USA Compression Partners, LP — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. The Partnership provides natural-gas compression services to oil and gas customers. Financial amounts below are in millions unless stated otherwise. Q1 2013 comparisons are affected by the S&R acquisition, which closed in August 2013 and was not included in reported Q1 2013 results, and by the Partnership’s January 2013 IPO.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date | Change |
|---|---|---|---|
| Total revenue | $50.2 | $32.6 | +54.0% |
| Operating income | $7.6 | $5.6 | +34.3% |
| Net income | $3.9 | $2.5 | +55.3% |
| Net income per common and subordinated unit | $0.10 | $0.07 | — |
| Gross operating margin (non-GAAP) | $32.5; 64.7% of revenue | $22.2; 68.0% | +46.4% in amount |
| Adjusted EBITDA (non-GAAP) | $25.2; 50.2% of revenue | $17.4; 53.5% | +44.4% in amount |
| Cash from operating activities | $10.1 | $9.4 | +0.7 |
| Capital expenditures | $86.8 | $23.4 | Higher expansion spending |
| Long-term debt | $503.6 | $420.9 at Dec. 31, 2013 | +82.6 since year-end |
| Cash and cash equivalents | $0.007 | $0.007 at Dec. 31, 2013 | Unchanged |
Operating cash flow was substantially below investment spending; net cash used in investing was $86.7 million and net financing cash provided was $76.7 million, largely reflecting borrowing to fund equipment purchases. The Partnership reported $226.7 million of borrowing availability at March 31, 2014 and said it was in compliance with its credit-facility covenants. Average revolving-credit borrowings were $468.5 million, versus $363.0 million in Q1 2013. The facility had a 2.15% period-end rate and matures in December 2018.
Q1 maintenance and expansion capital expenditures were $5.3 million and $81.5 million, respectively. The Partnership paid $0.48 per limited-partner unit for the prior-quarter distribution. It subsequently announced a $0.49-per-unit distribution, payable May 15, 2014.
Material changes and operating drivers
- Contract operations revenue rose 54.7%, with average revenue-generating horsepower up 36.6% to 1,094,677 and average revenue per horsepower per month up 12.6% to $15.30. Management attributed growth to organic fleet expansion, the S&R assets, and higher gas-lift rates.
- At March 31, revenue-generating horsepower was 1,107,218, up 37.0% year over year; reported average horsepower utilization was 94.0%. Management also disclosed an alternative utilization calculation based on revenue-generating horsepower divided by fleet horsepower: 87.8% average for the quarter.
- Margins declined despite higher revenue: cost of operations increased 70.0% and SG&A increased 73.0%. Management cited fleet growth, higher labor and maintenance costs, lubrication oil usage, headcount and unit-based compensation.
- Depreciation and amortization increased 38.9% to $16.2 million; interest expense rose 15.8% to $3.5 million as average borrowings increased.
- The S&R assets contributed $12.6 million of Q1 2014 revenue and $5.2 million of net income before certain SG&A and interest costs. Reported Q1 2013 results exclude those assets; the filing’s illustrative pro forma Q1 2013 revenue and net income were $40.5 million and $4.3 million.
Outlook, risks and unusual items
- Management expected to purchase approximately 300,000 horsepower of new equipment during 2014; 280,000 horsepower had been ordered. It reported $169.2 million of equipment purchase commitments, expected to be settled within 12 months.
- Management reported stable rates overall since 2011, but pricing pressure on some midstream units was expected to continue through the rest of 2014. It cited strong gas-lift demand and attractive pricing, and expected industry activity to support demand, while cautioning that expected growth may not occur.
- Key risks include energy-market and customer activity changes, competition, acquisition integration and benefits, access to capital, operating hazards, regulation, litigation, customer credit, and variable interest rates. The Partnership had $503.6 million of variable-rate debt; a 1 percentage-point rate change would change annual interest expense by approximately $5.0 million.
- One customer represented 12.4% of revenue. Management said ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no long-lived-asset impairment in Q1.
- A modification to phantom-unit awards resulted in an additional $0.5 million of compensation expense and a $1.2 million reclassification from partners’ capital to accrued liabilities. Non-GAAP EBITDA and distributable cash flow exclude selected costs; the filing cautions these measures are not substitutes for GAAP results or cash flows.
Important facts for investors to verify
- Whether new equipment is delivered, deployed and contracted as expected, and whether utilization and revenue per horsepower support planned growth.
- Whether margin compression persists as operating costs and SG&A rise faster than revenue, including the effects of fleet mix and midstream pricing.
- Available borrowing capacity, covenant compliance, debt growth, and sensitivity to variable interest rates as capital spending continues.
- How operating cash generation and distributable cash flow compare with expansion needs and distributions; review the assumptions behind non-GAAP measures.
- The timing and economics of the $169.2 million equipment commitments, and the realized operating contribution and integration costs of the S&R assets.