USA Compression Partners, LP - 10-K Summary (Fiscal Year Ended Dec 31, 2012)
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2012, for USA Compression Partners, LP, a Delaware limited partnership. The company is one of the largest independent providers of natural gas compression services in the U.S., operating a fleet of 919,121 horsepower as of year-end. The filing serves as the company's first annual report as a public entity, having completed its Initial Public Offering (IPO) on January 18, 2013. The financial statements distinguish between the "Predecessor" period (prior to a December 2010 acquisition) and the "Successor" period (post-acquisition).
Key Financial Metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Total Revenues | $118.8 million | $98.7 million |
| Operating Income | $20.6 million | $13.2 million |
| Net Income | $4.5 million | $0.1 million |
| Adjusted EBITDA | $63.5 million | $51.3 million |
| Distributable Cash Flow | $34.9 million | $22.8 million |
| Operating Cash Flow | $42.0 million | $33.8 million |
| Capital Expenditures | $180.0 million | $133.3 million |
| Long-Term Debt | $502.3 million | $363.8 million |
| Partners' Equity | $343.5 million | $339.0 million |
Note: The company defines Adjusted EBITDA as net income before interest, taxes, depreciation, impairment, and certain non-cash or one-time expenses. Distributable Cash Flow is a non-GAAP measure used to assess cash available for distributions.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20.3% to $118.8 million, driven primarily by a 23.9% increase in contract operations revenue. This was fueled by a 31.3% increase in average revenue-generating horsepower.
- Margin Expansion: Gross operating margin (revenue less cost of operations, excluding depreciation) improved to 68.2% of revenue in 2012 from 59.9% in 2011. This improvement was largely due to the termination of an operating lease facility with Caterpillar in late 2011, which reduced equipment lease expenses by $4.1 million.
- Profitability: Net income surged to $4.5 million from $69,000 in 2011. Operating income rose 56.2% to $20.6 million.
- Debt Levels: Long-term debt increased to $502.3 million from $363.8 million to fund significant expansion capital expenditures ($180.0 million in 2012).
- Customer Concentration: The top ten customers accounted for 54% of revenues in 2012, with the largest customer, Southwestern Energy Corporation, representing 14.5% of total revenue.
Guidance, Outlook, and Risks
Outlook and Strategy: Management expects continued growth in demand for compression services, particularly in shale plays (e.g., Marcellus, Fayetteville, Eagle Ford) and aging conventional basins. The company plans to fund expansion capital expenditures primarily through external financing (debt and equity) rather than retained cash, as it distributes all available cash to unitholders. The company anticipates pricing pressure to persist through 2013 as older, lower-rate contracts expire, though long-term rates are expected to improve.
Risks and Contingencies:
- Regulatory Compliance: New EPA regulations (Quad Z and Quad J) regarding emissions from internal combustion engines became effective in 2013, potentially requiring capital expenditures for emissions control equipment. The company does not currently believe these costs will be material.
- Customer Concentration: The loss of key customers, particularly Southwestern Energy, could materially impact revenue.
- Competition and Vertical Integration: Customers may choose to purchase their own compression equipment due to attractive financing terms, reducing demand for outsourced services.
- Contract Terms: Approximately 35% of compression services (by horsepower) were provided on a month-to-month basis as of year-end, creating potential revenue volatility if customers terminate.
- Debt Covenants: The company is subject to financial covenants under its $600 million revolving credit facility, including a maximum funded debt to EBITDA ratio. Violation could restrict distributions or accelerate debt.
Key Facts for Investor Verification
- IPO Proceeds Usage: Verify that the $180.8 million in net proceeds from the January 2013 IPO was used to repay indebtedness under the revolving credit facility, as disclosed in subsequent events.
- Debt Capacity: Confirm the current borrowing base and availability under the $600 million revolving credit facility, noting the requirement to maintain at least $20 million in availability to make distributions.
- Regulatory Impact: Monitor the actual capital expenditures required to comply with the EPA's Quad Z and Quad J regulations effective April 2013.
- Contract Renewals: Track the renewal rates of the 35% of the fleet operating on month-to-month contracts and the pricing of new contracts replacing those expiring from the 2009-2010 period.
- Customer Diversification: Assess the stability of revenue from the top ten customers, which collectively represent over half of total revenue.