USA Compression Partners, LP — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statement figures are generally in millions unless otherwise stated. The filing was signed August 6, 2019.
Business context and comparability
The Partnership provides natural gas compression services under fixed-term contracts across U.S. oil and gas producing regions. Its results are driven by customer demand for compression, fleet utilization, contract rates and operating costs.
Comparisons with the first half of 2018 require caution: the CDM Acquisition closed April 2, 2018, and pre-transaction 2018 results reflect the USA Compression Predecessor rather than the full business later included in the Partnership. The filing states that this affects comparability, particularly for revenue, expenses and interest.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $173.7 | $166.9 | $344.4 | $243.4 |
| Operating income | $42.9 | $28.6 | $78.4 | $4.8 |
| Net income (loss) | $9.9 | $3.2 | $16.5 | $(20.2) |
| Adjusted EBITDA (non-GAAP) | $104.7 | $95.4 | $206.1 | $127.1 |
| Distributable cash flow (non-GAAP) | $54.1 | $51.4 | $108.9 | $73.9 |
- Q2 revenue increased 4.1%; contract operations revenue rose 4.9%, while parts and service revenue fell 37.8%. Six-month revenue increased 41.5%, substantially reflecting the acquisition-related comparison noted above.
- Q2 gross operating margin, a non-GAAP measure, was $117.4 million, or 67.6% of revenue, versus $109.4 million, or 65.5%. Adjusted EBITDA margin was 60.3%, compared with 57.2%.
- Net income attributable to common and Class B unitholders was a loss of $2.2 million in Q2 after $12.2 million of preferred distributions. Common-unit earnings were $1.0 million, or $0.01 per unit; Class B results were a loss of $3.3 million, or $0.51 per unit.
- Q2 DCF coverage was 1.14x; six-month coverage was 1.15x. The lower six-month 2019 ratio versus 1.56x in 2018 partly reflects that 2018 distributions covered only one quarter.
- Six-month net cash from operating activities was $147.6 million, up from $94.4 million. Net investing cash use was $75.9 million, including $87.8 million of net capital expenditures. Financing used $71.7 million; ending cash was only $2,000.
- At June 30, total assets were $3.76 billion and partners’ capital was $1.28 billion. Net long-term debt was $1.81 billion; principal debt consisted of $363.4 million drawn on the revolver, $725 million of 2026 notes and $750 million of 2027 notes. The notes carry 6.875% interest.
- Revolver availability was $438.9 million, subject to financial covenants; borrowing-base availability was $1.2 billion. The Partnership reported covenant compliance. Revolver borrowings were $330 million as of August 2, 2019.
Changes, outlook and risks
- Management attributed stronger Q2 contract revenue to higher demand, a 4.3% increase in average revenue-generating horsepower and a 5.3% increase in average monthly revenue per revenue-generating horsepower. Average utilization was 94.6%, up from 91.5%.
- Q2 operating income improved partly because SG&A declined to $16.2 million from $27.2 million, including lower transaction, severance and unit-based compensation costs. Net interest expense increased to $32.7 million from $25.7 million, reflecting the new 2027 notes, debt levels and higher revolver rates.
- The Partnership issued $750 million of 2027 notes in March and used the net proceeds to reduce revolver borrowings. It declared a common distribution of $0.525 per unit for Q2, payable August 9, 2019. Preferred units carry cumulative quarterly cash distributions of $24.375 per preferred unit.
- Management expected operating cash flow and, if needed, revolver borrowings to fund debt service, working capital, estimated capital spending and distributions through the rest of 2019. Budgeted 2019 spending was approximately $25 million for maintenance and $140–150 million for expansion. The filing provides no earnings or revenue guidance.
- As of June 30, equipment purchase commitments were $82 million, expected to be settled in 2019 and 2020; approximately 95,000 horsepower was on order. Separately, operating leases not yet commenced had an estimated present value of $23.7 million.
- A $44.9 million sales-tax contingency related to predecessor periods was accrued, with an equal receivable from ETO under an indemnity. The tax dispute concerns the applicability of manufacturing exemptions. Management did not expect ordinary-course litigation to materially affect the Partnership.
- Key risks include changing oil and gas activity and commodity prices, customer credit deterioration, competition, capital availability, regulation and litigation. The Partnership has no direct commodity-price exposure but demand is indirectly affected; a 1% decline in average active revenue-generating horsepower was estimated to reduce six-month revenue by $6.5 million and gross operating margin by $4.4 million. A 1% change in the variable borrowing rate would change annual interest expense by about $3.6 million.
- On July 30, 2019, 6.4 million Class B units converted one-for-one into common units. The filing reports 96.6 million common units outstanding as of August 2.
Important facts for investors to verify
- Assess acquisition-driven distortions in year-over-year comparisons, especially the first-half 2018 baseline.
- Review debt maturities, interest expense, revolver availability and ongoing covenant headroom; cash on hand was minimal.
- Evaluate whether DCF and its coverage of common distributions remain adequate after preferred distributions, maintenance spending and financing costs.
- Track resolution and indemnification of the $44.9 million sales-tax matter, including the collectability of the ETO receivable.
- Confirm delivery, deployment and returns on committed and budgeted compression-equipment spending, and monitor utilization and contract pricing.