USA Compression Partners, LP — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. The partnership provides natural-gas compression services to oil and gas customers. Its IPO closed January 18, 2013, so 2013 results include both pre- and post-IPO periods; per-unit comparisons with 2012 are not provided.
Key financial results
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $38.4m | $31.0m | $104.3m | $87.0m |
| Operating income | $4.8m | $5.7m | $15.8m | $15.3m |
| Net income | $1.7m | $1.3m | $6.6m | $3.6m |
| Adjusted EBITDA (non-GAAP) | $20.2m | $16.9m | $55.6m | $46.7m |
| Net cash from operations | Not stated in the filing text for the quarter | Not stated in the filing text for the quarter | $41.7m | $30.4m |
- Q3 gross operating margin was $26.4m, or 68.9% of revenue, versus $21.2m and 68.5% a year earlier. Adjusted EBITDA margin was 52.5%, down from 54.6%.
- For the first nine months, gross operating margin was $71.8m, or 68.9% of revenue, versus $59.1m and 67.9%. Adjusted EBITDA margin was 53.3%, versus 53.6%.
- Nine-month investing cash outflow was $105.1m, including $108.9m of capital expenditures. Financing cash inflow was $63.4m. Cash remained $7,000.
- At September 30, debt was $390.3m, down from $502.3m at December 31, 2012. The debt was variable-rate, with a 2.43% weighted-average rate; reported revolver availability was approximately $209.7m, subject to covenants. The facility matures October 2015.
Changes and significant items
- Q3 revenue grew 23.7%, largely from a 16.6% increase in average revenue-generating horsepower and a 6.0% increase in average revenue per horsepower. Revenue-generating horsepower at period end rose 31.6% year over year. Period-end utilization was 94.5%, versus 93.4%.
- Despite higher revenue, Q3 operating income fell 16.4% as SG&A rose 84.4% to $8.3m and depreciation and amortization increased 22.4% to $13.4m. SG&A included $1.5m of S&R transaction costs; the partnership also cited public-company costs, higher staffing and unit compensation.
- Interest expense declined 31.0% in Q3 to $3.0m, reflecting lower average borrowings and lower rates. Nine-month net income rose 86.6%, while operating income increased only 3.0%; lower interest expense contributed to the net-income increase.
- The August 30 S&R acquisition added 982 gas-lift compression units with approximately 138,000 horsepower. Consideration was 7.43m common units valued at $181.9m; the effective purchase price after a working-capital adjustment was $178.3m. It added $50.7m of goodwill. From closing through September 30, the acquired assets contributed $3.5m revenue and $1.4m net income, before certain SG&A and interest costs.
- Nine-month maintenance capital expenditures were $10.7m; expansion capital expenditures were $276.5m, including the unit-funded S&R acquisition. The filing reports $104.7m of equipment and capital-purchase commitments due within one year.
Outlook, risks and contingencies
- Management expected demand to benefit from U.S. natural-gas and crude-oil activity and intended to grow both midstream and gas-lift fleets. It noted continued pricing pressure on some midstream units through the rest of 2013, while gas-lift demand and pricing remained attractive. These are expectations, not quantified earnings guidance.
- Management’s outlook depends on commodity-market activity, customer and third-party actions, competition, capital availability, acquisition integration, operating hazards, regulation and litigation. The partnership does not take title to natural gas, but weaker oil or gas prices could indirectly reduce demand for its services.
- All $390.3m of debt was variable-rate. The filing estimates that a 1 percentage-point rate increase would add approximately $3.9m to annual interest expense. The partnership reported compliance with financial covenants; covenant limits include minimum EBITDA/interest coverage of 2.5x and maximum funded debt/EBITDA of 5.5x through March 2014, then 5.0x from the quarter ending June 2014, subject to specified acquisition adjustments.
- Distributions are subject to facility conditions, including covenant compliance and at least $20m of availability after payment. The partnership paid $0.44 per unit for Q2 and announced $0.46 per unit for Q3, payable November 14, 2013. Litigation was described as ordinary-course, with no material adverse effect expected by management.
Important facts for investors to verify
- How S&R integration, acquired-asset performance and the $50.7m goodwill valuation develop; reported post-closing contribution excludes certain costs.
- Whether operating-income pressure and elevated SG&A persist as fleet capacity and public-company costs grow.
- Debt covenant headroom, revolver availability, 2015 maturity refinancing plans and exposure to variable rates.
- Funding plans for substantial expansion spending and equipment commitments, and distribution capacity under credit-agreement restrictions.
- Customer concentration and the sustainability of utilization, pricing and demand assumptions; management’s non-GAAP EBITDA and distributable-cash-flow measures should be assessed alongside GAAP cash flows and earnings.