CNX Midstream Partners LP (CNXM)
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(CNXM)
Q1 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome to the CNX Midstream First Quarter 2019 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.
I would now like to turn the conference over to Tyler Lewis Vice President of Investor Relations. Please go ahead.
Tyler Lewis -- Vice President of Investor Relations
Thanks, Brandon; and good morning, everybody. Welcome to CNX Midstream's first quarter conference call. We have in the room today Nick DeIuliis, our CEO; Chad Griffith, President; and Don Rush, our Executive Vice President and Chief Financial Officer. Today, we'll be discussing our first 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'll begin our call today with prepared remarks by Nick, followed by Chad, and then we will open the call for Q&A where Don will participate as well.
With that, let me turn the call over to you Nick.
Nicholas DeIuliis -- Chairman and Chief Executive Officer
Okay. Thanks, Tyler, and I just want to spend a couple of minutes before we hand it over to Chad just highlighting maybe the big picture as it relates to CNX Midstream. It's been almost 18 months since CNX Midstream transitioned to a sole-sponsored midstream MLP. And through 2018 into the first half of 2019, there's been a flurry of activity and it was used to create, modify, refine everything from gathering agreements to acreage dedications to the balance sheet to upstream activity commitments, and all of those things were done with an overarching goal. That was to derisk and deliver a steady distributable cash flow growth and distribution growth.
So the results for CNX Midstream in the fourth quarter last year, first quarter this year, they show how powerful these efforts have been when it comes to the financial performance of the company. You see the strength and bright future across a range of metrics. And, first, we posted the 16th consecutive quarter now of distribution growth.
Second, first quarter enjoyed a 1.49 coverage ratio, which is strong. Third, distribution growth and coverage ratios are driven by exceptional cost management. So it really starts with our efficiencies and in our cost structure that sets the tone for everything downstream of it.
Fourth, the balance sheet is very strong. It's slightly levered, fully capable of self-funding our capital program without having to access equity markets. And then, last, the all important 2019 capital program buildout, it's well under way, slightly ahead of schedule versus last time we spoke, and it's evidence of our ability to get ahead and complete work that was originally scheduled for 2020 into 2019. So we're entering a period of time for CNX Midstream where our footprint is built and ready for the optionality of Marcellus, Utica, STACK base and third-party opportunities beyond CNX resources and it's one where capital intensity is significantly reduced post buildout at the end of 2019. It's also one where continued distribution growth is delivered.
So, now, I'll turn things over to Chad.
Chad Griffith -- President
Thanks, Nick. Before I get into the results of the quarter, I want to briefly rehash the recent history of the CNXM story. As you may recall, we amended the gathering agreement with our largest shipper and sponsor CNX a couple of times last year. In the process, we created an agreement that provides a longer line of sight on upstream development with hard-coded mechanisms for upstream timing changes and pad relocations. The agreement also provides several financial backstops, including minimum well commitments and minimum volume commitments.
We also restructured our obligations of gather to be much clearer and objective. We've agreed to deadlines and pressure targets. These changes have allowed us to manage our business more effectively, both on capital and on operating expense. When we established the minimum well commitments, we agreed to activity levels that protected the returns on the large chunky upfront capital, which we assumed would require four greenfield compressor stations and several large diameter high pressure discharge lines, all built and brought online during 2019. This plan was largely laid out in our Analyst Day materials from last year.
Once these stations and trunk lines were in service, go-forward capital would decrease significantly and be limited to incremental well connects and incremental compression service, both of which would be timed with and linked to incremental revenue streams. This capital buildout plan, the financial backstops behind it and the upstream activity it supported flows through to and supports our plan to raise distributions by 15% annually through 2023 without drops and without accessing the equity markets. That was the plan then and continues to be the plan today modified only by the team's continuous efforts to reduce capital intensity and lowering -- and lower operating costs, both of which further improved the plan's financial performance.
The structure of the agreement provides us flexibility to build the system as we see appropriate, provided we hit specific connection dates and key pad pressures below certain defined targets. This has allowed us to modify our system design over the last year as we continue to solve for enhanced rates of return.
Though, significantly, we combined the planned greenfield Morris 2 Station into the original Morris Station footprint. We defer the North Nineveh Station and added a new Buckland Station, which would be located closer to CNX's core Richhill acreage and would likely be built during 2020. This new configuration is illustrated on slide five of the deck we've released this morning.
Finally, our close coordination with CNX has allowed us to respond when their activity accelerates. For example, last year, we were able to accelerate our buildout and connect several of their wells sooner than originally planned, resulting in a pull forward of EBITDA from 2019 until last year.
Similarly, a response to our sponsors announced incremental activity this morning, we're able to accelerate the Buckland Station, several high-pressure trunk lines attached to it and the Richhill TETCO Interconnect into this year. While this does increase 2019 capital by approximately $50 million to $60 million, it functions more as an acceleration of capital from 2020 into this year and will result in our major capital overhaul being predominantly finished this year and for basically the same dollars and on the same schedule we laid out last year at Analyst Day, but with the infrastructure and stations more optimally located.
Capital in 2020 beyond is expected to be limited to incremental plug -- incremental well connects and plug-and-play horsepower installations and is therefore expected to be considerably lower than 2019 on a go-forward basis.
Moving on to the first quarter results. I'll refer to the short slide deck we posted this morning to the Investor Relations section of our website. Starting on slide three, average daily throughput, excluding volumes under high-pressure short-haul agreement, was 1,468 BBTUs per day in the quarter or down just slightly from our record high in Q4 of 2018.
Net unit operating cost declined 12% year-over-year as efficiency initiatives continue to take hold, including our centralized control room and our increased use of data analytics. The cost performance is especially important in the quarter with heavy winter operations and a relatively cold and snowy season. In fact, our operating costs were the third best first quarter number in the history of the company.
The reduction in costs helped drive adjusted EBITDA increase by nearly $20 million to $54.4 million compared to the first quarter of 2018. Leverage ratio remains flat quarter-over-quarter at 2.7, and well within our target and below the industry average.
Moving on to slide four, is our updated full year 2019 guidance. The only change compared to last quarter is the previously discussed $50 million to $60 million increase in capital expenditure guidance for the year.
There were two accounting items in the quarter that I'd like to address. First, we proactively wrote off $7.2 million of capital cost related to the deferment of several projects. As I discussed earlier, we've modified our system overhaul, which delayed the necessity of our North Nineveh Station, a high-pressure trunk line in the North Nineveh area and an upgrade to our McQuay Interconnect. Even though we had already begun work on these projects, including land, engineering and some dirt work, it was a better overall economic decision to halt these projects, reclaim any disturbed areas and write-off the appropriate amount, which shows up in the loss on assets sales and abandonment line item in our consolidated statements of operations.
Secondly, there was a change under the omnibus SG&A agreement with our sponsor that has caused SG&A costs to increase by $6 million for the full year. The change relates to the way shared service costs are split between the two entities and reflects the run rate level going forward.
With regard to third-party business, we continue to make a concerted effort to engage counterparties and are working through several potential deals. We could see some of these come to fruition over the next few months and begin to see some impact beginning next year. As previously stated, there is no incremental third-party business or related capital factored into our plans and no additional business is required to support the 15% distribution growth target through 2023.
As we've said for several quarters now, 2019 is a transformational year for CNXM and the first quarter was a strong first step to completing that transformation. We're excited to continue building out the infrastructure that will support volume and distribution growth for years to come.
With that, I'll hand it back to Tyler.
Tyler Lewis -- Vice President of Investor Relations
Thanks, Chad. And, operator, could you open the line up for Q&A at this time, please?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Ethan Bellamy with Baird. Please go ahead.
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
Hey, guys, Good morning.
Nicholas DeIuliis -- Chairman and Chief Executive Officer
Good morning.
Chad Griffith -- President
Hi.
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
What do the owned versus leased compressor economics look like? And why do you choose to own those rather than lease them out?
Chad Griffith -- President
Yeah. So what the -- being a -- we got brought in -- the GP got brought in with CNX and we got the benefit of being that sole-sponsored entity. We -- and then restructured the TGA (ph). It gave us a much longer line of sight on volumes, production activity, growth and we are able to, sort of, much more intelligently think about how much compression horsepower are we going to need over the next several years. And when we have that line of sight, we can look at, OK, how much of this horsepower will we needed for multiple years? And at a certain point, depending upon the cost to buy horsepower versus lease rates to rent horsepower, there's a breakover point where it makes better economic decision to buy that horsepower rather than to rent it.
And that's a bogie that's really changing all the time and it's really been influenced lately by, sort of, some of the demand for compression elsewhere. So it's a decision that we're making over and over again. Each time a new compressor comes up for analysis, we'll make that analysis each time and make sure we're making the right rate of return decision on each and every one.
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
Got it. And can you ballpark that payback period for us?
Nicholas DeIuliis -- Chairman and Chief Executive Officer
It's generally in the, call it, five to six-year window.
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
Got it. That's helpful. And then separately on financing. Obviously, IDRs are a key topic in the space right now, any thoughts on those?
Nicholas DeIuliis -- Chairman and Chief Executive Officer
It's something -- as we've said previously and we've been saying in the last couple of quarters, it's something we're continuing to watch and we watched a lot of our peers go through simplification transactions. At the end of the day, I don't think it's really made a material difference to any of their unit prices. We understand that it's a very topical issue right now that we get asked the question a lot, but we're continuing to assess, we're continuing to look at what people are doing and we're looking for an actual win-win solution for both, for the LP unitholders and for CNX.
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
That's good to hear. Thank you, gentlemen. Good luck
Operator
(Operator Instructions) At this time, I'm seeing no further questions. I would like to turn the conference back over to Tyler Lewis for any closing remarks.
Tyler Lewis -- -- Analyst
Okay. Thank you, and thank you everyone for joining us this quarter. Look forward to speaking with you after the call.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Duration: 15 minutes
Call participants:
Tyler Lewis -- Vice President of Investor Relations
Nicholas DeIuliis -- Chairman and Chief Executive Officer
Chad Griffith -- President
Ethan Bellamy -- Robert W. Baird & Co. Inc. -- Analyst
Tyler Lewis -- -- Analyst
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