USA Compression Partners, LP — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The Partnership provides natural-gas and crude-oil compression services across U.S. shale and other production regions. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results and operating metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $72.8 | $61.1 | $204.8 | $191.0 |
| Operating income | $11.5 | $3.2 | $25.6 | $25.5 |
| Net income (loss) | $4.8 | $(2.1) | $6.9 | $9.7 |
| Adjusted EBITDA (non-GAAP) | $40.8 | $34.6 | $113.6 | $110.2 |
| Distributable cash flow, DCF (non-GAAP) | $30.8 | $27.2 | $85.1 | $89.6 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $85.3 | $94.6 |
Q3 gross operating margin was $49.4 million, or 67.8% of revenue, versus $42.2 million, or 69.1%, a year earlier. Adjusted EBITDA margin was 56.1%, versus 56.7%. For the nine months, gross operating margin was $137.3 million (67.0% of revenue) and Adjusted EBITDA margin was 55.5%, down from 69.4% and 57.7%, respectively.
- Q3 revenue grew 19.1%; contract-operations revenue rose 13.5%, while parts-and-service revenue increased to $4.4 million from $0.8 million. Average revenue-generating horsepower rose 14.2%, but average monthly revenue per revenue-generating horsepower declined 1.4% to $15.13.
- Q3 operating income increased substantially, reflecting higher revenue and lower impairment charges. Nine-month operating income was nearly flat, while net income fell 28.7%, primarily as higher interest expense offset operating gains.
- At September 30, cash was $0.9 million; current assets were $79.4 million and current liabilities $58.8 million. Total assets were $1.472 billion and partners’ capital $659.7 million.
- Revolving-credit debt was $752.0 million, up from $685.4 million at December 31, 2016. The rate was 3.25%; borrowing-base availability was $288.6 million, but available borrowing capacity subject to covenants was $104.9 million. The facility matures in January 2020.
- Nine-month investing cash outflow was $65.1 million, mainly capital expenditures; financing cash outflow was $19.4 million. Cash distributions paid were $83.2 million. Maintenance and expansion capital expenditures were $10.4 million and $66.3 million, respectively.
Changes, outlook and notable items
- Period-end revenue-generating horsepower increased 14.2% year over year to 1.558 million horsepower; utilization was 94.2%, compared with 88.3%. Management attributed improved utilization to increased industry activity and demand.
- Management cited reduced pricing in the small-horsepower fleet and a larger mix of large units as reasons for lower revenue per horsepower. Operating costs also increased with maintenance activity, fluids prices, and parts-and-service work.
- DCF coverage was 0.92x for Q3 and 0.85x for the nine months; cash coverage was 1.01x and 1.03x, respectively. The quarterly distribution remained $0.525 per unit. A further $0.525 distribution was announced for payment November 10, 2017.
- Management expected operating cash flow and, if needed, revolver borrowings to cover debt service, working capital, planned 2017 capital expenditures, and distributions through year-end. The 2017 plan included $105–110 million of expansion capital expenditures and approximately $13.5 million of maintenance capital expenditures. The filing does not provide earnings or cash-flow guidance.
- Binding commitments for new compression units and serialized parts totaled $151.5 million at September 30, expected to be settled in 2017 and 2018. Of this, $36.4 million was expected to be delivered in the remainder of 2017.
- The Partnership recorded $4.8 million of impairment for the first nine months, relating to equipment deemed unmarketable or costly to maintain. A disputed sales-tax matter had a recorded liability of $0.1 million; estimated possible losses ranged from $0.1 million to approximately $3.5 million, with management considering the upper end remote. Management said ordinary-course litigation was not expected to have a material adverse effect.
- The Partnership has no direct commodity-price exposure because it does not take title to oil or gas, but demand depends on production activity. A 1% change in active-fleet average revenue-generating horsepower was estimated to affect revenue by about $2.7 million and gross operating margin by $1.8 million. A 1% change in the interest rate on September 30 debt would change annual interest expense by approximately $7.5 million.
- On November 3, 2017, the Partnership amended its Services Agreement with USA Compression Management Services, LLC, extending the term to December 31, 2022, subject to termination conditions. Management reported effective disclosure controls and no material quarter-on-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether utilization gains translate into durable contract revenue and whether pricing and fleet mix continue to pressure revenue per horsepower.
- Ability to fund the $151.5 million of equipment and parts commitments, planned capital expenditures, and distributions while maintaining covenant compliance; the filing reported $104.9 million of covenant-subject available borrowing capacity.
- Sustainability of distributions given DCF coverage below 1.0x for both Q3 and the nine-month period, and the extent to which DRIP participation supports cash coverage.
- Interest-rate sensitivity, debt maturity and leverage-covenant headroom, including the post-2017 maximum leverage ratio of 5.00-to-1.0.
- Outcome of the sales-tax dispute, future impairment needs, and the terms and related-party implications of the Services Agreement extension.