USA Compression Partners, LP — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing was signed May 7, 2019. USA Compression provides natural-gas and crude-oil compression services across U.S. shale plays.
Comparability: The April 2, 2018 CDM Acquisition materially changed the business. Q1 2019 includes the acquired assets, while Q1 2018 reflects the USA Compression Predecessor before the transaction; year-over-year growth is therefore not directly comparable or solely organic.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $170.7 million | $76.5 million |
| Operating income (loss) | $35.5 million | $(23.8) million |
| Net income (loss) | $6.6 million | $(23.4) million |
| Net loss attributable to common and Class B unitholders | $(5.6) million | $(23.4) million |
| Net cash from operating activities | $47.8 million | $18.9 million |
| Capital expenditures, net | $36.3 million | $51.7 million |
- Revenue rose 123.1%, principally because of the acquired assets; contract operations revenue was $164.0 million. The acquired assets contributed $89.0 million of contract operations revenue in Q1 2019.
- Gross operating margin, a non-GAAP measure, was $113.7 million, or 66.6% of revenue, versus $39.2 million, or 51.2%. Adjusted EBITDA, also non-GAAP, was $101.4 million, or 59.4% of revenue, versus $31.6 million, or 41.4%.
- Q1 2019 DCF was $54.9 million; DCF and cash coverage ratios were each 1.16x. These are non-GAAP measures and depend on the Partnership’s stated definitions.
- Average revenue-generating horsepower increased 131.6% to 3.28 million; average utilization was 94.2%, compared with 87.6%. Average monthly revenue per revenue-generating horsepower increased 2.9% to $16.45.
- Cash was $0.2 million at quarter-end. Current assets were $226.2 million and current liabilities $133.3 million.
Debt, distributions, and liquidity
- Long-term debt, net of deferred financing costs, was $1.808 billion at March 31, 2019, versus $1.759 billion at year-end 2018. Principal comprised $361.4 million drawn under the revolving credit facility, $725 million of 2026 notes and $750 million of 2027 notes.
- The 2027 notes were issued in March at 6.875%; net proceeds were used to reduce revolver borrowings. Revolver borrowings were $361.4 million at quarter-end and $330.0 million on May 3. The quarter-end revolver rate was 5.17%; the weighted-average quarterly rate was 5.07%.
- Management reported compliance with credit covenants. Quarter-end available borrowing capacity was $492.7 million, subject to covenant compliance, against $1.2 billion of borrowing-base availability. The facility matures in April 2023.
- Common-unit distributions were $0.525 per unit; cash distributions paid on common units were $47.7 million. Preferred-unit distributions were $12.2 million. Preferred units had a $477.3 million carrying value and rank ahead of common units for distributions and liquidation.
- Operating cash flow less net capital expenditures was approximately $11.4 million. Financing activities included the senior-notes issuance, revolver repayments, distributions and $13.2 million of financing costs.
Outlook, risks, and unusual items
- Management stated that operating cash flow and, if needed, revolver borrowings should fund debt service, working capital, planned capital expenditures and distributions through the rest of 2019. This is not a guarantee of future results.
- 2019 capital spending plans were approximately $25 million for maintenance and $140–150 million for expansion. Binding purchase commitments for compression units and parts were $84.5 million, expected to be settled during 2019; approximately 103,000 horsepower was on order for delivery during the year.
- The Partnership recorded a $3.2 million impairment after deciding to retire, sell or reuse components of 14 compressor units, approximately 4,700 horsepower, due to limited marketability, high maintenance costs or equipment performance limitations.
- Interest expense was $28.9 million, reflecting debt not present in the predecessor’s prior-year results. A 1% change in the variable rate on quarter-end revolver debt would change annual interest expense by approximately $3.6 million. The company did not hedge this variable-rate exposure.
- Demand is indirectly exposed to oil and gas production and commodity prices, although the Partnership does not take title to commodities. A 1% decrease in average revenue-generating horsepower was estimated to reduce quarterly revenue by about $6.5 million and gross operating margin by $4.3 million.
- A $44.9 million sales-tax contingency accrual is matched by a related-party receivable from ETO under an indemnity for pre-acquisition periods. The underlying tax dispute concerns the applicability of manufacturing exemptions; collection of the indemnity remains relevant to monitor.
- Management said ordinary-course litigation was not expected to have a material adverse effect. No customer represented 10% or more of revenue in either period. The Partnership became self-insured for certain medical claims in 2019 and accrued $0.8 million.
- Lease accounting adoption added approximately $3.5 million of right-of-use assets and $3.7 million of lease liabilities at January 1, 2019, with no reported effect on earnings or cash flows. The Partnership also disclosed a $6.7 million operating lease expected to commence in 2020.
Important facts for investors to verify
- Separate acquisition-driven growth from organic demand, pricing and utilization trends; the comparison periods have different business scopes.
- Assess whether DCF and 1.16x distribution coverage convert into sustainable cash after capital spending, debt service and preferred distributions.
- Review leverage, covenant headroom, refinancing exposure and the cost of variable-rate debt, including the fixed 6.875% senior notes.
- Track delivery and returns on the $84.5 million of purchase commitments and the planned 2019 expansion program, as well as further idle-equipment impairments.
- Monitor recovery of the $44.9 million ETO indemnification receivable, related-party arrangements and the outcome of the sales-tax dispute.
- Compare management’s remaining-2019 liquidity and capital-spending expectations with subsequent results; the filing notes that interim results are not necessarily indicative of full-year performance.