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Edited Transcript of CNXM earnings conference call or presentation 27-Apr-20 3:00pm GMT

Q1 2020 CNX Midstream Partners LP Earnings Call

Canonsburg May 7, 2020 (Thomson StreetEvents) -- Edited Transcript of CNX Midstream Partners LP earnings conference call or presentation Monday, April 27, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad A. Griffith

CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC

* Donald W. Rush

CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC

* Nicholas J. DeIuliis

CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC

* Tyler Lewis

CNX Midstream Partners LP - VP – IR

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Conference Call Participants

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* Christopher Paul Tillett

Barclays Bank PLC, Research Division - Research Analyst

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning. Welcome to the CNX Midstream Partners First Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Go ahead.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [2]

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Thank you, and good morning to everybody. Welcome to CNX Midstream's First Quarter Conference Call. We have in the room today, Nicholas DeIuliis, our Chairman and CEO; Chad Griffith, President and Chief Operating Officer; and Don Rush, our Chief Financial Officer. Today, we'll be discussing our first quarter results, and we have posted an updated slide presentation to our website.

As a reminder, any forward-looking statements we make or comments about future expectations are subject to business risks, which we have laid out for you in our press release today as well as in our previous Securities and Exchange Commission filings.

We will begin our call today with prepared remarks by Nick, followed by Chad, and then we will open the call up for Q&A. With that, let me turn the call over to you, Nick.

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [3]

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Okay. Thank you, Tyler. Good morning, everybody. I hope that everybody's doing well out there and managing through this. I just wanted to take a minute at the front, really, to highlight 2 things that we've been talking about, both internally with our team, as well as externally with all of our stakeholders, both of them coming very apparent, I think, with the last couple of weeks and 1.5 months or so nationally and globally.

First one is that the teams and the individuals and the workers that you find in the industries that we work within, midstream, energy in general, have been absolutely phenomenal. I don't think that comes as a great shock to many of us who have been familiar with these industries and these individuals over our careers or through time, but it is certainly something that was to be hold in a really stressful crisis period, not just for our nation, but again globally. And that sort of leads into the second sort of comment at the start, which is this crisis has once again highlighted how crucial, how foundational, how essential the energy, natural gas, petroleum, midstream processing industries, are to our way of life.

So you think about all the things that really, really matter during this recent time period, hospitals and what's powering them. You think about just the logistical supply chains to transport essential goods to and from the manufacturers or producers of them to the consumers of them. Everything is driven off of the products that we're transporting and processing at CNX Midstream. Food, you think about what's fertilizing the food, how it's being transported to processing, what's processing the food, what's preserving it at the grocery store and what's ultimately cooking it at, all of it, again, really dependent upon the industry that the CNX Midstream operates within. And then even things like the masks and hand sanitizers, so it's really the end product use opportunity the petroleum and natural gas provides. So it's been -- I think in some ways, this challenge has been, as stressful as it's been, it has been, I think, very rewarding to see our industry play a crucial role and underscore once again how important it is.

The other things that I wanted to really highlight before turning it over to the team, Chad, in particular, I want to talk about how, in these times, it's also become very strategic, crucial and I think it highlights the very good relationship that CNX Midstream enjoys and the alignment that it enjoys with CNX Resources. To have a strong anchor and a strong shipper: strong, defined by reserve base; strong, defined by footprint, but also strong, defined by balance sheet and financial wherewithal, to have that as our anchor shipper and our largest customer, that puts us in a position to do some great things and navigate and also thrive during these challenging times. So we're strategically linked to the right upstream partner. And that wasn't by accident, of course. That was by a methodical effort over a long period of time, and we're happy that, that's the situation today.

Another thing I wanted to hit upon is how our capital intensity has been changing and improving, frankly, dramatically. The buildout, of course, is completed of these midstream assets. We've been talking about that towards the end of '18 and all through '19, and that is largely completed now. I think Slide 3 in the deck that we posted this morning sort of shows, in the lower left of that slide, what the capital intensity is doing quarter-by-quarter. Almost looks like an exponential decline. And that's the type of things that we had projected and the type of thing that we wanted to see. And it's good to see that coming to manifest at just the right time.

And we've talked a lot in this about maximizing free cash flow. In very complicated stressful times like these, sometimes things get very simple with respect to what works best. So generating free cash flow, obsessing on spend, whether it's OpEx, CapEx, overhead, but obsessing on that spend and trying to make that as efficient as it possibly can be, in paying down debt, increasing liquidity, lowering leverage ratio, those are the hallmarks of what's going to be a successful entity versus those that would not be successful in an environment like this. It preserves value, I think, for the unitholders. And it sets CNX Midstream not just in the position, as I said, to navigate these tough times, but actually to thrive in them, and that's what we're prepared to do.

So with that, I'm going to turn it over to Chad now, who's going to go into a little more detail with respect to the quarter and what we're seeing.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [4]

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Thanks, Nick. CNXM had a strong quarter with $60.4 million of adjusted EBITDA and $46.9 million of distributable cash flow. The quarter's capital expenditures were down 57% sequentially as we close out the major system overhaul we began last year. The 2 major greenfield stations, Dry Ridge and Buckland are both now online and moving gas. Moving forward, we expect to step down the business' capital intensity as we've been describing the past several quarters.

We ended the quarter with 3.1x leverage ratio and $258 million of liquidity. Echoing Nick's comments, lower leverage, ample available liquidity and cash flow generation define our position and are essential in this time of uncertainty caused by the global pandemic. In response to COVID-19, we rolled out social distancing and quarantine protocols for our field operations and construction locations to protect the health and safety of our employees and service providers. So far, our ability to move gas and our capital projects have not been materially impacted by the virus.

Slide 4 looks at our major capital projects in Southwest Pennsylvania. Now that Dry Ridge and Buckland are both flowing gas, we are working closely with our shippers on the timing of Phase 2, which includes the installation of additional horsepower at those 2 locations. We currently expect to install this additional horsepower this year and it is included in the year's capital guidance. We are also in the process of expanding our capacity at Dry Ridge, giving our shippers some additional delivery capacity into Leach Express, where they can expect to receive slightly better pricing.

We have a handful of pad connects in the plan for the year, including our first true arm plant new pad connect, which we expect to have completed during Q2. We expect these projects to have long utilization profiles and are essential to provide existing capabilities for our shippers, and this further improves our operational leverage. We do not have any expenditures in our plan that bank on improving markets and volumetric growth levels or capacity overbuild.

Turning to Slide 6. We've updated guidance and capital allocation to reflect the ever-changing environment. We've reduced our planned capital expenditures for the year by 16%, driven largely by improved bid prices for the work we have planned for the balance of the year. Our EBITDA guidance reflects a potential expected range of volume deferrals from our customers in 2020.

Late in the first quarter, we saw non-CNX shippers begin to defer flowing volumes from NGL-rich fields. The COVID-19 pandemic has created unprecedented demand loss for certain fuels, which has reduced the demand for certain NGLs. This has resulted in significantly depressed NGL pricing, and as a result, the economics for wet gas production are challenged, and some of our shippers have begun to defer production to later periods.

Fortunately, we see 2 reasons to be optimistic about these flows resuming soon. First, the gas strip is very strong heading in the winter in 2021. For producers with wet wells, both gas price and NGL price play a role in the equation. So strong gas prices can offset weaker NGL prices or vice versa. Second, we see the oil price and fuel demand loss as temporary. We are already beginning to see signs that the U.S. is ready to begin returning to some level of normalcy, and we expect demand to recover alongside. Meanwhile, the collapse of oil prices has resulted in significantly large reductions in rig and frac activity in oil plays such as the Permian, which also provides a significant amount of NGLs and associated gas in direct competition with NGLs and gas from Appalachian. The recovering demand and declining supply should push commodity prices higher and wet gas well economics to recover to the point that our shippers should resume any deferred production. But the energy markets are more dynamic than ever, and we will continue to update the public with our best view of performance expectations.

There continues to be tremendous uncertainty with respect to the COVID-19 virus situation and how the global economy will recover from this unprecedented shutdown. How things play out over the coming weeks and months will factor greatly into how commodity markets perform and play a huge role in the availability of capital. Due to this uncertainty, the Board of CNXM has decided to temporarily reduce cash distributions by 80%, beginning during the first quarter of 2020. We expect to use this incremental retained cash to strengthen the balance sheet and to pay down debt.

With that, I'll hand it back over to Tyler to open Q&A.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [5]

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Yes. Thanks, Chad. And operator, if you can open the line up for Q&A at this time, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Jeremy Tonet from JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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I was just wondering if you could dive into kind of what's happening in Appalachia in a bit more detail on the liquids-rich side. And when did you start to see this happen exactly, and just kind of thoughts on duration? And also, really, how much of this is CNX versus third-party producers here where you're seeing the reduced activity?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [3]

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So to the first part of your question, sort of some of the broader macro context, we really -- even before the OPEC Russia oil supply situation and then the demand destruction caused by COVID-19, I think a lot of Appalachian producers were already challenged by low gas prices. And then to be hit with plummeting oil prices from the oversupply of oil from Russia and OPEC as they went into their price war, and then get hit by demand destruction of COVID-19, so it's just really a perfect storm of just negative factors that weighed heavily on wet gas economics, really, across the country. And I think we're seeing that really across the U.S., really across North America in any kind of oil production or wet gas production.

It's beginning to become apparent that with the demand destruction, no one's traveling, no one's flying. There's a lot of demand destruction associated with those things, like the refined fuels that go into those activities. And so that's backing up refinery runs, and that's resulting in a reduction in condensate demand. That's resulting in declines on butane demand and C5+ demand. And unfortunately, like us, you can't just hand -- you can't just cherry-pick which of those products you want to produce. It sort of all comes out of the ground together. And if you don't have any place to move some of that gas flow, it becomes very challenged to produce the rest, even if the rest comes out at favorable pricing.

So we've been working with our producers to try to find ways to keep this gas flowing. It's just -- unfortunately, right now, it's very tough to move some of these products. And even if you can move those products, the prices are pretty low. I know folks are looking at storage options. They're looking at different ways of blending this stuff and using this stuff. But right now, for the year now, there's just a lot of uncertainty about what is going to happen with wet gas, with condensate, with NGLs. So that really played a lot. That's one of the many factors of why we decided to retain a little bit more cash and try to strengthen the balance sheet, at least until we get through the summer, and really, a lot of the uncertainty and risk associated with what the wet gas market is going to do and the commodity market is going to do over the course of the summer.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [4]

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And from the mix, CNX had our earnings release earlier. They kind of walked through the different production profiles that could happen up there. So can't get into third-party specifics, but at least gives you some color of how much could be on the CNX side. And as Chad touched on earlier, a delay of a couple of months or a couple of quarters, changes a little bit of 2019's profile, but the gas isn't going anywhere.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [5]

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2020.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [6]

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Or '20 -- yes, sorry, 2020's profile. But the gas is not going anywhere. It will be there. As we move into 2021, the cash flows that were expected from these wells will be harvested by next midstream. And net-net, it is very, very difficult to predict how the next months and quarters unfold and even as you roll into '21, but CNX Midstream is set to generate a substantial amount of free cash flow and really focused on making sure that, that free cash flow is put in the best place possible. So near term, patience, prudence, focused on balance sheet, liquidity and debt management makes a lot of sense. Long term for CNX Midstream, it's a phenomenal business with a lot of free cash flow and a lot of allocation opportunity to put it to work in many, many years to come.

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [7]

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And I think also, you've got a correlation between the comment of when you look at what's happening with liquids and it's not going anywhere, right, it's being deferred for a different time, it also correlates with respect to what we're doing with our free cash flow at CNX Midstream, whereas we're basically storing that, not in the ground, but we're storing that effectively on our balance sheet, which I think is one of the terms that we used actually in the slides on Slide 6. So again, the value is basically being allocated, and it's being allocated into a place where that flexibility and that optionality will be available to us if and when so we choose to use it.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [8]

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And I think, just to sort of wrap it up, like the oil situation, the oil price, the condensate price, NGL price is weighing heavily upon oil producers really across the North America, right? And so we're seeing a dramatic drop in rig activity, in frac crew activity and a lot of oil plays. Permian, Bakken, D&C activity is down dramatically in those areas. That's going to bring a lot of the stuff off the market. Supply of these products are going to decline. It's just the big question is when does demand recover, and when does storage levels work down to the point that you begin seeing a good price for these products. We know it's coming, it's just a big question of when.

And then this is also a big benefit on the associated gas side, right? So as oil plays come off, the associated gas comes off, brings a lot of strength in the gas market. You see that strength in the forward strip. With winter pricing in 2021, pricing improve materially. CNXM is positioned -- its future is weighted heavily towards the dry gas areas. A lot of the investments we've made over the last 1.5 years has been focused in dry gas areas. CNX, our principal shipper, is focused on dry gas. And so all these things that are happening that are potentially negative in the oil space and the NGL space is actually positive for the dry gas play, which is where CNXM and its principal shipper, CNX, is focused.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [9]

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That's helpful. I was just wondering, as a follow-up, if you could remind us of what you said publicly with regards to how much of your business is third party and who your larger third-party business is with.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [10]

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So we try to stay away from naming, actually, any of our other shippers other than CNX. I want to say the flows are roughly 1/3 by the third party, about 2/3 CNX.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [11]

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Got it. And then just wanted to turn to the distribution real quick here. I mean it seems to us that the leverage was not that high. And so just curious on the level to cut 80%. Have you had conversations with the rating agencies or from the banks? Was there kind of pressure there to reduce it to that degree? Or what were some of the driving factors there?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [12]

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Yes. I think Nick talked to -- had mentioned in the opening here that this is something where unprecedented times, where capital markets sit and with COVID-19 and just the whole situation that exists around us, we wanted to be thoughtful and try to just maintain as much, call it, liquidity and balance sheet strength as we can, not knowing how long these situations may or may not last. And in our minds, right now, bolstering your balance sheet and making it stronger is a good near-term risk-based decision. And as Nick said, it creates even more optionality as we roll forward into whatever normalcy looks like, call it, post this situation.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Got you. And last one, if I could. I think the IDR has been taken out recently. I think there were some deferred payments or there's some contingency payments. Can you just update us on how that stands, I guess? And any thoughts on the reduction in the cut coming right after it?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [14]

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Yes. So the scheduled payments are laid out. It's $50 million end of this year, $50 million end of '21 and $35 million at the end of '22.

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Operator [15]

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Our next question is from Chris Tillett from Barclays.

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Christopher Paul Tillett, Barclays Bank PLC, Research Division - Research Analyst [16]

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I guess first for me, there were some comments out of the -- from CNX, your sponsor, with their release this morning, that they're looking at entering maintenance mode from '22 to '26. Just curious to know, I guess, from a midstream perspective, sort of what that looks like and what that means for volumes on the midstream system.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [17]

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Yes. And then we've provided -- the upstream deck has a lot of information. So for midstream, we've built out a pretty big system to be ready to, call it, have a lower capital program going forward. So from CNX Midstream, the capital intensity is much less, and the big build is set up. So midstream is in, call it, an enviable position to generate a bunch of free cash flow in that type of a world. And just going back to the CNX call from earlier, if there would be gas price increases or any kind of growth up there, that will just be incremental future plan. So capital intensity is lower. A maintenance plan with our 2.5% escalation on our fee profile at CNX Midstream still allows us to produce substantial free cash flow due to the capital intensity being so low or OpEx being best in class. And like I said, that fee contract increasing is escalating as years move on.

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Christopher Paul Tillett, Barclays Bank PLC, Research Division - Research Analyst [18]

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Okay. That's helpful. And then maybe turning to the distribution for a second. It sounds like from some of the comments you guys have made on this call that you're viewing the cut there as sort of -- or possibly temporary. I guess is that a fair way to characterize it? And if so, when you return to something -- a situation that resembles more normalcy, do you think we should expect to see stair steps up in the distribution from the re-rated level, or just a straight return to where it was last quarter?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [19]

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Yes. So not to get into any kind of future guidance. As we've talked, it's around, right now, where the world sits in the, call it, the unclear nature of how long this lasts and when capital markets and the like get back to normal, it's hard to say over the long term. We do think right now, the prudent decision is just to bolster liquidity to use incremental cash flow to pay down debt. As we've always said, we view ourselves as a capital allocator and we like to allocate the free cash flow to the best place. So that is something we'll stay true to here. And right now, the best place for cash flow is to really pay down debt and bolster the liquidity of the business. And when normalcy comes, whenever that may be and whatever that looks like, we'll make sure we keep a playbook that follows the variables and tries to allocate the dollars into the best place that they can be allocated to.

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Christopher Paul Tillett, Barclays Bank PLC, Research Division - Research Analyst [20]

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Okay. And then maybe just last for me. To follow up on something Jeremy touched on. The -- with the distribution cut coming after the IDR transaction, and you still have the deferred payments coming out in the next couple of years, is there any opportunity there to adjust those payments or renegotiate those payments, given that the IDR transaction is now seemingly more expensive given the distribution cut?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [21]

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A couple of thoughts there. One, if you look at how we're assuming the world to look with midstream and being free cash flow positive, and there's a lot of moving parts, right? There's all kinds of different gathering rates. There's the payments that you've mentioned. There's many different components to what constitutes those cash flows. We assume that basically everything in that remains at steady state. So no assumed changes to gathering rates or contractual gathering agreements or installment payments tied to the IDR transactions.

Second thought is that, to my way of looking at this from a CNX Midstream perspective, the IDR transaction basically took what was the largest unitholder at the time, and saw them double down with respect to their holdings in units, which was a big vote of confidence in the long-term prospect of CNX Midstream. So with respect to distribution policy or the distribution levels that we announced today, CNX Resources at 53%, give or take, of the units is in the same shoes as the other unitholders. And that's what we wanted to see when we're trying to contemplate what an IDR transaction would do or not coming out of it.

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Operator [22]

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At this time, there's no more questions, so we will conclude the question-and-answer session. I would now like to turn the conference back over to Tyler Lewis for closing remarks.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [23]

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Thank you, operator. And thank you all for joining us here this morning. We look forward to speaking with you after the call if you have any questions, or next quarter's call.

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Operator [24]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.