USA Compression Partners, LP — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The partnership provides natural gas compression and treating services under customer contracts.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $168.7 million | $173.7 million | $347.7 million | $344.4 million |
| Net income (loss) | $2.7 million | $9.9 million | $(599.8) million | $16.5 million |
| Net income (loss) attributable to common unitholders | $(9.5) million | $1.0 million | $(624.2) million | $(1.0) million |
| Adjusted EBITDA | $105.5 million | $104.7 million | $211.7 million | $206.1 million |
| Distributable cash flow (DCF) | $58.7 million | $54.1 million | $113.4 million | $108.9 million |
- Q2 GAAP gross margin was $58.3 million versus $60.6 million. Adjusted gross margin was $118.7 million, or 70.4% of revenue, compared with $117.4 million, or 67.6%. Adjusted EBITDA margin was 62.5%, versus 60.3%.
- Operating cash flow was $147.4 million for the first half, essentially unchanged from $147.6 million a year earlier. Investing cash outflow was $63.8 million, including $67.4 million of net capital expenditures. Financing cash outflow was $83.6 million.
- At June 30, cash was $2,000. Long-term debt, net of financing costs, was $1.899 billion; principal comprised $447.8 million under the revolver and $1.475 billion of senior notes. Revolver availability was reported at $151.1 million, subject to covenants. Total debt increased from $1.852 billion at December 31, 2019.
- Common-unit distributions remained $0.525 per unit quarterly; the partnership declared the next payment after quarter-end. Q2 DCF coverage was 1.15x; first-half coverage was 1.12x. Preferred-unit distributions are cumulative and quarterly.
Changes versus the prior comparable period
- Q2 revenue declined 2.9%; first-half revenue increased 0.9%. First-half contract operations revenue rose 2.7%, while parts and service and related-party revenue declined.
- Average horsepower utilization fell to 88.0% in Q2 from 94.6%; period-end revenue-generating horsepower declined 4.1%. Management attributed lower utilization principally to returned units and weaker oil and gas activity. Average revenue per revenue-generating horsepower rose 1.1% in Q2.
- Q2 net income decreased 73.0%, while income attributable to common unitholders was a loss after preferred distributions. First-half net loss primarily reflects a non-cash $619.4 million goodwill impairment recorded in Q1; goodwill was reduced to zero.
- First-half adjusted EBITDA rose 2.7% and DCF rose 4.1%, despite the GAAP loss. Higher depreciation and amortization and increased credit-loss provisions were notable pressures.
Outlook, risks and unusual items
- Management cited COVID-19, crude-oil oversupply and commodity-price volatility as risks to customer finances, production, demand for compression and receivable collections. The allowance for credit losses rose to $5.4 million from $2.5 million at year-end; the first-half provision was $3.7 million.
- Management expected lower associated-gas production and related demand in some regions to continue through the remainder of 2020, while expressing a more positive longer-term view of natural-gas demand and possible strength in gas-focused regions. No specific revenue or earnings guidance was provided.
- The partnership said it cut its already reduced 2020 growth-capital budget by 25% in Q1 and reduced operating expenses by 10%, with further cuts possible. It budgeted approximately $30 million of maintenance capital and $80–$90 million of expansion capital for 2020; $18.3 million of equipment and parts purchase commitments were due for delivery in the remainder of the year.
- On August 3, 2020, after quarter-end, the partnership amended its credit agreement. The amendment temporarily raised maximum leverage limits through 2021 and increased specified availability thresholds for distributions and debt prepayments from $100 million to $250 million through December 31, 2021. It also increased the Eurodollar borrowing margin and added a partnership guarantee. The partnership reported covenant compliance at June 30.
- A $44.9 million accrued sales-tax contingency related to open Texas audits is matched by a $44.9 million receivable from Energy Transfer Operating, L.P. Management said ordinary-course litigation was not expected to have a material adverse effect. The partnership reported no off-balance-sheet financing arrangements.
Key facts for investors to verify
- How utilization, returned equipment and customer credit quality evolve, including subsequent changes in the allowance for credit losses.
- Whether cash generation and revolver availability support distributions, capital spending and debt-service needs under the amended covenant terms.
- The assumptions underlying the $619.4 million goodwill impairment and any further impairment or equipment-retirement charges.
- The status, timing and collectability of the sales-tax indemnification receivable from ETO and the resolution of the Texas audits.
- Actual 2020 capital spending versus the stated budgets, and whether market conditions prompt further spending or distribution changes.