USA Compression Partners, LP — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The filing was signed November 6, 2018. The Partnership provides natural gas and crude oil compression services. On April 2, 2018, it completed the acquisition of the USA Compression Predecessor’s business; reported comparisons therefore combine different businesses and are not fully comparable.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $168.9 million | $71.1 million | $412.4 million | $203.7 million |
| Operating income (loss) | $23.9 million | $(10.4) million | $28.7 million | $(28.5) million |
| Net income (loss) | $(0.6) million | $(12.4) million | $(20.7) million | $(32.5) million |
| Adjusted EBITDA | $90.1 million | $33.6 million | $217.2 million | $97.4 million |
| Distributable cash flow (DCF) | $47.5 million | $29.2 million | $121.3 million | $83.4 million |
| Operating cash flow | $38.8 million | $23.4 million | $133.2 million | $97.3 million |
Q3 gross operating margin was $104.6 million, or 61.9% of revenue, versus $39.4 million, or 55.5%, a year earlier. Adjusted EBITDA margin was 53.3%, versus 47.2%. These are non-GAAP measures. Q3 net loss attributable to common and Class B unitholders was $12.8 million after $12.2 million of preferred distributions; loss per common unit was $0.10 and per Class B Unit was $0.62.
Revenue growth principally reflected the acquired assets and higher demand. Average revenue-generating horsepower increased 147.4% year over year in Q3; average utilization rose to 92.8% from 82.9%, and average revenue per revenue-generating horsepower per month increased 2.1% to $16.17. The acquired assets contributed $83.6 million of Q3 contract operations revenue. Reported prior-period results are predecessor results; the filing also provides pro forma figures, which remain illustrative rather than forecasts.
Balance sheet, debt and liquidity
- At September 30, 2018, cash was $2.8 million, current assets $229.5 million and current liabilities $173.5 million.
- Long-term debt, net, was $1.731 billion: $1.022 billion outstanding under the revolving credit facility and $725 million principal of 6.875% senior notes due 2026. The revolving facility matures April 2023.
- Revolver borrowing-base availability was $578.2 million; borrowing capacity available subject to covenant compliance was $309.7 million. The Partnership reported compliance with all debt covenants.
- Nine-month investing cash outflow was $715.8 million, chiefly reflecting the acquisition and $200.9 million of capital expenditures. Financing cash inflow was $581.5 million. Ending cash declined by $1.2 million from year-end 2017.
- Preferred units were recorded as $477.3 million of mezzanine equity. Their cumulative quarterly distribution is $24.375 per $1,000 unit; holders also have conversion rights beginning in 2021. Warrants cover up to 15 million common units at stated exercise prices of $17.03 and $19.59.
Material changes, outlook and risks
- The acquisition and related financing expanded the fleet and revenue base but also introduced substantial debt, interest expense and preferred distributions. Q3 interest expense was $25.4 million; nine-month interest expense was $51.1 million.
- Common-unit distributions remained $0.525 per quarter. Q3 DCF coverage was 1.01x; nine-month coverage was 1.28x, reflecting only two quarters of Partnership distributions in 2018. Coverage measures are non-GAAP.
- Management said operating cash flow and, if needed, revolver borrowings should fund debt service, working capital, 2018 planned capital expenditures and distributions through the remainder of 2018. The filing gives no earnings or revenue guidance. Planned 2018 maintenance capital expenditures were approximately $29.6 million; expansion capital expenditures were budgeted at $190–$200 million.
- Capital commitments for equipment and parts were $126.4 million at September 30, with approximately $33 million expected for units delivered during the remainder of 2018. About 158,000 horsepower was on order, including approximately 38,000 expected for delivery in the remainder of 2018.
- Q3 included a $2.3 million impairment for 18 compressor units, approximately 5,800 horsepower, identified for retirement, sale or component reuse. Nine-month asset-disposal losses were $12.3 million. Acquisition-related expenses, severance and accelerated unit-based compensation also affected reported results.
- A change in estimated useful lives increased reported operating income and net income by $11.3 million in Q3 and $22.5 million year to date; investors should consider this non-cash estimate change when assessing earnings.
- A $44.9 million sales-tax contingency was accrued and matched by a related-party receivable from ETP under an indemnity for pre-acquisition periods. Management stated ordinary-course litigation was not expected to materially affect results.
- Key risks include energy-industry activity and customer demand, customer credit, acquisition integration, interest-rate exposure and covenant restrictions. A 1% change in the rate on variable-rate debt would change annual interest expense by approximately $10 million. The Partnership does not take title to commodities but demand for its services is indirectly exposed to oil and gas production.
Important facts for investors to verify
- How much of revenue and utilization growth is attributable to the acquisition versus continuing organic demand and pricing.
- Whether the $309.7 million of covenant-conditioned revolver capacity and covenant headroom remain adequate as capital spending and distributions continue.
- Whether DCF and cash generation can sustain common distributions given Q3 coverage of 1.01x, preferred distributions and planned capital expenditures.
- Whether the $44.9 million sales-tax receivable from ETP is collectible and fully offsets the accrued contingency.
- Potential dilution and future cash obligations from preferred-unit conversion/redemption rights, warrants and the expanded incentive-plan capacity.
- How acquisition accounting, the useful-life estimate change, impairment and transaction-related items affect sustainable earnings and cash flow.