USA Compression Partners, LP — Q1 2018 Form 10-Q
Business and period. The filing covers the three months ended March 31, 2018, compared with Q1 2017. The partnership provides natural gas and crude oil compression services. The results are primarily for the pre-acquisition business; the CDM acquisition closed on April 2, 2018, after quarter-end.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Revenue | $77.7 million | $66.0 million | Up 17.7%; contract operations rose 26.9%, while parts and service revenue fell 81.7%, largely reflecting lower station-installation revenue. |
| Operating income (loss) | $(6.1) million | $7.4 million | Shifted to a loss, primarily due to acquisition transaction and severance costs. |
| Net income (loss) | $(15.4) million | $1.6 million | Basic and diluted loss per common unit was $0.23, versus earnings of $0.02. |
| Operating cash flow | $36.4 million | $18.3 million | Increase included working-capital effects. |
| Capital expenditures, net cash investing | $(34.7) million | $(15.6) million | Expansion spending increased. |
| Adjusted EBITDA (non-GAAP) | $44.1 million | $36.0 million | Up 22.4%; Q1 2018 includes $21.7 million of acquisition transaction expenses added back. |
| Distributable cash flow (non-GAAP) | $33.7 million | $27.2 million | DCF coverage ratio reported as 1.03x; including units issued in the acquisition, the filing gives 0.71x. |
Gross operating margin was $52.2 million, or 67.1% of revenue, compared with $43.5 million, or 65.9%. Average revenue-generating horsepower increased 18.3% to approximately 1.663 million, average utilization rose to 94.9% from 88.2%, and average revenue per revenue-generating horsepower per month increased to $15.60 from $14.98.
Debt, liquidity and distributions
- At March 31, cash was $710.5 million, total assets were $2.228 billion, and long-term debt, net, was $1.527 billion. Debt comprised $819.1 million drawn on the revolving facility and $725 million of 6.875% senior notes due 2026, net of financing costs. The quarter-end cash balance reflects the notes issuance ahead of the acquisition.
- At March 31, the partnership reported $273.9 million of borrowing-base availability and $37.0 million of available borrowing capacity subject to covenants; it was in compliance with revolving-credit covenants. The variable-rate revolver carried a 4.75% rate at quarter-end. Management estimated that a 1 percentage-point rate change would alter annual interest expense by about $8.2 million.
- On April 2, the revolver was amended and restated: borrowing capacity increased from $1.1 billion to $1.6 billion, maturity extended to April 2, 2023, and leverage covenants and borrowing margins were revised. Outstanding borrowings were $899.5 million at closing and $926.7 million as of May 7.
- Quarterly distributions remained $0.525 per unit. The filing reports a 1.03x cash coverage ratio using its stated basis, but 0.72x using actual common units outstanding after the acquisition-related issuance.
Material developments, outlook and risks
- CDM acquisition and related transactions: Closed April 2 for approximately $1.7 billion in consideration: $1.232 billion cash, 19.2 million common units and 6.4 million Class B units. The partnership also issued $500 million of preferred units and warrants, receiving $495 million net before expenses. Purchase accounting and asset valuation were still under evaluation at filing.
- The GP was acquired by Energy Transfer affiliates for $250 million. The general partner interest became non-economic and IDRs were cancelled in exchange for 8 million common units to the GP. The acquisition and restructuring materially change the partnership’s ownership and unit count.
- Management expected 2018 maintenance capital expenditures of approximately $23 million and expansion capital expenditures of $200–$220 million, excluding future acquisitions. It stated operating cash flow and, if needed, revolver borrowings should fund debt service, working capital, planned 2018 capital expenditures and distributions for the rest of 2018.
- Equipment purchase commitments were $128.7 million at March 31, expected to be settled through 2018 and early 2019. Subsequent to quarter-end, the partnership ordered 50,000 additional horsepower for first-half 2019 delivery at an estimated $42 million.
- Sales-tax audits could result in additional losses; the recorded liability was $0.1 million and management estimated a possible loss range up to approximately $3.7 million, while considering the upper end remote. Management did not expect ordinary-course litigation to materially affect results.
- Demand depends indirectly on natural gas and crude oil production. The partnership does not take title to commodities and does not intend to hedge this indirect exposure. It also identified customer credit, competition, capital availability, operational hazards, regulation, litigation and acquisition integration as risks.
- All outstanding specified phantom-unit awards vested upon the April 2 change of control; the filing says $6.9 million of compensation expense will be recognized in Q2 2018. ASC 606 adoption had no material reported financial-statement impact.
Most important facts for investors to verify
- Post-closing acquisition accounting, acquired assets and liabilities, integration costs, and realized operating contribution from CDM.
- Actual post-transaction leverage, revolver availability and covenant headroom, including the effect of planned capital spending and acquisition funding.
- Distribution coverage using the post-acquisition unit count; distinguish the reported 1.03x measure from the filing’s 0.71x DCF and 0.72x cash coverage calculations using actual units.
- Whether utilization, pricing and demand support the planned expansion, and whether capital commitments and additional orders remain within management’s liquidity expectations.
- Actual acquisition-related and change-of-control expenses, including the anticipated $6.9 million phantom-unit charge, and any resolution of the sales-tax contingency.