USA Compression Partners, LP — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The Transactions closed April 2, 2018, combining the acquired Partnership assets with the USA Compression Predecessor. Historical 2017 results reflect only the predecessor, so reported year-over-year comparisons are not on a like-for-like basis. Unaudited results are not necessarily indicative of full-year performance.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $166.9m | $67.4m | $243.4m | $132.6m |
| Operating income (loss) | $28.6m | ($9.7m) | $4.8m | ($18.1m) |
| Net income (loss) | $3.2m | ($9.7m) | ($20.2m) | ($20.2m) |
| Net loss attributable to common and Class B unitholders | ($8.9m) | ($9.7m) | ($32.2m) | ($20.2m) |
| Adjusted EBITDA | $95.4m | $31.6m | $127.1m | $63.8m |
| Distributable cash flow (DCF) | $51.4m | $27.2m | $73.9m | $54.2m |
Q2 gross operating margin was $109.4m, or 65.5% of revenue, versus $37.0m, or 55.0%, a year earlier. Adjusted EBITDA margin was 57.2%, versus 46.9%. Both are non-GAAP measures. Q2 basic and diluted loss per common and Class B unit was $0.64, after $12.1m of preferred distributions; the declared common-unit distribution was $0.525 per unit.
Six-month operating cash flow was $94.4m, compared with $73.8m. Investing cash outflow was $665.0m, chiefly reflecting the acquisition; financing cash inflow was $569.1m. Period-end cash was $2.5m. Capital expenditures were $149.4m, including $94.4m of expansion and $17.1m of maintenance expenditures; reported capex also reflects non-cash and working-capital timing items.
At June 30, total assets were $3.785bn and total liabilities were $1.821bn. Long-term debt, net, was $1.658bn: $950m drawn on the revolving facility and $708.4m net carrying value of $725m principal Senior Notes. The Partnership reported $500.1m of available borrowing capacity, subject to covenant compliance. It was in compliance with credit covenants. Current assets were $216.3m and current liabilities $155.6m.
Material changes versus prior periods
- Q2 revenue rose 147.7%; the acquired historical assets contributed $81.0m of Q2 contract operations revenue. Average revenue-generating horsepower increased 149.0%, while revenue per horsepower per month was essentially unchanged.
- Period-end fleet horsepower was 3.56m versus 1.67m; Q2 average horsepower utilization was 91.5% versus 80.4%.
- Q2 operating income turned positive, but the six-month period remained loss-making after $25.7m of net interest expense and an $11.1m six-month asset-disposition loss. The predecessor had no debt in the prior-year period.
- Q2 SG&A rose to $27.2m, including transaction expense, severance, and elevated unit-based compensation related in part to accelerated vesting at the transaction closing.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow and, if needed, revolver borrowings to fund debt service, working capital, planned 2018 capital expenditures, and distributions through year-end. It budgeted $190m–$210m of 2018 expansion capex and approximately $30m of maintenance capex. Equipment-purchase commitments were $121.7m, with $72.4m expected for units delivered in the rest of 2018.
- The quarterly common-unit distribution remained $0.525; a distribution at that rate was announced for payment in August 2018. Q2 DCF coverage was 1.09x. The six-month coverage calculation reflects only one quarter of distributions and is not directly comparable to a normal six-month measure.
- The $725m Senior Notes bear 6.875% interest and mature in 2026. Revolver borrowings carried a 4.56% rate at quarter-end. A 1 percentage-point rate change on the $950m variable-rate balance would change annual interest expense by about $9.5m. Management did not hedge variable-rate debt.
- The company has no direct commodity-price exposure because it does not take title to oil or gas, but prolonged low prices could reduce customer production and demand for compression services. Management estimated a 1% decline in average active revenue-generating horsepower would reduce six-month revenue by about $5.9m and gross operating margin by $3.9m.
- Texas sales-tax audits challenge the applicability of manufacturing exemptions. The company recorded a $44.9m accrued liability and an offsetting related-party receivable from ETP for pre-transaction periods under an indemnity; a separate ongoing audit covers January 2009–August 2012.
- A change in estimated useful lives increased reported operating and net income by $15.2m for Q2 and the six-month period. Q2 included $2.9m of transaction expenses, $1.5m of severance and $6.8m of accelerated-vesting compensation expense. The $21.7m of transaction expenses incurred before April 2 were excluded from GAAP reported results for the six months, but included in pro forma information.
- Management cited acquisition integration and realization of benefits, customer financial condition, energy-industry activity, competition, capital availability, operating hazards and regulation among factors that could affect results. Management stated ordinary-course litigation was not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the enlarged fleet sustains high utilization and translates into durable revenue and cash generation; reported comparisons are materially affected by the April transaction.
- Whether DCF adequately covers distributions after preferred-unit payments, maintenance spending, interest and other cash needs; assess the non-GAAP definition and coverage-period limitations.
- Debt capacity, covenant headroom and sensitivity to variable rates, alongside the substantial acquisition-related leverage and committed capex.
- Resolution and collectability of the $44.9m ETP indemnification receivable and the outcome of the Texas sales-tax audits.
- Preferred-unit distribution, conversion and redemption terms, and potential dilution from preferred conversions and warrants.