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CNX Midstream Partners LP  (NYSE:CNXM)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the CNX Midstream Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (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.

Tyler Lewis -- Vice President of Investors Relations

Thanks, Alison, 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, President; and Don Rush, Executive Vice President and Chief Financial Officer.

Today, we'll be discussing our fourth quarter results and we've 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 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'll open the call up for Q&A where Don will participate as well.

With that, let me turn the call over to Nick.

Nicholas J. DeIuliis -- President and Chief Executive Officer

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 structure, 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, they created a balance sheet, they can still fund our capital program. And, of course, that's the first step to achieving the incremental volumes from our shippers that lead to our derisk 15% distribution growth targets. We participated in a transaction with our two largest shippers, HG and CNX, whereby unitholders came out with drilling commitments and a derisk runway for our multi-year 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 the mode of steady-state execution, and of methodical growth. Execution and growth that creates 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.

Chad A. Griffith -- President

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 derisk 15% distribution growth through 2023 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 three. 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 it was a 27% improvement compared to Q4 of last -- 2017. Generally, operating expenses increase during the fourth quarter as we prepare for winter weather and cold temperatures. 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 2017, adjusted EBITDA and distributable cash flow grew by $21 million and $15 million, respectively. We had a cash distribution coverage ratio of nearly 1.6 times and our year-end leverage ratio of 2.7 times remains within our projections and well below the industry average.

Moving on to slide four, 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 cost 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 we've 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 sync. 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, if 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 an increased throughput in 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 the 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 two compressor stations tweaking the timing of dehydration and horsepower, and we also spent considerable time studying the economics of buying compression versus leasing it. And we have elected to purchase several compressors that we had originally been forecasted of leased machines.

Finally, the HG transaction we completed last year added some additional future CNX activity on our major shale 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 IPO.

As I've stated in 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 the related capital is not factored into any of our guided plants

As I said, the fourth quarter was a very strong finish to the year and has a 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.

Tyler Lewis -- Vice President of Investors Relations

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

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question today will come from Jeremy Tonet of J.P. Morgan. Please go ahead.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Good morning, guys. This is Rahul on for Jeremy. Thanks for taking my questions here. 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?

Chad A. Griffith -- President

Well, so our capital guidance for 2019 is really based on the activity set that's been communicated to aspire shippers. The minimum well commitment that we have for the time period actually carries over into next year, so we're not really looking it on a versus minimum well commitment or minimum well activity basis. It's more like what capital we need to spend in 2019 to make sure we can perform the services that we need for our customers. And when you compare that back to the Analyst Day guidance we provided. When you look at 2018 and 2019 combined, sure, we accelerated some capital in 2018, but on a two-year basis we're really in line with what we had originally put out in that Analyst Day guidance.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Got it. So, I was just trying to clarify on the EBITDA and DCF. So, is the same arguments hold there as well along with the CapEx?

Chad A. Griffith -- President

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

Rahul Krotthapalli -- J.P. Morgan -- Analyst

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?

Chad A. Griffith -- President

It does. It does. That's correct. We accelerated some turn-in-lines, CNX predominantly shifted some TILs earlier into 2018. And so, that's why you really saw more EBITDA showing up in 2018, and it sort of has a corresponding effect on 2019.

Rahul Krotthapalli -- J.P. Morgan -- Analyst

Got it. That's helpful. And then -- yeah. I think that's it for me. Thanks. Thanks for taking my questions.

Nicholas J. DeIuliis -- President and Chief Executive Officer

Thanks.

Chad A. Griffith -- President

Thanks.

Operator

Our next question will come from TJ Schultz of RBC. Please go ahead.

TJ Schultz -- RBC Capital Markets -- Analyst

Great, thanks. 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 DCF 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 could help me understand what would flex DCF down to kind of that $150 million?

Chad A. Griffith -- President

Well, a lot of it depends on timing of turn-in-lines. Right? So, the way that these shale wells performed are just so heavily weighted in production toward the first several months. But if you get some turn-in-lines trend in early 2018, we saw a significant boost in EBITDA during 2018. Those shale wells would slip later in the year, out of 2019 or in the later part of 2019 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 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 one or two-month slip and a 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.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay, great. And then, I think in your prepared remarks you mentioned the 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?

Chad A. Griffith -- President

Sure. Like, really this is a pretty significant build out for us. As we laid out in the 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 optimization, and way to make the system better and ways to 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 two stations into one 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 may be save some capital by timing and combining some infrastructure. But at the same time, that's largely offset by a decision to buy compressors instead of leasing them. All of these decisions we look at the rate of return and the overall sort of the intrinsic value of the business and how much rate of return these projects are generating and that's what we're optimizing on.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

And just to add for a minute on top of that from what Chad stated that the HG transaction happened after the Analyst Day and some of the guidance that was in those numbers. So we 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 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.

TJ Schultz -- RBC Capital Markets -- Analyst

Okay. Thank you.

Operator

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

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

Hi, this is Matt Niblack from HITE. Thanks for taking the question. So, just wanted to follow-up a little bit on -- understating the bridge and the -- versus the guidance a little bit more. Because clearly 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 count for more than sort of $10 million of shift. In other words, 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 would suggest 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 presumably should all be additive. So, I guess, just help me a little better understand what I'm missing here?

Chad A. Griffith -- President

I mean, over the course of the prior year, we were highlighting on some changes that have sort of played a role and how these things have evolved. Certainly, shifting TILs from 2019 into 2018 or changing the slight order or pace or schedule that we see in 2019, those are all moving pieces that affect these financial results and how we guide. Just like we talked about with capital, there's a lot of moving pieces there as well, 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's 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.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. And I think as you look forward when we had our CNX upstream call here earlier 10 o'clock today and as Chad mentioned in this 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 the announcements that CNX and CNX Midstream both made today. And as plans and upstream, the incremental activity are decided, if any, those things will be updated at CNXM accordingly as well.

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

Right. That makes sense. I think it's very helpful to know for people to understand that this was 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 other question here that is, in the minimum guidance range, it -- that seems -- and also I think implied in CNX' 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 multiplying it by 4, I realize there'll 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 can handle in Q4?

Chad A. Griffith -- President

So, a lot of the cap -- 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 overspending is associated with additional horsepower and upgrade facilities that will improve line pressures on some of the legacy areas of our system. One of those areas of the legacy production that CNX had from earlier on the Marcellus program and we would expect a volumetric uplift from that work. And then other pieces of the capital are associated with the greenfield construction to support CNX' move into some other new greenfield areas.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

And just to add to that, so the big chunky pieces of stations and trunk lines, those are a long-lived assets that really you don't just use for a month or two or a one deal or a second deal, 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 any forward but a lot of information back in the Analyst Day, just trying to walk through, like the big chunky pieces that are going to happen in 2019 that are going to set us up well for way beyond 2019.

Chad A. Griffith -- President

Yeah. It's probably worth noting -- highlighted it a little bit in the prepared commentary, we've designed a system to allow us a lot of flexibility while maintaining capital efficiency to support customers whose needs change, whose needs can change very quickly. We're building a two-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 a high pressure discharge from stations to multiple taps, provides a lot of flexibility, a lot of growth opportunities while being still very efficient on capital.

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

Okay. So most of the CapEx then -- it sounds like it's really the assets that are going to have a lot of operating leverage to growth 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?

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we have an updated 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.

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

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 the upside year guidance?

Chad A. Griffith -- President

No, those numbers have already been included in our forecast.

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

Okay. Thank you.

Operator

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

Timothy Howard -- Stifel, Nicolaus & Company -- Analyst

Hi. Thanks for taking my question. How does CNX' minimum activity level compare to the minimum well commitments and NBC' 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 NBC's to kind of reach it, especially in 2021. So I'm just trying to reconcile those two things.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

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

Chad A. Griffith -- President

First quarter.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

The end of the first quarter, yeah, earnings call is where I think you'll be able to find the most recent one that we showcased, it has all that through it.

Whenever 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-by-TIL (ph) where it fits but it does kind of cover through that. So, those things together, which Chad said, I mean, the 2018 (inaudible) outperformance 2019 thinking through the wheel turning on covering the -- at least covering the activity commitments and the -- really the bar charts that we established after the HG transaction should help you piece that together.

Timothy Howard -- Stifel, Nicolaus & Company -- Analyst

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

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. So it's always something we're always look into 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're thinking CNX Resources, and likewise CNX Midstream on that long-term viability of the core Marcellus and very exciting deep, dry Utica. So, in general, feel good with we're at but it's -- like anything, it's another variable that we're constantly assessing, we want to be prudent and thoughtful to ensure we maintain healthy company.

Timothy Howard -- Stifel, Nicolaus & Company -- Analyst

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

Chad A. Griffith -- President

Obviously, the cold is sort of a double-edged sword for us in the oil and gas space, right. So, certainly, love the incremental demand that it creates and it helps create demand for the product that CNX moves. But yeah, it definitely does stretch our operations team and I'll tell you what we've got this new centralized control room where we work hand-in-hand with the upstream production 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 minor hiccups from time-to-time but I think the operation team has been doing a phenomenal job managing it so far.

Timothy Howard -- Stifel, Nicolaus & Company -- Analyst

Got it. Appreciate your comments.

Operator

Our next question will come from Ethan Bellamy of Baird. Please go ahead.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

Hey, guys. Good morning.

Chad A. Griffith -- President

Good morning.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

What kind of multiply are you getting on the debottlenecking capital?

Chad A. Griffith -- President

Yeah. I mean, we can follow-up with those specifics. I mean, those are good rate of return projects, otherwise we wouldn't do those on a stand-alone basis. It's sort of like core -- like base load sort of like easy low-hanging fruit stuff to do.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. You'll see anywhere, I mean, typically it's right, it's pulled forward from pressure changes been able to lower pressure. So, I mean, you can see easy 3 to 5 times low capital, big bang and pulling that forward in. And really not only just the short-term, it's setting it up and short it -- 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.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

Got it. That's helpful. Well connects in 2019 flat year-over-year from 2018?

Chad A. Griffith -- President

Yeah. 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, there would be the time things on a calendar basis is a little bit tricky but really does materially change the economics of some of the projects.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. 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.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

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

Chad A. Griffith -- President

We talked about 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 and assessing 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, executing, and get those done.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

In balance sheet two things -- balance sheet capacity obviously goes into the equation of how you would think about it, how you would structural commercial agreements and how that would work. And the second piece here, we really like the returns we get from investing in the business, investing in the organic projects that we have. So, any drops from an eviction (ph) perspective needs to compete with those and be structured in a way that keep strong balance sheets.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

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

Donald W. Rush -- Executive Vice President and Chief Financial Officer

So the way we've talked back to the premise that our philosophies haven't changed. So, when you look, we like staying under 3 times. 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' changes on its incremental activity.

So, in general, we want to stay at that 3 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 OK creeping over in order to take advantage of a good risk adjusted return and with the confidence we'll be back under it soon.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

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

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. I am not going to talk it -- 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, such as the 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 -- 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 a dollar type 70. Again, fully burned, fully covered, not talking like incremental return or only from that lens (ph).

Gas prices, there's two pieces, did they go up and how long did they stay up and can you grab hedges in order 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.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

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

Chad A. Griffith -- President

So that's ultimately a rate of return decision when we looked at buying versus leasing, you're basically exchanging upfront capital for avoiding long-term lease payments. And so, we looked at basically the life of some of these compressor installs. And once it reached a certain threshold and that sort of -- that depends upon the exact machine and the 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.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Yeah. And just to -- so to add to Chad's kind of philosophy, a lot of this gets how tight is the leasing market and how certain area (ph) what are going to be to get machines and keep machines and keep a rate on machines good as their fungible across different basins. And we like to stay (ph) 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 on and then we keep efficient prices.

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

Excellent. Many thanks. Good luck.

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

(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.

Tyler Lewis -- Vice President of Investors Relations

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

Operator

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

Duration: 33 minutes

Call participants:

Tyler Lewis -- Vice President of Investors Relations

Nicholas J. DeIuliis -- President and Chief Executive Officer

Chad A. Griffith -- President

Rahul Krotthapalli -- J.P. Morgan -- Analyst

TJ Schultz -- RBC Capital Markets -- Analyst

Donald W. Rush -- Executive Vice President and Chief Financial Officer

Matt Niblack -- HITE Hedge Asset Management LLC -- Analyst

Timothy Howard -- Stifel, Nicolaus & Company -- Analyst

Ethan Bellamy -- Robert W. Baird & Co. -- Analyst

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