Solaris Energy Infrastructure, Inc. Class A

Good morning and welcome to the Solaris third quarter 2024 earnings conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you, Operator. Good morning, and welcome to the Solaris Third Quarter 2024 Earnings Conference Call. Joining us today are our Chairman and CEO, Bill Zartler, and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release which is posted on the news section on our website. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and thank you, everyone, for joining us this morning. The Solaris team had a great third quarter. The highlights include the following. We announced and closed on the transformative acquisition of Mobile Energy Rentals, a distributed power business, which we supported with new financings to fund the growth and integration of their team into the organization. We renamed the company Solaris. Solaris energy infrastructure, which we believe more accurately reflects our broader solution offering that now includes providing power as a service to companies both inside and outside the energy industry. We delivered strong service quality and performance to our customers across both our legacy business and our newly acquired business. In our Solaris logistics segment, which is our legacy business, we continue to generate free cash flow and maintain multiple Solaris systems on over 60% of our customer locations during the quarter, primarily driven by the continued success of our non-pot-filled product. In our newly established Solaris Power Solutions segment, which represented the acquired MER business, we are currently running more than 220 megawatts of power and have signed new customer contracts for more than 80% of our pro forma capacity under agreements for two to four years, with a line of sight to having all of our ordered capacity fully contracted. These accomplishments helped to drive our third quarter results of $75 million in revenue and $22 million in adjusted EBITDA, which includes only a 20-day stub period in September from the Power Solutions business. We also returned $5 million to shareholders in dividends during the quarter and yesterday announced a fourth quarter dividend of $0.12 per share, which will result in approximately $190 million return to shareholders through dividends and share repurchases since 2018. I'd like to provide an update on the progress within our new power business. It has been less than two months since we closed on our acquisition of Mobile Energy Rentals, and both the integration and the commercial opportunity set are advancing rapidly. The Power Solutions team has been a great addition to Solaris. They're innovative problem solvers focused on safety, customer service through performance, and entrepreneurship. This aligns well with our company values and culture. We have identified attractive opportunities to grow our power solutions business organically and through acquisitions. These opportunities include expansion of our fleet of turbines, additional sport equipment such as switchgear, transformers, cables, and other items needed to deliver a valuable, high-quality, and reliable power solution to our customers. Since the acquisition announcement, we observed an acceleration in demand for rapid-deploy configurable power as wait times to obtain grid connectivity continue to extend. Today, Solaris Power Solutions customers include a large hyperscale data center and various upstream and midstream energy companies, requiring power for various applications, including production, processing, and transportation projects. Data center power demand is being propelled by rapid growth for artificial intelligence computing applications. Timely access to reliable power is critical for data centers, given the competitive landscape and high capital investment in computing infrastructure. Our customers appreciate our swift deployment of dependable power solutions, enabling them to maximize their investments. For our energy customers, power demand is motivated by production and processing operations, which are less correlated to short-term commodity prices. In certain geographies, such as West Texas and New Mexico, where grid infrastructure may not be available or reliable, our customers generally have access to low-cost natural gas, which can significantly decrease the cost of generating their own behind the meter power. An attractive feature of our mobile turbine offering is our ability to produce power in dense power blocks utilizing stranded gas as fuel. As delays for grid connectivity continue to extend, we're working with our customers to solve their longer term power needs beyond a short to medium term bridge. Our customers are assessing how behind the meter solutions combined with the grid power over the longer term can provide baseload power flexibility, enhanced backup in case of grid disruption, options for efficient operational expansion, and managed load variability. Additionally, because our equipment is located on or close to the demand center and uses local fuel, we can generally be cost competitive on a relative basis with line power. Over time, we believe our value proposition for behind-the-meter power may find more appeal as capital investments required to augment interruptible sources of generation and upgrade transmission infrastructure by upward pressure on power prices and exasperate the interconnection delays. We believe this transition from short-term bridge power to medium to long-term power is already underway and likely to continue. This transition is demonstrated by our recent success in contracting our fleet. We have committed to new orders that will grow the power generation fleet size from approximately 150 megawatts at acquisition closing to an expected 535 megawatts by the end of the third quarter of 2025. At acquisition closing, almost all of the power solution segment capacity was operating under short-term agreements, and our commitment to fleet expansion was predicated upon advanced customer interactions. In the two months since closing, we have converted those engagements into contracts for approximately 450 megawatts, or more than 80% of our ordered fleet capacity. These contracts have tenures that range from two to four years. We also have visibility to the full effective utilization of our ordered fleet based on advanced discussions with our customers and prospects. Our clients value our team's ability to execute, and they've indicated interest in expansion beyond our currently planned capacity. We are carefully assessing our planned capacity alongside the range of market opportunities. Turning to our Solaris logistics solution segment, the U.S. drilling and completions levels remain choppy in the third quarter, but activity on average was roughly in line with our expectations of flat compared to the second quarter of 2024. Our logistic solution activity generally followed the industry as we averaged 91 fully utilized systems roughly flat with the second quarter. We followed 56 completions crews on a fully utilized basis in the third quarter, which was flat sequentially, and we maintained multiple systems on over 60% of those locations. That 60% is also double where we were in early 2023, highlighting the success of our strategic investment in building and deploying a fleet of top fill equipment that drives efficiencies for our customers, as well as increased earnings opportunities per location for Solaris. As we look at the fourth quarter of 2024, we expect to see some seasonal impact from E&P budget exhaustion. We believe this could drive a decline in activity as measured by fully utilized systems of roughly 10%. However, we have increasing visibility and growing momentum into the first quarter where we see most of this activity coming back with specific customer wins. The Solaris logistics segment produced $18 million of free cash flow in the third quarter. We're using that cash flow in addition to funds from our recent financing to fund the growth of our power solutions business. As I mentioned earlier, the Solaris board recently approved our fourth quarter dividend of 12 cents per share, and I'd like to reiterate our commitment to shareholder returns. We continue to demonstrate strong free cash flow generation from our logistics solutions business, and we've increased visibility to free cash flow generation from our recently signed power solutions contracts. This should lead to a significant inflection in free cash flow during the second half of 2025, following the completion of our current growth capital plans. The end market diversification and enhanced growth profile of our pro forma earnings and cash flow stream, combined with the multi-year tenors of the power contracts we are signing, are expected to provide support for our shareholder returns program, even as we continue to invest to grow our power fleet's capacity. We will continue to focus on executing the right organic and inorganic opportunities that enhance our return on capital, helping us maximize total shareholder returns, strengthen our balance sheet, and bolster liquidity. With that, I will turn it over to Kyle for a more detailed financial review.