Eric Long - President, Chief Executive Officer Matt Liuzzi - Chief Financial Officer Chris Porter - Vice President, General Counsel, Secretary

Good morning. Welcome to the USA Compression Partners LP’s, Fourth Quarter 2019 Earnings Conference Call. Today's conference call, all parties will be in a listen-only mode and following the call the conference will be open for questions. [Operator Instructions] This conference is being recorded today, February 18, 2020. I would now like to turn the conference over to Chris Porter, Vice President, General Counsel and Secretary.

Good morning, everyone, and thank you for joining us. This morning we released our financial results for the quarter ended December 31, 2019. You can find our earnings release, as well as a recording of this call in the Investor Relations section of our website at www.usacompression.com. A recording will be available through February 28, 2020. During this call, our management will discuss certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures in the earnings release. As a reminder, our conference call will include forward-looking statements. These statements include projections and expectations of our performance and represent our current beliefs. Actual results may differ materially. Please review the statements of risk included in this morning's release and in our SEC filings. Please note that information provided on this call speaks only to management's views as of today, February 18, and may no longer be accurate at the time of a replay. I'll now turn the call over to Eric Long, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thanks for joining our call. Also with me is Matt Liuzzi, our CFO. This morning we released our financial and operational results for the fourth quarter of 2019 and with it wrapped up a solid year of performance for USA Compression. We are proud of the results our team has achieved, results which highlight the continued stability of the large horsepower, infrastructure focused compression services business, even in an environment of commodity price volatility, economic uncertainty and a continually evolving energy industry landscape. Unlike our small horsepower focused peers, who's higher beta, more volatile business model is more directly tied to commodity prices, we believe USA Compressions continued strong performance, operational, financial and utilization statistics, all point to the stability and strength of our large horsepower demand driven business model. Our results demonstrate the critical nature of our assets in moving clean burning, natural gas around the country to ultimate end users. Operational excellence in the field, combined with prudent financial management helped drive revenues, adjusted EBITDA and fleet utilization across our operating regions. And most importantly, we achieved these results while prioritizing safety in operations across the company. In fact, in 2019 we reduced both our vehicle incident rate and our injury incident rate by 10% compared to 2018. Historically, our safety metrics have been among the best in our industry. Safety is of the utmost importance to our customers, our industry and our broader workforce and in 2019 we've demonstrated our ability to achieve great results for our unit holders, while staying focused on safety as our number one priority. Now, to touch on some of the key achievements during the quarter. Revenues of $178 million were up almost 4% over the fourth quarter of 2018 and adjusted EBITDA of $109…

Thanks, Eric, and good morning everyone. Today USA Compression reported a strong fourth quarter to wrap up 2019, including quarterly revenue of $178 million, adjusted EBITDA of $109 million and DCF to limited partners of $58 million. Those cash flow numbers did benefit from certain non-recurring items about $1.2 million of property tax refunds, along with other items that collectively added about $2.5 million to adjusted EBITDA and DCF. In January we announced a cash distribution to our unit holders of $0.525 per LP common unit consistent with the previous quarter, which resulted in coverage of 1.14x. Our total fleet horsepower as of the end of Q4 was largely consistent with Q3 at just under 3.7 million horsepower and our revenue generating horsepower at period end increased slightly to just over 3.3 million horsepower. Our average horsepower utilization for the fourth quarter was 93.9%. Pricing as measured by average revenue per revenue generating horsepower per month was $16.82 for Q4, which again was a slight increase from the previous quarter’s level. Total revenue for the fourth quarter was $178 million, of which approximately $174 million reflected our core contract operations revenue. Parts and service revenue was approximately $4 million; both those amounts include a portion of related party amounts. Gross operating margin as a percentage of revenue was 68% in Q4. Net income for the quarter was $9.3 million; operating income was $43.8 million; net cash provided by operating activities was $91.7 million in the quarter; maintenance capital totaled $7.8 million in the quarter and cash interest expense net was $31 million. As we have traditionally done, concurrent with the fourth quarter earnings release, we are providing initial full year guidance for 2020. We currently expect 2020 adjusted EBITDA of between $415 million and $435 million and DCF of between $210 million and $230 million. Last, we expect to file our form 10-K with the SEC as early as this afternoon, and with that we’ll open the call to questions.

[Operator Instructions] Our first question comes from Praveen Nerra, Raymond James.

Hey, good morning guys. I guess when I look into your guidance it kind of implies that we should see utilization being relatively stable with today's levels or near today's levels for 2020 and you talked a lot about what's going on in the basins. Can you talk about kind of how you see the kind of redeployment of assets in the Permian on a fleet percentage basis? Is it material and then also, can you talk about kind of how much of your equipment is actually seeing returns of some sort that require redeployment?

Yes Praveen, this is Eric. First I would say as an overall percentage of our fleet, the redeployment is not material. You know we're talking a few pieces of equipment here, a few pieces of equipment there. We're talking you know 8 or 10 type machines. So you know we’ve got 4,500 units or so in our fleet, 3.3 million active horsepower, so talking extremely small percentages begin redeployed. So yeah, I think your commentary about looking at our EBITDA and looking at our DCF implies stable utilization and that's what we've always consistently done when we see periods of slowdown in growth CapEx. We focus on making sure that we're able to maintain a high utilization of our existing fleet. So since we’re not seeing wholesale returns, there’s a nominal decline, you know nominal returns here and nominal returns there. We’re pretty comfortable that we’ll be able to maintain that utilization throughout the year.

Right, and so as we think about it from a pricing standpoint, you talked about pricing moderating, we’ve talked about that for a few quarters now at least, so that shouldn't come as a surprise. But can you talk about whether that’s stabilizing, whether that’s heading down slightly and then also kind of what percentage of your fleet rests on either a month-to-month or contracts that are do up within the year.

Yeah, Praveen its Matt. Yeah, I think on the pricing side you're right. The last couple of quarters we’ve talked about sort of moderating pricing. As we you know have signed contracts for some of the few units that we’re bringing on this year, you know on the large horsepower stuff that pricing has remained, you know I would stay very stable. You know again, I think we found the top, but it's certainly not going the other way. And again, you know I think part of that is a factor of us and others with sort of the capital discipline. You know there's just not an over-abundance of especially the large horsepower equipment out there in the market, so I think that's primarily the reason that pricing has stayed stable. And then…

You know I think the other area that you touched on was looking at our mix of month-to-month contracts versus assets that we’ve termed up and we are running about 60%-ish of contracts under extended term. You know that's up significantly from a couple of quarters ago and one of the things that we've been able to do as we’ve placed either new contracts or re-negotiated contracts with extended term in place, we do put in place some annual upward pricing adjustments in those contracts. So you know when you start to look at a fleet that's our size, you know growth CapEx is one thing, but being able to continue to adjust upward the fees we charge on a monthly basis for our compression services starts to become a fairly meaningful number going forward.

Right, that’s great. Thank you very much guys.

Thank you.

Thanks Praveen.

Your next question comes from Jeremy Tonet, J.P. Morgan.

Good morning. Just starting off operationally. Gross margin was a bit better than expected this quarter, peers driven by kind of more on the operating cost side. Can you provide any color there and then as we think about this quarter's margin, is that a good run rate to apply for 2020?

Yeah Jeremy, it’s Matt. I would say you know I think you have to take into account those – the add backs, the one-time stuff that I mentioned that was about $2.5 million for the quarter. So I think if you take that out you get to levels that are probably much more indicative or kind of go forward margin levels. Obviously not huge amounts, but it'll take it down just a little bit. I think to -- basically you'll end up at levels that are very I think consistent with past levels, so. But yeah, in terms of generally speaking the margin, a lot of it was just continued operating cost efficiencies, you know watching, you know labor hiring and OpEx like that, and just really adjusting, making sure that we were adjusting to you know any changes in the market. So again, you know we've been in with the CDM stuff now for almost two full years and so all of that stuff has been completely integrated and I think the business as a whole, you know we’re able to kind of make those changes throughout as we need to through the year.

Great! And secondly, just going back to price increases here, you mentioned selective rate increases for customers. Can you provide a little more context to that?

In terms of – you're talking about going forward or just throughout the year?

Through the quarter, for the quarter and into 2020.

Yeah, again, I think it was more just continued – what Eric had mentioned you know as we termed up contracts, bringing current deployed equipment up to what we consider market rates.

Okay, and do you…

You know when you look at it, really you know we deployed a total of you know 8,000, 9,000 horsepower during the quarter. So there wasn't a whole lot of new horsepower going out at those real high kind of premium type rates. So basically what drove that was existing assets out in the field.

Okay, perfect. Thank you.

Thanks Jeremy.

Your next question comes from TJ Schultz, RBC Capital Markets.

Great, thanks. Hey guys. As EMPs here go through budgeting for 2020 and as you said increasingly focused on free cash flow, any change in view on whether EMPs that have historically owned their own compression may look to sell assets or is it just more simply turning more outsourcing of compression going forward.

TJ, a really good question. Now clearly you've got the go forward capital avoidance question, and we see probably an acceleration in that trend. As it pertains to folks that have existing fleets, surprisingly a large component of those assets really are not outright owned by the companies. You know many of those are covered by structured operating leases, so the ability to monetize some of those assets is probably less than what folks might anticipate. That said, you know there have been some M&A transactions recently, that you know as we've gotten closer to some of those companies, we've been surprised at the magnitude of some of their internally owned compression assets that they truly do have. So I think there's some select opportunities out there with some very attractive type of players to have the potential, but potentially you know [Indiscernible] some of that internal equipment. So it's not the wholesale throughout the industry. I think there's some unique special situations to do that. I’ll tell you, it’s honestly kind of a greater opportunity to probably focus on the avoided capital going forward rather than extract a big packets of some assets you know industry wide.

Okay, it makes sense. Just next, on your gas flaring in the premian’s then an issue. Clearly I think the railroad commission is coming out with a report this week, so is there any view from your seat just on how more regulations around flaring could impact your business?

You know its interesting TJ. When gas is being flared, obviously it's not being compressed or being put into and through a pipeline or a processing plant. I think some of this has to do with the timing of some of a larger diameter, large scale take away capacity, which is coming onscreen, so yes, I think the railroad commission is going to start come down a little harder on operators who have flared in the past. You know you've seen a couple of mid-stream companies who have kind of raised their hand and said, railroad commission you know, we've got pipes in the area. These guys need to be hooked up and they need to be moving gas into and through our pipe system. So that will benefit a company like USA, so instead of flaring one or two BCF, put it into and through the pipelines, which clearly has a positive location for the amount of compression of horsepower that’s needed.

Great! Just the last one from me. You guys have a slide in your most recent presentation just on balancing, distribution, stability and leverage. Is there anything in the cycle going forward just on gas pricing and demand utilization or pricing that you would be looking at that may make you decide that a lower payout and faster de-levering is a better path forward. Thanks.

Hey TJ, it's Matt. That sounds like a hidden question about a distribution cut, but no. I mean, I think when you look historically there's another page in our presentation where we go back you know 10 to 15 years and look at you know the cycles, including you know the Henry hub price, etcetera and you know we've overlaid that with the utilization of the fleet overall and so I think if you look at that page you’d say, “hey, you know this business – and we obviously believe it, that this business has the stability and the staying power to come up to manage and run through throughout commodity cycles.” So we've had multiple commodity cycles, multiple contract cycles over you know the 20 plus year history of the company and have been – you know, felt the need to change it in that regard.

Yeah, no, that makes good sense. I think – so your view is, even if you see some – like you’ve seen and I've seen those slides as well. If you see some decline in utilization, your mix of assets and customers still gives you comfort that you can kind of maintain consistent cash flow going forward, is that fair?

You know, we look at our contract book and they are – the vast majority, a big majority are you know investment grade credits. We've got customers that have diversified footprints; we've got customers that are major oil producers with associated gas; you know we've got some major producers that you know are in need of dry gas player or mid-stream players and for dry gas areas. So we've got a very diversified portfolio across all the geologic basins, geographic basins; we've got customer diversity and very, very strong counterparty. So you know, when we look at that, we’ve seen an environment where some areas grow, some areas are slow and areas that are slow, you know frankly people just kind of maintain their existing level of production and when you have a flat producing profile, as we all know with compression, as reservoir pressures decline you got to suck harder to keep the volume the same. So we're not just a volume game; we’re a pressure and volume game. So you've heard me say the mantra for years. You know we – when the capital markets tell us it's time to or the physical market tells us it’s time to grow we grow and when the capital markets or the physical market say, ‘hey guys, slow the growth down; maintain stability,’ then you know we stop the growth CapEx and we keep a very high utilization of our assets, because the volumes are flat, the pressure has come down, more horsepower is needed, times are good either way. So I think we're in the environment right now where you’ve got some people who are active, and you’ve got some people that are less inactive and even those folks that are struggling financially, you know we get paid, we are a mission critical supplier. We've had a couple of customers go into bankruptcy who are able to recoup our prepositioned billings and confirmed coming out of bankruptcy and gosh, then we are dealing with a customer who has no debt and converted all to equity and a pretty stable player. So you know TJ, it’s kind of the best of all time. You know it’s a perfect storm. Things are really good when times are good and things for us are really good when times are not so good for everybody else.

Perfect! Thanks Eric; thanks Matt.

Thanks TJ.

Our next question comes from Thomas Curran, B. Riley FBR.

Good morning.

Hey Tom.

A question on a macro topic here. So when it comes to the US queue of approved and expected future incremental LNG liquefaction capacity, you know both Greenville terminals and expansion trains, which signs if any have you detected of potential FID deferrals, construction timeline changes or any other forms of project delays in response to you know how China’s apparent demand is evolving.

Tom, it's Matt. I mean we obviously watch and keep an eye on that stuff. Maybe not as granular as some of the stuff you've imagined. I mean I think the truth of it is, you know everything that we read, which is probably the same stuff you see is, you know we're still kind of trying to figure out exactly what everything means for China and how that affects things. There are definitely people out there that say, you know it peaked or it's about to peak, there are others that take a different view. So I think it may be a little early to really know exactly what that impact is like. But you got to remember, in terms of LNG that the existing LNG export from this country is still a very, very small portion of the total gas that gets produced. We were over a 100 Bcf a day, back in the beginning of this year, end of last year. And so the exports of LNG are not even you know below 10% of that. So again, I think it’s still maybe a little early to tell, but you also I think I have to keep it all in perspective and look at how much of that gas is going there. There is obviously lot of other positive demand factors going on domestically.

Right, I was just looking out more over the next two to three years as you have that expected you know surge in U.S. LNG exports as a component of total U.S. natural gas demand. Not concerned about the truly longer term structural driver, but if nothing else, maybe just, you know emerging signs that your trajectory over the next two to three years might get reshaped and become a bit slower you know.

Yeah, I mean that's a fair point. So I think the timing, of that build out may shift you know outward a little bit. But you know I think everything we say it’s – it seems like it’s still little early. But I think the beauty about our business and others in our little sector is that we've been able to really kind of ramp back CapEx and if we saw things in 2021, 2022 you know meaningfully changing from kind of what we expected in this country, we can go to zero CapEx. We can easily kind of put the reins on the spending as can other people. So I think the benefit of not having these big capital commitment project that run two, three, four, five, years plays into our favorite in that sense.

Right, good. Okay, and then Eric or Matt or both of you, would you please update us on your technology strategy? As you look beyond telematics, which fleet technologies have you already decided to adopt and what is the timeline for the implementation and then could you update us on how much of the other CapEx was allocated to such initiatives last year, and then our plan for 2020.

This is Eric. We are working on some pretty creative technology and it's not just on the remote monitoring side. We are coming into some major overhaul cycles. We've been in business 20 years, we ratable added to our fleet and as we come into assets that are in the 10 to 12 year old range, there is some opportunities when we go through some major overhaul to up-rate and up-side some of the type of equipment that we have. So I'm not going to get into too many details other than to say, you know think about if you are doing an overhaul on a race car, you can bore it, you can stroke it, you can blueprint it, you can increase your horsepower rating. So we are looking at some creative things to how do we take our existing fleet and super-size it so to speak, with some nominal CapEx to allow us to have somewhat of a competitive advantage versus our peer groups. So let me just leave it at that.

Sounds potentially exciting. I guess we'll stay tuned. Thanks for filling my questions.

Thank you.

Yeah, thanks Tom.

At this time I’d like to turn the call back over to Eric Long, President and CEO for some closing comments.

Well, thank you operator, and thank you all for joining us on the call today. Our fourth quarter performance was a great wrap-up to 2019 and positions USA Compression well heading into 2020. For all, we expect will be a more restrained year for the broader industry, as well as USA Compression. Achieving these results for the fourth quarter, as well as the full year 2019 highlights the strength and stability of our large horsepower, infrastructure focused contract compression services business model. For 2020 we are focused on driving utilization, optimizing pricing and controlling expenses, all while operating in a safe manner and providing our customers with a high level of service to which they are accustomed. You can expect to see continued prudent capital spending in the coming year to help drive attractive economic returns, as we seek to provide a long term attractive investment opportunity for our unit holders. We look forward to updating you on the next quarterly call. Thank you for your continued interest in and support of USA Compression.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.