Good morning. Welcome to the USA Compression Partners First Quarter 2024 Earnings Conference Call. [Operator Instructions]. The conference is being recorded today, May 7, 2024. I now would like to turn the call over to Chris Porter, Vice President, General Counsel and Secretary. Please go ahead.

Good morning, everyone, and thank you for joining us. This morning, we released our operational and financial results for the quarter ending March 31, 2024. You can find a copy of our earnings release as well as a recording of this call in the Investor Relations section of our website at usacompression.com. During this call, our management will reference certain non-GAAP measures. You will find definitions and reconciliations of these non-GAAP measures to the most comparable U.S. GAAP measures in our earnings release. As a reminder, our conference call will include forward-looking statements. These statements are based on management's current beliefs and include projections and expectations regarding our future performance and other forward-looking matters. Actual results may differ materially from these statements. Please review the risk factors included in this morning's earnings release and other public filings. Please note that information provided on this call speaks only to manage views as of today, May 7, 2024, and may no longer be accurate at the time of a replay. I will 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. I am joined on the call by Eric Scheller, our COO. This morning, we released our first quarter 2024 results, which reflected another quarter of record results. Our first quarter results were driven by our strategy laid out during previous calls, focusing on prudent deployment of capital through return-based decision making and demand-driven pricing with extended contract tenors. By staying disciplined, we have continued to drive financial and operational performance to record levels, which we believe enhances and sustains unitholder value. Of note, we saw another quarter of record revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, average revenue generating horsepower and average revenue per revenue generating horsepower. Our utilization on both an average and period-end basis were also at record highs. Consistent with my commentary during our last call, we addressed several important components of our capital stack during the first quarter. In March 2024, the partnership opportunistically issued $1 billion of 7 1/8% senior notes due 2029 and redeemed all of our 725 million 6 7/8% senior notes due 2026. We used the remaining net proceeds to reduce the revolving credit facility. Our timing in the high-yield marketplace was virtually perfect with the spread to benchmark treasuries of 291 basis points, close to the recent lows last seen in January 2022. The issue was substantially oversubscribed and our notes have performed well even in light of the recent pressure on interest rates. Additionally, this issuance received a credit rating upgrade from Moody's. Further, on April 1, 2024, the holders of the partnership's Series A preferred units elected to convert an aggregate of 280,000 preferred units into 13,991,954 common units, which were issued effective as of April 2, 2024. 2024 guidance for distributable cash flow has…

Thanks, Eric, and good morning all. As Eric noted, we were pleased to deliver our unitholders another excellent quarter of strong results. In addition to the record results Eric mentioned, we deployed approximately 63,000 additional horsepower during the quarter as we continue to deploy large horsepower units into the field. As we mentioned last quarter, we are securing contracts with extended tenure and enhanced pricing that we think generates strong, stable baseload cash flows, while providing opportunistic upside as market conditions evolve. Our revenue growth trend continued and was driven primarily by increasing utilization, exiting the quarter at an all-time high of 95% and pricing improvement also at an all-time high, averaging $19.96 for the first quarter. Our revenue increased 2% sequential quarters and 16% compared to the year ago period. The first quarter also saw our sector-leading margins over 67%, in line with historical averages since our initial public offering, reflecting the stability of our steady determination to offset increased inflationary costs through both productivity improvements and contractual pass-through pricing adjustments, which we expect to continue supporting our margins in line with our current levels, should inflation remain high or increase in the near term. Regarding financial results, our first quarter 2024 net income was $23.6 million. Operating income was $66.9 million. Net cash provided by operating activities was $65.9 million, and cash interest expense net was $44.7 million. Cash interest expense increased by approximately $1.7 million on a sequential quarter basis, primarily due to higher average outstanding borrowings. However, higher cash interest expense was mitigated by $2.4 million of cash payments received under our $700 million notional principal fixed rate interest rate swap, which locks in 30 days SOFR until December 2025 at 3.9725% compared to current 30-day SOFR that exceeds 5.25%. Under our current leverage ratio, this…

Thank you, Eric. We are extremely proud of our first quarter results and the progress we have made in a mere 4 months on the optimization of our capital structure. While we remain bullish on the long-term prospects of the natural gas industry, we are all facing some general economic and political uncertainty in the near term. We believe we are well positioned to weather this uncertainty, continue improving our financial metrics and opportunistically address our capital structure over time. Once we have addressed our capital structure, we will then be in a better position to consider future potential distribution policy changes. To conclude, we are extremely please with our first quarter 2024 results, highlighted again by record quarterly revenues, adjusted EBITDA, distributable cash flow and utilization. We expect to file our Form 10-Q with the SEC as early as this afternoon. And with that, we will open the call to questions.

[Operator Instructions] Your first question comes from the line of Jim Rollyson of Raymond James.

Eric, just if you kind of take a step back from the kind of short-term caution you provided, it seems like the outlook as we go into next year and frankly, the next few years on the gas side, driven by LNG that we've all read about in some of the data center growth from AI and impact there on electric demand and gas bodes well for this cycle to play out over a period of time. And I'm curious, given the planning cycles that you all need with lead times and all that. I realize this year, you've taken a step back from just new units and focusing on some of the internal fleet upgrades and bring it back. But curious just how your conversations with customers are going. And plan -- how far out are they planning and just maybe how you're thinking about visibility going out here over the next handful of years?

Jim, all great questions. Obviously, I appreciate you're digging into our industry. You've recently published some research, which, by the way, I think some of the best I've seen in a long time with the deep dive that you've done. The fundamentals of the compression industry are probably the best they've been in the last 2 decades. If you think about when we formed USA Compression 25 years ago, domestically, we produced and consumed a little over 50 Bcf of gas a day. And today, we're north of 100 Bcf. With permitted and under construction LNG facilities, we're going to see a substantial increase in the next 2 or 3 or 4 years related to demand increases for natural gas, the electrification drive, the decarbonization drive, has legs. And I don't think people fully appreciate the magnitude of how far behind the electric grid is, what has to happen to stabilize the grid and expand the grid. As we all know, when the wind doesn't blow and the sun doesn't shine at night, the renewable sources of electric generation don't make electricity. Backup batteries are extremely expensive at the industrial and the utility scale. We've had a meeting with the Chairman of the Public Utility Commission recently in Texas, who indicated that looking at peaking gas plants versus looking at using battery backups for some of the renewables, but the renewables with batteries are 10x the cost of a conventional gas peaking type of unit. So when the light bulb comes on to the people of the state of Texas, as an example, or other states across the U.S., this is going to be an extremely costly effort to expand the grid, to stabilize the grid. And that's -- now you're at the point in time of starting to bring…

That's very helpful. Maybe circling just back to the balance sheet. You said a lot of things. Obviously, you guys made the move on refi-ing and congrats on that. It was certainly a good print on the coupon. From a going-forward perspective, we think about -- obviously, you mentioned at some point, you tackle the 2027, which I presume is going to be opportunistically driven based on the markets. But kind of bigger picture with where the balance sheet is today, the leverage is today, maybe remind us just where you want leverage to go? And kind of where does that need to be either leverage or distribution coverage or maybe a combination of both before you would actually think about doing something on distributions here down the road?

Again, great questions, Jim. And these are things we have discussions with our board with routinely. Keep in mind that USA never cut our distribution. You look at the now pushing $2 billion that we have distributed back to our unitholders since going public in 2013. We're one of the few who chose not to cut the distribution. I still believe that if you're going to be an MLP, distribution is one of the -- should be sacrosanct. And before you cut a distribution, you need to have exhausted each and every other alternative that you had. So before we induce then an increase in distribution, we want to make sure that going forward, regardless of volatility in the cycle that we will be able to maintain and the increased level of distribution over time. So you can see we're building our distribution coverage to the 1/4, 1/5 range coming up. We think that, that will continue to improve. You look at our leverage, which right now is running in the 4x or so range. We do have a different -- somewhat different definition for our ABL purpose versus the way some other people look at your all-in balance sheet. And I think that this conversion of our preferred to common units over time continues to simplify and get the convergence of kind of how people look at the balance sheet with and without the prep as total leverage coming down. So we're going to get the leverage down. This conversion of the prep to common goes a long way to getting that accomplished. Slowing the growth like we've been doing allows us to continue to reduce our leverage ratio. Yes, the absolute leverage has picked up a little bit, but think again to what we pointed to on our…

Your next question comes from the line of Brian DiRubbio of Baird.

Just was hoping a couple of follow-up questions. Can you let us know what you think CapEx spend is going to be this year in full?

Yes, sir. So CapEx being growth CapEx, being growth and maintenance CapEx?

Growth and maintenance.

Growth and maintenance, combine CapEx.

Yes . I think what we're going to see is somewhere that we're going to be around $115 million, $125 million in expansion capital and probably somewhere between, call it, $25 million and $35 million in maintenance CapEx.

Got it. And just we think about you deploying some of the existing fleet back into the field as opposed to buying new equipment. Is that included in the expansion, or is that included in the maintenance CapEx?

No, that's included in the expansion capital.

Okay. And I know you're not looking to add more new equipment right now, but any thoughts on how long it would take if you order new piece of equipment? How long that would it take to get delivered particularly with the CAT 36 series [indiscernible] engines.

[Technical Difficulty ] has brought in, their construction period was running as much as over a year, a quarter or 2 ago, it's been rain back into, I'd say, roughly 9 months or so ago, and it's not just CAT engines on the 3,600 series, you've got fabrication capacity limitations. You've got other components that go into manufacturing a compressor package from compressor frames and compressor cylinders. One of the things I think people haven't quite picked up on yet, is that Caterpillar also uses these types of engines to supply backup generation equipment for data centers. So you can envision that if you're Microsoft or Google or Facebook or Amazon, let alone before you move into the AI expansions that some of these folks are getting into. All of those data centers end up with backup electric generation equipment because they can [indiscernible] at any form of downtime. So as the number of data facilities are increased and spending billions and billions and billions of dollars to increasing capacity, these places all have CAT-driven, some diesel, some natural gas type backup generation equipment. So I look at it as these facilities continue to be brought online, there's going to be continued tension and pressure on not just USA and our peers to access this equipment, but we'll be competing with sourcing this equipment from Caterpillar with the likes of the Amazons, Googles, Facebooks and Microsoft to back up their expansions into AI and continued forays with data centers.

Understood. That's helpful there. And just as you think about the distribution policy post the simplification of the capital structure, how are you thinking about the distribution policy in context of the cycle?

So again, that's something that our board makes that decision. The management team will sit down and look at it and say, gents, here we are, early stage of cycle, mid-stage of cycle, late stages cycle What's the outlook for interest rates, what's the outlook for demand for our equipment going forward? What's the regulatory environment? All of these things go into our gonculator. So I think it's fair to say that once we do get these 2027s refinanced, maturity extended with our ABL facility, we're able -- on both of these, we have several years of runway left. But at the point in time that we have some good clarity on just what our cost of capital is going to be, our cost of interest is going to be what the regulatory environment is looking like, what's going on geologically worldwide, what's going on with OPEC. Then we'll have a little bit better sense of what we need to recommend to the board as far as distribution policy. So I'm not prepared today to commit to next quarter or 2 quarters or a year from now because there's a lot of stuff coming into an election year with basically 2 wars going on throughout the world. There's a lot of instability right now, and I'm not prepared today to comment further on what the policies might look like in the future because today, sitting here, it's pretty uncertain.

Understood. And then final question for me, unless I missed this, are you still in the active CFO search at this point in time, and where does that stand?

So as we've indicated to multiple people multiple times, the CFO has come in 2 categories, those who raised capital, i.e., you're actively in the equity markets, growing your balance sheet or the CFOs come in the form of more on the technical accounting, compliance and support and optimization of running your day-to-day business. Tracy Owens, our Chief Accounting Officer, comes from a long and stable background in the latter category. So we have made the conscious decision to not add a CFO at this stance. As you are aware, our board is controlled by Energy Transfer. We do have -- our financials are consolidated underneath ET, and we do have adult supervision in the room. Tom Long, my boss, who's the Co-CEO of Energy Transfer is the former CFO of ET. Dylan Bramhall, who is the current CFO of Energy Transfer sits on our board. And to the extent, Tracy and his team need any further support or "adult supervision." They're more than willing and able to roll up their sleeves if it's needed at any point in the future. So now we do not intend to add a CFO currently. We're not actively entertaining M&A. We're not actively growing our balance sheet with the form of equity capital. We haven't raised any equity capital in over a decade, and we don't contemplate needing to at any time in the foreseeable future.

As there are no further questions at this time, that concludes today's call. Thank you, everyone, for joining. You may now disconnect.