Good morning, and welcome to Kodiak Gas Services conference call to discuss the announced acquisition of Distributed Power Solutions. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the call over to your host, Graham Sones. Please go ahead.
Hello, and thank you for joining us. Today, we issued a press release announcing that Kodiak has agreed to acquire Distributed Power Solutions. That press release and an accompanying presentation are posted to the investor relations section of our website. A few housekeeping items. The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. Management can give no assurance that such statements or expectations will prove to be correct. We may also refer to certain non-GAAP financial measures and metrics.
Please refer to Slide 2 in the presentation posted on our website for additional discussion of forward-looking statements and non-GAAP measures. Participating from Kodiak today are Mickey McKee, President and Chief Executive Officer, Steven Green, Chief Commercial Officer, and John Griggs, Chief Financial Officer. Now I'd like to turn the call over to Mr. Mickey McKee. Mickey?
Thanks, Graham. Thank you all for joining us today to discuss an exciting new chapter for Kodiak. We recently announced that Kodiak has agreed to acquire Distributed Power Solutions for $675 million, positioning us to expand our product offering to include power generation solutions for our customers. As many of you know, we've been actively studying the distributed power market for some time, and I'm very happy to say that we have found the ideal asset base and management team to enter this exciting and growing market. Let me start by discussing why DPS is a great fit for Kodiak. As discussed on Slide 4, this transaction provides us with a state-of-the-art fleet of 384 MW of distributed power generation equipment, which includes both turbines and reciprocating engines, providing flexibility across a variety of applications and end markets.
Many of you know, the lead times for new power generation equipment are quite long, with some stretching out until well into 2028. We feel like the opportunity to acquire a quality fleet with existing customers and contracts, including data centers, is the right way to enter the distributed power end market. Plus, the fleet is 100% powered by Caterpillar engines and turbines, a company we clearly know well. Our combined Caterpillar relationships and supply chain arrangements should be beneficial as we invest and grow the business. Kodiak prides itself on our level of customer service and our industry-leading track record of operating large horsepower engines at high levels of reliability. We currently have over 700 technicians who are certified to work on Caterpillar engines, providing us the opportunity to bring the same level of customer service to the power industry.
Next, this transaction brings a seasoned team with decades of distributed power experience that has been successful in signing long-term, multi-year contracts with data centers for primary power. As shown on Slide 6, approximately two-thirds of DPS's active fleet is currently contracted to data centers, including a multi-year agreement to supply primary power to a large data center operator in Virginia. The contract has been in place for over a year and is running at 99.9% reliability. DPS has a healthy and growing pipeline of additional data center opportunities and is also active and growing in behind-the-meter microgrid business. Just as important, we have alignment on our safety culture, with DPS having a 0.0 TRIR since inception. We feel like the combination of DPS's relationships with data centers and our existing commercial relationships provides Kodiak with a key unique advantage.
The combination of our customer-focused business model, strong relationships with key suppliers, and a long, successful track record of operating large horsepower engines at industry-leading levels of reliability will help us unlock significant value and accelerate the growth outlook for this business. On a per-share basis, this transaction is accretive to both discretionary cash flow and earnings. We expect to be able to accelerate our earnings growth while protecting the balance sheet and maintaining our commitment to shareholder returns. Lastly, we have the right infrastructure in place to integrate and grow this business.
John will discuss the financing in more detail, but it's important to point out that thanks to the strategic actions we took in 2025, implementing a new ERP system, terming out our debt, and accelerating our technology investments, Kodiak is positioned to support this business as it scales and provide the capital it needs to meet the strong organic growth outlook. As a reminder, when we started Kodiak, we had a vision for how we could transform what was historically a volatile sector by focusing on large horsepower compression assets, allowing us to generate stable earnings supported by contracted cash flow. We believe the distributed power industry is ready for a similar transformation as more data center and energy infrastructure companies are forced to provide their own permanent power solutions.
We've done this before and believe that our customer service focus, our deep bench of highly trained technicians, and our focus on large horsepower engines provide us with a unique competitive advantage in distributed power. I want to spend a few minutes discussing our compression business, too. The outlook for contract compression remains as strong as ever. The recent weather events have reminded us all how important natural gas is to our day-to-day lives. As we move closer to the onset of additional Permian gas takeaway, combined with further expansion of LNG export capacity along the Gulf Coast, our compression services remain at high demand. We have fully sold out our compression in 2026 and have begun taking orders for 2027 and into 2028.
We are really excited about the unique combination of distributed power and large horsepower compression under the same roof, and the future it holds for the growth of Kodiak. I'll now turn the call over to Steven Green to discuss the market outlook.
Thank you, Mickey. The U.S. power market is at an inflection point, with demand growth over the next decade expected to accelerate rapidly. Electricity demand for data centers in the U.S. will double by 2035, accounting for over 50% of the power demand growth over that time period. A transformative demand increase on the grid that some are comparing to the advent of air conditioning in the 1960s. It has been well documented that power demand is overwhelming utility providers, with hyperscalers and other large power consumers experiencing unprecedented wait times to connect to the grid, if they can connect at all. In PJM, wait times are estimated to be over six years to connect to the grid. It is estimated to be closer to eight years in New Mexico.
With more regulatory and political pushbacks for large loads connecting to the grid, we see an emerging trend for data centers and others to supply their own power. Increasingly, that power is going to be permanent, not waiting for the grid. This is why we are seeing a shift in companies recognizing they need to provide their own power solution. The charts on Slide 10 illustrate the speed with which this shift is occurring as more data center developers expect on-site power generation. In fact, based on third-party research, more than 40% of the data centers that are expected to be online by 2035 are not expected to connect to the grid and instead supply their own power solutions. Based on this, we believe that the market will need in excess of 60 GW behind-the-meter power solutions.
Mickey stated, "The distributed power industry is ripe for transformation. What once was defined by short-term contracts involved with cash flows is now moving to 5-7+ year contracts with healthy returns and stable cash flows." It is our belief that over the next 12 months, we will be in a position to sign long-term contracts with data centers that effectively increase Kodiak's overall contract duration, enhancing Kodiak's stable earnings profile. Now, I'd like to turn the call over to John Griggs to provide you with more details on how we plan to finance the transaction.
Thanks, Steven. As shown on Slide 5, the total cost of the transaction, including estimated fees and expenses, is approximately $690 million, or about 7.4x what we would expect DPS's adjusted EBITDA to be in 2026 on a full year basis. We plan to finance the transaction with approximately $590 million drawn on our existing ABL facility, plus the issuance of $100 million of our stock to the sellers, which will be equal to about 2.4 million shares, totaling just under 3% ownership post-close. As Mickey mentioned earlier, we're committed to maintaining a strong balance sheet and our shareholder returns framework. All the work we did last year on our balance sheet put us in a great position to finance not only this transaction, but also our future growth.
As a reminder, closing is subject to a variety of conditions, including HSR. Since our businesses don't overlap, we don't anticipate any issues there, which would suggest that we can close the transaction most likely early in the second quarter, if not sooner. And we expect to provide full guidance for the power segment at that time. With that, I'll hand it back to Mickey.
Thanks, John. In closing, this is a remarkable opportunity to gain access to a rapidly growing industry that is in the early stages of undergoing a tremendous transformation. This transaction expands our customer offering and allows us to increase our organic growth outlook. Distributed power is a natural fit for Kodiak's culture, our workforce, and our customers, and we're excited for the future. Thanks for your participation today, and now we're happy to open up the line for questions. Operator?
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question today comes from John Mackay of Goldman Sachs. Please proceed with your question.
Hey, good morning, guys. Congrats on the announcement. Can we start a little bit on the operational synergies? I know you shared a fair amount of detail, but can you walk us through what you see in terms of synergies on both the existing fleet you're acquiring and then also what that could look like for new projects in the future?
Hey, good morning, John. This is Mickey. Look, I mean, I think that the thesis since we started looking at this is, has been, you know, Caterpillar qualified technicians that we can use on both sides of the fence here on power and compression. So we think that there's some opportunities there that are pretty significant. DPS current operations has quite a bit of equipment that is in the Permian already and quite a bit of a growth outlook for the Permian Basin, which is obviously where we're very well-stocked with Caterpillar technicians, as well as spare parts and pieces inventory, all that kind of thing.
So, you know, these, a lot of these reciprocating engines are the same engines that we're using on our compressors, so, you- we ought to be able to cross-train, technicians and those kind of things, so, to, to use on both sides of the fence here. So, like I said, I, we, we're not ready to guide on kind of what synergy kind of looks like right here, but this is a small private company, and so the synergy number is not gonna be huge. We think that the organic growth profile is what the attractive part of this deal is.
That's helpful. Maybe just a second one: Can we talk a little bit about that? You know, you mentioned broadly they have a backlog of projects they're working on. I know you guys have been talking to your customers kind of before this on something on the power side. Maybe just walk us through what that growth opportunity looks like from here.
If you look at this business right now, and you look at the other people in the business that are doing the same thing, and that you guys are pretty familiar with those names, really and truly, the opportunity set is as big as you want to make it right now. And so, we've got some work to do here. We're not ready to guide on, really on what CapEx looks like and that kind of thing yet, but we have identified some equipment that is available in the market right now that could be deployed in 2026, as well as into 2027. So, we're excited about getting our hands on some of that equipment, but, like I said, this is step one, getting this announced.
Hopefully, we'll close here in a month or two and be ready to guide and go forward from there.
All right. I'll leave it there. Thanks for the time, guys.
Appreciate it, John.
The next question is from Jim Rollyson of Raymond James. Please proceed with your question.
Hey, morning, Mickey, John, everybody. Congrats, and Mickey, just... I know you're gonna get this question. I know you've been asked this question as you've been talking about this for the last while, but I'll go ahead and ask it. Given that you're now entering the power business, kind of curious just how that shapes your view or vision around the compression business and, and maybe following from that, how you think about capital allocation between the two businesses and opportunity sets.
Yeah. Hey, good morning, Jim. I appreciate you joining us this morning. But, look, nothing has changed on our view of the compression business. I touched on it a little bit in the prepared remarks there. We are seeing as much or more demand on the compression side as we've ever seen. We believe that the right thing to do is continue a disciplined capital approach on the compression side, that we've, you know, demonstrated for the last three, four, five years. That's worked really well for us, and we don't plan to change that at all. We want to continue growing the compression business. It's a wonderful foundational business for us to leapfrog into this power business.
Then on the other side of that, we want to be able to deploy as much capital as we think is reasonable into the power business to continue growing that. So, from a capital allocation framework perspective, we're still... We're not ready to talk about that publicly yet, as we're trying to, like I said, in the last question, we're still trying to figure out kind of what the equipment availability is in 2026 and 2027, in the immediate term, and then develop a capital plan for 2027 and 2028, as we look at equipment availability out there beyond that.
Like I said, the compression business is still a wonderful business, and we want to continue to deploy an adequate amount of capital in that and then also grow the power side as well.
Gotcha. And then, following up, maybe, John, the question for you. I realize this will depend on how this plan develops, but many of the folks in your competitive landscape in this business right now are obviously talking about some external project finance type of financing. And I'm just curious how y'all are thinking about financing, you know, organic growth as we think about this scaling up over time.
Yeah. I'm gonna kind of go back to what Mickey said, too. We're still gonna kind of have to dial everything in. I think it does—the growth opportunity, as Mickey said, is as big as you want it to be. We're gonna honor the balance sheet big time, and we know that's very, very important to us. And so I think it's gonna allow us an opportunity to get real creative, whether that's through partnerships, whether that's through, financing opportunities, whether that's through kind of tapping more in the bond markets. You know, again, we think that, that it's gonna be, a much more creative financing playing field going forward than it has been at Kodiak in the past, because we're so excited about the return on new investment on this power side as well, too. So I'll leave it at that.
Perfect. Appreciate it, guys. Thanks.
Thanks, Jim.
The next question is from Doug Irwin of Citi. Please proceed with your question.
Hey, thanks for the question. I just want to start with the contracts. You had a comment about seeing power contracts kind of shift to that 5-7 year duration range. Could you maybe just talk about what the duration of these assets looks like today? And then more broadly, kind of any sense of where you see Kodiak's overall portfolio contract duration trending over time with the addition of these assets?
Yeah, morning, Doug, this is Mickey. Thanks for joining us. You know, today, you'll see in the presentation, about two-thirds of these assets right now are deployed on data centers currently, with another third deployed on kind of industrial type applications as well as oil and gas microgrid type of applications. I think those industrial and microgrid applications kind of kind of trend in the one or two-year contract kind of timeline length. Whereas the data center stuff, we're seeing the shift up to five and seven-year contracts, and even up to 10 or 15 in some of the larger discussions that we've had, there.
So, to our understanding, you know, our goal will be to trend as much as possible towards long-term infrastructure type primary power contracts. We'd like to extend the contract terms of all this kind of stuff out and get it locked down for a long period of time, and really mirror what we've done with compression business, right? It's let's make sure we're setting it in the right places with the right customers and with the right contracts, and that way that we minimize volatility and maintain stable cash flows.
Understood. That's helpful. And then, as a follow-up, just curious on the base compression business, we've seen you divest a lot of non-core horsepower over the last few years. Does the addition of these power assets and the fact that they're competing for capital here moving forward, maybe change the way you're thinking about some of your compression fleet outside of the Permian? Could we potentially see some more divestitures coming?
I wouldn't say there's anything like that imminent or that we've shifted our strategy at all. We continue to believe that our core base compression business is, like I said before, a wonderful platform of stable fee-based cash flows that is gonna underpin the cash flow to continue to grow both sides of this business right here. So I wouldn't suspect anything like that is imminent or is gonna change anytime soon.
Great. Thanks for the time.
Yes, sir.
The next question is from Eli Jossen of J.P. Morgan. Please proceed with your question.
Hey, good morning, everyone. Maybe just to dive deeper into the relationship with Cat and the ability to secure equipment, to expand both the compression fleet and also the, you know, new power gen assets. You know, are there synergies specifically with Cat? Or, you know, how do you guys think about, you know, the mix shift equipment between the two segments and your ability to deploy them? And maybe, you know, how the returns compare between those two businesses as well.
Yeah. Hey, good morning, Eli. I'll let John jump in here on the returns side of it, but as far as the synergies go, kind of with Caterpillar's and the adjacencies there goes, I mean, you know, we've been one of the largest buyers of Caterpillar engines in the oil and gas side over the last several years, and so we obviously have a great relationship with them, and we think that's only gonna get better as we increase our buying power with Caterpillar. So think that that's a big benefit to us, and we think that, you know, we'll be the first of our kind to be buying on both sides of the house here. So you know, it's a- it's gonna be a interesting...
We've got a lot of conversations to have with Cat. We haven't had a chance to have too many of those yet, as we've got to respect the rules of pre-closing here and all that kind of thing. So, we're still a lot of that is to be determined, but we think it only is gonna make our relationship better and is only gonna enhance our buying power with Cat and others. So I'll let John jump here on the returns side.
Yeah, and I, I just want to add on to what Mickey said. So Mickey and the team at Kodiak have spent 15 years building a reputation within the Caterpillar network. That includes Cat itself, it includes the dealers, it includes Cat Finance, and I think the reputation is a great one, and the partnership is a great one. So we think it's absolutely leverageable, and I think that's gonna extend into the debt capital market side, into the partnership side. I think that's part of the overall kind of strategic synergy in this transaction, is that, you know, we've worked really hard to get to where we are today, and now we're gonna apply everything that we've done in this business to the power business, and we're gonna get there, too.
In terms of returns, we said it in the deck, and we'll say it over and over, and I think you can corroborate this with any of the other, I'll call it, OFS players and people like that, that have stepped into the distributed power business. Returns are pretty comparable. You know, kind of sub-5-year EBITDA creation multiples, ±20% internal rates of return. Mickey mentioned the contract duration, earlier as well. Like, we think the opportunity set is there on the power side for prime power contracts to extend those pretty meaningfully. So again, our model is infrastructure cash flows, steady up and to the right type business, and through this acquisition, we think the up and to the right can kind of, the slope can shift upwards a bit more.
And so we're just really excited about this next, call it 90, 180 days, to get our arms around it, but more excited about, call it, the two to five-year type outlook.
Awesome. And then, maybe John, just further on the capital allocation piece. You know, you guys have been pretty committed to a balanced approach, shareholder returns. Can you just speak a little bit to what a larger scale business means for those returns and, you know, how you balance that with deleveraging post-deal, the overall capital allocation framework as you see it?
Sure, absolutely. So we and our board take capital allocation very seriously as do our investors. And that, you know, kind of starts with the kind of organic growth that we see, the CapEx, and then down to the dividends and shareholder or excuse me, share repurchases. So I would say, kind of like sitting here today, as we evaluate it, we don't see any change in terms of our kind of, dividend type model, where we're gonna pay out a healthy percentage of our discretionary cash flows going forward in the form of the dividend. In terms of share repurchases, like everybody knows, it's been around Kodiak, that we leaned into that heavily last year, to help grease the skids for EQT sell down and help act like a catalyst at a couple of the debt financing transactions.
Going forward, we'll evaluate the best uses of cash every quarter with our board and make a great recommendation. But I would expect the leaning into the share repurchases stage, the returns on kind of new power sets and on compression are gonna probably dwarf that going forward. And so we'll just have a programmatic approach to try to minimize dilution from management compensation, vesting and all that. But again, we think the real juice and the best returns for the shareholder, as we sit here today, are gonna be on organic CapEx in the power and compression business.
Great. I'll leave it there. Thanks.
The next question is from Neal Dingmann of William Blair. Please proceed with your question.
Morning, guys. Congrats. Thank you, John. My first question, just on plans for your future power generation build out. It looks like, you know, looking at DPS, I think, what is about 60% reciprocating generators, about 40% turbine. I'm wondering when you all sort of... I know it's still super early, nothing, you know, still a ways from even closing this, but when you think about maybe building out, you know, the future power gen, do you think more, maybe potentially on the, you know, I would say, on the turbine side, given, you know, the higher horsepower and, you know, it seems like if you're looking at maybe, I don't know, some key areas, it seems like people are looking for higher horse or any thoughts on that yet, or still too early?
Yeah, I mean, we'll still the details are still a little bit TBD there, Neal, but I think that the common thought process probably is, in the short term, as we want to get our hands on additional megawatts in 2026 and early into 2027, the recips are gonna be easier to come by in that time, kind of timeframe. But as we shift to larger type power infrastructure type deals with data centers and that kind of thing, I think that the shift will obviously move towards turbines as we get in the queue for some of that supply chain out into 2028 and 2029.
That makes a lot of sense. That's kind of what I was looking for. Thanks, Mickey. And then secondly-
Yep.
Just quickly, do you think now by having and adding power, you know, it'll provide some key advantages on the compression side? Or, you know, like, is compression already so tight that... You know, I'm just wondering, like, will it help you get into more customers or key areas that you're maybe not in, that you wanted to get on the compression? Just wondering again, or is the compression business already so tight, you know, given the, what, 80+ week backlog of Cat motors, you know, Cat engines, does it not provide really anything significant on that side?
Yeah. Look, I think there is some opportunities there that we have to kind of figure out which, those engine deliveries are now 90+ weeks, by the way, Neal, so, on the compression side. So, we think that there is some opportunities that there might be able to unlock there, specifically on some of our customers and their, desire to maybe go to, to electric motor-driven compression, that they haven't had access to grid power in the past. We think that some of those, those conversations are gonna be, pretty interesting in our ability to provide some power, at least, as, as a bridge to grid, or ultimately, as we've talked about before, as primary power that's permanent, on, on that microgrid type of, installation.
They're supporting electric motor-driven compression as well as other operations. So, more to come on that, but I think that there definitely is an opportunity there.
Can't wait to see it. Thanks, Mickey.
Yep. Thanks, Neal.
This concludes the question and answer session for today. I would like to turn the floor back over to Mickey McKee for closing comments.
Yeah, thank you, operator, and, thanks for everybody for, participating in today's call. If you have follow-up questions or we didn't get to you today, please reach out to our Investor Relations team. We'll talk to you in a few weeks on our fourth quarter earnings call. Thanks a lot. Bye-bye.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.