USA Compression Partners, LP — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; financial statements are unaudited. The Partnership provides natural-gas and crude-oil compression services under term contracts across U.S. production regions.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $63.5 million | $66.4 million | $129.9 million | $131.4 million |
| Operating income (loss) | $8.5 million | $(11.4) million | $22.3 million | $4.2 million |
| Net income (loss) | $3.3 million | $(15.9) million | $11.8 million | $(4.4) million |
| Gross operating margin | $44.9 million; 70.6% | $47.3 million; 71.3% | $90.4 million; 69.6% | $93.1 million; 70.9% |
| Adjusted EBITDA | $37.1 million; 58.5% of revenue | $38.6 million; 58.2% | $75.6 million; 58.2% | $76.1 million; 57.9% |
| Distributable cash flow (DCF) | $30.5 million | $31.0 million | $62.4 million | $60.4 million |
| DCF coverage ratio | 1.03x | 1.23x | 1.07x | 1.22x |
Cash flow and capital spending: For the six months, operating cash flow was $58.5 million, versus $48.6 million a year earlier. Investing cash outflow was $24.6 million, including $24.8 million of capital expenditures; financing cash outflow was $33.8 million. Cash remained $7,000 at June 30. Maintenance capital expenditures were $3.0 million for the half-year.
Debt and liquidity: Long-term revolving-credit borrowings were $735.1 million at June 30, compared with $729.2 million at year-end 2015; the facility matures in January 2020. The Partnership reported $364.9 million of borrowing-base availability and $146.0 million of available borrowing capacity, subject to financial-covenant compliance. It was in compliance with all covenants at quarter-end. The reported borrowing rate was 2.51%; a 1 percentage-point rate change would alter annual interest expense by approximately $7.4 million.
Distributions and capital: The quarterly distribution was $0.525 per unit. The Partnership declared the same distribution for payment August 12, 2016. Six-month cash distributions were $37.6 million, while $21.3 million of distributions were reinvested through the DRIP. All subordinated units converted one-for-one into common units in February 2016; 54.9 million common units were outstanding at June 30.
Changes versus comparable periods
- Q2 revenue declined 4.3%, and six-month revenue declined 1.2%. Management cited lower industry activity, customers optimizing compression needs, reduced revenue-generating horsepower and lower pricing for smaller units.
- Average horsepower utilization fell to 86.1% in Q2 from 90.5%; period-end utilization was 86.0% versus 91.5%. Revenue-generating horsepower at quarter-end decreased to 1.36 million from 1.41 million.
- Net results improved substantially, chiefly because compression-equipment impairment fell to $0.7 million from $26.8 million in the prior-year periods. Q2 operating income also included a $1.0 million loss on transferred equipment.
- Interest expense increased to $5.1 million in Q2 and $10.2 million for the half-year, reflecting higher rates and, for the half-year, higher average borrowings.
- Six-month DCF rose 3.3%, but DCF coverage declined to 1.07x from 1.22x as distributions increased. Cash coverage was 1.49x versus 3.03x, partly reflecting lower DRIP participation.
Outlook, commentary, risks and contingencies
- Management expected operating cash generation and, if needed, revolver borrowings to fund debt service, working capital, 2016 capital expenditures and distributions. It budgeted $10.5 million of 2016 maintenance capital expenditures and $40–$50 million of expansion capital expenditures; $18.5 million of expansion spending occurred in the first half, much of it for prior-year purchases. The filing gives no earnings or revenue guidance.
- There were $7.2 million of binding equipment and parts purchase commitments, expected to be settled within 12 months. Management said future expansion or acquisitions would primarily require external financing because available cash is distributed, subject to operating reserves.
- New EPA methane and VOC rules require specified controls and 95% emissions reduction beginning August 2016, with leak-detection and repair requirements beginning June 2017. Compliance may increase operating costs and capital spending; the Partnership may not pass all costs to customers.
- The business is indirectly exposed to oil and gas prices through customer production and demand. The Partnership does not hedge this exposure. It also faces variable-rate debt risk, customer credit risk and continued energy-market volatility.
- Management accrued $0.2 million for potential additional state and local taxes but said further losses were reasonably possible and could not be reasonably estimated. Ordinary-course litigation was not expected by management to materially affect results or financial position.
Important facts for investors to verify
- Revolver capacity and covenant headroom, particularly after borrowings rose to $740.6 million as of August 2, 2016.
- Whether utilization, customer project timing and pricing stabilize, and how those trends affect revenue and cash generation.
- Distribution sustainability in light of DCF coverage of 1.03x for Q2 and 1.07x for the half-year, including the effect of DRIP participation.
- Actual 2016 expansion and maintenance spending versus budget, and the funding required for remaining commitments.
- Costs and customer cost-recovery under the new emissions rules, plus developments in the unquantified tax contingency and customer credit exposure.
Gross operating margin, Adjusted EBITDA, DCF and coverage ratios are non-GAAP measures; the filing cautions that they may not be comparable across companies.