USA Compression Partners, LP — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The partnership provides natural gas and crude oil compression services under fixed-term contracts. Unless stated otherwise, dollar amounts below are in millions. The nine-month comparison is affected by the April 2, 2018 acquisition: 2018 results include the acquired business only after that date, so reported growth is not fully comparable.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $175.8 | $168.9 | $520.2 | $412.4 |
| Operating income | $46.2 | $23.9 | $124.6 | $28.7 |
| Net income (loss) | $13.3 | $(0.6) | $29.9 | $(20.7) |
| Net income (loss) attributable to common and Class B unitholders | $1.1 | $(12.8) | $(6.7) | $(45.0) |
| Operating cash flow | Not separately stated | Not separately stated | $208.9 | $133.2 |
| Adjusted EBITDA | $104.3 | $90.1 | $310.4 | $217.2 |
| Distributable cash flow (DCF) | $54.9 | $47.5 | $163.8 | $121.3 |
Q3 revenue grew 4.0%; contract operations revenue rose 4.7%, while parts and service revenue fell 25.8%. Operating income nearly doubled, aided by higher contract revenue, lower operating costs, a gain on asset dispositions versus a prior-year loss, and no Q3 impairment charge. Net interest expense increased 28.2% to $32.6 million, primarily reflecting the new 2027 notes. Common-unit earnings were $0.02 per unit, versus a $0.10 loss per unit a year earlier.
For the first nine months, revenue increased 26.1% and operating income rose to $124.6 million from $28.7 million; both comparisons are substantially affected by the acquisition-period difference. Net interest expense increased 84.2% to $94.2 million. Common and Class B unitholders had a combined $6.7 million loss after $36.6 million of preferred distributions, despite consolidated net income of $29.9 million.
Q3 gross operating margin was $118.3 million, or 67.3% of revenue, versus $104.6 million, or 61.9%. Adjusted EBITDA margin was 59.4%, versus 53.3%. Nine-month DCF coverage was 1.13x, down from 1.28x; quarterly coverage was 1.08x, up from 1.01x. These are non-GAAP measures. Nine-month 2018 coverage reflects only two quarters of partnership distributions, limiting comparability.
Balance sheet, liquidity and capital
- At September 30, 2019, total assets were $3.75 billion; cash was only $2,000. Current assets of $232.7 million exceeded current liabilities of $172.7 million.
- Long-term debt, net of financing costs, was $1.84 billion, compared with $1.76 billion at year-end 2018. Principal included $394.5 million on the revolving facility, $725 million of 2026 notes and $750 million of 2027 notes. Both note series bear 6.875% interest.
- The revolver had $1.2 billion of borrowing-base availability and $410.4 million of available borrowing capacity, subject to covenant compliance. The partnership reported covenant compliance; the facility matures in April 2023. Revolver borrowings were $375.2 million on November 1, 2019.
- Operating cash flow of $208.9 million less capital expenditures of $134.1 million implies approximately $74.7 million of cash flow after capex, before other investing items. Investing activities used $108.2 million; financing activities used $100.8 million. Cash declined by $97,000.
- Preferred units were carried at $477.3 million and receive cumulative quarterly distributions. Preferred distributions were $36.6 million for the first nine months. Common distributions were $0.525 per unit each quarter; the October announcement maintained that rate.
- Common units outstanding rose to 96.6 million. On July 30, 2019, 6.4 million Class B units converted one-for-one into common units, increasing the units participating in distributions.
Outlook, commentary and risks
- Management expected operating cash flow and, if needed, revolver borrowings to cover debt service, working capital, estimated capital spending and distributions through the remainder of 2019. It provided no earnings or revenue guidance.
- 2019 capital spending plans were approximately $28 million for maintenance and $145–155 million for expansion. Nine-month spending was $21.8 million and $136.9 million, respectively. Binding equipment and parts commitments totaled $47.7 million, including $7.8 million expected to be spent in the remainder of 2019.
- Management attributed demand improvement to higher U.S. oil and gas production. Average Q3 revenue-generating horsepower increased 1.4%, and average revenue per horsepower per month rose 3.5% to $16.73. Average horsepower utilization was 93.9%, versus 92.8%.
- Key exposures include changes in oil and gas production and customer creditworthiness, competition, capital availability, operating hazards, regulation and litigation. The partnership has no direct commodity-price exposure because it does not take title to oil or gas, but sustained price declines could reduce customer activity. It does not currently hedge indirect commodity exposure or variable-rate debt.
- A 1% change in revenue-generating horsepower would change annual revenue by approximately $6.5 million and gross operating margin by $4.4 million. A 1% change in variable borrowing rates would change annual interest expense by approximately $3.9 million.
- A $44.9 million sales-tax contingency is accrued, with an equal receivable from Energy Transfer Operating under an indemnity for pre-transaction periods. Texas tax authorities dispute the applicability of manufacturing exemptions; the matter remains a contingency. Management did not expect ordinary-course litigation to have a material adverse effect.
- Nine-month impairment of compression equipment was $3.2 million, relating to units retired or repurposed; none was recorded in Q3. The filing also reports $13.7 million of additional operating leases not yet commenced, with ten-year terms.
Most important facts for investors to verify
- Whether cash generation and revolver capacity can support planned expansion spending, debt service and distributions, particularly given the very low reported cash balance.
- The sustainability of operating improvement: Q3 growth reflects utilization, pricing and cost changes, while nine-month comparisons are materially affected by the 2018 acquisition accounting period.
- Debt-service sensitivity and refinancing exposure, including the 6.875% notes, floating-rate revolver, covenant headroom and the effect of interest-rate changes.
- The status and collectability of the $44.9 million related-party indemnification receivable and the resolution of the Texas sales-tax dispute.
- Whether DCF coverage remains adequate after preferred distributions, maintenance capital needs, and the added common units following Class B conversion.