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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge accelerated filer☒ Accelerated filer ☐ Non-accelerated
filer ☐Smaller Reporting Company i☐ Emerging Growth Company i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As
of April 27, 2020, CNX Midstream Partners LP had i89,799,224 common units outstanding.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — iDESCRIPTION
OF BUSINESS
CNX Midstream Partners LP (the “Partnership”, or “we”, “us”, or “our”) is a growth-oriented master limited partnership focused on the ownership, operation, development and acquisition of midstream energy infrastructure in the Appalachian Basin. We currently provide midstream services to our customers’ production in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia under long-term, fixed-fee contracts. Our assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities. We are managed by our general partner, CNX Midstream GP LLC (our “general partner”), a wholly owned subsidiary of CNX Gathering LLC (“CNX Gathering”). CNX Gathering is a wholly
owned subsidiary of CNX Gas Company LLC (“CNX Gas”), which is a wholly owned subsidiary of CNX Resources Corporation (NYSE: CNX) (“CNX Resources”). Accordingly, CNX Resources is the Sponsor of the Partnership, and we may refer to CNX Resources as the “Sponsor” throughout this Quarterly Report on Form 10-Q.
Description of Business
Our midstream assets consist of itwo operating segments that we refer to as our “Anchor Systems” and “Additional
Systems” based on their relative current cash flows, growth profiles, capital expenditure requirements and the timing of their development.
•Our Anchor Systems, in which the Partnership owns a i100% controlling interest, include our most developed midstream systems that generate the largest portion of our current cash flows, including our ifive
primary midstream systems (the McQuay, Majorsville, Dry Ridge, Mamont and Shirley-Penns Systems), a 20” high-pressure pipeline contributed to us in the CNX Transaction, that occurred in 2018, and related assets.
•Our Additional Systems, in which the Partnership owns a i5% controlling interest, include several gathering systems throughout our dedicated acreage. Revenues from our Additional
Systems are currently derived primarily from the Pittsburgh Airport area, which is within the wet gas region of our dedicated acreage and the Wadestown area in the dry gas region. Currently, the substantial majority of capital investment in these systems would be funded directly by CNX Resources in proportion to CNX Gathering’s i95% retained ownership interest.
In order to maintain operational flexibility, our operations are conducted through, and our operating assets are owned by, our operating
subsidiaries. However, neither we nor our operating subsidiaries have any employees. Our general partner has the sole responsibility for providing the personnel necessary to conduct our operations, whether through directly hiring employees or by obtaining the services of others, which may include personnel of CNX Resources as provided through contractual relationships with the Partnership. All of the personnel who conduct our business are employed or contracted by our general partner and its affiliates, including our Sponsor, but we sometimes refer to these individuals as our employees because they provide services directly to us. See Note 4–Related Party Transactions for additional information.
IDR Elimination Transaction
On
January 29, 2020, CNX and CNXM entered into and closed definitive agreements to eliminate CNXM’s incentive distribution rights (“IDRs”) held by its general partner and to convert the i2.0% general partner interest in CNXM into a non-economic general partnership interest (collectively, the "IDR Elimination Transaction").
Pursuant to
the IDR Elimination Transaction agreements, CNX received the following consideration in exchange for the cancellation of the IDRs and conversion of the i2.0% general partner interest:
•i26 million
CNXM common units;
•i3 million new CNXM Class B units, which will not receive or accrue distributions until January 1, 2022, at which time they will automatically convert into CNXM common units on a one-for-one basis; and
After giving effect to the IDR Elimination Transaction, CNX now owns i47.7 million CNXM common units, or approximately i53.1%,
of the outstanding limited partner interests in CNXM, excluding the CNXM Class B units. Following the conversion of the CNXM Class B units into CNXM common units on January 1, 2022, CNX’s ownership will increase to i50.7 million CNXM units, or approximately i54.6%
of the outstanding limited partner interests in CNXM, on a proforma basis.
iThe accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). iThe
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and various disclosures. Actual results could differ from those estimates, which are evaluated on an ongoing basis, utilizing historical experience and other methods considered reasonable under the particular circumstances. Although these estimates are based on management’s best available knowledge at the time, changes in facts and circumstances or discovery of new facts or circumstances may result in revised estimates and actual results may differ from these estimates. Effects on the Partnership’s business, financial position and results of operations resulting from revisions to estimates are recognized when the facts that give rise to the revision become known. In the opinion of management, all adjustments considered necessary for a fair presentation of the accompanying
consolidated financial statements have been included.
The balance sheet at December 31, 2019 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the Consolidated Financial Statements and related notes for the year ended December 31, 2019 included in CNX Midstream Partners LP’s (the “Partnership”, or “we”, “us”, or “our”) Annual Report on Form 10-K as filed with the Securities and Exchange Commission (SEC) on February 10, 2020.
Principles of Consolidation
i
The
consolidated financial statements include the accounts of the Partnership and all of its controlled subsidiaries, including 100% of each of the Anchor Systems and Additional Systems in the applicable periods presented within this Quarterly Report on Form 10-Q. Although the Partnership has less than a 100% economic interest in the Additional Systems, it has been consolidated fully with the results of the Partnership in the applicable periods as the Partnership is considered to be the primary beneficiary and has a controlling financial interest and the power through its ownership to direct the activities of the Additional Systems. After adjusting for noncontrolling interests, net income attributable to general and limited partner ownership interests in the Partnership reflect only that portion of net income that is attributable to the Partnership’s unitholders.
Transactions
between the Partnership and CNX Resources have been identified in the consolidated financial statements as transactions between related parties and are disclosed in Note 4–Related Party Transactions.
Revenue Recognition
i
We record revenue when obligations under the terms of the contracts with our shippers are satisfied; generally, this occurs on a daily basis as
we gather natural gas at the wellhead. Revenue is measured as the amount of consideration we expect to receive in exchange for providing the natural gas gathering services.
Nature of performance obligations
At contract inception, we assess the services promised in our contracts with customers and identify a performance obligation for each promised service that is distinct. To identify the performance obligations, we consider all of the services promised in the contract, regardless of whether they are explicitly stated or are implied by customary business practices.
Our
revenue is generated from natural gas gathering activities. The gas gathering services are interruptible in nature and include charges for the volume of gas actually gathered and do not guarantee access to the system. Volumetric-based fees relate to actual volumes gathered. In general, the interruptible gathering of each unit one million British Thermal Units (MMBtu) of natural gas represents a separate performance obligation. Payment terms for these contracts require payment within i25 days of the end of the calendar month in which the hydrocarbons
are gathered.
Transaction price allocated to remaining performance obligations
We are required to disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied. However, the guidance provides certain practical expedients that limit this requirement. iSubstantially all of our revenues are derived from contracts that have terms
of greater than one year. Under these contracts, the interruptible gathering of each unit of natural gas represents a separate performance obligation.
For revenue associated with the Shirley-Penns System, for which we have remaining contractual performance obligations, the aggregate amount of the transaction price allocated to those remaining performance obligations was $i350.8 million at March 31,
2020. See Note 4–Related Party Transactions for a detailed breakout of the minimum revenue by year.
The amount of revenue associated with this contract up to the minimum volume commitment (“MVC”) is fixed in nature, and volumes that we may gather above the MVC will be variable in nature. As of March 31, 2020, no future performance obligations exist relative to volumes to be gathered in excess of the MVC as the related volumes have not yet been nominated
for gathering. Therefore, we have not disclosed the value of unsatisfied performance obligations for the variable aspect of this agreement, nor have we disclosed the value of other unsatisfied performance obligations that are variable in nature.
Prior-period performance obligations
We record revenue when obligations under the terms of the contracts with our shippers are satisfied; generally this occurs on a daily basis when we gather gas at the wellhead. In some cases, we are required to estimate the amount of natural gas that we have gathered during an accounting period and record any differences between our estimates and the actual units of natural gas that we gathered in the following month. We have existing internal controls
for our revenue estimation process and related accruals; historically, any identified differences between our revenue estimates and actual revenue received have not been significant. For the quarters ended March 31, 2020 and 2019, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.
Disaggregation of revenue
See Note 8–Segment Information for additional information.
We invoice customers once our performance obligations have been satisfied, at which point payment becomes unconditional. Accordingly, our contracts
with customers do not give rise to contract assets or liabilities. We also have no contract assets recognized from the costs to obtain or fulfill a contract with a customer.
Classification
The fees we charge our affiliates, including our Sponsor, are recorded in gathering revenue — related party in our consolidated statements of operations. Fees from midstream services we perform for third-party shippers are recorded in gathering revenue — third-party in our consolidated statements of operations.
Cash
iCash
includes cash on hand and on deposit at banking institutions.
Receivables
i
On January 1, 2020, the Partnership adopted the guidance under the Financial Accounting Standards Board (the “FASB”) Accounting Standard Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Partnership adopted Topic 326 using the prospective transition method.
Prior to adopting Topic 326, the Partnership reserved for specific accounts receivable when it was probable that all or a part of an outstanding balance would not be collected, such as customer bankruptcies. Collectability was determined based on terms of sale, credit status of customers and various other circumstances. We regularly reviewed collectability and established or adjusted the reserve as necessary using the specific identification method. Account balances were charged off against the reserve after all means of collection had been
exhausted and the potential for recovery was considered remote.
Under Topic 326, management recorded an allowance for credit losses related to the collectability of third-party customers receivables using the historical aging of the customer receivable balance. Related party receivables between entities under common control are excluded from Topic 326. The collectibility was determined based on past events, including historical experience, customer credit rating, as well as current market conditions. We will continue to monitor customer ratings and collectability on a quarterly basis. Account balances will be charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. iThe
allowance for credit losses is as follows:
iThe FASB Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This guidance also relates to all nonfinancial assets and liabilities that are not recognized or disclosed on a
recurring basis (e.g., the initial recognition of asset retirement obligations and impairments of long-lived assets). The fair value is the price that we estimate we would receive upon selling an asset or that we would pay to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy is used to prioritize input to valuation techniques used to estimate fair value. An asset or liability subject to the fair value requirements is categorized within the hierarchy based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The highest priority (Level 1) is given to unadjusted quoted market prices in active markets for identical assets or liabilities,
and the lowest priority (Level 3) is given to unobservable inputs. Level 2 inputs are data, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly.
The carrying values on our balance sheets of our current assets, current liabilities and revolving credit facility approximate fair values due to their short maturities. We estimate the fair value of our long-term debt, which is not actively traded, using an income approach model that utilizes a discount rate based on market rates for other debt with similar remaining time to maturity and credit risk (Level 2). The estimated fair value of our long-term debt was approximately $i280.0
million on March 31, 2020.
Property and Equipment
i
Property and equipment is recorded at cost upon acquisition and is depreciated on a straight-line basis over the assets’ estimated useful lives or over the lease terms of the assets. Expenditures which extend the useful lives of existing property and equipment are capitalized. When properties are retired or otherwise disposed, the related cost and accumulated depreciation are
removed from the respective accounts and any gain or loss on disposition is recognized.
The Partnership evaluates whether long-lived assets have been impaired during any given quarter and has processes in place to ensure that we become aware of such indicators. Impairment indicators may include, but are not limited to, sustained decreases in commodity prices, a decline in customer well results and lower throughput forecasts, and increases in construction or operating costs. For such long-lived assets, impairment exists when the carrying amount of an asset or group of assets exceeds our estimates of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or group of assets. If the carrying amount of the long-lived asset(s) is not recoverable, based on the estimated future undiscounted cash flows, the impairment loss would be measured as the excess of the asset’s carrying amount over
its estimated fair value. In the event that impairment indicators exist, we conduct an impairment test.
Fair value represents the estimated price between market participants to sell an asset in the principal or most advantageous market for the asset, based on assumptions a market participant would make. When warranted, management assesses the fair value of long-lived assets using commonly accepted techniques and may use more than one source in making such assessments. Sources used to determine fair value include, but are not limited to, recent third-party comparable sales, internally developed discounted cash flow analyses and analyses from outside advisors. Significant changes, such as the condition of an asset or management’s intent to utilize the asset, generally require management to reassess the cash flows related to long-lived assets. iiNo/
property and equipment impairments were identified during the periods presented in the accompanying consolidated financial statements.
Leases
i
In February 2016, the FASB issued ASU 2016-02–Leases (Topic 842), which increases transparency and comparability among organizations by recognizing right-of-use (“ROU”) lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU maintains a distinction between finance leases and operating leases, which is substantially similar to the classification
criteria for distinguishing between capital leases and operating leases in the previous lease guidance. Retaining this distinction allows the recognition, measurement and presentation of expenses and cash flows arising from a lease to remain similar to the previous accounting treatment. A lessee is permitted to make an accounting policy election by class of underlying asset to exclude from balance sheet recognition any lease assets and lease liabilities with a term of 12 months or less, and instead to recognize lease expense on a straight-line basis over the lease term. For both financing and operating leases, the ROU asset and lease liability are initially measured at the present value of the lease payments. In July 2018, the FASB issued ASU 2018-11 which provides entities with the option to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if
necessary.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets and accrued liabilities on our consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date of the lease in determining the present value of future payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis
over the lease term.
iWe are subject to various federal, state and local laws and regulations relating to the protection of the environment. Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. At this time, we are unable to assess the timing and/or effect of potential liabilities related to greenhouse gas emissions or other environmental issues. As of March 31, 2020 and December 31, 2019, we had no material environmental matters that required the recognition of a separate liability or specific disclosure.
Asset Retirement Obligations
iOur
gathering pipelines and compressor stations have an indeterminate life. If properly maintained, they will operate for an indeterminate period as long as supply and demand for natural gas exists, which we expect for the foreseeable future. We are under no legal or contractual obligation to restore or dismantle our gathering system upon abandonment. Therefore, we have iino/t
recorded any liabilities for asset retirement obligations at March 31, 2020 or December 31, 2019.
Variable Interest Entities
iEach of the Anchor and Additional Systems is structured as a limited partnership (the “Limited Partnerships”) and a variable interest entity (“VIE”).
These VIEs correspond with the manner in which we report our segment information in Note 8–Segment Information, which also includes information regarding the Partnership’s involvement with each of these VIEs and their relative contributions to our financial position, operating results and cash flows.
The Partnership fully consolidates each of the Limited Partnerships through its ownership of CNX Midstream Operating Company LLC (the “Operating Company”). The Operating Company, through its general partner ownership interest in each of the Limited Partnerships during the period in which any ownership interest exists, is considered to be the primary beneficiary for accounting purposes and has the power to direct all substantive strategic and day-to-day operational decisions of the Limited Partnerships.
Income Taxes
iWe
are treated as a partnership for federal and state income tax purposes, with each partner being separately taxed on its share of the Partnership’s taxable income. Accordingly, iino/
provision for federal or state income taxes has been recorded in the Partnership’s consolidated financial statements for any period presented in the accompanying consolidated financial statements./
Equity Compensation
iEquity compensation expense for all unit-based compensation awards is based on the grant date fair value estimated in accordance with the provisions of ASC 718–Compensation–Stock Compensation.
We recognize unit-based compensation costs on a straight-line basis over the requisite service period of an award, which is generally the same as the award’s vesting term. See Note 9–Long-Term Incentive Plan for further discussion.
Net Income Per Limited Partner Unit and General Partner Interest
i
Net income per limited partner unit is calculated using the two-class method, under which income is allocated to participating securities in accordance with the terms of our partnership agreement.
The two-class method uses an earnings allocation method under which earnings per limited partner unit are calculated for each class of common unit and any participating security considering all distributions declared and participation rights in undistributed earnings as if all earnings had been distributed during the period. Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units were exercised, settled or converted into common units.
Prior to the IDR Elimination Transaction on January 29, 2020, we allocated net income between our general partner and limited partners, which included allocations of net income to our limited partners, our general partner and the holders of our IDRs in accordance with the terms of our partnership agreement. We also allocated any distributions in excess of earnings
for the period to our general partner and our limited partners based on their respective proportionate ownership interests in us, after taking into account distributions to be paid with respect to the IDRs, as set forth in our partnership agreement. Following the IDR Elimination Transaction, the Partnership’s common unitholders are entitled to all distributions until the Class B units are converted to common units on January 1, 2022. Class B unitholders have no rights to distributions until they are converted into common units.
Historical Earnings per Unit
The Partnership calculates historical earnings per unit under the two-class method and allocates the earnings or losses of a transferred business before the date of a dropdown transaction entirely to the general partner. If applicable, the previously reported earnings per unit
of the limited partners would not change as a result of a dropdown transaction.
Diluted net income per limited partner unit reflects the potential dilution that could occur if securities or agreements to issue common units, such as awards under the long-term incentive plan, were exercised, settled or converted into common units. When it is determined that potential common units resulting from an award subject to performance or market conditions should be included in the diluted net income per limited partner unit calculation, the impact is calculated by applying the treasury stock method. There were i200,086
and i34,566 phantom units that were not included in the calculation for the three months ended March 31, 2020 and 2019, respectively, because the effect would have been antidilutive.
Recent Accounting Pronouncements
iIn
March 2020, the FASB issued ASU 2020-04 - Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). This ASU provides optional expedient and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning
away from reference rates that are expected to be discontinued. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Partnership is still evaluating the effect of adopting this guidance.
In March 2020, the FASB issued ASU 2020-03 - Codification Improvements to Financial Instruments. This ASU improves and clarifies various financial instruments topics, including the CECL standard. The ASU includes seven different issues that describe the areas of improvement and the related amendments to GAAP, intended to make the standards easier to understand and apply by eliminating inconsistencies and providing clarifications. The amendments in this ASU have different effective dates. The adoption of this guidance is not expected to have
a material impact on the Partnership's financial statements.
NOTE 3 — iCASH DISTRIBUTIONS
Our partnership agreement requires that we distribute all of our Available Cash from Operating Surplus, as those terms are defined in the partnership agreement, within i45
days after the end of each quarter to unitholders of record on the applicable record date, in accordance with the terms below.
Allocations of Available Cash from Operating Surplus and Incentive Distribution Rights
Prior to the IDR Elimination Transaction on January 29, 2020 (See Note 1 – Description of Business), the percentage allocations of available cash from operating surplus between the unitholders and our general partner was based on the specified target distribution levels. IDRs represented the right to receive an increasing percentage, up to a maximum of i48%
(which did not include the i2% general partner interest), of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels had been achieved.
Cash Distributions
i
The
Board of Directors declared the following cash distributions to the Partnership’s common unitholders and to the general partner for the periods presented:
See Note 10–Subsequent Events for information regarding the distribution that was approved by the Board of Directors with respect to the quarter ended March 31, 2020.
NOTE 4 — iRELATED
PARTY TRANSACTIONS
In the ordinary course of business, we engage in related party transactions with CNX Resources (and certain of its subsidiaries) and CNX Gathering, which include the fees we charge and revenues we receive under a fixed fee gathering
agreement (including fees associated with electrically-powered compression that CNX Resources reimburses to us) and our reimbursement of certain expenses to CNX Resources under several agreements, discussed below. In addition, we may waive or modify certain terms under
these arrangements in the ordinary course of business, including the provisions of the fixed fee gathering agreement, when we determine it is in the best interests of the Partnership to do so. Any material transactions are reviewed by the Board of Directors or the Audit Committee, together with oversight by our conflicts committee, as deemed appropriate.
i
Operating expense and general and administrative expense – related party were derived from CNX Resources and consisted of the following:
Three
Months Ended March 31,
(in thousands)
2020
2019
Operational services
$
i1,909
$
i3,633
Electrical
compression
i1,919
i1,915
Total
Operating Expense — Related Party
$
i3,828
$
i5,548
Total
General and Administrative Expense — Related Party
$
i2,857
$
i3,967
Related
party liabilities due to CNX Resources consisted of the following:
Upon the closing of the initial public offering of our common units (our “IPO”), we entered into an operational services agreement with CNX Resources, which was amended and restated on December 1, 2016. Under the agreement, CNX Resources provides certain operational services to us in support of our gathering pipelines and dehydration, treating and compressor stations and facilities, including routine and emergency maintenance and repair services, routine operational activities, routine administrative services, construction and related services
and such other services as we and CNX Resources may mutually agree upon from time to time. CNX Resources prepares and submits for our approval a maintenance, operating and capital budget on an annual basis. CNX Resources submits actual expenditures for reimbursement on a monthly basis, and we reimburse CNX Resources for any direct third-party costs incurred by CNX Resources in providing these services.
Omnibus Agreement
We are party to an omnibus agreement with CNX Resources, CNX Gathering and our general partner that addresses the following matters:
• our payment of an annually-determined administrative support fee (approximately $i7.3
million for the year ending December 31, 2020 and $i7.9 million for the year ended December 31, 2019) for the provision of certain services by CNX Resources and its affiliates, including executive costs. Such costs may not necessarily reflect the actual expenses that the Partnership would incur on a stand-alone basis,
and we are unable to estimate what those expenses would be on a stand-alone basis;
• our obligation to reimburse CNX Resources for all other direct or allocated costs and expenses incurred by CNX Resources in providing general and administrative services (which reimbursement is in addition to certain expenses of our general partner and its affiliates that are reimbursed under our partnership agreement);
• our right of first offer to acquire (i) CNX Gathering’s retained interests in our Additional Systems, (ii) CNX Gathering’s other ancillary midstream assets and (iii) any
additional midstream assets that CNX Gathering develops; and
• our obligation to indemnify CNX Gathering for events and conditions associated with the use, ownership or operation of our assets that occur after the closing of the IPO, including environmental liabilities.
The omnibus agreement will remain in full force and effect throughout the period in which CNX Gathering controls our general partner. If CNX Gathering ceases to control our general partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms.
Gathering Agreements
On January 3, 2018, we
entered into the Second Amended and Restated gas gathering agreement (“GGA”) with CNX Gas, which is a i20-year, fixed-fee gathering agreement. Under the Second Amended and Restated GGA, we continue to gather, compress, dehydrate and deliver all of CNX Gas’ dedicated natural gas in the Marcellus Shale on a first-priority basis and gather, inject, stabilize and store all of CNX Gas’ dedicated condensate on a first-priority basis. Under this agreement, during the year ending December 31, 2020, we will receive a fee based on the type and scope of the midstream
services we provide, summarized as follows:
•For the services we provide with respect to natural gas from the Marcellus Shale formation that does not require downstream processing, or dry gas, we will receive a fee of $i0.4531 per MMBtu.
•For the services we provide with respect to natural gas from the Marcellus Shale formation that requires downstream processing, or wet gas, we will receive:
◦a
fee of $i0.3116 per MMBtu in the Pittsburgh International Airport area; and
◦a fee of $i0.6222
per MMBtu for all other areas in the dedication area.
•Our fees for condensate services will be $ii5.6580/ per
Bbl in the Majorsville area and in the Shirley-Penns area.
Each of the foregoing fees escalates by i2.5% on January 1 each year through the end of the initial term. Commencing on January 1, 2035, and as of January 1 thereafter, each of the applicable fees will be adjusted pursuant to the percentage change in CPI-U, but such fees will never escalate or decrease by more than i3%
per year.
The Second Amended and Restated GGA also dedicated an additional i63,000 acres in the Utica Shale in and around the McQuay and Wadestown areas and introduced the following gas gathering and compression rates (rates shown effective January 1, 2020):
•Gas Gathering:
◦McQuay
area Utica - a fee of $i0.2368 per MMBtu; and
◦Wadestown Marcellus and Utica - a fee of $i0.3678 per MMBtu.
•Compression:
◦For
areas not benefiting from system expansion pursuant to the Second Amended and Restated GGA, compression services are included in the base fees; and
◦In the McQuay and Wadestown areas, for wells turned in line beginning January 1, 2018 and beyond, we will receive additional fees of $i0.0683 per MMBtu for Tier 1 pressure services (maximum receipt point of pressure of 600 psi)
and $i0.1366 per MMBtu for Tier 2 pressure services (maximum receipt point of pressure of 300 psi).
In addition, the Second Amended and Restated GGA committed CNX Gas to drill and complete i140
total wells in the McQuay area within the Anchor Systems, provided that if i125 wells have been drilled and completed in the Marcellus Shale, then the remainder of such planned wells must be drilled in the Utica Shale. To the extent the requisite number of wells are not drilled and completed by CNX Gas in a given period, we will be entitled to a deficiency payment per shortfall well as set forth below:
In the event that CNX Gas drills wells and completes a number of wells in excess of the number of wells required to be drilled and completed in such period, (i) the number of excess wells drilled and completed during such period will be applied to the minimum well requirement in the succeeding period or (ii) to the extent CNX Gas was required to make deficiency payments for shortfalls in the preceding period, CNX Gas may elect to cause the Partnership
to pay a refund in an amount equal to (x) the number of excess wells drilled and completed during the period, multiplied by (y) the deficiency payment paid per well during the period in which the shortfall occurred.
On March 16, 2018, we entered into the First Amendment to the Second Amended and Restated GGA, which added the MVC on volumes associated with the Shirley-Penns System through December 31, 2031. The MVC commits CNX Gas to pay the Partnership the wet gas fee under the
GGA for all natural gas we gather up to a specified amount per day through December 31, 2031. During the MVC period, if CNX Gas actually delivers volumes in a given quarter in excess of the volume commitment for such quarter, CNX Gas is entitled to credit such excess volumes against amounts otherwise payable under the MVC in the future.
i
We will recognize minimum revenue on volumes throughout the term
of the GGA, as set forth below:
Total minimum revenue to be recognized pursuant to Shirley-Penns MVC
$
i350.8
/
For
all natural gas the Partnership gathers in excess of the MVC, the Partnership will receive a fee of $i0.3678 per MMBtu in 2020, which escalates by i2.5%
on January 1 of each year. Since the Shirley-Penns Acquisition, CNX Gas has exceeded the required MVC each quarter.
On May 2, 2018, we completed the CNX Transaction, pursuant to which we entered into the Second Amendment to the Second Amended and Restated GGA, which committed CNX Gas to drill and complete an additional i40 wells in the Majorsville/Mamont area within the Anchor Systems by the end of 2023. To the extent the requisite number of wells are not drilled and completed by CNX Gas in
a given period, we will be entitled to a deficiency payment per shortfall well as set forth below:
CNX Gas provides us with quarterly updates on its drilling and development operations, which include detailed descriptions of the drilling plans, production details and well locations for periods that range from up to i24-i48 months,
as well as more general development plans that may extend as far as iten years. In addition, we regularly meet with CNX Gas to discuss our current plans to timely construct the necessary facilities to be able to provide midstream services to them on our dedicated acreage. In the event that we do not perform our obligations under our GGA, CNX Gas will be entitled to certain rights and procedural remedies thereunder, including the temporary and/or permanent release from dedication and indemnification from us.
There are no restrictions
under our GGAs with CNX Gas on the ability of CNX Gas to transfer acreage in the right of first offer (“ROFO”) area, and any such transfer of acreage in the ROFO area will not be subject to our right of first offer.
Upon completion of its i20-year term in 2037, our GGA with CNX Gas will continue in effect from year to year until such time as the agreement is terminated by either us or CNX Gas on or before i180 days
prior written notice.
The
Partnership capitalized approximately $i0.7 million and $i0.8 million of interest on assets under construction during the three months ended March 31,
2020 and 2019, respectively.
During the three months ended March 31, 2019, the Partnership abandoned the construction of a compressor station that was designed to support additional production within certain areas of the Anchor Systems, incurring a loss of $i7.2 million.
NOTE
6 — iLONG-TERM DEBT
Revolving Credit Facility
In March 2018, we entered into a five-year $i600.0
million secured revolving credit facility with an accordion feature that allows, subject to certain terms and conditions, the Partnership to increase the available borrowings under the revolving credit facility by up to an additional $i250.0 million. The revolving credit facility includes the ability to issue letters of credit up to $i100.0
million in the aggregate. The available borrowing capacity is limited by certain financial covenants pertaining to leverage and interest coverage ratios as defined in the revolving credit facility agreement.
On April 24, 2019, the Partnership amended its revolving credit facility and extended its maturity to April 2024. Among other things, we received an annual interest rate reduction of i0.25% on borrowings
compared to the original agreement. Under the terms of the amended agreement, borrowings under the revolving credit facility will bear interest at our option at either:
•the base rate, which is the highest of (i) the federal funds open rate plus i0.50%, (ii) PNC Bank, N.A.’s prime rate, or (iii) the one-month LIBOR rate plus i1.00%,
in each case, plus a margin ranging from i0.50% to i1.50%; or
•the LIBOR rate
plus a margin ranging from i1.50% to i2.50%.
Following the amendment,
the revolving credit facility now includes (i) the addition of a restricted payment basket permitting cash repurchases of IDRs subject to a pro forma secured leverage ratio of i3.00 to 1.00, a pro forma total leverage ratio of i4.00
to 1.00 and pro forma availability of i20% of commitments and (ii) a restricted payment basket for the repurchase of limited partner units not to exceed Available Cash (as defined in the partnership agreement) in any quarter of up to $i150.0
million per year and up to $i200.0 million during the life of the facility.
Interest on base rate loans is payable on the first business day of each calendar quarter. Interest on LIBOR loans is payable on the last day of each interest period or, in the case of interest periods longer than three months, every three months. The unused portion of our revolving credit facility is subject to a commitment fee ranging from
i0.375% to i0.500% per annum depending on our most recent consolidated leverage
ratio.
The revolving credit facility contains a number of affirmative and negative covenants that include, among others, covenants that restrict the ability of the Partnership, its subsidiary guarantors and certain of its non-guarantor, non-wholly-owned subsidiaries, except in certain circumstances, to: (i) create, incur, assume or suffer to exist indebtedness; (ii) create or permit to exist liens on their properties; (iii) prepay certain indebtedness unless there is no default or event of default under the
revolving
credit facility; (iv) make or pay any dividends or distributions in excess of certain amounts; (v) merge with or into another person, liquidate or dissolve; or acquire all or substantially all of the assets of any going concern or going line of business or acquire all or a substantial portion of another person’s assets; (vi) make particular investments and loans; (vii) sell, transfer, convey, assign or dispose of its assets or properties other than in the ordinary course of business and other select instances; (viii) deal with any affiliate except in the ordinary course of business on terms no less favorable to the Partnership than it would otherwise receive in an arm’s length transaction; and (ix) amend in any material manner its certificate of incorporation, bylaws, or other organizational
documents without giving prior notice to the lenders and, in some cases, obtaining the consent of the lenders. The agreement also contains customary events of default, including, but not limited to, a cross-default to certain other debt, breaches of representations and warranties, change of control events and breaches of covenants. The obligations under the revolving credit facility agreement are secured by substantially all of the assets of the Partnership and its wholly owned subsidiaries.
In addition, the Partnership is obligated to maintain at the end of each fiscal quarter:
•for as long as at least $i150.0
million of the Senior Notes are outstanding (see below), a maximum total leverage ratio of no greater than i5.25 to 1.00 (which increases to no greater than i5.50
to 1.00 during qualifying acquisition periods);
•if less than $i150.0 million of the Senior Notes are outstanding (see below), a maximum total leverage ratio of no greater than i4.75
to 1.00 (which increases to no greater than i5.25 to 1.00 during qualifying acquisition periods);
•a maximum secured leverage ratio of no greater than i3.50
to 1.00; and
•a minimum interest coverage ratio of no less than i2.50 to 1.00.
The Partnership was in compliance with all financial covenants at March 31, 2020.
On March 31, 2020, the outstanding balance on the revolving
credit facility was $i347.0 million at an interest rate of i2.40%. The Partnership had the maximum amount of remaining revolving credit available for borrowing at March 31,
2020, or $i253.0 million.
At December 31, 2019, the outstanding balance on the revolving credit facility was $i311.8
million at an interest rate of i3.26%.
Senior Notes
In March 2018, the Partnership, together with its wholly owned subsidiary CNX Midstream Finance Corp (“Finance Corp”) and (collectively with the Partnership, the “Issuers”), completed a private offering of the Senior Notes, with related guarantees (the
“Guarantees”) and received net proceeds of approximately $i394.0 million, after deducting the initial purchasers’ discount. In connection with the issuance of the Senior Notes, the Partnership capitalized related offering expenses, which are recorded in our consolidated balance sheet as a reduction to the principal amount. Net proceeds from the Senior Notes offering were primarily used to fund the Shirley-Penns Acquisition and repay existing indebtedness under our prior $i250.0
million unsecured revolving credit facility. The Senior Notes mature on March 15, 2026 and accrue interest at a rate of i6.5% per year, which is payable semi-annually in arrears on March 15 and September 15. There are no principal payment requirements on the Senior Notes prior to maturity.
The Senior Notes and Guarantees were issued pursuant to an indenture (the “Indenture”),
dated March 16, 2018, among the Partnership, Finance Corp, the guarantors party thereto (the “Guarantors”) and UMB Bank, N.A., as trustee (the “Trustee”). The Senior Notes rank equally in right of payment with all of the Issuers’ existing and future senior indebtedness and senior to any subordinated indebtedness that the Issuers’ may incur. The Guarantees rank equally in right of payment to all of the Guarantors’ existing and future senior indebtedness.
The Issuers may redeem all or part of the Senior Notes at redemption prices ranging from i104.875%
beginning March 15, 2021 to i100.0% beginning March 15, 2024. Prior to March 15, 2021, the Issuers may on one or more occasions redeem up to i35.0%
of the principal amount of the Senior Notes with an amount of cash not greater than the amount of the net cash proceeds from one or more equity offerings at a redemption price of i106.50%. At any time or from time to time prior to March 15, 2021, the Issuers may also redeem all or a part of the Senior Notes, at a redemption price equal to i100.0%
of the principal amount thereof plus the Applicable Premium, as defined in the Indenture, plus accrued and unpaid interest.
If the Partnership experiences certain kinds of changes of control, holders of the Senior Notes will be entitled to require the Partnership to repurchase all or any part of that holder’s Senior Notes pursuant to an offer on the terms set forth in the Indenture. The Partnership will offer to make a cash payment equal to i101.0%
of the aggregate principal amount of the Senior Notes repurchased plus accrued and unpaid interest on the Senior Notes repurchased to, but not including, the date of purchase, subject to the rights of holders of the Senior Notes on the relevant record date to receive interest due on the relevant interest payment date.
The Partnership may become involved in certain legal proceedings from time to time, and where appropriate, we have accrued our estimate of the probable costs for the resolution of these claims. The Partnership believes that the ultimate outcome of any matter currently pending against the Partnership will not materially affect the Partnership’s business, financial condition, results of operations, liquidity or ability
to make distributions.
NOTE 8 — iSEGMENT INFORMATION
Operating segments are the revenue-producing components of a company for which separate financial information is produced internally and is subject to evaluation by the chief operating decision maker in deciding how to allocate resources. In order to effectively manage
the Partnership, we have divided our current midstream assets among itwo separate categories that we refer to as our “Anchor Systems” and “Additional Systems” based on their relative current cash flows, growth profiles, capital expenditure requirements and the timing of their development. All of the Partnership’s operating revenues, income from operations and assets are generated or located in the United States.
i
Segment
results for the periods presented were as follows:
Under the Partnership’s 2014 Long-Term Incentive Plan (our “LTIP”), our general partner may issue long-term equity-based awards to directors, officers and employees of the general partner or its affiliates, or to any consultants, affiliates of our general partner or other individuals who perform services on behalf of the Partnership. The Partnership is responsible for the cost of awards granted under the LTIP, which limits
the number of units that may be delivered pursuant to vested awards to i5.8 million common units, subject to proportionate adjustment in the event of unit splits and similar events. Common units subject to awards that are canceled, forfeited, withheld to satisfy tax withholding obligations or otherwise terminated without delivery of the common units will be available for delivery pursuant to other awards.
i
The
following table presents phantom unit activity during the three months ended March 31, 2020:
The Partnership accounts
for phantom units as equity awards and records compensation expense on a straight-line basis over the vesting period based on the fair value of the awards on their grant dates. Awards granted to independent directors vest over a period of ione year, and awards granted to certain officers and employees of the general partner vest i33%
per year over a period of ithree years.
The Partnership recognized $i0.5
million and $i0.6 million of compensation expense related to phantom units for the three months ended March 31, 2020 and 2019, which was included in general and administrative expense–related party in the consolidated statements of operations.
At March 31, 2020, the unrecognized compensation related to all outstanding awards was approximately $i3.0
million, which we expect to recognize through 2022.
NOTE 10 — iSUBSEQUENT EVENTS
On April 24, 2020, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders with respect to the first quarter of 2020 of $i0.0829
per common unit. The cash distribution will be paid on May 15, 2020 to unitholders of record at the close of business on May 7, 2020.
In March of 2020, the Partnership was notified of temporary production curtailments by one of its third-party customers that will reduce the Partnership’s future wet gas gathering revenues, of which the length and severity is still unknown. There was minimal impact on the current quarter. As of April 27, 2020, we have not received any other notifications from our customers.
COVID-19 Update
CNXM is closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and geographies, including how it may impact our customers, the employees provided
by our Sponsor, our vendors and contractors. While we did not incur significant disruptions during the three months ended March 31, 2020 from COVID-19, we are unable to predict the impact that the COVID-19 pandemic will have on us, including our financial position, operating results, ability to obtain future financing, the impact to our customers and demand for our services due to numerous uncertainties.
The federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. The Partnership continues to assess the
potential impacts of this recently enacted legislation on its financial position and results of operations.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and results of operations of CNX Midstream Partners LP in conjunction with the historical and unaudited interim consolidated financial statements and notes to the consolidated financial statements. Among other things, those historical unaudited interim consolidated financial statements include more detailed information regarding the basis of presentation for the following information. This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified under “forward-looking statements” below and those discussed in the section entitled “Risk Factors” in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019, which we filed with the SEC on February 10, 2020, as updated in this Quarterly Report on Form 10-Q. In this Item 2, all references to “we,” us,” “our,” the “Partnership,”“CNXM,” or similar terms refer to CNX Midstream Partners LP and its subsidiaries.
Executive
Overview
We are a growth-oriented master limited partnership focused on the ownership, operation, development and acquisition of midstream energy infrastructure in the Appalachian Basin. We currently provide midstream services to our customers’ production in the Marcellus Shale and Utica Shale in Pennsylvania and West Virginia under long-term, fixed-fee contracts. Our assets include natural gas gathering pipelines and compression and dehydration facilities, as well as condensate gathering, collection, separation and stabilization facilities. We are managed by our general partner, CNX Midstream GP LLC (our “general partner”), which is a wholly-owned subsidiary of CNX Gathering LLC (“CNX Gathering”). CNX Gathering is a wholly owned subsidiary of CNX Gas Company LLC (“CNX Gas”), which is a wholly-owned subsidiary of
our Sponsor, CNX Resources Corporation (NYSE: CNX) (“CNX Resources”).
In the current environment, the Partnership has been re-evaluating its current capital allocation opportunities and will remain flexible based on market conditions and availability of opportunities. We remain committed to growing value for our investors over the long term by allocating capital investment to high rate of return midstream projects, delivering cash distributions to our investors over the long term while remaining flexible based on market conditions and availability of opportunities.
The markets for crude oil, natural gas and NGLs remain volatile, and prices may continue to fluctuate in response to, among other things: Geopolitical factors, such as events that may reduce or increase production from particular oil-producing regions and/or from members of the Organization of Petroleum Exporting
Countries ("OPEC"), and global events, such as the ongoing coronavirus COVID-19 (“COVID-19”) outbreak. Since the beginning of 2020, NYMEX oil prices have moved downward due in part to concerns about COVID-19 and its impact on near-term worldwide oil demand and due to the increase in oil production by certain members of OPEC. This oversupply of oil has caused historically low oil prices, which has compounded the impact of the domestic oversupply of NGLs as well as current export constraints and has driven NGL prices to historic lows. While OPEC agreed in April to cut production, downward pressure on prices has continued and could continue for the foreseeable future, particularly given concerns over available storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane.
Continued strength in natural gas production, along with reduced heating demand for natural gas
as a result of relatively mild winter temperatures throughout most of the United States, accounted for relatively higher inventory levels. Despite an April 12 agreement by the OPEC and its allies to reduce global production by approximately 10%, the economic slowdown and stay-at-home orders has continued to decrease demand for natural gas. The U.S. Energy Information Administration’s (“EIA”) Short-Term Energy Outlook for April 2020 forecasts are subject to heightened uncertainty because of the economic slowdown and significant changes in energy markets recently.
In March of 2020, the Partnership was notified of temporary production curtailments by one of its third-party customers that will reduce the Partnership’s future wet gas gathering revenues, of which the length and severity is still unknown. There was minimal impact on the current quarter. As of April 27, 2020,
we have not received any other notifications from our customers, however our Sponsor is still determining the impact to their wet gas production and the potential for future curtailments.
While CNXM did not incur significant disruptions to our operations during the three months ended March 31, 2020 as a result of the COVID-19 pandemic, CNXM is unable to predict the impact that the COVID-19 pandemic will have on us, including our financial position, operating results,
liquidity and ability to obtain financing in future reporting periods, due to numerous uncertainties. These uncertainties include the severity of the virus, the duration of the outbreak, governmental or other actions taken to combat the virus (which could include limitations on our operations or the operations of our customers and vendors), and the effect that the COVID-19 pandemic and the current oil price wars have on the demand for natural gas and natural gas liquids. The health of our Sponsor’s employees, contractors and vendors, and our ability to meet staffing needs in our operations and certain critical functions cannot be predicted and is vital to our operations. Further, the impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets as well as other unanticipated consequences remain unknown. In addition, CNXM cannot predict the impact that COVID-19 will have on our customers,
vendors and contractors; however, any material effect on these parties could adversely impact CNXM. For instance, in the short term, CNXM is starting to see a reduction in overall service and materials costs, due to oversupply of those services and costs, since industrial production has waned. However, if service providers to our industry are forced into bankruptcy or otherwise consolidate due to weakening economic conditions, demand could outpace supply in the long-term and cause these costs to increase. The situation surrounding COVID-19 remains fluid, and CNXM is actively managing our response in collaboration with our contractors, customers, Sponsors employees and vendors and assessing potential impacts to our financial position and operating results, as well as any adverse developments that could impact our business.
CNXM has also taken, and is continuing to take, proactive steps to manage any disruption in our business
caused by COVID-19. For instance, even though our operations were not required to close, CNXM and our sponsor were early adopters in employing a work-from-home system, even before any government mandate on non-essential businesses was enacted. CNXM increased its technology platform, infrastructure and security to allow for a work-from-home environment ahead of the actual need, and therefore, once the hypothetical became a reality, we believe CNXM was ahead of many companies in this respect. CNXM has also deployed additional safety protocols at our field sites in order to keep our Sponsors employees and contractors safe and to keep our operations running without material disruption.
For further information regarding the impact of COVID-19 see Risk factors in Item 1A of this Form 10-Q.
First Quarter Financial Highlights
The Partnership
continued its solid financial performance during the three months ended March 31, 2020 with Distributable Cash Flow exceeding expansion capital by $21.2 million. Comparative results net to the Partnership, with the exception of operating cash flows, which is presented on a gross consolidated basis, were as follows:
Three Months Ended March 31,
(in
millions)
2020
2019
Net income
$
45.2
$
35.1
Net cash provided by operating activities
$
40.1
$
49.9
Adjusted
EBITDA (non-GAAP)
$
60.4
$
54.4
Distributable cash flow (non-GAAP)
$
46.9
$
43.0
Expansion
Capital
$
25.7
$
71.1
For a discussion of why the above non-GAAP metrics are viewed as important by management, and how the non-GAAP financial measures reconcile to their nearest comparable financial measures prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”), see “Non-GAAP Financial Measures” below for additional information.
Quarterly Cash Distribution
On April 24, 2020, the Board of Directors of the Partnership’s general partner declared a cash distribution to the Partnership’s unitholders with respect to the first quarter of 2020 of $0.0829 per common unit. The cash distribution will be paid on May 15, 2020 to unitholders of record at the close of business on May 7, 2020.
Factors Affecting the Comparability of Our Financial Results
The Partnership continues to monitor a number of factors that may cause actual results of operations and financial
results to differ from our historical results or current expectations. These factors include: the impact of the COVID-19 pandemic and the related economic downturn, the historically low natural gas and natural gas liquid prices and ramifications of the crude oil price war between OPEC/Saudi Arabia and Russia that occurred in March which has also led to concerns over available storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane. These and other factors could affect the Partnership’s operations, earnings and cash flow for any period and could cause such results to not be
comparable to those of the same
period in previous years. The results presented in this Form 10-Q are not necessarily indicative of future operating results.
General
and administrative expense — related party
2,857
3,967
(1,110)
(28.0)
%
General and administrative expense — third party
2,765
1,536
1,229
80.0
%
(Gain)
loss on asset sales and abandonments
(11)
7,229
(7,240)
(100.2)
%
Depreciation expense
7,578
5,650
1,928
34.1
%
Interest
expense
8,793
7,339
1,454
19.8
%
Total Expense
34,406
37,243
(2,837)
(7.6)
%
Net
Income
$
45,790
$
34,976
$
10,814
30.9
%
Less: Net income (loss) attributable to noncontrolling interest
571
(131)
702
(535.9)
%
Net
Income Attributable to General and Limited Partner Ownership Interest in CNX Midstream Partners LP
$
45,219
$
35,107
$
10,112
28.8
%
Operating Statistics - Gathered Volumes for the Three Months Ended March 31, 2020
Anchor
Additional
TOTAL
Dry
Gas (BBtu/d) 1
1,037
65
1,102
Wet Gas (BBtu/d) 1
548
49
597
Other
(BBtu/d) 2
299
—
299
Total Gathered Volumes
1,884
114
1,998
Operating
Statistics - Gathered Volumes for the Three Months Ended March 31, 2019
Anchor
Additional
TOTAL
Dry
Gas (BBtu/d) 1
828
3
831
Wet Gas (BBtu/d) 1
629
71
700
Other
(BBtu/d) 2
134
—
134
Total Gathered Volumes
1,591
74
1,665
1
(One billion British Thermal Units per day - BBtu/d) Classification as dry or wet is primarily based upon system area. In certain situations, we may elect to allow customers to access alternate delivery points within our system, which would be a negotiated change addressed on a case-by-case basis.
2 Includes third-party volumes we gather under high-pressure short-haul agreements (294 BBtu/d and 126 BBtu/d for the three months ended March 31, 2020 and 2019, respectively) as well as condensate handling.
Our revenue typically increases or decreases as our customers’ production on our dedicated acreage increases or decreases. Since we charge a higher fee for natural gas that is shipped through our wet system than through our dry system, our revenue can also be impacted by the relative mix of gathered volumes by area, which may vary dependent upon our customers’ elections as to where to deliver their produced volumes, which may change dynamically depending on the most current commodity prices at the time of shipment.
Total revenue increased 11.0% to approximately $80.2 million for the three months ended March 31, 2020 compared to approximately $72.2 million for the three months ended March 31, 2019
primarily due to an 11.0% increase in gathered volumes of dry gas and wet gas. Significantly contributing to the volume increase was a 32.6% increase in gathered volumes of dry gas in the current quarter compared to the prior year quarter. The increase was the result of continued significant well turn-in-line activity that occurred after March 31, 2019 and continued into the first quarter of 2020.
In addition, there was an increase of 165.0 BBtu/d in other volumes compared with the prior year quarter, due primarily to activity under short-haul gathering contracts. Volumes gathered under short-haul gathering contracts do not have as significant an impact on revenues as volumes gathered at our standard
dry or wet gas rates.
Operating Expense
Operating expense primarily includes electrically-powered compression, direct labor, repairs and maintenance and compression expenses. Total operating expenses were approximately $12.4 million in the three months ended March 31, 2020 compared to approximately $11.5 million in the three months ended March 31, 2019. Included in total operating expense was electrically-powered compression expense of $3.7 million for the three months ended March 31, 2020 compared to $3.3 million for the three months ended March 31, 2019, which was reimbursed by our customers pursuant to our GGAs. Although dry gas and wet gas volumes gathered
increased 11.0%, operating expenses only increased 6.1% after adjusting for the electrically-powered compression expense reimbursement in the current quarter compared to the prior year quarter. This was primarily due to continued adherence to cost control initiatives implemented by our operations team over the past few years.
General and Administrative Expense
General and administrative expense primarily includes direct charges for the management and operation of our assets. Total general and administrative expense was approximately $5.6 million for the three months ended March 31, 2020 compared to approximately $5.5 million for the three months ended March 31, 2019. For the three months ended March 31, 2020,
the Partnership incurred transaction costs associated with the IDR Elimination Transaction during the current quarter (see Note 1-Description of Business, in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q). The increase was offset, in part by a decrease in personnel related costs as part of continuing cost reductions.
(Gain) Loss on Asset Sales and Abandonments
During the three months ended March 31, 2019, due in part to changes in customer drilling plan timing and ongoing assessments of projects that generate the highest returns on invested capital, the Partnership abandoned the construction of a compressor station that was designed to support additional production within certain areas of the Anchor Systems. After evaluating the amount of project spending that could be repurposed to other
ongoing projects, management determined that the loss on abandoning the project was $7.2 million. No such transactions occurred in the three months ended March 31, 2020.
Depreciation Expense
Depreciation expense is recognized on gathering and other equipment on a straight-line basis, with useful lives ranging from 25 years to 40 years. Total depreciation expense was approximately $7.6 million in the three months ended March 31, 2020 compared to approximately $5.7 million in the three months ended March 31, 2019. The increase was the result of additional assets placed into service over time.
Interest Expense
Interest expense is comprised of
interest on our 6.5% Senior Notes due 2026 (the “Senior Notes”) as well as on the outstanding balance of our revolving credit facility. Interest expense was approximately $8.8 million for the three months ended March 31, 2020 compared to approximately $7.3 million for the three months ended March 31, 2019. The increase in interest expense was primarily due to an increase in borrowings on our revolving credit facility which was related to our long-term capital program that was completed in 2019. The increase was also related to a reduction in the amount of interest that was capitalized in the first quarter of 2020 and was partially offset by lower interest rates on our revolving credit facility.
We define EBITDA as net income (loss) before net interest expense, depreciation and amortization, and Adjusted EBITDA as EBITDA adjusted for gains or losses on asset sales and abandonments and other non-cash items which should not be included in the calculation of Distributable Cash Flow. EBITDA and Adjusted EBITDA are used as supplemental financial measures by management and by external users of our financial statements, such as investors, industry analysts, lenders and ratings agencies, to assess:
•our operating performance as compared to those of other companies in the midstream energy industry, without regard to financing methods, historical cost basis or capital structure;
•the
ability of our assets to generate sufficient cash flow to make distributions to our partners;
•our ability to incur and service debt and fund capital expenditures; and
•the viability of acquisitions and other capital expenditure projects and the returns on investment of various investment opportunities.
We believe that the presentation of EBITDA and Adjusted EBITDA in this Quarterly Report on Form 10-Q provides information that is useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to EBITDA and Adjusted EBITDA are Net Income and Net Cash Provided by Operating Activities. EBITDA and Adjusted EBITDA should not be considered an alternative to Net Income, Net Cash Provided by Operating Activities or any other measure
of financial performance or liquidity presented in accordance with GAAP. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect Net Income or Net Cash Provided by Operating Activities, and these measures may vary from those of other companies. As a result, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.
Distributable Cash Flow
We define Distributable Cash Flow as Adjusted EBITDA less net income attributable to noncontrolling interest, cash interest expense and maintenance capital expenditures, each net to the Partnership. Distributable Cash Flow does not reflect changes in working capital balances.
Distributable Cash Flow is used as a supplemental financial measure by management and by external users of our financial statements, such as investors, industry
analysts, lenders and ratings agencies, to assess:
•the ability of our assets to generate cash sufficient to support our indebtedness and make future cash distributions to our unitholders; and
•the attractiveness of capital projects and acquisitions and the overall rates of return on alternative investment opportunities.
We believe that the presentation of Distributable Cash Flow in this Quarterly Report on Form 10-Q provides information that is useful to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Distributable Cash Flow are Net Income and Net Cash Provided by Operating Activities. Distributable Cash Flow should not be considered an alternative to Net Income, Net Cash Provided by Operating Activities or any other measure
of financial performance or liquidity presented in accordance with GAAP. Distributable Cash Flow excludes some, but not all, items that affect Net Income or Net Cash Provided by Operating Activities, and these measures may vary from those of other companies. As a result, our Distributable Cash Flow may not be comparable to similarly titled measures that other companies may use.
The following table presents a reconciliation of the non-GAAP measures of EBITDA, Adjusted EBITDA and Distributable Cash Flow to the most directly comparable GAAP financial measures of Net Income and Net Cash Provided by Operating Activities.
Three Months Ended March 31,
(in thousands)
2020
2019
Net
Income
$
45,790
$
34,976
Depreciation expense
7,578
5,650
Interest
expense
8,793
7,339
EBITDA
62,161
47,965
Non-cash unit-based compensation expense
504
612
(Gain)
loss on asset sales and abandonments
(11)
7,229
Adjusted EBITDA
62,654
55,806
Less:
Net
income (loss) attributable to noncontrolling interest
571
(131)
Depreciation expense attributable to noncontrolling interest
480
394
Other
expenses attributable to noncontrolling interest
1,173
1,120
Adjusted EBITDA Attributable to General and Limited Partner Ownership Interest in CNX Midstream Partners LP
$
60,430
$
54,423
Less: cash
interest expense, net to the Partnership
7,905
6,604
Less: maintenance capital expenditures, net to the Partnership
5,673
4,835
Distributable
Cash Flow
$
46,852
$
42,984
Net Cash Provided by Operating Activities
$
40,123
$
49,913
Interest
expense
8,793
7,339
(Gain) loss on asset sales and abandonments
(11)
7,229
Other, including changes in working
capital
13,749
(8,675)
Adjusted EBITDA
62,654
55,806
Less:
Net
income (loss) attributable to noncontrolling interest
571
(131)
Depreciation expense attributable to noncontrolling interest
480
394
Other
expenses attributable to noncontrolling interest
1,173
1,120
Adjusted EBITDA Attributable to General and Limited Partner Ownership Interest in CNX Midstream Partners LP
$
60,430
$
54,423
Less: cash
interest expense, net to the Partnership
7,905
6,604
Less: maintenance capital expenditures, net to the Partnership
5,673
4,835
Distributable
Cash Flow
$
46,852
$
42,984
Distributable Cash Flow is a non-GAAP measure that is net to the Partnership. The $3.9 million increase in Distributable Cash Flow in the three months ended March 31, 2020 compared to the 2019 period was primarily attributable to an increase in volumes gathered under our fixed-fee gathering agreement with our Sponsor due to significant well turn-in-line activity over the last 12 months, coupled with
continued adherence to cost control measures implemented by our operations team over the past few years.
We have historically satisfied our working capital requirements, funded capital expenditures, acquisitions and debt service obligations, and made cash distributions with cash generated from operations,
borrowings under our revolving credit facility and issuance of debt and equity securities. If necessary, we may issue additional equity or debt securities to satisfy the expenditure requirements necessary to fund future growth. We believe that cash generated from these sources will continue to be sufficient to meet these needs in the future. Nevertheless, the ability of the Partnership to satisfy its working capital requirements, to service its debt obligations, to fund planned capital expenditures, or to pay dividends will depend upon future operating performance, which will be affected by prevailing economic conditions in the natural gas industry and other financial and business factors, including the current COVID 19 pandemic, some of which are beyond our control.
We continuously review our liquidity and capital resources. If market conditions were to change, for instance due to the significant decline in natural gas, NGLs
and/or crude oil prices or uncertainty created by the COVID-19 pandemic, and our revenue was reduced significantly or operating costs were to increase significantly, our cash flows and liquidity could be reduced.
As of March 31, 2020, we were in compliance with all our debt covenants. After considering the current and potential effect of the significant decline in natural gas, NGLs and/or crude oil prices and uncertainty created by the COVID-19 pandemic on our operations, the Partnership currently expects to remain in compliance with its debt covenants.
Cash Flows
Net cash provided by or used in operating activities, investing activities and financing activities were as follows for the periods presented:
Three
Months Ended March 31,
(in millions)
2020
2019
Change
Net Cash Provided by Operating Activities
$
40.1
$
49.9
$
(9.8)
Net
Cash Used in Investing Activities
$
(32.7)
$
(78.6)
$
45.9
Net Cash (Used in) Provided by Financing Activities
$
(2.3)
$
24.7
$
(27.0)
Net
Cash Provided by Operating Activities decreased approximately $9.8 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The Partnership’s consolidated Adjusted EBITDA increased by $6.8 million in the current year period compared to the prior year period. The remainder of the change was primarily due to a reduction in accounts payable resulting from lower capital spend.
Net Cash Used in Investing Activities decreased $45.9 million in the current quarter compared to the prior year quarter due primarily to the long-term capital program being completed during 2019 and the go-forward capital intensity of the Partnership being lower.
Net Cash (Used in) Provided by Financing Activities in the current year period decreased compared to the prior
year period due to a reduction in borrowings required to support lower levels of capital spending (investing activities). Also contributing to the decrease was the 15% growth in our distribution payments, which were $37.2 million in the current year compared to $27.3 million in the prior year.
Indebtedness
Revolving Credit Facility
We are party to a $600.0 million secured revolving credit facility, as amended in April 2019 (our “revolving credit facility”), that matures on April 24, 2024 and includes the ability to issue letters of credit up to $100.0 million in the aggregate. The revolving credit facility has an accordion feature that allows, subject to certain terms and conditions, the Partnership to increase the available borrowings under
the revolving credit facility by up to an additional $250.0 million. The available borrowing capacity under the revolving credit facility is limited by certain financial covenants pertaining to leverage and interest coverage ratios as defined in the revolving credit facility agreement.
Borrowings under the amended revolving credit facility bear interest at our option at either:
•the base rate, which is the highest of (i) the federal funds open rate plus 0.50%, (ii) PNC Bank, N.A.’s prime rate, or (iii) the one-month LIBOR rate plus 1.00%, in each case, plus a margin ranging from 0.50% to 1.50%; or
•the LIBOR rate plus a margin ranging from 1.50% to 2.50%.
We incurred interest expense of $2.5 million on our revolving credit facility (not including amortization of revolver fees) during the three months ended March 31, 2020. At March 31, 2020, the outstanding balance on our revolving credit facility was $347.0 million, and we had the maximum remaining amount of revolving credit, or $253.0 million, available for borrowing.
For additional information on our revolving credit facility, including details relating to the amendment that was completed in April 2019, see Note 6–Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q.
Senior Notes due 2026
On March 16,
2018, the Partnership completed a private offering of $400.0 million in 6.5% senior notes due 2026 (the “Senior Notes”), and received net proceeds of approximately $394.0 million, after deducting the initial purchasers’ discount. In connection with the issuance of the Senior Notes, the Partnership capitalized related offering expenses, which are recorded in our consolidated balance sheet as a reduction to the principal amount. Net proceeds from the Senior Notes offering were primarily used to fund the Shirley-Penns Acquisition and repay existing indebtedness under our revolving credit facility.
The Senior Notes mature on March 15, 2026 and accrue interest at a rate of 6.5% per year, which is payable semi-annually, in arrears, on March 15 and September 15. We incurred interest expense of $6.5 million (not including amortization of capitalized bond issue costs) on
the Senior Notes during the three months ended March 31, 2020.
For additional information regarding our Senior Notes, see Note 6–Long-Term Debt in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q.
Capital Expenditures
The midstream energy business is capital intensive and requires maintenance of existing gathering systems and other midstream assets and facilities, as well as the acquisition or construction and development of new gathering systems and other midstream assets and facilities. Our partnership agreement requires that we categorize our capital expenditures as either:
•Maintenance capital expenditures, which are cash expenditures (including expenditures
for the construction or development of new capital assets or the replacement, improvement or expansion of existing capital assets) made to maintain, over the long-term, our operating capacity, operating income or revenue. Examples of maintenance capital expenditures are expenditures to repair, refurbish and replace pipelines, to maintain equipment reliability, integrity and safety and to comply with environmental laws and regulations. In addition, we designate a portion of our capital expenditures to connect new wells to maintain gathering throughput as maintenance capital to the extent such capital expenditures are necessary to maintain, over the long-term, our operating capacity, operating income or revenue; or
•Expansion capital expenditures, which are cash expenditures to construct new midstream infrastructure and those expenditures incurred
in order to extend the useful lives of our assets, reduce costs, increase revenues or increase system throughput or capacity from current levels, including well connections that increase existing system throughput. Examples of expansion capital expenditures include the construction, development or acquisition of additional gathering pipelines and compressor stations, in each case to the extent such capital expenditures are expected to expand our operating capacity, operating income or revenue. In the future, if we make acquisitions that increase system throughput or capacity, the associated capital expenditures may also be considered expansion capital expenditures.
Capital Expenditures for the Three Months Ended March 31, 2020
Anchor
Additional
Total
Capital
Investment
Maintenance capital
$
5,655
$
346
$
6,001
Expansion capital
25,653
1,005
26,658
Total
Capital Investment
$
31,308
$
1,351
$
32,659
Capital Investment Net to the Partnership
Maintenance
capital
$
5,655
$
18
$
5,673
Expansion capital
25,653
50
25,703
Total
Capital Investment Net to the Partnership
$
31,308
$
68
$
31,376
We anticipate that we will continue to make expansion capital expenditures in the future. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives.
We expect that any significant future expansion capital expenditures will be funded by borrowings under our revolving credit facility and/or the issuance of debt and equity securities.
Cash Distribution
The amount of distributions paid under the Partnership’s cash distribution policy and the decision to make any distribution will be determined by our general partner, taking into consideration the terms of the partnership agreement. Under that agreement, the Partnership makes quarterly distributions on its common units to the extent the Partnership has available cash after the establishment of cash reserves. However, we do not have a legal or contractual obligation to pay distributions quarterly or on any other basis at any rate.
On
April 24, 2020, the board of directors of our general partner declared a cash distribution to our unitholders of $0.0829 per common unit with respect to three months ended March 31, 2020. The cash distribution will be paid on May 15, 2020 to unitholders of record as of the close of business on May 7, 2020.
For additional information on our cash distribution policy, see Note 3–Cash Distributions in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q.
Insurance Program
We share an insurance program with our Sponsor, and we reimburse our Sponsor for the costs of the insurance program, which includes insurance
policies with insurers in amounts and with coverage and deductibles that we believe are reasonable and prudent. We cannot, however, assure that this insurance will be adequate to protect us from all material expenses related to potential future claims for personal and property damage or that these levels of insurance will be available in the future at economical prices.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources which are not disclosed in the notes to the unaudited consolidated financial
statements of this Quarterly Report on Form 10-Q.
Contractual Obligations
For a discussion of amounts outstanding under our Revolving Credit Facility and Senior Notes, see Note 6–Long-Term Debt, in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q.
Critical Accounting Policies
For a description of the Partnership’s accounting policies and any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements, see Note 2–Significant Accounting Policies, in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Form 10-Q. The application
of the Partnership’s accounting policies may require management to make judgments and estimates about the amounts reflected in the Consolidated Financial Statements. If applicable, management uses historical experience and all available information to make these estimates and judgments. Different amounts could be reported using different assumptions and estimates.
As of March 31, 2020, the Partnership did not have any accounting policies that we deemed to be critical or that would require significant judgment.
Forward-Looking Statements
This report contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “believe,”“expect,”“anticipate,”“intend,”“estimate,”“will” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures and the impact of such expenditures on our performance, the costs of being a publicly traded partnership and our capital programs.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. You are cautioned not to place undue reliance on any forward-looking statements, as these statements involve risks, uncertainties and other factors that could cause our actual future outcomes to differ materially from those set forth in such statements.
You should also understand that it is not possible to predict or identify all such factors and should not consider the following list to be a
complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:
•our ability to grow, or maintain, our current rate of cash distributions;
•our reliance on our customers, including our Sponsor, CNX Resources Corporation;
•the
effects of changes in market prices of natural gas, NGLs and crude oil on our customers’ drilling and development plans on our dedicated acreage and the volumes of natural gas and condensate that are produced on our dedicated acreage;
•because of the natural decline in production from existing wells, our success, in part, depends on our ability to maintain or increase natural gas and condensate throughput volumes on our midstream systems, which depends on the level of development and completion activity on acreage dedicated to us;
•changes in our customers’ drilling and development plans in the Marcellus Shale and Utica Shale, and our customers’ ability to meet such plans;
•our ability to maintain or increase volumes of natural gas and condensate on our midstream systems;
•the
demand for natural gas and condensate gathering services, changes in general economic condition, and competitive conditions in our industry, including competition from the same and alternative energy sources;
•actions taken by third-party operators, gatherers, processors and transporters;
•our ability to successfully implement our business plan;
•our ability to complete internal growth projects on time and on budget;
•our ability to generate adequate returns on capital;
•the price and availability of debt and equity financing;
•the availability and price of oil, NGLs
and natural gas to the consumer compared to the price of alternative and competing fuels;
•the availability of storage capacity for refined products such as crude, and refinery inputs including condensate, c5+ and butane;
•prolonged customer curtailments;
•energy efficiency and technology trends;
•operating hazards and other risks incidental to our midstream services;
•natural disasters, weather-related delays, casualty losses and other matters beyond our control;
•the impact of outbreaks of communicable diseases such as the novel highly transmissible and pathogenic
coronavirus (“COVID-19”) on business activity, the Partnership’s operations and national and global economic conditions, generally;
•interest rates;
•labor relations;
•defaults by our customers under our gathering agreements;
•changes in availability and cost of capital;
•changes in our tax status;
•the effect of existing and future laws and government regulations;
•the effects of future litigation; and
•certain factors discussed
elsewhere in this report.
You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs at the time they are made, forward-looking statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by our Quarterly Reports on Form 10-Q (including those set forth in Part II, Item IA below), which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future
events, changed circumstances or otherwise, unless required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We generate substantially all of our revenues pursuant to fee-based gathering agreements under which we are paid based on the volumes of natural gas and condensate that we gather and compress, rather than the underlying value of the commodity. Consequently, our existing operations and cash flows do not have significant direct exposure to commodity price risk. However, we are indirectly exposed to commodity price risks through our customers, who may reduce or shut-in production during periods of depressed commodity prices or as
a result of an economic downturn resulting from the COVID-19 pandemic, or other health crisis. We have been able to mitigate this exposure to a limited extent through the use of minimum volume
commitments and minimum well commitments in our gas gathering agreements with our customers. Although we intend to enter into similar fee-based gathering agreements with new customers in the future, our efforts to negotiate terms with third parties may not be successful.
In the future, we may acquire or develop additional midstream assets in a manner that increases our exposure to commodity price risk. Such exposure to the
volatility of natural gas, NGLs and crude oil prices could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to make cash distributions to our unitholders.
Interest Rate Risk
We maintain a $600.0 million secured revolving credit facility and pay interest at a variable rate. Assuming the March 31, 2020 outstanding balance on our revolving credit facility of $347.0 million was outstanding for the entire year, an increase of one percentage point in the interest rates would have resulted in an increase to interest expense of $3.5 million. Accordingly, our results of operations, cash flows and financial condition, all of which affect our ability to make cash distributions to our unitholders, could be materially and adversely affected by significant increases in interest rates.
Credit
Risk
We are subject to credit risk due to the concentration of receivables from our most significant customer, our Sponsor, for gas gathering services. We generally do not require our customers to post collateral. We maintain credit policies intended to minimize overall credit risk and actively monitor these policies to reflect changes and scope of operations. The inability or failure of our significant customers to meet their obligations to us, or their insolvency or liquidation, may adversely affect our financial results.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with
the participation of management of our general partner, including the principal executive officer and principal financial officer, we evaluated the effectiveness of the Partnership’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, management, including the principal executive officer and principal financial officer of our general partner, have concluded that the Partnership’s disclosure controls and procedures are effective as of March 31, 2020 to ensure that information required to be disclosed by the Partnership in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms, and includes controls and procedures
designed to ensure that information required to be disclosed by the Partnership in such reports is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Partnership's internal controls over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Partnership’s internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM
1.LEGAL PROCEEDINGS
Refer to Note 7–Commitments and Contingencies in the Notes to the Unaudited Consolidated Financial Statements included in Item 1 of this Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
The Partnership is subject to certain risks and hazards due to the nature of the business activities it conducts. For a discussion of these risks, see “Item 1A. Risk Factors” in the Partnership’s 2019 Annual Report on Form 10-K as filed with the SEC on February 10, 2020 ("2019 Form 10-K"). The risks described in the 2019
Form 10-K could materially and adversely affect the Partnership's business, financial condition, cash flows, and results of operations. Other than as set forth below, there have been no additional material changes to the risks described in the 2019 Form 10-K. The Partnership may experience additional risks and uncertainties not currently known; or, as a result of developments occurring in the future, conditions that are currently deemed to be immaterial may also materially and adversely affect the Partnership's business, financial condition, cash flows, and results of operations.
Events
beyond our control, including a global or domestic health crisis, may result in unexpected adverse operating and financial results.
The recent outbreak of the coronavirus pandemic (COVID-19) has affected, and may materially and adversely affect, our business, operating and financial results and liquidity. The severity, magnitude and duration of the current COVID-19 outbreak is uncertain, rapidly changing and hard to predict. While the full impact of this virus and the long-term worldwide reaction to it and impact from it remains unknown at this time, government reaction to the pandemic and restrictions and limitations applied by the government as a result, continued widespread growth in infections, travel restrictions, quarantines, or site closures as a result of the virus could, among other things, impact the ability of our Sponsor’s employees and our contractors to perform their duties,
cause increased technology and security risk due to extended and company-wide telecommuting, lead to disruptions in our supply chain (including necessary vendors or service providers), lead to a disruption in our infrastructure acquisition or permitting activities and cause disruption in our relationship with our customers. Additionally, the COVID-19 outbreak has significantly impacted economic activity and markets around the world, and COVID-19 or another similar outbreak could negatively impact our business in numerous ways, including, but not limited to, the following:
•our revenue may be reduced if the outbreak results in an economic downturn or recession, as many experts predict, to the extent it leads to a prolonged decrease in the demand for natural gas, to a lesser extent, NGLs and/or crude oil;
•our
operations may be disrupted or impaired if a significant portion of our Sponsor’s employees or our contractors are unable to work due to illness or if our operations are suspended or temporarily shut-down or restricted due to control measures designed to contain the outbreak;
•the operations of our upstream counterparties may be curtailed by many of the same challenges we face and, as such, may not be able to meet their minimum volume delivery obligations under their agreements with us and further, because of these challenges, have difficulties paying applicable shortfall or deficiency fees; and
•the disruption and instability in the financial markets and the uncertainty in the general business environment may affect opportunities to enhance our liquidity position and long-term financial flexibility.
To
the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, such as those relating to our financial performance and debt obligations. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on our business, which will depend on numerous evolving factors and future developments that we are not able to predict, including the length of time that the pandemic continues, its effect on the demand for natural gas, NGLs and/or crude oil, the response of the overall economy and the financial markets as well as the effect of governmental
actions taken in response to the pandemic.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on April 27, 2020 on its behalf by the undersigned
thereunto duly authorized.
