USA Compression Partners, LP — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; financial statements are unaudited. The partnership provides natural-gas compression and treating services. Comparisons below are against the corresponding 2022 periods unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $217.1 million | $179.6 million | $621.1 million | $514.5 million |
| Operating income | $61.0 million | $45.1 million | $163.4 million | $122.6 million |
| Net income | $20.9 million | $9.6 million | $55.4 million | $22.0 million |
| Net income attributable to common unitholders | $8.7 million | Loss of $2.6 million | $18.9 million | Loss of $14.6 million |
| Basic earnings (loss) per common unit | $0.09 | $(0.03) | $0.19 | $(0.15) |
| Operating cash flow | Not separately reported in the supplied quarterly cash-flow statement | $180.3 million | $178.5 million | |
| Adjusted EBITDA | $130.2 million | $109.2 million | $373.3 million | $313.0 million |
| Distributable cash flow (DCF) | $71.6 million | $55.2 million | $201.2 million | $160.9 million |
| DCF coverage ratio | 1.39x | 1.07x | 1.30x | 1.04x |
Adjusted gross margin was $142.2 million in Q3 and $409.6 million for the nine months. Its revenue margin was 65.5% and 65.9%, respectively, down 1.4 percentage points from each prior-year comparable period. Adjusted EBITDA margin was 60.0% in Q3 and 60.1% year to date, also lower year over year. These are non-GAAP measures.
At September 30, cash was $6,000, current assets were $223.7 million, and current liabilities were $177.7 million. Long-term debt, net, was $2.276 billion, compared with $2.107 billion at December 31, 2022. Debt included $813.1 million drawn on the revolving facility and $1.475 billion aggregate principal of senior notes. The partnership reported $786.9 million of facility availability and $434.3 million of available borrowing capacity subject to covenant compliance. It was in compliance with debt covenants at quarter-end.
Operating changes and drivers
- Revenue increased 20.9% in Q3 and 20.7% year to date. Management attributed growth primarily to higher average revenue-generating horsepower, improved rates on new and redeployed units, price adjustments on existing contracts, and higher treating-services revenue.
- Average revenue-generating horsepower increased 8.6% in Q3 and 8.9% year to date. Quarter-end horsepower utilization was 93.9%, versus 90.9% a year earlier; revenue-generating horsepower increased 8.5%.
- Operating income rose 35.1% in Q3 and 33.3% year to date. However, operating costs excluding depreciation increased 26.0% in Q3 and 25.6% year to date, while revenue grew about 21%. Management cited higher parts, fluids, labor and maintenance costs, including inflation.
- Net interest expense rose 23.1% in Q3 and 25.0% year to date, reflecting increased borrowings and higher rates. The revolving facility’s weighted-average rate was 7.99% at quarter-end, versus 4.94% in Q3 2022 and 3.79% for the first nine months of 2022.
- Year-to-date impairment of compression equipment was $12.3 million, versus $0.9 million in 2022; 42 units representing approximately 37,700 horsepower were retired, compared with 12 units and 2,500 horsepower. Q3 also included a $3.9 million gain on disposition of assets, primarily from selling treating assets.
Cash, investment, distributions and outlook
- Operating cash flow of $180.3 million was nearly flat year over year. Capital expenditures, net, were $159.0 million, versus $88.1 million, and investing cash outflow was $153.4 million.
- Management planned 2023 maintenance capital expenditures of approximately $26 million and expansion capital expenditures of $270–$280 million, excluding acquisitions. It said operating cash flow and, if needed, revolver borrowings should fund debt service, working capital, planned capital expenditures and distributions over the next 12 months.
- Binding commitments for compression equipment and parts totaled $101.3 million, expected to be settled within 12 months; $63.0 million was expected by year-end 2023. The partnership had 100,000 large horsepower on order, with 62,500 expected by year-end.
- The common-unit distribution remained $0.525 per unit for Q3; the partnership declared the same amount for payment November 3, 2023. Preferred distributions were $24.375 per unit quarterly. Management cautions that distributions depend on available cash and facility terms.
- In April 2023, the partnership entered a $700 million interest-rate swap, paying a fixed 3.785% and receiving one-month SOFR. In October, it extended the swap through December 31, 2025 and increased the fixed rate to 3.9725%.
Risks, contingencies and unusual items
- Interest-rate exposure remains material: a 1 percentage point change in the rate on quarter-end variable-rate debt would change annual interest expense by approximately $8.1 million, before considering the swap. The swap is not designated for hedge accounting, so fair-value changes affect earnings.
- Two tax matters have uncertain outcomes: an Oklahoma sales-tax assessment with estimated possible losses of $0–$28.2 million, and an IRS examination of 2019 and 2020 returns with estimated possible imputed underpayment of $0–$25 million, including interest. Management described ordinary-course litigation as not expected to materially adversely affect the partnership.
- One customer represented approximately 11% of Q3 and nine-month revenue. Management identifies customer credit deterioration, commodity-driven changes in production and demand, inflation, labor competition, interest rates, contract renegotiations, operational hazards, regulation and cybersecurity among risks.
- On October 27, 2023, holders exercised warrants to purchase 10 million units; the partnership expected to net settle them for approximately 2.36 million common units. Preferred units are also convertible at the holder’s option, subject to their terms.
Important facts for investors to verify
- Revolver borrowing, covenant headroom, refinancing timing and the effect of rates on interest expense and distribution capacity.
- Whether operating cash flow and planned financing can support the 2023 expansion program, equipment commitments and distributions.
- Progress and final exposure in the Oklahoma and IRS tax matters.
- Customer concentration, utilization, pricing and cost trends, including whether inflation-related margin pressure eases.
- Potential common-unit dilution from warrant settlement, preferred-unit conversion and the distribution reinvestment plan.
- Non-GAAP Adjusted EBITDA, DCF and coverage calculations alongside GAAP earnings and cash flows.