USA Compression Partners, LP — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited quarterly results, including fourth-quarter 2016. USA Compression provides fixed-fee natural gas and crude oil compression services across U.S. shale and conventional regions.
Key financial results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $265.9 million | $270.5 million |
| Operating income (loss) | $34.4 million | $(135.6) million |
| Net income (loss) | $12.9 million | $(154.3) million |
| Operating cash flow | $103.7 million | $117.4 million |
| Adjusted EBITDA | $146.6 million | $153.6 million |
| Distributable cash flow (DCF) | $118.3 million | $120.9 million |
| Gross operating margin | $177.8 million; 66.8% of revenue | $189.0 million; 69.9% of revenue |
| Long-term debt at year end | $685.4 million | $729.2 million |
Contract operations revenue declined 6.4% to $247.0 million; parts and service revenue rose 181.9% to $19.0 million, mainly from installation work. Average revenue-generating horsepower fell 2.2%, utilization fell to 87.4% from 90.5%, and average monthly revenue per revenue-generating horsepower declined 3.1% to $15.41. The filing reports a 4.7x leverage ratio at year end.
Fourth-quarter revenue was $74.9 million and net income was $3.3 million. The quarter’s reported gross profit was $45.1 million. The filing does not provide a clear fourth-quarter cash-flow value.
Liquidity, distributions and capital
- Year-end working capital was positive $16.6 million; cash and cash equivalents were only $65,000.
- The $1.1 billion revolving credit facility matures in January 2020. At year end, borrowing-base availability was $414.6 million, but available borrowing capacity subject to covenants was $152.3 million. The Partnership reported compliance with its covenants.
- Operating cash flow declined $13.7 million. Capital expenditures were $48.7 million in 2016, compared with $265.8 million in 2015. The Partnership raised $80.9 million net in a December 2016 common-unit offering and used the proceeds to reduce revolver borrowings.
- The quarterly distribution remained $0.525 per unit ($2.10 annualized). DCF coverage was 1.00x on the Partnership’s weighted-average-unit basis; on actual units at record dates, it was 0.98x. Cash coverage was 1.26x, partly reflecting distributions reinvested through the DRIP.
- There were 60.7 million common units outstanding at February 9, 2017. The 2016 unit count increased with the conversion of subordinated units, the public offering and DRIP issuances.
Changes, outlook and material items
- Revenue fell 1.7% and Adjusted EBITDA fell 4.5% year over year; DCF decreased 2.1%. Lower utilization and pricing, particularly for small-horsepower units, weighed on results.
- Net income improved from the prior-year loss, principally because 2015 included a $172.2 million goodwill impairment. In 2016 the Partnership recorded $5.8 million of compression-equipment impairment, versus $27.3 million in 2015, and no goodwill impairment. The 2016 impairment related to 29 units, about 15,000 horsepower, deemed unlikely to be redeployed under market conditions.
- Management expected organic growth in 2017 to be similar to 2016 levels, which were lower than prior periods. It budgeted $50–$60 million of 2017 expansion capital expenditures and approximately $12 million of maintenance capital expenditures; 20,000 horsepower was on order for 2017 delivery.
- Management anticipated stronger customer activity and compression demand, particularly for large-horsepower infrastructure equipment, with increased demand expected in the second half of 2017. It noted that small-horsepower service rates could remain depressed through 2017 and that project delays and customer optimization continued to affect utilization.
- Key risks include commodity-driven changes in customer activity and creditworthiness, customer concentration (the ten largest customers generated 43% of revenue), and month-to-month contracts (39% of horsepower and 47% of revenue). Variable-rate debt, tightening leverage limits, refinancing and distribution coverage are also important risks.
- Environmental and emissions rules, permitting delays, supplier concentration, competition, equipment failures and insurance limitations could affect costs or demand. A disputed sales-tax matter had a $0.1 million recorded liability; management estimated possible losses from $0.1 million to approximately $3.0 million, while describing the high end as extremely remote. Management said ordinary-course litigation was not expected to have a material effect.
- The Partnership stated it expected operating cash flow and, if needed, revolver borrowings to fund debt service, working capital and planned 2017 capital spending. It cautioned that covenant compliance and distributions depend on operating performance and financing access. A 1% increase in the effective rate on year-end variable-rate debt was estimated to increase annual interest expense by approximately $6.9 million.
Most important facts for investors to verify
- Whether utilization, contract rates and revenue-generating horsepower stabilize or improve, and whether the anticipated 2017 customer projects proceed on schedule.
- Whether DCF sustainably covers distributions, given the reported actual-unit DCF coverage below 1.0x and the Partnership’s reliance on DRIP participation and external capital.
- Debt leverage, covenant headroom, borrowing availability and exposure to higher variable interest rates as covenant limits tighten.
- Customer concentration and the proportion of revenue and horsepower under terminable month-to-month arrangements.
- Actual 2017 expansion and maintenance spending, unit deliveries and returns on deployed capital, including further impairment or retirement of idle equipment.
- Resolution and financial impact of the sales-tax contingency and any material changes in environmental permitting or emissions requirements.