Greg Holloway - VP, General Counsel and Secretary Eric Long - President and CEO Matt Liuzzi - CFO.

Andrew Burd - JPMorgan TJ Schultz - Royal Bank of Canada Capital Markets Kurt Hoffman - Barclays.

Good day, and welcome to the USA Compression Partners Third Quarter Earnings Call. Today's conference is being recorded. We will have a question-and-answer session after the prepared remarks. At this time, I would like to turn the conference over to Greg Holloway, Vice President, General Counsel and Secretary. Please go ahead..

Thanks, Alicia. Good morning everyone and thanks for joining us. As you know this morning, we released our financial results for the quarter ended September 30, 2015. You can find our earnings release, as well as a recording of this conference, in the Investor Relations section of our website at usacpartners.com.

The recording will be available through November 16, 2015. During this call, our management will discuss certain non-GAAP measures. You will find definitions and a reconciliation of these measures to GAAP measures in the earnings release. As a reminder, our conference call will include certain 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 latest filings with the SEC.

Please note that information provided on this call speaks only to management’s views as of today, November 5th, and may no longer be accurate at the time of a replay. I’ll now turn the call over to Eric Long, President and Chief Executive Officer of USA Compression..

first, fee-based take-or-pay contracts with terms ranging up to five years; two, staggered contract profile that helps mitigate large-scale unit returns. For each and every one of our active units, some 2,700 to 2,800 of them, there is a separate and discrete contract with its own original start date and term.

Of that active horsepower, today almost two thirds are under contracts with remaining term, which is consistent with historical levels. No. 3, we have what I call high barriers to exit. Once a unit rolls off the primary term does not mean that it automatically is sent home. Generally we've experienced to the opposite.

Our contracts are structured so that there are substantial costs to returning or switching out equipment, which we refer to as barriers to exit.

Our customers bear the cost of freight and cranes required to return the equipment, and additionally many of our units especially in the Northeast are installed inside buildings that would require disassembly, et cetera.

It is an expensive proposition for our customers to return our larger horsepower midstream compression, and as such, our units are extremely sticky. And No. 4, regulatory and permitting requirements. A large number of our units require a regulatory permit relating to air emissions.

These permits, generally secured by our customers, are unique to the specific serial number of the engine. Rarely do our customers want to go through the permitting process again, which depending on the jurisdiction may take as long as up to six months, with numerous bureaucratic hoops to jump through.

So, although while business needs can necessitate a customer return, it is not a simple or inexpensive exercise for one of USA's customers to return a unit. One final attribute of our business model that I want to remind you of is our customer profile and creditworthiness.

Our top 10 customers, who represent over 45% of our total revenue, have an average credit rating of BBB/Baa3. We get paid. And in fact for the past 10-year period, which includes the 2008-2009 financial crisis, USA had a mere $800,000 of bad or uncollectible debt write-offs on revenues of $1.2 billion or said another way, only 0.007%.

So, unlike many of the 50-some-odd new entrants to the MLP space, we consider USA Compression to be old school, with boring, long-life assets and contracts, a business model that is consistent with what was contemplated by the original MLP model. Demand for natural gas continues to go up.

When we started USA Compression back in 1998 the US produced and consumed in the low 50s Bcf per day. Today we're in the mid-70s Bcf per day. More natural gas demand, thus more demand for compression.

So, as Matt goes through our performance for the third quarter and our performance to date in 2015 please keep in mind some basic tenets as to how your management team and your Board approaches our business. USA Compression for nearly 20 years has been and continues to be a story of stability and growth. We grow when it makes sense.

We slow the growth down when it doesn't. And we focus on the stability of our core business over the long term and the stability of our cash flows, which we believe will help us to provide stable distributions to our unit holders in periods such as these.

So, turning now to our third quarter, we continued our strong momentum for the first half of the year and have now completed the majority of 2015's new unit capital spending. The stability of our fee-based, infrastructure-oriented business continues to shine through, as clearly evidenced by our strong financial results for the quarter.

We have experienced operating through commodity price cycles like this before, and, just as in periods past, when the activity in the broader energy market begins to slow, we similarly rein in our capital spending and continue to focus on execution of existing growth plans, operational excellence and capital allocation.

In our earnings release this morning we have further revised upward as well as more tightly refined our full-year 2015 guidance range. As we now have three quarters of 2015 in the books and good clarity on the final few months, we now have confidence in providing an updated guidance range which reflects our strong continued performance.

This update reflects the continued stability of our cash flows and margins as well as what we expect to see for the remainder of the year, which we will get into a bit more lately. I'll now turn the floor over to Matt to cover some of the financial highlights of the quarter as well as more specific details on 2015 guidance.

Matt?.

Thanks, Eric. For the third quarter USA Compression reported record revenue of $70.5 million, record adjusted EBITDA of $39.5 million, and adjusted Bcf of $32.3 million.

In late October, we announced a cash distribution to our unit holders of $0.525 per unit, which results in an adjusted distributable cash flow coverage ratio of 1.25 times, taking into account the weighted average effect of the 4 million units recently sold in our follow-on offering. The Q3 distribution represents a 4% increase year over year.

Our goal of improving coverage continues. In fact, taking this distribution into account, this is our fourth quarter in a row with over 1 times coverage and the third in a row with over 1.2 times coverage.

We believe investors desire a more acute focus on leverage and coverage metrics, and we are pleased with where we are on both these metrics this quarter. As it regards the distribution amount, our management team believes that the prudent course of action is to conserve cash until such time when the market rewards an increased distribution.

We spent approximately $55 million in expansion capital in Q3, primarily focused in West Texas and our Northeast region. We added approximately 50,000 horsepower of new compression units to our fleet during the quarter, ending the quarter with approximately 1.7 million total fleet horsepower.

Our revenue-generating horsepower increased slightly, to just over 1.4 million horsepower. So far this year we've spent $232 million in expansion capital, a majority of which was for large-horsepower compression units.

As has been discussed previously, we deliberately front-end-loaded our spending this year to better align with the visibility we had entering the year. Based on current full-year capital spending estimate of approximately $245 million, we have now completed over 90% of our spend for the year.

Our trend towards larger and larger compression units continued during the quarter. The average size of the large-horsepower units delivered during the third quarter was over 2,200 horsepower, up from 1,600 horsepower in Q2.

We continue to believe we differentiate USA Compression as one of the few third-party operators who have the people, experience, capability and wherewithal to operate and maintain these large-horsepower units.

During the third quarter we continued to deploy units on attractive contract terms while also strategically investing in certain assets that we believe will give us a competitive advantage in the marketplace.

Through the first three quarters we've taken delivery of approximately 195,000 horsepower and have already contractually or otherwise committed over 70% of that horsepower. Our utilization for the quarter averaged just over 90%, basically flat from Q2 levels.

Given that we are over 90% of the way through our spend for the year and therefore have a relatively light expansion capital spend in the fourth quarter, our team will focus on continuing to maintain high utilization rates across our asset base, as we have historically, and placing into service those remaining in-stock large-horsepower compression units that we purchased in Q2 and Q3.

Turning to the financial performance for the third quarter, revenue increased approximately 24% compared to the third quarter of 2014, primarily driven by an increase in our contract operations revenues as a result of organic growth in our revenue-generating horsepower.

Average revenue per revenue-generating horsepower per month increased 1.7%, to $15.94, for the third quarter, as compared to $15.67 for the third quarter of 2014. Adjusted EBITDA increased approximately $39.5 million in the third quarter as compared to 29.3 million for the third quarter of 2014.

Adjusted distributable cash flow in the quarter was 32.3 million as compared to 23 million for the same period last year, an increase of approximately 41%.

Gross operating margin, as a percent of revenue, increased from 65.9% in the third quarter of last year to 68.9% this quarter, due primarily to lower prices related to lubrication fluids, motor fuel and optimization of maintenance activities. Maintenance capital totalled $3 million in the quarter and cash interest expense net was 4.2 million.

In early September, we successfully executed our second follow-on equity offering via an overnight sale of 4 million common units and the net proceeds of $74 million raised by the partnership were used to reduce indebtedness under our revolving credit facility.

We proactively decided to tap the equity marketplace and it has proven to be a prudent decision as we were ahead of the herd and the de-levering will provide us running room through the end of this year and well into 2016. Our leverage stood at 4.5 times at the end of the quarter, a reduction in leverage of roughly half a turn from Q2 levels.

Outstanding borrowings under our revolving credit facility as of September 30 were $712 million. Additionally, the offering helped increase our public float, which benefits our public unit holders by providing increased liquidity.

Regarding our full year 2015 guidance, we have revised upward the ranges we provided in conjunction with our second quarter earnings. The details of our current guidance ranges are as follows; we expect adjusted EBITDA for the year of $147 million to $152 million and DCF of $113 million to $118 million.

At the midpoint, these revised ranges represent further increases of 7% and 10%, respectively, over the guidance we provided at the time of our Q2 earnings. Finally, we expect to file our Form 10-Q with the SEC as early as later this afternoon. With that I will turn it back over to Eric for some general commentary on what we’re seeing in the market..

So to summarize, Q3 continued the strong first half of 2015 and constituted another record quarter in terms of EBITDA and distributable cash flow.

The stability of our fee-based income, infrastructure oriented business model continues to be evident and we believe this will become even more important as we enter a period characterized by less clarity and certainty.

We will continue to execute operationally to keep our existing assets highly utilized and out in the field working, and we are well positioned to meet new demand from customers in our key operating regions.

Our fleet utilization and margins remain strong, leverage and coverage continue to improve and contracting activity for both gas lift and midstream applications in this market is encouraging.

While the churn of our existing fleet has ticked up a bit higher recently, yet I know that it still remains right on track with our 2015 budget that we put together back in October of last year. We have positioned ourselves to manage future horsepower returns from customers given our relatively small build program in fourth quarter and into 2016.

We have ongoing discussions with certain customers, including E&P operators, gathering and processing infrastructure players, as well as gas lift customers and we are seeing a focus on their compression optimization efforts that may lead to the possible reduction of idle, inefficient or oversized units whether customer owned or provided by third parties like USA Compression in the future.

We have decided to take a cautious and conservative approach to our outlook through the end of 2015 and into 2016. We’re currently in the midst of our budget process, which involves a bottoms up, region-by-region build up.

Given the number of our customers that have still not firmed up their own 2016 CapEx budgets, it's actually difficult to hone in on ours.

That said, while we see continued activity in the Northeast, driven by continued Marcellus and Utica infrastructure build out, as well as in West Texas, driven by similar build out in the Permian and Delaware basins, we expect our new unit CapEx for 2016 to be significantly lower than in 2014 or 2015.

We expect to see a trend of fewer, but larger projects in these areas as evidenced by our increased new unit size in the most recent quarter. Additionally, we see opportunities for more station services offerings in these regions, as producers and midstream customers refocus their own constrained capital to their highest return projects.

Lead times to source major components from Caterpillar and Ariel, among others and to fabricate into completed compression units have shortened from 40 to 60 weeks a year or so ago to roughly 12 to 16 weeks today.

Should market conditions dictate, we could quickly commit to purchase additional equipment throughout 2016, if warranted? With less overall spending across the sector, we expect compression equipment supply and demand should be in balance and we therefore continue to look for high grading opportunities, moving units to areas and applications where we earn higher returns on our capital.

In this market, we are reaping the benefits of our geographic diversity, we’re able to capitalize on continued growth in the Northeast and West Texas, while we focus on operational excellence and maintaining high utilization in the Midcontinent and gas-lift regions.

As you've heard me say before, our business is characterized by both stability and growth, and we believe our geographic and basin in play diversity is a key factor behind the stability of our business. In the past two years, we have spent approximately $600 million in growth capital.

In 2016 we expect that our growth will be reined in from those levels and we will focus more on the stability of our business, maintaining high utilization and margins, which will help generate strong Bcf from our infrastructure-oriented assets.

We believe strongly that operational excellence and high levels of customer service are the keys to success in this business. We demonstrated in Q3 that our strategy continues to deliver, with the hard work of all of our dedicated employees across the country.

While near term the midstream complex faces some headwinds, we continue to be bullish on the long-term outlook for natural gas domestically. We expect the domestic drivers of the natural gas market to keep things busy for our business as natural gas continues to transition into the fuel of choice for the future.

Our customers have demonstrated their ability to react to a depressed commodity price environment, and we are there alongside of them no matter which direction the price goes. So with that we'll open the call to questions..

[Operator Instructions]. We’ll go first to Andrew Burd of JPMorgan..

Can you just talk about the strong top-line resiliency that you've seen this quarter and the last few quarters? Is that just the mix shift, or have you really not seen a heck of a lot of pricing pressure?.

Interestingly, Andrew, there's not a glut of compression equipment lying around. I'd go back to the 2008-2009 time period where there were some capital constraints, but people continued to build lots of compression horsepower, and there tended to be kind of a glut of equipment.

USA Compression, and when we look around at some publicly available data about our peers, we've determined that there's not an excess of equipment.

So I think it's fair to say in a period of rising demand for natural gas, rising needs for compression, the units that have been deployed are staying out and active, and since we're not building a bunch of new equipment, probably not a heck of a lot of pricing pressure downward..

And perhaps you could provide some commentary into what I think is the best quarter ever in parts and service. It also looks like it was high a year ago in the third quarter.

And what are the typical margins for that service? And then kind of longer term, as producers, or midstream operators, for that matter, thinking about cost cuts but don't necessarily want to sell their compression units, is there an opportunity within aftermarket to service those clients and add some cash flows without even having to invest anything and taking advantage of the scale that you already have with your techs in the field and things like that?.

Yes, sure, Andrew. I mean, that's always an opportunity, to focus on providing retail services. Historically, and I think consistent with our business model, we utilize our service technicians and our support infrastructure to really maintain and service our own assets that we use to render compression services.

We do offer that third-party service to a discrete few folks that we have a large concentration of units with who may actually have a few company-owned machines scattered about right in the middle of where we're providing our contract compression services.

So I think when you look at the activities, there've been some pass-through retail jobs that we did in the quarter. We've done some additional work for some of our core customers. So I don't think we would want to extrapolate that as a large growth business going forward.

I think we've got enough to do in the upcoming quarters to keep us busy without having to take on another line of business..

And I asked about six questions in one, so I apologize. And can you remind us what the rough range of margin for that business is on a….

Yes, the margins overall are not particularly large. I mean, it ranges from pass-through work to something in the 20% to 30% line. So, again, it's a small part of the business, so it doesn't have too much of an impact on it.

And I think as we look at it going forward when the occasion presents itself, and, like Eric mentioned for major customers we'll do it, but it's not something out there that we're kind of hawking, because we don't love the economics with it..

That makes sense. And then I guess no questions are the best kinds of questions, but -- so I'll ask this one, recognizing that it's a little bit sensitive. But looking ahead, the subordinated units should probably convert early next year. Coverage seems to have stabilized nicely above 1 times even after the recent offering on a total-unit basis.

So what's the latest view from the sponsors, and do they view themselves as more buyers or sellers of compression assets in this environment?.

Andy, you might have to actually ask the sponsors that question. But you're right on the timing of the subordination conversion.

We do expect everything to kind of flip really in February after that payment's made, but I think we've obviously been focused on total coverage and building that, so that from our standpoint whether it's a DRIP or a cash pay shouldn't matter to us, and obviously with that three, four good quarters of kind of along those lines.

So in terms of their desire to either not DRIP or do something else with their units we can't really speak to..

I had figured as much, but it was worth a shot. .

[Operator Instructions] We will go to TJ Schultz of Royal Bank of Canada Capital Markets..

This is Rahil Jiwan stepping in for TJ. Another strong quarter, guys. Just had a couple of questions.

One is on the remaining 25,000 horses that are expected to be delivered in fourth quarter, any idea if any of these are contracted yet? And then, two, the second question is do you guys have any idea on, I guess, 2016 CapEx? I know you guys are still waiting for the E&P budgets, but just kind of just want to know your thoughts on how you try to balance coverage, distribution growth and your leverage.

And that's it for me..

. Why don't I hit the second one first, coverage and leverage? I think as we've made the point over the last several quarters and even going further back than that, I mean, it is a delicate balance.

We heard from a lot of people that leverage was a big focus, and so we backed it, backed our spending down a little bit this year from maybe where we thought it might end up. Recently we kept our distribution flat to conserve that cash. And so at 4.5 times, I mean, that is very comfortable for us to run the business at.

The covenant, we've got a ton of room under our revolving credit facility, so that is a very comfortable area for us. 1.25 times coverage on the distribution is, I think, also a very comfortable area for us.

And so I think as we look out, as the market kind of hopefully shakes out and sorts things out here, we'll obviously consider growing that distribution to the extent that we can balance the coverage and the leverage aspects of it..

As it pertains to contract execution activity, we have a pretty successful and aggressive sales team scattered across the US. What I can share with you is we continue to execute contracts.

As we inferred in our text of our commentary, we expect to see fewer but larger types of projects, and that's consistent with our quoting activity and our leasing activity. We are seeing some multi-unit larger contracts that we have entered into agreements with.

So we are very pleased in the current marketplace how our leasing or contracting activity is continuing to perform..

[Operator Instructions] We will go to Kurt Hoffman of Barclays..

Just a quick question on guidance. If I look last quarter it seems like you beat guidance, and then heading into the fourth quarter, if I'm just looking at the ranges offered it would kind of suggest fourth quarter is down a bit.

I'm just wondering if you could provide some more colour on factors that could cause you to maybe beat guidance or stay within that range..

Your math is correct. Based on kind of where we have the ranges set now it would imply a slight tick down next quarter. I think, going back to Eric's comments, we're here kind of early November looking forward, taking a very cautious and conservative outlook.

We have seen -- heard things, tick-ups about units and how our customers are looking at their compression needs and really the timing of things here as we kind of get toward the end of the year. So that basically is intended to be our best estimate of where we stand here what it'll look like.

Obviously things are pretty fluid on a daily basis in our business, so things can move around a little bit. So we wanted to make sure that we kind of had it covered in a conservative fashion..

Yes, Kurt, we can't control the weather. We can't control some of the commodity-type plays. So now that we're seeing storage coming into the winter being chock-a-block full we know that there are some pipelines that are going to be brought on in the spring. We've got $2 spot pricing right now on natural gas.

So if we have a very temperate winter, the mega El Nino year that some folks are forecasting where it's -- heating your degree days are less than they would be in a typical winter that might put some downward pressure on commodity pricing.

To the extent we have a super cold winter and a lot of storage withdrawals go on and some flare-ups in the Mideast, which in either scenario could drive pricing a different direction, could have a different outlook for some of the coming quarters into 2016.

So rather than speculate on which direction it might go, we prefer to be conservative and manage to the downside and hopefully we can be pleasantly surprised at the upside..

And then the final question would just be same on guidance but with maintenance CapEx.

Is that ticking up in the fourth quarter because of seasonal issues or what's causing that to be so much higher in the fourth quarter?.

Kurt, I think it's really just going to be timing and you look at timing throughout the year, based on that guidance that maintenance CapEx number is actually the same as it has been for a while. So I think it's just the shift in timing between quarters. There is nothing overly different.

To the extent things come home we'll take advantage of that time to perform the maintenance and just be more efficient with the machines in that sense. But overall for the year it hasn't changed..

And at this time we have no further questions. I would like to turn the call back over to our speakers for any additional or closing comments..

Well, we appreciate everybody's continued interest in USA Compression. Happy holidays, safe travels and we'll chat with you coming up in the first quarter..

That does conclude our conference for today. We thank you for your participation..