Good morning. Welcome to USA Compression Partners' fourth quarter 2024 earnings conference call. During today's call, all parties will be in listen-only mode. At the conclusion of management's prepared remarks, the call will be open for Q&A. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star one again. This conference is being recorded today, February 11, 2025. I now would like to turn the call over to Chris Porter, Vice President General Counsel, and Secretary. Good morning, everyone, and thank you for joining us.

This morning, we released our operational and financial results for the quarter and year ending December 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 in our other public filings. Please note that information provided on this call speaks only to management's views as of today, February 11, 2025, and may no longer be accurate at the time of a replay. I'll now turn the call over to Clint Green, President and CEO of USA Compression.

Thank you, Chris. Good morning, everyone, and thank you for joining our call. Chris Porter and I are joined on the call by Chris Paulson, our CFO, who's joining for the first USA Compression earnings call but has already been quite active with investor conferences in December and January. First, I want to commend our team for their unwavering commitment to safety in all that they do, ensuring the safety of our employees, contractors, and customers remains our top priority. Second, we released our fourth quarter and year-end 2024 results this morning. We are extremely pleased that we were able to deliver record revenues, adjusted gross margin, adjusted EBITDA, distributable cash flow, distributable cash flow coverage, average revenue generating horsepower, and average revenue per revenue generating horsepower results for the quarter and full year. These results enable us to improve distribution coverage and decrease leverage, which is approaching four times. On the operational front, we benefit from a focus on converting idle units to active status. This results in a 94.6% average horsepower utilization for full year, a record for the company and something we are dedicated to maintaining and hopefully improving from here. In 2025, we expect the majority of our growth capital will be spent on new unit deliveries and the remainder on fleet enhancements. On the personnel front, we embarked upon several organizational changes and are quickly adopting a shared service model with Energy Transfer involving various support functions. This will enable us to review the way in which we have worked in the past, optimize processes, and improve the overall digitalization of the business as we begin the first phase of an ERP implementation this year. While the field staff will remain unchanged by this integration, we anticipate their digital resources and real-time management of the…

Thanks, Clint. I'm pleased to join our unitholders in my first call since joining the company in late November. It is an outstanding privilege to discuss record levels of operating and financial performance in many areas. In the quarter, our sales teams continued to build upon pricing improvements, up to an all-time high averaging $20.85 per horse for the fourth quarter, which drove a revenue increase of 2% in sequential quarters and 9% compared to a year ago. These revenue increases were also driven by an all-time high in average active horsepower of 3.56 million. Our fourth-quarter adjusted gross margins were over 68%. Regarding the financial results, our fourth-quarter 2024 net income was $25.4 million, operating income was $74.5 million, net cash provided by operating activities was $130.2 million, and cash interest expense net was $46.4 million. Cash interest expenses decreased by approximately $700,000 on a sequential quarter basis, primarily due to lower average interest rates under our floating rate credit facility. Our leverage ratio declined to a record low of 4.02 times. Turning to operational results, our total fleet horsepower at the end of the quarter was approximately 3.9 million horsepower, essentially flat to the prior quarter. Our revenue-generating horsepower was also flat on a sequential quarter basis but up 4% from a year ago. Our average utilization for the fourth quarter was 94.5%, in line with the prior quarter. Fourth-quarter 2024 expansion capital expenditures were $37.6 million, and our maintenance capital expenditures were $8.2 million. Expansion capital spending primarily consisted of reconfiguration and make-ready of idle units. We expect additional and ongoing conversion of current idle fleet units to active status. Regarding full-year 2024 financial results, net income was $99.6 million, adjusted EBITDA was $584.3 million, and distributable cash flow was $355.3 million. Finally, expansion and maintenance capital…

Thanks, Chris. With a full quarter under my belt and having reconnected with longstanding relationships, both internally and externally, I'm confident this company is well-positioned to lead the way in supporting US natural gas growth into the next decade. With that, I will open the call to questions. We will now begin the question and answer session.

To ask a question, you may press star then one on your touch tone phone. To withdraw your question, and your first question comes from the line of James Rollyson with Raymond James. James, please go ahead.

Hey. Good morning, guys. Clint, maybe the first question will be around the CapEx. Obviously, you just came aboard not that long ago. And as I look at growth CapEx for 2025 in the budget, it's obviously down a bit from where you guys spent in 2024. But with the back half waiting for deliveries, I'm assuming part of that was maybe you kinda took some time to evaluate how things look before you proceeded with spending a bunch of money. So I'm just kinda curious with your generally bullish outlook, which we agree with, how you're thinking about kind of growth in 2025, what's driving a lower CapEx, and maybe beyond 2025?

Yeah. Well, thank you very much for that question. You know, you're exactly right with what you said, but we're also wanting to maintain our leverage ratio down. We don't want to watch that walk up too much. And we will see it tick up a little bit, but we expect it to start coming down as soon as EBITDA comes online. So that's really our driver. We want to maintain our discipline and then sustain some growth as well.

Perfect. Appreciate that answer. And maybe as a follow-up, Clint, as you guys look forward at kinda where things take you from a pricing standpoint and a capacity addition standpoint. And your leverage if you kind of continue to tick away at bringing that down into the range where you guys are hoping to get I've noticed that your distribution coverage also has gone up. And maybe curious how you think in the longer term about potential distribution growth after you've been pretty much steady for the last several years, long as I can remember.

Yeah. Thanks for that, James. This is Chris Paulson. Every CFO would like to grow that distribution coverage and in turn grow the underlying distribution price. I mean, we remain mindful of that. As we undertake this additional growth capital, I do think our coverage will continue to improve. Ultimately, we need to decide what is the right coverage level to withstand cycles. Given our capital structure and our debt structure at the time, so at this point, you know, I'm not prepared to give you what that number is. But that's something that we'll continue to be mindful of as we continue to grow both our underlying DCF and hopefully the underlying unit prices. Same time.

Gotcha. Appreciate that. Thank you, guys.

Thank you.

Your next question comes from the line of Gabe Moreen with Mizuho Securities. Gabe, please go ahead.

Hey. Good morning, everyone. A couple of questions if I might. Just in terms of the 2025 guidance, I mean, if you take your fourth quarter results and kind of annualize them, it looks like, you know, maybe just expecting a flattish for 2025. So I'm just wondering if you can contextualize that a little bit. Are you expecting a little bit of diminishment in gross margins, maybe what you're looking at in cost? So I'm just wondering if you can contextualize 2025 guidance in the context of fourth quarter results.

Hey, Gabe. Chris Paulson again. Great question. So just I will note that Q4 benefited from a net sales tax credit of approximately $3 million. That being said, we are optimistic that the margin and utilization trends that we've seen in Q4 will carry into 2025. Our full-year guidance reflects the price increases we've seen in Q1, modest increases tied to CPI-U for the remainder of the year, and new horsepower that will be delivered in Q4. To the extent, we see that horsepower delivery early or we see larger price increases for the remainder of the year or, frankly, less turnaround time than budgeted; it likely presents some upside to this range. If that occurs, we will update the range accordingly later in the year. But that's what's factored into our guidance today.

Great. Thank you. And then maybe if I could also ask on kind of the CapEx cadence. I think 2024 saw you raise growth CapEx a couple of times, and I realize that maybe it wasn't you specifically in terms of the management team at the time. But can you just talk about not getting to, I think, the growth CapEx number in 2024 that you had put out there? Did you not end up redeploying some of that idle horsepower? Just curious how that played out.

So as it relates to 2025, in particular, you know, we know how much new horsepower we're bringing to bear, and we certainly have additional growth capital tied to make ready and idle units. That proportion in 2025 is a higher proportion on contracted new contract units that I think we have a much better handle on the relative cost and potential inflationary measures of that. We have that as soon as we ink that contract. And so, you know, going into this year and that growth capital, I think we have a very good handle on what that would be, and we're certainly, we certainly understand the implications of having to raise capital ranges and having to do that several times through a given year, and it's our intent not to do that this year.

Thanks, Chris. And if you could just squeeze one more in. I think there was a mention of adjacent business opportunities. I wonder if you could maybe elaborate on what you guys maybe mean by that.

Yeah. So we're talking about our third-party service division. We're working on customer-owned equipment. We expect to see that business grow this year and take on more of a larger role in. So it's mainly just servicing third-party customers' equipment. Okay?

Got it. Thanks, Clint. Appreciate that.

Yep. And your next question comes from the line of Jeremy Tonet with JPMorgan. Jeremy, please go ahead.

Hi. Good morning.

Good morning, Jeremy.

Just want to dive into gross margin a little bit more if we could. You had a nice expansion there and just wondering what you could share with us with regards to, I guess, pricing in general for your services and any other inputs to gross margin like steel tariffs, would that impact you in any sense? Just looking to see what you're seeing there.

Yeah. Great question. So, historically, we've really not commented on price increases, we try to keep that, you know, close to the vest as it relates to our customer discussions. I can note that customers are still favoring contracts as opposed to remaining on month-to-month, where we tend to push for near-term escalators that are much greater necessarily than contract terms. We've seen greater interest in longer renewals than we've seen in the past, which is also interesting. So customers recognize that there could be additional pricing pressure down the line if they were to wait on renewals. As it relates to steel tariffs, that's a tough one. It's a brand-new factor that we're thinking through. Obviously, have been hearing about the potential of oil tariffs in the market, and that got pushed or at least punted a few months, but steel tariffs and the implications for both compression and compression manufacturing, even though a lot of our specific components are US-born, they still do have steel associated with it. And then the implications for the broader industry upstream and midstream, I just think it's too early to make a determination on that. Does that help with that, the question, or was there something more?

Yeah. No. Makes sense. Certainly a lot of uncertainty out there at this juncture. So maybe I don't know if there's any other comments you could provide with regards to leading edge new build pricing trends right now even if you don't have clarity on what tariff impacts might be.

You know, on our new build compression, we are laser-focused on payback periods and payback periods that don't have negative implications on our current leverage. So, you know, we want that product to pay back within term, and so that's one of our significant items that we look at. Obviously, internal rate of return on a standalone unit basis, but also the rate of return as it relates to supporting our yield and supporting our capital structure from a corporate standpoint as a whole is also very important. But those are the things that all go into the calculus as it relates to new unit orders. And obviously, that was supportive of increasing the amount of new unit orders going into this year, and I think it will continue into 2026. As a matter of course, we're already having those discussions for 2026 given lead times, and starting to factor that into our models and forecasting and thinking about what that growth capital should look like into 2026.

Got it. Makes sense. Is there any way to help us kind of quantify what that might look like for payback periods or any other way to quantify the question in general?

Oh, in general, I don't want to tip my hand, but it's mentioned we anticipate that payback will occur within the contract term.

Got it. That's helpful. And then just the last one, if I could. We've been fielding a lot of inbounds recently from investors with regards to potential other applications for your units. And I know that your units are all being applied to your current customers, and that's your first and foremost focus. But just wanted to see, is it even possible at all for compressed units to be used in other services such as electric power behind the meter, what have you? Is that even physically possible or any thoughts on the topic in general?

Yeah. Well, for compression, not really. I mean, those compressors are, you know, they're one purpose to take low-pressure gas or lower pressure gas and compress it and make it a higher pressure to move down the pipeline or to the front end of a cry or what have you. Now we have our dual drive technology. In theory, you could take that equipment and run the gas engine and use the motor to distribute electricity. We don't see that market really opening up. We like our dual drive for the ability to unload the power grid and take the electric motor off, put it on electric drive, that's the same as generating back to the grid if you're not taking the load. So that's where we see the opportunity for another market with a different compressor or with our compressor.

Got it. So certain arbitrage is possible with existing units, but not bespoke power solutions. Is that a fair way to think about it?

I agree. Yes, sir.

Wonderful. Thank you so much.

And your last question comes from the line of Brian DiRubbio with Baird. Brian, please go ahead.

Good morning, gentlemen. Just a couple of questions for me. Chris, I think you mentioned that you're going to address the ABL in the second half of this year. I mean, sort of in an ideal world, what are you guys thinking about having, you know, your debt in terms of fixed terms and rates versus having the ABL?

Yeah. You know what? I like where we stand presently. Obviously, I inherited the current structure in terms of our fixed versus variable component on the ABL. We need to think about the sizing of the ABL and make sure that we size it according to what we think our long-term growth budget is and long-term targets in terms of leverage. You know, we sit around four times a day. I think that is an area that is a reasonable place to be. We obviously would like to be lower, and it would be my plan to be lower in time. But that will go into the calculus in terms of fixed versus variable as it relates to the fixed component on that. I mean, the first lever that we can push would be as it relates to our $750 million 2027 notes. Those at least the premium call on those go away in September of this year, and so we plan to progress our evaluation of that in Q2. We haven't been in a hurry to accelerate evaluation efforts given where rates stand today, but I think we'll be opportunistic as it relates to rate and tenure by following Fed commentary alongside our bankers with the hope that maybe we'll get more than a rate cut, you know, later this year.

Understood. That's helpful there. And just as you're thinking about capital allocation, the company has been borrowing to fund the distributions for a number of years. Am I hearing you right? You're looking to sort of stop that need to borrow to fund the distributions going forward and you want to start paying down some gross debt?

I think we just need to look at relative debt measures and relative capacity of the business as it relates to our debt measures and look at that as it relates to the cycle that we're in. I'm not prepared just yet to address whether or not that means more aggressive pay down of debt or continued relative financing capacity of the business. Right now, the focus, at least as it relates to our growth capital in 2025, is to make sure that the relative standing and relative measures and debt measures of the business are not impacted in a significant way, especially as it relates to the ability to go out and refinance some of our fixed notes. So that's the near-term view for me in managing the business. And then longer term, I think I'll be better at answering that question.

Yeah. Very good. And just the final question for me is if you think about the CapEx program and the spend for new build equipment, have the prices for new builds increased materially over the last couple of years when you made your last big order? Just trying to get a scope of, you know, with the growth CapEx, how much horsepower are you essentially adding?

Really, year over year, we haven't seen significant increases. In fact, at least for the last several quarters as we've looked towards the new build, I should point to, you know, pricing that we saw in Q4 versus the pricing we've seen in Q1 in terms of the new build compression has not moved. As it relates to looking year over year, Q4 to Q3, I would have to do some research to see relatively how significantly that has moved.

Yeah. To add, I mean, over the last few years, we have seen significant price increases on engines, compressors, you know, and the manufacturing itself or the fabrication. It seems like every year, Caterpillar or Waukesha, or you know, they give us a price increase that just gets passed along. But thankfully, we've seen the market carry that pricing as far as contract rates to be able to buy new equipment.

You know, the 3600 engine is still the preferred engine by customers?

Yeah. Everybody likes them a lot. They run well and yeah. I mean, Waukesha seems to be taking a foothold, but Caterpillar is still by far the lawn chair.

Understood. Appreciate the time. Thank you, gentlemen.

Thank you.

That concludes our question and answer session. Also, concludes our today's call. Thank you all for joining. You may now disconnect.