USA Compression Partners, LP — Q1 2017 Form 10-Q
Business and period. The Partnership provides natural-gas and crude-oil compression services across U.S. shale and other producing regions. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Unless otherwise stated, figures below are in millions of dollars.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $66.0 | $66.4 | Down 0.5% |
| Gross operating margin (non-GAAP) | $43.5 | $45.5 | Down 4.5% |
| Gross operating margin as % of revenue | 65.9% | 68.6% | Down 2.7 percentage points |
| Operating income | $7.4 | $13.8 | Down 46.7% |
| Net income | $1.6 | $8.5 | Down 81.8% |
| Net income per common unit | $0.02 | $0.24 | |
| Adjusted EBITDA (non-GAAP) | $36.0 | $38.4 | Down 6.3% |
| Distributable cash flow (non-GAAP) | $27.2 | $31.9 | Down 14.7% |
| Cash provided by operating activities | $18.3 | $22.0 | |
| Net cash used in investing activities | $(15.6) | $(16.2) | |
| Interest expense, net | $5.7 | $5.1 | Up 12.1% |
At March 31, 2017, cash was $7,000; total assets were $1,477.8 million; and long-term debt was $714.8 million, all borrowings under the revolving credit facility. The Partnership reported $342.1 million of borrowing-base availability and $76.8 million of available borrowing capacity subject to financial-covenant compliance. It was in compliance with all facility covenants. The facility matures in January 2020. The weighted-average borrowing rate was 2.98% during Q1 2017.
Capital expenditures were $28.3 million in Q1: $25.1 million expansion and $3.2 million maintenance. The Partnership reported $99.3 million of binding equipment and parts purchase commitments. The distribution declared per limited partner unit was $0.525, unchanged from the comparable period. DCF coverage was 0.82x; cash coverage was 1.04x.
Material changes and operating trends
- Contract operations revenue fell 6.0% to $60.4 million, while parts and service revenue rose to $5.6 million from $2.1 million, mainly due to installation work. Management said the installation services contributed $2.0 million of gross operating margin.
- Average revenue-generating horsepower was broadly unchanged, but average revenue per revenue-generating horsepower per month declined 4.7% to $14.98. Management cited lower pricing in the small-horsepower fleet and a greater mix of larger units, which generally earn less per horsepower.
- Average horsepower utilization was 88.2%, versus 88.7%. Management attributed softer utilization to customer project delays, optimization of compression requirements, and selective pursuit of opportunities. Period-end utilization improved to 89.9% from 87.9%.
- Operating costs, SG&A, and depreciation and amortization increased. Q1 included a $1.1 million impairment charge for two compression units totaling 2,760 horsepower, following a decision to retire, sell, or reuse components because of estimated repair costs from prior damage.
- Debt at quarter-end was $29.5 million higher than at year-end 2016. Q1 financing activity included $29.5 million of net borrowing, $29.4 million of cash distributions, and $2.8 million of cash paid for net settlement of unit-based awards.
Outlook, risks, and contingencies
Management expected operating cash flow and, if needed, revolver borrowings to fund debt service, working capital, budgeted 2017 expansion and maintenance capital expenditures, and distributions through the remainder of 2017. The 2017 budget was $80–$90 million for expansion capital expenditures and approximately $12 million for maintenance. Management expected covenant compliance through 2017, while noting that inaccurate cash-flow projections could require actions such as reducing distributions, raising equity, or seeking covenant modifications. No specific earnings or revenue guidance was provided.
The Partnership has no direct commodity-price exposure because it does not take title to natural gas or crude oil, but weaker commodity prices could reduce customer production and demand for compression. It does not currently hedge this indirect exposure or its variable-rate debt. A 1% change in the effective interest rate on quarter-end variable-rate debt would change annual interest expense by approximately $7.1 million. A 1% decrease in average revenue-generating horsepower would, based on the filing’s sensitivity estimate, reduce revenue by approximately $2.5 million and gross operating margin by approximately $1.7 million.
For a disputed state sales-tax matter, the Partnership had recorded a $0.1 million liability and estimated a possible loss range of $0.1 million to approximately $3.0 million; management considered the upper end remote. Management did not expect ordinary-course litigation to have a material adverse effect. The filing also identifies customer credit, industry conditions, competition, capital availability, operating hazards, regulation, and litigation as risks. The Partnership expected no material effect from adopting the new revenue-recognition standard, but was still evaluating the financial impact of the new lease standard.
Important facts for investors to verify
- Whether utilization, customer project timing, and pricing trends support recovery in contract operations revenue and margins.
- Whether forecast cash generation and the $76.8 million covenant-dependent borrowing capacity are adequate for committed equipment spending, distributions, and debt service.
- How the 0.82x DCF coverage ratio and 1.04x cash coverage ratio develop, including the effect of DRIP participation and distributions.
- Progress and outcome of the sales-tax dispute, including whether the taxing authority accepts the Partnership’s documentation.
- Whether variable-rate debt costs, customer credit conditions, or lower production activity materially affect results or covenant headroom.