USA Compression Partners, LP — Q1 2016 Form 10-Q
Business and period: The Partnership provides natural-gas and crude-oil compression services under term contracts. This unaudited filing covers the three months ended March 31, 2016, compared with Q1 2015; balance-sheet figures are compared with December 31, 2015. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $66.4 | $65.0 |
| Operating income | $13.8 | $15.5 |
| Net income | $8.5 | $11.5 |
| Operating margin | 20.8% | 23.9% |
| Net margin | 12.9% | 17.6% |
| Gross operating margin (non-GAAP) | $45.5; 68.6% of revenue | $45.8; 70.4% |
| Adjusted EBITDA (non-GAAP) | $38.4 | $37.5 |
| Distributable cash flow (non-GAAP) | $31.9 | $29.5 |
| Operating cash flow | $22.0 | $14.5 |
| Capital expenditures | $16.3 | $117.8 |
| Long-term debt at period end | $743.1 | $729.2 at Dec. 31, 2015 |
| Cash at period end | $0.007 | $0.007 at Dec. 31, 2015 |
| Current assets / current liabilities | $52.9 / $40.0 | $53.0 / $61.4 at Dec. 31, 2015 |
Interest expense rose 26.7% to $5.1 million. The revolver’s weighted-average interest rate was 2.47% in Q1 2016; the period-end rate was 2.51%. At March 31, borrowings were $743.1 million, with $100.8 million of available borrowing capacity and $356.9 million of borrowing-base availability. The facility matures in January 2020. The Partnership reported compliance with covenants at quarter-end.
Distributions declared were $0.525 per limited-partner unit, versus $0.515 a year earlier. DCF coverage was 1.10x, down from 1.22x; cash coverage was 1.68x, down from 2.99x. On February 16, all 14.0 million subordinated units converted one-for-one into common units. Q1 basic and diluted common-unit earnings were $0.24 per unit in both periods; 2016 subordinated-unit earnings were negative $0.38 because of the conversion timing and allocation methodology.
Material changes and management commentary
- Revenue increased 2.1%, driven by 1.8% growth in average revenue-generating horsepower and higher parts-and-service revenue. Average revenue per revenue-generating horsepower per month declined 0.8% to $15.72, with lower small-unit pricing partly offset by improved large-unit pricing.
- Operating income fell 10.9% and net income fell 25.5%, as operating costs, depreciation and interest expense increased. Cost of operations rose 8.4%; management attributed increases to fleet growth, labor, property and other taxes, and parts-and-service activity.
- Period-end horsepower utilization declined to 87.9% from 91.1% a year earlier; utilization measured against revenue-generating horsepower and fleet horsepower was 81.6% versus 85.2%. Management cited reduced pricing in the small-horsepower fleet and softer energy-market conditions.
- Operating cash flow improved mainly because inventory purchases were lower. Capital spending dropped substantially from Q1 2015, and management said planned 2016 compression-unit purchases had been significantly reduced amid the energy-market slowdown.
Outlook, risks and contingencies
Management expected operating cash flow and, if needed, revolver borrowings to fund working capital, debt service, and planned 2016 capital expenditures. The filing gives no revenue or earnings guidance. It estimated approximately $15 million of 2016 maintenance capital expenditures and budgeted $40–$50 million of expansion capital expenditures; $20.6 million of binding equipment and parts purchase commitments were expected to settle within 12 months. Management stated that future expansion and acquisitions would primarily require external financing because available cash is distributed, subject to reserves.
The March 2016 credit amendment revised leverage-ratio covenant limits, stepping down from 5.95x for Q2 and Q3 2016 to 5.0x from 2018 onward. The Partnership had $743.1 million of variable-rate debt; a 1 percentage-point rate change was estimated to affect annual interest expense by approximately $7.4 million. It did not hedge variable-rate debt. The Partnership has no direct commodity-price exposure because it does not take title to oil or gas, but lower commodity prices could reduce production and demand for compression. A 1% decrease in average active-fleet revenue-generating horsepower was estimated to reduce revenue by $2.7 million and gross operating margin by $1.9 million.
Management said ordinary-course litigation was not expected to have a material adverse effect. No customer represented more than 10% of Q1 2016 revenue. The filing reported no impairment charges and no off-balance-sheet financing. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether utilization, small-unit pricing, and customer demand stabilized after quarter-end, particularly given the energy-market slowdown.
- Compliance with the amended leverage covenants and the practical availability of revolver capacity relative to borrowing-base availability.
- Ability to sustain distributions and coverage as debt costs rise; distinguish declared distributions, cash distributions, and DRIP reinvestments.
- Execution and funding of the 2016 maintenance and expansion capital budgets, including the $20.6 million purchase commitments.
- Customer payment and credit quality, and the effect of interest-rate changes on the highly leveraged, floating-rate debt balance.