponsors account for all of our revenue. If our Sponsors change their business strategy, alter their current drilling and development plan on our dedicated acreage, or otherwise significantly reduce the volumes of natural gas and condensate transported through our gathering systems, our revenue would decline and our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected.

 

 

Under our Sponsors’ joint development agreement, our Sponsors’ drilling and development plan with respect to their upstream joint venture is subject to annual agreement of our Sponsors and is subject to each Sponsor’s non-consent rights.

 

 

On a pro forma basis, we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2013 or the twelve months ended June 30, 2014.

 

 

The assumptions underlying the forecast of EBITDA and distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual EBITDA and distributable cash flow to differ materially from our forecast.

 

 

Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of our Sponsors, and neither CONSOL nor Noble is under any obligation to adopt a business strategy that favors us.

 

 

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

 

 

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

 

 

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

 

 

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

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

       Per common unit      Total

Initial price to the public

     $                          $                    

Underwriting discounts and commissions(1)

     $                          $                    

Proceeds, before expenses, to CONE Midstream Partners LP

     $                          $                    

 

 

(1)

Excludes an aggregate structuring fee equal to         % of the gross proceeds from this offering payable equally to Wells Fargo Securities, LLC and Robert W. Baird & Co. Incorporated. Please read “Underwriting.”

We have granted the underwriters a 30-day option to purchase up to an additional             common units from us at the initial public offering price, less the underwriting discounts, commissions and the structuring fee, if the underwriters sell more than             common units in this offering.

The underwriters expect to deliver the common units on or about                 , 2014.

 

 

 

Wells Fargo Securities   BofA Merrill Lynch   Baird

Prospectus dated                 , 2014.


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

     1   

Overview

     1   

Our Initial Midstream Assets

     2   

Business Strategies

     4   

Competitive Strengths

     5   

Our Relationship with Our Sponsors and CONE

     6   

Our Emerging Growth Company Status

     8   

Risk Factors

     8   

The Transactions

     9   

Ownership and Organizational Structure

     10   

Management of CONE Midstream Partners LP

     12   

Principal Executive Offices and Internet Address

     12   

Summary of Conflicts of Interest and Duties

     12   

The Offering

     14   

Summary Historical and Pro Forma Financial Data

     20   

RISK FACTORS

     22   

Risks Related to Our Business

     22   

Risks Inherent in an Investment in Us

     39   

Tax Risks

     48   

USE OF PROCEEDS

     53   

CAPITALIZATION

     54   

DILUTION

     55   

CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     56   

General

     56   

Our Minimum Quarterly Distribution

     58   

Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014

     60   

Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2015

     64   

Significant Forecast Assumptions

     67   

PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

     72   

Distributions of Available Cash

     72   

Operating Surplus and Capital Surplus

     73   

Capital Expenditures

     75   

Subordinated Units and Subordination Period

     75   

Distributions of Available Cash from Operating Surplus During the Subordination Period

     77   

Distributions of Available Cash from Operating Surplus After the Subordination Period

     77   

General Partner Interest and Incentive Distribution Rights

     77   

Percentage Allocations of Available Cash from Operating Surplus

     79   

General Partner’s Right to Reset Incentive Distribution Levels

     79   

Distributions from Capital Surplus

     81   

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

     82   

Distributions of Cash Upon Liquidation

     83   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

     86   

Non-GAAP Financial Measure

     88   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     89   

Overview

     89   

How We Generate Revenue

     89   

How We Evaluate Our Operations

     90   

Factors Affecting the Comparability of Our Financial Results

     92   

 

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Index to Financial Statements

Other Factors Impacting Our Business

     93   

Results of Operations

     95   

Capital Resources and Liquidity

     98   

Contractual Obligations

     102   

Qualitative and Quantitative Disclosures About Market Risk

     102   

INDUSTRY

     103   

General

     103   

Midstream Services

     103   

U.S. Natural Gas Market Fundamentals

     104   

Overview of the Appalachian Basin and the Marcellus Shale

     107   

BUSINESS

     110   

Overview

     110   

Our Initial Midstream Assets

     111   

Business Strategies

     113   

Competitive Strengths

     113   

Our Relationship with Our Sponsors and CONE

     116   

Our Sponsors’ Upstream Joint Venture

     117   

Our Acreage Dedication

     119   

Our Gathering Agreements

     120   

Our Midstream Assets

     121   

Right of First Offer Assets

     124   

Third-Party Services and Commitments

     124   

Title to Our Properties

     124   

Seasonality

     125   

Competition

     125   

Regulation of Operations

     125   

Regulation of Environmental and Occupational Safety and Health Matters

     128   

Employees

     132   

Insurance

     132   

Legal Proceedings

     132   

MANAGEMENT

     133   

Management of CONE Midstream Partners LP

     133   

Director Independence

     133   

Committees of the Board of Directors

     134   

Directors and Executive Officers of CONE Midstream GP LLC

     134   

Board Leadership Structure

     136   

Board Role in Risk Oversight

     136   

Reimbursement of Expenses

     136   

Compensation of Our Officers and Directors

     137   

Our Long-Term Incentive Plan

     140   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     144   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     147   

Distributions and Payments to Our General Partner and Its Affiliates

     147   

Agreements Governing the Transactions

     149   

Procedures for Review, Approval and Ratification of Related Person Transactions

     153   

CONFLICTS OF INTEREST AND DUTIES

     154   

Conflicts of Interest

     154   

Duties of Our General Partner

     161   

DESCRIPTION OF OUR COMMON UNITS

     164   

Our Common Units

     164   

Transfer Agent and Registrar

     164   

 

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Index to Financial Statements

Transfer of Common Units

     164   

Exchange Listing

     165   

OUR PARTNERSHIP AGREEMENT

     166   

Organization and Duration

     166   

Purpose

     166   

Capital Contributions

     166   

Voting Rights

     166   

Limited Liability

     168   

Issuance of Additional Partnership Interests

     169   

Amendment of Our Partnership Agreement

     169   

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

     171   

Termination and Dissolution

     172   

Liquidation and Distribution of Proceeds

     172   

Withdrawal or Removal of Our General Partner

     173   

Transfer of General Partner Interest

     174   

Transfer of Ownership Interests in Our General Partner

     174   

Transfer of Incentive Distribution Rights

     174   

Change of Management Provisions

     174   

Limited Call Right

     174   

Possible Redemption of Ineligible Holders

     175   

Meetings; Voting

     176   

Status as Limited Partner

     177   

Indemnification

     177   

Reimbursement of Expenses

     177   

Books and Reports

     177   

Right to Inspect Our Books and Records

     178   

Registration Rights

     178   

Applicable Law; Exclusive Forum

     178   

UNITS ELIGIBLE FOR FUTURE SALE

     180   

Rule 144

     180   

Our Partnership Agreement and Registration Rights

     180   

Lock-Up Agreements

     181   

Registration Statement on Form S-8

     181   

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     182   

Partnership Status

     183   

Limited Partner Status

     184   

Tax Consequences of Unit Ownership

     184   

Tax Treatment of Operations

     190   

Disposition of Common Units

     191   

Uniformity of Units

     194   

Tax-Exempt Organizations and Other Investors

     194   

Administrative Matters

     195   

Recent Legislative Developments

     198   

State, Local, Foreign and Other Tax Considerations

     198   

INVESTMENT IN CONE MIDSTREAM PARTNERS LP BY EMPLOYEE BENEFIT PLANS

     200   

UNDERWRITING

     202   

Option to Purchase Additional Common Units

     202   

Discounts

     202   

Indemnification of Underwriters

     203   

Lock-Up Agreements

     203   

Electronic Distribution

     204   

 

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Index to Financial Statements

New York Stock Exchange

     204   

Stabilization

     204   

Discretionary Accounts

     205   

Pricing of This Offering

     205   

Directed Unit Program

     205   

Relationships

     206   

Sales Outside the United States

     206   

VALIDITY OF THE COMMON UNITS

     207   

EXPERTS

     207   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     208   

FORWARD-LOOKING STATEMENTS

     209   

INDEX TO FINANCIAL STATEMENTS

     F-1   

APPENDIX A  — FORM OF FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF CONE MIDSTREAM PARTNERS LP

     A-1   

APPENDIX B — GLOSSARY OF TERMS

     B-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus prepared by us or on behalf of us or to which we have referred you. We have not, and the underwriters have not, authorized any other person to provide you with information different from that contained in this prospectus and any free writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common units. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including             , 2014 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in these securities, whether or not participating in this offering, to deliver a prospectus. This requirement is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

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

 

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Index to Financial Statements

Industry and Market Data

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

 

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Index to Financial Statements

Certain Terms Used in This Prospectus

Unless the context otherwise requires, references in this prospectus to the following terms have the meanings set forth below:

 

   

“CONE” refers to CONE Gathering LLC, a Delaware limited liability company and the parent of our general partner. CONE is a midstream energy joint venture between CONSOL and Noble;

 

   

“CONE Midstream Partners LP,” “our partnership,” “we,” “our,” “us” or like terms, when used in a historical context, refer to CONE Midstream Partners LP Predecessor, our predecessor for accounting purposes. When used in the present tense or future tense, these terms refer to CONE Midstream Partners LP, a Delaware limited partnership, and its subsidiaries;

 

   

“CONSOL” refers to CONSOL Energy Inc., a Delaware corporation, and its consolidated subsidiaries;

 

   

“Noble” refers to Noble Energy, Inc., a Delaware corporation, and its consolidated subsidiaries;

 

   

our “general partner” refers to CONE Midstream GP LLC, a Delaware limited liability company and our general partner;

 

   

our “Predecessor” refers to CONE Midstream Partners LP Predecessor, our predecessor for accounting purposes; and

 

   

our “Sponsors” refers collectively to CONSOL, Noble and, unless the context otherwise requires, CONE.

In addition, we have provided definitions for some of the terms we use to describe our business and industry and other terms used in this prospectus in the “Glossary of Terms” beginning on page B-1 of this prospectus.

 

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Index to Financial Statements

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors” and the historical, unaudited interim and unaudited pro forma financial statements and related notes included elsewhere in this prospectus before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $             per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units. You should read “Risk Factors” beginning on page 22 for more information about important factors that you should consider before purchasing our common units.

CONE Midstream Partners LP

Overview

We are a fee-based, growth-oriented master limited partnership recently formed by CONSOL Energy Inc. (NYSE: CNX) and Noble Energy, Inc. (NYSE: NBL), whom we refer to as our Sponsors, to own, operate, develop and acquire natural gas gathering and other midstream energy assets to service our Sponsors’ rapidly growing production in the Marcellus Shale in Pennsylvania and West Virginia. Our initial assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities. We generate all of our revenues under long-term, fixed-fee gathering agreements that we have entered into with each of our Sponsors that are intended to mitigate our direct commodity price exposure and enhance the stability of our cash flows. Our gathering agreements also include substantial acreage dedications currently totaling approximately 496,000 net acres in the Marcellus Shale. We believe that our strategically located assets, our relationship with our Sponsors and our Sponsors’ intention to use us as their primary midstream services company in the Marcellus Shale position us to become a leading midstream energy company.

Each of our Sponsors is a large, independent oil and natural gas exploration and production company with a substantial resource base and a history of growing production in its areas of operation. Through an upstream joint venture formed in September 2011, our Sponsors established a joint development plan for one of the largest aggregate acreage positions in the Marcellus Shale, which is widely viewed as a premier North American shale play due to its significant hydrocarbon resources in place, consistent and predictable geology, high well recoveries relative to drilling and completion costs and proximity to high-demand metropolitan markets in the northeastern United States.

Our Sponsors have achieved substantial production growth on our dedicated acreage since the formation of their upstream joint venture in September 2011 and have invested over $458 million in our midstream infrastructure over the same period. Our Sponsors’ combined daily gross wellhead production for the six months ended June 30, 2014 averaged approximately 520 MMcfe/d on our dedicated acreage, representing a compound annual growth rate of approximately 100% since January 1, 2011, which includes production from certain wells drilled by CONSOL prior to the formation of the upstream joint venture. On our dedicated acreage, as of June 30, 2014, our Sponsors had over 5,700 potential drilling locations (based on 86-acre spacing, with approximately 38% in wet gas locations), were operating 10 drilling rigs and, since January 1, 2011, had drilled 358 gross horizontal wells. For an explanation of how we calculate our potential drilling locations, please read “Business – Overview.” In addition, our Sponsors have long-term contracts for an aggregate of approximately 700 MMcf/d of gas processing capacity in the Marcellus Shale and have secured significant long-haul firm transportation capacity or firm sales commitments for their Marcellus Shale production. Our Sponsors believe that their existing contractual commitments for Marcellus Shale processing capacity help minimize disruptions to their drilling and development plan that might otherwise exist as a result of insufficient outlets for growing production.

 

 

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Index to Financial Statements

The following charts illustrate our Sponsors’ growth in production and wells drilled with respect to our dedicated acreage for the periods indicated:

 

LOGO

 

(1) Represents gross wellhead production attributable to wells drilled on our dedicated acreage.

 

(2) Represents gross wells drilled on our dedicated acreage.

 

(3) Represents our Sponsors’ average gross daily production for the six months ended June 30, 2014, and their estimated average total gross daily production for the twelve months ending December 31, 2014.

 

(4) Represents our Sponsors’ gross wells drilled as of June 30, 2014, and their estimate of the total number of gross wells they intend to drill in 2014.

Our Sponsors intend to connect to our gathering systems, and to commence production on, over 165 gross wells on our dedicated acreage during the twelve months ending September 30, 2015. Please read “Cash Distribution Policy and Restrictions on Distributions—Significant Forecast Assumptions.” We expect strong and growing demand for our midstream services as our Sponsors complete additional wells and increase throughput volumes on our gathering systems. In addition, we believe that our Sponsors’ large portfolio of repeatable, low-cost drilling opportunities in the Marcellus Shale and exposure to a range of liquids contents, coupled with their substantial committed third-party processing and takeaway capacity, will allow them to continue to drill economically attractive wells in the Marcellus Shale across a range of commodity price environments.

The table below highlights the scale of, as well as expected growth with respect to, our Sponsors’ drilling and completion activities on our dedicated acreage.

 

Gross Producing Wells
Connected to Our Midstream
Systems as  of June 30, 2014
    Gross Completed Wells Not
Connected to Our Midstream
Systems  as of June 30, 2014
    2014 Estimated
Completion Activity

(# of Wells)
 
Dry Gas     Wet Gas     Total     Dry Gas     Wet Gas     Total     Dry Gas     Wet Gas     Total  
  210       
71
  
   
281
  
   
3
  
   
25
  
   
28
  
    74        103        177 (1) 

 

(1) Approximately 85% of the total wells completed in 2014 are anticipated to be connected to our gathering systems and commence production in 2014, with the remainder of the total wells completed in 2014 anticipated to be connected to our gathering systems and commence production in early 2015.

Our Initial Midstream Assets

In order to effectively manage our growth, capital expenditure requirements and leverage profile, we have divided our current midstream assets among three separate categories that we refer to as our “Anchor

 

 

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Index to Financial Statements

Systems,” “Growth Systems” and “Additional Systems” based on their relative current cash flows, growth profiles, capital expenditure requirements and the timing of their development.

 

   

Our Anchor Systems include our midstream systems that generate the substantial majority of our current cash flows and that we expect to drive our growth over the near term as we increase average throughput on these systems from our Sponsors’ growing production.

 

   

Our Growth Systems include our high-growth, developing gathering systems that will require substantial expansion capital expenditures over the next several years, the substantial majority of which will be funded by our Sponsors in proportion to their retained ownership interest.

 

   

Our Additional Systems include our smaller, lower-growth gathering systems that we expect will generate stable cash flows and require lower levels of expansion capital expenditures over the next several years.

In connection with the completion of this offering, our Sponsors, through CONE, will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. Please read “—The Transactions” and “— Ownership and Organizational Structure.”

The following table summarizes our midstream systems:

 

    Our Initial
Ownership
Interest
    Gas Type   Pipeline
(miles)

as of
June 30,
2014
    Average
Daily
Throughput
for the
Six Months
Ended
June  30,
2014

(BBtu/d)
    Estimated
Average

Daily
Throughput
for the
Twelve Months
Ending

September 30,
2015(1)

(BBtu/d)
    Maximum
Interconnect
Capacity(2)(3)

as of June 30,
2014

(BBtu/d)
    Compression
as  of
June 30,

2014
(horsepower)
 

System

             

Anchor Systems

    75   Dry/Wet     127        497        765        1,329        55,340   

Growth Systems

    5   Dry/Wet     27        50        86        820        6,700   

Additional Systems

    5   Dry/Wet     6        8        200        200        —     

 

(1) Please read “Cash Distribution Policy and Restrictions on Distributions — Significant Forecast Assumptions.”

 

(2) Maximum interconnect capacity is the maximum throughput that can be delivered from the system through physical interconnections to third-party facilities or pipelines.

 

(3) Our midstream systems currently have interconnects with the following interstate pipelines: Columbia Gas Transmission, Texas Eastern Transmission and Dominion Transmission, Inc.

Our Sponsors intend to utilize our midstream assets to support their rapidly growing Marcellus Shale production. Following the completion of this offering, our Sponsors, through their respective 50% ownership interests in CONE, will continue to own a 25% non-controlling interest in our Anchor Systems and a 95% non-controlling interest in each of our Growth Systems and Additional Systems, as well as a 100% interest in our general partner, a     % limited partner interest in us and all of our incentive distribution rights. We believe these retained ownership interests in us and our assets will incentivize our Sponsors to promote our growth.

In addition, we benefit from the following rights of first offer from our Sponsors:

 

   

to acquire (i) CONE’s retained interests in each of our Anchor Systems, Growth Systems and Additional Systems, (ii) CONE’s other ancillary midstream assets that it will retain after the

 

 

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completion of this offering and (iii) any additional midstream assets that CONE develops (collectively, our “right of first offer assets”), in each case, before CONE sells any of those interests to any third party during the ten-year period following the completion of this offering (the “right of first offer period”); and

 

   

to provide midstream services to our Sponsors on our right of first offer acreage, or our ROFO acreage, which currently includes approximately 194,000 net acres of our Sponsors’ existing upstream acreage that is not currently dedicated to us, as well as any acreage that becomes jointly owned by our Sponsors in the future within their upstream area of mutual interest, or our Sponsors’ upstream AMI, that is not subject to become automatically dedicated to us or to a pre-existing third-party commitment.

As a result of our rights of first offer from CONE and our existing and potential future acreage dedications from our Sponsors, we believe that we possess significant growth potential that will be generated from both organic growth and accretive acquisitions. However, CONE is under no obligation to offer to sell us any assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), we are under no obligation to buy any assets from CONE and we do not know when or if CONE will make any offers to sell assets to us. Please read “Business — Right of First Offer Assets” and “Business — Our Acreage Dedication.” While we believe our rights of first offer are significant positive attributes, they may also be sources of conflicts of interest. After the completion of this offering, CONE will own our general partner, and there will be substantial overlap between of the officers and directors of our general partner and the officers and directors of our Sponsors. Please read “Risk Factors — Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties.”

Business Strategies

Our primary business objectives are to generate stable and predictable cash flows and increase our quarterly cash distribution per unit over time. We intend to accomplish these objectives by executing the following strategies:

 

   

Capitalizing on organic growth opportunities.    We anticipate significant growth in demand for our midstream services driven by our Sponsors’ substantial drilling and development program. As of June 30, 2014, our Sponsors had over 8,000 potential drilling locations in the Marcellus Shale (of which over 5,700 were located on our dedicated acreage), which we believe provides visible long-term demand for our midstream services.

 

   

Completing accretive acquisitions from CONE.    We expect to make accretive acquisitions of additional interests in each of our systems from CONE over time to expand our operations and increase our distributable cash flow per unit. In connection with this offering, CONE will grant us a right of first offer for a period of ten years to acquire CONE’s retained interests in our midstream systems. However, CONE is under no obligation to offer to sell us any assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), we are under no obligation to buy any assets from CONE and we do not know when or if CONE will make any offers to sell assets to us.

 

   

Pursuing fixed-fee cash flows.    All of our revenues are generated from our Sponsors under long-term, fixed-fee gathering agreements that are designed to mitigate direct commodity price exposure and enhance our long-term cash flow stability. We intend to continue pursuing similar fixed-fee opportunities from our Sponsors and third parties in the future as we focus on capturing anticipated production growth in our areas of operation.

 

   

Attracting third-party volumes.    In addition to being the primary gatherer of our Sponsors’ production in the Marcellus Shale, we also intend to market our services to, and pursue strategic relationships with, third-party producers over the long term. We believe that our portfolio of

 

 

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gathering systems in the Marcellus Shale will position us favorably to compete for third-party production. However, we do not know when or if such relationships with third-party producers will develop.

Competitive Strengths

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

 

   

Our relationship with CONSOL and Noble.    Our Sponsors rely on us to provide substantially all of the midstream infrastructure and services necessary to support their continuing production growth in the Marcellus Shale. We believe our Sponsors will be incentivized to promote and support the successful execution of our business strategies. Particularly, we expect to realize benefits from the following:

 

   

Our significant dedicated acreage.    Our Sponsors have dedicated to us approximately 496,000 net acres of their jointly owned Marcellus Shale acreage for an initial term of 20 years. In addition to our existing dedicated acreage, our gathering agreements provide that any additional acreage covering the Marcellus Shale that is jointly acquired by our Sponsors in a “dedication area” covering over 7,700 square miles in West Virginia and Pennsylvania will be automatically dedicated to us. Our Sponsors continue to identify and acquire additional acreage in their core operating areas in the Marcellus Shale, including farmouts of approximately 88,000 contiguous net acres in central West Virginia and a lease of approximately 9,000 contiguous net acres surrounding the Pittsburgh International Airport that are included in our dedicated acreage. We will also have the right of first offer to provide midstream services to our Sponsors on our ROFO acreage, which currently includes approximately 194,000 net acres of our Sponsors’ upstream acreage covering the Marcellus Shale and any additional acreage covering the Marcellus Shale that is jointly acquired by our Sponsors in a “ROFO area” covering over 18,300 square miles in West Virginia and Pennsylvania. Please read “Business — Our Acreage Dedication.”

 

   

Our Sponsors’ planned production growth.    Our Sponsors have achieved substantial production growth on our dedicated acreage since the formation of their upstream joint venture and we expect this growth to continue. Our expectation for future growth is based on our belief that our Sponsors will complete the drilling and development activities on our dedicated acreage reflected in their current drilling plan.

 

   

Our Sponsors’ exposure to a large resource of wet gas and condensate.    Over the near term, our Sponsors expect their production mix in the Marcellus Shale to continue to shift towards higher margin wet gas production. As of June 30, 2014, approximately 38% of our Sponsors’ over 5,700 potential drilling locations (based on 86-acre spacing) on our dedicated acreage are in wet gas areas of the Marcellus Shale.

 

   

Our Sponsors’ upstream operational advantages.    We believe that our Sponsors have several upstream operational advantages in the development of their Marcellus Shale acreage, including (i) CONSOL controls over 118,000 surface acres in the Marcellus Shale, which CONSOL and, by agreement, Noble can utilize for pad drilling, water lines, access roads and similar drilling and completion needs, (ii) our Sponsors have the ability to coordinate their Marcellus Shale drilling and development with coal mining activity due to CONSOL’s mine operations in Pennsylvania and West Virginia and (iii) CONSOL’s coal mining operations in Pennsylvania and West Virginia provide our Sponsors access to significant sources of water necessary for well completions.

 

 

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Our Sponsors’ flexibility in developing their upstream acreage.    Approximately 87% of our Sponsors’ upstream acreage is currently held by production, of which less than 13% of such acreage is subject to drilling obligations under a farmout agreement. As a result, our Sponsors have flexibility in developing their existing acreage. Our Sponsors can focus their drilling efforts in more concentrated ways, such as by utilizing multi-well pads and longer laterals. In addition, our Sponsors expect to accelerate production by drilling and completing both Marcellus Shale and Upper Devonian wells from the same well pads in certain areas, thereby increasing throughput on our gathering systems.

 

   

Our acquisition opportunities.    Following this offering, our Sponsors, through their indirect non-controlling ownership of 25% of our Anchor Systems and 95% of each of our Growth Systems and Additional Systems, will retain a sizable ownership interest in our growing portfolio of midstream assets. We believe our Sponsors will be financially incentivized to offer us the opportunity to purchase additional interests in our midstream systems over time.

 

   

Our Sponsors’ access to committed processing and firm takeaway capacity.     Our Sponsors have long-term contracts for an aggregate of approximately 700 MMcf/d of gas processing capacity in the Marcellus Shale and have secured significant long-haul firm transportation capacity or firm sales commitments for their Marcellus Shale production. We believe our Sponsors’ existing contractual commitments for Marcellus Shale processing capacity help minimize disruptions to their drilling and development plan that might otherwise exist as a result of insufficient outlets for growing production.

 

   

Stable cash flows underpinned by long-term, fixed-fee contracts with our Sponsors.    We generate all of our revenue under long-term, fixed-fee gathering agreements that we have entered into with our Sponsors that have initial terms of 20 years and include substantial acreage dedications currently totaling approximately 496,000 net acres.

 

   

Financial flexibility.    Given their retained ownership interests in our midstream systems, our Sponsors will be responsible for their proportionate share of the total capital expenditures associated with the ongoing build-out of those systems. In addition, at the closing of this offering, we expect to have no debt and an available borrowing capacity of $250 million under a new $250 million revolving credit facility. We believe that our ownership structure, our cash position following this offering, our available borrowing capacity and our ability to access the debt and equity capital markets will provide us with the financial flexibility to successfully execute our organic growth and acquisition strategies.

 

   

Experienced management and operating teams.    Our executive management team has an average of over 15 years of experience in designing, acquiring, building, operating, financing and otherwise managing large-scale midstream and other energy assets. In addition, through our operational services agreement with CONSOL, we employ engineering, construction and operations teams that have significant experience in designing, constructing and operating large-scale midstream energy assets. CONSOL’s operational management team has over 80 years of combined experience designing, building and operating large-scale midstream and other energy assets.

Our Relationship with Our Sponsors and CONE

One of our principal strengths is our relationship with our Sponsors and CONE.

CONSOL is a Pittsburgh-based producer of natural gas and coal and is one of the largest independent natural gas exploration, development and production companies, with operations focused on the major shale formations of the Appalachian Basin, including the Marcellus Shale. CONSOL deploys an organic growth strategy focused on rapidly developing its resource base. CONSOL’s premium coals are sold to

 

 

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electricity generators and steel makers, both domestically and internationally. CONSOL is listed on the New York Stock Exchange (“NYSE”) under the symbol “CNX” and had a market capitalization of approximately $9.1 billion as of August 15, 2014.

Noble is an independent energy company engaged in worldwide oil and natural gas exploration and production. Noble’s portfolio is diversified between short-term and long-term projects, both onshore and offshore, domestic and international. In addition to its operations in the Marcellus Shale, Noble has operations in four other core areas: (i) the Denver-Julesburg Basin in Colorado; (ii) the deepwater Gulf of Mexico; (iii) offshore West Africa; and (iv) offshore Eastern Mediterranean Sea. Noble is listed on the NYSE under the symbol “NBL” and had a market capitalization of approximately $25.3 billion as of August 15, 2014.

CONE is a joint venture formed by CONSOL and Noble in September 2011 to develop, own and operate natural gas and condensate midstream assets to service our Sponsors’ joint natural gas and condensate production in the Marcellus Shale. CONSOL and Noble each own a 50% interest in CONE. In connection with the completion of this offering, our Sponsors, through CONE, will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. We will have controlling interests in each of our Anchor Systems, Growth Systems and Additional Systems through our ownership and control of the operating subsidiaries that own these systems. Through our ownership of all of the outstanding general partner interests in these operating subsidiaries, we will have voting control over, and the exclusive right to manage, the day-to-day operations, business and affairs of our midstream systems. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Contribution Agreement.” CONE will retain non-controlling interests in our operating subsidiaries that will be subject to our right of first offer. CONE’s contribution to us of a 75% controlling interest in the Anchor Systems, which include our Sponsors’ most developed systems, provides us with a substantial initial base of earnings and distributable cash flow. CONE’s contribution to us of a 5% controlling interest in each of the Growth Systems and the Additional Systems allows us to integrate the development and operation of these systems into our existing operations while allowing our Sponsors, through their ownership of CONE, to bear responsibility for funding the substantial majority of the initial development of these systems, thereby reducing our share of capital expenditures and borrowings associated with expansion of these systems in the short term. In addition, CONE’s retention of ownership interests in the Anchor Systems, the Growth Systems and the Additional Systems, combined with our right of first offer on those interests, may provide opportunities for us to grow our distributable cash flow through a series of acquisitions of these retained interests over time. However, CONE is under no obligation to offer to sell us any assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), we are under no obligation to buy any assets from CONE and we do not know when or if CONE will make any offers to sell assets to us. Please read “Business — Right of First Offer Assets.”

In connection with the completion of this offering (assuming the underwriters do not exercise their option to purchase additional common units), we will (i) issue              common units and                  subordinated units to CONE, representing an aggregate     % limited partner interest in us, (ii) issue a 2% general partner interest in us and all of our incentive distribution rights to our general partner and (iii) use the net proceeds from this offering to make a distribution of approximately $                 million to CONE. Based on an assumed initial public offering price of $             per common unit (the mid-point of the price range set forth on the cover page of this prospectus), the aggregate value of the common units and subordinated units that will be issued to CONE in connection with the completion of this offering is approximately $             million. Please read “—The Offering,” “Use of Proceeds,” “Security Ownership of Certain Beneficial Owners and Management” and “Certain Relationships and Related Party Transactions—Distributions and Payments to Our General Partner and Its Affiliates.”

Our Sponsors, indirectly through their respective 50% ownership interests in CONE, will retain a significant interest in us through CONE’s ownership of a 100% interest in our general partner, a     % limited

 

 

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partner interest in us and all of our incentive distribution rights. Given our Sponsors’ significant indirect ownership interests in us following this offering and their intent to utilize us as their primary midstream service provider in the Marcellus Shale, we believe that our Sponsors will be incentivized to promote and support the successful execution of our business strategies; however, we can provide no assurances that we will benefit from our relationship with our Sponsors. While our relationships with our Sponsors and CONE are a significant strength, they are also a source of potential risks and conflicts. Please read “Risk Factors — Risks Inherent in an Investment in Us” and “Conflicts of Interest and Duties.”

Our Emerging Growth Company Status

As a company with less than $1.0 billion in revenue during its last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may, for up to five years, take advantage of specified exemptions from reporting and other regulatory requirements that are otherwise applicable generally to public companies. These exemptions include:

 

   

the presentation of only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this prospectus;

 

   

deferral of the auditor attestation requirement on the effectiveness of our system of internal control over financial reporting;

 

   

exemption from the adoption of new or revised financial accounting standards until they would apply to private companies;

 

   

exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; and

 

   

reduced disclosure about executive compensation arrangements.

We may take advantage of these provisions until we are no longer an emerging growth company, which will occur on the earliest of (i) the last day of the fiscal year following the fifth anniversary of this offering, (ii) the last day of the fiscal year in which we have more than $1.0 billion in annual revenue, (iii) the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period and (iv) the date on which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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

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

Risk Factors

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

Risks Related to Our Business

 

   

Our Sponsors account for all of our revenue. If our Sponsors change their business strategy, alter their current drilling and development plan on our dedicated acreage, or otherwise significantly

 

 

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reduce the volumes of natural gas and condensate transported through our gathering systems, our revenue would decline and our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected.

 

   

Under our Sponsors’ joint development agreement, our Sponsors’ drilling and development plan with respect to their upstream joint venture is subject to annual agreement of our Sponsors and is subject to each Sponsor’s non-consent rights.

 

   

On a pro forma basis, we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2013 or the twelve months ended June 30, 2014.

 

   

The assumptions underlying the forecast of EBITDA and distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual EBITDA and distributable cash flow to differ materially from our forecast.

Risks Inherent in an Investment in Us

 

   

Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of our Sponsors, and neither CONSOL nor Noble is under any obligation to adopt a business strategy that favors us.

 

   

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

 

   

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

Tax Risks

 

   

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

 

   

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

The Transactions

We were formed on May 30, 2014 by CONE. In connection with this offering, our Sponsors, through CONE, will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems.

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

 

   

issue             common units and             subordinated units to CONE, representing an aggregate     % limited partner interest in us, and issue a 2% general partner interest in us and all of our incentive distribution rights to our general partner;

 

 

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

 

   

enter into a new $250 million revolving credit facility;

 

   

enter into a long-term, fixed-fee gathering agreement with each of our Sponsors;

 

   

enter into an omnibus agreement with our Sponsors, CONE and our general partner; and

 

   

enter into an operational services agreement with CONSOL.

Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions.”

The number of common units to be issued to CONE includes             common units that will be issued at the expiration of the underwriters’ option to purchase additional common units, assuming that the underwriters do not exercise the option. Any exercise of the underwriters’ option to purchase additional common units would reduce the common units shown as issued to CONE by the number to be purchased by the underwriters in connection with such exercise. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to any exercise will be sold to the public, and any remaining common units not purchased by the underwriters pursuant to any exercise of the option will be issued to CONE at the expiration of the option period for no additional consideration. We will use any net proceeds from the exercise of the underwriters’ option to purchase additional common units from us to make a cash distribution to our Sponsors.

Ownership and Organizational Structure

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

 

Public common units

      

Sponsor common units

      

Sponsor subordinated units

      

General partner interest

     2.0
  

 

 

 

Total

     100.0
  

 

 

 

 

 

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

 

LOGO

 

 

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Management of CONE Midstream Partners LP

We are managed and operated by the board of directors and executive officers of CONE Midstream GP LLC, our general partner. CONE, in which each of CONSOL and Noble own a 50% membership interest, is the sole owner of our general partner and has the right to appoint the entire board of directors of our general partner, including the independent directors appointed in accordance with the listing standards of the NYSE. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or the board of directors of our general partner. Many of the executive officers and directors of our general partner also currently serve as executive officers of our Sponsors. Please read “Management — Directors and Executive Officers of CONE Midstream GP LLC.”

In order to maintain operational flexibility, our operations will be conducted through, and our operating assets will be owned by, our operating subsidiaries. However, neither we nor our operating subsidiaries will have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of personnel employed by our Sponsors or others. All of the personnel that will conduct our business immediately following the closing of this offering will be employed or contracted by our general partner and its affiliates, including our Sponsors, but we sometimes refer to these individuals in this prospectus as our employees because they provide services directly to us.

Principal Executive Offices and Internet Address

Our principal executive offices are located at 1000 CONSOL Energy Drive, Canonsburg, Pennsylvania, 15317, and our telephone number is (724) 485-4000. Following the completion of this offering, our website will be located at www.             .com. We expect to make our periodic reports and other information filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Summary of Conflicts of Interest and Duties

Under our partnership agreement, our general partner has a duty to manage us in a manner it believes is in the best interests of our partnership. However, because our general partner is a wholly owned subsidiary of CONE, the officers and directors of our general partner have a duty to manage the business of our general partner in a manner that is in the best interests of CONE, in which each of CONSOL and Noble own a 50% membership interest. As a result of this relationship, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including our Sponsors, on the other hand. For example, our general partner will be entitled to make determinations that affect the amount of cash distributions we make to the holders of common units, which in turn has an effect on whether our general partner receives incentive cash distributions. In addition, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period. All of these actions are permitted under our partnership agreement and will not be a breach of any duty (fiduciary or otherwise) of our general partner. Please read “Conflicts of Interest and Duties.”

 

 

 

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Delaware law provides that a Delaware limited partnership may, in its partnership agreement, expand, restrict or eliminate the fiduciary duties otherwise owed by the general partner to limited partners and the partnership. As permitted by Delaware law, our partnership agreement contains various provisions replacing the fiduciary duties that would otherwise be owed by our general partner with contractual standards governing the duties of the general partner and contractual methods of resolving conflicts of interest. The effect of these provisions is to restrict the remedies available to unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. Our partnership agreement also provides that affiliates of our general partner, including CONSOL, Noble and their respective affiliates (including CONE), are not restricted from competing with us, and neither our general partner nor its affiliates have any obligation to present business opportunities to us except with respect to rights of first offer contained in our omnibus agreement. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement, and, pursuant to the terms of our partnership agreement, each holder of common units consents to various actions and potential conflicts of interest contemplated in our partnership agreement that might otherwise be considered a breach of fiduciary or other duties under Delaware law. Please read “Conflicts of Interest and Duties — Duties of Our General Partner” and “Certain Relationships and Related Party Transactions.”

 

 

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The Offering

 

Common units offered to the public

                common units.

 

                  common units if the underwriters exercise in full their option to purchase additional common units from us.

 

Units outstanding after this offering

                common units and                 subordinated units, each representing an aggregate 49% limited partner interest in us.

 

  In addition, we will issue a 2% general partner interest to our general partner.

 

  The number of common units outstanding after this offering includes                 common units that are available to be issued to the underwriters pursuant to their option to purchase additional common units from us. The number of common units purchased by the underwriters pursuant to any exercise of the option will be sold to the public. If the underwriters do not exercise their option to purchase additional common units, in whole or in part, any remaining common units not purchased by the underwriters pursuant to the option will be issued to CONE at the expiration of the option period for no additional consideration. Accordingly, any exercise of the underwriters’ option, in whole or in part, will not affect the total number of common units outstanding or the amount of cash needed to pay the minimum quarterly distribution on all units.

 

Use of proceeds

We expect to receive net proceeds of approximately $         million from the sale of                 common units offered by this prospectus, based on an assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units is not exercised. We intend to use the net proceeds from this offering to (i) make a distribution of approximately $         million to CONE and (ii) pay approximately $         million of origination fees related to our new revolving credit facility. Please read “Use of Proceeds.”

 

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

 

Cash distributions

We intend to make a minimum quarterly distribution of $         per unit to the extent we have sufficient cash at the end of

 

 

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each quarter after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. We refer to this cash as “available cash.” Our ability to pay the minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Cash Distribution Policy and Restrictions on Distributions.”

 

  For the quarter in which this offering closes, we will pay a prorated distribution on our units covering the period from the completion of this offering through                 , 2014, based on the actual length of that period.

 

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

 

   

first, 98% to the holders of common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $             plus any arrearages from prior quarters;

 

   

second, 98% to the holders of subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $             ; and

 

   

third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $            .

 

  If cash distributions to our unitholders exceed $         per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” In certain circumstances, our general partner, as the initial holder of our incentive distribution rights, has the right to reset the target distribution levels described above to higher levels based on our cash distributions at the time of the exercise of this reset election. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”

 

  If we do not have sufficient available cash at the end of each quarter, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

 

 

Pro forma distributable cash flow that was generated during the year ended December 31, 2013 and the twelve months ended June 30, 2014, was approximately $14.0 million and $27.7 million, respectively. The amount of distributable cash flow we must generate to support the payment of the minimum quarterly distribution for four quarters on our common units and subordinated units to be outstanding immediately after this offering and the corresponding distributions on our general partner’s 2% general partner interest is approximately $         million (or an average of approximately $         million per

 

 

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quarter). As a result, for each of the year ended December 31, 2013 and the twelve months ended June 30, 2014, on a pro forma basis, we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest. Please read “Cash Distribution Policy and Restrictions on Distributions — Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014.”

 

  We believe, based on our financial forecast and related assumptions included in “Cash Distribution Policy and Restrictions on Distributions — Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” that we will generate sufficient distributable cash flow to support the payment of the aggregate minimum quarterly distributions of $         million on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest for the twelve months ending September 30, 2015. However, we do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement, and there is no guarantee that we will make quarterly cash distributions to our unitholders. Please read “Cash Distribution Policy and Restrictions on Distributions.”

 

Subordinated units

CONE will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that for any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution for such quarter plus any arrearages in the payment of the minimum quarterly distribution from prior quarters during the subordination period. Subordinated units will not accrue arrearages.

 

Conversion of subordinated units

The subordination period will end on the first business day after the date that we have earned and paid distributions of at least (i) $             (the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest for each of three consecutive, non-overlapping four quarter periods ending on or after                 , 2017 or (ii) $             (150% of the annualized minimum quarterly distribution) on each of the outstanding common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest and the related distributions on the incentive distribution rights for any four-

 

 

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quarter period ending on or after                 , 2015, in each case provided there are no arrearages in payment of the minimum quarterly distributions on our common units at that time.

 

  When the subordination period ends, each outstanding subordinated unit will convert into one common unit, and common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordinated Units and Subordination Period.”

 

Issuance of additional partnership interests

Our partnership agreement authorizes us to issue an unlimited number of additional partnership interests and options, rights, warrants and appreciation rights relating to the partnership interests for any partnership purpose at any time and from time to time to such persons for such consideration and on such terms and conditions as our general partner shall determine in its sole discretion, all without the approval of any partners. Our unitholders will not have preemptive or participation rights to purchase their pro rata share of any additional units issued. Please read “Units Eligible for Future Sale” and “Our Partnership Agreement — Issuance of Additional Partnership Interests.”

 

Limited voting rights

Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Our unitholders will have no right to elect our general partner or its directors on an annual or other continuing basis. Our general partner may not be removed unless such removal is both (i) for cause and (ii) approved by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, CONE will own     % of our total outstanding common units and subordinated units on an aggregate basis (or     % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters exercise in full their option to purchase additional common units). This will give CONE the ability to prevent the removal of our general partner. Please read “Our Partnership Agreement — Voting Rights.”

 

Limited call right

If at any time our general partner and its affiliates own more than 80% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all of the remaining common units at a price equal to the greater of (i) the average of the daily closing price of our common units over the 20 trading days preceding the date that is three business days before notice of exercise of the call right is first mailed and (ii) the highest per-unit price paid by our general partner or any of its affiliates for common units during the 90-day period preceding the date such notice is first mailed. At the completion of this offering and assuming the underwriters’ option to purchase additional

 

 

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common units from us is not exercised, our general partner and its affiliates will own approximately     % of our common units (excluding any common units purchased by officers and directors of our general partner and our Sponsors under our directed unit program). At the end of the subordination period (which could occur as early as within the quarter ending                 , 2015), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units) and the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own     % of our outstanding common units (excluding any common units purchased by officers and directors of our general partner and our Sponsors under our directed unit program) and therefore would not be able to exercise the call right at that time. Please read “Our Partnership Agreement — Limited Call Right.”

 

Possible redemption of ineligible holders

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

 

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

 

 

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

 

Estimated ratio of taxable income to distributions

We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2017, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $         per unit, we estimate that your average allocable federal taxable income per year will be no more than approximately $         per unit. Thereafter, the ratio of allocable taxable income to cash distributions to you could substantially increase. Please read “Material Federal Income Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions.”

 

Material federal income tax consequences

For a discussion of the material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Federal Income Tax Consequences.”

 

Directed unit program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 7.5% of the common units being offered by this prospectus for sale to directors, director nominees and executive officers of our general partner, directors of our Sponsors and certain other key employees of our Sponsors. We do not know if these persons will choose to purchase all or any portion of these reserved common units, but any purchases they do make will reduce the number of common units available to the general public. Please read “Underwriting — Directed Unit Program.”

 

Exchange listing

We have applied to list our common units on the NYSE under the symbol “CNNX.”

 

 

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Summary Historical and Pro Forma Financial Data

The following table presents summary historical financial data of CONE Midstream Partners LP Predecessor, our predecessor for accounting purposes (our “Predecessor”), and summary unaudited pro forma financial data of CONE Midstream Partners LP for the periods and as of the dates indicated. The following summary historical financial data of our Predecessor consists of all of the assets and operations of our Predecessor on a 100% basis. In connection with the completion of this offering, our Sponsors will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. However, as required by U.S. generally accepted accounting principles (“GAAP”), we will continue to consolidate 100% of the assets and operations of our operating subsidiaries in our financial statements.

The summary historical financial data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited financial statements of our Predecessor appearing elsewhere in this prospectus. The summary historical interim financial data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited interim financial statements of our Predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical, unaudited interim and unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The summary unaudited pro forma financial data presented in the following table for the year ended December 31, 2013 and for the six months ended June 30, 2014 are derived from the unaudited pro forma condensed financial statements included elsewhere in this prospectus. The unaudited pro forma condensed balance sheet assumes the offering and the related transactions occurred as of June 30, 2014, and the unaudited pro forma condensed statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014 assume the offering and the related transactions occurred as of January 1, 2013. These transactions include, and the unaudited pro forma condensed financial statements give effect to, the following:

 

   

CONE’s contribution to us of a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems;

 

   

our entry into a new $250 million revolving credit facility;

 

   

our entry into new long-term, fixed-fee gathering agreements with each of our Sponsors and the recognition of revenue under those agreements at historical rates that were not recognized by our Predecessor;

 

   

our entry into an omnibus agreement with our Sponsors;

 

   

our entry into an operational services agreement with CONSOL;

 

   

the consummation of this offering and our issuance of (i)                 common units to the public, (ii) a 2% general partner interest and the incentive distribution rights to our general partner and (iii)                 common units and                  subordinated units to CONE; and

 

   

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

The unaudited pro forma condensed financial statements do not give effect to (i) an estimated $5.0 million in incremental general and administrative expenses that we expect to incur annually as a result of being a publicly traded partnership or (ii) variable general and administrative costs we will incur under the omnibus agreement and operational services agreement that we will enter into with our Sponsors as of the closing of this offering.

 

 

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

Year Ended

December 31,

   

Six
Months

Ended
June 30,

 
    2013     2012     2014     2013     2013     2014  
    (in thousands, except per unit data)  

Statement of Operations Data:

           

Revenue

           

Gathering Revenue — Related Party

  $ 65,626      $ 42,597      $ 51,917      $ 24,712      $ 62,093      $ 50,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    65,626        42,597        51,917        24,712        62,093        50,409   

Expenses

           

Operating Expense — Third Party

    13,175        8,806        12,221        5,990        13,090        9,798   

Operating Expense — Related Party

    16,669        8,977        12,523        8,217        16,562        12,343   

General and Administrative Expense — Third Party

    219        363        45        85        214        44   

General and Administrative Expense — Related Party

    1,614        1,069        1,349        789        2,681        1,870   

Depreciation

    5,825        3,438        3,297        2,670        5,789        3,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Expenses

    37,502        22,653        29,435        17,751        38,336        27,258   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

                                850        425   

Net Income

  $ 28,124      $ 19,944      $ 22,482      $ 6,961      $ 22,907      $ 22,726   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests(1)

          $ 5,453      $ 6,162   

Net income attributable to CONE Midstream Partners LP

            17,454        16,564   

General partner interest in net income attributable to CONE Midstream Partners LP

           

Net income per limited partner unit (basic and diluted)

           

Common units

           

Subordinated units

           

Balance Sheet Data (at period end):

           

Property and equipment, net

  $ 388,116      $ 249,451      $ 499,966         

Total assets

    409,264        266,405        522,344         

Total members equity

    368,074        244,950        476,556         

Cash Flow Statement Data:

           

Net cash provided by operating activities

  $ 34,514      $ 25,607      $ 40,710      $ 8,618       

Net cash used in investing activities

    (130,924     (121,173     (120,318     (55,832    

Net cash provided by financing activities

    95,000        81,800        83,000        45,000       

Other Data:

           

Capital expenditures

  $ 130,924      $ 121,173      $ 120,318      $ 55,832       

EBITDA(2)

    33,949        23,382        25,779        9,631      $ 29,546      $ 26,354   

EBITDA attributable to CONE Midstream Partners LP(2)

            21,512        18,704   

 

(1) Represents the 25%, 95% and 95% non-controlling interests in the net income of the Anchor Systems, Growth Systems and Additional Systems, respectively, retained by CONE that have been calculated for each of the respective operating subsidiaries for the pro forma periods presented.

 

(2) For our definition of the non-GAAP financial measure of EBITDA and a reconciliation of EBITDA to our most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Selected Historical and Pro Forma Financial Data — Non-GAAP Financial Measure.”

 

 

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RISK FACTORS

Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus, including the matters addressed under “Forward-Looking Statements,” in evaluating an investment in our common units.

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

Risks Related to Our Business

Our Sponsors account for all of our revenue. If our Sponsors change their business strategy, alter their current drilling and development plan on our dedicated acreage, or otherwise significantly reduce the volumes of natural gas and condensate transported through our gathering systems, our revenue would decline and our business, financial condition, results of operations, cash flows and ability to make distributions to our unitholders would be materially and adversely affected.

As we expect to initially derive all of our revenue from our gathering agreements with our Sponsors, any event, whether in our dedicated acreage or elsewhere, that materially and adversely affects either or both of CONSOL’s or Noble’s business strategies with respect to drilling on and development of our dedicated acreage or their financial condition, results of operations or cash flows may adversely affect our ability to sustain or increase cash distributions to our unitholders. Accordingly, we are indirectly subject to the operational and business risks of our Sponsors, the most significant of which include the following:

 

   

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

 

   

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

 

   

the availability of capital on an economic basis to fund the exploration and development activities of our Sponsors’ upstream joint venture;

 

   

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

 

   

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

 

   

adverse effects of increased or changed governmental and environmental regulation.

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

 

   

our Sponsors’ financial condition, credit ratings, leverage, market reputation, liquidity and cash flows;

 

   

the ability of our Sponsors to maintain or replace their reserves;

 

   

adverse effects of governmental and environmental regulation on our Sponsors’ upstream operations; and

 

   

losses from pending or future litigation.

Further, we have no control over our Sponsors’ business decisions and operations, and our Sponsors are under no obligation to adopt a business strategy that is favorable to us. Thus, we are subject to the risk

 

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of non-payment or non-performance by our Sponsors, including with respect to our gathering agreements, which do not contain minimum volume commitments. We cannot predict the extent to which our Sponsors’ businesses would be impacted if conditions in the energy industry were to deteriorate nor can we estimate the impact such conditions would have on the ability of our Sponsors to execute their drilling and development plan on our dedicated acreage or to perform under our gathering agreements. Any material non-payment or non-performance by either CONSOL or Noble under our gathering agreements would have a significant adverse impact on our business, financial condition, results of operations and cash flows and could therefore materially adversely affect our ability to make cash distributions to our unitholders at the expected rate or at all. Each of our gathering agreements with our Sponsors has an initial term of 20 years, and there is no guarantee that we will be able to renew or replace those gathering agreements on equal or better terms upon their expiration. Our ability to renew or replace our gathering agreements with our Sponsors following their expiration at rates sufficient to maintain our current revenues and cash flows could be adversely affected by activities beyond our control, including the activities of our competitors and our Sponsors.

Under our Sponsors’ joint development agreement, our Sponsors’ drilling and development plan with respect to their upstream joint venture is subject to annual agreement of our Sponsors and is subject to each Sponsor’s non-consent rights. Accordingly, we can provide no assurance as to the number of wells, if any, that will be drilled by our Sponsors in any given year.

Each year, our Sponsors collaborate to create a detailed drilling and development plan for the following year, based upon a number of assumptions, such as expected drilling and completion costs, expected production and expected commodity prices, which includes the number of wells, if any, to be drilled on our dedicated acreage and our ROFO acreage. If our Sponsors mutually agree, the annual plan for a given year can provide for more or fewer wells to be drilled than the number of wells that was provided for in the multi-year drilling and development plan set forth in our Sponsors’ joint development agreement, which we refer to as the “default plan.” Historically, our Sponsors have been able to mutually agree on an annual plan for a given year, several of which provided for fewer wells to be drilled during the applicable year than the number of wells that was set forth in the default plan for such year. If our Sponsors agree on an annual plan for any year that provides for significantly fewer wells to be drilled than would have been drilled under the default plan, our business, financial condition, results of operations, cash flows and ability to make cash distributions may be materially adversely affected.

If our Sponsors cannot agree on a drilling plan for a given year, then, unless a Sponsor exercises the non-consent right described below, our Sponsors will be obligated to drill the number of wells set forth in the default plan for such year. The current default plan provides for our Sponsors to drill 354 wells in 2015 and 377 wells in each of 2016, 2017, 2018, 2019 and 2020. If our Sponsors are to operate under the default plan for a given year, each Sponsor has a “non-consent right,” which is the right to elect not to participate in all (but not less than all) of the operations provided for in the default plan for the following year. If one of our Sponsors elects to exercise its non-consent right, then the other Sponsor, in its sole discretion, may determine the number of wells, if any, it will drill in such year, which may be significantly less than the number of wells that was provided for in the default plan, or none at all. Under our Sponsors’ joint development agreement, this non-consent right may be exercised by each Sponsor twice (in non-consecutive years) prior to the termination of the default plan at the end of 2020. Neither of our Sponsors has exercised its non-consent right , and thus, each Sponsor may still elect to exercise its non-consent right twice prior to the end of 2020. If a Sponsor exercises its non-consent right for any year, our business, financial condition, results of operations, cash flows and ability to make cash distributions will be materially adversely affected.

The default plan ends at the end of 2020. Following the end of the default plan, all drilling operations on our dedicated acreage and our ROFO acreage will be governed by the applicable joint operating agreement. Under the joint operating agreements, either Sponsor may propose drilling operations; however, neither Sponsor is obligated to participate in any drilling operations and may elect not to participate in any or all of the operations proposed on our dedicated acreage or our ROFO acreage. If either or both of our Sponsors elect not to participate in any or all of the operations proposed on our dedicated

 

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acreage or our ROFO acreage, our business, financial condition, results of operations, cash flows and ability to make cash distributions will be materially adversely affected.

On a pro forma basis, we would not have generated sufficient distributable cash flow to support the payment of the aggregate annualized minimum quarterly distribution on all of our units for the year ended December 31, 2013 or the twelve months ended June 30, 2014.

We must generate approximately $         million of distributable cash flow to support the payment of the minimum quarterly distribution for four quarters on all of our common units and subordinated units that will be outstanding immediately following this offering, as well as the corresponding distribution on our 2.0% general partner interest. The amount of pro forma distributable cash flow generated during each of the year ended December 31, 2013 and the twelve months ended June 30, 2014 would not have been sufficient to support the payment of the full minimum quarterly distribution on our common units and subordinated units, as well as the corresponding distribution on our 2.0% general partner interest, during those periods. Specifically, the amount of pro forma distributable cash flow generated during the year ended December 31, 2013 would have been sufficient to support a distribution of $         per common unit per quarter ($         per common unit on an annualized basis), or     % of the minimum quarterly distribution, and would not have supported any distributions on our subordinated units, and the amount of pro forma distributable cash flow generated during the twelve months ended June 30, 2014 would have been sufficient to support a distribution of $         per common unit per quarter ($         per common unit on an annualized basis), or         % of the minimum quarterly distribution, and would not have supported any distributions on our subordinated units. For a calculation of our ability to make cash distributions to our unitholders based on our pro forma results for the year ended December 31, 2013 and the twelve months ended June 30, 2014, please read “Cash Distribution Policy and Restrictions on Distributions.” If we are unable to generate sufficient distributable cash flow in future periods, we may not be able to support the payment of the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially.

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

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

The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things:

 

   

the volume of natural gas we gather, compress and dehydrate, the volume of condensate we gather and treat and the fees we are paid for performing such services;

 

   

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

 

   

our Sponsors’ ability to fund their drilling and development plan on our dedicated acreage;

 

   

capital expenditures necessary for us to maintain and build out our midstream systems to gather natural gas and condensate from our Sponsors’ new well completions on our dedicated acreage;

 

   

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

 

   

regulatory action affecting: (i) the supply of, or demand for, natural gas and condensate, (ii) the rates we can charge for our midstream services, (iii) the terms upon which we are able to contract to

 

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provide our midstream services, (iv) our existing gathering and other commercial agreements or (v) our operating costs or our operating flexibility;

 

   

the rates we charge third parties, if any, for our midstream services;

 

   

prevailing economic conditions; and

 

   

adverse weather conditions.

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

 

   

the level and timing of our capital expenditures;

 

   

our debt service requirements and other liabilities;

 

   

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

 

   

fluctuations in our working capital needs;

 

   

restrictions on distributions contained in any of our debt agreements;

 

   

the cost of acquisitions, if any;

 

   

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

 

   

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

 

   

other business risks affecting our cash levels.

The assumptions underlying the forecast of EBITDA and distributable cash flow that we include in “Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and subject to significant business, economic, financial, regulatory and competitive risks that could cause our actual EBITDA and distributable cash flow to differ materially from our forecast.

The forecast of EBITDA and distributable cash flow set forth in “Cash Distribution Policy and Restrictions on Distributions” includes our forecast of our EBITDA and distributable cash flow for the twelve months ending September 30, 2015. Our ability to pay the full minimum quarterly distribution in the forecast period is based on a number of assumptions that may not prove to be correct and that are discussed in “Cash Distribution Policy and Restrictions on Distributions.” Our management has prepared the financial forecast and has neither requested nor received an opinion or report on it from our or any other independent auditor.

The assumptions and estimates underlying the forecast are substantially driven by our Sponsors’ anticipated drilling and development plan on our dedicated acreage during the forecast period and, although we consider our assumptions as to our Sponsors’ ability to maintain that schedule to be reasonable as of the date of this prospectus, those assumptions and estimates are inherently uncertain and subject to a wide variety of significant business, economic and competitive risks that could cause actual results to differ materially from those contained in the forecast. If we do not achieve the forecasted results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units, in which event the market price of our common units may materially decline.

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

The level of natural gas and condensate volumes handled by our midstream systems depends on the level of production from natural gas wells dedicated to our midstream systems, which may be less than

 

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expected and which will naturally decline over time. In order to maintain or increase throughput levels on our midstream systems, we must obtain production from wells completed by our Sponsors and/or third parties on acreage dedicated to our midstream systems.

We have no control over our Sponsors’ or other producers’ levels of development and completion activity in our area of operation, the amount of reserves associated with wells connected to our systems or the rate at which production from a well declines. In addition, we have no control over our Sponsors or other producers or their exploration and development decisions, which may be affected by, among other things:

 

   

the availability and cost of capital;

 

   

prevailing and projected natural gas, NGL and crude oil prices;

 

   

demand for natural gas, NGLs and crude oil;

 

   

levels of reserves;

 

   

geologic considerations;

 

   

changes in the strategic importance our Sponsors assign to development in the Marcellus Shale area as opposed to other plays they may consider core to their business, which could adversely affect the financial and operational resources either or both of our Sponsors are willing to devote to development in our areas of operations;

 

   

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

 

   

environmental or other governmental regulations, including the availability of drilling permits and the regulation of hydraulic fracturing; and

 

   

the costs of producing natural gas and the availability and costs of drilling rigs and other equipment.

Due to these and other factors, even if reserves are known to exist in areas served by our midstream systems, producers may choose not to develop those reserves. If producers choose not to develop their reserves, or they choose to slow their development rate, in our areas of operation, they will have no need to dedicate such additional acreage and associated reserves to our midstream systems and the pace of such additional dedications will be below anticipated levels. Our inability to obtain additional dedications of acreage resulting from reductions in development activity, coupled with the natural decline in production from our current dedicated acreage, would result in our inability to maintain the then current levels of throughput on our midstream systems, which could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Our gathering agreements with our Sponsors provide for the release of our Sponsors’ dedicated acreage in certain situations, provide our Sponsors the ability to transfer certain of the dedicated acreage free of the dedication to us and do not include minimum volume commitments.

Our gathering agreements provide that if we fail to timely complete the construction of the facilities necessary to provide midstream services to our Sponsors on our dedicated acreage or have an uncured default of any of our material obligations that has caused an interruption in our services for more than 90 days, the affected acreage will be permanently released from our dedication. Also, after the fifth anniversary of our gathering agreements, if our Sponsors drill a well that is located a certain distance from our current gathering system (and is not included in the detailed drilling plan provided by our Sponsors) and a third- party gatherer offers a lower cost of service, then the acreage associated with such well will be permanently released from our dedication. Any permanent releases of our Sponsors’ acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

 

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Our gathering agreements also provide that in certain situations, such as an uncured default of any of our material obligations that has caused an interruption in our services for less than 90 days, our dedicated acreage can be temporarily released from our dedication. Any temporary releases of acreage from our dedication could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Our gathering agreements will run with the land and be binding on a transferee of any of our dedicated acreage; however, each of our Sponsors may transfer 25,000 net acres of the dedicated acreage free of the dedication to us. This amount of net acres that can be transferred free of the dedication will be increased by the amount, if any, of net acres acquired by our Sponsors in the dedication area that will become automatically dedicated to us. Any transfer of acreage free from the dedication to us could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Our gathering agreements do not include minimum volumes commitments. Any decrease in the current levels of throughput on our gathering systems could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Certain of our dedicated acreage is either not held by production by our Sponsors or has not yet been earned by our Sponsors.

Certain of our dedicated acreage is either not held by production or has yet to be earned by our Sponsors under farmout agreements to which they are parties. As of June 30, 2014, approximately 31% of our dedicated acreage was not held by production or was yet to be earned by our Sponsors. With respect to the dedicated acreage that is not held by production, if our Sponsors do not timely meet the drilling obligations specified in the underlying leases, then the leases will terminate and will no longer be subject to our dedication. With respect to the dedicated acreage that is yet to be earned by our Sponsors under certain farmout agreements, if our Sponsors do not meet their drilling obligations to earn the acreage subject to the farmout agreements prior to the termination of the farmout agreements, then they will have no further rights to earn any acreage that they have not previously earned under the farmout agreements. Also, if the counterparty to the farmout agreements becomes insolvent or bankrupt, then the farmout agreements may be deemed an executory contract that may be discharged in a bankruptcy proceeding. If our Sponsors do not timely meet the drilling obligations specified in the leases not held by production or do not earn all of the acreage subject to the farmout agreements prior to the termination of the farmout agreement or if our Sponsor’s farmout agreements are discharged, the affected acreage will no longer be dedicated to us, which could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

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

Part of our long-term growth strategy includes diversifying our customer base by identifying opportunities to offer services to third parties in our areas of operation. To date and over the near term, all of our revenues have been and will be earned from our Sponsors relating to production they own or control on our dedicated acreage. Our ability to increase throughput on our midstream systems and any related revenue from third parties is subject to numerous factors beyond our control, including competition from third parties and the extent to which we have available capacity when requested by third parties. Any lack of available capacity on our systems for third-party volumes will detrimentally affect our ability to compete effectively with third-party systems for natural gas and condensate produced from reserves associated with acreage other than our then current dedicated acreage in our area of operation. In addition, some of our competitors for third-party volumes have greater financial resources and access to larger supplies of natural gas than those available to us, which could allow those competitors to price their services more aggressively than we do.

 

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

We may not be able to make an attractive offer to our Sponsors on our ROFO acreage.

Our Sponsors are required to allow us to make a first offer to provide midstream services on existing upstream acreage that is not currently dedicated to us or a third party, which, as of June 30, 2014, covered approximately 194,000 net acres, and any future acreage that our Sponsors jointly acquire in the ROFO area. Our Sponsors are under no obligation to accept any offer we make on this acreage, even if we submit the lowest bid they receive. In addition, another midstream service provider may be able to make a more attractive offer to our Sponsors, whether because they have existing infrastructure on or around this acreage or otherwise. Any rejection by our Sponsors of any offer on this acreage could adversely affect our organic growth strategy or our ability to maintain or increase our cash distribution level.

If our Sponsors elect not to jointly acquire acreage in their upstream AMI, they are under no obligation to dedicate or otherwise offer the acquired acreage to us for midstream services.

Pursuant to our Sponsors’ upstream joint venture agreement, if either of our Sponsors decides to acquire acreage in their upstream AMI, prior to 2036 they are required to offer the other Sponsor the right to participate in the joint acquisition of that acreage. Any acreage that is jointly acquired in the dedication area, and that is not subject to an existing third-party commitment, will automatically be dedicated to us. Any acreage that is jointly acquired in the ROFO area, and that is not subject to an existing third-party commitment, will be subject to our right of first offer for midstream services. However, if either of our Sponsors elects not to participate in an acquisition in their upstream AMI, the other Sponsor is under no obligation to dedicate such solely acquired acreage or allow us to make an offer to provide midstream services on that acreage, even if the acreage is not subject to any third-party commitment. A failure of one of our Sponsors to participate in an acquisition in their upstream AMI will limit the acreage that is either automatically dedicated to us (in the dedication area) or subject to our right of first offer (in the ROFO area) and could adversely affect our organic growth strategy or our ability to maintain or increase our cash distribution level.

Our only assets are controlling ownership interests in our operating subsidiaries. Because our interests in our operating subsidiaries represent our only cash-generating assets, our cash flow will depend entirely on the performance of our operating subsidiaries and their ability to distribute cash to us.

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

 

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

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

We may be responsible for mine subsidence costs in the future.

Portions of our gathering systems pass over coal mines. Activities related to the use and expansion of our gathering systems have historically, and may continue to, be affected by mine subsidence. Under the terms of the omnibus agreement to be entered into between us, our general partner, CONE and our Sponsors, CONE has agreed to indemnify us for a period of four years against costs or losses arising out of mine subsidence. However, after the four year period, we may be liable for any costs or losses arising out of or attributable to mine subsidence. For the six months ended June 30, 2014, we incurred mine subsidence costs related to the expansion of our systems of approximately $2.2 million. We cannot predict the amount of any costs or losses associated with mine subsidence that may impact our assets after the term of the indemnification provided in the omnibus agreement. Mine subsidence costs and losses that we incur and for which we cannot seek indemnification could materially adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

Our midstream systems are exclusively located in the Appalachian Basin, making us vulnerable to risks associated with operating in a single geographic area.

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

We may be unable to grow by acquiring the non-controlling interests in our operating subsidiaries owned by CONE, which could limit our ability to increase our distributable cash flow.

Part of our strategy for growing our business and increasing distributions to our unitholders is dependent upon our ability to make acquisitions that increase our distributable cash flow. Part of the acquisition component of our growth strategy is based upon our expectation of future divestitures by CONE to us of portions of its remaining, non-controlling interests in our operating subsidiaries. We have only a right of first offer pursuant to our omnibus agreement to purchase the non-controlling interests in our operating subsidiaries retained by CONE after the completion of this offering and that CONE subsequently elects to sell. CONE is under no obligation to offer to sell us additional assets (including our right of first offer assets, unless and until it otherwise intends to dispose of such assets), we are under no obligation to buy any additional assets from CONE and we do not know when or if CONE will make any offers to sell assets to us. We may never purchase all or a portion of the non-controlling interests in our operating subsidiaries for several reasons, including the following:

 

   

CONE may choose not to sell these non-controlling interests;

 

   

we may not make offers for these non-controlling interests;

 

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

 

   

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

 

   

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

We do not know when or if all or any portion of such non-controlling interests will be offered to us for purchase, and we can provide no assurance that we will be able to successfully consummate any future acquisition of all or any portion of such non-controlling interests in our operating subsidiaries. Furthermore, if CONE reduces its ownership interest in us, it may be less willing to sell to us its remaining non-controlling interests in our operating subsidiaries. In addition, except for our rights of first offer, there are no restrictions on CONE’s ability to transfer its non-controlling interests in our operating subsidiaries to a third party. If we do not acquire all or a significant portion of the non-controlling interests in our operating subsidiaries held by CONE, our ability to grow our business and increase our cash distributions to our unitholders may be significantly limited.

If third-party pipelines or other midstream facilities interconnected to our gathering systems become partially or fully unavailable, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.

Our assets connect to other pipelines or facilities owned and operated by unaffiliated third parties. The continuing operation of third-party pipelines, processing and fractionation plants, compressor stations and other midstream facilities is not within our control. These third-party pipelines, processing and fractionation plants, compressor stations and other midstream facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, force majeure events, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues. If any such increase in costs occurs or if any of these pipelines or other midstream facilities becomes unable to receive or transport natural gas, our operating margin, cash flow and ability to make cash distributions to our unitholders could be adversely affected.

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

In order to maintain and grow our business, we will need to make substantial capital expenditures to fund our share of growth capital expenditures associated with our 75%, 5% and 5% controlling interests in our Anchor Systems, Growth Systems and Additional Systems, respectively, or to purchase or construct new midstream systems. If we do not make sufficient or effective capital expenditures, we will be unable to maintain and grow our business and, as a result, we may be unable to maintain or raise the level of our future cash distributions over the long term. To fund our capital expenditures, we will be required to use cash from our operations, incur debt or sell additional common units or other equity securities. Using cash from our operations will reduce cash available for distribution to our unitholders. Our ability to obtain bank financing or our ability to access the capital markets for future equity or debt offerings may be limited by our financial condition at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions, contingencies and uncertainties that are beyond our control. Also, due to our relationships with our Sponsors, our ability to access the capital markets, or the pricing or other terms of any capital markets transactions, may be adversely affected by any impairment to

 

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the financial condition of our Sponsors or adverse changes in the credit ratings of our Sponsors. Any material limitation on our ability to access capital as a result of such adverse changes to a Sponsor could limit our ability to obtain future financing under favorable terms, or at all, or could result in increased financing costs in the future. Similarly, material adverse changes affecting one or both of our Sponsors could negatively impact our unit price, limiting our ability to raise capital through equity issuances or debt financing, or could negatively affect our ability to engage in, expand or pursue our business activities, or could also prevent us from engaging in certain transactions that might otherwise be considered beneficial to us.

Even if we are successful in obtaining the necessary funds to support our growth plan, the terms of such financings could limit our ability to pay distributions to our unitholders. In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional limited partner interests may result in significant unitholder dilution and would increase the aggregate amount of cash required to maintain the then current distribution rate, which could materially decrease our ability to pay distributions at the then prevailing distribution rate. While we have historically received funding from our Sponsors, none of our Sponsors, CONE, our general partner or any of their respective affiliates is committed to providing any direct or indirect financial support to fund our growth.

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

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

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

The construction of additions or modifications to our existing systems involves numerous regulatory, environmental, political and legal uncertainties beyond our control and may require the expenditure of significant amounts of capital. Financing may not be available on economically acceptable terms or at all. If we undertake these projects, we may not be able to complete them on schedule, at the budgeted cost or at all.

Our revenues may not increase immediately (or at all) upon the expenditure of funds on a particular project. For instance, if we build a processing facility, the construction may occur over an extended period of time, and we may not receive any material increases in revenues until the project is completed. Additionally, we may construct facilities to capture anticipated future production growth in an area in which such growth does not materialize. As a result, new gathering, compression, dehydration, treating or other midstream assets may not be able to attract enough throughput to achieve our expected investment return, which could adversely affect our business, financial condition, results of operations, cash flows and ability to make cash distributions.

The construction of additions to our existing assets may require us to obtain new rights-of-way prior to constructing new pipelines or facilities. We may be unable to timely obtain such rights-of-way to connect new natural gas supplies to our existing gathering pipelines or capitalize on other attractive expansion opportunities. Additionally, it may become more expensive for us to obtain new rights-of-way or to expand or renew existing rights-of-way. If the cost of renewing or obtaining new rights-of-way increases, our cash flows could be adversely affected.

 

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The McQuay to Majorsville Pipeline experienced a slip at two stream crossings. Although construction of the pipeline has been completed, and remediation is ongoing, any additional delays in placing the pipeline into service may have a material impact on our operations and revenue.

We have completed construction of a 19-mile pipeline that connects the McQuay compressor station in Pennsylvania to the Majorsville compressor station in West Virginia. Construction of the pipeline was initially scheduled to be completed by the end of the first quarter of 2014. However, in early 2014, adverse weather conditions both delayed construction of the pipeline and contributed to soil slippage on slide slopes at two stream crossings in West Virginia, which caused a release of sediment into the streams. The West Virginia Department of Environmental Protection (“WVDEP”) has issued Notices of Violation in relation to those slips. We experienced another slip in August 2014, which resulted in an additional release of sediment. We have been and are continuing to work with WVDEP, the installation contractor and an external engineering firm to remedy the situation. Though we have not been contacted by the EPA or the Army Corps of Engineers with regard to the slips, both agencies have jurisdiction over activities related to the slips and either one or both agencies may bring enforcement actions at some time in the future. We still expect to be able to place the pipeline into service by the time our customer requires our services. However, any additional slips or delays could have a material adverse effect on our financial position, results of operations, or cash flows. In addition, resolution of any enforcement actions may include monetary sanctions, and the WVDEP, the EPA or the Army Core of Engineers may seek to recover any economic benefit derived from non-compliance with the Clean Water Act. However, we presently do not have sufficient information to determine whether the potential liability with respect to these matters will have a material effect on our financial position, results of operations or cash flows.

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

The federal Endangered Species Act, or ESA, restricts activities that may affect endangered or threatened species or their habitats. Many states have analogous laws designed to protect endangered or threatened species. Such protections, and the designation of previously unidentified endangered or threatened species under such laws, may affect our and our Sponsors’ operations.

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

We currently generate all of our revenues pursuant to fee-based gathering agreements under which we are paid based on the volumes that we gather and compress, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows have little direct exposure to commodity price risk. However, the producers that are customers of our midstream services are exposed to commodity price risk, and extended reduction in commodity prices could adversely reduce the production volumes available for our midstream services in the future below expected levels. Although we intend to enter into fee-based gathering agreements with existing or new customers in the future, our efforts to negotiate such terms may not be successful.

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

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

 

   

incur or guarantee additional debt;

 

   

redeem or repurchase units or make distributions under certain circumstances;

 

   

make certain investments and acquisitions;

 

   

incur certain liens or permit them to exist;

 

   

enter into certain types of transactions with affiliates;

 

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merge or consolidate with another company; and

 

   

transfer, sell or otherwise dispose of assets.

Our new revolving credit facility will also contain covenants requiring us to maintain certain financial ratios. For example, we may not permit the ratio of (i) consolidated total funded debt (as defined in the agreement governing our revolving credit facility) as of the last day of each fiscal quarter to (ii) consolidated EBITDA (as defined in the agreement governing our revolving credit facility) for the four consecutive fiscal quarters ending on the last day of such fiscal quarter to exceed (A) at any time other than during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.00 to 1.00 and (B) during a qualified acquisition period (as defined in the agreement governing our revolving credit facility), 5.50 to 1.00. In addition, we may not permit the ratio of (i) consolidated EBITDA for the four consecutive fiscal quarters ending on the last day of each fiscal quarter to (ii) consolidated interest expense (as defined in the agreement governing our revolving credit facility) for such four consecutive fiscal quarters to be less than 3.00 to 1.00. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet any such ratios and tests.

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

A change in the jurisdictional characterization of some of our assets by federal, state or local regulatory agencies or a change in policy by those agencies may result in increased regulation of such assets, which may cause our revenues to decline and our operating expenses to increase.

Our gathering and transportation operations are exempt from regulation by the Federal Energy Regulatory Commission, or FERC, under the Natural Gas Act of 1938, or NGA, and the Interstate Commerce Act, or ICA. Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC under the NGA, and the ICA only governs liquids transportation service in interstate commerce. Although the FERC has not made any formal determinations with respect to any of our facilities we consider to be gathering facilities, we believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish that a natural gas pipeline is a gathering pipeline not subject to FERC or NGA jurisdiction. We believe that the condensate pipelines in our gathering systems meet the traditional tests FERC has used to determine that a condensate pipeline is not providing transportation service in interstate commerce subject to FERC ICA jurisdiction. The distinction between FERC-regulated transmission services and federally unregulated gathering services, however, has been the subject of substantial litigation, and the FERC determines whether facilities are gathering facilities on a case-by-case basis, so the classification and regulation of our gathering facilities may be subject to change based on future determinations by FERC, the courts, or Congress. If the FERC were to consider the status of an individual facility and determine that the facility or services provided by it are not exempt from FERC regulation under the NGA or under the ICA, the rates for, and terms and conditions of, services provided by such facility would be subject to regulation by the FERC under the NGA and/or the Natural Gas Policy Act of 1978, or NGPA, or ICA. Such regulation could decrease revenue, increase operating costs, and, depending upon the facility in question, could adversely affect our results of operations and cash flows.

Other FERC regulations may indirectly impact our businesses and the markets for products derived from these businesses. FERC’s policies and practices across the range of its natural gas regulatory activities, including, for example, its policies on open access transportation, market manipulation, ratemaking, gas quality, capacity release and market center promotion, may indirectly affect the intrastate

 

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natural gas market. Should we fail to comply with any applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties and fines, which could have a material adverse effect on our results of operations and cash flows. Under the Energy Policy Act of 2005, the FERC has civil penalty authority under the NGA and the NGPA to impose penalties for current violations of up to $1,000,000 per day for each violation. Violations of the NGA or the NGPA could also result in administrative and criminal remedies and the disgorgement of any profits associated with the violation.

State regulation of natural gas gathering facilities and intrastate transportation pipelines generally includes various safety, environmental and, in some circumstances, nondiscriminatory take and common purchaser requirements, as well as complaint-based rate regulation. Other state regulations may not directly apply to our business, but may nonetheless affect the availability of natural gas for purchase, compression and sale.

For more information regarding federal and state regulation of our operations, please read “Business — Regulation of Operations.”

We may incur significant costs and liabilities as a result of pipeline and related facility integrity management program testing and any related pipeline repair or preventative or remedial measures.

The United States Department of Transportation’s Pipeline and Hazardous Materials Safety Administration, or PHMSA, has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines and related facilities located where a leak or rupture could do the most harm, i.e., in “high consequence areas.” The regulations require operators to:

 

   

perform ongoing assessments of pipeline and related facility integrity;

 

   

identify and characterize applicable threats to pipeline segments that could impact a high consequence area;

 

   

improve data collection, integration and analysis;

 

   

repair and remediate the pipeline as necessary; and

 

   

implement preventive and mitigating actions.

The Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, or the 2011 Pipeline Safety Act, among other things, increases the maximum civil penalty for pipeline safety violations and directs the Secretary of Transportation to promulgate rules or standards relating to expanded integrity management requirements, automatic or remote-controlled valve use, excess flow valve use, leak detection system installation and testing to confirm the material strength of pipe operating above 30% of specified minimum yield strength in high consequence areas. Effective October 25, 2013, PHMSA adopted new rules increasing the maximum administrative civil penalties for violation of the pipeline safety laws and regulations after January 3, 2012 to $200,000 per violation per day, with a maximum of $2,000,000 for a related series of violations. Should our operations fail to comply with PHMSA or comparable state regulations, we could be subject to substantial penalties and fines. PHMSA has also published advanced notices of proposed rulemaking to solicit comments on the need for changes to its safety regulations, including whether to extend the integrity management program requirements to additional types of facilities, such as gathering pipelines and related facilities. Additionally, in 2012, PHMSA issued an advisory bulletin providing guidance on the verification of records related to pipeline maximum allowable operating pressure, which could result in additional requirements for the pressure testing of pipelines or the reduction of maximum operating pressures to verifiable pressures. The adoption of these and other laws or regulations that apply more comprehensive or stringent safety standards could require us to install new or modified safety controls, pursue new capital projects, or conduct maintenance programs on an accelerated basis, all of which could require us to incur increased operational costs that could be significant. While we cannot predict the outcome of legislative or regulatory initiatives, such legislative and regulatory changes could have a material effect on our cash flow. Please read “Business — Regulation of Operations — Pipeline Safety Regulation.”

 

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

We do not conduct hydraulic fracturing operations, but substantially all of our Sponsors’ natural gas production on our dedicated acreage is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. All of the natural gas, NGL and crude oil production from our Sponsors’ upstream joint venture is being developed from an unconventional source, the Marcellus Shale formation. Hydraulic fracturing is a well stimulation process that utilizes large volumes of water and sand combined with fracturing chemical additives that are pumped at high pressure to crack open previously impenetrable rock to release hydrocarbons. Hydraulic fracturing is typically regulated by state oil and gas commissions and similar agencies. Some states, including those in which we operate, have adopted, and other states are considering adopting, regulations that could impose more stringent disclosure and/or well construction requirements on hydraulic fracturing operations, or otherwise seek to ban some or all of these activities. However, the U.S. Environmental Protection Agency, or the EPA, has asserted certain regulatory authority over hydraulic fracturing and has moved forward with various regulatory actions, including, the issuance of new regulations requiring green completions for hydraulically fractured wells, emission requirements for certain midstream equipment, and an Advanced Notice of Proposed Rulemaking seeking comment on its intent to develop regulations under the Toxic Substances and Control Act to require companies to disclose information regarding the chemicals used in hydraulic fracturing. In addition, various studies are currently underway by the EPA and other federal agencies concerning the potential environmental impacts of hydraulic fracturing activities. Certain environmental groups have also suggested that additional laws may be needed to more closely and uniformly regulate the hydraulic fracturing process; and legislation has been proposed by some members of Congress to provide for such regulation. We cannot predict whether any such legislation will be enacted and if so, what its provisions would be. Additional levels of regulation and permits required through the adoption of new laws and regulations at the federal, state or local level could lead to delays, increased operating costs and process prohibitions that could reduce the volumes of natural gas and liquids that move through our gathering systems, which in turn could materially adversely affect operations.

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

As an owner and operator of gathering and compressing systems, we are subject to various stringent federal, state and local laws and regulations relating to the discharge of materials into, and protection of, the environment and worker health and safety. Numerous governmental authorities, such as the EPA and analogous state agencies, have the power to enforce compliance with these laws and regulations and the permits issued under them, oftentimes requiring difficult and costly response actions. These laws and regulations may impose numerous obligations that are applicable to our and our customer’s operations, including the acquisition of permits to conduct regulated activities, the incurrence of capital or operating expenditures to limit or prevent releases of materials from our or our customers’ operations, the imposition of specific standards addressing worker protection, and the imposition of substantial liabilities and remedial obligations for pollution or contamination resulting from our and our customer’s operations. Failure to comply with these laws, regulations and permits may result in joint and several or strict liability or the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, and/or the issuance of injunctions limiting or preventing some or all of our operations. Private parties, including the owners of the properties through which our gathering systems pass, may also have the right to pursue legal actions to enforce compliance, as well as to seek damages for non-compliance, with environmental laws and regulations or for personal injury or property damage. We may not be able to recover all or any of these costs from insurance. In addition, we may experience a delay in obtaining or be unable to obtain required permits, which may cause us to lose potential and current customers, interrupt our operations and limit our growth and revenues, which in turn could affect our profitability. There is no

 

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assurance that changes in or additions to public policy regarding the protection of the environment and worker health and safety will not have a significant impact on our operations and profitability.

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

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

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

While Congress has from time to time considered legislation to reduce emissions of GHGs, there has not been significant activity in the form of adopted legislation to reduce GHG emissions at the federal level in recent years. In the absence of such federal climate legislation, a number of state and regional efforts have emerged that are aimed at tracking and/or reducing GHG emissions. If Congress undertakes comprehensive tax reform in the coming year, it is possible that such reform may include a carbon tax, which could impose additional direct costs on operations and reduce demand for refined products.

The current Administration announced its Climate Action Plan in 2013, which, among other things, directs federal agencies to develop a strategy for the reduction of methane emissions, including emissions from the oil and gas industry. As part of the Climate Action Plan, the Administration announced that it intends to adopt additional regulations to reduce emissions of GHGs and to encourage greater use of low carbon technologies in the coming years, and in March 2014, the Administration announced several components of its methane reduction strategy that apply to the oil and gas industry, which include an EPA assessment of methane and other emissions from the oil and gas industry that could lead to additional regulations by the end of 2016; and updated standards from the Bureau of Land Management to reduce venting and flaring from oil and gas production on public lands, which are expected to be released later in 2014. Although it is not possible at this time to predict how legislation or new regulations that may be adopted to address GHG emissions would impact our business, any such future laws and regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs associated with our operations. Substantial

 

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limitations on GHG emissions could also adversely affect demand for the natural gas we gather. Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our Sponsors’ exploration and production operations.

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

Our operations are subject to all of the hazards inherent in the gathering and compression of natural gas, including:

 

   

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

 

   

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

 

   

fires, ruptures, landslides, mine subsidence and explosions; and

 

   

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

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

 

   

injury or loss of life;

 

   

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

 

   

pollution and other environmental damage;

 

   

regulatory investigations and penalties;

 

   

suspension of our operations; and

 

   

repair and remediation costs.

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

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

We own in fee approximately 23% of the land on which our midstream systems have been constructed, with the remainder held by surface use agreement, rights-of-way or other easement rights. We are, therefore, subject to the possibility of more onerous terms or increased costs to retain necessary land use if we do not have valid rights-of-way or if such rights-of-way lapse or terminate. We may obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way or otherwise, could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

 

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

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

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

We depend on the services of a relatively small group of our general partner’s senior management and technical personnel. We do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals. The loss of the services of our general partner’s senior management or technical personnel, including John Lewis, our Chief Executive Officer, David Khani, our Chief Financial Officer, Joseph Fink, our Chief Operating Officer, Kristopher Hagedorn, our Chief Accounting Officer, and Kirk Moore, our General Counsel and Secretary, could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions.

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

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

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

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

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

 

   

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

 

   

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

 

   

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

 

   

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

Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control. If our operating results are not sufficient to service any future indebtedness, we will be forced to take actions such as reducing

 

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distributions, reducing or delaying our business activities, investments or capital expenditures, selling assets or issuing equity. We may not be able to effect any of these actions on satisfactory terms or at all.

Increases in interest rates could adversely affect our business.

We will have exposure to increases in interest rates. After the consummation of this offering on a pro forma basis, we do not expect to have any outstanding indebtedness. However, in connection with the completion of this offering we expect to enter into a new revolving credit facility. Assuming our average debt level of $57.0 million, comprised of funds drawn on our new revolving credit facility, an increase of one percentage point in the interest rates will result in an increase in annual interest expense of $2.1 million. As a result, our results of operations, cash flows and financial condition and, as a result, our ability to make cash distributions to our unitholders, could be materially adversely affected by significant increases in interest rates.

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

Terrorist attacks or cyber-attacks may significantly affect the energy industry, including our operations and those of our customers, as well as general economic conditions, consumer confidence and spending and market liquidity. Strategic targets, such as energy-related assets, may be at greater risk of future attacks than other targets in the United States. Our insurance may not protect us against such occurrences. Consequently, it is possible that any of these occurrences, or a combination of them, could have a material adverse effect on our business, financial condition and results of operations.

Risks Inherent in an Investment in Us

Our general partner and its affiliates, including our Sponsors, have conflicts of interest with us and limited fiduciary duties to us and our unitholders, and they may favor their own interests to our detriment and that of our unitholders. Additionally, we have no control over the business decisions and operations of our Sponsors, and neither CONSOL nor Noble is under any obligation to adopt a business strategy that favors us.

Following the completion of this offering, our Sponsors, through their ownership of CONE, will collectively own a 2% general partner interest and a     % limited partner interest in us (or     % if the underwriters exercise in full their option to purchase additional common units) and will own and control our general partner. In addition, CONE will continue to own 25%, 95% and 95% non-controlling equity interests in our Anchor Systems, Growth Systems and Additional Systems, respectively, following the completion of this offering. Although our general partner has a duty to manage us in a manner that is in the best interests of our partnership and our unitholders, the directors and officers of our general partner also have a duty to manage our general partner in a manner that is in the best interests of its owner, CONE, which is owned by our Sponsors. Conflicts of interest may arise between our Sponsors and their respective affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts, the general partner may favor its own interests and the interests of its affiliates, including our Sponsors, over the interests of our common unitholders. These conflicts include, among others, the following situations:

 

   

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

 

   

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

 

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

 

   

except in limited circumstances, our general partner has the power and authority to conduct our business without unitholder approval;

 

   

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

 

   

our general partner will determine the amount and timing of any capital expenditures and whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus. This determination can affect the amount of cash that is distributed to our unitholders and to our general partner, the amount of adjusted operating surplus generated in any given period and the ability of the subordinated units to convert into common units;

 

   

our general partner will determine which costs incurred by it are reimbursable by us;

 

   

our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate expiration of the subordination period;

 

   

our partnership agreement permits us to classify up to $         million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or to our general partner in respect of the general partner interest or the incentive distribution rights;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner interests to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of the board of directors of our general partner, which we refer to as our conflicts committee, or our common unitholders. This election could result in lower distributions to our common unitholders in certain situations.

Neither our partnership agreement nor our omnibus agreement will prohibit our Sponsors or any other affiliates of our general partner from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to our general partner or any of its affiliates, including our Sponsors and executive officers and directors of our general partner. Any such person or entity that becomes aware of

 

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a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. Consequently, our Sponsors and other affiliates of our general partner, including CONE, may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from our Sponsors and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow. This may create actual and potential conflicts of interest between us and affiliates of our general partner and result in less than favorable treatment of us and our unitholders. Please read “Certain Relationships and Related Party Transactions — Agreements Governing the Transactions — Omnibus Agreement” and “Conflicts of Interest and Duties.”

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

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

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

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

As permitted by Delaware law, our partnership agreement contains provisions that eliminate the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty law and replaces those duties with several different contractual standards. For example, our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner, free of any duties to us and our unitholders. This provision entitles our general partner to consider only the interests and factors that it desires and relieves it of any duty or

 

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obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our limited partners. By purchasing a common unit, a unitholder is treated as having consented to the provisions in our partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Duties — Duties of Our General Partner.”

Our partnership agreement restricts the remedies available to holders of our common units and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement contains provisions that restrict the remedies available to unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty under state fiduciary duty law. For example, our partnership agreement:

 

   

provides that whenever our general partner makes a determination or takes, or declines to take, any other action in its capacity as our general partner, our general partner is required to make such determination, or take or decline to take such other action, in good faith, meaning that it subjectively believed that the determination or the decision to take or decline to take such action was in the best interests of our partnership, and will not be subject to any other or different standard imposed by our partnership agreement, Delaware law, or any other law, rule or regulation, or at equity;

 

   

provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith;

 

   

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

 

   

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

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

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

Under our partnership agreement, we are required to reimburse our general partner and its affiliates for all costs and expenses that they incur on our behalf for managing and controlling our business and operations. Except to the extent specified under our omnibus agreement and operational services agreement, our general partner determines the amount of these expenses. Under the terms of the omnibus agreement we will be required to reimburse our Sponsors for the provision of certain administrative support services to us. Under our operational services agreement, we will be required to reimburse CONSOL for the provision of certain maintenance, operating, administrative and construction services in support of our operations. Our general partner and its affiliates also may provide us other services for which we will be charged fees as determined by our general partner. The costs and expenses for which we will reimburse our

 

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general partner and its affiliates may include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. The costs and expenses for which we are required to reimburse our general partner and its affiliates are not subject to any caps or other limits. We estimate that the total amount of such reimbursed expenses will be approximately $42.4 million for the twelve months ending September 30, 2015. Please read “Cash Distribution Policy and Restrictions on Distributions — Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2015.” Payments to our general partner and its affiliates will be substantial and will reduce the amount of cash we have available to distribute to unitholders.

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

Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. For example, unlike holders of stock in a public corporation, unitholders will not have “say-on-pay” advisory voting rights. Unitholders did not elect our general partner or the board of directors of our general partner and will have no right to elect our general partner or the board of directors of our general partner on an annual or other continuing basis. The board of directors of our general partner is chosen by its sole member, CONE, which is owned by our Sponsors. Furthermore, if the unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which our common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Our general partner may not be removed unless such removal is both (i) for cause and (ii) approved by a vote of the holders of at least 66 2/3% of the outstanding units, including any units owned by our general partner and its affiliates, voting together as a single class. “Cause” is narrowly defined under our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable to us or any limited partner for actual fraud or willful misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business. Upon the completion of this offering, CONE will own     % of our total outstanding common units and subordinated units on an aggregate basis (or     % of our total outstanding common units and subordinated units on an aggregate basis if the underwriters exercise in full their option to purchase additional common units). This will give CONE the ability to prevent the removal of our general partner.

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

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

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

Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of CONE to transfer its membership interest in our general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of our general partner with its own choices.

 

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

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

 

   

our unitholders’ proportionate ownership interest in us will decrease;

 

   

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

 

   

because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

   

the ratio of taxable income to distributions may increase;

 

   

the relative voting strength of each previously outstanding unit may be diminished; and

 

   

the market price of our common units may decline.

The issuance by us of additional general partner interests may have the following effects, among others, if such general partner interests are issued to a person who is not an affiliate of our Sponsors:

 

   

management of our business may no longer reside solely with our current general partner; and

 

   

affiliates of the newly admitted general partner may compete with us, and neither that general partner nor such affiliates will have any obligation to present business opportunities to us except with respect to rights of first offer contained in our omnibus agreement.

CONE may sell units in the public or private markets, and such sales could have an adverse impact on the trading price of the common units.

After the completion of this offering, assuming that the underwriters do not exercise their option to purchase additional common units, CONE will hold                 common units and                 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period and may convert earlier under certain circumstances. Additionally, we have agreed to provide CONE with certain registration rights under applicable securities laws. Please read “Units Eligible for Future Sale.” The sale of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.

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

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

 

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

Neither our partnership agreement nor our omnibus agreement will prohibit our Sponsors or any other affiliates of our general partner, including CONE, from owning assets or engaging in businesses that compete directly or indirectly with us. Under the terms of our partnership agreement, the doctrine of corporate opportunity, or any analogous doctrine, will not apply to our general partner or any of its affiliates, including our Sponsors and executive officers and directors of our general partner. Any such person or entity that becomes aware of a potential transaction, agreement, arrangement or other matter that may be an opportunity for us will not have any duty to communicate or offer such opportunity to us. Any such person or entity will not be liable to us or to any limited partner for breach of any fiduciary duty or other duty by reason of the fact that such person or entity pursues or acquires such opportunity for itself, directs such opportunity to another person or entity or does not communicate such opportunity or information to us. Consequently, our Sponsors and other affiliates of our general partner, including CONE, may acquire, construct or dispose of additional midstream assets in the future without any obligation to offer us the opportunity to purchase any of those assets. As a result, competition from our Sponsors and other affiliates of our general partner could materially and adversely impact our results of operations and distributable cash flow.

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

If at any time our general partner and its affiliates own more than 80% of our then-outstanding common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. At the completion of this offering and assuming the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our common units (excluding any common units purchased by officers, directors and director nominees of our general partner and our Sponsors under our directed unit program). At the end of the subordination period (which could occur as early as within the quarter ending                , 2015), assuming no additional issuances of common units by us (other than upon the conversion of the subordinated units) and the underwriters’ option to purchase additional common units from us is not exercised, our general partner and its affiliates will own approximately     % of our outstanding common units (excluding any common units purchased by officers and directors of our general partner and our Sponsors under our directed unit program) and therefore would not be able to exercise the call right at that time. Please read “Our Partnership Agreement — Limited Call Right.”

Unitholders may have to repay distributions that were wrongfully distributed to them.

Under certain circumstances, unitholders may have to repay amounts wrongfully distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the “Delaware Act”), we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Transferees of common units are liable for the obligations of the transferor to make contributions to the partnership that are known to the transferee at the time of the transfer and for unknown obligations if the liabilities could be determined from our partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

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

Prior to this offering, there has been no public market for our common units. After this offering, there will be only             publicly traded common units, assuming the underwriters’ option to purchase additional common units from us is not exercised. In addition, at the completion of this offering, CONE will                  own                  common units and                 subordinated units, representing an aggregate     % limited partner interest (or                  common units and                  subordinated units, representing an aggregate     % limited partner interest, if the underwriters exercise in full their option to purchase additional common units). We do not know the extent to which investor interest will lead to the development of an active trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.

The initial public offering price for the common units offered hereby will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price.

Our general partner, or any transferee holding incentive distribution rights, may elect to cause us to issue common units and general partner interests to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of our conflicts committee or our common unitholders. This election could result in lower distributions to our common unitholders in certain situations.

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received distributions on its incentive distribution rights at the highest level to which it is entitled (48%, in addition to distributions paid on its 2% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and a general partner interest. The number of common units to be issued to our general partner will be equal to that number of common units that would have entitled their holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in such two quarters. Our general partner will also be issued an additional general partner interest necessary to maintain our general partner’s interest in us at the level that existed immediately prior to the reset election. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive distributions based on the initial target distribution levels. This risk could be elevated if our incentive distribution rights have been transferred to a third party. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that they would have otherwise received had we not issued new common units and general partner interests in connection with resetting the target distribution levels. Additionally, our general partner has the right to transfer all or any

 

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portion of our incentive distribution rights at any time, and such transferee shall have the same rights as the general partner relative to resetting target distributions if our general partner concurs that the tests for resetting target distributions have been fulfilled. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels.”

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

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

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

Our partnership agreement will provide that, with certain limited exceptions, the Court of Chancery of the State of Delaware shall be the exclusive forum for any claims, suits, actions or proceedings (i) arising out of or relating in any way to our partnership agreement (including any claims, suits or actions to interpret, apply or enforce the provisions of our partnership agreement or the duties, obligations or liabilities among our partners, or obligations or liabilities of our partners to us, or the rights or powers of, or restrictions on, our partners or us), (ii) brought in a derivative manner on our behalf, (iii) asserting a claim of breach of a duty owed by any of our, or our general partner’s, directors, officers, or other employees, or owed by our general partner, to us or our partners, (iv) asserting a claim against us arising pursuant to any provision of the Delaware Act or (v) asserting a claim against us governed by the internal affairs doctrine.

In addition, if any person brings any of the aforementioned claims, suits, actions or proceedings and such person does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then such person shall be obligated to reimburse us and our affiliates for all fees, costs and expenses of every kind and description, including but not limited to all reasonable attorneys’ fees and other litigation expenses, that the parties may incur in connection with such claim, suit, action or proceeding. By purchasing a common unit, a limited partner is irrevocably consenting to these limitations and provisions regarding claims, suits, actions or proceedings and submitting to the exclusive jurisdiction

 

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of the Court of Chancery of the State of Delaware (or such other court) in connection with any such claims, suits, actions or proceedings. These provisions may have the effect of discouraging lawsuits against us and our general partner’s directors and officers. Please read “Our Partnership Agreement — Applicable Law; Exclusive Forum.”

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

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

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

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

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

Tax Risks

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

 

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

The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested a ruling from the IRS on this or any other tax matter affecting us.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state and local income tax at varying rates. Distributions would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions, or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our distributable cash flow would be substantially reduced. In addition, changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. For example, effective for tax years starting after December 31, 2013, Pennsylvania may assess a partnership level tax if the partnership is found to have underreported income by more than $1,000,000 in any tax year. Imposition of any such taxes may substantially reduce the cash available for distribution to you. Therefore, if we were treated as a corporation for federal income tax purposes or otherwise subjected to a material amount of entity-level taxation, there would be a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

Our partnership agreement provides that, if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target distribution levels may be adjusted to reflect the impact of that law on us.

The present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing federal income tax laws that affect publicly traded partnerships, including the elimination of the qualifying income exception upon which we rely for our treatment as a partnership for federal income tax purposes. Any modification to the federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for federal income tax purposes. Please read “Material Federal Income Tax Consequences — Partnership Status.” We are unable to predict whether any such changes will ultimately be enacted. However, it is possible that a change in law could affect us, and any such changes could negatively impact the value of an investment in our common units.

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

Because a unitholder will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of federal income taxes and, in some cases, state and local

 

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income taxes, on its share of our taxable income even if it receives no cash distributions from us. Our unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our distributable cash flow to our unitholders.

We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may have a materially adverse impact on the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our distributable cash flow.

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

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

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

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

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

Because we cannot match transferors and transferees of common units and because of other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. Latham & Watkins LLP is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from your sale of

 

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common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Federal Income Tax Consequences — Tax Consequences of Unit Ownership — Section 754 Election.”

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction for federal income tax purposes between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. The U.S. Treasury Department and the IRS have issued proposed regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material Federal Income Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees.”

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

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

We will adopt certain valuation methodologies and monthly conventions for federal income tax purposes that may result in a shift of income, gain, loss and deduction between our general partner and our unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.

When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal

 

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Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.

A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.

The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.

We will be considered to have technically terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Immediately after the completion of this offering, CONE and our general partner will collectively own an aggregate     % interest in our capital and profits. Therefore, a transfer by CONE and our general partner of all or a portion of their interests in us could result in a termination of us as a partnership for federal income tax purposes. Our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead we would be treated as a new partnership for federal income tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has announced a publicly traded partnership technical termination relief program whereby, if a publicly traded partnership that technically terminated requests publicly traded partnership technical termination relief and such relief is granted by the IRS, among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the year notwithstanding two partnership tax years. Please read “Material Federal Income Tax Consequences — Disposition of Common Units — Constructive Termination.”

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

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

 

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USE OF PROCEEDS

We expect to receive net proceeds of approximately $         million from the sale of                  common units offered by this prospectus, based on an assumed initial public offering price of $         per common unit (the mid-point of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. Our estimate assumes the underwriters’ option to purchase additional common units is not exercised. We intend to use the net proceeds from this offering to (i) make a distribution of approximately $         million to CONE and (ii) pay approximately $         million of origination fees related to our new revolving credit facility.

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

A $1.00 increase (decrease) in the assumed initial public offering price of $         per common unit would increase (decrease) the net proceeds to us from this offering by approximately $         million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the underwriters do not exercise their option to purchase additional common units, and after deducting underwriting discounts and commissions, the structuring fee and estimated offering expenses. The actual initial public offering price is subject to market conditions and negotiations between us and the underwriters.

Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.

 

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CAPITALIZATION

The following table sets forth:

 

   

the historical cash and cash equivalents and capitalization of our Predecessor as of June 30, 2014; and

 

   

our pro forma capitalization as of June 30, 2014, giving effect to the pro forma adjustments described in our unaudited pro forma condensed financial statements included elsewhere in this prospectus, including this offering and the application of the net proceeds of this offering in the manner described under “Use of Proceeds” and the other transactions described under “Prospectus Summary — The Transactions.”

The following table assumes that the underwriters do not exercise their option to purchase additional common units. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder of the                 additional common units, if any, will be issued to CONE at the expiration of the option period. Any such common units issued to CONE will be issued for no additional consideration.

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

 

     As of June 30, 2014  
     Historical      Pro forma  
     (in thousands)  

Cash and cash equivalents

   $ 9,368       $            
  

 

 

    

 

 

 

Long-term debt:

     

Revolving credit facility(1)

   $       $            
  

 

 

    

 

 

 

Total long-term debt (including current maturities)

          
  

 

 

    

 

 

 

Members’ equity / partners’ capital:

     

CONSOL

     238,278      

Noble

     238,278      

Held by public:

     

Common units

          

Held by Sponsors:

     

Common units

          

Subordinated units

          

General partner interest

          
  

 

 

    

 

 

 

Total Members’ equity / partners’ capital

     476,556      
  

 

 

    

 

 

 

Total capitalization

   $ 476,556       $            
  

 

 

    

 

 

 

 

(1) In connection with the completion of this offering, we expect to enter into a new $250 million revolving credit facility. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Revolving Credit Facility.”

 

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DILUTION

Dilution is the amount by which the offering price per common unit in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of June 30, 2014, after giving effect to the offering of common units and the related transactions, our net tangible book value was approximately $         million, or $         per unit. Purchasers of common units in this offering will experience substantial and immediate dilution in pro forma net tangible book value per common unit for financial accounting purposes, as illustrated in the following table.

 

Assumed initial public offering price per common unit(1)

      $            

Pro forma net tangible book value per unit before this offering(2)

   $               

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

     
  

 

 

    

Less: Pro forma net tangible book value per unit after this offering(3)

     
     

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in this offering(4)(5)

      $            
     

 

 

 

 

(1) Represents the mid-point of the price range set forth on the cover page of this prospectus.

 

(2) Determined by dividing the number of units (            common units,             subordinated units and the corresponding value for the 2% general partner interest) to be issued to the general partner and its affiliates for their contribution of assets and liabilities to us into the pro forma net tangible book value of the contributed assets and liabilities of $        million.

 

(3) Determined by dividing the number of units to be outstanding after this offering (            common units,             subordinated units and the corresponding value for the 2% general partner interest) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the net proceeds from this offering, of $         million.

 

(4) If the initial public offering price were to increase or decrease by $1.00 per common unit, then dilution in net tangible book value per common unit would equal $         and $        , respectively.

 

(5) Assumes the underwriters’ option to purchase additional common units is not exercised. If the underwriters exercise in full their option to purchase additional common units, the immediate dilution in net tangible book value per common unit to purchasers in this offering would be $            .

The following table sets forth the number of units that we will issue and the total consideration contributed to us by our general partner and its affiliates in respect of their units and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus.

 

     Units Acquired     Total Consideration  
     Number    %     Amount
(in  millions)
     %  

General partner and its affiliates(1)(2)(3)

                   $                          

Purchasers in this offering

                                
  

 

  

 

 

   

 

 

    

 

 

 

Total

                   $                          
  

 

  

 

 

   

 

 

    

 

 

 

 

(1) Upon the completion of this offering, our general partner and its affiliates will own                common units,                subordinated units and a 2% general partner interest.

 

(2) Assumes the underwriters’ option to purchase additional common units is not exercised.

 

(3) The assets contributed by our general partner and its affiliates were recorded at historical cost in accordance with accounting principles generally accepted in the United States. Book value of the consideration provided by our general partner and its affiliates, as of June 30, 2014, was $         million.

 

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CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

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

For additional information regarding our historical and pro forma results of operations, please refer to our historical financial statements and the accompanying notes and the unaudited pro forma condensed financial statements and the accompanying notes included elsewhere in this prospectus.

General

Rationale for Our Cash Distribution Policy

Our partnership agreement requires that we distribute all of our available cash quarterly. This requirement forms the basis of our cash distribution policy and reflects a basic judgment that our unitholders will be better served by distributing our available cash rather than retaining it because, among other reasons, we believe we will generally finance any expansion capital expenditures from external financing sources. Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $         per unit, or $         per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including the payment of expenses to our general partner. However, other than the requirement in our partnership agreement to distribute all of our available cash each quarter, we have no legal obligation to make quarterly cash distributions in this or any other amount, and the board of directors of our general partner has considerable discretion to determine the amount of our available cash each quarter. In addition, the board of directors of our general partner may change our cash distribution policy at any time, subject to the requirement in our partnership agreement to distribute all of our available cash quarterly. Generally, our available cash is the sum of (i) all cash on hand at the end of a quarter after the payment of our expenses and the establishment of cash reserves and (ii) if the board of directors of our general partner so determines, all or any portion of additional cash on hand resulting from working capital borrowings made after the end of the quarter. Because we are not subject to an entity-level federal income tax, we expect to have more cash to distribute than would be the case if we were subject to federal income tax. If we do not generate sufficient available cash from our operations, we may, but are under no obligation to, borrow funds to pay the minimum quarterly distribution to our unitholders.

Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy

Although our partnership agreement requires that we distribute all of our available cash quarterly, there is no guarantee that we will make quarterly cash distributions to our unitholders at our minimum quarterly distribution rate or at any other rate, and we have no legal obligation to do so. Our current cash distribution policy is subject to certain restrictions, as well as the considerable discretion of the board of directors of our general partner in determining the amount of our available cash each quarter. The following factors will affect our ability to make cash distributions, as well as the amount of any cash distributions we make:

 

   

We expect that our cash distribution policy will be subject to restrictions on cash distributions under our new revolving credit facility. We expect that one such restriction would prohibit us from making cash distributions while an event of default has occurred and is continuing under our new revolving credit facility, notwithstanding our cash distribution policy. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Revolving Credit Facility.”

 

   

The amount of cash that we distribute and the decision to make any distribution is determined by the board of directors of our general partner, taking into consideration the terms of our partnership agreement. Specifically, the board of directors of our general partner will have the authority to

 

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establish cash reserves to provide for the proper conduct of our business, comply with applicable law or any agreement to which we are a party or by which we are bound or our assets are subject and provide funds for future cash distributions to our unitholders, and the establishment of or increase in those reserves could result in a reduction in cash distributions from levels we currently anticipate pursuant to our stated cash distribution policy. Any decision to establish cash reserves made by the board of directors of our general partner in good faith will be binding on our unitholders.

 

   

While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including the provisions requiring us to make cash distributions, may be amended. During the subordination period, our partnership agreement may not be amended without the approval of our public common unitholders, except in a limited number of circumstances when our general partner can amend our partnership agreement without any unitholder approval. Please read “Our Partnership Agreement — Amendment of Our Partnership Agreement — No Unitholder Approval.” However, after the subordination period has ended, our partnership agreement may be amended with the consent of our general partner and the approval of a majority of the outstanding common units, including common units owned by our general partner and its affiliates. At the completion of this offering, CONE will own our general partner and will own             common units and             subordinated units, representing an aggregate         % limited partner interest (or             common units and             subordinated units, representing an aggregate         % limited partner interest, if the underwriters exercise in full their option to purchase additional common units).

 

   

Under Section 17-607 of the Delaware Act, we may not make a distribution if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We may lack sufficient cash to pay distributions to our unitholders due to cash flow shortfalls attributable to a number of operational, commercial or other factors as well as increases in our operating or general and administrative expenses, principal and interest payments on our debt, tax expenses, working capital requirements and anticipated cash needs. Our available cash is directly impacted by the cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent such uses of cash increase. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Distributions of Available Cash.”

 

   

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

 

   

If and to the extent our available cash materially declines from quarter to quarter, we may elect to change our current cash distribution policy and reduce the amount of our quarterly distributions in order to service or repay our debt or fund expansion capital expenditures.

To the extent that our general partner determines not to distribute the full minimum quarterly distribution on our common units with respect to any quarter during the subordination period, the common units will accrue an arrearage equal to the difference between the minimum quarterly distribution and the amount of the distribution actually paid on the common units with respect to that quarter. The aggregate amount of any such arrearages must be paid on the common units before any distributions of available cash from operating surplus may be made on the subordinated units and before any subordinated units may convert into common units. The subordinated units will not accrue any arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordinated Units and Subordination Period.”

 

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Our Ability to Grow Is Dependent on Our Ability to Access External Expansion Capital

Our partnership agreement requires us to distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon our cash reserves and external financing sources, including borrowings under our new revolving credit facility and the issuance of debt and equity securities, to fund future acquisitions and other expansion capital expenditures. While we have historically received funding from our Sponsors, we do not have any commitment from our Sponsors, CONE, our general partner or any of their respective affiliates to fund our cash flow deficits or provide other direct or indirect financial assistance to us following the closing of this offering. Our Sponsors, indirectly through their respective 50% ownership interests in CONE, will retain a significant interest in us through CONE’s ownership of a 100% interest in our general partner, a     % limited partner interest in us and all of our incentive distribution rights. Given our Sponsors’ significant indirect ownership interests in us following the closing of this offering, we believe our Sponsors will be incentivized to promote and support the successful execution of our business strategies, including by providing us with direct or indirect financial assistance; however, we can provide no assurances that our Sponsors will provide such direct or indirect financial assistance.

To the extent we are unable to finance growth with external sources of capital, the requirement in our partnership agreement to distribute all of our available cash and our current cash distribution policy may significantly impair our ability to grow. In addition, because we will distribute all of our available cash, our growth may not be as fast as businesses that reinvest all of their available cash to expand ongoing operations. We expect that our new revolving credit facility will restrict our ability to incur additional debt, including through the issuance of debt securities. Please read “Risk Factors — Risks Related to Our Business — Restrictions in our new revolving credit facility could adversely affect our business, financial condition, results of operations and ability to make quarterly cash distributions to our unitholders.” To the extent we issue additional partnership interests, the payment of distributions on those additional partnership interests may increase the risk that we will be unable to maintain or increase our cash distributions per common unit. There are no limitations in our partnership agreement on our ability to issue additional partnership interests, including partnership interests ranking senior to our common units, and our common unitholders will have no preemptive or other rights (solely as a result of their status as unitholders) to purchase any such additional partnership interests. If we incur additional debt (under our new revolving credit facility or otherwise) to finance our growth strategy, we will have increased interest expense, which in turn will reduce the available cash that we have to distribute to our unitholders. Please read “Risk Factors — Risks Related to Our Business — Debt we incur in the future may limit our flexibility to obtain financing and to pursue other business opportunities.”

Our Minimum Quarterly Distribution

Upon the consummation of this offering, our partnership agreement will provide for a minimum quarterly distribution of $         per unit for each whole quarter, or $         per unit on an annualized basis. Our ability to make cash distributions at the minimum quarterly distribution rate will be subject to the factors described above under “ — General — Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.” Quarterly distributions, if any, will be made within 45 days after the end of each calendar quarter to holders of record on or about the first day of each such month in which such distributions are made. We do not expect to make distributions for the period that begins on                 , 2014 and ends on the day prior to the closing of this offering. We will adjust the amount of our first distribution for the period from the closing of this offering through                 , 2014 based on the number of days in that period.

 

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The amount of available cash needed to pay the minimum quarterly distribution on all of our common units, subordinated units and the 2% general partner interest to be outstanding immediately after this offering for one quarter and on an annualized basis (assuming no exercise and full exercise of the underwriters’ option to purchase additional common units) is summarized in the table below:

 

     No Exercise of Option to Purchase
Additional Common Units
     Full Exercise of Option to Purchase
Additional Common Units
 
            Aggregate Minimum
Quarterly
Distributions
            Aggregate Minimum
Quarterly
Distributions
 
     Number of
Units
     One
Quarter
     Annualized
(Four
Quarters)
     Number of
Units
     One
Quarter
     Annualized
(Four
Quarters)
 
            ($ in millions)             ($ in millions)  

Publicly held common units

      $         $            $         $     

Common units held by Sponsors

                 

Subordinated units held by Sponsors

                 

2% general partner interest

     N/A               N/A         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $                $                   $                $            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Initially, our general partner will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner’s initial 2% general partner interest in these distributions may be reduced if we issue additional partnership interests in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its initial 2% general partner interest. Our general partner will also initially hold all of the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48%, of the cash we distribute in excess of $         per unit per quarter.

During the subordination period, before we make any quarterly distributions to our subordinated unitholders, our common unitholders are entitled to receive payment of the full minimum quarterly distribution for such quarter plus any arrearages in distributions of the minimum quarterly distribution from prior quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordinated Units and Subordination Period.” We cannot guarantee, however, that we will pay distributions on our common units at our minimum quarterly distribution rate or at any other rate in any quarter.

Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by the Delaware Act or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must subjectively believe that the determination is in the best interests of our partnership. In making such determination, our general partner may take into account the totality of the circumstances or the totality of the relationships between the parties involved, including other relationships or transactions that may be particularly favorable or advantageous to us. Please read “Conflicts of Interest and Duties.”

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

Additionally, the board of directors of our general partner may reduce the minimum quarterly distribution and the target distribution levels if legislation is enacted or modified that results in our partnership becoming taxable as a corporation or otherwise subject to taxation as an entity for federal, state

 

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or local income tax purposes. In such an event, the minimum quarterly distribution and the target distribution levels may be reduced proportionately by the percentage decrease in our available cash resulting from the estimated tax liability we would incur in the quarter in which such legislation is effective. The minimum quarterly distribution will also be proportionately adjusted in the event of any distribution, combination or subdivision of common units in accordance with the partnership agreement, or in the event of a distribution of available cash from capital surplus. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” The minimum quarterly distribution is also subject to adjustment if the holder(s) of the incentive distribution rights (initially only our general partner) elect to reset the target distribution levels related to the incentive distribution rights. In connection with any such reset, the minimum quarterly distribution will be reset to an amount equal to the average cash distribution amount per common unit for the two quarters immediately preceding the reset. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels.”

In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our annualized minimum quarterly distribution of $        per unit for the twelve months ending September 30, 2015. In those sections, we present two tables, consisting of:

 

   

“Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014,” in which we present the amount of EBITDA and distributable cash flow we would have generated on a pro forma basis for the year ended December 31, 2013 and the twelve months ended June 30, 2014, derived from our unaudited pro forma condensed financial statements that are included in this prospectus, as adjusted to give pro forma effect to this offering and the related formation transactions; and

 

   

“Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2015,” in which we provide our estimated forecast of our ability to generate sufficient EBITDA and distributable cash flow to support the payment of the minimum quarterly distribution on all common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest for the twelve months ending September 30, 2015.

Unless otherwise specifically noted, the amounts set forth in the following sections reflect the pro forma historical and forecasted results attributable to 100% of the assets and operations of our operating subsidiaries and are not adjusted to reflect CONE’s non-controlling interests in our operating subsidiaries. In connection with the completion of this offering, our Sponsors, through CONE, will contribute to us 75%, 5% and 5% controlling interests in the operating subsidiaries that own our Anchor Systems, Growth Systems and Additional Systems, respectively, and CONE will retain 25%, 95% and 95% non-controlling interests in the operating subsidiaries that own our Anchor Systems, Growth Systems and Additional Systems, respectively. Please read “Prospectus Summary — The Transactions” and “Prospectus Summary — Ownership and Organizational Structure.” Following the completion of this offering, we will consolidate the results of operations of our operating subsidiaries and then record a non-controlling interest deduction for CONE’s retained interests in our operating subsidiaries.

Unaudited Pro Forma EBITDA and Distributable Cash Flow for the Year Ended December 31, 2013 and the Twelve Months Ended June 30, 2014

If we had completed the transactions contemplated in this prospectus on January 1, 2013, pro forma EBITDA generated for the year ended December 31, 2013 and the twelve months ended June 30, 2014 would have been approximately $16.5 million and $31.1 million, respectively, and pro forma distributable cash flow generated for those periods would have been approximately $14.0 million and $27.7 million, respectively. These amounts would not have been sufficient to support the payment of the minimum quarterly distribution of $         per unit per quarter ($         per unit on an annualized basis) on all of our common units and subordinated units and the corresponding distributions on our general partner’s 2% general partner interest for each of the year ended December 31, 2013 and the twelve months ended June 30, 2014.

 

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We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, EBITDA and distributable cash flow are primarily cash accounting concepts, while our unaudited pro forma condensed financial statements have been prepared on an accrual basis. As a result, you should view the amounts of pro forma EBITDA and distributable cash flow only as general indications of the amounts of EBITDA and distributable cash flow that we might have generated had we been formed on January 1, 2013.

The following table illustrates, on a pro forma basis, for the year ended December 31, 2013 and the twelve months ended June 30, 2014, the amounts of EBITDA and distributable cash flow that would have been generated, assuming in each case that this offering and the other transactions contemplated in this prospectus had been consummated on January 1, 2013.

CONE Midstream Partners LP

Unaudited Pro Forma EBITDA and Distributable Cash Flow

 

    Year Ended
December 31, 2013
    Twelve  Months
Ended
June 30, 2014
 
   

($ in millions, except
per unit amounts)

 

Revenues

   

Gathering Revenue — Related Party

  $ 62.1      $ 89.2   
 

 

 

   

 

 

 

Total Revenue

    62.1        89.2   

Expenses

   

Operating Expense — Third Party

    13.1        17.0   

Operating Expense — Related Party

    16.6        20.8   

General and Administrative — Third Party(1)

    5.1        5.1   

General and Administrative — Related Party(1)

    2.8        3.3   

Depreciation

    5.8        6.3   
 

 

 

   

 

 

 

Total Expenses

    43.4        52.5   
 

 

 

   

 

 

 

Operating Income

    18.7        36.7   

Interest Expense(2)

    0.9        0.9   
 

 

 

   

 

 

 

Income Before Income Tax Expense

    17.8        35.8   

Income Tax Expense

             
 

 

 

   

 

 

 

Net Income

  $ 17.8      $ 35.8   

Less:

   

Net Income Attributable to Sponsor-Retained Interests(3)

   
3.8
  
    9.0   
 

 

 

   

 

 

 

Net Income Attributable to CONE Midstream Partners LP

  $ 14.0      $ 26.8   

Add:

   

Net Income Attributable to Sponsor-Retained Interests

    3.8      $ 9.0   

Depreciation

    5.8        6.3   

Interest Expense

    0.9        0.9   

Income Tax Expense

             
 

 

 

   

 

 

 

EBITDA

  $ 24.5      $ 43.0   

Less:

   

EBITDA Attributable to Sponsor-Retained Interests(4)

  $ 8.0      $ 11.9   
 

 

 

   

 

 

 

EBITDA Attributable to CONE Midstream Partners LP

  $ 16.5      $ 31.1   
 

 

 

   

 

 

 

 

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    Year Ended
December 31, 2013
    Twelve Months
Ended
June 30, 2014
 
   

($ in millions, except

per unit amounts)

 

Less:

   

Cash Interest Expense(5)

  $      $   

Maintenance Capital Expenditures(6)

    2.5        3.4   

Expansion Capital Expenditures(7)

    81.9        92.2   
 

 

 

   

 

 

 

Add:

   

Capital Contributions from Sponsors to Fund Expansion Capital Expenditures

    81.9        92.2   
 

 

 

   

 

 

 

Pro Forma Distributable Cash Flow Attributable to CONE Midstream Partners LP

    14.0        27.7   
 

 

 

   

 

 

 

Pro Forma Cash Distributions:

   

Distributions to Public Common Unitholders

  $        $     

Distributions to Sponsors:

   

Common Units Held by Sponsors

   

Subordinated Units Held by Sponsors

   

General Partner Interest Held by Sponsors

   
 

 

 

   

 

 

 

Total Distributions to Sponsors

   
 

 

 

   

 

 

 

Aggregate Quarterly Distributions

  $                   $                
 

 

 

   

 

 

 

Excess / (Shortfall) of Distributable Cash Flow Over Aggregate Annualized Minimum Quarterly Distribution

  $        $     

Percent of Aggregate Annualized Minimum Quarterly Distribution Payable to Common Unitholders

          %   

Percent of Aggregate Annualized Minimum Quarterly Distribution Payable to Subordinated Unitholders

          %   

 

(1) We expect to incur approximately $5.0 million of estimated annual incremental general and administrative expenses as a result of being a publicly traded partnership, of which approximately $4.9 million is included in General and Administrative — Third Party and approximately $0.1 million is included in General and Administrative — Related Party.

 

(2) Represents non-cash amortization of origination fees and commitment fees on the undrawn portion of our new revolving credit facility that we expect to have in place at the closing of this offering (assuming no amounts have been drawn on the revolving credit facility).

 

(3) Represents net income attributable to our Sponsors’ non-controlling interests in our operating subsidiaries.

 

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(4) Represents EBITDA attributable to our Sponsors’ non-controlling interests in our operating subsidiaries, calculated as follows:

 

     Year Ended
December 31, 2013
     Twelve  Months
Ended
June 30, 2014
 

Net income attributable to our Sponsors’ non-controlling interests in our operating subsidiaries

   $ 3.8         9.0   

Add:

     

Depreciation expense attributable to our Sponsors’ non-controlling interests in our operating subsidiaries

     4.2         2.9   
  

 

 

    

 

 

 

EBITDA attributable to our Sponsors’ non-controlling interests in our operating
subsidiaries

   $ 8.0         11.9   
  

 

 

    

 

 

 

 

(5) Represents commitment fees on the undrawn portion of our new revolving credit facility that we expect to have in place at the closing of this offering (assuming no amounts have been drawn on the revolving credit facility).

 

(6) Represents estimated maintenance capital expenditures attributable to our controlling interests in our operating subsidiaries. Historically, we did not make a distinction between maintenance capital expenditures and expansion capital expenditures; however, for the purposes of the presentation of “Unaudited Pro Forma EBITDA and Distributable Cash Flow,” we have estimated that approximately $2.5 million and $3.4 million of our capital expenditures would have constituted maintenance capital expenditures for the pro forma year ended December 31, 2013 and the twelve months ended June 30, 2014, respectively. The estimated maintenance capital expenditures attributable to our Sponsors’ retained interests are listed below:

 

     Year Ended
December 31, 2013
     Twelve  Months
Ended
June 30, 2014
 

Maintenance Capital Expenditures Attributable to CONE Midstream Partners LP

   $ 2.5         3.4   

Maintenance Capital Expenditures Attributable to Sponsor — Retained Interest

     2.4         3.6   
  

 

 

    

 

 

 

Total Maintenance Capital Expenditures Attributable to Our Operating Subsidiaries

   $ 4.9         7.0   
  

 

 

    

 

 

 

 

(7) Represents estimated expansion capital expenditures attributable to our controlling interests in our operating subsidiaries. The estimated expansion capital expenditures attributable to our Sponsors’ retained interest are listed below:

 

     Year Ended
December 31, 2013
     Twelve  Months
Ended
June 30, 2014
 

Expansion Capital Expenditures Attributable to CONE Midstream Partners LP

   $ 81.9         92.2   

Expansion Capital Expenditures Attributable to Sponsor — Retained Interests

     44.1         92.2   
  

 

 

    

 

 

 

Total Expansion Capital Expenditures Attributable to Our Operating Subsidiaries

   $ 126.0       $ 184.4   
  

 

 

    

 

 

 

 

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Estimated EBITDA and Distributable Cash Flow for the Twelve Months Ending September 30, 2015

We forecast our estimated EBITDA and distributable cash flow for the twelve months ending September 30, 2015 will be approximately $67.4 million and $58.2 million, respectively. In order to pay the aggregate annualized minimum quarterly distribution to all of our unitholders and the corresponding distribution on our general partner’s 2% general partner interest for the twelve months ending September 30, 2015, we must generate EBITDA and distributable cash flow of at least $         million and $         million, respectively.

We have not historically made public projections as to future operations, earnings or other results. However, management has prepared the forecast of estimated EBITDA and distributable cash flow for the twelve months ending September 30, 2015, and related assumptions set forth below, to substantiate our belief that we will have sufficient EBITDA and distributable cash flow to pay the aggregate annualized minimum quarterly distribution to all our unitholders and the corresponding distributions on our general partner’s 2% general partner interest for the twelve months ending September 30, 2015. Please read “— Significant Forecast Assumptions.” This forecast is a forward-looking statement and should be read together with our historical and unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This forecast was not prepared with a view toward complying with the published guidelines of the SEC or guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate sufficient EBITDA and distributable cash flow to pay the minimum quarterly distribution to all unitholders and our general partner for the forecasted period. However, this information is not fact and should not be relied upon as being necessarily indicative of our future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.

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

When considering our financial forecast, you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus, to the extent they are realized, could cause our actual results of operations to vary significantly from those that would enable us to generate our estimated EBITDA and distributable cash flow.

We do not undertake any obligation to release publicly the results of any future revisions we may make to the forecast or to update this forecast to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this prospective financial information.

 

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CONE Midstream Partners LP

Estimated EBITDA and Distributable Cash Flow

 

     Twelve Months
Ending
September 30,
2015
 
     ($ in millions,
except per
unit amounts)
 

Revenues

  

Gathering Revenue — Related Party

   $ 199.1   
  

 

 

 

Total Revenue

     199.1   

Expenses

  

Operating Expense — Third Party

     37.8   

Operating Expense — Related Party

     38.4   

General and Administrative — Third Party(1)

     5.0   

General and Administrative — Related Party(1)

     4.0   

Depreciation

     18.1   
  

 

 

 

Total Expenses

     103.3   
  

 

 

 

Operating Income

     95.8   

Interest Expense(2)

     2.1   
  

 

 

 

Income Before Income Tax Expense

     93.7   

Income Tax Expense

       
  

 

 

 

Net Income

   $ 93.7   

Less:

  

Net Income Attributable to Sponsor-Retained Interests(3)

     34.9   
  

 

 

 

Net Income Attributable to CONE Midstream Partners LP

   $ 58.8   

Add:

  

Net Income Attributable to Sponsor-Retained Interests

   $ 34.9   

Depreciation

     18.1   

Interest Expense

     2.1   

Income Tax Expense

       
  

 

 

 

EBITDA

   $ 113.9   

Less:

  

EBITDA Attributable to Sponsor-Retained Interests(4)

   $ 46.5   
  

 

 

 

Estimated EBITDA Attributable to CONE Midstream Partners LP

   $ 67.4   
  

 

 

 

Less:

  

Cash Interest Expense(5)

   $ 1.8   

Maintenance Capital Expenditures(6)

     7.4   

Expansion Capital Expenditures(7)

     114.8   
  

 

 

 

Add:

  

Borrowings to Fund Expansion Capital Expenditures

     112.4   

Cash Used to Fund Expansion Capital Expenditures

     2.4   
  

 

 

 

Estimated Distributable Cash Flow Attributable to CONE Midstream Partners LP

   $ 58.2   
  

 

 

 

 

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     Twelve Months
Ending
September 30,
2015
     ($ in millions,
except per
unit amounts)

Distributions to Public Common Unitholders

  

Distributions to Sponsors:

  

Common Units Held by Sponsors

  

Subordinated Units Held by Sponsors

  

General Partner Interest Held by Sponsors

  
  

 

Total Distributions to Sponsors

  

Aggregate Annualized Minimum Quarterly Distribution

  
  

 

Excess / (Shortfall) of Distributable Cash Flow Over Aggregate Annualized Minimum Quarterly Distribution

  
  

 

 

(1) We expect to incur approximately $5.0 million of estimated annual incremental general and administrative expenses as a result of being a publicly traded partnership, of which approximately $4.4 million is included in General and Administrative — Third Party and approximately $0.6 million is included in General and Administrative — Related Party.

 

(2) Forecasted interest expense includes (i) interest on amounts outstanding under our new revolving credit facility; (ii) amortization of origination fees and (iii) commitment fees on the unused portion of our new revolving credit facility.

 

(3) Represents net income attributable to our Sponsors’ non-controlling interests in our operating subsidiaries.

 

(4) Represents EBITDA attributable to our Sponsors’ non-controlling interests in our operating subsidiaries, calculated as follows:

 

Net income attributable to our Sponsors’ non-controlling interests in our operating subsidiaries

   $ 34.9   

Add:

  

Depreciation expense attributable to our Sponsors’ non-controlling interests in our operating subsidiaries

     11.6   
  

 

 

 

EBITDA attributable to our Sponsors’ non-controlling interests in our operating subsidiaries

   $ 46.5   
  

 

 

 

 

(5) Forecasted cash interest expense includes (i) interest on amounts outstanding under our new revolving credit facility and (ii) commitment fees on the unused portion of our new revolving credit facility.

 

(6) Represents estimated maintenance capital expenditures attributable to our controlling interests in our operating subsidiaries. The estimated maintenance capital expenditures attributable to our Sponsors’ retained interests are listed below:

 

Maintenance Capital Expenditures Attributable to CONE Midstream Partners LP

   $ 7.4   

Maintenance Capital Expenditures Attributable to Sponsor-Retained Interests

     8.2   
  

 

 

 

Total Maintenance Capital Expenditures Attributable to Our Operating Subsidiaries

   $ 15.6   
  

 

 

 

 

 

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(7) Represents estimated expansion capital expenditures attributable to our controlling interests in our operating subsidiaries. The estimated expansion capital expenditures attributable to our Sponsors’ retained interests are listed below:

 

Expansion Capital Expenditures Attributable to CONE Midstream Partners LP

   $ 114.8   

Expansion Capital Expenditures Attributable to Sponsor-Retained Interests

     506.3   
  

 

 

 

Total Expansion Capital Expenditures Attributable to Our Operating Subsidiaries

   $ 621.1   
  

 

 

 

Significant Forecast Assumptions

The forecast has been prepared by and is the responsibility of management. The forecast reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending September 30, 2015. We believe our actual results of operations will approximate those reflected in our forecast, but we can give no assurance that our forecasted results will be achieved. There will likely be differences between our forecast and our actual results, and those differences could be material. If the forecasted results are not achieved, we may not be able to make cash distributions on our common units at the minimum quarterly distribution rate or at all.

General Considerations

Our Predecessor’s historical results of operations include all of the results of operations of CONE on a 100% basis, which includes 100% of the results of our Anchor Systems, Growth Systems and Additional Systems, as well as 100% of the results of certain ancillary midstream assets that CONE will retain after the completion of this offering. In connection with the completion of this offering, our Sponsors will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting the Comparability of Our Financial Results.” All of our revenue will be derived from long-term, fixed-fee gathering agreements with our Sponsors.

Results, Volumes and Fees

The following table summarizes the pro forma revenues, volumes, fees and EBITDA for our midstream services for the year ended December 31, 2013 and the twelve months ended June 30, 2014, as well as our forecast regarding those same amounts for the twelve months ending September 30, 2015.

 

    Pro Forma
Year Ended
December 31, 2013
    Pro Forma Twelve
Months Ended
June 30, 2014
    Forecasted Twelve
Months Ending
September 30, 2015
 

Dry gas gathering volumes (BBtu/d)

    266.9        418.8        551.0   

Dry gas gathering fees ($/MMBtu)

  $ 0.40      $ 0.40      $ 0.40   

Wet gas gathering volumes (BBtu/d)

    78.6        108.3        499.6   

Wet gas gathering fees ($/MMBtu)(1)

  $ 0.55      $ 0.55      $ 0.51   

Condensate gathering volumes (MBbls/d)

    0.2        0.4        5.8   

Condensate gathering fees ($/Bbl)(2)

  $ 5.04      $ 5.00      $ 4.50   

Gathering revenues ($ in millions)

  $ 62.1      $ 89.2      $ 199.1   

EBITDA ($ in millions)

  $ 24.5      $ 43.0      $ 113.9   

 

(1) Forecasted wet gas gathering fees are a weighted average. Our fee for wet gas is $0.275 per MMBtu in the Moundsville area (Marshall County, West Virginia), $0.275 per MMBtu in the Pittsburgh International Airport area (Allegheny County, Pennsylvania) and $0.55 per MMBtu for all other areas in the dedication area. Please read “Business — Our Gathering Agreements.”
(2) Forecasted condensate gathering fees are a weighted average. Our fee for condensate is $2.50 per Bbl in the Moundsville area and $5.00 per Bbl for all other areas in the dedication area. Please read “Business — Our Gathering Agreements.”

 

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Revenue

We estimate that total gathering revenues for the twelve months ending September 30, 2015 will be approximately $199.1 million compared to approximately $62.1 million for the pro forma year ended December 31, 2013 and approximately $89.2 million for the pro forma twelve months ended June 30, 2014 primarily due to increased throughput on our gathering systems. At September 30, 2015, we expect to have approximately 165 miles of dry gas pipelines and approximately 120 miles of wet gas pipelines in the Marcellus Shale compared to 116 miles of dry gas pipelines and 44 miles of wet gas pipelines in place as of June 30, 2014. Our Sponsors forecast connecting to our gathering systems, and commencing production on, over 165 gross wells on our dedicated acreage during the twelve months ending September 30, 2015. As a result of these additional wells, in addition to production from existing wells on our systems, we estimate that our average daily throughput for the twelve months ending September 30, 2015 will be 551.0 BBtu/d of dry gas and 499.6 BBtu/d of wet gas. Our forecasted increase in volumes over the pro forma twelve months ended June 30, 2014 is based on our expectation that our Sponsors will complete the drilling and development activities on our dedicated acreage consistent with their current drilling and development plan. Under our gathering agreements, we forecast that we will receive a fee of $0.40/MMBtu for dry gas gathering, an estimated weighted average fee of $0.51/MMBtu for wet gas gathering and an estimated weighted average fee of $4.50/Bbl for condensate gathering. Please read “Business — Our Gathering Agreements.”

Operating Expense

We estimate that total operating expense for the twelve months ending September 30, 2015 will be $76.2 million compared to approximately $29.7 million for the pro forma year ended December 31, 2013 and approximately $37.8 million for the pro forma twelve months ended June 30, 2014. Our increase in operating expense is primarily due to our significantly higher operating levels, resulting in higher:

 

   

gathering throughput on our dedicated acreage;

 

   

maintenance and contract service costs;

 

   

regulatory and compliance costs;

 

   

operating costs associated with increased pipeline mileage and additional compressor stations; and

 

   

ad valorem taxes.

General and Administrative Expenses

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

We expect total general and administrative expenses for the twelve months ending September 30, 2015 will be $9.0 million as compared to $7.9 million for the pro forma year ended December 31, 2013 and approximately $8.4 million for the pro forma twelve months ended June 30, 2014. These amounts include the $5.0 million of annual incremental publicly traded partnership expenses we expect to incur. The increase in general and administrative expenses primarily relates to increased personnel and associated administrative expenses due to our projected growth.

Depreciation

We estimate that depreciation for the twelve months ending September 30, 2015 will be $18.1 million as compared to approximately $5.8 million for the pro forma year ended December 31, 2013 and approximately $6.3 million for the pro forma twelve months ending June 30, 2014. Our expected increase is primarily attributable to the effect of a full year of depreciation on our gathering infrastructure constructed in 2013 and depreciation on the new infrastructure constructed and to be constructed during the twelve months ending September 30, 2015.

 

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Interest Expense

We estimate that interest expense will be approximately $2.1 million for the twelve months ending September 30, 2015. Our interest expense for the twelve months ending September 30, 2015 includes (i) interest under our new revolving credit facility, (ii) non-cash amortization of assumed origination fees for our new revolving credit facility and (iii) commitment fees on the unused portion of our new revolving credit facility based on an assumed $57.0 million in average borrowings outstanding under our new revolving credit facility during the twelve months ending September 30, 2015.

Capital Expenditures

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

 

   

Maintenance capital expenditures, which are cash expenditures (including expenditures for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long term, our operating capacity, operating income or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations. In addition, we designate a portion of our capital expenditures to connect new wells to maintain gathering throughput as maintenance capital to the extent such capital expenditures are necessary to maintain, over the long term, our operating capacity, operating income or revenue; or

 

   

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

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

Because our Sponsors are significantly accelerating their joint drilling and development program, our total natural gas and condensate volumes gathered are experiencing growth that substantially exceeds natural production declines. Accordingly, the substantial majority of our capital expenditures for new well connections are considered expansion capital expenditures, with a substantial minority considered maintenance capital expenditures. As our Sponsors’ joint drilling and development program and production profile matures, we would expect a larger percentage of wells placed online to represent maintenance capital expenditures.

In allocating expenditures between maintenance capital expenditures and expansion capital expenditures for new well connections during the twelve months ending September 30, 2015, we first estimate the number of new well connections needed to offset the natural production decline and maintain

 

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the average throughput volume on our systems during the forecast period. We then allocate to maintenance capital the estimated new well connection expenditures based on a per well connection cost estimate.

We estimate that total capital expenditures attributable to our operating subsidiaries for the twelve months ending September 30, 2015 will be $636.7 million ($122.2 million net to our ownership interests in our operating subsidiaries) based on the following assumptions.

Maintenance Capital Expenditures

We estimate that maintenance capital expenditures will be $15.6 million ($7.4 million net to our ownership interests in our operating subsidiaries) for the twelve months ending September 30, 2015. We expect to fund these maintenance capital expenditures with cash generated by our operations. Because our midstream systems are relatively new, having been substantially built within the last three years, we believe that the capital expenditures necessary to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations during the twelve months ending September 30, 2015 will be relatively low. The majority of our maintenance capital expenditures included in the forecast period represent that portion of our estimated capital expenditures associated with the connection of new wells to our gathering systems that we believe will be necessary to offset the natural production declines our Sponsors will experience on all of their wells over time. The methodology we use to categorize these capital expenditures is described above.

Expansion Capital Expenditures

We estimate that expansion capital expenditures for the twelve months ending September 30, 2015 will be $621.1 million ($114.8 million net to our ownership interests in our operating subsidiaries). During the twelve months ending September 30, 2015, we have assumed that we will fund our expansion capital expenditures with borrowings under our new revolving credit facility. In general, our expansion capital expenditures are necessary to increase the size and scope of our midstream infrastructure in order to continue servicing our Sponsors’ drilling and completion schedule and increasing production on our dedicated acreage. A majority of our Sponsors’ planned well completions and production growth on our dedicated acreage during the twelve months ending September 30, 2015 will drive our need for expansion capital expenditures.

These expansion capital expenditures are primarily comprised of the following expansion capital projects that we intend to pursue during the twelve months ending September 30, 2015:

 

   

Natural gas gathering: We expect to spend approximately $72.5 million in expansion capital expenditures (net to our ownership interests in our operating subsidiaries) related to natural gas gathering pipeline expansions on our dedicated acreage in order to add over 140 miles of pipeline, including for new well pad connections, giving us a total of over 280 miles at September 30, 2015.

 

   

Compression facilities: We expect to spend approximately $21.6 million in expansion capital expenditures (net to our ownership interests in our operating subsidiaries) related to the expansion or construction of compression facilities on our dedicated acreage, resulting in total capacity of 1.1 Bcf/d as of September 30, 2015.

 

   

Land and permitting: We expect to spend approximately $20.7 million in expansion capital expenditures (net to our ownership interests in our operating subsidiaries) related to land and permitting capital expenditures on our dedicated acreage.

Regulatory, Industry and Economic Factors

Our forecast of EBITDA and distributable cash flow for the twelve months ending September 30, 2015 is also based on the following significant assumptions related to regulatory, industry and economic factors:

 

   

our Sponsors will not default under our gathering agreements or reduce, suspend or terminate their obligations, nor will any events occur that would be deemed a force majeure event, under such agreements;

 

 

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

 

   

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

 

   

there will not be a shortage of skilled labor; and

 

   

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

 

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PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS

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

Distributions of Available Cash

General

Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending                 , 2014, we distribute all of our available cash to unitholders of record on the applicable record date. We will adjust the amount of our distribution for the period from the closing of this offering through                 , 2014, based on the actual length of the period.

Definition of Available Cash

Available cash generally means, for any quarter, all cash and cash equivalents on hand at the end of that quarter:

 

  Ÿ  

less, the amount of cash reserves established by our general partner to:

 

   

provide for the proper conduct of our business (including reserves for our future capital expenditures, future acquisitions and anticipated future debt service requirements);

 

   

comply with applicable law or any loan agreement, security agreement, mortgage, debt instrument or other agreement or obligation to which we or any of our subsidiaries is a party or by which we or such subsidiary is bound or we or such subsidiary’s assets are subject; or

 

   

provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for distributions pursuant to this bullet point if the effect of such reserves will prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages on such common units for the current quarter);

 

  Ÿ  

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

The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are generally borrowings incurred under a credit facility, commercial paper facility or similar financing arrangement that are used solely for working capital purposes or to pay distributions to our partners and with the intent of the borrower to repay such borrowings within twelve months with funds other than from additional working capital borrowings.

Intent to Distribute the Minimum Quarterly Distribution

Under our current cash distribution policy, we intend to make a minimum quarterly distribution to the holders of our common units and subordinated units of $             per unit, or $             per unit on an annualized basis, to the extent we have sufficient available cash after the establishment of cash reserves and the payment of costs and expenses, including reimbursements of expenses to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on our units in any quarter. The amount of distributions paid under our cash distribution policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of our partnership agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Revolving Credit Facility.”

 

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General Partner Interest and Incentive Distribution Rights

Initially, our general partner will be entitled to 2% of all quarterly distributions from inception that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2% general partner interest in these distributions will be reduced if we issue additional limited partner interests in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest (other than the issuance of common units upon any exercise by the underwriters of their option to purchase additional common units in this offering).

Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 48%, of the available cash we distribute from operating surplus (as defined below) in excess of $         per unit per quarter. The maximum distribution of 48% does not include any distributions that our general partner or its affiliates may receive on common units, subordinated units or the general partner interest that they own. Please read “— General Partner Interest and Incentive Distribution Rights.”

Operating Surplus and Capital Surplus

General

All cash distributed to unitholders will be characterized as either being paid from “operating surplus” or “capital surplus.” We treat distributions of available cash from operating surplus differently than distributions of available cash from capital surplus.

Operating Surplus

We define operating surplus as:

 

   

$         million (as described below); plus

 

   

all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions (as defined below) and the termination of hedge contracts, provided that cash receipts from the termination of a commodity hedge or interest rate hedge prior to its scheduled settlement or termination date shall be included in operating surplus in equal quarterly installments over the remaining scheduled life of such commodity hedge or interest rate hedge; plus

 

   

working capital borrowings made after the end of a quarter but on or before the date of determination of operating surplus for that quarter; plus

 

   

cash distributions (including incremental distributions on incentive distribution rights) paid in respect of equity issued, other than equity issued in this offering, to finance all or a portion of expansion capital expenditures in respect of the period from the date that we enter into a binding obligation to commence the construction, development, replacement, improvement or expansion of a capital asset and ending on the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; less

 

   

all of our operating expenditures (as defined below) after the closing of this offering; less

 

   

the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less

 

   

all working capital borrowings not repaid within twelve months after having been incurred, or repaid within such twelve-month period with the proceeds of additional working capital borrowings.

As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by operations. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $         million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term

 

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borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.

The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures (as described below) and thus reduce operating surplus when repayments are made. However, if working capital borrowings, which increase operating surplus, are not repaid during the twelve-month period following the borrowing, they will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such working capital borrowings are in fact repaid, they will not be treated as a further reduction in operating surplus because operating surplus will have been previously reduced by the deemed repayment.

We define interim capital transactions as (i) borrowings, refinancings or refundings of indebtedness (other than working capital borrowings and items purchased on open account or for a deferred purchase price in the ordinary course of business) and sales of debt securities, (ii) sales of equity securities and (iii) sales or other dispositions of assets, other than sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business and sales or other dispositions of assets as part of normal asset retirements or replacements.

We define operating expenditures as all of our cash expenditures, including, but not limited to, taxes, reimbursements of expenses of our general partner and its affiliates, officer, director and employee compensation, debt service payments, payments made in the ordinary course of business under interest rate hedge contracts and commodity hedge contracts (provided that payments made in connection with the termination of any interest rate hedge contract or commodity hedge contract prior to its scheduled settlement or termination date will be included in operating expenditures in equal quarterly installments over the remaining scheduled life of such interest rate hedge contract or commodity hedge contract and amounts paid in connection with the initial purchase of an interest rate hedge contract or a commodity hedge contract will be amortized over the life of such interest rate hedge contract or commodity hedge contract), maintenance capital expenditures (as discussed in further detail below), and repayment of working capital borrowings; provided, however, that operating expenditures will not include:

 

   

repayments of working capital borrowings where such borrowings have previously been deemed to have been repaid (as described above);

 

   

payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness other than working capital borrowings;

 

   

expansion capital expenditures;

 

   

payment of transaction expenses (including taxes) relating to interim capital transactions;

 

   

distributions to our partners;

 

   

repurchases of partnership interests (excluding repurchases we make to satisfy obligations under employee benefit plans); or

 

   

any other expenditures or payments using the proceeds from this offering that are described in “Use of Proceeds.”

Capital Surplus

Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, except as described above, capital surplus would generally be generated by:

 

   

borrowings other than working capital borrowings;

 

   

sales of our equity and debt securities;

 

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sales or other dispositions of assets, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of ordinary course retirement or replacement of assets; and

 

   

capital contributions received.

Characterization of Cash Distributions

All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed by us since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. We anticipate that distributions from operating surplus generally will not represent a return of capital. However, operating surplus, as defined in our partnership agreement, includes certain components, including a $         million cash basket, that represent non-operating sources of cash. Consequently, it is possible that all or a portion of specific distributions from operating surplus may represent a return of capital. Any available cash distributed by us in excess of our cumulative operating surplus will be deemed to be capital surplus under our partnership agreement. Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering and as a return of capital. We do not anticipate that we will make any distributions from capital surplus.

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

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, increase revenues or increase system throughput or capacity from current levels, including well connections that increase existing system throughput. Examples of expansion capital expenditures include the construction, development or acquisition of additional gathering pipelines and compressor stations, in each case to the extent such capital expenditures are expected to expand our operating capacity, operating income or revenue. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures may also be considered expansion capital expenditures.

Capital expenditures that are made in part for maintenance capital purposes and in part for expansion capital purposes will be allocated as maintenance capital expenditures or expansion capital expenditures by our general partner.

Subordinated Units and Subordination Period

General

Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $         per unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Subordinated units are deemed “subordinated” because for a period of time, referred to as the “subordination period,” the subordinated units will not be entitled to

 

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receive any distributions until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters. Furthermore, no arrearages will accrue or be payable on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that, during the subordination period, there will be available cash to be distributed on the common units.

Subordination Period

Except as described below, the subordination period will begin on the closing date of this offering and will extend until the first business day following the distribution of available cash in respect of any quarter beginning after             , 2017, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest equaled or exceeded $         (the annualized minimum quarterly distribution), for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of $         (the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest during those periods on a fully diluted basis; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Early Termination of the Subordination Period

Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day following the distribution of available cash in respect of any quarter, beginning with the quarter ending             , 2015, that each of the following tests are met:

 

   

distributions of available cash from operating surplus on each of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest equaled or exceeded $         (150% of the annualized minimum quarterly distribution), plus the related distributions on the incentive distribution rights, for the four-quarter period immediately preceding that date;

 

   

the adjusted operating surplus (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded the sum of (i) $         (150% of the annualized minimum quarterly distribution) on all of the outstanding common units and subordinated units and the corresponding distributions on the 2% general partner interest during that period on a fully diluted basis and (ii) the corresponding distributions on the incentive distribution rights; and

 

   

there are no arrearages in payment of the minimum quarterly distribution on the common units.

Expiration of the Subordination Period

When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will thereafter participate pro rata with the other common units in distributions of available cash.

Adjusted Operating Surplus

Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net drawdowns of reserves of cash established in prior periods. Adjusted operating surplus for a period consists of:

 

   

operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet under the caption “— Operating Surplus and Capital Surplus — Operating Surplus” above); less

 

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any net increase in working capital borrowings with respect to that period; less

 

   

any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus

 

   

any net decrease in working capital borrowings with respect to that period; plus

 

   

any net decrease made in subsequent periods to cash reserves for operating expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods; plus

 

   

any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.

Distributions of Available Cash from Operating Surplus During the Subordination Period

We will make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:

 

   

first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

   

second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;

 

   

third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “— General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

Distributions of Available Cash from Operating Surplus After the Subordination Period

We will make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:

 

   

first, 98% to all common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter; and

 

   

thereafter, in the manner described in “— General Partner Interest and Incentive Distribution Rights” below.

The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

General Partner Interest and Incentive Distribution Rights

Our partnership agreement provides that our general partner initially will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest if we issue additional limited partner interests. Our general partner’s 2% general partner interest, and the percentage of our cash distributions to which it is entitled from such 2% general partner interest, will be proportionately reduced if we issue additional limited partner interests in the future (other than the issuance of common units upon any exercise by the underwriters of their option to purchase additional

 

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common units in this offering, the issuance of common units upon conversion of outstanding subordinated units or the issuance of common units upon a reset of the incentive distribution rights) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash. Our general partner may instead fund its capital contribution by the contribution to us of common units or other property.

Incentive distribution rights represent the right to receive an increasing percentage (13%, 23% and 48%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest.

The following discussion assumes that our general partner maintains its 2% general partner interest and that our general partner continues to own the incentive distribution rights.

If for any quarter:

 

   

we have distributed available cash from operating surplus to the common unitholders and subordinated unitholders in an amount equal to the minimum quarterly distribution; and

 

   

we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;

then, we will distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:

 

   

first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “first target distribution”);

 

   

second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “second target distribution”);

 

   

third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives a total of $         per unit for that quarter (the “third target distribution”); and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

 

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Percentage Allocations of Available Cash from Operating Surplus

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total quarterly distribution per unit target amount.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2% general partner interest and assume that our general partner has contributed any additional capital necessary to maintain its 2% general partner interest, our general partner has not transferred its incentive distribution rights and that there are no arrearages on common units.

 

                   Marginal Percentage Interest in
Distributions
 
   Total Quarterly  Distribution
Per Unit Target Amount
     Unitholders     General Partner  

Minimum Quarterly Distribution

     $                    98     2

First Target Distribution

     above $                up to $                98     2

Second Target Distribution

     above $                up to $                85     15

Third Target Distribution

     above $                up to $                75     25

Thereafter

     above $                   50     50

General Partner’s Right to Reset Incentive Distribution Levels

Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement, subject to certain conditions, to elect to relinquish the right to receive incentive distribution payments based on the initial target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and target distribution levels upon which the incentive distribution payments to our general partner would be set. If our general partner transfers all or a portion of the incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee, at any time when there are no subordinated units outstanding, we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distributions for each of the four consecutive fiscal quarters immediately preceding such time and the amount of each such distribution did not exceed adjusted operating surplus for such quarter. If our general partner and its affiliates are not the holders of a majority of the incentive distribution rights at the time an election is made to reset the minimum quarterly distribution amount and the target distribution levels, then the proposed reset will be subject to the prior written concurrence of the general partner that the conditions described above have been satisfied. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that the holder of the incentive distribution rights will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.

In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target distributions prior to the reset, our general partner will be entitled to receive a

 

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number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters immediately preceding the reset event as compared to the average cash distributions per common unit during that two-quarter period. In addition, our general partner will be issued a general partner interest necessary to maintain our general partner’s interest in us immediately prior to the reset election.

The number of common units that our general partner (or the then-holder of the incentive distribution rights, if other than our general partner) would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average aggregate amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the aggregate amount of cash distributed per common unit during each of these two quarters.

Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:

 

   

first, 98% to all unitholders, pro rata, and 2% to our general partner, until each unitholder receives an amount equal to 115% of the reset minimum quarterly distribution for that quarter;

 

   

second, 85% to all unitholders, pro rata, and 15% to our general partner, until each unitholder receives an amount per unit equal to 125% of the reset minimum quarterly distribution for the quarter;

 

   

third, 75% to all unitholders, pro rata, and 25% to our general partner, until each unitholder receives an amount per unit equal to 150% of the reset minimum quarterly distribution for the quarter; and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the completion of this offering, as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $            .

 

                Marginal Percentage
Interest in Distributions
    Quarterly Distribution
Per Unit
Following Hypothetical
Reset
 
    Quarterly
Distribution Per Unit
Prior to Reset
    Common
Unitholders
    General
Partner
Interest
    Incentive
Distribution
Rights
   

Minimum Quarterly Distribution

      $                98     2            $          

First Target Distribution

    above $                up to $               98     2            above $         up to $         (a) 

Second Target Distribution

    above $                up to $               85     2     13     above $         up to $         (b) 

Third Target Distribution

    above $                up to $               75     2     23     above $         up to $         (c) 

Thereafter

      above $               50     2     48     above $         (c) 

 

(a) This amount is 115% of the hypothetical reset minimum quarterly distribution.

 

(b) This amount is 125% of the hypothetical reset minimum quarterly distribution.

 

(c) This amount is 150% of the hypothetical reset minimum quarterly distribution.

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, based on an average of the amounts distributed for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be             common units outstanding, our

 

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general partner’s 2% general partner interest has been maintained and the average distribution to each common unit would be $             per quarter for the two consecutive, non-overlapping quarters prior to the reset.

 

                Cash
Distributions
to Common
Unitholders
Prior to  Reset
    Cash Distribution to General
Partner Prior to Reset
    Total
Distributions
 
    Quarterly
Distribution Per
Unit Prior to Reset
      Common
Units
    2%
General
Partner
Interest
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

      $                $            $ —        $            $ —        $            $       

First Target Distribution

    above $                up to $                                

Second Target Distribution

    above $                up to $                           

Third Target Distribution

    above $                up to $                           

Thereafter

      above $                           
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $            $—        $            $           $            $       
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the general partner, including in respect of incentive distribution rights, with respect to the quarter after the reset occurs. The table reflects that, as a result of the reset, there would be                 common units outstanding, our general partner has maintained its 2% general partner interest and that the average distribution to each common unit would be $            . The number of common units issued as a result of the reset was calculated by dividing (x) $         as the average of the amounts received by the general partner in respect of its incentive distribution rights for the two consecutive, non-overlapping quarters prior to the reset as shown in the table above, by (y) the average of the cash distributions made on each common unit per quarter for the two consecutive, non-overlapping quarters prior to the reset as shown in the table above, or $            .

 

                Cash
Distributions
to Common
Unitholders
After Reset
    Cash Distribution to General
Partner After Reset
    Total
Distributions
 
    Quarterly
Distribution Per
Unit After Reset
      Common
Units
    2%
General
Partner
Interest
    Incentive
Distribution
Rights
    Total    

Minimum Quarterly Distribution

      $                $            $            $            $—        $            $       

First Target Distribution

    above $                up to $                                                    

Second Target Distribution

    above $                up to $                                                    

Third Target Distribution

    above $                up to $                                                    

Thereafter

      above $                                                    
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
        $           
 

  
  
    $            $            $            $       
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the immediately preceding four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.

Distributions from Capital Surplus

How Distributions from Capital Surplus Will Be Made

We will make distributions of available cash from capital surplus, if any, in the following manner:

 

   

first, 98% to all unitholders, pro rata, and 2% to our general partner, until we distribute for each common unit that was issued in this offering, an amount of available cash from capital surplus equal to the initial public offering price in this offering;

 

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second, 98% to all unitholders, pro rata, and 2% to our general partner, until we distribute for each common unit, an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the outstanding common units; and

 

   

thereafter, as if they were from operating surplus.

The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.

Effect of a Distribution from Capital Surplus

Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution after any of these distributions are made, the effects of distributions of capital surplus may make it easier for our general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.

Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, we will reduce the minimum quarterly distribution and the target distribution levels to zero. Then, after distributing an amount of capital surplus for each common unit equal to any unpaid arrearages of the minimum quarterly distributions on outstanding common units, we will then make all future distributions from operating surplus, with 50% being paid to the unitholders, pro rata, and 2% to our general partner and 48% to the holder of our incentive distribution rights.

Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels

In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:

 

   

the minimum quarterly distribution;

 

   

target distribution levels;

 

   

the unrecovered initial unit price; and

 

   

the arrearages per common unit in payment of the minimum quarterly distribution on the common units.

For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level and each subordinated unit would be split into two units. We will not make any adjustment by reason of the issuance of additional units for cash or property (including additional common units issued under any compensation or benefit plans).

In addition, if legislation is enacted or if the official interpretation of existing law is modified by a governmental authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation) and the denominator of which is the sum of available cash for that quarter (reduced by the amount of the estimated tax liability for such quarter payable by reason of such legislation or interpretation)

 

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plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference may be accounted for in subsequent quarters.

Distributions of Cash Upon Liquidation

General

If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.

The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.

Manner of Adjustments for Gain

The manner of the adjustment for gain is set forth in our partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to our partners in the following manner:

 

   

first, to our general partner to the extent of any negative balance in its capital account;

 

   

second, 98% to the common unitholders, pro rata, and 2% to our general partner, until the capital account for each common unit is equal to the sum of:

 

  (1) the unrecovered initial unit price;

 

  (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and

 

  (3) any unpaid arrearages in payment of the minimum quarterly distribution;

 

   

third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until the capital account for each subordinated unit is equal to the sum of:

 

  (1) the unrecovered initial unit price; and

 

  (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;

 

   

fourth, 98% to all unitholders, pro rata, and 2% to our general partner, until we allocate under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98% to the unitholders, pro rata, and 2% to our general partner, for each quarter of our existence;

 

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fifth, 85% to all unitholders, pro rata, and 15% to our general partner, until we allocate under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85% to the unitholders, pro rata, and 15% to our general partner for each quarter of our existence;

 

   

sixth, 75% to all unitholders, pro rata, and 25% to our general partner, until we allocate under this paragraph an amount per unit equal to:

 

  (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less

 

  (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75% to the unitholders, pro rata, and 25% to our general partner for each quarter of our existence; and

 

   

thereafter, 50% to all unitholders, pro rata, and 50% to our general partner.

The percentages set forth above are based on the assumption that our general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.

Manner of Adjustments for Losses

If our liquidation occurs before the end of the subordination period, after making allocations of loss to the general partner and the unitholders in a manner intended to offset in reverse order the allocations of gains that have previously been allocated, we will generally allocate any loss to our general partner and unitholders in the following manner:

 

   

first, 98% to the holders of subordinated units in proportion to the positive balances in their capital accounts and 2% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;

 

   

second, 98% to the holders of common units in proportion to the positive balances in their capital accounts and 2% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and

 

   

thereafter, 100% to our general partner.

The percentages set forth above are based on the assumption that our general partner maintains its 2% general partner interest and has not transferred its incentive distribution rights and that we do not issue additional classes of equity securities.

If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.

Adjustments to Capital Accounts

Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional units. In this regard, our partnership agreement specifies that we allocate any unrealized and,

 

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for tax purposes, unrecognized gain resulting from the adjustments to the unitholders and the general partner in the same manner as we allocate gain upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional units or upon our liquidation in a manner that results, to the extent possible, in the partners’ capital account balances equaling the amount that they would have been if no earlier positive adjustments to the capital accounts had been made. In contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common units and subordinated units. If we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table presents selected historical financial data of our Predecessor and selected unaudited pro forma financial data of CONE Midstream Partners LP for the periods and as of the dates indicated. The following selected historical financial data of our Predecessor consists of all of the assets and operations of our Predecessor on a 100% basis. In connection with the completion of this offering, our Sponsors will contribute to us a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems. However, as required by GAAP, we will continue to consolidate 100% of the assets and operations of our operating subsidiaries in our financial statements.

The selected historical financial data of our Predecessor as of and for the years ended December 31, 2013 and 2012 are derived from the audited financial statements of our Predecessor appearing elsewhere in this prospectus. The summary historical interim financial data of our Predecessor as of June 30, 2014 and for the six months ended June 30, 2014 and 2013 are derived from the unaudited interim financial statements of our Predecessor appearing elsewhere in this prospectus. The following table should be read together with, and is qualified in its entirety by reference to, the historical, unaudited interim and unaudited pro forma financial statements and the accompanying notes included elsewhere in this prospectus. The table should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The selected unaudited pro forma financial data presented in the following table for the year ended December 31, 2013 and for the six months ended June 30, 2014 are derived from the unaudited pro forma condensed financial statements included elsewhere in this prospectus. The unaudited pro forma condensed balance sheet assumes the offering and the related transactions occurred as of June 30, 2014, and the unaudited pro forma condensed statements of operations for the year ended December 31, 2013 and the six months ended June 30, 2014 assume the offering and the related transactions occurred as of January 1, 2013. These transactions include, and the unaudited pro forma condensed financial statements give effect to, the following:

 

   

CONE’s contribution to us of a 75% controlling interest in our Anchor Systems, a 5% controlling interest in our Growth Systems and a 5% controlling interest in our Additional Systems;

 

   

our entry into a new $250 million revolving credit facility;

 

   

our entry into new long-term, fixed-fee gathering agreements with each of our Sponsors and the recognition of revenue under those agreements at historical rates that were not recognized by our Predecessor;

 

   

our entry into an omnibus agreement with our Sponsors;

 

   

our entry into an operational services agreement with CONSOL;

 

   

the consummation of this offering and our issuance of (i)             common units to the public, (ii) a 2% general partner interest and the incentive distribution rights to our general partner and (iii)             common units and             subordinated units to CONE; and

 

   

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

 

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The unaudited pro forma condensed financial statements do not give effect to (i) an estimated $5.0 million in incremental general and administrative expenses that we expect to incur annually as a result of being a publicly traded partnership or (ii) variable general and administrative costs we will incur under the omnibus agreement and operational services agreement that we will enter into with our Sponsors as of the closing of this offering.

 

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

Year Ended

December 31,

   

Six
Months

Ended
June 30,

 
    2013     2012     2014     2013     2013     2014  
    (in thousands, except per unit data)  

Statement of Operations Data:

           

Revenue

           

Gathering Revenue — Related Party

  $ 65,626      $ 42,597      $ 51,917      $ 24,712      $ 62,093      $ 50,409   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

    65,626        42,597        51,917        24,712        62,093        50,409   

Expenses

           

Operating Expense — Third Party

    13,175        8,806        12,221        5,990        13,090        9,798   

Operating Expense — Related Party

    16,669        8,977        12,523        8,217        16,562        12,343   

General and Administrative Expense — Third Party

    219        363        45        85        214        44   

General and Administrative Expense — Related Party

    1,614        1,069        1,349        789        2,681        1,870   

Depreciation

    5,825        3,438        3,297        2,670        5,789        3,203