USA Compression Partners, LP — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
USA Compression provides natural gas compression and treating services across U.S. shale and conventional basins. It earns most revenue from fixed-fee contracts and does not take title to the natural gas or crude oil it handles, so it has no direct commodity-price exposure, but customer activity and demand for services are indirectly affected by energy markets. Its fleet totaled 3.69 million horsepower at year-end.
Key financial metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $632.6 million | $667.7 million |
| Operating income (loss) | $140.9 million | $(464.9) million |
| Net income (loss) | $10.3 million | $(594.7) million |
| Net income (loss) attributable to common and Class B unitholders, after preferred distributions | $(38.5) million | $(643.5) million |
| Gross margin | $199.5 million | $222.8 million |
| Adjusted gross margin (non-GAAP) | $438.3 million; 69.3% of revenue | $461.7 million; 69.2% of revenue |
| Adjusted EBITDA (non-GAAP) | $398.4 million; 63.0% of revenue | $413.9 million; 62.0% of revenue |
| Distributable cash flow (DCF, non-GAAP) | $209.1 million | $220.8 million |
| Net cash provided by operating activities | $265.4 million | $293.2 million |
| Net cash used in investing activities | $(39.2) million | $(105.1) million |
| Net cash used in financing activities | $(226.2) million | $(188.1) million |
| DCF coverage ratio | 1.03x | 1.09x |
Adjusted gross margin, Adjusted EBITDA, DCF and coverage ratios are non-GAAP measures; the filing cautions that they should be considered alongside GAAP results and may not be comparable with similarly named measures from other companies.
Debt, liquidity and distributions
- Year-end long-term debt, net of deferred financing costs, was $1.97 billion. Principal included $725 million of 6.875% senior notes due 2026, $750 million of 6.875% senior notes due 2027, and $516.3 million drawn under the revolving credit facility.
- The December 2021 amended and restated revolving facility has a $1.6 billion commitment, subject to borrowing-base availability, and matures in December 2026; it can mature earlier, on December 31, 2025, if any 2026 notes remain outstanding then. Year-end borrowing-base availability was approximately $1.1 billion, while stated available borrowing capacity, subject to financial covenants, was $261.9 million. Cash and cash equivalents were zero at year-end.
- The year-end leverage ratio under the credit agreement was 5.09x; the applicable maximum was 5.75x through the second quarter of 2022, with scheduled step-downs thereafter. The Partnership reported compliance with its covenants at year-end and expected continued compliance through 2022.
- Common distributions remained $0.525 per unit quarterly, or $2.10 annually. DCF coverage was 1.03x. Preferred distributions are cumulative and senior to common distributions; 500,000 preferred units carry quarterly distributions of $24.375 per unit, totaling $48.8 million annually.
- 2021 maintenance capital expenditures were $19.5 million and expansion capital expenditures were $40.2 million. Management budgeted approximately $23 million for 2022 maintenance capital expenditures and $110–$120 million for 2022 expansion capital expenditures, excluding acquisitions. Year-end equipment purchase commitments were $19.3 million; an additional 50,000 horsepower ordered after year-end was expected to cost $43.7 million.
Material changes versus 2020
- Revenue declined 5.2%, primarily because customer equipment returns reduced average revenue-generating horsepower 6.0%; average revenue per revenue-generating horsepower per month fell 0.7%, to $16.60.
- Average horsepower utilization decreased to 82.7% from 86.8%, mainly because returned equipment increased idle horsepower. Year-end utilization was nearly unchanged at 82.7% versus 82.8%.
- Adjusted EBITDA fell 3.7% and DCF fell 5.3%. Operating cash flow decreased $27.8 million.
- Reported net income improved substantially from the 2020 loss, largely because 2020 included a $619.4 million goodwill impairment. The Partnership recorded no goodwill impairment in 2021; it recorded $5.1 million of compression-equipment impairment, compared with $8.1 million in 2020.
- Operating costs and SG&A declined, partly reflecting lower activity, headcount and expected-credit-loss provisions. Interest expense increased $1.2 million, while year-end net debt increased from $1.93 billion to $1.97 billion.
Outlook, risks and unusual items
- Management described 2021 as an industry recovery in commodity demand and prices, but said customer capital discipline and subdued drilling limited compression demand more than anticipated. It sees long-term U.S. natural gas fundamentals as positive and expects improving production activity could support future service demand, but gave no specific revenue or earnings guidance and emphasized uncertainty about timing and scale.
- Key operating risks include customer equipment returns and optimization, competition, customer concentration, contract renewals and month-to-month arrangements. Approximately 33% of 2021 compression-service revenue was from month-to-month services, generally terminable on 30 days’ notice. The ten largest customers generated approximately 39% of revenue; one customer represented 14% of year-end trade receivables.
- Debt and distribution risks include variable-rate revolver exposure, covenant limits, required preferred distributions and the possibility that common distributions may be reduced. A one-percentage-point increase in the year-end effective rate on variable-rate borrowings would increase annual interest expense by approximately $5.2 million.
- Sales-tax matters include a disputed Oklahoma assessment with an estimated possible loss range of $0–$19.5 million, including penalties and interest. Separately, the Partnership recorded a $44.9 million Texas sales-tax contingency liability and an equal related-party receivable from Energy Transfer. Federal tax returns for 2019 and 2020 and Texas Margin Tax returns for 2018–2021 were under examination.
- Other risks include COVID-19 and energy-market volatility, inflation and labor availability, supplier constraints, environmental and emissions regulation, climate-related policy and litigation, cybersecurity, and potential impairment of long-lived assets. Management said ordinary-course litigation was not expected to have a material adverse effect.
- The Partnership reported an unqualified audit opinion and effective internal control over financial reporting as of year-end. The auditor reported no critical audit matters.
Important facts for investors to verify
- Whether utilization and revenue-generating horsepower recover, and whether returned units can be redeployed without rate concessions.
- Current covenant headroom and borrowing availability, especially as leverage limits step down and capital spending rises.
- Whether DCF continues to cover common distributions after preferred distributions and maintenance capital needs.
- The status and collectability of the $44.9 million Energy Transfer receivable, the Oklahoma sales-tax dispute, and the tax examinations.
- The potential dilution and cash burden from preferred-unit conversion or redemption, warrants, and future equity issuance.
- How customer concentration, month-to-month contracts, inflation, labor costs and environmental requirements affect margins and cash flow.