10-Q 1 smlp-0616x10q.htm 2Q16 FORM 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-35666
Summit Midstream Partners, LP
(Exact name of registrant as specified in its charter)
Delaware 
(State or other jurisdiction of
 
incorporation or organization)
 
45-5200503 
(I.R.S. Employer
Identification No.)
 
 
 
1790 Hughes Landing Blvd, Suite 500
The Woodlands, TX
(Address of principal executive offices)
 
77380
(Zip Code)
 
 
 
 (832) 413-4770
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes     o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes     o No
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.
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
As of July 31, 2016
Common Units
 
66,588,168 units
General Partner Units
 
1,354,700 units






TABLE OF CONTENTS
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.


i


Glossary of Terms
adjusted EBITDA: EBITDA plus our proportional adjusted EBITDA for equity method investees, adjustments related to MVC shortfall payments, deferred purchase price obligation expense, impairments and other noncash expenses or losses, less income (loss) from equity method investees and other noncash income or gains
AMI: area of mutual interest; AMIs require that any production from wells drilled by our customers within the AMI be shipped on our gathering systems and/or processed by our processing facilities
associated natural gas: a form of natural gas which is found with deposits of petroleum, either dissolved in the oil or as a free gas cap above the oil in the reservoir
Bbl: one barrel; used for crude oil and produced water and equivalent to 42 U.S. gallons
Bcf: one billion cubic feet
condensate: a natural gas liquid with a low vapor pressure, mainly composed of propane, butane, pentane and heavier hydrocarbon fractions
conventional resource basin:  a basin where natural gas or crude oil production is developed from a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the crude oil and natural gas to readily flow to the wellbore; also referred to as a conventional resource play
delivery point: the point where hydrocarbons or produced water are delivered into a gathering system, processing or fractionation facility or downstream transportation pipeline
distributable cash flow: adjusted EBITDA plus cash interest received and cash taxes received, less cash interest paid, senior notes interest adjustment, cash taxes paid and maintenance capital expenditures
dry gas: natural gas primarily composed of methane where heavy hydrocarbons and water either do not exist or have been removed through processing or treating
EBITDA: net income or loss, plus interest expense, income tax expense and depreciation and amortization, less interest income and income tax benefit
end users: the ultimate users and consumers of transported energy products
hub: geographic location of a storage facility and multiple pipeline interconnections
LACT unit: lease automatic custody transfer unit; a system for ownership transfer of hydrocarbons or produced water from the production site to trucks, pipelines or storage tanks
Mbbl: one thousand barrels
Mbbl/d: one thousand barrels per day
Mcf: one thousand cubic feet
Mcfe: the equivalent of one thousand cubic feet; generally calculated when liquids are converted into gas; determined using a ratio of six Mcf of natural gas to one barrel of crude oil
MMBtu: one million British Thermal Units
MMcf: one million cubic feet
MMcf/d: one million cubic feet per day
MQD: minimum quarterly distribution; SMLP's partnership agreement has established a minimum quarterly distribution of $0.40 per unit per quarter, or $1.60 per unit per year

ii


MVC: minimum volume commitment; an MVC contractually obligates a customer to ship natural gas, crude oil and/or produced water and/or use processing services for a minimum quantity of volume throughput
NGLs: natural gas liquids; the combination of ethane, propane, normal butane, iso-butane and natural gasolines that, when removed from unprocessed natural gas streams, become liquid under various levels of higher pressure and lower temperature
play: a proven geological formation that contains commercial amounts of hydrocarbons
produced water: water from underground geologic formations that is brought to the surface during the crude oil production process
receipt point: the point where hydrocarbons or produced water are received by or into a gathering system or transportation pipeline
residue gas: the natural gas remaining after being processed and/or treated
segment adjusted EBITDA: calculated as total revenues less total costs and expenses; plus (i) other income excluding interest income, (ii) our proportional adjusted EBITDA for equity method investees, (iii) depreciation and amortization, (iv) adjustments related to MVC shortfall payments, (v) impairments and (vi) other noncash expenses or losses, less other noncash income or gains.
shortfall payment: the payment received from a counterparty when its volume throughput does not meet or exceed its MVC for the applicable period
tailgate: refers to the point at which processed residue natural gas and NGLs leave a processing facility for end-use markets
Tcf: one trillion cubic feet
throughput volume: the volume of natural gas, crude oil or produced water transported or passing through a pipeline, plant or other facility during a particular period; also referred to as volume throughput
unconventional resource basin: a basin where natural gas or crude oil production is developed from unconventional sources that require hydraulic fracturing as part of the completion process, for instance, natural gas produced from shale formations and coalbeds; also referred to as an unconventional resource play
wellhead: the equipment at the surface of a well used to control the well's pressure; also, the point at which the hydrocarbons and water exit the ground


iii


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
 
December 31,
 
2016
 
2015
 
(In thousands)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,743

 
$
21,793

Accounts receivable
48,305

 
89,581

Other current assets
2,138

 
3,573

Total current assets
57,186

 
114,947

Property, plant and equipment, net
1,846,147

 
1,812,783

Intangible assets, net
441,961

 
461,310

Investment in equity method investees
711,021

 
751,168

Goodwill
16,211

 
16,211

Other noncurrent assets
8,748

 
8,253

Total assets
$
3,081,274

 
$
3,164,672

 
 
 
 
Liabilities and Partners' Capital
 
 
 
Current liabilities:
 
 
 
Trade accounts payable
$
21,597

 
$
40,808

Due to affiliate
183

 
1,149

Deferred revenue

 
677

Ad valorem taxes payable
7,658

 
10,271

Accrued interest
17,483

 
17,483

Accrued environmental remediation
8,026

 
7,900

Other current liabilities
13,781

 
13,297

Total current liabilities
68,728

 
91,585

Long-term debt
1,312,539

 
1,267,270

Deferred purchase price obligation
532,355

 

Deferred revenue
48,196

 
45,486

Noncurrent accrued environmental remediation
3,886

 
5,764

Other noncurrent liabilities
8,031

 
7,268

Total liabilities
1,973,735

 
1,417,373

Commitments and contingencies (Note 15)

 

 
 
 
 
Common limited partner capital (66,588 units issued and outstanding at June 30, 2016 and 42,063 units issued and outstanding at December 31, 2015)
1,068,680

 
744,977

Subordinated limited partner capital (0 units issued and outstanding at June 30, 2016 and 24,410 units issued and outstanding at December 31, 2015)

 
213,631

General partner interests (1,355 units issued and outstanding at June 30, 2016 and December 31, 2015)
27,822

 
25,634

Noncontrolling interest
11,037

 

Summit Investments' equity in contributed subsidiaries

 
763,057

Total partners' capital
1,107,539

 
1,747,299

Total liabilities and partners' capital
$
3,081,274

 
$
3,164,672

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1


SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per-unit amounts)
Revenues:
 
 
 
 
 
 
 
Gathering services and related fees
$
76,187

 
$
69,754

 
$
154,287

 
$
138,194

Natural gas, NGLs and condensate sales
8,581

 
11,967

 
16,169

 
24,580

Other revenues
4,867

 
5,133

 
9,750

 
10,167

Total revenues
89,635

 
86,854

 
180,206

 
172,941

Costs and expenses:
 
 
 
 
 
 
 
Cost of natural gas and NGLs
6,864

 
8,574

 
13,154

 
18,015

Operation and maintenance
23,410

 
23,595

 
49,252

 
46,385

General and administrative
12,876

 
11,632

 
25,755

 
23,231

Transaction costs
122

 
822

 
1,296

 
932

Depreciation and amortization
27,963

 
26,019

 
55,691

 
51,549

Loss (gain) on asset sales, net
74

 
(214
)
 
11

 
(214
)
Long-lived asset impairment
569

 

 
569

 

Total costs and expenses
71,878

 
70,428

 
145,728

 
139,898

Other income
19

 

 
41

 
1

Interest expense
(16,035
)
 
(15,599
)
 
(31,917
)
 
(30,503
)
Deferred purchase price obligation expense
(17,465
)
 

 
(24,928
)
 

(Loss) income before income taxes
(15,724
)
 
827

 
(22,326
)
 
2,541

Income tax (expense) benefit
(360
)
 
263

 
(283
)
 
(167
)
Loss from equity method investees
(34,471
)
 
(3,486
)
 
(31,611
)
 
(7,254
)
Net loss
$
(50,555
)
 
$
(2,396
)
 
$
(54,220
)
 
$
(4,880
)
Less:
 
 
 
 
 
 
 
Net (loss) income attributable to Summit Investments

 
(5,381
)
 
2,745

 
(9,532
)
Net loss attributable to noncontrolling interest
(268
)
 

 
(224
)
 

Net (loss) income attributable to SMLP
(50,287
)
 
2,985

 
(56,741
)
 
4,652

Less net (loss) income attributable to general partner, including IDRs
935

 
1,891

 
2,746

 
3,459

Net (loss) income attributable to limited partners
$
(51,222
)
 
$
1,094

 
$
(59,487
)
 
$
1,193

 
 
 
 
 
 
 
 
(Loss) earnings per limited partner unit:
 
 
 
 
 
 
 
Common unit – basic
$
(0.77
)
 
$
0.05

 
$
(0.89
)
 
$
0.04

Common unit – diluted
$
(0.77
)
 
$
0.05

 
$
(0.89
)
 
$
0.04

Subordinated unit – basic and diluted
 
 
$
(0.03
)
 
 
 
$
(0.01
)
 
 
 
 
 
 
 
 
Weighted-average limited partner units outstanding:
 
 
 
 
 
 
 
Common units – basic
66,587

 
38,278

 
66,540

 
36,369

Common units – diluted
66,587

 
38,461

 
66,540

 
36,477

Subordinated units – basic and diluted
 
 
24,410

 
 
 
24,410

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

 
Partners' capital
 
Summit Investments' equity in contributed subsidiaries
 
 
 
Limited partners
 
General partner
 
 
 
 
Common
 
Subordinated
 
 
 
Total
 
(In thousands)
Partners' capital, January 1, 2015
$
649,060

 
$
293,153

 
$
24,676

 
$
863,789

 
$
1,830,678

Net income (loss)
715

 
478

 
3,459

 
(9,532
)
 
(4,880
)
Distributions to unitholders
(38,769
)
 
(27,462
)
 
(4,388
)
 

 
(70,619
)
Unit-based compensation
3,049

 

 

 

 
3,049

Tax withholdings on vested SMLP LTIP awards
(936
)
 

 

 

 
(936
)
Issuance of common units, net of offering costs
222,119

 

 

 

 
222,119

Contribution from general partner

 

 
4,737

 

 
4,737

Cash advance from Summit Investments to contributed subsidiaries, net

 

 

 
286,799

 
286,799

Purchase of Polar and Divide

 

 

 
(290,000
)
 
(290,000
)
Excess of acquired carrying value over consideration paid for Polar and Divide
77,423

 
46,100

 
2,521

 
(126,044
)
 

Expenses paid by Summit Investments on behalf of contributed subsidiaries

 

 

 
13,352

 
13,352

Capitalized interest allocated from Summit Investments to contributed subsidiaries

 

 

 
558

 
558

Class B membership interest noncash compensation

 

 

 
502

 
502

Partners' capital, June 30, 2015
$
912,661

 
$
312,269

 
$
31,005

 
$
739,424

 
$
1,995,359


3


SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(continued)
 
Partners' capital
 
Noncontrolling interest
 
Summit Investments' equity in contributed subsidiaries
 
 
 
Limited partners
 
General partner
 
 
 
 
 
Common
 
Subordinated
 
 
 
 
Total
 
(In thousands)
Partners' capital, January 1, 2016
$
744,977

 
$
213,631

 
$
25,634

 
$

 
$
763,057

 
$
1,747,299

Net (loss) income
(60,527
)
 
1,040

 
2,746

 
(224
)
 
2,745

 
(54,220
)
Distributions to unitholders
(62,475
)
 
(14,034
)
 
(5,511
)
 

 

 
(82,020
)
Unit-based compensation
3,665

 

 

 

 

 
3,665

Tax withholdings on vested SMLP LTIP awards
(796
)
 

 

 

 

 
(796
)
Subordinated units conversion
200,637

 
(200,637
)
 

 

 

 

Purchase of 2016 Drop Down Assets

 

 

 

 
(866,858
)
 
(866,858
)
Establishment of noncontrolling interest

 

 

 
11,261

 
(11,261
)
 

Distribution of debt related to Carve-Out Financial Statements of Summit Investments

 

 

 

 
342,926

 
342,926

Excess of acquired carrying value over consideration paid for 2016 Drop Down Assets
243,044

 

 
4,953

 

 
(247,997
)
 

Cash advance from Summit Investments to contributed subsidiaries, net

 

 

 

 
12,214

 
12,214

Expenses paid by Summit Investments on behalf of contributed subsidiaries

 

 

 

 
4,821

 
4,821

Capitalized interest allocated from Summit Investments to contributed subsidiaries

 

 

 

 
223

 
223

Class B membership interest noncash compensation
155

 

 

 

 
130

 
285

Partners' capital, June 30, 2016
$
1,068,680

 
$

 
$
27,822

 
$
11,037

 
$

 
$
1,107,539

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4



SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six months ended June 30,
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net loss
$
(54,220
)
 
$
(4,880
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
55,957

 
52,012

Amortization of deferred loan costs
1,947

 
2,196

Deferred purchase price obligation expense
24,928

 

Unit-based and noncash compensation
3,950

 
3,551

Loss from equity method investees
31,611

 
7,254

Distributions from equity method investees
24,181

 
13,869

Loss (gain) on asset sales, net
11

 
(214
)
Long-lived asset impairment
569

 

Write-off of debt issuance costs

 
727

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
41,276

 
36,778

Trade accounts payable
1,447

 
(2,031
)
Due to affiliate
(966
)
 
5,162

Change in deferred revenue
2,033

 
5,845

Ad valorem taxes payable
(2,613
)
 
(2,413
)
Accrued interest

 
(1,375
)
Accrued environmental remediation
(1,752
)
 
(10,196
)
Other, net
3,141

 
(1,289
)
Net cash provided by operating activities
131,500

 
104,996

Cash flows from investing activities:
 
 
 
Capital expenditures
(91,372
)
 
(131,517
)
Contributions to equity method investees
(15,645
)
 
(64,396
)
Acquisitions of gathering systems from affiliate, net of acquired cash
(359,431
)
 
(292,941
)
Other, net
(435
)
 
238

Net cash used in investing activities
(466,883
)
 
(488,616
)


5


SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
 
Six months ended June 30,
 
2016
 
2015
 
(In thousands)
Cash flows from financing activities:
 
 
 
Distributions to unitholders
(82,020
)
 
(70,619
)
Borrowings under revolving credit facility
439,300

 
257,000

Repayments under revolving credit facility
(50,300
)
 
(151,000
)
Repayments under term loan

 
(177,500
)
Deferred loan costs
(2,766
)
 
(136
)
Proceeds from issuance of common units, net

 
222,119

Contribution from general partner

 
4,737

Cash advance from Summit Investments to contributed subsidiaries, net
12,214

 
286,799

Expenses paid by Summit Investments on behalf of contributed subsidiaries
4,821

 
13,352

Other, net
(916
)
 
(936
)
Net cash provided by financing activities
320,333

 
383,816

Net change in cash and cash equivalents
(15,050
)
 
196

Cash and cash equivalents, beginning of period
21,793

 
27,811

Cash and cash equivalents, end of period
$
6,743

 
$
28,007

 
 
 
 
Supplemental cash flow disclosures:
 
 
 
Cash interest paid
$
31,464

 
$
30,331

Less capitalized interest
1,779

 
1,361

Interest paid (net of capitalized interest)
$
29,685

 
$
28,970

 
 
 
 
Cash paid for taxes
$

 
$

 
 
 
 
Noncash investing and financing activities:
 
 
 
Capital expenditures in trade accounts payable (period-end accruals)
$
14,322

 
$
29,357

Issuance of deferred purchase price obligation to affiliate to partially fund the 2016 Drop Down
507,427

 

Capitalized interest allocated from Summit Investments to contributed subsidiaries
223

 
558

Excess of acquired carrying value over consideration paid and recognized for 2016 Drop Down Assets
247,997

 

Excess of acquired carrying value over consideration paid for Polar and Divide

 
126,044

Distribution of debt related to Carve-Out Financial Statements of Summit Investments (see Notes 2 and 11)
342,926

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6


SUMMIT MIDSTREAM PARTNERS, LP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS OPERATIONS AND PRESENTATION AND CONSOLIDATION
Organization. Summit Midstream Partners, LP ("SMLP" or the "Partnership"), a Delaware limited partnership, was formed in May 2012 and began operations in October 2012 in connection with its initial public offering ("IPO") of common limited partner units. SMLP is a growth-oriented limited partnership focused on developing, owning and operating midstream energy infrastructure assets that are strategically located in the core producing areas of unconventional resource basins, primarily shale formations, in the continental United States. Our business activities are conducted through various operating subsidiaries, each of which is owned or controlled by our wholly owned subsidiary holding company, Summit Midstream Holdings, LLC ("Summit Holdings"), a Delaware limited liability company. References to the "Partnership," "we," or "our" refer collectively to SMLP and its subsidiaries.
Summit Midstream GP, LLC (the "general partner"), a Delaware limited liability company, manages our operations and activities. Summit Midstream Partners, LLC ("Summit Investments"), a Delaware limited liability company, is the ultimate owner of our general partner and has the right to appoint the entire board of directors of our general partner.  Summit Investments is controlled by Energy Capital Partners II, LLC and its parallel and co-investment funds (collectively, "Energy Capital Partners" or our "Sponsor").
In addition to its 2% general partner interest in SMLP (including the incentive distribution rights ("IDRs") in respect of SMLP), Summit Investments has direct and indirect ownership interests in our common units. As of June 30, 2016, Summit Investments beneficially owned 29,854,581 SMLP common units.
Neither SMLP nor its subsidiaries have any employees. All of the personnel that conduct our business are employed by Summit Investments, but these individuals are sometimes referred to as our employees.
On February 25, 2016, the Partnership and Summit Midstream Partners Holdings, LLC (“SMP Holdings”), a wholly owned subsidiary of Summit Investments, entered into a contribution agreement (the "Contribution Agreement") pursuant to which SMP Holdings agreed to contribute to the Partnership substantially all of its limited partner interest in Summit Midstream OpCo, LP ("OpCo"), a Delaware limited partnership that owns (i) 100% of the issued and outstanding membership interests of Summit Midstream Utica, LLC ("Summit Utica"), Meadowlark Midstream Company, LLC ("Meadowlark Midstream") and Tioga Midstream, LLC ("Tioga Midstream" and collectively with Summit Utica and Meadowlark Midstream, the "Contributed Entities"), each a limited liability company and (ii) a 40.0% ownership interest in each of Ohio Gathering Company, L.L.C. and Ohio Condensate Company, L.L.C. (collectively with OpCo and the Contributed Entities, the “2016 Drop Down Assets”)(the “2016 Drop Down”). The 2016 Drop Down closed on March 3, 2016. Subsequent to closing, SMP Holdings retained a 1.0% noncontrolling interest in OpCo, which is managed by Summit Midstream OpCo GP, LLC ("OpCo GP"), a Delaware limited liability company and a wholly owned subsidiary of Summit Holdings.
Business Operations. We provide natural gas gathering, treating and processing services as well as crude oil and produced water gathering services pursuant to primarily long-term and fee-based agreements with our customers. Our results are driven primarily by the volumes of natural gas that we gather, treat, compress and process as well as by the volumes of crude oil and produced water that we gather. Our gathering systems and the unconventional resource basins in which they operate are as follows:
Summit Utica, a natural gas gathering system operating in the Appalachian Basin, which includes the Utica and Point Pleasant shale formations in southeastern Ohio;
Bison Midstream, LLC ("Bison Midstream"), an associated natural gas gathering system, operating in the Williston Basin, which includes the Bakken and Three Forks shale formations in northwestern North Dakota;
Polar Midstream, LLC ("Polar Midstream" or "Polar and Divide"), crude oil and produced water gathering systems and transmission pipelines located in the Williston Basin, which includes the Bakken and Three Forks shale formations in northwestern North Dakota;
Tioga Midstream, crude oil, produced water and associated natural gas gathering systems, operating in the Williston Basin, which includes the Bakken and Three Forks shale formations in northwestern North Dakota;
Grand River Gathering, LLC ("Grand River"), a natural gas gathering and processing system located in the Piceance Basin, which includes the Mesaverde formation and the Mancos and Niobrara shale formations in western Colorado and eastern Utah;

7


Niobrara gathering and processing system ("Niobrara G&P"), an associated natural gas gathering and processing system operating in the Denver-Julesburg ("DJ") Basin, which includes the Niobrara and Codell shale formations in northeastern Colorado;
DFW Midstream Services LLC ("DFW Midstream"), a natural gas gathering system, operating in the Fort Worth Basin, which includes the Barnett Shale formation in north-central Texas; and
Mountaineer Midstream gathering system ("Mountaineer Midstream"), a natural gas gathering system, operating in the Appalachian Basin, which includes the Marcellus Shale formation in northern West Virginia.
Meadowlark Midstream is the legal entity which owns (i) certain crude oil and produced water gathering pipelines, which is managed and reported as part of the Polar and Divide system subsequent to the 2016 Drop Down and (ii) Niobrara G&P, which is managed and reported as part of the Grand River system subsequent to the 2016 Drop Down.
Ohio Gathering Company, L.L.C. ("OGC") and Ohio Condensate Company, L.L.C. ("OCC" and together with OGC, "Ohio Gathering") operate a natural gas gathering system and a condensate stabilization facility in the Appalachian Basin, which includes the Utica and Point Pleasant shale formations in southeastern Ohio.
Presentation and Consolidation. We prepare our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These principles are established by the Financial Accounting Standards Board (the "FASB"). We make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet dates, including fair value measurements, the reported amounts of revenue and expense and the disclosure of contingencies. Although management believes these estimates are reasonable, actual results could differ from its estimates.
The unaudited condensed consolidated financial statements include the assets, liabilities and results of operations of SMLP and its subsidiaries. All intercompany transactions among the consolidated entities have been eliminated in consolidation. The financial position, results of operations and cash flows of (i) acquired drop down assets, liabilities and expenses or (ii) entities that were carved out of entities held by Summit Investments and included herein have been derived from the accounting records of the respective Summit Investments' subsidiary on a carve-out basis (see Note 2).
These unaudited condensed consolidated financial statements have been prepared pursuant to the rules and the regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. We believe that the disclosures made are adequate to make the information not misleading. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, including normal recurring adjustments, which are necessary to fairly present the unaudited condensed consolidated balance sheet as of June 30, 2016, the unaudited condensed consolidated statements of operations for the three- and six-month periods ended June 30, 2016 and 2015, and the unaudited condensed consolidated statements of partners' capital and cash flows for the six-month periods ended June 30, 2016 and 2015. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto that are included in our annual report on Form 10-K for the year ended December 31, 2015, as filed with the SEC on February 29, 2016, and as updated and superseded by our current report on Form 8-K dated June 6, 2016 (the "2015 Annual Report"). The results of operations for an interim period are not necessarily indicative of results expected for a full year.
SMLP recognized its drop down acquisitions at Summit Investments' historical cost because the acquisitions were executed by entities under common control. The excess of Summit Investments' net investment over the purchase price paid and recognized for a contributed subsidiary is recognized as an addition to partners' capital, while the excess of purchase price paid and recognized over net investment is recognized as a reduction to partners' capital. Due to the common control aspect, we account for drop down transactions on an “as-if pooled” basis for the periods during which common control existed.
Reclassifications. In the first quarter of 2016, we adopted Accounting Standards Update ("ASU") No. 2015-03 Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs ("ASU 2015-03"). As a result, we reclassified $9.2 million of deferred loan costs from other noncurrent assets to long-term debt at December 31, 2015 (see Note 2).
In 2015, we made certain reclassifications to conform to current presentation. We evaluated our historical classification of (i) gathering fee revenue associated with certain Bison Midstream percent-of-proceeds contracts and (ii) certain pass-through expenses for Bison Midstream. As a result of this evaluation, we determined that

8


certain amounts that had previously been recognized in cost of natural gas and NGLs would be more appropriately reflected as gathering services and related fees and other revenues to enhance reporting transparency. The impact of these reclassifications, which had no impact on net loss, total partners' capital or segment adjusted EBITDA, follows.
 
Three months ended
June 30, 2015
 
Six months ended
June 30, 2015
 
(In thousands)
Gathering services and related fees
$
3,050

 
$
6,468

Other revenues
620

 
1,258

Net impact on total revenues
$
3,670

 
$
7,726

 
 
 
 
Cost of natural gas and NGLs
$
3,670

 
$
7,726

Net impact on total costs and expenses
$
3,670

 
$
7,726


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property, Plant, and Equipment. We record property, plant, and equipment at historical cost of construction or fair value of the assets at acquisition. We capitalize expenditures that extend the useful life of an asset or enhance its productivity or efficiency from its original design over the expected remaining period of use. For maintenance and repairs that do not add capacity or extend the useful life of an asset, we recognize expenditures as an expense as incurred. We capitalize project costs incurred during construction, including interest on funds borrowed to finance the construction of facilities, as construction in progress. To the extent that Summit Investments incurred interest expense related to capital projects of assets that have been acquired by the Partnership, the associated interest expense is allocated to the drop down assets as a noncash equity contribution and capitalized into the basis of the asset.
We record depreciation on a straight-line basis over an asset’s estimated useful life. We base our estimates for useful life on various factors including age (in the case of acquired assets), manufacturing specifications, technological advances and historical data concerning useful lives of similar assets. Estimates of useful lives follow.
 
Useful lives
(In years)
Gathering and processing systems and related equipment
30
Other
4-15
Construction in progress is depreciated consistent with its applicable asset class once it is placed in service. Land and line fill are not depreciated.
We base an asset’s carrying value on estimates, assumptions and judgments for useful life and salvage value. Upon sale, retirement or other disposal, we remove the carrying value of an asset and its accumulated depreciation from our balance sheet and recognize the related gain or loss, if any.
Accrued capital expenditures are reflected in trade accounts payable.
Equity Method Investments. We account for investments in which we exercise significant influence using the equity method so long as we (i) do not control the investee and (ii) are not the primary beneficiary. We recognize these investments in investment in equity method investees in the accompanying consolidated balance sheets. We recognize our proportionate share of net income or loss on a one-month lag.
We recognize an other-than-temporary impairment for losses in the value of equity method investees when evidence indicates that the carrying amount is no longer supportable. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of the equity method investee to sustain an earnings capacity that would justify the carrying amount of the investment. A current fair value of an investment that is less than its carrying amount may indicate a loss in value of the investment. We evaluate our equity method investments whenever evidence exists that would indicate a need to assess the investment for potential impairment.

9


Other Noncurrent Assets. Other noncurrent assets primarily consist of external costs incurred in connection with the closing of our revolving credit facility and related amendments. We capitalize and then amortize these deferred loan costs over the life of the respective debt instrument. We recognize amortization of deferred loan costs in interest expense.
Deferred Purchase Price Obligation Income or Expense. We recognized a liability for the deferred purchase price obligation to reflect the expected value of the remaining consideration to be paid in 2020 for the acquisition of the 2016 Drop Down Assets. The calculation of the remaining consideration incorporates estimates of projected capital expenditures and Business Adjusted EBITDA related to the 2016 Drop Down Assets. For balance sheet recognition purposes, we discount the remaining consideration using a commensurate risk-adjusted discount rate and recognize the change in present value in earnings in the period of change. The income or expense represents the change in present value, which comprises a time value of money concept as well as adjustments to projections and the expected value of the remaining consideration (see Note 16).
Commitments and Contingencies. We record accruals for loss contingencies when we determine that it is probable that a liability has been incurred and that such economic loss can be reasonably estimated. Such determinations are subject to interpretations of current facts and circumstances, forecasts of future events, and estimates of the financial impacts of such events. We record receivables for gain contingencies when they are realized.
Noncontrolling Interest. Noncontrolling interest represents the ownership interests of third-party entities in the net assets of our consolidated subsidiaries, including SMP Holdings' ownership interest in OpCo. For financial reporting purposes, we consolidate OpCo and its wholly owned subsidiaries with our wholly owned subsidiaries and SMP Holdings' interest is shown as noncontrolling interest in partners' capital. We reflect changes in our ownership of OpCo as adjustments to noncontrolling interest.
Earnings or Loss Per Unit ("EPU"). We determine basic EPU by dividing the net income or loss that is attributed, in accordance with the net income and loss allocation provisions of our partnership agreement, to limited partners under the two-class method, after deducting (i) the 1% noncontrolling interest in OpCo (for periods subsequent to the 2016 Drop Down), (ii) any net income or loss of contributed subsidiaries that is attributable to Summit Investments, (iii) the general partner's 2% interest in net income or loss, and (iv) any payment of IDRs, by the weighted-average number of limited partner units outstanding. Diluted EPU reflects the potential dilution that could occur if securities or other agreements to issue common units, such as unit-based compensation, were exercised, settled or converted into common units and included in the weighted-average number of units outstanding. When it is determined that potential common units resulting from an award subject to performance or market conditions should be included in the diluted EPU calculation, the impact is reflected by applying the treasury stock method.
Comprehensive Income or Loss. Comprehensive income or loss is the same as net income or loss for all periods presented.
Environmental Matters. We are subject to various federal, state and local laws and regulations relating to the protection of the environment. Liabilities for loss contingencies, including environmental remediation costs, arising from claims, assessments, litigation, fines, and penalties and other sources are charged to expense when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. We accrue for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change. Recoveries of environmental remediation costs from other parties or insurers are recorded as assets when their receipt is deemed probable.
Carve-Out Entities, Assets, Liabilities and Expenses. For drop down transactions involving entities that were carved out of other entities, the majority of the assets and liabilities allocated to the carve-out entity are specifically identified based on the original entity's existing divisional organization. Goodwill is allocated to the carve-out entity based on initial purchase accounting estimates. Revenues and depreciation and amortization are specifically identified based on the relationship of the carve-out entity to the original entity's existing divisional structure. Operation and maintenance and general and administrative expenses are allocated to the carve-out entity based on volume throughput.
For drop down transactions involving assets, liabilities and expenses that were carved out of other entities, the majority of the assets and liabilities allocated to the carve-out are specifically identified based on the original entity's existing divisional organization. Depreciation and amortization are specifically identified based on the relationship of the carve-out entity to the original entity's existing divisional structure. General and administrative expenses are allocated to the carve-out entity based on an allocation of Summit Investments' consolidated expenses.

10


Allocation of Certain Liabilities in Drop Downs. For drop down transactions involving assets for which their development was funded with parent company debt which was replaced with bank borrowings or debt capital at the Partnership, we allocate a portion of that debt, net of deferred loan costs, to the drop down assets during the common control period. Interest expense is allocated and recognized during the common control period. Any outstanding debt balance or principal is included in the calculation of the excess or deficit of acquired carrying value over consideration paid and recognized.
Recent Accounting Pronouncements. Accounting standard setters frequently issue new or revised accounting rules. We review new pronouncements to determine the impact, if any, on our financial statements. Accounting standards that have or could possibly have a material effect on our financial statements are discussed below.
Recently Adopted Accounting Pronouncements. In April 2015, the FASB issued ASU 2015-03. Under ASU 2015-03, entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying amount of that debt liability. In August 2015, the FASB amended ASU 2015-03 to address the presentation and subsequent measurement of debt issuance costs related to line of credit (“LOC”) arrangements. The amendment permits an entity to defer and present debt issuance costs as an asset and subsequently amortize deferred debt issuance costs ratably over the term of a LOC arrangement, regardless of whether there are outstanding borrowings under that LOC arrangement.  This new standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The January 2016 adoption of this update resulted in a reclassification from other noncurrent assets to long-term debt of the debt issuance costs associated with our senior notes (see Note 9). Debt issuance costs associated with the Partnership's revolving credit facility will remain in other noncurrent assets. This standard had no impact on interest expense, net income or loss, EPU or partners' capital.
Accounting Pronouncements Pending Adoption. We are currently in the process of evaluating the applicability and/or impact of the following accounting pronouncements:
ASU No. 2014-09 Revenue From Contracts With Customers (Topic 606) ("ASU 2014-09"). There has been no change to our position regarding ASU 2014-09 during 2016. See Note 2 to the consolidated financial statements included in the 2015 Annual Report for additional information.
ASU No. 2016-02 Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires that lessees recognize all leases on the balance sheet, with the exception of short-term leases. A lease liability will be recorded for the obligation of a lessee to make lease payments arising from a lease. A right-of-use asset, will be recorded which represents the lessee’s right to use, or to control the use of, a specified asset for a lease term. Under the new guidance, lessor accounting is largely unchanged. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, and requires the modified retrospective approach for transition.
ASU No. 2016-08 Revenue From Contracts With Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU No. 2016-08"). ASU No. 2016-08 does not change the core principle of Topic 606, rather it clarifies the implementation guidance on principal versus agent considerations. The effective date and transition for this update are the same as ASU 2014-09.
ASU No. 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects for share-based payment award transactions, including income tax consequences, the liability or equity classification of awards and classification on the statement of cash flows. ASU 2016-09 is effective for public companies for fiscal years beginning after December 15, 2016. It does not specify a single transition approach, rather it specifies retrospective, modified retrospective and/or prospective transition approaches based on the aspect being applied.
ASU No. 2016-10 Revenue From Contracts With Customers (Topic 606): Identifying Performance Obligations and Licensing ("ASU No. 2016-10"). ASU No. 2016-10 clarifies the following two aspects of Topic 606 (i) identifying performance obligations and (ii) the licensing implementation guidance, while retaining the related principles for those areas. The effective date and transition for this update are the same as ASU 2014-09.
ASU No. 2016-12 Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients ("ASU No. 2016.12"). ASU No. 2016.12 does not change the core principle of the guidance in Topic 606. Rather, the amendments therein affect only the narrow aspects of Topic 606 including assessing the collectability criterion and issues related to contract modification at transition and

11


completed contracts at transition. The effective date and transition for this update are the same as ASU 2014-09.
Recent accounting guidance not discussed above is not applicable, did not have, or is not expected to have a material impact on our financial statements. For additional information on new accounting pronouncements and recent accounting guidance and their impact, if any, on our financial position or results of operations, see Note 2 of the notes to the consolidated financial statements included in the 2015 Annual Report.

3. SEGMENT INFORMATION
As of June 30, 2016, our reportable segments are:
the Utica Shale, which includes our ownership interest in Ohio Gathering and is served by Summit Utica;
the Williston Basin, which is served by Bison Midstream, Polar and Divide and Tioga Midstream;
the Piceance/DJ Basins, which is served by Grand River and Niobrara G&P;
the Barnett Shale, which is served by DFW Midstream; and
the Marcellus Shale, which is served by Mountaineer Midstream.
Each of our reportable segments provides midstream services in a specific geographic area. Our reportable segments reflect the way in which we internally report the financial information used to make decisions and allocate resources in connection with our operations.
As noted above, our investment in Ohio Gathering (see Note 7) is included in the Utica Shale reportable segment. Segment assets for the Utica Shale includes the associated investment in equity method investees. Income or loss from equity method investees, as reflected on the statements of operations, solely relates to Ohio Gathering and is recognized and disclosed on a one-month lag. No other line items in the statements of operations or cash flows, as disclosed in the tables below, include results for our investment in Ohio Gathering.
Corporate represents those assets and liabilities and revenues and expenses that are (i) not specifically attributable to a reportable segment, (ii) not individually reportable, or (iii) that have not been allocated to our reportable segments.
Assets by reportable segment follow.
 
June 30,
2016
 
December 31,
2015
 
(In thousands)
Assets:
 
 
 
Utica Shale (1)
$
892,969

 
$
886,224

Williston Basin
716,926

 
740,361

Piceance/DJ Basins
819,954

 
866,095

Barnett Shale
407,667

 
416,586

Marcellus Shale
229,898

 
233,116

Total reportable segment assets
3,067,414

 
3,142,382

Corporate
13,860

 
22,290

Total assets
$
3,081,274

 
$
3,164,672

__________
(1) Represents the investment in equity method investees for Ohio Gathering (see Note 7) and total assets for Summit Utica.

12


Revenues by reportable segment follow.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Revenues:
 
 
 
 
 
 
 
Utica Shale
$
5,403

 
$
515

 
$
9,686

 
$
904

Williston Basin
27,507

 
23,650

 
57,517

 
46,718

Piceance/DJ Basins
29,411

 
31,083

 
58,402

 
61,977

Barnett Shale
20,856

 
23,823

 
41,257

 
47,720

Marcellus Shale
6,458

 
7,783

 
13,344

 
15,622

Total reportable segment revenues and total revenues
$
89,635

 
$
86,854

 
$
180,206

 
$
172,941

Counterparties accounting for more than 10% of total revenues were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Percentage of total revenues:
 
 
 
 
 
 
 
Counterparty A - Piceance/DJ Basins
*
 
12
%
 
*
 
13
%
__________
* Less than 10%
Depreciation and amortization, including the amortization expense associated with our favorable and unfavorable gas gathering contracts as reported in other revenues, by reportable segment follows.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Depreciation and amortization:
 
 
 
 
 
 
 
Utica Shale
$
952

 
$
217

 
$
1,796

 
$
357

Williston Basin
8,410

 
7,729

 
16,767

 
15,096

Piceance/DJ Basins
12,297

 
11,818

 
24,570

 
23,600

Barnett Shale
4,057

 
4,114

 
8,113

 
8,271

Marcellus Shale
2,222

 
2,169

 
4,441

 
4,338

Total reportable segment depreciation and amortization
27,938

 
26,047

 
55,687

 
51,662

Corporate
154

 
184

 
270

 
350

Total depreciation and amortization
$
28,092

 
$
26,231

 
$
55,957

 
$
52,012


13


Cash paid for capital expenditures by reportable segment follow.
 
Six months ended June 30,
 
2016
 
2015
 
(In thousands)
Capital expenditures:
 
 
 
Utica Shale
$
54,064

 
$
40,195

Williston Basin
21,919

 
76,470

Piceance/DJ Basins
10,633

 
11,900

Barnett Shale
2,109

 
1,922

Marcellus Shale
2,135

 
637

Total reportable segment capital expenditures
90,860

 
131,124

Corporate
512

 
393

Total capital expenditures
$
91,372

 
$
131,517

We assess the performance of our reportable segments based on segment adjusted EBITDA. We define segment adjusted EBITDA as total revenues less total costs and expenses; plus (i) other income excluding interest income, (ii) our proportional adjusted EBITDA for equity method investees, (iii) depreciation and amortization, (iv) adjustments related to MVC shortfall payments, (v) impairments and (vi) other noncash expenses or losses, less other noncash income or gains. We define proportional adjusted EBITDA for our equity method investees as the product of total revenues less total expenses, plus amortization for deferred contract costs multiplied by our ownership interest in Ohio Gathering during the respective period.
Segment adjusted EBITDA by reportable segment follows.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Reportable segment adjusted EBITDA:
 
 
 
 
 
 
 
Utica Shale (1)
$
17,452

 
$
6,414

 
$
33,029

 
$
11,621

Williston Basin
19,209

 
12,638

 
38,929

 
23,615

Piceance/DJ Basins
26,231

 
28,207

 
51,046

 
56,909

Barnett Shale
13,913

 
15,540

 
27,990

 
32,301

Marcellus Shale
4,807

 
6,162

 
9,408

 
12,696

Total of reportable segments’ measures of profit or loss
$
81,612

 
$
68,961

 
$
160,402

 
$
137,142

__________
(1) Includes our proportional share of adjusted EBITDA for Ohio Gathering and is reflected as the proportional adjusted EBITDA for equity method investees in the reconciliation of income or loss before income taxes to segment adjusted EBITDA.

14


A reconciliation of loss before income taxes to total reportable segment adjusted EBITDA follows.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Reconciliation of (loss) income before income taxes to total of reportable segments' measure of profit or loss:
 
 
 
 
 
 
 
(Loss) income before income taxes
$
(15,724
)
 
$
827

 
$
(22,326
)
 
$
2,541

Add:
 
 
 
 
 
 
 
Allocated corporate expenses
9,247

 
7,043

 
18,006

 
13,666

Interest expense
16,035

 
15,599

 
31,917

 
30,503

Deferred purchase price obligation expense
17,465

 

 
24,928

 

Depreciation and amortization
28,092

 
26,231

 
55,957

 
52,012

Proportional adjusted EBITDA for equity method investees
12,725

 
6,552

 
25,113

 
11,816

Adjustments related to MVC shortfall payments
11,135

 
10,935

 
22,277

 
23,268

Unit-based and noncash compensation
1,994

 
1,988

 
3,950

 
3,551

Loss on asset sales
77

 
24

 
134

 
24

Long-lived asset impairment
569

 

 
569

 

Less:
 
 
 
 
 
 
 
Interest income

 

 

 
1

Gain on asset sales
3

 
238

 
123

 
238

Total of reportable segments’ measures of profit or loss
$
81,612

 
$
68,961

 
$
160,402

 
$
137,142

Segment adjusted EBITDA excludes the effect of allocated corporate expenses, such as certain general and administrative expenses (including compensation-related expenses and professional services fees), transaction costs, interest expense, deferred purchase price obligation income or expense and income tax expense.
Adjustments related to MVC shortfall payments account for:
the net increases or decreases in deferred revenue for MVC shortfall payments and
our inclusion of expected annual MVC shortfall payments. We include a proportional amount of these historical or expected MVC shortfall payments in each quarter prior to the quarter in which we actually recognize the shortfall payment. These adjustments have not been billed to our customers and are not recognized in our unaudited condensed consolidated financial statements.
Adjustments related to MVC shortfall payments by reportable segment follow.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Adjustments related to MVC shortfall payments:
 
 
 
 
 
 
 
Williston Basin
$
4,261

 
$
2,847

 
$
7,797

 
$
5,500

Piceance/DJ Basins
7,456

 
9,866

 
14,973

 
19,769

Barnett Shale
(582
)
 
(1,778
)
 
(493
)
 
(2,001
)
Total adjustments related to MVC shortfall payments
$
11,135

 
$
10,935

 
$
22,277

 
$
23,268



15


4. PROPERTY, PLANT, AND EQUIPMENT, NET
Details on property, plant, and equipment follow.
 
June 30,
2016
 
December 31,
2015
 
(In thousands)
Gathering and processing systems and related equipment
$
1,923,234

 
$
1,883,139

Construction in progress
101,743

 
75,132

Land and line fill
11,442

 
11,055

Other
33,552

 
32,427

Total
2,069,971

 
2,001,753

Less accumulated depreciation
223,824

 
188,970

Property, plant, and equipment, net
$
1,846,147

 
$
1,812,783

Depreciation expense and capitalized interest follow.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Depreciation expense
$
17,595

 
$
15,721

 
$
34,966

 
$
30,985

Capitalized interest
1,063

 
834

 
1,779

 
1,361


5. AMORTIZING INTANGIBLE ASSETS AND UNFAVORABLE GAS GATHERING CONTRACT
Details regarding our intangible assets and the unfavorable gas gathering contract (included in other noncurrent liabilities), all of which are subject to amortization, follow.
 
June 30, 2016
 
Useful lives
(In years)
 
Gross carrying amount
 
Accumulated amortization
 
Net
 
 
 
(Dollars in thousands)
Favorable gas gathering contracts
18.7
 
$
24,195

 
$
(10,189
)
 
$
14,006

Contract intangibles
12.5
 
426,464

 
(128,760
)
 
297,704

Rights-of-way
26.1
 
152,174

 
(21,923
)
 
130,251

Total intangible assets
 
 
$
602,833

 
$
(160,872
)
 
$
441,961

 
 
 
 
 
 
 
 
Unfavorable gas gathering contract
10.0
 
$
10,962

 
$
(6,466
)
 
$
4,496

 
December 31, 2015
 
Useful lives
(In years)
 
Gross carrying amount
 
Accumulated amortization
 
Net
 
 
 
(Dollars in thousands)
Favorable gas gathering contracts
18.7
 
$
24,195

 
$
(9,534
)
 
$
14,661

Contract intangibles
12.5
 
426,464

 
(111,052
)
 
315,412

Rights-of-way
26.3
 
150,143

 
(18,906
)
 
131,237

Total intangible assets
 
 
$
600,802

 
$
(139,492
)
 
$
461,310

 
 
 
 
 
 
 
 
Unfavorable gas gathering contract
10.0
 
$
10,962

 
$
(6,077
)
 
$
4,885


16


We recognized amortization expense in other revenues as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Amortization expense – favorable gas gathering contracts
$
(317
)
 
$
(375
)
 
$
(655
)
 
$
(801
)
Amortization expense – unfavorable gas gathering contract
188

 
163

 
389

 
338

We recognized amortization expense in costs and expenses as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Amortization expense – contract intangibles
$
8,854

 
$
8,835

 
$
17,708

 
$
17,670

Amortization expense – rights-of-way
1,514

 
1,463

 
3,017

 
2,894

The estimated aggregate annual amortization expected to be recognized for the remainder of 2016 and each of the four succeeding fiscal years follows.
 
Amortizing intangible assets
 
Unfavorable gas gathering contract
 
(In thousands)
2016
$
21,607

 
$
509

2017
42,027

 
1,047

2018
41,481

 
1,035

2019
41,726

 
1,045

2020
44,374

 
860


6. GOODWILL
We evaluate goodwill for impairment annually on September 30 and whenever events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There have been no impairments of goodwill during 2016.
Fourth Quarter 2015 Goodwill Impairment. In the first quarter of 2016, we finalized our calculations of the fair values of the identified assets and liabilities in step two of the December 31, 2015 goodwill impairment testing for the Grand River and Polar and Divide reporting units. This process confirmed the preliminary goodwill impairments of $45.5 million for Grand River and $203.4 million for Polar and Divide that were recognized as of December 31, 2015.
Fair Value Measurement. Our impairment determinations, in the context of (i) our annual impairment evaluations and (ii) our other-than-annual impairment evaluations involved significant assumptions and judgments, as discussed in the 2015 Annual Report. Differing assumptions regarding any of these inputs could have a significant effect on the various valuations. As such, the fair value measurements utilized within these models are classified as non-recurring Level 3 measurements in the fair value hierarchy because they are not observable from objective sources. Due to the volatility of the inputs used, we cannot predict the likelihood of any future impairment.

7. EQUITY METHOD INVESTMENTS
Ohio Gathering owns, operates and is currently developing midstream infrastructure consisting of a liquids-rich natural gas gathering system, a dry natural gas gathering system and a condensate stabilization facility in the Utica Shale Play in southeastern Ohio. Ohio Gathering provides gathering services pursuant to primarily long-term, fee-based gathering agreements, which include acreage dedications.

17


In January 2014, Summit Investments acquired a 1.0% ownership interest in Ohio Gathering from Blackhawk Midstream, LLC ("Blackhawk") for $190.0 million. Concurrent with this acquisition, Summit Investments made an $8.4 million capital contribution to Ohio Gathering to maintain its 1.0% ownership interest.
The ownership interest Summit Investments acquired from Blackhawk included an option to increase the holder's ownership interest in Ohio Gathering to 40.0% (the "Option"). In May 2014, Summit Investments exercised the Option to increase its ownership to 40.0% (the "Option Exercise") and made the following payments (i) $326.6 million of capital contribution true-ups, (ii) $50.4 million of additional capital contributions to maintain its 40.0% ownership interest, and (iii) $5.4 million of management fee payments that were recognized as capital contributions in its Ohio Gathering capital accounts. Concurrent with and subsequent to the Option Exercise, the non-affiliated owners have retained their respective 60.0% ownership interest in Ohio Gathering (the "Non-affiliated Owners").
Summit Investments accounted for its initial ownership interests in Ohio Gathering under the cost method due to its ownership percentage and because it determined that it was not the primary beneficiary. Subsequent to the Option Exercise, Summit Investments accounted for its ownership interests in Ohio Gathering as equity method investments because it had joint control with the Non-affiliated Owners, which gave it significant influence. This shift from the cost method to the equity method required that Summit Investments retrospectively reflect its investment in Ohio Gathering and the associated results of operations as if it had been utilizing the equity method since the inception of its investment.
Summit Investments recognized the $190.0 million that it paid to Blackhawk as an investment in Ohio Gathering at inception. In addition, Ohio Gathering had assigned a value of $7.5 million to the Option, recognized it initially as an asset and concurrently attributed the value of the Option to Blackhawk's capital account. Upon acquiring Blackhawk's interest, the Option was reclassified from Blackhawk's capital account to Summit Investments' capital account in Ohio Gathering's records. Neither of these transactions involved a flow of funds to or from Ohio Gathering. As such, they created a basis difference between its recorded investment in equity method investees and that recognized and attributed to Summit Investments by Ohio Gathering. In accordance with the retrospective recognition triggered by the Option Exercise, in February 2014, Summit Investments began amortizing these basis differences over the weighted-average remaining life of the contracts underlying Ohio Gathering's operations. The impact of amortizing these two basis differences will result in a net decrease to its investment in equity method investees.
Subsequent to the Option Exercise, Summit Investments continued to make capital contributions to Ohio Gathering along with receiving distributions such that it maintained its 40.0% ownership interest through the 2016 Drop Down, at which point SMLP began making contributions and receiving distributions such that it maintained its 40.0% ownership interest through June 30, 2016.
In June 2016, an impairment loss was recognized by the operator of OCC. The Partnership recorded its 40.0% share of the impairment loss, or $37.8 million, in loss from equity method investees in the consolidated statements of operations. Although we recognize activity for Ohio Gathering on a one-month lag, we recorded the impairment loss in May 2016 activity because the information was available to us prior to receiving the full June 2016 financial results.
A reconciliation of our 40% ownership interest in Ohio Gathering to our investment per Ohio Gathering's books and records follows (in thousands).
Investment in equity method investees, June 30, 2016
$
711,021

June cash distributions
3,847

Basis difference
(150,213
)
Impairment loss
37,782

Investment in equity method investees, net of basis difference, May 31, 2016
$
602,437


18


Summarized statements of operations information for OGC and OCC follows (amounts represent 100% of investee financial information).
 
Three months ended
May 31, 2016
 
Three months ended
May 31, 2015
 
OGC
 
OCC
 
OGC
 
OCC
 
(In thousands)
Total revenues
$
38,444

 
$
5,417

 
$
26,531

 
$
831

Total operating expenses
22,572

 
98,748

 
23,755

 
3,881

Net income (loss)
15,868

 
(93,701
)
 
2,776

 
(3,315
)
 
Six months ended
May 31, 2016
 
Six months ended
May 31, 2015
 
OGC
 
OCC
 
OGC
 
OCC
 
(In thousands)
Total revenues
$
76,243

 
$
10,615

 
$
50,182

 
$
860

Total operating expenses
45,105

 
103,307

 
46,327

 
6,066

Net income (loss)
31,137

 
(93,245
)
 
3,856

 
(5,472
)

8. DEFERRED REVENUE
A rollforward of current deferred revenue follows.
 
Williston Basin
 
Piceance/DJ
Basins
 
Barnett
Shale
 
Total
current
 
(In thousands)
Current deferred revenue, January 1, 2016
$

 
$

 
$
677

 
$
677

Additions

 
5,484

 

 
5,484

Less revenue recognized

 
5,484

 
677

 
6,161

Current deferred revenue, June 30, 2016
$

 
$

 
$

 
$

A rollforward of noncurrent deferred revenue follows.
 
Williston Basin
 
Piceance/DJ
Basins
 
Barnett
Shale
 
Total noncurrent
 
(In thousands)
Noncurrent deferred revenue, January 1, 2016
$
29,002

 
$
16,484

 
$

 
$
45,486

Additions
235

 
2,475

 

 
2,710

Less revenue recognized

 

 

 

Noncurrent deferred revenue, June 30, 2016
$
29,237

 
$
18,959

 
$

 
$
48,196

As of June 30, 2016, accounts receivable included $1.6 million of shortfall billings related to MVC arrangements that can be utilized to offset gathering fees in subsequent periods.


19


9. DEBT
Debt consisted of the following:
 
June 30,
2016
 
December 31,
2015
 
(In thousands)
Summit Holdings variable rate senior secured revolving credit facility (2.97% at June 30, 2016 and 2.93% at December 31, 2015) due November 2018
$
721,000

 
$
344,000

SMP Holdings variable rate senior secured revolving credit facility (2.43% at December 31, 2015) (1)

 
115,000

SMP Holdings variable rate senior secured term loan (2.43% at December 31, 2015) (1)

 
217,500

Summit Holdings 5.50% Senior unsecured notes due August 2022
300,000

 
300,000

Unamortized deferred loan costs (2)
(3,826
)
 
(4,139
)
Summit Holdings 7.50% Senior unsecured notes due July 2021
300,000

 
300,000

Unamortized deferred loan costs (2)
(4,635
)
 
(5,091
)
Total long-term debt
$
1,312,539

 
$
1,267,270

__________
(1) Debt was allocated to the 2016 Drop Down Assets prior to the closing of the 2016 Drop Down but was retained by Summit Investments after close.
(2) Issuance costs are being amortized over the life of the notes.
Revolving Credit Facility. We have a senior secured revolving credit facility which allows for revolving loans, letters of credit and swingline loans (the "revolving credit facility"). On February 25, 2016, we closed on an amendment to the revolving credit facility, which became effective concurrent with the March 3, 2016 closing of the 2016 Drop Down. In connection with this amendment, (i) the revolving credit facility's borrowing capacity increased from $700.0 million to $1.25 billion, (ii) a new investment basket allowing the Co-Issuers (as defined below) to buy back up to $100.0 million of our outstanding senior unsecured notes was included, (iii) the total leverage ratio was increased to 5.50 to 1.0 through December 31, 2016, and (iv) various amendments were approved to facilitate the 2016 Drop Down. The revolving credit facility matures in November 2018 and includes a $200.0 million accordion feature. It is secured by the membership interests of Summit Holdings and those of its subsidiaries. Substantially all of Summit Holdings' and its subsidiaries' assets are pledged as collateral under the revolving credit facility. The revolving credit facility, and Summit Holdings' obligations, are guaranteed by SMLP and each of its subsidiaries other than OpCo, Summit Utica, Meadowlark Midstream and Tioga Midstream ("Non-Guarantor Subsidiaries").
Borrowings under the revolving credit facility bear interest at the London Interbank Offered Rate ("LIBOR") or an Alternate Base Rate ("ABR") plus an applicable margin ranging from 0.75% to 1.75% for ABR borrowings and 1.75% to 2.75% for LIBOR borrowings, with the commitment fee ranging from 0.30% to 0.50% in each case based on our relative leverage at the time of determination. At June 30, 2016, the applicable margin under LIBOR borrowings was 2.50%, the interest rate was 2.97% and the unused portion of the revolving credit facility totaled $529.0 million (subject to a commitment fee of 0.50%).
The revolving credit agreement contains affirmative and negative covenants customary for credit facilities of its size and nature that, among other things, limit or restrict the ability to: (i) incur additional debt; (ii) make investments; (iii) engage in certain mergers, consolidations, acquisitions or sales of assets; (iv) enter into swap agreements and power purchase agreements; (v) enter into leases that would cumulatively obligate payments in excess of $30.0 million over any 12-month period; and (vi) prohibits the payment of distributions by Summit Holdings if a default then exists or would result therefrom, and otherwise limits the amount of distributions Summit Holdings can make. In addition, the revolving credit facility requires Summit Holdings to maintain a ratio of consolidated trailing 12-month earnings before interest, income taxes, depreciation and amortization ("EBITDA," as defined in the credit agreement) to net interest expense of not less than 2.5 to 1.0 (as defined in the credit agreement) and a ratio of total net indebtedness to consolidated trailing 12-month EBITDA of not more than 5.0 to 1.0, or not more than 5.5 to 1.0 for up to 270 days following certain acquisitions. Additionally, the total leverage ratio upper limit can be increased from 5.0 to 1.0 to 5.5 to 1.0 at our option, subject to the inclusion of a senior secured leverage ratio (senior secured net indebtedness to consolidated trailing 12-month EBITDA, as defined in the credit agreement) upper limit of 3.75 to 1.0.
As of June 30, 2016, we were in compliance with the revolving credit facility's covenants. There were no defaults or events of default during the six months ended June 30, 2016.

20


Senior Notes. In July 2014, Summit Holdings and its 100% owned finance subsidiary, Summit Midstream Finance Corp. ("Finance Corp.," together with Summit Holdings, the "Co-Issuers"), co-issued $300.0 million of 5.50% senior unsecured notes maturing August 15, 2022 (the "5.5% senior notes"). In June 2013, the Co-Issuers co-issued $300.0 million of 7.50% senior unsecured notes maturing July 1, 2021 (the "7.5% senior notes").
Bison Midstream and its subsidiaries, Grand River and its subsidiary, DFW Midstream Services and OpCo GP (collectively, the "Guarantor Subsidiaries") and SMLP have fully and unconditionally and jointly and severally guaranteed the 5.5% senior notes and the 7.5% senior notes (collectively, the "Senior Notes")(see Note 17). The Senior Notes have not been guaranteed by the Co-Issuers or the Non-Guarantor Subsidiaries. The Non-Guarantor Subsidiaries were previously guarantors of the Senior Notes. On August 5, 2016, a consent and waiver agreement to the revolving credit facility was executed to remove the guarantees of the entities that now comprise the Non-Guarantor Subsidiaries group effective March 30, 2016. There are no significant restrictions on the ability of SMLP or Summit Holdings to obtain funds from its subsidiaries by dividend or loan. Finance Corp. has had no assets or operations since inception in 2013.
As of June 30, 2016, we were in compliance with the covenants of the Senior Notes. There were no defaults or events of default during the six months ended June 30, 2016.

10. FINANCIAL INSTRUMENTS
Concentrations of Credit Risk. Financial instruments that potentially subject us to concentrations of credit risk consist of cash and accounts receivable. We maintain our cash in bank deposit accounts that frequently exceed federally insured limits. We have not experienced any losses in such accounts and do not believe we are exposed to any significant risk.
Accounts receivable primarily comprise amounts due for the gathering, treating and processing services we provide to our customers and also the sale of natural gas liquids ("NGLs") resulting from our processing services. This industry concentration has the potential to impact our overall exposure to credit risk, either positively or negatively, in that our customers may be similarly affected by changes in economic, industry or other conditions. We monitor the creditworthiness of our counterparties and can require letters of credit for receivables from counterparties that are judged to have substandard credit, unless the credit risk can otherwise be mitigated. Our top five customers or counterparties accounted for 46% of total accounts receivable at June 30, 2016, compared with 68% as of December 31, 2015.
Fair Value. The carrying amount of cash and cash equivalents, accounts receivable and trade accounts payable reported on the balance sheet approximates fair value due to their short-term maturities.
The deferred purchase price obligation's carrying value is its fair value because carrying value represents the present value of the payment expected to be made in 2020. Our calculation of the present value of the expected cash payment for the 2016 Drop Down Assets involved significant assumptions and judgments. Differing assumptions regarding any of these inputs could have a material effect on the cash payment and its present value. As such, its fair value measurement is classified as a non-recurring Level 3 measurement in the fair value hierarchy because our assumptions and judgments are not observable from objective sources (see Note 16).
The rollforward of the Level 3 liabilities measured at fair value on a recurring basis follows (in thousands).
Level 3 liabilities, January 1, 2016
$

Additions
507,427

Change in fair value
24,928

Level 3 liabilities, June 30, 2016
$
532,355


21


A summary of the estimated fair value of our debt financial instruments follows.
 
June 30, 2016
 
December 31, 2015
 
Carrying
value
 
Estimated
fair value (1)
 
Carrying
value
 
Estimated
fair value (1)
 
(In thousands)
Summit Holdings revolving credit facility
$
721,000

 
$
721,000

 
$
344,000

 
$
344,000

SMP Holdings revolving credit facility (2)

 

 
115,000

 
115,000

SMP Holdings term loan (2)

 

 
217,500

 
217,500

5.5% Senior notes ($300.0 million principal)
296,174

 
257,500

 
295,861

 
224,000

7.5% Senior notes ($300.0 million principal)
295,365

 
284,375

 
294,909

 
257,000

__________
(1) All estimated fair value calculations are Level 2.
(2) Debt was allocated to the 2016 Drop Down Assets prior to the closing of the 2016 Drop Down but was retained by Summit Investments after close.
The outstanding balance on the revolving credit facility is its fair value due to its floating interest rate. The fair value for the senior notes is based on an average of nonbinding broker quotes as of June 30, 2016 and December 31, 2015. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value of the senior notes.

11. PARTNERS' CAPITAL
A rollforward of the number of common limited partner, subordinated limited partner and general partner units follows.
 
Common
 
Subordinated
 
General partner
 
Total
Units, January 1, 2016
42,062,644

 
24,409,850

 
1,354,700

 
67,827,194

Net units issued under SMLP LTIP
115,674

 

 

 
115,674

Subordinated unit conversion
24,409,850

 
(24,409,850
)
 

 

Units, June 30, 2016
66,588,168

 

 
1,354,700

 
67,942,868

Subordination. Prior to the end of the subordination period, the principal difference between our common units and subordinated units was that holders of the subordinated units were not entitled to receive any distribution of available cash until the common units had received the minimum quarterly distribution ("MQD") plus any arrearages in the payment of the MQD from prior quarters. The subordination period ended in conjunction with the February 2016 distribution payment in respect of the fourth quarter of 2015 and the then-outstanding subordinated units converted to common units on a one-for-one basis.
Noncontrolling Interest. We have recorded Summit Investments' retained ownership interest in OpCo and its subsidiaries as a noncontrolling interest in the consolidated financial statements.
Summit Investments' Equity in Contributed Subsidiaries. Summit Investments' equity in contributed subsidiaries represents its position in the net assets of the 2016 Drop Down Assets and Polar and Divide that have been acquired by SMLP. The balance also reflects net income or loss attributable to Summit Investments for the 2016 Drop Down Assets and Polar and Divide for the periods beginning on the dates they were acquired or formed by Summit Investments and ending on the dates they were acquired by the Partnership. Net income or loss was attributed to Summit Investments for:
the 2016 Drop Down Assets during the six months ended June 30, 2016 and the three and six months ended June 30, 2015 and
Polar and Divide during the three and six months ended June 30, 2015.
Although included in partners' capital, any net income or loss attributable to Summit Investments is excluded from the calculation of EPU.
2016 Drop Down. On March 3, 2016, we acquired the 2016 Drop Down Assets from a subsidiary of Summit Investments. We paid cash consideration of $360.0 million and recognized a deferred purchase price obligation of $507.4 million in exchange for Summit Investments' $1.11 billion net investment in the 2016 Drop Down Assets (see

22


Note 16). In June 2016, we received a working capital adjustment of $0.6 million from a subsidiary of Summit Investments. We recognized a capital contribution from Summit Investments for the difference between (i) the net cash consideration paid and the deferred purchase price obligation and (ii) Summit Investments' net investment in the 2016 Drop Down Assets.
The calculation of the capital distribution and its allocation to partners' capital follows (in thousands).
Summit Investments' net investment in the 2016 Drop Down Assets
$
771,929

 
 
SMP Holdings borrowings allocated to 2016 Drop Down Assets and retained by Summit Investments
342,926

 
 
Acquired carrying value of 2016 Drop Down Assets
 
 
$
1,114,855

 
 
 
 
Deferred purchase price obligation
$
507,427

 
 
Borrowings under revolving credit facility
360,000

 
 
Working capital adjustment received from a subsidiary of Summit Investments
(569
)
 
 
Total consideration paid and recognized by SMLP
 
 
866,858

Excess of acquired carrying value over consideration paid and recognized
 
 
$
247,997

 
 
 
 
Allocation of capital contribution:
 
 
 
General partner interest
$
4,953

 
 
Common limited partner interest
243,044

 
 
Partners' capital contribution – excess of acquired carrying value over consideration paid and recognized
 
 
$
247,997

Cash Distributions Paid and Declared. We paid the following per-unit distributions during the three and six months ended June 30:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Per-unit distributions to unitholders
$
0.575

 
$
0.565

 
$
1.150

 
$
1.125

On July 21, 2016, the board of directors of our general partner declared a distribution of $0.575 per unit for the quarterly period ended June 30, 2016. This distribution, which totaled $41.0 million, will be paid on August 12, 2016 to unitholders of record at the close of business on August 5, 2016. We allocated the August 2016 distribution using a 25% marginal percentage interest in accordance with the third target distribution level.
Incentive Distribution Rights. Our general partner also currently holds IDRs that entitle it to receive increasing percentage allocations, up to a maximum of 50.0%, of the cash we distribute from operating surplus in excess of $0.46 per unit per quarter. Our payment of IDRs as reported in distributions to unitholders – general partner in the statement of partners' capital during the three and six months ended June 30 follow.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
IDR payments
$
1,938

 
$
1,534

 
$
3,874

 
$
2,976

For the purposes of calculating net income or loss attributable to general partner, the financial impact of IDRs is recognized in respect of the quarter for which the distributions were declared. For the purposes of calculating distributions to unitholders in the statements of partners' capital and cash flows, IDR payments are recognized in the quarter in which they are paid.


23


12. EARNINGS PER UNIT
The following table details the components of EPU.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per-unit amounts)
Numerator for basic and diluted EPU:
 
 
 
 
 
 
 
Allocation of net (loss) income among limited partner interests:
 
 
 
 
 
 
 
Net (loss) income attributable to common units
$
(51,222
)
 
$
1,847

 
$
(59,487
)
 
$
1,490

Net income attributable to subordinated units (1)
 
 
(753
)
 

 
(297
)
Net (loss) income attributable to limited partners
$
(51,222
)
 
$
1,094

 
$
(59,487
)
 
$
1,193

 
 
 
 
 
 
 
 
Denominator for basic and diluted EPU:
 
 
 
 
 
 
 
Weighted-average common units outstanding – basic
66,587

 
38,278

 
66,540

 
36,369

Effect of nonvested phantom units

 
183

 

 
108

Weighted-average common units outstanding – diluted
66,587

 
38,461

 
66,540

 
36,477

 
 
 
 
 
 
 
 
Weighted-average subordinated units outstanding – basic and diluted (1)
 
 
24,410

 
 
 
24,410

 
 
 
 
 
 
 
 
(Loss) earnings per limited partner unit:
 
 
 
 
 
 
 
Common unit – basic
$
(0.77
)
 
$
0.05

 
$
(0.89
)
 
$
0.04

Common unit – diluted
$
(0.77
)
 
$
0.05

 
$
(0.89
)
 
$
0.04

Subordinated unit – basic and diluted (1)
 
 
$
(0.03
)
 
 
 
$
(0.01
)
 
 
 
 
 
 
 
 
Nonvested anti-dilutive phantom units excluded from the calculation of diluted EPU
4

 

 
250

 
95

__________
(1) The subordinated units converted to common units on a one-for-one basis in February 2016 (see Note 11).

13. UNIT-BASED AND NONCASH COMPENSATION
SMLP Long-Term Incentive Plan. The SMLP Long-Term Incentive Plan (the "SMLP LTIP") provides for equity awards to eligible officers, employees, consultants and directors of our general partner and its affiliates. Items to note:
In March 2016, we granted 488,482 phantom units to employees in connection with our annual incentive compensation award cycle. These awards had a grant date fair value of $14.82 and vest ratably over a three-year period.
Also in March 2016, 120,920 phantom units vested.
As of June 30, 2016, approximately 3.9 million common units remained available for future issuance.
SMP Net Profits Interests. In connection with the formation of Summit Investments, up to 7.5% of total membership interests were authorized for issuance (the "SMP Net Profits Interests"). These membership interests were not contributed to SMLP in connection with its IPO. The expense associated with the SMP Net Profits Interests was allocated to Summit Investments' subsidiaries other than SMLP and its subsidiaries after the IPO. In connection with our acquisitions of the 2016 Drop Down Assets and Polar and Divide, we recognized the SMP Net Profits Interests' noncash compensation expense that had been allocated to the contributed subsidiaries prior to their respective drop down date due to common control.

24


Noncash compensation recognized in general and administrative expense related to the SMP Net Profits Interests was as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
SMP Net Profits Interests noncash compensation
$
90

 
$
251

 
$
285

 
$
502


14. RELATED-PARTY TRANSACTIONS
Acquisitions. See Notes 1, 9, 11 and 16 for disclosure of the 2016 Drop Down and its funding.
Reimbursement of Expenses from General Partner. Our general partner and its affiliates do not receive a management fee or other compensation in connection with the management of our business, but will be reimbursed for expenses incurred on our behalf. Under our partnership agreement, we reimburse our general partner and its affiliates for certain expenses incurred on our behalf, including, without limitation, salary, bonus, incentive compensation and other amounts paid to our general partner's employees and executive officers who perform services necessary to run our business. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. Due to affiliate on the consolidated balance sheet represents the payables to our general partner for expenses incurred by it and paid on our behalf.
Expenses incurred by the general partner and reimbursed by us under our partnership agreement were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Operation and maintenance expense
$
6,623

 
$
6,472

 
$
13,372

 
$
12,946

General and administrative expense
7,679

 
7,087

 
15,457

 
14,222

Expenses Incurred by Summit Investments. Prior to the 2016 Drop Down and the Polar and Divide Drop Down, Summit Investments incurred:
certain support expenses and capital expenditures on behalf of the contributed subsidiaries. These transactions were settled periodically through membership interests prior to the respective drop down;
interest expense that was related to capital projects for the contributed subsidiaries. As such, the associated interest expense was allocated to the respective contributed subsidiary's capital projects as a noncash contribution and capitalized into the basis of the asset; and
noncash compensation expense for the SMP Net Profits Interests, which were accounted for as compensatory awards. As such, the annual expense associated with the SMP Net Profits was allocated to the respective contributed subsidiary.
Subsequent to any drop down, these expenses are retrospectively included in the reimbursement of general partner expenses disclosed above due to common control.

15. COMMITMENTS AND CONTINGENCIES
Operating Leases. We and Summit Investments lease certain office space to support our operations. We have determined that our leases are operating leases. We recognize total rent expense incurred or allocated to us in general and administrative expenses. Rent expense related to operating leases, including rent expense incurred on our behalf and allocated to us, was as follows:
 
Three months ended June 30,