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CNX Midstream Partners LP (NYSE:CNXM)
Q3 2019 Earnings Call
Oct 29, 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 Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead, sir.

Tyler Lewis -- Vice President, Investor Relation

Thank you and good morning to everybody. Welcome to CNX Midstream's third quarter conference call. We have in the room today Nick DeIuliis, our CEO; Chad Griffith, President and COO and Don Rush, our Chief Financial Officer.

Today, we'll be discussing our third 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.

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

Thanks, Tyler. Good morning, everybody. I'm going to be brief and then I'll turn it over to Chad. I did want to hit on a few key points. First, CNX Midstream continues to smoothly and efficiently execute our business plan day in and day out. And we do it in a safe and compliant manner that ability is the pre-requisite, it sets up the strong financial performance that we've been posting quarter after quarter, and we expect to continue into the future. So hats off to the entire Midstream team.

Second, you can see this ability to execute manifest itself in the financial numbers both in results for the quarter as well as in 2019 and 2020 updated guidance. Cash flows and throughput are being raised for 2019 reflecting Midstream's smooth execution and coupled with upstream producer CNX, being able to improve its performance for the year. Cash flow guidance for 2020 and coverage ratio are unchanged from the last update, despite upstream activity from CNX being streamlined and reduced as it adjust with gas prices. And by the way that streamlining of 2020 activity by CNX only builds inventory and runway for CNX Midstream into the future, beyond 2020. Third point, our build-out and capital spend associated with it. They're coming through a successful conclusion as we speak. That is going to allow us to double down on even more intense day-to-day operation, generate free cash flow and reduce leverage ratio, all things to look to and forward -- for in 2020 and beyond.

And then last our 15% distribution growth forward path and 18 consecutive quarters of delivering on 15% distribution growth in the past, those things do not happen by accident. They are the results of business philosophy of astute capital allocation and a focused team on execution -- executing that philosophy in action. So with that, now am going to turn things over to Chad.

Chad A. Griffith -- President and Chief Operating Officer

Thanks, Nick. The Company posted another strong quarter of results highlighted on Slide 3. Average daily throughput excluding volumes under high pressure short-haul agreements was 1,754 Bbtus per day in the quarter, up around 1.4% when compared to the second quarter of 2019. We also posted the 18th consecutive quarterly cash distribution increase at our targeted 15% annual growth rate.

We have continued to focus on costs, which have helped drive up our adjusted EBITDA, which in the quarter was $56.5 million or $12 million higher than the third quarter of last year. Despite our leverage ratio remaining well within our targets and below the industry average, it did tick up slightly to 2.9 times compared to 2.8 times last quarter.

As we have previously stated, we continue to expect that our leverage ratio will peak in the fourth quarter of 2019 at around 3 times. And then quickly come back down to around 2.7 times by year-end 2020.

Moving on to Slide 4, we have provided updated guidance for 2019 and 2020. In 2019, we are taking up our throughput volumes for the year as CNX accelerate some volumes from 2020 into 2019. And we are adjusting -- adjusted EBITDA and distributable cash flows as a result, which were up $15 million each based on the midpoints of the guidance ranges.

For 2019, we are reaffirming the previous guidance. In 2020, we are reducing throughput volumes modestly by 50 Bbtus per day. However, despite a lower volume range compared to the previous guidance, adjusted EBITDA and DCF remain unchanged, due primarily to offsetting general and administrative cost reductions. For capital, we are reaffirming the previous range of $80 million to $100 million as we continue to expect capital to decline substantially as we return to a more run rate construction program in 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 in the year between $120 million to $140 million. Lastly, we are reaffirming our 15% annual distribution growth as the target through 2023. As already stated, the third quarter was our 18th consecutive quarterly cash distribution increase at the targeted 15% annual growth rate. Slide 5 is an update of our major capital projects. On the facility side, we've reached major milestones on two large-scale projects turning to new Dry Ridge Station into service and completing the Morris station expansion resulting in the commissioning of seven new compressors in the quarter.

In the fourth quarter of 2019, we will install the Buckland Station discharge line and see first volumes flow soon after. We expect our major 2019 projects to reach mechanical completion in fourth quarter with some level of project closeout during the first half of 2020. Slide 6 is one that we've showed in the past. A quick summary. Per the amended gas gathering agreements, we have a total of 192 total well commitments, of which 180 are CNX's responsibility with the remaining 12 coming from HG. The easiest way to think of these commitments is that there are approximately 40 wells per year.

We also have a minimum volume commitment from CNX in the Shirley Pennsboro area of operation for approximately 130 Bbtus per day this year, which amount -- which that amount increases slightly over the next couple of years. But the commitment amounts to roughly one pad per year.

CNX is currently producing above that minimum commitment. And with that, I'm going to turn it back over to Tyler.

Tyler Lewis -- Vice President, Investor Relation

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

Questions and Answers:

Operator

Absolutely. [Operator Instructions] Our first question comes from Jeremy Tonet with JP Morgan. Please go ahead.

Jeremy Tonet -- JP Morgan -- Analyst

Good morning.

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

Good morning.

Chad A. Griffith -- President and Chief Operating Officer

Good morning.

Jeremy Tonet -- JP Morgan -- Analyst

Given that CNXM has been yielding more than 10% for the past several quarters here and CNX is lowering their targeted 2020 production, does it makes sense to still grow the distribution at 15% here and sort of do some level of buybacks. It seems like distribution growth seems to only really benefit the GP IDRs at this juncture as opposed to the LP unit price.

Chad A. Griffith -- President and Chief Operating Officer

Yeah. As we've stated whenever we did kind of consolidate or the other half that GP got bought it reconfigure the gathering agreements and putting the well commitments in place. We would like to take the long approach on how we manage the capital structure of the Company and the policies going forward. So we -- we've spent a lot of time, energy and effort building a business that is suited for this plan. I think -- it's appropriately acknowledged if the MLP market has been challenging, for everybody. Frankly not just CNX Midstream net net, we've done well versus a lot of different peers and such over time. So we're trying to take too long [Phonetic] on here trying to be disciplined, trying to be prudent and thoughtful as we continue to run the Company.

Jeremy Tonet -- JP Morgan -- Analyst

Got you. I mean, I was just curious with CNXM yielding over 10% for almost all of the year. At what point, would buyback start to make sense, I guess.

Chad A. Griffith -- President and Chief Operating Officer

Yeah. We've, this is part of the valuation we run obviously on the CNX upstream side that is part of the playbook, when we did some of the amendments and pieces in place, we've provided some optionality in regards to -- to thinking about those things, obviously there's complexities involved with how that mechanically would work versus other uses of the cash versus how IDRs are situated. So it is something that is part of the capital allocation playbook that we look at at CNX Midstream and no particulars on exactly what thresholds matter or not. It's just one of the areas that you look to to put cash flow to work that you have.

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

And at this stage and at this point in time, the 15% distribution growth is what you should be assuming.

Jeremy Tonet -- JP Morgan -- Analyst

Okay, that's all from me. Thanks.

Operator

[Operator Instructions] Our next question comes from David Amos with Heikkinen Energy. Please go ahead.

David Amos -- Heikkinen Energy -- Analyst

Good morning, guys. I just wanted to clarify whether or not your 15% distribution growth guidance through 2023 included any assumption of dropdowns during that period.

Chad A. Griffith -- President and Chief Operating Officer

It does not include any assumption of drops. Our plan and the structure that we've put into place. We believe gets us there through 2023 without performing any drops or really raising any additional capital.

David Amos -- Heikkinen Energy -- Analyst

Okay, thanks. And then I just wanted to get Chad's [Phonetic] view as management about just generally, how you're thinking about the IDR structure, which is clearly an overhang for every small cap MLP at this point that continues to have it. And then more specifically, if you wouldn't mind just kind of talking about how you view the Hess deal that was recently announced, which seems to have worked for both the upstream sponsor and the midstream company.

Chad A. Griffith -- President and Chief Operating Officer

Yeah and that's something we've talked to in the past, around recognizing and reinforcing that hey the business works with them in place. But recognizing that IDRs are something that MLP investors aren't interested in companies having at this juncture, so similar to how things change. It's continuing to change and the thought around there is really the same as it's been is looking for these types of a win-win type of a situation between the two. I think in the Hess transaction without getting into specifics, it was a nice way to couple a couple of things together and officially get that, get that situated. So as we've shown in the past with all the things we've done with the GGA and the Utica dedication and the Shirley-Pennsboro drop, and the well -- well commitments that we've put in place. We do look at these things to create win-win scenarios and I understand that IDRs are going. Do need to be addressed. And we have time to sort them out. But that doesn't mean that we are not trying to figure out some things sooner rather than later, so understand sentiment and we're working hard on thinking about the right approach.

David Amos -- Heikkinen Energy -- Analyst

I really appreciate that answer. Thank you.

Operator

Our next question comes from Chris Tillett with Barclays. Please go ahead.

Chris Tillett -- Barclays -- Analyst

Hi guys, good morning. Just a quick one for me here, there was a -- there was a mention actually in the CNX press release this morning that CNX saw some increased transportation gathering fees in the quarter due to higher CNXM fees, just sort of curious, if you could maybe expand on that a little bit, was that just sort of routine contractual increases or is there something else going on there? And then how should we think about that going forward?

Chad A. Griffith -- President and Chief Operating Officer

Yes. So Chris. That is in relation to the Q3 2018 comparison. So that would adjust for the 2.5% annual escalation that we see with those contracts.

Chris Tillett -- Barclays -- Analyst

Got it. Okay, that's it for me then, thank you.

Operator

Our next question comes from Ethan Bellamy with Baird. Please go ahead.

Ethan Bellamy -- Baird -- Analyst

Hey gentlemen, good morning, would CNXM be better off as the C Corp or is the partnership format, the best way to go for the business.

Chad A. Griffith -- President and Chief Operating Officer

Yeah, again the -- looking at what -- what the appropriate capital structure is and how to have that work is something that is things that you look at and consider. I do think that right now, especially with CNX being the biggest and largest customer for the business and how those two are interrelated and some of the synergies and things we talked about flattening the organization and combining teams. There's a lot of benefits in -- in how we have it structured right now, but we're always looking at different things and how folks have addressed things.

Ethan Bellamy -- Baird -- Analyst

Okay. Well obviously lot of -- lot of pain in your contiguous footprint of your assets from some of your peers. Are there any third party opportunities out there right now? Or are you focused on the parent.

Chad A. Griffith -- President and Chief Operating Officer

Well, it's a mix. We of course are continuing to increase the integration between CNX upstream and CNX midstream. As we noted on both the upstream call and just noted in my prepared commentary, we've integrated the operating teams and so those guys are totally in sync. And really focused on maximizing the value from the CNX opportunity. But that doesn't mean that we're ignoring third party opportunity. Right. So your point is valid. Our -- the other operators in the space are sort of slowing down a little bit and have announcing slowdowns. But we are continuing to talk to them or continue to have discussions, we're continuing to look ways to position ourselves to take advantage of when those guys get back to the drill bit. I think that opportunity really presents itself in CPA unlike the Westmoreland, Indiana Armstrong County area of Pennsylvania, it's a lot of -- a lot of those volumes are unspoken for and it's really a jump off for a midstream operator to get out there and grab that and add that to our portfolio.

Sweepers [Phonetic] a little bit more challenged because there's a lot of existing dedications already, but to the extent that every dollar is becoming more and more critical. The more and more that we're all going to have to sort of work together to find ways of sharing capital projects and keeping capital as efficient as possible and that's where some of the third-party opportunity Sweepers can come from.

Ethan Bellamy -- Baird -- Analyst

Okay and then just to carry on that theme are there any specific third-party capital projects, whether it'd be pipes, G&P, crackers etc that could catalyze let's say pre-hedge realizations at CNX, that we should care about on the CNXM side.

Chad A. Griffith -- President and Chief Operating Officer

At CNX -- CNX took a little bit different of a approach to marketing our gas than most of the peers. Right. So they, they avoided lot of the long-haul transport. They avoided signing up for a lot of long-haul FTEs, so a lot of their exposure is really that local market and then they protect the volatility of that local market with their hedge book. Right. And so that's why at the CNX level, you're seeing a lot of the benefit of the -- sort of after hedge realization. I think, you can operate on go forward.

As far as like step change events in the basin that will help them, certainly, we are looking for continued expansion -- pipeline expansion project to get gas out of the basin, we're looking at our peers as they change their capital programs and their availability to access capital and what their drill programs end up looking like. It creates an opportunity for CNX, and their healthy balance sheet, have been in still some of that space as their peer slowdown.

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

And there are folks looking to add additional crackers in the facility.

Chad A. Griffith -- President and Chief Operating Officer

Right.

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

Now it shows up and running, so there is from the demand side, there are, there are components that I think will help call it slowly, and over time, build more demand.

Ethan Bellamy -- Baird -- Analyst

Okay, thanks very much.

Operator

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Tyler Lewis for any closing remarks.

Tyler Lewis -- Vice President, Investor Relation

Okay, Ana, thank you all again for joining us here today and we look forward to speaking with you again next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 18 minutes

Call participants:

Tyler Lewis -- Vice President, Investor Relation

Nicholas J. DeIuliis -- Chairman of the Board and Chief Executive Officer

Chad A. Griffith -- President and Chief Operating Officer

Jeremy Tonet -- JP Morgan -- Analyst

David Amos -- Heikkinen Energy -- Analyst

Chris Tillett -- Barclays -- Analyst

Ethan Bellamy -- Baird -- Analyst

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