USA Compression Partners, LP — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Although the request refers to 2018 Q4, this is an annual filing; it also reports selected quarterly results. The CDM Acquisition closed April 2, 2018, so full-year comparisons combine the predecessor’s results before that date with the enlarged Partnership’s results afterward and are not directly comparable.
Business context and reporting period
USA Compression provides natural-gas and crude-oil compression and gas-treating services in the United States, primarily under fixed-fee contracts, many of which are take-or-pay. At year-end, its fleet totaled 3.60 million horsepower, with 131,750 horsepower on order. The CDM Acquisition expanded the fleet and geographic footprint; the predecessor is the accounting predecessor for periods before the transaction.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $584.4 million | $276.7 million |
| Gross operating margin (non-GAAP) | $369.6 million; 63.3% of revenue | $151.5 million; 54.7% of revenue |
| Operating income (loss) | $65.3 million | $(262.7) million |
| Net income (loss) | $(10.6) million | $(264.7) million |
| Adjusted EBITDA (non-GAAP) | $320.5 million; 54.8% of revenue | $130.3 million; 47.1% of revenue |
| Distributable cash flow (non-GAAP) | $177.8 million | $109.3 million |
| Cash from operating activities | $226.3 million | $136.0 million |
| Capital expenditures | $241.2 million | $175.5 million |
| Cash / working capital at year-end | $0.1 million / $68.1 million | $4.0 million / $27.1 million |
| Long-term debt, net | $1.76 billion | None |
Fourth-quarter 2018 revenue was $172.0 million, gross profit as defined in the filing was $116.4 million, and net loss attributable to common and Class B unitholders was $2.0 million. Basic and diluted common-unit earnings were $0.01 for the quarter.
Year-end debt included $1.05 billion drawn on the revolving facility and $725 million of 6.875% senior notes due 2026. Revolver availability was $550.5 million; reported leverage was 4.33x, and the Partnership stated it was covenant-compliant. Operating cash flow was below total capital expenditures, while investing cash outflow also reflected the acquisition. The cash-flow statement reports $779.7 million of net cash used in investing activities and $549.4 million provided by financing activities.
Common-unit distributions were $0.525 per unit for each of the three post-acquisition quarters, or $1.575 for 2018. Reported DCF coverage was 1.25x, but this compares full-year DCF with only three quarters of distributions; management gave a more comparable pro forma coverage ratio of 1.10x. Preferred-unit distributions are cumulative at 9.75% annually and rank ahead of common distributions.
Material changes versus prior comparable period
- Revenue rose 111.2% and Adjusted EBITDA rose 145.9%, principally reflecting the acquisition and a larger revenue-generating fleet—not solely organic growth. Acquired historical assets contributed $252.1 million of contract-operations revenue for the period included in 2018 results.
- Fleet horsepower more than doubled to 3.60 million; revenue-generating horsepower increased 133.8%. Average utilization rose to 91.9% from 82.4%, and year-end utilization was 94.0% versus 87.5%.
- Operating results improved from 2017’s $223.0 million goodwill impairment, but 2018 included $8.7 million of compression-equipment impairment and a $13.0 million net loss on asset dispositions. Net income remained negative, including $78.4 million of net interest expense following the financing of the acquisition.
- Capital structure changed substantially: the Partnership issued $725 million of senior notes, raised $500 million through preferred units and warrants, and amended its revolver to a $1.6 billion facility with a 2023 maturity.
Outlook, commentary, risks and unusual items
- Management said it expected demand for compression services to continue increasing through 2019, while noting it could not predict demand with reasonable certainty. The cited EIA projections for natural-gas and oil production are third-party forecasts, not Partnership earnings guidance.
- 2019 planned spending was approximately $25 million for maintenance capital and $140–$150 million for expansion. The Partnership had $107.5 million of binding equipment-purchase commitments, expected to be settled within 12 months, and said most large-unit orders were committed to customers or under contract.
- Management believed operating cash flow and, if needed, revolver borrowings would fund debt service, working capital, capital expenditures and distributions through 2019. This outlook depends on operating performance, access to capital and covenant compliance.
- Distribution capacity faces competing claims: at the then-current common distribution rate, the filing estimated $189.0 million annual cash needs for common units, rising by $13.4 million annually when Class B Units convert after the June 2019 quarter; preferred distributions require about $48.8 million annually. Common distributions cannot be paid before required preferred distributions.
- Key risks include commodity-driven customer activity and service pricing, customer credit and concentration, competition, and month-to-month contracts (47% of compression-service revenue at year-end). The top ten customers represented 33% of 2018 revenue. Variable-rate revolver debt creates interest-rate exposure; a 1 percentage-point rate change was estimated to change annual interest expense by about $10.5 million.
- The acquisition brought integration and execution risks; management disclosed higher-than-projected technician attrition and added third-party service costs. Other material exposures include environmental and emissions regulation, supplier concentration, potential impairment, and the ability to maintain distributions.
- A $44.9 million sales-tax contingency was recorded with an equal receivable from ETP under an indemnity. Management said ordinary-course litigation was not expected to have a material adverse effect. The 2017 predecessor goodwill impairment was $223.0 million; 2018 goodwill testing found no impairment.
Most important facts for investors to verify
- How much of 2018 growth and utilization improvement is sustainable organic performance versus the April acquisition, and how results compare on a full-year pro forma basis.
- Whether cash generation can support planned expansion spending, debt service, preferred distributions and common distributions, especially after Class B conversion; assess the more comparable 1.10x pro forma DCF coverage.
- Revolver borrowing-base availability, leverage and covenant headroom as thresholds tighten to 5.0x after 2019, and sensitivity to interest rates.
- Collection and timing of the $44.9 million ETP indemnification receivable, and resolution of the underlying sales-tax contingency.
- Customer retention and contract renewal rates, technician staffing and the deployment or retirement of idle equipment; review the assumptions supporting goodwill and asset values.