USA Compression Partners, LP — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial amounts below are in millions unless noted. The Partnership provides natural-gas compression services to oil and gas customers. Results are unaudited.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $53.3 | $33.3 | $103.5 | $65.9 |
| Operating income | $10.6 | $5.3 | $18.1 | $11.0 |
| Net income | $7.5 | $2.4 | $11.4 | $4.9 |
| Adjusted EBITDA (non-GAAP) | $26.9 | $18.1 | $52.1 | $35.6 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $31.7 | $25.5 |
- Q2 revenue grew 59.9% and net income grew 213.1% year over year. Six-month revenue rose 57.0% and net income rose 132.3%.
- Q2 gross operating margin was $35.3 million, or 66.2% of revenue, versus $23.2 million, or 69.6%, a year earlier. Six-month margin was $67.8 million, or 65.5%, versus $45.4 million, or 68.8%.
- Adjusted EBITDA margin also declined: 50.4% in Q2 versus 54.4%; six-month margin was 50.3% versus 54.0%. These are non-GAAP measures.
- Q2 diluted earnings per common unit were $0.20, versus $0.08; distributions paid per limited-partner unit were $0.49, versus $0.348. The Partnership subsequently declared a $0.50 distribution for Q2, payable August 14, 2014.
Cash, debt and capital
- At June 30, cash was $7,000; total current assets were $43.4 million and current liabilities were $58.3 million.
- Long-term debt was $452.0 million, up from $420.9 million at year-end 2013. The variable-rate revolving facility matures in December 2018. Borrowing availability was $305.6 million, subject to the borrowing base and covenants; the Partnership reported covenant compliance.
- Six-month operating cash flow of $31.7 million was more than offset by investing outflows of $188.1 million, principally capital expenditures. Financing provided $156.4 million. Capital expenditures were $188.5 million: $179.4 million expansion and $9.1 million maintenance.
- In May, the Partnership issued 5.6 million new common units and received net proceeds of $138.0 million, used to reduce revolver borrowings. Selling unitholders also sold units, but those proceeds went to them, not the Partnership.
- Partners’ capital was $845.5 million. Common units outstanding increased to 30.2 million from 23.6 million at year-end.
Business changes and management outlook
- Revenue growth reflected higher average revenue-generating horsepower, up 39.7% in Q2 and 38.1% for the six months, plus higher revenue per horsepower. The S&R assets, acquired in August 2013, contributed to the year-over-year comparison; reported growth is therefore not solely organic.
- Fleet horsepower reached 1.35 million, with 1.20 million revenue-generating horsepower. Reported period-end utilization was 95%; average utilization was 94.8% in Q2. Management said utilization remained above 90% and described gas-lift demand and pricing as strong; midstream rates had generally been stable since 2011.
- The Partnership had ordered or expected delivery of approximately 352,000 horsepower of equipment during 2014. Management expected continued demand as U.S. oil and gas activity increased, while acknowledging that expected activity and demand may not materialize. No formal financial earnings guidance was provided.
- Cost of operations and SG&A rose faster than revenue, reflecting fleet expansion, labor and training, maintenance, fuel and oil, added headcount, and public-company support costs. The lower gross margin percentage was attributed partly to gas-lift units having lower margins than large midstream assets.
Unusual items, risks and contingencies
- A June 30 Superior transaction was accounted for as a sales-type lease with a bargain purchase option. It generated a $2.7 million noncash gain on sale and an installment receivable of $22.7 million in total, including $2.6 million current and $20.1 million long-term.
- Equipment purchase commitments were $397.9 million at June 30, of which $334.7 million were expected to be settled within 12 months.
- Debt covenants require minimum EBITDA-to-interest coverage of 2.5x and impose maximum funded-debt-to-EBITDA limits. Distributions are also conditioned on covenant compliance and at least $20 million of post-distribution availability.
- All $452.0 million of debt was variable-rate at a weighted-average rate of 2.2%. A one-percentage-point rate change would affect annual interest expense by approximately $4.5 million.
- The Partnership has no direct commodity-price exposure from taking title to gas, but lower oil and gas prices could reduce production and demand for its services. One customer accounted for 11.7% of Q2 revenue and 12.0% of six-month revenue.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The filing reported no impairment of long-lived or intangible assets in the periods presented.
- The Partnership was evaluating the impact of a new revenue-recognition standard effective for annual periods beginning after December 15, 2016. Management assessed disclosure controls as effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether contracted equipment deliveries and fleet utilization translate into sustained revenue and cash generation, and whether the large equipment commitments can be financed on acceptable terms.
- How much reported growth reflects organic additions versus the S&R acquisition, and whether lower gross and EBITDA margins stabilize.
- Revolver borrowing-base availability, covenant headroom, variable-rate exposure, and the ability to fund distributions while meeting expansion needs.
- The Superior option’s effect on future asset ownership, cash receipts, and earnings, including the noncash nature of the reported gain.
- Customer concentration, commodity-driven demand sensitivity, and the assumptions underlying management’s industry outlook.