Archrock Inc (AROC) 2003 Q1 法說會逐字稿

Good morning and welcome to the Hanover Compressor Company first quarter 2003 conference call for Tuesday, May 13, 2003. With us this morning are Mr. Chad Deaton, President and Chief Executive Officer, Mr. John Jackson, Senior Vice President and Chief Financial Officer and Mr. Mark Berg, Senior Vice President and General Counsel. All participants are in a listen-only mode. Today's call is being recorded. If you do not wish to participate please disconnect at this time. Earlier today, Hanover released its earnings results for the first quarter ended March 31, 2003. By now, you should have all received a copy by fax or e-mail. If you have not received a copy, you can find the information on the Hanover website, www.Hanover-CO.com. A revised press release has been posted to the company's website and filed with the SEC, reflecting a minor correction of a typo in the footnotes to the financial data table.

I want to remind listeners that the news release Hanover issued this morning, the companies prepared remarks on this conference call, and the related question and answer session include forward-looking statements. These forward-looking statements include projections and expectations of the company and represents the company's current beliefs. Various factors could cause Hanover's results to differ materially from those projected in its forward-looking statements. Additional information concerning the factors which could cause Hanover's actual results to differ materially from those in its forward-looking statements can be found in the company's SEC form 10K for the year ended December 31, 2002 and the company’s SEC form 8K filing and other SEC filings. I'll now turn the call over to Mr. Chad Deaton. Please go ahead, sir.

Thank you, good afternoon, ladies and gentlemen, and welcome to the Hanover Compressor first quarter earnings conference call. Joining me on the call today is John Jackson, our Chief Financial Officer and Mark Berg our General Counsel. Today, our plan is to go over first quarter financial results and provide you with an update on the progress we're making on several key initiatives that we've identified in 2003 and that we've actually highlighted on some of our last earnings calls.

I would like to start off by quickly reviewing the progress we made in the first quarter on several of these corporate initiatives. During this quarter we completed one of the initiatives and have made several steps forward on two others. First, as announced this morning, we have reached a settlement subject to court approval of all of our current outstanding securities related litigation. Mark Berg is going to provide more details on the terms of this settlement later in the call, but I did want to just highlight that we feel this is an extremely important milestone for the company because it does allow us to put to rest one of the key issues that has, obviously, been overhanging Hanover for the past several months.

Secondly, we are close to an agreement in principle with Slumber J (ph) to retain our ownership in the P gap 2 Venezuela project, in return for Slumber J agreeing to restructure some of the terms of the subordinated note that it received for part of the purchase price for the POA acquisition back in 2001. The new terms of the note will be more favorable to Hanover and in exchange the note will be more marketable for Slumber J. As I mentioned, I want to state this has been agreed to in principle, subject to the lawyer's completion of the agreement and of course subject to bank consent.

Finally, we announced on May 8th that we sold our interest in two of the California peaking power plants for approximately $28 million in proceeds. This was one of the first steps in selling the non-core businesses that we've been talking about in previous calls into the fourth quarter. We continue to work on completing the remaining sale of the other non-core assets and we anticipate we will sell these assets by the year end and that we're going to be stay on target to realize approximately $50 million in total proceeds. And of course that includes the $28 million we just received for the two California plants. Clearly, you know, we're pleased with the results of all three of these transactions and we are looking forward to the fact that with these three eventually behind us it is going to allow us to spend a lot more time on improving the operational performance of this company.

In regards to the operations in the first quarter, and John is going to go into a lot more detail on this in a minute, but due to the litigation settlement we posted a loss for the quarter for continuing operations of $49.3 million or 61 cents per share. If you exclude this charge, we would have had a positive first quarter results, as income from continued operations would have been $1.7 million and 2 cents per share. And this was in spite of what we continue to see as a very soft domestic market for compression. A definite bright spot for the quarter was the strong increase in activity in our production and processing equipment and fabrication, as revenues in this product line were up 34% compared to the same time last year. This does exclude Bralelli (ph). Internationally, we continued to see strong demand as international rental revenues have increased 20% over the first quarter 2002 and we see exceptionally strong activity continuing in Argentina and Mexico.

The domestic compression business does continue to remain soft for both rental and fabrication, and although we did improve our fleet utilization slightly in the quarter from 79% from 78% at year end 2002, we still have way too much idle horsepower in our fleet. As we've discussed previously, we have instituted a selective price increase and we have dramatically cut back on building new units for our domestic fleet and have been focusing on getting the equipment that we do have and getting it back to work. We have had some price success we've talked about that previously on our price increase front and we are still on track that we believe we'll see a 1-2% increase in revenues for month to month contracts because of this price increase initiative. I mentioned earlier that demand for domestic compression still remains weak and usually our -- typically compression demand lags new drilling activity by six to nine months, so we do expect and still forecasting to see increased activity in the second half of the year.

I'm going to have John here in a minute go into more details and of course Mark will come on and talk about the litigation settlement, but at the end of the call I'll come back on and talk a little bit about what we see for some new business activity. Before I hand it over to Mark to discuss the litigation settlement, I wanted to just update you briefly on where we stood in Venezuela. We did continue to have disruptions in our business early in the quarter, but as each month went on, January through March, we did see improvement in operations and our utilization went from the low that we talked about of 30% at the end of the fourth quarter to the high 80s, low 90s, 91, 92% is where we are today and that is pretty much in line with where we were on pre-strike levels. In addition, our receivable position at the end of April has improved and is now in line with what we would call normal for this country.

We are receiving and continue to receive payment from Pay da Vassa (ph) and we’re actually also seeing new inquiries coming in from Pay da Vassa and quite a bit of activity interest from our non Pay da Vassa clients. Clearly, we are going to continue to monitor Venezuela closely. There's a referendum coming up in August. That will be the next litmus test, but I would say we are optimistic that we are probably getting back to normal levels in this country. We are taking some advantage of the situations where the client chooses to exercise their option to purchase some of the equipment, and of course this gives us a chance to reduce our overall exposure in Venezuela but also gives us the flexibility that should another project come up there with higher returns that we could possibly take it and not increase our overall exposure. With that now I'm going to turn it over to Mark who is going to discuss the securities related litigation settlement.

Right. Thanks, Chad. Just to underscore Chad's comments, we really see this settlement as an important step in putting the difficulties of last year behind the company and allowing management to eliminate the uncertainties associated with this kind of litigation and avoid the distraction of litigation, and allow us to focus on the operations in the future of our business.

In terms of the impact of the settlement on Hanover, looking at it a high level, we see it as an overall positive event for our shareholders. In all of the settlements, win completed would involve 3% delusion for the shares that we're contributing, a $9.2 million contingent note that has the possibility of either being eliminated or being reduced. And an allowance for the past and future costs associated with completing this matter. In terms of the settlement itself, it involves three primary components. One is a $30 million cash contribution to the class. The second is a contribution from Hanover of 2.5 million shares and a contribution by GKH, one of our primary shareholders, of 2.5 million shares and a $9.2 million contingent note. The note will adjust over the near term as follows. If our closing price at the close of our trading session tomorrow is higher than $9.62, which was yesterday's close, the note will go down by $25,000 per each one cent increase over that amount. In addition to that, the note will be fully extinguished and would not be owed the stock trades higher than $12.25 for a trading period between March 2004 and March 2007. John's going to also go through some of the other accounting impact of the settlement, the financial impact of the settlement in a minute.

On the contributions to the settlement, Hanover has reached an overall insurance settlement with our directors and officers insurers of $30 million. All but $3.4 million of that is being contributed to the settlement, the $3.4 million has already been advanced on the policies for costs or has been ear marked for future expenses. In addition, as I mentioned a minute ago, 2.5 million shares will be contributed by GKH out of their remaining 8.27 million shares that they're holding in the company.

In terms of the process, the settlement does require court approval and the approval process begins immediately and should end in about a year. We think this is a fair settlement for all parties and believe the settlement will be approved by the court. In addition to that, we continue to fully cooperate with the SEC in its inquiry and we certainly hope that this settlement along with the other steps taken by the company will favorably position us to reach a conclusion of the SEC matter within the next 6 months or so. With that, let me turn it over to John and he'll cover the quarter.

Thanks, Mark. I just wanted to touch on the three components here and a little bit about how the accounting will work. On the expense side just from a cash perspective, Mark has talked about the component that we’ll contribute on the cash to the settlement and then we’ll have expenses to implement this settlement and get it executed. That will total close to $10 million. We've already spent about $1 million of that. We'll have another $1.4 million or so that will be spent fairly shortly and the other $8 million or so will be spent over the next 12 months, or there abouts, as this court order is finished and finalized and the settlement is completed. The cash impact will cover over the next year.

Relative to the note itself, it will not be larger than $9.2 million. Mark has alluded to the pricing mechanism that goes along with that. There's also some accounting specifics that go with that as far as the interest rate and so forth. We won’t get into that here. You'll be able to see that in our queue as we describe that in more detail. But as a result of the pricing mechanism that's going to occur tomorrow night when we have our closing price and re-price the note and so forth, our queue will be extended five days as is allowed on the SEC rules to allow us time to price that and run that through our financials and put together the appropriate disclosure.

Relative to the stock, the stock at this time has not been contributed to either a trust and settlement is not yet court approved, so as a result a couple of things happen. One, they're not issued and outstanding as far as EPS calculations at this time. There's a possibility that a trust will be established and we can contribute the shares prior to a court order at that time they might be issued, they might be issued outstanding for EPS. The second thing that will occur is we will have to mark to market these shares. The effect of the share price change each quarter until such time they're either in a trust or the court approval has occurred. So we will have that volatility until such time as that occurs. Moving to the GKH contribution, just so we're clear, GKH is contributing 2.5 million shares as part of the settlement. But as a result of them being a principal shareholder under some staff accounting bulletin rules of the SEC, we are expensing their share contribution and we are also recognizing, or will recognize when they actually contribute their shares, in contribution to equity for Hanover. So there is some possibility that we would go before the SEC and talk about this accounting because it is fairly technical in nature and if the SEC says we can account for that differently, the only thing that would happen if we went there would be that we would not have the charge associated with GKH and we would reverse that charge.

The one thing that you need to note about that component of the charge is the LP shareholders will take the tax deduction, so there will be no tax deduction in our income statement. That's why when you see the charge on a pretax basis and an after tax basis there's a fairly small amount of benefit. And that’s relative to the BKH share contribution being not tax affected. With that I'm going to turn attention now to a few points on the business and then I'll turn it back to Chad before Q&A.

EBITDA for the quarter was $76 million excluding the charge of $66 million associated with the settlement. So focusing on that for a minute included in that, in Venezuela as Chad mentioned, things are picking up there and our revenue recognition was on a fairly normal level. However, there were a couple of unusual items associated with Venezuela in the quarter. One, we recognized $1.7 million of 2002 deferred revenue. On our last call we talked about deferring $2.8 million based on the uncertainty of what was going on in Venezuela and whether it was billable and collectable. We have wrestled that, at least $1.7 of that, we have billed it and are in the process of collecting. Additionally, we had a modification to a contract that occurred in the quarter. We received a payment and recognized income of $1.9 million associated with that modification of the contract.

If we move now down to our tax line, the only thing I want to point out there is we were using an effective rate in the quarter of 40%, except for the shareholder settlement, and there's one other item that that's in there that makes our effective rate very unusual and that is we had a tax amnesty payment for a Bralelli subsidiary over in Italy was $1.1 million. This allowed Bralelli to extend their period to utilize NOLs, so that skewed our effective rate for the quarter also. Moving to capital. Capital for the quarter was $36 m. So this was a reduction from the fourth quarter and certainly a reduction from our run rate that we were experiencing last year and certainly what we've been trying to articulate and are now seeing achievement in the discipline on the capital front. One thing I do want to point out is we had a fair amount of growth capital spent in the quarter, however there is not yet any revenue impact from that growth capital. That growth capital will begin to come on later in the year as those projects come on line. Chad has mentioned some of them in the past, but we are spending capital currently that is not having a revenue impact in the current period.

From a liquidity perspective, I want to remind everyone in mid March, we got our S4 effective and penalty stopped of $15,000 a day, so you'll have the full quarter impact in quarter 2 of normalized interest there. In addition, we had about $99 million available under a revolver and $21 million of cash which put us about $120 million of liquidity at the end of the quarter. We were not covenant constrained at the end of the quarter. So we feel like we're in pretty good shape on liquidity and we continue to focus on that and monitor that along with our capital. So those were the highlights I wanted to point out from an operation standpoint. Certainly the press release has more about the different lines of business. With that I'll turn it back over to Chad.

Before we open this up for some questions, I just wanted to give a quick update on some of the business opportunities that we're seeing out there going forward. As we stated, we really see the domestic compression rental business being more of a second half event. This being said, we still are very encouraged by some of the demand internationally for our products and services and this is especially true, in the past we’ve talked about integrated solutions, there's been a lot of questions on that, but we recently were awarded two new projects and I think these are excellent examples of what integrated solution is.

These two projects, one is a 90 million standing cubic feet per day gas plant in Mexico. The other is a 53 million plant in Brazil. These projects include the processing equipment, refrigeration, power generation, compression and the overall project management to design and to engineer and complete these facilities for our clients. And I think these will be coming on line within the next few months. On the sales side of the business during the quarter, we did target the Far East as one of the areas, you know, a few months ago we were going to go after and during the quarter we booked $18 million in equipment sales in China and Southeast Asia. And domestically, another area that we said we're interested in looking at is alternative fuels for the CNG business and did book $1 million in new equipment sales for CNG sales for the United States. We also completed the opening of the office in Moscow and we also now have representatives on the ground in Nigeria and the Middle East and we are looking forward to seeing some activity come from those areas in the future. So with that, we're ready to open it up for any questions that you may have.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch tone telephone. If you're using a speaker phone, please make sure your mute function is turn turned off to allow your signal to reach our equipment. We'll go first to Geoff Kieburtz with Smith Barney.

Good morning, a couple of things. You in the press release gave some, I think reiterated, guidance on the EBITDA of the full year of 300 to 330 million but mentioned there were a number of other variables below that line that made it difficult to make a specific earnings guidance. Can you just discuss what those principal variables are?

Well, Jeff, you know, we've got depreciation and taxes, if you look at what happened with our tax rate last year with our international operations, you have a lot of variability and what can occur as far as how FX affects your taxes and so forth. We're trying to do a lot of restructuring of our corporate environment as far as how the rollup of the acquisitions we've made, how our tax structure works. That obviously creates a lot of potential volatility in earnings. We're in the process of going through the change and as part of the new FAS B regulation and putting our synthetic leases on balance sheet, we have an estimate of what that depreciation expense would be, but we haven't actually finalized that and put those on balance sheet. So there are a lot of variables below the line that along with -- we've had the discussion with Slumber J relative to the restructuring and how that would affect interest expense depending on where we end up with that settlement. So those variables are out there that we just are not comfortable talking about at this time.

Can you give us any sense of likely time frame for you to get a little bit more visibility on these issues?

Well, the FAS B has dictated that the third quarter of this year, the synthetics will be on balance sheet. We have given some visibility in our K and our subsequent Q that you'll see, relative to what we expect the P&L effect to be on a go forward basis. Again, that's an estimate on the tax side, we're working on that diligently, using a 40% effective rate currently, we think that’s our best estimate at this time, but as noted last year, it changes dramatically depending on how the Venezuela operations and Argentina operations may perform over the course of the year, so we're not comfortable giving EPS guidance. We're working on that. Obviously, we’ve said we have an agreement in principle on the P gap situation so hopefully we'll give clarity on that in a short order.

You may be able to talk about this in a little bit more specific manner by third quarter?

I think we'll be able to talk about specifics. I'm not sure that you're going to see us talking about EPS guidance anyway. Something that we have not come out and said we're going do and I'm not sure you'll see us do it.

Okay. Second question, on the idea that the domestic rental business recovery is a second half event. Just at a fairly high level, it does still appear as if gas production in the U.S. is going to be down this year versus last year even with the fairly strong drilling activity we're seeing. Just conceptually do you believe that you can see an increase in domestic rental demand in the face of declining production?

Jeff, we're watching this extremely closely, because if it turns out it's not a second half event, then obviously we have some other issues to address operationally, but if we look at some of the inquiries coming in for third party fabrication, it does tend to be a bright spot for us that we think there is some turnaround coming. How big is that? We don't know. Like I said, we're watching it very carefully.

I guess, some of this, when we talk about the rental business specifically, I mean there's what's a market the looking for in terms of total compression requirements, but then there's also your strategy in regards to whether you push equipment sales or push the rental format. I mean where are you on that? You've talked before about maybe remaining focused on the equipment sales aspect for maybe a year or more from now.

Well, if you look at the domestically on the compression business, as I mentioned earlier we had a lot of idle equipment. And you know, we want to put that back to work in the rental business. And you know that may involve some maintenance capital to get that up and running, but we are not building any new equipment for the domestic rental business. We are capital starting that. When we talk about third party sales of equipment, a lot of that is for production of processing equipment that we're talking about, especially if we're looking at areas like Russia and the far East where we don't want to have the exposure of owning the asset and worried about getting paid, then we are promoting sales of equipment in those areas. But domestically, our goal is to go ahead and continue to reduce the amount of idle horsepower that we have. Some of that we may move internationally as we get new projects there. We moved 35,000 horsepower out a few months ago and we've got a new project right now that may consume another 22,000 horsepower if we're successful. So our goal is to, again capital start the U.S. on the rental side and until we get to the point our utilization is high enough we can then see some price improvement.

Got you. You did have a decline in used equipment sales, it was noted in the press release. Is this a trend, is it sort of timing, what can you do? Can you elaborate a little bit on that?

I don't know if you recall last year, but in the first quarter, Jeff, we had a fairly significant, in east Texas, we had a change of ownership of some assets, both plants and compression that was being rented to the previous owner. That owner sold their interest in that area in that field. The new owner came in and had the idea of owning everything instead of renting. So that was about a mid 30s, I think, sale to this one particular customer and that was really a change in the philosophy based on the sale. So these are not real predictable. We don’t really control them. The customers have, in many instances purchase options. So it's very difficult to project how that will move, but that's the difference and why we had such a drop off. There was this one big event that occurred that last year.

But for our purposes, using something more like the first quarter '03 run rate would be --.

More typical, yes.

More typical.

Yes.

Last question is just on Bralelli, it's really a revenue question, but the revenue from Bralelli looked a little bit higher than what we've been expecting. Same question, is that first quarter '03 a good run rate to expect from Bralelli or is that going to move around as well?

I think that will move around a little bit. I mean they are a fabricator, so they have a fairly large backlog, but it does move up and down a little bit. I think we've projected, kind of typically of around $120-125 million of revenue for Bralelli for the year. So you'll have some choppiness in that from time to time. So yeah, it is a little bit higher right now. It may stay there, we don't know.

Okay. Great. Thanks very much.

We'll take our next question from Yves Siegel from Wachovia Securities.

Thanks, good afternoon.

Hi, Ives.

Just a couple for you guys. First off, John, do you have the number just for house keeping the difference in utilization between the international and domestic markets?

No, I don't have it here in front me right now.

Okay. In terms of the initiatives that you have on cost savings, can you just update where you are?

Well, as we know from last time on the most significant area of cost savings is the area of the consolidation of the manufacturing and fabrication centers. We targeted that we would take them from 13 to 9. We have completed the closure of two of them. We talked about around 488 people that would be identified under the RIF program. I think to date we're a little over 280 reduction in headcount since January 1. We're about halfway through our reduction plan and we said that that would probably take us through the third quarter by the time we made all the announcements and moved some of the equipment and so on.

Ives, just as a follow-up, I'll just tell you I was able to track those numbers down. The utilization domestically was 74% and internationally was about 94%. Okay?

Super. Thank you. If I could, just two more follow-ups. In terms of the SEC, getting that matter behind you, in terms of fines or what have you, do you think that -- what's your best guess, if you could have a guess, in terms of the financial impact, if any, on an SEC settlement? And where would you be relative to insurance covering that? Then I have one quick follow-up.

Yeah, there would not be any insurance covering it, but regardless, we wouldn't expect, if there were a fine, that it would be material.

We'll take our next question from David Matterly with Zazu Associates (ph).

Just a couple of questions. Firstly, can you reconcile liquidity at year end versus where it stands currently? Also is there anything else you can point us to on the talks with Slumber J, I know they were just agreed to in principle. Where is the bond being modified? And where is it beneficial Hanover? Thanks.

Reconciling liquidity from year end to now, let me just try and do it from an outstanding’s perspective. We had 157 million outstanding at year end on our revolver and 190 million outstanding on our revolver at the end of the first quarter. Our LCs at the end of the year were closer to 50 million, they are closer to 70 million today. So, our liquidity has come down some from the end of the year to the end of the first quarter. As we stated on our call related to year end, the first quarter is a heavy cash loaded expense quarter relative to our interest payments and so forth. So we expected, we said on the call, we expected our draws to come into play and our outstanding’s to go up in the first quarter. We would expect to see those begin to come down in the second quarter. We are down slightly from we were at March to now. We paid down our outstanding's just a little bit and we continue to expect to see that occur. And second question --.

Second question is on Slumber J.

The specifics. I think again we've reached agreement in principle but what we’ve said is really what we're going to say about the specifics at this time. Is that the terms of the note will be more favorable to Hanover than they currently are. So we hope to have this agreement in principle papered fairly quickly. We have been work on it very diligently to this point. So this is not something we’re just starting. We hope to be out with the specifics surrounding this in a short order but can't give you a specific time frame on that.

Okay, great. Thank you.

We'll take our next question from Justin Tugman from Simmons and Company.

Good morning.

Hi, Justin.

Mark, I wanted to ask you a quick question regarding the shareholders lawsuits settlements and the shares contributes by both Hanover and GKH, will there be any lockup periods on those?

No, not once they're distributed out. Effectively, Justin, they will, as I think John mentioned earlier, we're working out an arrangement where those shares may be issued into a trust with the court and effectively they'll remain in that trust until the settlement is approved and the shares are distributed which would be probably somewhere between 12 and 18 months before that is complete. But once distributed there's no further lockup. But it's widely disseminated to the members of the class.

Okay. And Chad, I wanted to get your take on what's going on in the parts and services business. If you look at it on a sequential basis excluding the equipment sales, we were down approximately 8 million sequentially by my calculations. I understand that domestic business in terms of rentals is slow, but what's going on here in the parts and services business?

Well, again, we continue to wait, Justin, for the clients to, you know obviously a lot of that is the overhaul of equipment and everything else which we have not seen that business to develop. We also did lose a fairly large contract in the southeast part of the United States which probably has dropped us by a couple -- $3-4 million. That would be on an annual basis, but we continue to see this business is very soft. It's a lot like the fabrication side.

Okay.

The other thing that goes on in there, Justin, just FYI, is when we have a lot of international installations going on, that hits the parts and service, the installation work there it's hits the parts and service business, so with a ramp down in CapEx and ramp down in spending you know, you're going to is to see a natural decline there, too until that business either picks back up on the sale side or we install more projects --.

That's a good point. Because a couple of these plants, that I mentioned on the integrated solutions, we do have the project management and engineering and construction on that and that does flow into the parts and service line, when those get ready to get kicked off.

So let me try a hypothetical. If you were to start a project in Q2, then we could see a pretty significant sequential increase?

Definition of significant, but --.

Well, relative.

Yeah.

Okay. Final question then, John. Looking at your backlog, you gave, I believe 94 million for the entire Hanover backlog, can you break that down between compressor, fabrication, and production and processing?

I think -- I'm going to guess. This is a guess. I would say 1/3, 2/3.

I've got it here, I think at the end of the first quarter we're looking at approximately 40 million for packaging and about 50 million for production equipment. So that's a pickup in the compression business since the end of the year. If you look at the end of the year, you're looking more like 60/30. 30 for compression and 60 for production equipment, or 55, it was a little smaller number. So you had more than one third, two third, but the backlog on compression has picked up a bit.

Thanks very much, guys.

Just for clarity, Jeff, a lot of that is international compression.

Great. All right, thank you.

Okay.

Once again, if you would like to ask a question, please press star one on your touch tone phone. We'll go next to Mike Knox (ph) with Hamilton Investment Management.

My question has been answered, thanks.

Okay. Great.

We'll go next to Ted Grace with Goldman Sachs.

Hi, hoping that you might be able to provide more color of the magnitude of opportunities in Mexico, Argentina and Venezuela that you mentioned?

Okay. Mexico is the brightest spot, if we looked at the three. We have several projects identified there that we're in the process of going after. Obviously I don't want to state exactly which ones they are. Venezuela is probably next. Although we're being very conservative in terms of what we do or how far we go in Venezuela, simply because it goes back to the point about our exposure down there. We do have a client down there that is exercising their right to purchase some of the equipment and at the same time has ordered additional equipment from us to build, and we will be selling that to them and then signing into a five year O&M, Operating & Maintenance contract with the client. That will allow us to take some capital out of there and possibly look at some of the other projects that are coming on. Gas has got a lot of potential in both Mexico and Venezuela for the future. Argentina is probably, of the three, you look at is farther down the list. I don't see that as having near the potential as of the other two.

Okay. And is it more likely that you use existing capacity to fill these contracts versus build dedicated capacity on the idea of moving offshore?

I think it's going to be a mixture. Again I mentioned, one of the projects we have internationally requires 22,000 horsepower. It happens to fit we have some of that horsepower in the fleet we can prepare for that. Some cases, of course, we don't have the match we need and we have it go ahead and build new for that, but yes, where possible, we intend to use up our idle horsepower.

Hoping you might be able to provide some color on pricing in the domestic market, sort of what realizations you've seen from the price increases you've pushed through and just where the market is broadly speaking?

Well, again, we did not go out and try to get across the board price increase. The market is too soft for that. But we did isolate and look at client by client and looked at their portfolio of compressors they may have in the fleet that we would own and in looking at that, we would adjust one or two out of the 15 units, for example that we could increase the pricing in that example, 10, 15% in order to bring it up in line. If you look at that across the board for month to month type contracts which is about 2/3’s of our rental income in the U.S., if we looked across the board what we think we can realize when all is said and done, we're somewhere around a 2% overall effective price increase for that fleet. But the market is difficult to get a price increase in today's domestic market.

Okay. I guess phrased another way, for opportunities that you're bidding now on new capacity, is that being bid at rates that are in line with the average across the fleet? Is it down? Is it --?

It depends on the horsepower and the size of the horsepower, the unit that's out there. But for the most part, I mean, we are not lowering our pricing in order to get additional work. There is some horsepower we are being more competitive on to get placed. But again, it comes back to if it has anything to do with pricing new horsepower, our returns are so much better internationally that if this involves new CapEx we'll go after the international market until we see the U.S. market improve.

Okay, thank you very much.

We'll take our next question from Ashish Gupta with Banc of America Securities.

Hi guys. I know you didn't provide any balance sheet information in the press release, but I was hoping you could provide some general numbers on forces in use and cash flow for this quarter.

No. I mean, we had working capital use in the quarter as you might imagine because we paid interest payments and that kind of thing so if you look at your net source of usage, just looking at working capital that was part of our draw and that was largely paying down liability. Receivables built a little bit because of the growth in the business and rental business picking up a little bit and some of the things coming back on line in Venezuela, we didn't get a lot of payments until April, so you do see a little bit of working capital build, but beyond those specifics, I think what we’d like to do is give this re-pricing done and get our financials settled down and solve the Q.

Okay. Just a point of clarification on Venezuela, regarding the receivables. I’m seeing you guys have about 1.1 million left, that's how much you guided earlier, can you give us any timing on that? Do you expect that to come in in the second quarter or --?

No we're still pursuing that, but no I don't know when we will feel comfortable. Well, we'll comfortable when we get the cash on that. So we will feel comfortable at that point. But we’re still working through -- there's five different regions to Pay da Vassa down in Venezuela. They’ve had a lot of turnover, a lot of change. There's been a lot of our staff working directly with Pay da Vassa on an issue by issue basis, so we try to get our contracts current and our billing process back on line, and being able to delving back into the past is just taking time when people are available. But I can’t give you a real hard and fast timeline.

Finally, I'll take a chance on this question, following through with the previous person's question on pricing. I guess putting it another way, can you give us maybe the success rate for those clients that you've tried to push through a price increase on, 50%, 100%?

It's closer to the 100 than the 50.

Okay. Thanks, guys.

I think it's more in the 85, 90% range is what the guys have told me.

Great. Thank you, that's helpful.

We'll go next to Mike Clark (ph), private investor.

Good afternoon. Just had a quick question on the compressed natural gas business. Just hoping you could, you know, characterize the growth you see in that market. This is primarily in the mass transit sector? Also, you know, do you see this being more of a rental or a sales business? Could you just elaborate on that please?

Well, we see the compressed CNG business in the U.S. or the market potential of about $70 million right now. Internationally the numbers that reported to me are $120 million, which I think is probably light. Of course the CNG is a popular fuel internationally and is becoming more popular in the U.S. so it's just really in its infancy here. We have a good position in that we are providing the compression now in Boston, Washington, Los Angeles, and several other projects that are pending. We are treating this business as a cash sale business. We do not own the asset in this particular case, we continue to -- and the metro facilities prefer to buy it. But we do have fairly long-terms O&M contracts on the projects. And that's our strategy going forward with that. And then internationally, we have identified a couple different countries and some clients that we're dealing with to establish CNG stations in those other countries.

Next question, just wondering if at any point you see lease substitution limitations really coming into your thinking as far as moving rental units from the U.S. to international markets?

At this point, we have probably still 15 to 20% of our fleet that would be substitutable. The other thing we're looking at doing, Mike, is hopefully in the next few months, refinancing our '04 maturity of the bank synthetic lease. When we do that, that's a $200 million maturity and we will not be using synthetic leases in re-doing that. So that would free up another $200 million of substitutable equipment. So I think that will give us at least in the near term, probably all the leverage we need to move equipment.

Great. Great job, guys and great quarter. Thank you.

Thanks, Mike.

Thank you. That does conclude today's conference, we thank you for your participation and you may disconnect at this time.