Business context and reporting period
USA Compression Partners, LP filed this Form 10-K for the fiscal year ended December 31, 2017. It provides natural-gas and crude-oil compression services in U.S. production, gathering, processing and transportation markets. The filing reports annual results; fourth-quarter figures are included in unaudited quarterly data. The 2018 CDM transaction described below was pending when the filing was issued, and is not reflected in 2017 financial results.
Financial and operating performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $280.2 million | $265.9 million | +5.4% |
| Gross operating margin (non-GAAP) | $187.6 million; 67.0% of revenue | $177.8 million; 66.8% | +5.6% |
| Operating income | $37.1 million | $34.4 million | +7.8% |
| Net income | $11.4 million | $12.9 million | -11.6% |
| Adjusted EBITDA (non-GAAP) | $155.7 million; 55.6% of revenue | $146.6 million; 55.2% | +6.2% |
| Distributable cash flow (non-GAAP) | $118.3 million | $118.3 million | Approximately flat |
| Cash provided by operating activities | $124.6 million | $103.7 million | +20.2% |
| Capital expenditures | $129.5 million | $48.7 million | Higher expansion spending |
| Year-end long-term debt | $782.9 million | $685.4 million | +$97.5 million |
Net income margin was approximately 4.1% in 2017, versus 4.9% in 2016. Net interest expense rose 19.2% to $25.1 million, reflecting higher borrowing costs. The weighted-average revolver rate was 3.14%, compared with 2.55% in 2016. Cash at year-end was only $47,000; working capital was positive at $3.1 million. Debt leverage was 4.65x under the facility’s measure.
Annual distributions were $2.10 per common unit, unchanged from 2016. DCF coverage was 0.89x, below 1.0x; cash coverage was 1.02x after accounting for DRIP participation. The reported quarterly data show fourth-quarter 2017 revenue of $75.4 million, gross profit of $50.3 million and net income of $4.5 million, versus $74.9 million, $45.1 million and $3.3 million, respectively, in fourth-quarter 2016.
Material changes versus the prior year
- Contract operations revenue rose 7.0%, supported by a 9.3% increase in average revenue-generating horsepower. Average revenue per revenue-generating horsepower per month fell 2.2% to $15.07, partly because the fleet mix shifted toward larger units and small-unit pricing declined.
- Average horsepower utilization increased to 92.0% from 87.4%; year-end utilization rose to 94.8% from 87.1%. Revenue-generating horsepower at year-end grew 17.1%.
- Parts and service revenue fell 16.2% to $15.9 million, mainly due to lower installation-service revenue.
- DCF remained essentially flat despite higher gross margin, as maintenance capital expenditures and cash interest increased. DCF coverage declined from 1.00x to 0.89x, reflecting distributions on a larger unit base.
- Maintenance capital expenditures increased to $12.6 million from $7.7 million. Compression-equipment impairment was $5.0 million versus $5.8 million; no goodwill impairment was recorded in 2017 or 2016.
Outlook, transactions and key risks
Management expected demand to increase during 2018, citing customer activity and growth in natural-gas production and infrastructure. The company expected 2018 organic growth to be consistent with growth in the second half of 2017. It budgeted $130–$140 million of 2018 expansion capital expenditures, in addition to approximately $15 million of maintenance capital expenditures. At year-end, 153,020 horsepower was on order for delivery in 2018 and 2019; most planned 2018 large-unit purchases were committed to customers or under contract. These are expectations, not guarantees.
On January 15, 2018, the Partnership agreed to acquire CDM Resource Management and CDM Environmental & Technical Services from Energy Transfer Partners for approximately $1.7 billion, comprising $1.225 billion cash plus Partnership units, subject to adjustments and closing conditions. The deal was expected to close in the first half of 2018. Planned financing included a $500 million preferred-unit and warrant private placement, up to $725 million of bridge loans, other debt financing and potentially revolver borrowings. The Partnership estimated post-acquisition debt of approximately $1.6 billion. The acquisition had no financing condition, creating execution and funding risk.
Related transactions included Energy Transfer’s agreement to acquire the general partner and 12,466,912 common units; cancellation of the incentive distribution rights and conversion of the general partner interest to a non-economic interest in exchange for 8 million common units at closing; and a January 2018 revolver amendment permitting acquisition financing. The amended facility raised the minimum availability required to make distributions from $20 million to $100 million. The proposed preferred units would have priority over common units for distributions, and the warrants could add substantial dilution if exercised.
- Liquidity and leverage: At December 31, 2017, revolver borrowings were $782.9 million, borrowing-base availability was $272.1 million, and available borrowing capacity subject to covenant compliance was $101.6 million. The facility matures in January 2020; maximum leverage was 5.0x after the December 2017 quarter. Floating-rate debt exposes cash flow to rate increases.
- Distribution sustainability: The $0.525 quarterly distribution had DCF coverage below 1.0x. Management said operating cash flow and revolver borrowings should fund operations, capital spending and distributions through 2018, but distributions depend on cash generation, reserves, financing access and covenant compliance.
- Commercial and industry risks: The ten largest customers generated approximately 43% of revenue, and about 51% of compression-services revenue came from month-to-month contracts. Commodity prices do not directly determine revenue, but lower prices can reduce customer activity, utilization and service rates. Competition and customer-owned equipment are additional risks.
- Other exposures: Environmental and emissions regulation, hydraulic-fracturing restrictions, supplier concentration, equipment reliability, customer credit and insurance limitations could raise costs or reduce demand. A sales-tax dispute carried a $0.1 million recorded liability; management estimated possible losses of $0.1–$3.5 million, while describing the upper end as extremely remote. Ordinary-course litigation was not expected to have a material effect.
- Control and audit: KPMG issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness because of the company’s emerging-growth-company status.
Most important facts for investors to verify
- Whether the CDM acquisition and related GP sale, restructuring, preferred financing and debt financing closed on the stated terms, and the resulting leverage, dilution and preferred distribution burden.
- Post-acquisition pro forma cash flow, DCF coverage and the Partnership’s ability to sustain distributions, particularly given 2017 coverage of 0.89x.
- Actual 2018 capital spending, unit deliveries, customer commitments, utilization and realized service rates versus management’s outlook.
- Revolver availability and covenant headroom after the January 2018 amendment, including the effect of the $100 million minimum availability condition on distributions.
- Customer concentration, month-to-month contract retention, and developments in the sales-tax contingency and environmental or regulatory matters.