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CNX Midstream Partners LP (NYSE:CNXM)
Q4 2019 Earnings Call
Jan 30, 2020, 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 2019 Earnings Conference call. [Operator Instructions].

I would now like to turn the conference over to Tyler Lewis, Vice President of Investor Relations. Please go ahead.

Tyler Lewis -- Vice President- Investor Relations

Thank you, and good morning to everybody. Welcome to CNX Midstream's Fourth Quarter Conference Call. We have in the room today, Nick Deluliis, our Chairman of the Board and CEO; Chad Griffith, President and Chief Operating Officer; and Don Rush, our Chief Financial Officer. Today, we'll be discussing our fourth 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 Security and Exchange commission filings. We will begin our call today with prepared remarks by Nick, followed by Don, and then Chad, and then we will open the call for Q&A.

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

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

Okay, Tyler. Thank you. Good morning. I'd like to start off by reviewing our fourth quarter and full year '19 results. Those are shown on slide three in our slide deck. As you can see, CNX Midstream had another strong quarter, which has allowed us to meet or exceed our guidance for the year. This continues a trend for the business that has been consistent since our IPO back in 2014, consistently meeting or beating the guidance that we've laid out. This shows we are doing what we say we're going to do and showcases the phenomenal group of employees we have at the company. If you move to slide four, that illustrates that not only have we been meeting or exceeding our guidance year in and year out, we've also been growing the IBA in distributable cash flow for LP unit at a phenomenal rate over the last five years. And as our updated God's reflex, which Don will get into later, we expected to continue going forward into 2020 and beyond.

A 25% EBITDA cumulative annual growth rate over the course of seven years is quite an impressive feat. And we've effectively tripled the EBITDA of the company in five short years. Now all the great results, they haven't happened on their own. It's taken a lot of work by the CNX Midstream team and a lot of great cooperation and harmony between CNX Midstream and CNX Resources. If you look at slide five, a lot of major accomplishments have occurred since the IPO. From the initial IPO date back in September of 2014, we executed the drop of the 25% remaining from the Anchor System. CNX Resources invested $300 million by buying the other 50% interest in the GP and immediately dedicated substantial new acres and added well commitments into CNX Midstream.

The balance sheet was strengthened with the drop of the Shirley-Penns system coupled with the concurrent financing to support the continued Southwest PA infrastructure build-out that wrapped up in 2019 as well as other well commitments and transactions the company has done along the way. And as announced this morning, the recent IDR transaction, it gets CNX Midstream into a capital structure to excel into its next chapter. In conclusion, and as I highlighted in the upstream call, we reliably do what we say we're going to do.

And we've been thoughtful, disciplined, and focused through the ups and downs of both the commodity cycles in the MLP markets. We believe that we built a best in class Appalachian midstream company that's grown tremendously, and is projected to continue to do so in the future. And our transaction track record coupled with the midstream teams smooth execution, it helped drive 19 consecutive quarters of 15% distribution growth, which in turn sets us up for an IDR transaction that strengthened both companies in a big way. All these things create an exciting future.

And with that, I'm going to turn it over to Don to talk about some of the transaction highlights.

Donald W. Rush -- Chief Financial Officer

Thanks, Nick, and good morning, everyone. I'd like to start off by covering the details of the IDR transaction and then walking through our updated guidance. But before I get into the details of the IDR transaction, I want to highlight that due to the recent investor focus and push to address IDRs across the MLP space, we executed our simplification transaction much earlier in our MLP life cycle than most other MLPs have. And in figuring this out, both CNX, CNX Midstream, the independent midstream board members and their legal and financial advisors worked hard to come up with a fair transaction. The details of the transaction can be found on slide six. As you can see, as part of the transaction, CNX received 26 million CNX Midstream common units, three million CNX Midstream Class B units and deferred cash payments totaling $135 million.

The Class B units represent a newly issued class of units, which will not receive or approve distributions prior to conversion. The Class B units will automatically convert to CNX Midstream common units on January 1, 2022. The $135 million cash component of the transaction will be paid out in three installments: $50 million on December 31, 2020, $50 million on December 31, 2021, and $35 million on December 31, 2022. As a result, our sponsor CNX now owns more than 50% of the equity interest in CNX Midstream, which continues to represent important and material value to CNX Resources. As illustrated on slide seven, there are a number of benefits associated with this transaction.

The transaction was purposely structured to stagger the value over the next three years to ensure LP unitholder accretion for each year beginning in 2020, while also ensuring that CNX Midstream maintains a best-in-class balance sheet. This transaction also simplifies our corporate structure, permanently lowers our cost of capital and creates further alignment between the sponsor and public unitholders as each owns the same form of equity interest in CNX Midstream now. We expect this transaction to substantially expand the opportunity set for CNX Midstream going forward, and we are glad the IDR overhang is now eliminated.

Our pro forma guidance can be found on slide eight. As you can see, we're reaffirming our 2022 or 2020 guidance and giving select premium preliminary guidance for 2021. Looking forward and both 2020 and 2021, you can see EBITDA is expected to grow materially or capital span is expected to climb significantly. And already strong leverage ratio is expected to get even better. And I want to make sure to highlight that under the base plan that our outlook is based upon, CNX Midstream generates significant free cash flow, especially relative to its current equity and enterprise value. And this free cash flow provides us with a tremendous amount of strength and optionality going forward. We are excited, and we are very optimistic about the future.

And with that, I will hand it over to Chad to discuss our operational performance.

Chad A. Griffith -- Executive Vice President and Chief Operating Officer

Thanks, Don. Slide nine provides an update on the status of the major overhaul of our Southwest PA system. During 2019, we completed the expansion of our Morris Station and built and commissioned our Dry Ridge compressor station. In all, we added just over 18,000 horsepower during the year. We're still on schedule with our greenfield Buckland Station and expect to begin utilizing that station late spring. I'd like to congratulate the team on their successful completion of our 2019 planned capital program. Looking into 2020, we still have a fair amount of infrastructure projects planned. In addition to completing Buckland, we plan to expand our Dry Ridge interconnect, install additional compression at Dry Ridge and install a new tap in the Texas Eastern directly from our Buckland Station.

Once those are complete, our Southwest Pennsylvania system is situated to support years of production from CNX and our other shippers. The stations have been designed for additional compression and dehy capacity to be essentially plug-and-play. And our unique dual-line well connects will greatly assist our shippers as they come back for second and third trips to their pads. We expect extended utilization of the capital we deployed in 2019. We built a long-lived midstream system in the core of Southwest PA Marcellus, and we used financial backstops provided by well commitments from our primary shipper. We're now positioned for multiple rounds of future development and years of healthy free cash flow.

Slide 10 highlights our strong track record, focused on an improvement in operating costs and is really the result of two main drivers. We've been very thoughtful over the years with how we would expand our system in order to keep operating efficiency high and a strong culture among the team for rooting out inefficiencies and finding ways to do things better. That's paid off over the years. In fact, since the fourth quarter of 2014 to the fourth quarter of 2019, even though our volumes have more than doubled and our footprint has expanded, our operating costs have gone down on an absolute basis. Slide 11 provides a reminder of the financial backstops provided by our gathering agreements. Everything we've been able to do over the last two years from the midstream build-out to the continued distribution growth to the IDR transaction are based upon these commitments.

And even after their target years past, the assets and operating leverage they allowed us to build will continue to pay financial rewards well into the future. And I want to highlight the magnitude of these commitments. At their combined face value, the commitments are worth nearly $960 million of minimum revenue to CNXM. Moving to slide 12, we've updated our distribution bar chart. As the slide illustrates, even if our customers develop at the bare minimum required to meet their well and volume commitments to CNXM, we would expect our distributable cash flow to continue to exceed our distributions at the 15% annual growth rate target through 2022. And slide 13 really sums up where we are exiting 2019 and entering 2020 and beyond.

We've resolved the IDR overhang. We have a balance sheet and leverage ratio combined with financial commitments from our shippers to protect us from changes in commodity and capital market downturns. We're forecasted to return to strong free cash flow generation now that the major capital overhaul is winding down, beginning with $130 million in 2020 and an early view of around $200 million in 2021. And with the IDRs resolved, we've eliminated any potential misalignment with our sponsor and largest shipper, CNX, who just so happens to have one of the best balance sheets and hedge books in the basin.

As we've discussed, since IPO, CNXM has continually performed by delivering on its plans and growing the business. And now, after the last two-plus years of working hard to expand the infrastructure and improve the corporate structure, we're ready for an even brighter future.

And with that, I'll hand it back to Tyler to open it -- up the line for any questions.

Tyler Lewis -- Vice President- Investor Relations

Thanks, Chad. Operator, if you can open the line up at this time, we'd be happy to take any questions from the audience.

Questions and Answers:

Operator

[Operator Instructions] The first question will come from Chris Tillett of Barclays.

Chris Tillett -- Barclays -- Analyst

Hi, guys. Good morning.

Donald W. Rush -- Chief Financial Officer

Morning.

Chris Tillett -- Barclays -- Analyst

I guess just a quick one from me. Maybe could you help us sort of bridge the gap in the 2020 guidance? I guess relative to $250 million to $270 million EBITDA target you guys have put out there, it looks like you're expecting throughput to be -- the 1.6 to 1.75 BBtus per day is roughly flattish, I guess, from where you finished in 2019. CNX is indicating that volume growth next year might also -- or this year rather, might also be limited. So just curious to know kind of -- what's behind the 15% growth in 2020 relative to some of the other expectations that are out?

Donald W. Rush -- Chief Financial Officer

Yes, sure. It's a combination of many different factors. It's the dry gas rate versus the wet gas rate, it's some of the incremental tier compression fees that we've agreed to with CNX. So there's a bunch of components that affect the kind of the rate blend that you're expected to get at the CNX Midstream level. And two, if you look at CNX' activity and where they're spending their money on D&C, the majority of that is in the CNX Midstream bucket. So some of the nonmidstream assets that would be otherwise declining in CNX' total production wedge is being offset by more CNX Midstream's volumes and couple that with the different fee structures that I talked through, allows you to get the guidance the way it's been set up.

Chad A. Griffith -- Executive Vice President and Chief Operating Officer

We certainly expect to continue improve on operating costs, which should help operating margins -- which we expect to help operating margin in 2020.

Chris Tillett -- Barclays -- Analyst

Okay. Makes sense. And then I guess, as a follow-up to that, what are the expectations in 2020 as far as third-party activity goes?

Chad A. Griffith -- Executive Vice President and Chief Operating Officer

So we have a new third-party talent that's planned to turn in line, call it, Q2, maybe late Q2. We're working very closely with those guys to make sure that our facilities are ready to go when they're ready, bring those wells online. We're super excited about this. It's the first arm's length like new greenfield pad that CNXM's gathered. And so we're super excited to get this thing online. And like I said, that's a late Q2, sort of turn in line.

Chris Tillett -- Barclays -- Analyst

Okay. Thanks for that. That's it for me.

Operator

[Operator Closing Remarks]

Duration: 15 minutes

Call participants:

Tyler Lewis -- Vice President- Investor Relations

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

Donald W. Rush -- Chief Financial Officer

Chad A. Griffith -- Executive Vice President and Chief Operating Officer

Chris Tillett -- Barclays -- Analyst

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