USA Compression Partners, LP annual report, FY2023

USA Compression Partners, LP — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter earnings report. The Partnership provides natural-gas compression and treating services in U.S. energy markets; its units trade on the NYSE as USAC. Its general partner is wholly owned by Energy Transfer.

Key financial results

Metric	FY2023	FY2022
Total revenue	$846.2 million	$704.6 million
Operating income	$232.0 million	$169.3 million
Net income	$68.3 million	$30.3 million
Net income (loss) attributable to common unitholders	$20.5 million	$(18.4) million
Net cash provided by operating activities	$271.9 million	$260.6 million
Adjusted EBITDA (non-GAAP)	$511.9 million	$426.0 million
Distributable cash flow, or DCF (non-GAAP)	$281.1 million	$221.5 million
DCF coverage ratio (non-GAAP)	1.35x	1.08x

Revenue rose 20.1%; operating income increased 37.0% and net income 125.2%. GAAP gross margin was $315.4 million, approximately 37.3% of revenue. Adjusted gross margin was $561.5 million, or 66.4% of revenue, versus 66.7% in 2022; Adjusted EBITDA margin was 60.5% in both years. These adjusted measures are non-GAAP and should be considered alongside GAAP results.

Operating cash flow increased by $11.3 million. Investing activities used $232.7 million, primarily reflecting capital expenditures; total capital expenditures were $238.5 million. Financing activities used $39.3 million, with higher net borrowings under the revolving credit facility partly offsetting distributions and other payments.

Debt, liquidity and distributions

• At year-end, long-term debt, net of financing costs, was $2.336 billion: $871.8 million drawn on the revolving credit facility and $1.475 billion principal amount of senior notes ($725 million due 2026 and $750 million due 2027). Both note issues carry a 6.875% coupon.
• Revolver capacity was $1.6 billion, subject to borrowing-base availability. Of $728.2 million in unused availability, $529.1 million was available to draw under covenant-related restrictions. Cash and cash equivalents were only $11,000 at year-end. The Partnership reported covenant compliance and a 4.10x leverage ratio against a 5.25x maximum.
• Average revolver borrowing rates were 7.68% for 2023 and 7.98% at year-end. Management estimated a 1 percentage-point rate increase on year-end variable-rate debt would add approximately $8.7 million of annual interest expense. A $700 million interest-rate swap had a 3.9725% fixed rate and a December 31, 2025 termination date.
• Common-unit distributions remained $0.525 per quarter ($2.10 annually); 2023 distributions declared per unit were unchanged from 2022. The Partnership also paid $48.75 million in preferred-unit distributions. Preferred distributions are cumulative and senior to common distributions.

Operating changes and outlook

• Fleet horsepower at year-end increased 1.6% to 3.776 million. Average revenue-generating horsepower increased 8.5%, and average revenue per revenue-generating horsepower per month rose 8.7%. Average utilization improved to 93.4% from 88.6%; year-end utilization was 94.3% versus 91.8%.
• Management attributed stronger revenue chiefly to increased deployment and redeployment, improved utilization, higher rates on new and redeployed units, contract price increases, and $24.2 million more natural-gas-treating revenue. Operating costs also rose, including from higher parts, fluids, labor and fleet activity.
• Management expects cash from operations and, if needed, revolver borrowings to fund 2024 operating needs, capital expenditures and distributions. It budgeted 2024 expansion capital expenditures of $115–$125 million, down from $275.4 million in 2023, and maintenance capital expenditures of approximately $32 million. Binding equipment-purchase commitments at year-end were $53.4 million, expected to be settled within 12 months.
• The filing cites EIA expectations for continued U.S. oil and gas production and LNG-export growth, while noting uncertainty from commodity prices, geopolitics, the global economy and weather. Management cautions that actual demand and results remain subject to these factors; it does not provide specific earnings or distribution guidance.

Material risks, contingencies and unusual items

• Customer concentration and contract duration: the ten largest customers generated approximately 39% of revenue. One customer represented 11% of 2023 revenue and 17% of year-end trade receivables. Approximately 22% of compression-service revenue came from month-to-month arrangements, generally terminable on 30 days’ notice.
• Leverage, interest costs and refinancing: the credit facility may mature December 31, 2025 if any 2026 senior notes remain outstanding then; otherwise its stated maturity is December 2026. The 2026 notes mature in April 2026 and the 2027 notes in September 2027. Debt covenants and required preferred distributions can constrain liquidity and common distributions.
• Preferred-unit dilution and priority: 40,000 preferred units converted in January 2024 into 1,998,850 common units. As of February 8, 2024, 460,000 preferred units remained outstanding; the filing states they are convertible and rank ahead of common units for distributions and liquidation.
• Unusual expenses and gains included $12.3 million of compression-equipment impairments, compared with $1.5 million in 2022, and a $7.4 million gain on the interest-rate swap. The impairment followed retirement of 42 units with approximately 37,700 horsepower, reflecting limited marketability, maintenance costs or uneconomic retrofits.
• Contingencies include an Oklahoma sales-tax assessment with an estimated possible loss range of $0–$25.8 million and IRS examinations of 2019 and 2020 returns with a potential loss range of $0–$26.4 million, including interest. These are stated as possible ranges, not amounts determined to be payable. Management says ordinary-course litigation is not expected to materially affect the Partnership.
• Other material risks include reduced energy production or demand, competition and customer self-supply, supplier concentration and lead times, environmental and methane regulation, severe weather, customer credit risk, and limits on common-unitholder voting rights. Energy Transfer controls the general partner and held approximately 45% of common units as of February 8, 2024.

The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; no critical audit matters were identified. Management and the auditor concluded internal controls were effective as of December 31, 2023.

Investor verification priorities

1. Review liquidity and covenant headroom, including the $529.1 million drawable amount, rising revolver borrowings after year-end, leverage, interest-rate exposure and the 2025–2027 maturities.
2. Assess whether the 1.35x DCF coverage and operating cash flow can support common distributions after preferred distributions, maintenance needs and the planned growth program.
3. Verify customer concentration, the credit quality of the customer representing 17% of receivables, and renewal or termination exposure in month-to-month contracts.
4. Track preferred-unit conversions, remaining preferred distributions and potential common-unit dilution.
5. Follow outcomes of the Oklahoma tax dispute and IRS examinations, and compare actual 2024 capital spending and operating performance with management’s stated plans.