USA Compression Partners, LP — Q3 2016 Form 10-Q
Business context and reporting period. The partnership provides natural-gas compression services to the oil and gas industry. This unaudited filing covers the quarter and nine months ended September 30, 2016; comparisons are with the same 2015 periods.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $61.1M | $70.5M | $191.0M | $201.9M |
| Operating income | $3.2M | $15.5M | $25.5M | $19.7M |
| Net income (loss) | ($2.1M) | $9.8M | $9.7M | $5.4M |
| Operating cash flow | Not reported by quarter in the supplied filing text | Not reported | $94.6M | $82.7M |
| Adjusted EBITDA | $34.6M | $39.5M | $110.2M | $115.6M |
| Distributable cash flow (DCF) | $27.2M | $32.3M | $89.6M | $92.8M |
| DCF coverage ratio | 0.91x | 1.25x | 1.01x | 1.23x |
Gross operating margin was $42.2M in Q3 and $132.6M for nine months; the corresponding margins were 69.1% and 69.4% of revenue. Adjusted EBITDA margins were 56.7% and 57.7%, respectively. These are non-GAAP measures.
At September 30, cash was $7,000; long-term debt was $743.9M, all under the revolving credit facility. The partnership reported $356.1M of borrowing-base availability and $81.4M of available borrowing capacity subject to financial-covenant compliance. Current assets were $55.2M and current liabilities $61.2M. The facility matures in January 2020. The partnership reported covenant compliance at quarter-end.
For the first nine months, investing activities used $45.9M, including $46.3M in net capital expenditures. Financing activities used $48.7M, including $61.4M of cash distributions; net borrowing was $14.8M. Capital expenditures included $5.4M maintenance and $31.6M expansion spending.
Material changes versus prior comparable periods
- Q3 revenue fell 13.3% year over year, while nine-month revenue fell 5.4%. Management attributed the decline to weaker customer activity, optimization of compression needs, lower revenue-generating horsepower and pricing pressure.
- Average revenue-generating horsepower declined 4.7% in Q3; average utilization fell to 87.3% from 90.2%. Utilization based on revenue-generating horsepower relative to fleet horsepower was 78.8% versus 85.3%.
- Q3 operating income declined 79.5% and the partnership recorded a net loss, reflecting weaker revenue, higher SG&A, depreciation and impairment. Nine-month operating income and net income rose, helped by impairment charges of $4.1M versus $27.3M in 2015.
- Interest expense increased 13.1% in Q3 and 18.4% for nine months, primarily due to higher interest rates; nine-month average borrowings also increased.
- Debt increased from $729.2M at December 31, 2015 to $743.9M at September 30, 2016. Common units outstanding rose, in part because all 14.0M subordinated units converted one-for-one into common units in February 2016.
- Cash distributions declared remained $0.525 per unit quarterly. Q3 DCF coverage was below 1.0x; the nine-month ratio was 1.01x. Cash coverage was 1.06x for Q3 and 1.33x for nine months, reflecting the effect of DRIP participation.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow and, if needed, revolver borrowings to fund debt service, working capital, 2016 capital expenditures and distributions through the remainder of 2016. It cautioned that financing sources may not meet all short-term liquidity needs after 2016 while complying with the leverage covenant.
- 2016 capital expenditure plans were approximately $8M for maintenance and $40M–$50M for expansion. Purchase commitments were $18.7M, expected to be settled within 12 months. Management said it had significantly reduced new-unit purchases amid the energy-market slowdown.
- The amended maximum leverage covenant was 5.95x for Q3 2016, tightening to 5.75x at year-end 2016, then declining to 5.0x from 2018 onward. The filing does not provide a clear actual leverage ratio. Management cited possible responses to future covenant or liquidity pressure, including delaying discretionary capex or raising equity.
- Q3 impairment expense was $3.4M. For the first nine months, the partnership determined to retire, sell or reuse components from 21 units totaling about 12,000 horsepower, citing maintenance costs and difficulty meeting emissions standards.
- Risks include continued low oil and gas prices reducing production and demand for compression, returned or idle units, customer credit deterioration, floating-rate debt exposure and covenant constraints. A 1% rate increase on quarter-end variable-rate debt was estimated to increase annual interest expense by approximately $7.4M.
- Management reported no customer above 10% of revenue in 2016 and said ordinary-course litigation was not expected to have a material adverse effect. It accrued $0.2M for potential additional sales taxes, but could not estimate a reasonable range of possible losses beyond the accrual.
- On October 20, 2016, the partnership announced a $0.525-per-unit distribution payable November 14, 2016. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether utilization, pricing and returned-unit trends improve, and how these affect revenue and cash generation.
- Actual leverage-covenant headroom and borrowing availability, particularly as covenant limits tighten and debt remains substantial.
- Whether DCF can consistently cover declared distributions, given Q3 DCF coverage below 1.0x and ongoing reliance on DRIP participation.
- Planned capital spending, purchase commitments and funding needs after 2016.
- Customer credit quality, sales-tax exposure and the effects of variable interest rates.