USA Compression Partners, LP — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 19, 2015. This is an annual report, with quarterly results also provided. The Partnership provides natural-gas and crude-oil compression services, primarily under fixed-fee contracts. It does not take title to the commodities it compresses.
Financial and operating performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $221.5 million | $152.9 million | +44.9% |
| Operating income | $37.6 million | $23.8 million | +57.6% |
| Net income | $24.9 million | $11.1 million | +125.3% |
| Net income per common unit | $0.60 | $0.32 | |
| Operating cash flow | $101.9 million | $68.2 million | +49.4% |
| Adjusted EBITDA (non-GAAP) | $114.4 million | $81.1 million | +41.0% |
| Adjusted distributable cash flow (non-GAAP) | $85.9 million | $56.2 million | +52.9% |
| Gross operating margin (non-GAAP) | $147.5 million; 66.6% of revenue | $104.8 million; 68.5% | Margin narrowed |
Growth reflected fleet expansion, organic demand and the full-year contribution from the 2013 S&R acquisition. Costs of operations rose 53.9%, faster than revenue; SG&A increased 40.3%. The reported margin percentage is approximately 66.6% (management also describes it as 66.5%).
Cash flow and investment: Cash capital expenditures were $381.9 million, primarily for new compression units, compared with operating cash flow of $101.9 million. Investing cash outflow was $380.5 million. Financing provided $278.6 million, including net debt proceeds and equity proceeds. Maintenance capital expenditures were $15.8 million; expansion capital expenditures were reported at $372.1 million. The filing’s selected-data capital expenditure figure differs from cash-flow capital expenditures; investors should consult the filing’s definitions and reconciliations.
Distributions: The quarterly distribution increased during 2014 from $0.49 to $0.51 per unit; the fourth-quarter distribution of $0.51 was paid in February 2015. Declared distributions were $2.01 per common unit for 2014. Adjusted DCF coverage was 0.99x, while cash coverage after the distribution reinvestment plan (DRIP) was 2.58x. A substantial portion of distributions was reinvested rather than paid in cash.
Liquidity and debt: Year-end debt was $594.9 million, all under a floating-rate revolving credit facility; cash was only $6,000 and working capital was negative $44.1 million. Reported covenant-adjusted borrowing availability at year-end was $133.3 million, versus borrowing-base availability of $255.1 million. Borrowings rose to $657.4 million by February 17, 2015. The facility was amended in January 2015: commitments increased to $1.1 billion, maturity extended to January 2020, and covenant flexibility changed. A 1 percentage-point increase in interest rates was estimated to raise annual interest expense by approximately $5.9 million.
Material changes and unusual items
- Fleet horsepower increased 28.8% to 1.55 million; revenue-generating horsepower grew 26.2%. Average horsepower utilization was 94.0% on the company’s stated measure, but 87.3% when calculated using revenue-generating horsepower alone.
- Average revenue per revenue-generating horsepower per month increased 10.0%. Average revenue-generating horsepower rose 33.1% year over year.
- The company sold 5.6 million common units in May 2014 and received net proceeds of $138.0 million, used primarily to repay revolving debt. It also established a continuous offering program of up to $150 million; no units were issued under it in 2014.
- FY 2014 included $2.3 million of compression-equipment impairment and a $2.2 million gain on sale of assets. The impairment related to idle units assessed as unlikely to return to the operating fleet.
- A customer capital-lease transaction generated a $2.6 million gain and a $20.2 million long-term installment receivable at year-end.
- Goodwill was $208.1 million. No goodwill impairment was recorded, but year-end estimated fair value exceeded carrying value by only about 7% ($100 million), following a decline in unit price, crude prices and the MLP index.
Outlook, commentary and risks
Management expected to spend $250–$270 million on 2015 expansion capital expenditures and approximately $20 million on maintenance. About 238,000 horsepower was on order for delivery mainly in the first three quarters of 2015. Management said it expected to maintain utilization above 90% through prudent fleet management; this is commentary, not formal earnings guidance.
Management reported significant declines in commodity prices and anticipated some service-rate pressure, slower gas-lift demand, customer requests for rate relief, and delays or cancellations of customer projects. It nevertheless cited continuing need for compression in gas gathering, processing and transportation. The business has no direct commodity-price exposure, but its demand depends on customers’ production and investment.
- Customer concentration remains material: Southwestern Energy represented 11.6% of 2014 revenue; the ten largest customers represented 46%. Approximately 36% of services by horsepower, and 40% of revenue, were month-to-month and generally terminable on 30 days’ notice.
- High capital spending, distributions and reliance on external financing expose the Partnership to borrowing capacity, covenant and equity-market risk. The company said it would likely need to issue equity in the following 12 months to address liquidity needs and covenant compliance.
- Operations face competition, potential customer-owned compression fleets, supplier concentration, equipment and environmental liabilities, and regulatory uncertainty, including air-emissions rules and possible restrictions on hydraulic fracturing.
- The Partnership reported compliance with its credit covenants at year-end. It reported effective internal control over financial reporting, but identified a late Form 8-K filing concerning appointment of its principal accounting officer and said it added controls to address timely filings.
- Litigation in the ordinary course was not expected by management to have a material adverse effect. The filing does not identify a specific material legal contingency.
Most important facts for investors to verify
- Whether commodity-price weakness, customer budget cuts and rate concessions reduce utilization, contract rates or new equipment demand.
- Whether the Partnership can finance its 2015 capital program while maintaining covenant headroom and distributions; verify subsequent borrowing, equity issuance and covenant availability.
- Whether the 238,000 horsepower on order is delivered on schedule and placed under revenue-generating contracts.
- How much of reported cash distribution coverage depends on DRIP participation, and whether cash coverage remains adequate without reinvested distributions.
- Whether the limited goodwill fair-value cushion or idle-equipment assessments lead to additional impairment charges.
- How customer concentration, month-to-month contracts, related-party arrangements and environmental compliance affect future cash flows.