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Edited Transcript of CNXM earnings conference call or presentation 31-Jan-19 4:00pm GMT

Q4 2018 CNX Midstream Partners LP Earnings Call

Canonsburg Feb 4, 2019 (Thomson StreetEvents) -- Edited Transcript of CNX Midstream Partners LP earnings conference call or presentation Thursday, January 31, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad A. Griffith

CNX Midstream Partners LP - President 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 of the Board & CEO

* Tyler Lewis

CNX Midstream Partners LP - VP – IR

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Conference Call Participants

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* Ethan Heyward Bellamy

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

* Matt Niblack

Hite Hedge Asset Management LLC - Portfolio Manager

* Rahul Krotthapalli

JP Morgan Chase & Co, Research Division - Analyst

* Timothy D. Howard

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

* Torrey Joseph Schultz

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the CNX Midstream Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

At this time, I'd 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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Thanks, Allison, and good morning, everybody. Welcome to CNX Midstream's fourth quarter conference call. We have in the room today Nick DeIuliis, our President and CEO; Chad Griffith, our President; and Don Rush, Executive Vice President and Chief Financial Officer.

Today, we'll be discussing our fourth quarter results, and we 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 Nick.

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

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Thanks, Tyler, and good morning, everybody.

So much has happened at CNX Midstream in just over a year's time. We saw at the start of 2018 the consolidation of the GP into CNX, which simplified our structures, streamlined decision-making and better aligned our largest customer. We updated the gas gathering agreement with CNX to create better line of sight for our capital allocations. That was an important accomplishment. The acquisition of the Shirley-Pennsboro assets into CNX Midstream earlier in 2018, that was everything we hoped it would be, and it keeps looking better by the quarter.

CNX Midstream issued notes that created a balance sheet that can self-fund our capital program. And of course, that's the first step to achieving the incremental volumes from our shippers that lead to our derisked 15% distribution growth targets. We participated in a transaction with our 2 largest shippers, HG and CNX, whereby unitholders came out with drilling commitments and a derisked runway for our multiyear distribution growth.

So all of these events, as great as they were individually and collectively, they achieved the larger objective of placing CNX Midstream in a mode of steady-state execution and of methodical growth, execution and growth that accretes value to our unitholders. 2018 was the first installment in that growth story, and the Midstream team delivered. We're excited about the next installment of 2019 and then beyond.

With that now, I'm going to turn things over to Chad.

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

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Thanks, Nick. The fourth quarter was a strong finish to a transformational year at CNX Midstream and has us poised to move forward with our previously disclosed operating and financial plans. As Nick mentioned, we completed a series of transactions during 2018 to create a midstream company with the potential to generate significant EBITDA and distributable cash flow, which then delivers the derisked 15% distribution growth through 2023 so without accessing equity markets, completing any additional drops or stressing the fundamental health of the partnership.

While the provisions of our gathering agreements derisk this plan, we expect to execute on this plan through a close collaboration with our sponsor and largest shipper, CNX, whose undeveloped acreage position hedge book and cost structure give us confidence that they'll continue to develop acreage dedicated to CNXM and provide strong results.

Turning to the short slide deck we released this morning, let's review results for the quarter on Slide 3. We set another company record with net daily throughput of 1,539 Bbtus per day in the quarter, which was up over 17% over Q3 of 2018. At the same time, we held net operating cost unit -- net operating cost per unit flat on a quarter-over-quarter basis, but this is still notable because there was a 27% improvement compared to Q4 of last -- of 2017.

Generally, operating expenses increased during the fourth quarter as we prepare for winter weather and cold temperatures. Yet through the efficiencies we highlighted during our last call, including a centralized control room, staffing optimization and increased use of data analytics, we were able to keep net operating cost per unit even with Q3 even while preparing for winter.

Comparing this Q4 to Q4 of '17, adjusted EBITDA and distributable cash flow grew by $21 million and $15 million, respectively. We had a cash distribution coverage ratio of nearly 1.6x, and our year-end leverage ratio of 2.7x remains within our projections and well below the industry average.

Moving on to Slide 4, you'll see our full year results and how we compare to the latest financial and operating guidance we provided last quarter. We ended up with throughput EBITDA and distributable cash flow all above the high end of the range. These are due to several factors, including well outperformance, early turn-in-lines and our strong operating cost result.

A couple of highlights for the year include average daily net throughput for the year of 1,248 Bbtus per day, which is a 27% increase when compared to 2017. Also, net unit operating costs declined 17% over that same time period.

At the bottom of this slide is our updated full year 2019 guidance, which we have based on the most recent information that we have received from our customers, including CNX. As we laid out during our March 2018 Analyst Day, our gathering system and our approach to business allows us to be flexible and respond quickly to changing customer needs while staying capital-efficient. We benefit from a collaborative relationship with CNX. Our teams are continually talking and ensuring that upstream and midstream plans are totally synced. This means we're able to shape and time capital expenditures to closely match the activity of our largest shipper.

One example of this was how we accelerated capital into 2018 to take advantage of several wells that were ready to flow earlier than expected. Similarly, as CNX elects to increase activity from the plan they provided us, we may need to increase capital in 2019. But we would expect any increase in CNX's activity to also result in increased throughput and EBITDA. But please note, midstream and upstream projects often span multiple calendar years. So while an increase in our customers' plans may provide us an opportunity to invest additional capital this year into accretive projects, we may not see the corresponding increase in EBITDA during 2019.

It's also worth noting that since Analyst Day, we've had our team of talented engineers digging into our system plans, and they've already found several ways to enhance the return on those projects. These improvements include the consolidation of 2 compressor stations, tweaking the timing of dehydration in horsepower and we also spent several times studying the economics of buying compression versus leasing it. And we have elected to purchase several compressors that we had originally been forecasted as leased machines.

Finally, the HG transaction we completed last year added some additional future CNX activity on our Majorsville system, which has added some additional capital to 2019 versus our Analyst Day forecast. Our expectation is that all of our 2019 capital initiatives will begin to drive EBITDA in 2019 and are expected to benefit the company for the long term. It's the long-lived nature of these assets that help drive substantial rates of return across the board, just as our anchor system assets that were built in the earlier part of this decade have driven our results since the IPO.

As I stated last call, a major priority for me is to grow third-party business. To that end, we continue to make progress with several different counterparties on a range of potential deals. Although there is meaningful lead time with any third-party business, based on current progress, we believe there could be additional third-party volumes as early as this year. And we would expect to see these benefits picking up more sometime in 2020.

We also continue to work with third parties on synergistic efforts around taps, interconnects and other infrastructure that could be mutually beneficial. As we've stated before, incremental third-party business and related capital is not factored into any of our guided plans.

As I've said, the fourth quarter was a very strong finish to the year and has us set up nicely for a big 2019 in terms of capital projects and company growth. We look forward to keeping you updated along the way.

With that, I'll hand it back to Tyler.

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

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Thanks, Chad. Operator, if you could please open the line up for Q&A at this time.

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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. So firstly, could you guys provide some additional color on what drove the 2019 guidance revision? Like how much activity above the minimum well commitments is now modeled into your guidance?

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

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So our capital guidance for 2019 is really based off of the activity set that's been communicated to us by our shippers. The minimum well commitment that we have for the time period actually carries over into next year, so we're not really looking at it on a versus minimum well commitment or minimal activity basis. It's more like what capital do we need to spend in 2019 to make sure we can perform the services that we need for our customers. I mean, when you compare that back to the Analyst Day guidance we provided, when you look at '18 and '19 combined, sure, we accelerated some capital in '18. But on a 2-year basis, we're really, really in line with what we had originally put out in that Analyst Day guidance.

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

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Good. I was just trying to clarify the EBITDA in this year. So does the same argument hold there as well along with the CapEx?

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

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I'm sorry, could you say that -- repeat that question?

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

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I'm trying to better understand the EBITDA guidance reconciliation between your old and the new guidance. So does the same argument hold for the EBITDA guidance as well?

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

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It does. It does, that's correct. We accelerated some turn-in-lines. CNX predominately shifted some TILs earlier into 2018. And so that's why we really saw more EBITDA showing up in 2018, and that sort of has a corresponding effect on '19.

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Operator [8]

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Our next question will come from TJ Schultz of RBC.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [9]

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Great. I think you kind of answered the question just there, but maybe if I can ask the guidance question a little bit differently. So with 2019, do you see a guidance range of $150 million to $170 million? My understanding was that activity commitments provided essentially a floor of about $170 million. So I'm just trying to help -- or just trying to understand, if you'd help me understand, what would flush DCF down to kind of that $150 million?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman of the Board & CEO [10]

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Well, a lot of it just depends on timing of turn-in-lines, right? So the way that these shale wells are performed, they're just so heavily weighted in production towards the first several months. But if you get some turn-in-lines turning early in '18 -- we saw a significant boost in EBITDA during 2018. The shale wells would slip later in the year. Out of '19 or in the later part of '19, you could see some of that EBITDA during the calendar year come down. It's sort of hard to look at these projects, both from a midstream and upstream perspective on a calendar-year basis. Sort of we're building systems or we're building our gathering systems for the long term. And you get a 1- or 2-month flip in the turn-in-line, that's going to dramatically affect what 2019 may look like or any given calendar year may look like. But the rates of return on the project and the overall economics are still strong.

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Torrey Joseph Schultz, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Okay, great. And then I think in your prepared remarks, you mentioned a few moving parts that impacted some increase in 2019 CapEx, maybe on compressors and so forth. Can you just reiterate kind of what some of those additions were? And what the impact is on 2019 CapEx?

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Nicholas J. DeIuliis, CNX Midstream Partners LP - Chairman of the Board & CEO [12]

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Sure. Like, really, this is a fair -- pretty significant build out for us. As we laid out at Analyst Day, we're really overhauling our entire Southwest PA gathering system. And we laid out at that point in time sort of our best view of what that overhaul is going to look like. And we -- but we're not going to just stop then. We're going to continually analyze the system and always try to find optimizations, the way to make the system better and ways that enhance returns on that project. And over the course of that -- the intervening year, we found a couple of ways to save some capital. And that's predominately been driven by combining 2 stations into 1 and then maybe the timing of some other infrastructure. But at the same time, some of those cost savings have been offset by other changes to the plan, such as we've decided to buy compression instead of leasing it. So we maybe saved some capital by timing and combining some infrastructure, but at the same time, that's largely offset by the decision to buy compressors instead of leasing them. All these decisions, we look at the rate of return and the overall sort of the share -- the intrinsic value of the business and how much rate of return these products are generating. And that's what we're optimizing on.

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

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And just to add for a minute on top of that and from what Chad stated, that the HG transaction happened after the Analyst Day, and some of the guidance that was in that is numbers. So when you look at the additional minimum activity commitments that we were able to get from both HG and CNX at the time of that transaction, we discussed it that, that would potentially impact development on those acres going forward and then the capital associated with developing those is now in our 2019 numbers.

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Operator [14]

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Our next question today will come from Andy Gupta of HITE Hedge.

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Matt Niblack, Hite Hedge Asset Management LLC - Portfolio Manager [15]

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This is Matt Niblack from HITE. So I just wanted to follow up a little bit on understanding the bridge on the -- versus the guidance a little bit more. Because clearly, you had an early turn-in-line in Q4. You had a very strong Q4. But it doesn't look to me, just from the outside here, like that could account for more than sort of $10 million of shift. In other words, it's -- I guess we wouldn't have expected Q4 to be lower than $10 million below kind of what you reported. And yet, again, your range is $150 million to $170 million, which suggests up to $20 million in downside. And then on top of that, it seems like the commentary since you put out that guidance at the Analyst Day that people are referring to has had some net positives in it. So for instance, another $5 million, roughly, worth of EBITDA and DCF related to operating improvements that you've highlighted as well as some momentum in third-party volumes, which should presumably should all be additives. So I guess just help me a little better understand what I'm missing here.

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [16]

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I mean, over the course of the prior year, we already highlighted some changes that have sort of played a role in how these things have evolved. Certainly, shifting TILs from '19 into '18 or changing the slight order or pace or schedule that we see in '19, those are all moving pieces that affect these financial results and how we guide. Just like we've talked about with capital, there's a lot of moving pieces there as well as we're continually optimizing and trying to optimize that rate of return. So at the end of the day, I mean, it's just a -- this is a -- it sort of fluid, right? So we put out our guidance at Analyst Day last year, and it's been almost a year since then. And we've had some wins. We've had some losses. But net-on-net, we're still on track to execute on this program.

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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 I think as you look forward and we had our CNX Upstream Call, only earlier, 10:00 today and as Chad mentioned in his commentary, this whole mirroring of how upstream guidance and midstream guidance go hand in hand, the upstream guidance really focused on a minimum activity set. So really, this guidance is just part and parcel to how the upstream guidance unfolds over the course of the year. So you can kind of -- I guess, you need to look at both in order to understand how it's working. And you can kind of look at both the Analyst Day. You can look at both via the announcements that CNX and CNX Midstream both made today. And as plans and upstream incremental activity are decided, if any, those things will be updated at CNXM accordingly as well.

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Matt Niblack, Hite Hedge Asset Management LLC - Portfolio Manager [18]

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Right. That makes sense. I think a very helpful note for people to understand that this is -- the minimum has been adjusted down from $170 million to kind of $150 million to $170 million due to timing and other factors. But there's still upside to that, and we just have to see how that goes. My -- I guess my only other question here then is, in the minimum guidance range, if that seems -- and also, I think implied in CNX's production growth range, you're looking at kind of roughly flat economics relative to Q4, right? And I'm just taking your EBITDA in Q4 and multiplying it by 4. I realize there will be some seasonality associated with that, so that will vary quarter-to-quarter. But for the full year, that's what you're looking at. And yet, there's significant growth CapEx. And so just help me understand operationally why there needs to be so much growth CapEx when it doesn't appear that volumes on the system are growing relative to what your system could handle in Q4?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [19]

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So a lot of the -- well, let me rephrase. So a significant portion of the capital that we're spending in 2019 is associated with debottlenecking projects. So some of the capital that we're spending is associated with additional horsepower and upgrades to facilities that will improve line pressures on some of the legacy areas of our system. A lot of those areas are the legacy production that CNX had from earlier in the Marcellus program. And we would expect a volumetric uplift from that work. And then other pieces of the capital are associated with sort of greenfield construction to support CNX's move into some other new greenfield areas.

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

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And just to add to that, so the big chunky pieces of stations and trunk lines, those are long-lived assets that, really, you don't just use for a month or 2 or 1 TIL or a second TIL. So this is just really setting up the big chunky pieces that will be utilized for many years to come. And we're not updating anything forward, but a lot of information back in the Analyst Day is just trying to walk through like the big chunky pieces that are going to happen in '19 that are going to set us up well for way beyond 2019.

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

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Yes. It's probably worth noting -- I highlighted it a little bit in the prepared commentary. We've designed the system to allow us a lot of flexibility while maintaining capital efficiency to support customers whose needs change, whose needs could change very quickly. And we're building a 2-pipe system to provide multiple levels of pressure service. We're building compressor stations that are effectively plug-and-play, so we can add additional horsepower as needed. And we're building sort of high-pressure trunk lines to take that sort of high-pressure discharge from the stations to multiple taps. It provides a lot of flexibility, a lot of growth opportunities while being still very efficient on capital.

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Matt Niblack, Hite Hedge Asset Management LLC - Portfolio Manager [22]

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Okay. So most of the CapEx then, it sounds like, is related to assets that are going to have a lot of operating leverage to grow in future years. And you'd still expect, consistent with the Analyst Day, a major CapEx roll-off after this work is done this year even if CNX continues to grow materially?

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

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We haven't updated the intricacies of what that capital is. But, I mean, if you look at well connects versus stations versus trunk lines, you obviously need to build the stations and the trunk lines first. So if you're talking about just how much of this is well connects, I think we've done a good job of showing how much per well, well connects are versus the bigger, chunkier spends for setting up the system on the front end.

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Matt Niblack, Hite Hedge Asset Management LLC - Portfolio Manager [24]

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Okay. And then last follow-on to that. You said you expect some volumetric uplift from increasing the pressure on the system in some of the legacy areas. Is that included in your guidance? Or would that be upside to your guidance?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [25]

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No. Those numbers have already been included in our forecast.

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Operator [26]

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Our next question today will come from Tim Howard of Stifel.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [27]

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How does CNX's minimum activity level compare to the minimum well commitments NDC is committed to CNX Midstream? What I'm trying to focus on is, as we looked into 2020 at the Analyst Day, I think the 15% growth and the anticipated coverage requires some level of activity beyond those NDCs to kind of reach it, especially in 2021. So I'm just trying to reconcile those 2 things.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [28]

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Yes. I mean, so there's different pieces over time. So if you look back at the Analyst Day, I actually can't recall but we've added to that since we did the HG transaction. So that's probably the more relevant stacked bar chart to reference when you're thinking through how activity commitments really gets help -- derisk the 15% distribution over time. So that HG trend -- is that the second quarter?

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

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First quarter.

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

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The end of the first quarter earnings call is where, I think, you'll be able to find the most recent one that we showcased, that has all that through it. Whenever I spoke, we talked on the CNX upstream's call that this minimum activity plan that CNX Resources unveiled does cover the CNXM commitments. We didn't get into exactly TIL -- that TIL, where it sits, but it does kind of cover through that. So those things together, what Chad said. I mean, the '18 CNX, and the outperformance; '19, thinking through the wheel turning on covering the activities, covering the activity commitments. And the really, the bar charts that we established after the HG transaction should help you piece that together.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [31]

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Got it. So was there any consideration in slowing distribution growth, especially as you kind of look into the out years? Or do you think you will be fine to cover that?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [32]

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Yes. So there's always something. We're always looking to -- just like CNX Resources, we want to have several years of strong business dynamics and a strong capital structure. So no changes in long-term thinking, no changing in philosophy from how we were thinking CNX Resources and, likewise, CNX Midstream on the long-term viability of core -- the core Marcellus and, very exciting, the dry Utica. So in general, we feel good with where we're at. But like anything, it's another variable that we're constantly assessing. We want to be prudent and thoughtful to ensure we maintain a healthy company.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [33]

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That makes sense. And then just as it relates to weather in 1Q, are you expecting any impacts? Is there any issues right now that are ongoing?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [34]

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Well, obviously, the cold is sort of a double-edged sword for us in the oil and gas space, right? So we certainly love the incremental demand that it creates. And it helps create demand for the product that CNXM moves. But yes, it definitely does stress our operations team. And I'd tell you what, we've got this new centralized control room where we work hand-in-hand with the upstream productions control room and where we're able to really get out ahead of issues and try to mitigate things and keep things flowing. Obviously, there's always moderate hiccups from time to time, but I think the operation team has been doing a phenomenal job managing it so far.

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Operator [35]

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Our 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 [36]

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What kind of multiple are you getting on the debottleneck in capital?

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

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Yes. I mean, we could follow up with those specifics. I mean, those are good rate of return projects. Otherwise, we wouldn't do those on a standalone basis. It's sort of like core, like baseload, sort of like easy low-hanging fruit stuff to do.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [38]

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Yes. You'll see it anywhere. I mean, typically, it's right, it's pulling forward from pressure changes, being able to lower pressure. So I mean, you can see quick, easy 3x to 5x type low capital big bang to pull that forward. And really, not only just a short term, it's setting it up to ensure that incremental activity ramps can occur. If you have a pipe that's full and high pressured, you don't have the ability to ramp up from your customers' perspective, CNX Resources. So you're able to get some real incremental dollars quickly with this capital, but more importantly, for our go-forward business plan is you want the ability to go quick and not be stuck with full pipes with high pressure.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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Got it. That's helpful. Well connects in 2019, flat year-over-year from '18?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [40]

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Yes, we don't really provide that detail. Again, that's really a subject of timing. And we talked about earlier on the call, when you look at sort of the E&P business to be a time thing on a calendar basis, it's a little bit tricky, but it really doesn't materially change the economics of some of the projects.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [41]

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And the CNX Resources call went through like the D&C capital budget. So you can kind of -- we haven't -- we didn't give any tilt guidance, but we did give D&C capital spend.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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Got it. That's helpful. And what's the latest thought on drop downs? And is that gated by capital availability?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [43]

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So as we -- we talked about it earlier. None of our plans include any drops. And we don't need to do any drops to make sure -- to cover the plan through 2023. So really, it's just sitting back, intercepting the assets and working with the upstream team to find things that make sense, that are win-wins for both sides. And when we find things that work, we'll go out, execute it and get those done.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [44]

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And balance sheet, 2 things. Balance sheet capacity obviously does need equation of how you would think about it, how you would structure commercial agreements and how that would work. And the second piece here, we really like the returns we get from investing in the business and investing in the organic projects that we have. So any drops from a midstream perspective needs to compete with those and be structured in a way that that, keeps a strong balance sheets.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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Got it. Hard to compete with 3x to 5x. Is there a ceiling on leverage as we think about drops in CapEx for year-end 2019?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [46]

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So the way we've thought and back to the premise that our philosophies haven't changed. So when you look, we like staying under 3x. That being said, as we've talked, we're comfortable creeping over as we have line of sight to get back under it with a high degree of certainty. So I think you'll see that fluctuate as the year comes on. And it'll change obviously on -- based on CNX's changes on its incremental activity. So in general, we want to stay at that 3x or below. We think that provides a nice platform for a healthy company. And it does give you some ability to take advantage of opportunities when they present themselves. And like we said, if we see a quick line of sight, we're okay creeping over in order to take advantage of a good risk-adjusted return and with the confidence we'll be back under it soon.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [47]

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Okay. And then what do you think is the breakeven gas price for CNX here? And where is the price where we could expect to see production accelerate? And then conversely, where is the pain point where production would come in?

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [48]

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Yes. And I think I can kind of talk at a few different angles here. So way back then at the Analyst Day, we gave very thorough, by area-type curves, economics, gas-price sensitivities. So there's a rich data source to kind of look through there. This morning, on the CNX Resources call, we kind of walked through our cost structure, fully burdened cost structure and really introduced this whole fully burdened cash cost structure plus a kind of new capital over -- a new production kind of number on top of it, which was an approximate $0.30. So you sort of stack all those up, on an average basis for a model Southwest PA, Marcellus well, it's like $1.70-type, again, fully burdened, fully covered, not talking like incremental return or only from that lens. Gas prices, there's 2 pieces: did they go up and how long did they stay up; and can you grab hedges and where to facilitate it. So there's a lot that goes into how quickly you would move to add or subtract, gas prices being one of them. But what we want to do is build thoughtful companies, both midstream and upstream, to have a strong base no matter what happens and the ability to react quick and add more when opportunities show up.

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Ethan Heyward Bellamy, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [49]

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Very helpful. And last one, what clinched the purchase versus lease decision on compression? And what are the sort of key variables there?

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Chad A. Griffith, CNX Midstream Partners LP - President of CNX Midstream GP LLC [50]

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So that's ultimately a rate of return decision. When we looked at buying versus leasing, you're basically exchanging upfront capital for, like, avoiding long-term lease payment. And so we looked at, basically, the life of some of these compressions, compressor installs. And once it reached a certain threshold and that sort of -- that depends upon the exact machine and exact cost structure of that machine. Once the expected use of that machine exceeded that threshold, with some safety margin built in, we elected to buy that machine instead of leasing it.

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Donald W. Rush, CNX Midstream Partners LP - CFO & Director of CNX Midstream GP LLC [51]

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Yes. And just to -- so to add to Chad's kind of philosophy, a lot of this gets held tight at the leasing market and how certain we are we're going to be able to get machines and keep machines and keep a rate on machines good as they're fungible across different basins. And we like to stay conservative and make sure we're not buying ones we're not going to need, so we keep a good eye on how much we're going to need and on the margins we lease. And even the ones that we know we're going to need, we keep a watchful eye on how that leasing and competition from other basins and supply/demand on the supply chains are working to ensure that we get them and we keep efficient prices.

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Operator [52]

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(Operator Instructions) I'm not showing any further questions. This will conclude our question-and-answer session. At this time, I'd 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 [53]

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Great. Thanks, Allison, and thank you all for joining us. We look forward to speaking with you again next quarter.

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Operator [54]

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