USA Compression Partners, LP — Q2 2013 Form 10-Q
Business and period: The Partnership provides natural-gas compression services to oil and gas customers. This unaudited filing covers the quarter and six months ended June 30, 2013, with comparisons to 2012. The Partnership completed its IPO on January 18, 2013; six-month 2013 earnings and per-unit amounts therefore include pre- and post-IPO periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $33.3 million | $28.9 million | $65.9 million | $56.0 million |
| Operating income | $5.3 million | $4.7 million | $11.0 million | $9.6 million |
| Net income | $2.4 million | $1.0 million | $4.9 million | $2.2 million |
| Adjusted EBITDA (non-GAAP) | $18.1 million | $15.5 million | $35.6 million | $29.7 million |
| Distributable cash flow (non-GAAP) | $11.9 million | $6.8 million | $23.5 million | $15.2 million |
| Gross operating margin | 69.6% | 68.4% | 68.8% | 67.6% |
Contract operations drove revenue growth. Q2 average revenue-generating horsepower rose 12.4% year over year to 829,684, while average monthly revenue per revenue-generating horsepower increased 1.3% to $13.55. Q2 net income per common and subordinated unit was $0.08; six-month post-IPO unit earnings were $0.15. Distributions declared and paid during the six months were $0.348 per unit, reflecting 72 days at a $0.435 quarterly rate.
Cash flow, capital spending and liquidity
- Six-month operating cash flow was $25.5 million, versus $18.0 million. Investing cash outflow was $52.8 million, including $52.9 million of capital expenditures; financing cash inflow was $27.3 million.
- Cash remained $6,500 at June 30, 2013. Maintenance and expansion capital expenditures were $6.8 million and $46.1 million, respectively.
- Long-term debt was $353.0 million, down from $502.3 million at year-end 2012. IPO proceeds included $180.6 million used to repay revolving-credit borrowings. The facility had $247.0 million of borrowing availability, subject to covenants, and matures October 2015.
- The Partnership reported compliance with credit covenants. Requirements include minimum EBITDA-to-interest coverage of 2.5:1 and maximum funded debt-to-EBITDA of 5.5:1 through March 2014, then 5.0:1, with specified acquisition-related provisions. Distributions require covenant compliance and at least $20 million of facility availability.
Changes and management commentary
- Q2 revenue increased 15.4%; six-month revenue increased 17.7%. Growth reflected higher average revenue-generating horsepower and modestly higher revenue per horsepower. Parts and service revenue declined 67.8% in Q2 and 19.7% for six months.
- Costs of operations grew more slowly than revenue, improving gross operating margin. SG&A rose 17.4% in Q2 and 24.1% for six months, reflecting public-company costs, staffing and support expenses, including unit-based compensation.
- Interest expense declined 22.7% in Q2 and 18.1% for six months, primarily with lower average borrowings and interest rates. Depreciation and amortization increased with the larger asset base.
- Management reported pricing pressure across most horsepower ranges and expected it to continue through 2013. It anticipated that industry activity and demand for compression could continue to support growth, but noted that this outcome was uncertain. Revenue-generating horsepower at period end was up 10.1% year over year; utilization measures were lower than in 2012.
Outlook, risks and unusual items
- No formal financial guidance was provided. Management expects continued significant expansion investment and rising maintenance needs as the fleet grows; future acquisitions may require external debt or equity financing.
- After quarter-end, the Partnership agreed to acquire S&R Compression assets and assume related liabilities, in exchange for units representing 20% of fully diluted common and subordinated units after issuance, excluding general partner interests and IDRs. Closing was expected in Q3 2013 and remained subject to customary conditions, including antitrust requirements. The agreement also provides for distribution reinvestment and a 180-day lock-up for recipients, and a small-horsepower compression-unit right of first refusal for S&R through at least June 30, 2017.
- Variable-rate debt was approximately $353 million at a weighted-average rate of 2.45%; management estimated a 1 percentage-point rate increase would raise annual interest expense by about $3.5 million. The Partnership has indirect commodity-price exposure through customer activity, but does not take title to natural gas.
- Two customers represented 16.0% and 7.4% of Q2 revenue. Management said ordinary-course litigation was not expected to have a material adverse effect. Future results also depend on customer activity, competition, capital availability, operating hazards, regulation and other factors.
- The Partnership announced a Q2 distribution of $0.44 per unit, payable August 14, 2013. Its largest holder, USA Compression Holdings, intended to reinvest its distribution through the DRIP.
Important facts for investors to verify
- Completion terms, acquired assets and liabilities, financing and unit dilution for the S&R transaction.
- Whether utilization, pricing and revenue per horsepower sustain growth amid management’s stated pricing pressure.
- Capital expenditure needs, operating cash conversion and the capacity to fund distributions while maintaining at least $20 million of revolver availability.
- Debt covenant headroom, refinancing plans ahead of the October 2015 maturity, and sensitivity to variable interest rates.
- Customer concentration and the assumptions underlying non-GAAP Adjusted EBITDA and distributable cash flow.