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Edited Transcript of CNXM earnings conference call or presentation 30-Jul-19 3:00pm GMT

Q2 2019 CNX Midstream Partners LP Earnings Call

Canonsburg Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of CNX Midstream Partners LP earnings conference call or presentation Tuesday, July 30, 2019 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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* David Meagher Amoss

Heikkinen Energy Advisors, LLC - Research Analyst

* Ethan Heyward Bellamy

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Rahul Krotthapalli

JP Morgan Chase & Co, Research Division - Analyst

* Timothy D. Howard

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the CNX Midstream Second Quarter 2019 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. Please 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 second quarter conference call.

We have in the room today Nick DeIuliis, our Chairman and CEO; Chad Griffith, President and COO; and Don Rush, our Executive Vice President and Chief Financial Officer. Today, we will be discussing our second 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, where Don will participate as well.

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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Good morning, and thanks for joining us.

Before Chad's commentary, I wanted to provide a quick summary of where we see ourselves today. And I'm going to do that by looking back at the 3-year projections we published in our March 2018 Analyst Day.

We see that, taking the sum of 2018 through 2020, we're within 6% of EBITDA and 7% of capital expenditures when comparing to midpoint of that guidance that I just mentioned. This is despite relatively reduced upstream customer activity, which is resulting in lower well TIL counts which in turn extends core inventory. So said differently, our sponsor was able to do a lot more with less, which resulted in comparable financial results for CNX Midstream while preserving drilling inventory for upcoming years. And the types of things that drove that ability or that performance, they were the traditional drivers of greater returns in the E&P and midstream business. It's improved well profiles, EUR outperformance, the stack pay opportunities with the Utica and the Marcellus and cycle time compression along with debottlenecking projects.

We saw a great 2018, where we accelerated some activity. 2019's focus is around the substantial build-out of capital projects, which are all on track. And we're reaching an inflection point in 2020, where the company expects to generate a nice level of organic free cash. This company continues to execute, and we are intent on doing what we say we're going to do. That's what you're seeing in our numbers again this quarter as well as our updated 2020 guidance. Our focus moving forward will be on operational execution, and we look forward to providing more color as the quarters unfold.

So now I'm going to turn it over to Chad to go over an update for the quarter.

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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.

The company posted another strong quarter of results, which are highlighted on Slide 3 of our slide deck. Average daily throughput excluding volumes under high-pressure short-haul agreements was 1,730 BBtus per day in the quarter, up around 9% when compared to the first quarter of 2019. Net operating cost per unit declined 11% year-over-year, as we continue to benefit from efficiency initiatives, including our centralized control room and increased use of data analytics.

Our focus on costs have helped drive our adjusted EBITDA, which in the quarter was $59.3 million or $18 million higher than the second quarter of last year. Despite our leverage ratio remaining well within our targets and below the industry average, it ticked up slightly to 2.8x compared to 2.7x last quarter. We expect our leverage ratio to peek at the end of the year at around 3.2x and then quickly come back down to around 2.8x by the end of 2020.

Moving on to Slide 4, we have provided updated guidance for 2019 and 2020. We are reaffirming our 2019 guidance, but we are providing an update to 2020, which is consistent with our main sponsor CNX who provided updated guidance this morning.

We expect throughput to increase approximately 19% in 2020 compared to 2019 based on the midpoint of the guidance ranges. Also we expect capital to decrease significantly to $80 million to $100 million, which is down from the $310 million to $330 million we expect to spend in 2019. As we have stated in previous quarters, we expect capital to decline substantially as we return to more run rate construction program towards the end of 2019 and into 2020 after completing the handful of projects and system expansions that I will touch on shortly. The reduced capital in 2020 is helping to drive expected free cash flow next year to between $120 million to $140 million.

Lastly, we are reaffirming our 15% annual distribution growth target. As a reminder, this second quarter was our 17th consecutive quarterly cash distribution increase at the targeted 15% annual growth rate.

Slide 5 is an update of our major 2019 capital projects.

Our Dry Ridge facility is up and running, flowing at just over 100 million a day to Leach XPress, as we expect to ramp up further in November as we complete the installation of additional dehydration and compression there. At our Morris Station, we've just completed commissioning 3 new compressors for an incremental 7,500 horsepower, with 2 more machines being installed and expected to be up and running later this year.

Our Buckland Station and Richhill pipelines are well underway and remain on budget and schedule. These projects will help optimize our system, enhance existing production on our system and support continued drilling by CNX in the Southwest PA field.

Slide 6 is one that we have shown in the past. We've been getting some questions on the minimum well commitments, so we thought it might be helpful to provide the summary again.

Per the amended gas gathering agreement, we have a total of 192 total well commitments, of which 180 are CNX' responsibility, with the remaining 12 going to HG. The easiest way to think about these commitments that -- is that there are roughly 40 wells per year. Separately, we have a minimum volume commitment in CNX' Shirley-Pennsboro field, which is approximately 130 BBtus a day for this year. That amount increases slightly over the coming years, but the commitment amounts to approximately 1 pad per year. CNX is currently producing above that minimum commitment.

And with that, I'm going to turn it back over to Tyler.

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

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Thanks, Chad.

And operator, if you can open the line up for questions 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 today will come from Jeremy Tonet of JPMorgan.

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Rahul Krotthapalli, JP Morgan Chase & Co, Research Division - Analyst [2]

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This is Rahul on for Jeremy Tonet here. Just starting off with, like, can you elaborate on how much of upside to the minimum equity commitment have been incorporated in your 2020 guidance? Just curious on also if you can talk about the upside risk to this range.

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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 the forecasts that we put out are largely based on -- they're synced up very well with what CNX has put out there. I think they're slightly above the minimum well commitment. And so I think that, if anything, there are upsides to that case as we keep a close eye on the commodity markets moving forward to see what commodity prices do. And then CNX will adjust their activity accordingly, but I think for -- as far as CNX Midstream is concerned, I think that's largely upside potential for them. When we reset the gathering agreements last year, we really wanted to target a minimum well commitment level and a minimum volume commitment that underpinned our distributions, 15% distribution growth policy, and we're right on track for that. And so I think, if anything, stronger commodity markets next year will lead to increased activity from CNX and drive us further above that sort of minimum case.

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Rahul Krotthapalli, JP Morgan Chase & Co, Research Division - Analyst [4]

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Got you. So the -- and this is -- today provide us flows for the 250. Or is it much lower than that?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [5]

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It -- yes, we haven't articulated that exactly, but the range has that contemplated in it. If there would be -- CNX' call earlier today talked to -- potentially on how gas prices unfold over the next 18 months, shaping their production profile a bit. That is thought through as thinking through the 2020 guidance here at CNX Midstream. So we've targeted and historically we've shown bar charts on what -- if you did only the minimum, what would it look like. So I think that can provide a pretty good reference for you. And you can kind of see where it would stack up closer to the bottom end of the range we're targeting in 2020.

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Rahul Krotthapalli, JP Morgan Chase & Co, Research Division - Analyst [6]

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Got you. That's helpful. And then how should we think about CapEx into 2020 and beyond given now we have accelerated some of the part in second half of '19?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [7]

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Sure. So really the big system overhaul that we kicked off really last year involved expanding and establishing a few -- you saw expanding a few brownfield compressor stations and then building a few greenfield compressor station, along with laying a few major trunk lines. The majority of that work is wrapped up this fall. We then -- after which, we really move into a period where incremental compression is solved by plug-and-play compressor installation; or if we need additional dehydration capacity, becomes plug-and-play dehyd installation.

If we need well connects, those are incremental well connects off of the trunk lines that we've established this year. So on a go-forward basis, that's really why you see a much lower capital number moving into next year because at that point it just becomes well connects and incremental compression installs. And when we think about incremental compression installs, the way we've restructured the gathering agreement is that, that actually becomes an incremental revenue source because there's now an incremental fee associated with compression service under our new gathering agreement.

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Rahul Krotthapalli, JP Morgan Chase & Co, Research Division - Analyst [8]

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Got you. That's helpful color, guys. And then lastly, any thoughts you could share on winning the new third-party businesses going forward?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [9]

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Yes. So we actually had a -- we had a really good win in the quarter. It's relatively small as from an EBITDA perspective, but the team was able to close a gathering agreement with a third party. We obviously keep our customer information very confidential, so I can't really disclose too many details, but it was definitely a win. We got a legitimate third-party business coming, and we expect to see the first volumes from that appear next year.

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Operator [10]

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Our next question will come from David Amoss of Heikkinen Energy.

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David Meagher Amoss, Heikkinen Energy Advisors, LLC - Research Analyst [11]

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I just wanted to think theoretically about the $80 million to $100 million spend in 2020 and what that meant for potential volume growth in 2021 and also how sustainable that CapEx number would be going forward.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [12]

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So largely from -- like I already -- I answered the previous question. We made it a point to design a system and roll out a system through the end of '18 and 2019 that became very much a plug-and-play expansion system. So that's really why you see such a dramatic drop-off of capital spend as we complete those projects this year. That was a big slug of capital upfront, but it was a step-change in system design. Moving forward, it really becomes incremental well connects and incremental compression installs. So that's really on a go-forward basis. When you think about the core areas that are in CNXM's footprint, it really does become like very small capital spend to connect each incremental pad.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [13]

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Which sticks and ties to the minimum activity and well commitments and the growth plan laid out that Chad talked to earlier, if there would be any additional assets being built or dropped into the MLPs where you would get a new capital spend, but for the current systems that are in there, it is just, as Chad mentioned, the incremental plug-and-play capital and on an as-needed basis.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [14]

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And I think, if you guys tuned into the CNX call, it was highlighted there they were able to hit some of their cost targets for Utica wells in the Southwest PA area. So to the extent that it's been all good news for Southwest PA Utica, that's just more incremental activity on top of an existing gathering system that will lead to longer utilization of existing assets.

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David Meagher Amoss, Heikkinen Energy Advisors, LLC - Research Analyst [15]

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Okay. I guess my question was really just as simple as are you growing at that level in 2021 and beyond throughput.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [16]

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The actual growth or not growth will be determined on the upstream activity sets. So if you look at '21 and beyond, the capital program will allow it to grow. And then the ultimate activity sets of the minimum well, minimum activity commitments do grow the company. That's how we built them in place. So the -- this supports the minimum activity commitment level. And as long as the minimum activity commitments are hit, which right now they seem likely just due the nature of them and the penalties that you would incur if you don't hit them, you would grow at those levels.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [17]

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And we've consolidated the midstream and upstream teams. We bought back GP last year. We're going to continue consolidating the teams together in-house to continue to lead to better alignment between midstream and upstream. Now that we've got the major pieces built, those incremental well connects can really be built on a sort of just-in-time basis. And so the future capital spend is going to be much more closely connected to what the upstream activity set looks like. So we're not going to have to spend a slug of money next year to support what CNX may or may not do in '21 and beyond. Those will be much more synced up and much more closer in time.

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Operator [18]

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The next question will come from Ethan Bellamy of Baird.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [19]

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I've got a few here. And to start with: Just to clarify on the guidance. That is total CapEx, not just growth CapEx, correct?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [20]

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Correct.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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And can you break out expectations on maintenance versus growth in that number?

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [22]

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Details on the guidance tables...

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [23]

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Yes, in the guidance table we do have it detailed, but I think our maintenance capital we laid out was around $25 million or so, $25 million to $30 million.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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Per year.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [25]

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Yes, for 2020...

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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Okay. And is there any lumpiness in that number, any -- or should we just rate pro rata for the year?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [27]

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It just changes as your volumes change, but for 2020, $25 million is a good number.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Got it. Moving to incentive distribution rights. Any incremental thoughts there?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [29]

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Yes. I -- we get the question a lot, and I think our answer remains the same. We continue to study what everyone else is doing. We continue to look at what the results of those transactions have been. We've not really seen any material improvements in a lot of our peers' equity position as a consequence of solving their IDRs or quote-solving their IDRs. And so where we sit here and today, we don't -- we think we've got time. And we're not going to rush into something and try to make a "solution" to IDRs and then really not benefit anyone, whether don't benefit CNX, don't benefit our unitholders. And so we're -- sort of are going to continue to focus on execution, continue to grow free cash flow, continue to grow distributable cash. And sort of I guess we'll just -- we're going to continue to monitor and see how the situation evolves.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [30]

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Yes. The business model is built with them in mind. And obviously we'll look to figure out a win-win solution, and whenever one presents itself, we'll make a move for both CNX and CNX Midstream, but the business is okay with them as is. And we don't need the equity markets at the moment, so we're going to be patient and find a good solution.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [31]

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Okay. And with respect to the -- thank you for the narrow guidance on free cash flow in 2020. That's helpful. What are the biggest risks to hitting that number? And what sort of contingency factor is in there?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [32]

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So we still -- obviously there's multiple pieces that go into that. Revenues drive a top line. Capital ends up going into that, so it's not entirely locked and loaded, but at this point in time we know what CNX is doing. We know what direction they're heading. We have a good line of sight on what wells are currently drilling, what wells are currently completing. And those wells that they're currently active on are predominantly drilling to top line of CNXM for next year. So then when you think about sort of costs, the team has been tremendously focused on costs.

We're continuing to drop unit costs down through automation, through the use of the control rooms I feel about -- feel good about the direction costs are going. That gives you the EBITDA, and then you start backing out a capital program. We've got a good view on what capital looks like next year. It's really just incremental well connects and cleaning up a few of these compressor builds. So it's a small, more controllable sort of capital program. So I guess, at the end of the day, we've got good line of sight on the major drivers of that free cash flow for next year. And that's why we were able to give you a pretty tight range on that free cash flow number.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [33]

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And when you look, I mean, the wells have been performing, so the confidence in the volume is there. CNX has a best-in-class hedge book that 86% of their volumes are protected from commodity prices next year. So that's a big risk off the table. Then the minimum activity commitments and minimum well commitments really give you a pretty solid floor to build off on whenever you're looking at your 2020 projections.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [34]

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Okay. That's helpful. In terms of the metrics that you're solving for in the business, what are the most important ones? And could you remind us, please, what your executive compensation targets are based on?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [35]

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Basically, when you look at compensation, there's 2 big drivers, 1 in the shorter term which is looking at effectively a cash flow per share metric that is consolidated up through CNX, through the sponsor. So every incremental dollar of improvement that we can see with the CNX Midstream side of the business benefits not just the CNX Midstream team but also the CNX Resources team. That's been a metric that we have used for a number of years on the upstream side and it's worked very well. So we like that. That plays into obviously everything, from capital to operating costs, to throughput revenues and throughput volumes.

Longer term, when you get higher up into the executive management ranks, the long-term incentive plan is one that looks to, at the end of the day, the long-term share price performance, share price appreciation of CNX Resources, of which CNX Midstream is a crucial piece of the puzzle, whether it's sum of the parts, whether it's just with respect to being able to have the upstream sponsor realize margins and cash margins and cash flow. So I think that those 2 metrics in the shorter term and in the longer term are definitely goal aligned when it comes to finding ways to squeeze incremental efficiencies and higher rate of returns out of the midstream business and the midstream's execution.

And then in terms of what we're solving for, when on that part of your question, when you look at things like capital program and on the midstream side and how we're going about our business. We basically solve and run the math of the risk-adjusted rate of returns, and we're looking at that from basically well ahead all the way through to sales points. And midstream is right smack at the middle of that. And that gets into a lot of the characteristics that Chad was speaking about on the prior questions about what the nature of the capital spend was through '18 and '19, setting us up for really multiyear, longer-term rate of returns on a risk-adjusted basis that are quite attractive; and then looking at that incremental capital spend in the coming years in '20 and beyond for sort of the just-in-time bolt-on capital opportunities.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [36]

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Okay. That's helpful. And then lastly, if you'll indulge just one more question very big picture: the sentiment on Appalachia is pretty bad. I'm curious what you think about Northeast gas macro; how things are going to evolve; and how you see CNXM fitting into that bigger picture over the next, say, 3 years.

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [37]

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So I think -- so prior to my current roles or, I guess, still currently, I am also responsible for marketing our gas and sort of maintaining macro view, so I keep a really close eye on what's happening out there. I think the story for Appalachia is close, is very related to what's going on nationally for natural gas. You've got a lot of gas coming out of the ground and -- but at the same time, we also have some incremental weather-normalized demand domestically through some incremental power gen demand. You've got increasing exports to Mexico.

Hopefully, they get sort of some of the political issues with some of their pipelines worked out and really begin taking more exports to Mexico. And you've got increasing LNG offtake. So I think, as for like domestic balance, we're certainly refilling storage at a healthy clip, where I would expect just to get back to sort of like average levels as we enter into the winter season. And where we come out going into 2020, really it depends on what winter does. A strong winter or a mild winter can be a big flip on what 2020 gas prices end up doing. So that's sort of what's happening on a national picture.

And so then when you relate that back to what's happening at Appalachia, what it means for CNXM and our peers, it really comes -- we've had improving differentials. We've had improving basis. We've had a number of expansion pipelines come online. That's helped basis improve. Not all of those pipes are absolutely full, so that's kept basis down at that sort of variable cost level which is sort of healthy and where it rationally should be. And we sort of see it stay in there on a go-forward basis.

What happens longer term for some of our peers and their ability to compete at sort of this [gap] level is, I think, a big question mark and something we're all keeping a close eye on, but I know CNX and CNX Midstream have set themselves up to succeed really regardless of what that cost does to their hedge book and through their focus on being a low-cost producer in Appalachia.

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Operator [38]

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(Operator Instructions) Our next question will come from Tim Howard of Stifel.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [39]

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I just want to follow up a question from the CNX call. Given that the large shale build-out is close to complete at the midstream side, just how does the relationship between CNX and the midstream evolve? A number of peers have separated the midstream and upstream entities. So just want to get your view on that. And are you hearing any investor pushback from the CNX base on kind of realizing that sum-of-parts valuation?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [40]

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So we've dealt with "sum of the parts" valuations, and we've sold businesses and we've created businesses. So we've done this over the dynamic of, call it, last 5 to 10 years at CONSOL, now CNX Resources, with spinning out our coal business. So we've done these types of situations before. And I think we've spent a lot of time really harping on the strategic hand-in-glove relationship and the abilities and synergies you get from having an upstream and midstream company combined together.

Now we are working hard and, as Chad mentioned, to getting a third party to continue to work and get third parties; and we do believe, to have separately stand-alone type business models, which is a possibility you need to have significant third-party presence. So that's a platform that we're still working on, on the CNX Midstream standpoint. And in the meantime, CNX is just -- it owns a profitable, cash flow-producing, highly valuable entity that is also one of the main ingredients to getting its gas to market.

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman & CEO of CNX Midstream GP LLC [41]

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And one of the other things just to consider is the corporate structures we've seen in the basin with midstream entities and peers, versus maybe in some of the prior upstream sponsors, have evolved certainly from MLP, C-corp spins, everything in-between. But the one thing that hasn't changed is, for better or for worse, those midstream entities are still tied strategically, financially and from a risk perspective to what was their prior upstream sponsors the currently are their largest customer. So when you look at that from the position of CNX Midstream and CNX Resources, we had that assumption from day 1 no matter what the corporate structure was going to be or what the overlap, the ownership might be.

And that's why things like the hedge book of the upstream sponsor is critically important to the performance and the viability and the risk profile of CNX Midstream. That's why the ability to capitalize a flexible midstream system on the CNX Midstream side is incredibly important to CNX Resources when it comes to its future capital deployment. And those things are going to -- the assumption is they're going to stick and they're going to remain relevant whether we're MLP, whether we're something else, whether the ownership is currently cast as it is or whether the ownership ends up being something entirely different.

So I think, as long as that is understood and we make decisions across those 2 companies that contemplate that and take advantage of that opportunity in front of us, we're in a position where we're able to, as Chad said, quarter after quarter after quarter grow distributions in a way where the coverage ratios look healthy and the balance sheet is in great shape.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [42]

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Got it. That's helpful. And then a follow-up on that, where are you in the process of creating those kind of stand-alone functions for the midstream side? And I mean you've done an excellent job with costs over the years. Are there any kind of higher costs associated with that as you fully get there?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [43]

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Yes. So it's gone through a few evolutions going back into history. So at one point in time, upstream and midstream were together at CNX, then coupled with JVs we had at the time. And spinning out and IPO-ing it, we separated them. As mentioned on the upstream call that the -- here earlier today, we are in the process of looking at places that make sense to combine some efforts and some initiatives across upstream and midstream. So as conditions change and activities change and focus changes, we try to keep that in mind and balance our decision making accordingly at both CNX and CNX Midstream.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [44]

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Got it. And then just pivoting to CNX potentially going flat production in 2020. How should we be thinking about distribution growth at CNXM and kind of where you target coverage at in that environment in 2021 and beyond?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [45]

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So we've talked a lot about the minimum well commitments and the minimum activity commitments and the minimum volume commitments. Those are really built to kind of carry distribution growth through the plans that Chad laid out. So that is kind of the backstop as we think about it at CNX Midstream as CNX Resources kind of ebbs and flows as the commodity price dictates some incremental activity with the substantial hedge book. And the commitments really help to baseline a very healthy, achievable future.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [46]

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Okay. And I just thought, based on the minimum well commitments, that 2021 coverage would be tighter than your historical kind of 1.4x. And you're okay with that, knowing that the commitments are there and it'll grow into 2022, I guess. Is that...

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [47]

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Yes. We look the -- I mean, as we've talked, we like several years of visibility. So what happens kind of quarter-to-quarter can -- or year-to-year. We like several years, so as -- we're looking forward into kind of the longer-term several-year picture is where we either have comfort or not. And minimum well commitments, as we've laid out, and it's laid out in the presentations, gives us that longer-term, clean line-of-sight comfort.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [48]

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Got it. And then 2 quick ones on the third-party volumes. It seems like the other volumes line, which is where third party is captured, increased pretty substantially quarter-over-quarter, but revenues were minimally changed, I guess. So that's kind of question one. What's driving that differential? And secondly, are third-party volumes expected to roll over end of 3Q? Or should we expect them to tick higher given that agreement that was signed?

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Chad A. Griffith, CNX Midstream Partners LP - President, COO of CNX Midstream GP LLC & Director of CNX Midstream GP LLC [49]

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So I think what you're seeing current year is you're seeing some volume increases associated with what -- we have a very short-haul contract that's like literally right down over the hill. So the gathering fee associated with that service is appropriately sized to a very, very short haul sort of agreement. So that's why you're seeing an increase in volumes and not such a significant increase in revenues associated with that. And that was an agreement we signed, let's say, late last year. We started seeing some of those volumes late last year, and it -- those have been slowly ramping up. And those will probably sort -- those will fluctuate, depending if there's sort of overflow from an adjacent system.

So those are going to be fluctuating, but really it's, like I said, the gathering fee associated with that is small because we're providing very, very short-haul service for that customer. The new agreement we mentioned in the -- we mentioned earlier in response to one of the questions, that's full gathering. That's at a good arm's length of the new pad. It's several wells, but we won't begin seeing those volumes until middle of next year.

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Operator [50]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Tyler Lewis for any closing remarks.

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Tyler Lewis, CNX Midstream Partners LP - VP – IR [51]

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Great. Thank you. And thank you, everyone, for joining us this morning. We look forward to speaking with you again next quarter. Thank you.

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Operator [52]

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The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.