Archrock Inc (AROC) 2013 Q3 法說會逐字稿

Good morning. Welcome to the Exterran Holdings, Incorporated and Exterran Partners, LP third-quarter 2013 earnings conference call.

(Operator Instructions)

Earlier today Exterran Holdings and Exterran Partners released our financial results for the third quarter of 2013. If you have not received a copy, you can find the information on the Company's website at www.exterran.com. During today's call, Exterran Holdings may be referred to as Exterran or EXH and Exterran Partners as either Exterran Partners or EXLP. Because EXLP's financial results and position are consolidated into Exterran, the discussion of Exterran will include Exterran Partners unless otherwise noted. Also, the term International will be used to refer to Exterran's operations outside the US and Canada, and the combination of US and Canada will be referred to as North America.

I want to remind listeners that the news release issued this morning by Exterran Holdings and Exterran Partners, the Company's 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's performance and represent the Company's current beliefs. Various factors could cause results to differ materially from those projected in the forward-looking statements.

Information concerning the risk factors, challenges, and uncertainties that could cause actual results to differ materially from those in the forward-looking statements can be found in the Company's press release as well as in the Exterran Holdings annual report on Form 10-K for the year ended December 31, 2012, and Exterran Partners' annual report on Form 10-K for the year ended December 31, 2012 and those set forth from time to time in Exterran Holdings' and Exterran Partners' filings with the Securities and Exchange Commission which are currently available at www.exterran.com. Except as required by law, the Companies express disclaim any intention of obligation to revise or update any forward-looking statements.

And your host for this morning's call is Brad Childers, President and CEO. And I would now like to turn the call over to Mr. Childers. You may begin.

Thank you, operator. Good morning, everyone. With me today is Bill Austin, CFO of Exterran Holdings and David Miller, CFO of Exterran Partners. As we usually do, we're going to provide a review of both Exterran Holdings and Exterran Partners in the call before we open it up for questions. I'm going to provide a review of the financial results, operating highlights and our priorities moving ahead and Bill will provide a detailed summary of Exterran Holdings' financial performance, while David will provide a detailed summary of Exterran Partners' financial performance.

At Exterran Holdings we achieved significant milestones in improving our performance in the third quarter. We generated our second highest level of EBITDA in 4 years at about $156 million; it's 23% higher than the year ago period. We achieved solid operating performance in cash flows, and we reduced debt by $84 million at the Exterran Holdings level.

In our Fabrication business overall bookings levels in 2013 have declined compared to prior year levels as discussed in our last call. But we believe that our backlog has generally stabilized, and that we will see improved booking levels going forward. There are several positive indicators that we see behind this. First, our third quarter bookings were higher than second quarter levels. Second, we've seen an increase in quote and bid activity late in the third quarter and at the front of this current fourth quarter, and we continue to have attractive opportunities in International.

In our North America Contract Operations business, our market remains channeling, particularly in dry gas conventional plays due to relatively low natural gas prices. Reduced activity levels in these conventional plays continues to offset the increasing activity we're experiencing in oil and liquids-rich plays which resulted in a slight reduction in our operating horsepower in the quarter. Looking ahead, we expect flat to slightly higher operating horsepower levels in the fourth quarter based on customer demand in shale and liquids-rich plays. Overall we continue to believe that our Fabrication and our Contract Operations and Aftermarket Services businesses are positioned to performance well as oil and gas infrastructure investment levels continue to increase in the US and in International.

Turning to our initiatives, as we've discussed extensively, we have been on a multi-year plan to deliver better returning to investors, and we've successful in driving improvements in our business to do just that. Over the last 2 years, we've achieved improved profitability across business lines and across geographic regions, we've reduced debt levels, and we've improved our capital position. This has resulted in improvements in revenues in gross margin percentages across most of our businesses on a year-over-year basis. And we are not done.

We are now executing on the next set of structural and process changes to our core operations to drive further improvement in our performance in 2014. We continue to make good progress with several process driven initiatives being rolled out this year to improve the efficiency and cost performance of our Contract Operations business and our materials management systems, especially within our Fabrication businesses. In addition, we're continuing to invest in new compression units to further standardize our fleet, enhance our competitive position, and increase the overall cash flow generation capacity of our fleet going forward. Significantly, our improved operating performance and financial position allow us to now focus on creating value in other ways. This includes aggressively pursuing opportunities for growth and maximizing the value of our businesses.

An additional accomplishment on this front that we had in the quarter, in our North America Contract Operations business we have made substantial progress in our work to have the remaining operating horsepower owned by Exterran Holdings under contracts that generate qualifying income and are available for future drop down transactions. As a result, we believe that substantially all of the horsepower owned by Exterran Holdings is available for drop down.

Now let me turn to some operating highlights in our services businesses for quarter. Importantly, each of our North America Contract Operations, International Contract Operations and Aftermarket Services businesses recorded year-over-year growth in revenue and gross margin dollars, and we had good overall performance in the quarter. The reductions in gross margin percentage as compared to the prior quarter were primarily driven by customer exercises of purchased options in our North America and International Contract Operations businesses which benefited second quarter results as we discussed last quarter.

In our North America Contract Operations business, gross margin dollars of $82 million represented a 7% increase over prior year period levels. Net operating horsepower declined by 27,000 during the quarter, as we had an increase of about 35,000-horsepower in our growth areas, and these included the Eagleford, Avalon, the Woodford, the Niobrara shale plays and the Mississippi Lime. And we also saw growth in the Permian, but this growth was offset by a decline of about 62,000-horsepower that was operating in conventional dry gas areas.

In our International Contract Operations business we started projects in Brazil and Trinidad during the quarter, and while we had a project in Brazil that's been delayed. We also received some significant Contract Operations awards in the quarter. These included a contract extension and expansion for a project in Brazil and a contract extension and expansion in Mexico. Looking further out, we have a solid set of business development opportunities that we're working on currently, and we're optimistic about additional growth opportunities in International Contract Operations, particularly in Latin America in the near term.

In our Aftermarket Services business revenue was up 7%,compared to the prior year period to $102 million, primarily driven by increased activity in International markets as well as solid execution in the field. With this quarter's performance, we've achieved greater than 20% gross margin percentage in our Aftermarket Services business for the seventh straight quarter.

Turning to our product sales activities, our Fabrication gross margin was $75 million, 50% higher than the prior year period level. This performance was driven by high throughput volumes in our manufacturing facilities, improved product pricing and disciplined cost controls. However, Fabrication revenue decreased 12% compared to the second quarter, driven by reduced backlog levels and the slippage in the completion of installation projects in Latin America and North America that moved out of the third quarter.

In North America, we expect an improvement in our order flow driven by continued development of shale and liquids-rich plays on the supply side and a positive outlook around power generation, petrochemical, and NGL exports on the demand side.

In our International markets, we've seen a modest increase in quarterly booking activity over the course of 2013. Bookings highlights for the third quarter include a [nice] level of compression orders for Thailand, China, Australia, and Nigeria and new Belleli projects in the Middle East. With a solid opportunity set of International Fabrication projects, we believe we are well positioned to win significant new projects over the coming quarters.

In conclusion, on the Exterran Holdings section of my comments, we had solid operating and cash flow performance in the quarter, and this has allowed us to reduce our debt levels at the Exterran Holdings level by a meaningful amount. We are executing on structural and process changes to our core operations to drive improved performance in 2014 and beyond. With the progress we've made in improving the base profitability of our core operations, we can now expand our focus to include growth and other opportunities to unlock value at Exterran Holdings.

Now turning to Exterran Partners. Exterran Partners delivered good performance in the quarter. Highlights included increased overall operating levels and cash flows compared to the prior year period, and we announced our 13th consecutive increase in quarterly distribution per Limited Partner Unit. Our average operating horsepower was over 2.2 million up 15% as compared to the prior year period driven by the compression assets we acquired from Exterran Holdings in March 2013.

Looking at our financial performance, Exterran Partners achieved a 13% increase in distributable cash flow on a 17% increase in revenue compared to the results for the prior year period. Our gross margin percentage increased from 51% in the third quarter of 2012 to 56% in the third quarter of 2013. Our financial results did decline as compared to the second quarter of 2013, however, which benefited from a customer's exercise of purchase options on two natural gas processing plants, and as operating horsepower dropped slightly and costs increased.

Looking ahead, we will continue to target growth of the partnership through organic growth opportunities associated with the development of shale and liquids-rich plays and acquisitions, including further execution of our drop down strategy with Exterran Holdings. In addition, we believe that the performance improvements being initiated and implemented in our North America Contract Operations business will continue to improve the efficiency of our operations and help drive enhanced financial performance in 2014.

Now moving to the financial section of today's call, I'd like to turn the call over to Bill for a review of the financial results for Exterran Holdings, including a summary of the quarterly trends and guidance for the fourth quarter.

Thanks, Brad. With Brad's overview I'll provide a brief summary of the results for Holdings. We'll discuss some of the segment results, and then, as Brad said, I'll give you some guidance for the fourth quarter. Quickly, we did generate EBITDA as adjusted of $156 million for the third quarter as compared to the $177 million in the second quarter and $126 million in the prior year period.

I'll remind you that customer exercises of purchase options in our North American and International Contract Operations increased EBITDA as adjusted by that $18 million in the second quarter of 2013. We also reported diluted net income from continuing operations attributed to Exterran stockholders of some $0.34 per share in the third quarter. That's up from $0.31 in the second quarter and $0.02 per share in the prior year period.

Now moving on to the segment results, our North American Contract Operations revenue came in at $153 million in the third quarter. Gross margin was 53% in the quarter as compared to 57% in the second quarter of 2013 but 50% in the prior year period. Again, I remind you that a customer exercise of purchase options on two processing plants during the second quarter of 2013 increased our revenue by $6.5 million and increased our gross margin by -- percentage by some 2%. In addition, the second quarter results included revenue of some $2.3 million from the operations of those plants.

Now in the fourth quarter we expect revenues again to be in the mid $150 million level but gross margin percentages to be somewhat up into the 54% to 55% range. Maintenance capital came in at $21 million in North America during the third quarter as compared to $18 million in the second quarter of 2013 and some $23 million in the prior year period. Maintenance capital spending in the fourth quarter is expected to be flat to somewhat lower than the third quarter levels.

Moving on to the International Contract Operations business in the third quarter, revenue came in at $118 million and gross margin was 57%. In the third quarter of 2013 our results benefited from the startup of new projects, as Brad, said in Brazil and Trinidad, a full quarter of contribution from the new project in Iraq and some inflation rate adjustments in Argentina. We did experience delays in the startup of a significant project in Brazil which is now expected to start up in the fourth quarter.

Now looking at the fourth quarter we expect International Contract Operations revenues to increase to the mid $120 million range driven by contract rate adjustments in Latin America and the contribution of some new projects. Our gross margin percentage is expected to be in the upper 50% range, somewhat higher than the third quarter. Our International operating horsepower was 977,000 at September 30, somewhat down from the quarter driven primarily by slightly lower utilization in Argentina and the completion of jobs in Brazil. And we did sell a couple of units in Brazil and Oman.

Moving on to Fabrication. Our Fabrication operations had another solid performance for the quarter. Revenue came in at $403 million as compared to $456 million in the second quarter and some $361 million in the year ago period. Revenue was somewhat lower than expected due primarily to the delay in the completion of a large installation project in Latin America and one in North America. Gross margins, however, came in at 19% up from some --16% in the second quarter and 14% in the year ago period. Outstanding execution in our process and treatment product line in North America contributed to the higher gross margin percentages in this quarter.

Our Fabrication backlog came in at $619 million for the end of the quarter as compared to $747 million at the end of the second quarter and some $1.2 billion September 30, 2012. As Brad said, the Fabrication bookings did come up in the second quarter. They came in at $276 million for the third quarter as compared to the $209 million in the second quarter of 2013 and some $314 million for the third quarter of 2012. The Fabrication revenue during the third quarter was comprised of about 30% compression, 60% production and processing, and about 10% in Belleli. Now it was roughly two-thirds from North America and one-third from International.

Moving on to the bookings during the third quarter and the quarter end backlog, where both roughly 50% from North America and 50% from International markets. Moving on for the fourth quarter, we expect Fabrication revenues in the $325 million to $375 million range with gross margins in the 13% to 15% which is somewhat lower on a sequential basis, but it is a slight difference in the product mix.

Moving on to our Aftermarket Service business in the third quarter, Brad said our revenue came in at $102 million, gross margin again above 20% at the 21% level. Looking at the fourth quarter we expect Aftermarket Services revenue again to be in that $95 million to $105 million range, gross margins again in that low 20%.

Moving on to SG&A expenses came in at $94 million in the third quarter. That's up from $91 million in the second quarter and $86 million in the third quarter of 2012. I would point out that we did have higher legal expenses that helped drive that increase compared to prior quarter levels. In the fourth quarter, however, we expect that SG&A expenses to be closer to the $90 million level. There was a long-lived asset impairment in the quarter that came in at $7 million, including a charge of $4 million related to the idle fleet and some $2 million related to our contract water treatment business.

Depreciation and amortization expense was $81 million in the third quarter, and we expect that to continue in that low $80 million range in the fourth quarter. Taxes and the consolidated tax rate came in at 36% for the quarter. Our tax rate from net income from continuing operations attributed to Exterran stockholders was 39% for the quarter. It's a bit higher than expected due to the business mix, but it's expected to be approximately 39% for the fourth quarter.

Shifting to capital, growth capital spending came in at $52 million which includes $43 million in North America primarily for our previously announced fleet build program. We did have proceeds from the sale of property, plant, and equipment of approximately $13 million in the quarter, so therefore, net capital expenditures came in at $80 million for the third quarter. Maintenance capital for the quarter was $26 million, which is slightly up from the $22 million in the second quarter. I will move on full year capital expenditure guidance. We continue to expect that net capital expenditures will be in the $300 million to $325 million range and maintenance capital in the $100 million to $110 million range.

Now moving on to cash flow, during the third quarter we received our sixth installment payment of $4.8 million from the sale of our joint venture assets in Venezuela and the fourth installment of approximately $17 million from the sale of our wholly owned Venezuelan assets in Venezuela. These cash payments from the sale of Venezuelan assets are not included in EBITDA as adjusted and are not included in net income from continuing operations attributed to Exterran stock holders. Looking forward, we still have approximately $240 million -- $245 million to go in terms of our collection and our receivables from Venezuela.

Available but undrawn debt capacity at September 30 was approximately $630 million at Exterran Holdings and about $425 million at Partners. Total consolidated debt came in at $1.56 billion on September 30 as compared to $1.64 billion at June 30 and $1.71 billion in the year ago September 30. During the third quarter, debt decreased by $84 million at the Exterran Holdings levels driven by strong cash flow from operations and increased slightly, $5 million at the Partnership. Exterran Holdings total leverage ratio, which is the total debt to adjusted EBITDA as defined in our credit agreement, came in at 1.8 times at September 30, 2013. That compared to 2.1 at June 30 and down from 3 at September 30, 2012.

Now for the fourth quarter, we will continue to generate cash at the holdings level, and we expect our leverage to come down again in the fourth quarter. Cash distribution to be received by Exterran Holdings based upon its Limited Partner and General Partner interests in Exterran Partners is $12.6 million for the third quarter compared to $12.4 million for the second quarter of 2013 and $7.9 million for the third quarter of 2012.

I would point out that the distribution level for the third quarter is in the high splits -- that is the 50/50 splits, which provide the General Partner which is indirect -- which is directly owned by Exterran Holdings with an increased share of incremental distributable cash flows generated by the Partnership. We expect that will help is grow and build the value of our General Partnership ownership. I would point out, just as Brad did, our improved capital position provides financial flexibility as we implement our growth initiatives. Furthermore, we believe that our ability to generate strong cash flow is an important driver to unlocking the value at Exterran Holdings.

Sorry that was fairly long, but I'll turn it over to David to talk a little bit about Exterran Partners.

Thanks, Bill. In the third quarter 2013 Exterran Partners had a good overall performance. Our financial results, however, declined as compared to the second quarter 2013 period which benefited from a customer's exercise of purchase options on two natural gas processing plants. In addition we performed more service activities in the third quarter than in the second quarter of 2013, and we believe we will return to lower service levels in the fourth quarter of 2013.

As a reminder, the sale of the two natural gas processing plants increased our revenue by $6.5 million with no incremental costs, EBITDA, as further adjusted by $13.3 million, and our distributable cash flow by $6.5 million in the second quarter. In addition, the operations of these plants generated revenue of $2.3 million in the second quarter of 2013 but did not re-occur in the third quarter.

For the quarter, Exterran Partners generated EBITDA as further adjusted of $55.7 million as compared to $71.1 million in the second quarter of 2013 and $46.2 million in the prior year period. Distributable cash flow was $33.3 million in the third quarter of 2013 as compared to $44.7 million in the second quarter of 2013 and $29.5 million in the third quarter of 2012. Maintenance capital expenditures in the third quarter were $12.7 million which is expected to be the highest level for the year and compares to $9.6 million in the second quarter and $10.3 million in the prior year period. Distributable cash flow coverage in the third quarter was 1.17 times. Excluding the benefit of the cost cap payment our distributable cash flow coverage decreased to 0.91 times in the third quarter of 2013 from 1.46 times in the second quarter and 0.98 times in the prior year period.

Net income for the Limited Partner Unit was $0.16 in the third quarter compared to $0.52 in the second quarter 2013 and $0.21 in the prior year period. In the third quarter, Exterran Partners average operating horsepower decreased by 19,000 to approximately 2.22 million as net stops in conventional dry gas plays offset growth in shale and liquids-rich plays. Revenue was $115.8 million as compared to $125.5 million in the second quarter and $99.3 million in the prior year period. Gross margin was 56% in the third quarter as compared to 59% in the second quarter and 51% in the prior year period. The exercise of the purchase options and the operations of the two processing plants increased our gross margin percentage by 3% in the second quarter of 2013.

Cost of sales per average operating horsepower was $23.22 in the third quarter, up 2% from second quarter 2013 and down 8% from prior year levels. Last week Exterran Partners announced its distribution of $0.5275 per Limited Partner Unit or $2.11 per Limited Partner Unit on an annualized basis. This distribution is $0.005 higher than the second quarter 2013 distribution and $0.02 higher than the third quarter 2012 distribution.

Since the inception of Exterran Partners, we've grown our distribution by over 50%. The third quarter 2013 distribution level will result in a payment to the General Partner, which is indirectly owned by Exterran Holdings, at the highest tier incentive distribution level. On the balance sheet total debt increased by $5 million during the quarter to $720 million at September 30, 2013 as capital deployed to fund internal growth opportunities, offset proceeds from the sale of plant, property and equipment.

Available but undrawn debt capacity under our debt facilities at September 30 was approximately $425 million. We believe that our debt capacity gives us the financial flexibility to finance organic growth and positions the Partnership for future acquisitions. As of September 30, 2013, Exterran Partners had a total leverage ratio covenant debt to adjusted EBITDA as defined in the credit agreement of 3 times, unchanged from the end of the second quarter. With a strong balance sheet and substantially all the remaining operating contracts in Exterran Holdings North America Contract Operations business eligible for the future drop downs, as Brad discussed earlier, we are in a good position to execute our drop down strategy.

Gross capital expenditures for third quarter 2013 were $40.3 million consisting of $27.6 million for fleet growth capital and $12.7 million for maintenance activities. For the full year 2013 we now expect total fleet growth capital expenditures to be in the $100 million to $125 million range, as compared to the previous guidance of $125 million to $150 million range, and maintenance capital expenditures in the $40 million to $45 million range as compared to previous guidance in the $45 million to $50 million range. In summary, third quarter highlights included 13% year-over-year growth in quarterly distributable cash flow, 1.17 times distributable cash flow coverage and a 3 times covenant debt to EBITDA ratio.

Operator, at this point we'd like to open the call up for questions.

(Operator Instructions)

Mike Irvin, Deutsche Bank.

This is actually Jason Bandel calling in for Mike who is traveling today.

Good morning, Jason.

Are there any de-mobilization costs left in the US contract business for Q4 given that you're guiding toward improving margins in these levels? And what's the main driver behind the improvement?

Jason, this is Bill. Yes, there's a little bit left. As opposed to what we had said, it's come more in smaller increments quarter-by-quarter. So there's still some left for the fourth quarter, but to be perfectly honest, I got tired of talking about it. And we just execute on it, and we'll have a little bit in the fourth quarter, and our margins will go up despite that.

Understood. That's helpful. In terms of the pace of customer stop activity in conventional fields, is that slowing down? I know you said you have a decline of 74,000-horsepower in Q2 and now 62,000-horsepower here. Is that trend continuing? And what helps that is to stabilize at what point?

This is Brad. I'll take that one, Jason. It was certainly higher in Q3, and year-to-date both compared to prior year periods, and that caught us at a higher level candidly than we expected. We are seeing it taper off a little bit. But it's been too short of a test period to get carried away with that. But that is part of the reason why we expect that we are going to be able to see more growth in the liquids rich and shale plays that will not be as hardly hit by offsets coming out of the traditional gas plays in Q4.

Okay. And then the last one for me here. You touched on it a little bit in your prepared remarks. I know we saw it recently in a presentation in the addendum section. You were highlighting the value of the units. And a lot of the investors we've talked to believe your GP interest in the MLP is not getting any value. How do you go about unlocking that value, and are you considering adopting a model similar to like a Williams as an example.

Well, I can't comment on the Williams example or direction forward. That would be not be something we'd be willing to make any comments around as you would expect. Right now our main focus is to ensure that we're driving operational improvements and improvement in the cash flow that can be seen in all of our businesses with a focus on what that cash flow value will mean to the GP. I think that's the focus we have on the business right now.

Great, thanks, guys. Appreciate the help.

Led me add one thing. You are starting to see quarter-by-quarter higher GP revenues, and we will be talking more and more about that. You'll see higher GP revenues in the fourth quarter versus the third quarter. Just like you've seen in the third quarter versus the second quarter. So we are starting to build some view and some look at those annualized revenues.

Blake Hutchinson, Howard Weil.

I was intrigued by the comment, Brad, that at this point all of your horsepower is available for potential dropdown or nearby all of your horsepower. Is that meant to imply that if you so -- were to choose that you could clean up the relationship here in one transaction? Or would you caution against that and say the pace would be more similar to what we've seen historically?

Sure. The comment was made because in the past the contract conversion process has been a gating item in the timing of our dropdowns. And what we're telling you now is that that is no longer a gating item for future dropdown transactions. And so the timing of the transactions will be dictated by our own internal strategy and market timing. And that that item is removed. It's not to speak at all to the timing of the drop downs or the structure of what any future dropdowns would look like. It's just that in the past we've tracked that and reported it out. And we wish to kind of close down that process, because it's all generally available for drop down now.

You wouldn't caution us to say that a transaction that might involve everything at this point would be too daunting to take on necessarily.

I just really don't want to comment on what a future transaction would look like or what the timing of it could look like, Blake.

Sure. That's fair. And let me just switch over to the fabrication margin, certainly a highlight for the quarter. And this may be for Brad or Bill. Can you take us to -- explain the moving parts between Q3 which is obviously a superlative quarter probably beyond the range of which you'd anticipated. Is that just more kind of the base US processing business driving that? Is that kind of late major project installation and just a really good quarter overall? And then we transition to more international mix that weighs that down. Can we just get kind of a little more at least qualitative explanation between the two Qs in the mix issues.

This is Bill. Let me try. That's a long question with lots of parts. I tried to say in the remarks that we had a great quarter for our processing & treating, and that includes our production equipment. We did have some good numbers there. As you look at the mix through the fourth quarter, we'll probably have a little different mix in terms of the install projects that are complete versus what we've had in this quarter. So all in all, a great quarter. We did close out some contracts but I try to guide to something that's more in line with the product mix that we see coming in the fourth quarter.

Okay. That's helpful. I'll turn it back. Thanks, guys.

Thanks.

Sharon Lui, Wells Fargo Securities.

I guess in terms of your guidance for CapEx at the MLP level if you could just talk about the reductions. Is that a deferment of spending into 2014?

Yes, I think so. We lowered our guidance for growth from $125 million to $150 million down to $100 million to $125 million for the year. And it's just sort of a timing issue where some of the stuff is moving into 2014.

Okay. And same thing for the maintenance CapEx spending?

Yes, that was only a $5 million reduction or so. And we had a little bit lower than we expected maintenance activity in the first part of the year, and we think we'll have a normalized maintenance activity in Q4. And it comes out to $40 million to $45 million versus $45 million to $50 million.

Okay. And I guess with regards to future dropdowns, is the intention just to drop down operating horsepower to the MLP?

in past transactions we have dropped down a mix of horsepower, and we have also dropped down in other transactions where it was all operating horsepower. And I think that for future dropdowns we can only look to the past and a discussion with -- between Exterran Holdings and Exterran Partners as to what assets are required to be dropped down for that operating horsepower and for that business to be valued at a reasonable price based upon a going enterprise -- going concern valuation. So we'll look at a mix between whether it needs to be all operating or whether there is sufficient idle capacity that's already at EXLP to support it. And that's the way the analysis has worked in past transactions also.

Okay and just the last question for me. In terms of the conversions that you did during the quarter, can you maybe just talk about I guess what contributed to the success? Because I think only 84% was converted. Was it one big contract that was tied to these horsepower?

No. There are a few factors we look at and we have been working on to come to the position we're in today. One is the conversion exercise itself. The second is the assessment of the contract which may or may not require conversion for some of the contracts depending upon how structured. As well as finally an assessment of how much non-qualifying income could be borne in a drop down if we were to proceed with a contract that did not necessarily -- although it's not clear -- did not necessarily or clearly generate qualifying income. And it's the combination of those three factors that pushed us over the hurdle for the position we are expressing today.

Okay, great. Thank you.

James Bardowski, Sidoti & Company.

Congratulations on a pretty good quarter. Just had a brief question; a couple others were answered. Regarding the fabrication segment, I know you mentioned that you witnessed some project delays on the quarter and expect it being pushed out. How severe are any of the delays on this front?

You know, from a gross margin impact perspective, we don't expect the delays to be severe. These are project completions, so in some cases a substantial amount of the percentage of completion for the equipment side has flown through, and what remains are some installation revenues to be realized on closure of those contracts. So I would not expect it to have a significant impact on future gross margin period.

Okay. Excellent. And I guess also one more brief question. Regarding the minority interest on the income statement, what specifically caused the decrease sequentially from the last quarter?

James, you're asking a tough accounting question, but I think and somebody can correct me here, remember in the second quarter we had the sale of those plants in the partnership, and that increased the income in the partnership and the minority interest increased to us. And we didn't have that this quarter. And looking around I think that's the -- I can put a number to it maybe in a follow-up call, but that's generally what's happened.

Sounds good, sounds good. I'll defer. Thank you, gentlemen.

Peter van Roden, Spitfire Capital.

I just have a quick question on how you guys think about growth capital versus the existing fleet. And so if you do the math utilization ticked down quarter-over-quarter, but you're still spending money on the growth side. How do you think about trying to get back older units work versus spending money on new units.

Sure. Two dynamics that are really the driver of that. Where we're adding horsepower with new CapEx, it tends to be in categories of equipment that are highly utilized in our fleet already. That is, without the addition, we would not have the right equipment to work by horsepower category or by application. The second factor that we see is there's a geographic shift in the infrastructure and use of our equipment today where the declines that we are contending with come out of dry gas plays that demand both different equipment and are geographically differently situated with different customers than we see in the growth areas. And these two dynamics are really the driver behind why we are continuing to see good growth in our business in the growth plays but are facing contraction in the dry gas plays. That's the way to think about that net impact that we see in the business.

Okay. And as you guys think about price, price was down a little bit this quarter. Was any of that from trying -- is that just stuff that was on contract for a while coming off? Or what was going on there?

Peter, this is Bill. I think some of the price issue again goes back to some of those one time effects in the second quarter. But let me make sure, but I'm 90% sure that it was the one time effects in the second quarter which lowered because those plants were so lower. What you see is the price for horsepower.

And can you guys walk me through -- the natural gas processing plants are running through both Partners and Holdings?

The two that we sold were owned by Partners, and that runs through Partners and comes to us through the minority interest. But, when we report some of the horsepower stats, we report them on a consolidated basis. The other plant which was the [Reineke] plant that got removed and you don't see that -- and that was owned by Holdings. You don't see that any more period.

Okay. Thanks, guys.

(Operator Instructions)

Majid Khan, Tourbillon Capital

Congratulations on a good quarter, especially on the cost side. There's a lot of movement on the international side both in terms of price and cost. Is that just a mix thing or pure horsepower? I was wondering if you could comment on that a little bit.

Help me, again, Majid This is Bill. With that question --

It seems price per horsepower and international operations and costs were up substantially I think like 12% year-over-year on price and 6% on the cost per horsepower.

Yes. And the year-over-year I think some of it --I'll have to break it down. You do have some inflation that comes certainly through our Argentina operations. And that while we're getting the same kinds of margins there, because you've got inflation both on the revenue and the costs, you see some of that. But to be perfectly honest, I'll have to take a harder look to see if I can break it down any better than that.

Got it, got it. And I guess when I look back on what you guys have done over the last couple of years, and your operating performance has been great. The fabrication backlog recently per your comments is improving. And the leverage ratios are looking pretty good. And your maintenance CapEx looks to be pretty stable. You're collecting cash from Venezuela. The SG&A support for EXLP is closer to being gone. And it looks like the contracts at EXH for dropdowns look to be clearer, and you're in the high splits. I think you know where I'm going with this. I'm wondering if --

Majid, you're doing a great sales job for us. We love it.

Well, one of the perils of doing well is that people expect more. So I'm wondering. Could you -- given you're the only publicly traded GP that doesn't pay a dividend, how are you thinking about the path to eventually paying a dividend in the future?

I'll go first and Bill will [top me up]. Look, we're evaluating all of the opportunities that we have to create value for our investors. And the past practice we've had plenty of opportunities and competing demands to utilize the cash flow that the business was generating by investing in the business. And we're going to continue to evaluate all of the opportunities we have, including investing in the business and investing in other businesses and any other competing uses for that cash that would maximize the value available to our stock holders. And I think that's about as much as we can really say about how we think about that cash going forward. Bill, anything you want to add to that?

Majid, we're just happy you asked the question. We've got financial flexibility, but Brad is right. That's about all we can say at this juncture.

That's fair. Thank you very much and congrats again.

And at this time we have no further questions.

Okay, great. Everyone we appreciate your interest in Exterran Holdings and Exterran Partners. And we'll look forward to talking to you on our fourth quarter conference call. Thanks very much.

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. You may now disconnect.