USA Compression Partners, LP — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. The Partnership provides natural-gas compression services under term contracts to oil and gas customers.
Financial and operating performance
- Q3 revenue: $57.0 million, up 48.7% year over year; contract operations revenue was $55.3 million and parts and service revenue was $1.8 million.
- Q3 earnings: Operating income was $7.7 million, up 60.0%; net income was $5.0 million, versus $1.7 million. Basic and diluted earnings were $0.11 per common unit and $0.11 per subordinated unit.
- Q3 operating measures: Gross operating margin was $37.6 million, up 42.3%, but its revenue margin fell to 65.9% from 68.9%. Adjusted EBITDA was $29.3 million, up 45.5%, with a 51.4% margin versus 52.5%. Adjusted distributable cash flow was $23.0 million, up 68.1%. These are non-GAAP measures.
- Nine-month results: Revenue was $160.5 million, up 53.9%; operating income was $25.8 million, up 63.7%; and net income was $16.4 million, up 147.9%. Adjusted EBITDA was $81.4 million, up 46.4%, and adjusted distributable cash flow was $59.7 million, up 60.6%.
- Cash flow and investment: Nine-month operating cash flow was $70.6 million, compared with $41.7 million. Investing cash outflow was $274.6 million, primarily for compression equipment; reported capital expenditures were $275.2 million. Financing provided $204.0 million. Cash remained $7,000.
- Debt and liquidity: Long-term debt was $509.7 million, up from $420.9 million at year-end 2013. Revolver availability was $288.4 million, subject to covenants and borrowing-base limits. The variable-rate debt carried a 2.24% weighted-average rate; a one-percentage-point rate change would alter annual interest expense by about $5.1 million. The Partnership reported covenant compliance.
- Distributions: Q3 distribution paid was $0.50 per limited partner unit; the filing reported $1.47 per unit paid for the first nine months. A $0.505 per-unit distribution was announced after quarter-end for payment November 14, 2014.
Changes and drivers
- Revenue growth reflected fleet expansion and higher revenue per horsepower, as well as the S&R assets acquired in 2013. Q3 average revenue-generating horsepower rose 33.3% to 1.225 million; revenue per revenue-generating horsepower per month increased 10.9% to $15.67.
- At September 30, fleet horsepower was 1.453 million, up from 1.162 million a year earlier. Period-end horsepower utilization was 93.5%, versus 94.5%; the filing’s alternate utilization measure based only on revenue-generating and fleet horsepower was 86.7%, versus 89.1%.
- Operating costs rose faster than revenue: Q3 cost of operations increased 63.0%, and nine-month costs increased 69.8%, reflecting fleet growth, labor, maintenance, lubricant, and tax costs. Management attributed lower gross margins partly to gas-lift units having lower margins than large midstream units.
- Q3 SG&A increased 25.6% to $10.4 million; depreciation and amortization increased 36.5% to $18.3 million. Nine-month interest expense rose 3.4% despite a lower average rate, primarily due to higher average borrowings.
Outlook, risks, and unusual items
- Management expected approximately 352,000 horsepower of new equipment deliveries in 2014, versus its prior year-end 2013 expectation of 220,000 horsepower; about 112,000 horsepower remained expected for Q4. Management cited utilization above 90% and strong gas-lift demand, but provided no formal earnings or cash-flow guidance.
- Management expects continued growth in midstream and gas-lift horsepower and significant expansion capital spending. It cited EIA forecasts for U.S. natural-gas and crude-oil production as supportive of compression demand, while cautioning that anticipated activity and demand may not materialize.
- Purchase commitments for ordered but undelivered compression units totaled $374.8 million, of which $362.1 million was expected to be settled within 12 months. Nine-month expansion capital expenditures were $262.8 million; maintenance capital expenditures were $12.4 million.
- The Partnership recorded a $1.2 million impairment on equipment it no longer expected to use. A customer capital-lease transaction generated a $2.8 million gain on sale and a $20.9 million long-term installment receivable.
- Risks include exposure to variable interest rates, indirect sensitivity to oil and gas production and commodity prices, customer credit risk, significant capital needs, and covenant limits on distributions and other actions. One customer represented 11.3% of Q3 revenue and 11.7% of nine-month revenue. Management said ordinary-course litigation was not expected to have a material adverse effect.
- The Partnership reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether new equipment deliveries, customer demand, and utilization support the planned fleet growth and associated capital commitments.
- How margins and operating costs evolve as gas-lift and midstream units contribute to the fleet mix.
- Debt levels, revolver availability, covenant headroom, and exposure to variable interest rates as capital spending continues.
- The sustainability and cash coverage of distributions, including the effect of DRIP participation and future financing needs.
- The customer lease’s installment collections and purchase option, and any further impairment of idle or underused equipment.