Rice Energy Operating LLC

Income Taxes

Prior to the Company’s change in tax status to a partnership on October 19, 2016, the Company’s income was reported as part of Rice Energy’s consolidated federal tax return, and the Company was taxed as a corporation under the Internal Revenue Code, subject to federal income tax at a statutory rate of 35%. The Company has not reported any income tax benefit or expense for periods subsequent to October 19, 2016 because, as a partnership, the Company is not subject to federal income tax.

In addition, the Company has not reported any income tax benefit or expense for periods prior to the consummation of Rice Energy’s IPO in January 2014 because Rice Drilling B, Rice Energy’s accounting predecessor, is a limited liability company that was not subject to federal income tax. The reorganization of Rice Energy into a corporation in connection with the closing of Rice Energy’s IPO required the recognition of a deferred tax asset or liability for the initial temporary differences at the time of its IPO. The resulting deferred tax liability of approximately $162.3 million was recorded in capital at the date of the completion of Rice Energy’s IPO, as it represents a transaction among shareholders.

The components of the income tax provision are as follows:



	Year Ended December 31,
(in thousands)	2016			2015			2014
Current tax expense:
Federal	$	9,909		$	5,851		$	23,414
State	(2,802		)	(593		)	3,395
Total	7,107			5,258			26,809
Deferred tax (benefit) expense:
Federal	(201,288		)	18,066			49,393
State	(46,633		)	(11,206		)	15,398
Total	(247,921		)	6,860			64,791
Total income tax (benefit) expense⁽¹⁾	$	(240,814	)	$	12,118		$	91,600

(1)

As a result of the Company’s October 19, 2016 change in status to an entity not subject to federal and state income tax, deferred tax liabilities in existence at that date were written off, yielding a tax benefit of approximately $272.0 million. Of the total amount written off, $247.9 million related to net liabilities of Rice Energy subsidiaries, and $24.1 million related to net liabilities due to Rice Energy.

Income tax (benefit) expense differs from amounts computed at the federal statutory rate of 35% on pre-tax income as follows:



	Year Ended December 31,
(in thousands)	2016			2015				2014
Tax at statutory rate	$	(136,861	)	$	(89,560	)		$	108,722
Permanent tax differences	41			74				18
State income taxes⁽¹⁾	(32,133		)	(7,668		)		12,216
Partnership earnings (1/1/14 - 1/28/14)	—			—				(66,239		)
Partnership earnings (10/19/16 - 12/31/16)	113,541			—			—	—
Noncontrolling partners’ share of partnership earnings⁽²⁾	(26,395		)	(8,168		)		(203		)
Change in entity tax status	(175,452		)	—				—
Goodwill impairment	—			103,218				—
Incentive unit expense	15,716			12,634				37,086
Other, net	729			1,588				—
Income tax (benefit) expense	$	(240,814	)	$	12,118			$	91,600
Effective tax rate	61.58		%	(4.74		)%		29.49		%


(1)	Includes $28.3 million of state deferred benefit relating to the write-off of deferreds due to the change in entity tax status.


(2)	Prior to 2016, the noncontrolling interest was principally due to the Partnership’s earnings. During 2016, noncontrolling interest includes the earnings of the Partnership, GP Holdings and Strike Force Midstream.

The Company recognizes deferred tax liabilities for temporary differences between the financial statement and tax basis of assets and liabilities. The effect of changes in the tax laws or tax rates is recognized in income in the period such changes are enacted. Prior to 2016, the deferred tax liabilities primarily relate to intangible drilling costs, depreciation and depletion. As a result of the Company’s change in tax status to a partnership on October 19, 2016, all of the Company’s deferred tax liabilities and deferred tax assets were written off to tax expense because, as a partnership, the Company is not subject to federal income tax. The following table summarizes the source and tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2016 and 2015.



	Year Ended December 31,
(in thousands)	2016		2015
Deferred income taxes
Total deferred tax assets	$	—	$	299,023
Total deferred tax liabilities	—		(546,944		)
Total net deferred tax liabilities	—		(247,921		)

Principal components of deferred tax assets and liabilities:
Drilling and development costs expensed for tax	—		(368,949		)
Tax depreciation in excess of book depreciation	—		(92,710		)
Investment in partnerships	—		57,227
Incentive compensation	—		5,576
Net operating loss carryforwards	—		153,558
Hedging loss	—		(85,285		)
AMT tax credit	—		7,999
IDC 59e election	—		73,977
Other	—		686
Total	$	—	$	(247,921	)

Based on management’s analysis, the Company did not have any uncertain tax positions as of December 31, 2016.