c
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission File No.
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧ | Accelerated filer ◻ | |
Non-accelerated filer ◻ | Smaller reporting company | |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧
As of November 1, 2019, there were
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1.Financial Statements
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
| September 30, |
| December 31, | |||
2019 | 2018 | |||||
Assets | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net: | ||||||
Trade |
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Other |
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Related party receivables | | | ||||
Inventories |
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Prepaid expenses and other assets |
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Total current assets |
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Installment receivable | | | ||||
Property and equipment, net |
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Identifiable intangible assets, net | | | ||||
Goodwill |
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Other assets |
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Total assets | $ | | $ | | ||
Liabilities, Preferred Units and Partners’ Capital | ||||||
Current liabilities: | ||||||
Accounts payable | $ | | $ | | ||
Related party payables | | | ||||
Accrued liabilities |
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Deferred revenue |
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Total current liabilities |
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Long-term debt, net |
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Other liabilities |
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Total liabilities | | | ||||
Commitments and contingencies | ||||||
Preferred Units | | | ||||
Partners’ capital: | ||||||
Limited partner interests: | ||||||
Common units, |
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Class B Units, | — | | ||||
Warrants |
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Total partners’ capital |
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Total liabilities, preferred units and partners’ capital | $ | | $ | | ||
See accompanying notes to unaudited condensed consolidated financial statements.
1
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per unit amounts)
Three Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Revenues: | ||||||||||||
Contract operations | $ | | $ | | $ | | $ | | ||||
Parts and service |
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Related party | | | | | ||||||||
Total revenues |
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Costs and expenses: | ||||||||||||
Cost of operations, exclusive of depreciation and amortization |
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Selling, general and administrative |
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Depreciation and amortization |
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Loss (gain) on disposition of assets |
| ( |
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| ( |
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Impairment of compression equipment | — | | | | ||||||||
Total costs and expenses |
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Operating income |
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Other income (expense): | ||||||||||||
Interest expense, net |
| ( |
| ( |
| ( |
| ( | ||||
Other |
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Total other expense |
| ( |
| ( |
| ( |
| ( | ||||
Net income (loss) before income tax expense (benefit) |
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| ( |
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| ( | ||||
Income tax expense (benefit) |
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| ( |
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| ( | ||||
Net income (loss) | | ( | | ( | ||||||||
Less: distributions on Preferred Units | ( | ( | ( | ( | ||||||||
Net income (loss) attributable to common and Class B unitholders’ interests | $ | | $ | ( | $ | ( | $ | ( | ||||
Net income (loss) attributable to: | ||||||||||||
Common units | $ | | $ | ( | $ | | $ | ( | ||||
Class B Units | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Weighted average common units outstanding - basic |
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Weighted average common units outstanding - diluted |
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Weighted average Class B Units outstanding - basic and diluted |
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Basic and diluted net income (loss) per common unit | $ | | $ | ( | $ | | $ | ( | ||||
Basic and diluted net loss per Class B Unit | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Distributions declared per common unit for respective periods | $ | | $ | | $ | | $ | | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital
And Predecessor Parent Company Net Investment
(in thousands, except per unit amounts)
For the Nine Months Ended September 30, 2019 | ||||||||||||
| Common Units |
| Class B Units |
| Warrants |
| Total | |||||
Partners’ capital ending balance, December 31, 2018 |
| $ | |
| $ | | $ | | $ | | ||
Vesting of phantom units |
|
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| — |
| — |
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Distributions and distribution equivalent rights, $ |
|
| ( |
| — |
| — |
| ( | |||
Issuance of common units under the DRIP |
|
| |
| — |
| — |
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Net loss attributable to common and Class B unitholders’ interests |
|
| ( |
| ( |
| — |
| ( | |||
Partners’ capital ending balance, March 31, 2019 | $ | | $ | | $ | | $ | | ||||
Vesting of phantom units | | — | — | | ||||||||
Distributions and distribution equivalent rights, $ | ( | — | — | ( | ||||||||
Issuance of common units under the DRIP | | — | — | | ||||||||
Net income (loss) attributable to common and Class B unitholders’ interests | | ( | — | ( | ||||||||
Partners’ capital ending balance, June 30, 2019 | $ | | $ | | $ | | $ | | ||||
Vesting of phantom units | | — | — | | ||||||||
Distributions and distribution equivalent rights, $ | ( | — | — | ( | ||||||||
Issuance of common units under the DRIP | | — | — | | ||||||||
Net income (loss) attributable to common and Class B unitholders’ interests | | ( | — | | ||||||||
Conversion of Class B Units to common units | | ( | — | — | ||||||||
Partners’ capital ending balance, September 30, 2019 |
| $ | |
| $ | — | $ | | $ | | ||
3
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital
And Predecessor Parent Company Net Investment
(continued)
(in thousands, except per unit amounts)
For the Nine Months Ended September 30, 2018 | |||||||||||||||
Predecessor Parent | |||||||||||||||
Company Net | |||||||||||||||
| Common Units |
| Class B Units |
| Warrants |
| Investment |
| Total | ||||||
Ending balance, December 31, 2017 |
| $ | — |
| $ | — | $ | — | $ | | $ | | |||
Predecessor net loss | — | — | — | ( | ( | ||||||||||
Predecessor parent company net contribution | — | — | — | | | ||||||||||
Ending balance, March 31, 2018 | $ | — | $ | — | $ | — | $ | | $ | | |||||
Allocation of Predecessor parent company net investment | | — | — | ( | — | ||||||||||
Deemed distribution for additional interest in USA Compression Predecessor | ( | — | — | — | ( | ||||||||||
Purchase Price Adjustment for USA Compression Partners, LP | ( | — | — | — | ( | ||||||||||
Issuance of common units for the Equity Restructuring | | — | — | — | | ||||||||||
Issuance of common units for the CDM Acquisition | | — | — | — | | ||||||||||
Issuance of Class B units for the CDM Acquisition | — | | — | — | | ||||||||||
Issuance of Warrants | — | — | | — | | ||||||||||
Vesting of phantom units | | — | — | — | | ||||||||||
Distributions and distribution equivalent rights | ( | — | — | — | ( | ||||||||||
Issuance of common units under the DRIP | | — | — | — | | ||||||||||
Net loss attributable to common and Class B unitholders’ interests for the period April 2, 2018 to June 30, 2018 | ( | ( | — | — | ( | ||||||||||
Partners’ capital ending balance, June 30, 2018 | $ | |
| $ | | $ | | $ | — | $ | | ||||
Vesting of phantom units | | — | — | — | | ||||||||||
Distributions and distribution equivalent rights | ( | — | — | — | ( | ||||||||||
Issuance of common units under the DRIP | | — | — | — | | ||||||||||
Net loss attributable to common and Class B unitholders’ interests | ( | ( | — | — | ( | ||||||||||
Partners’ capital ending balance, September 30, 2018 |
| $ | |
| $ | | $ | | $ | — | $ | | |||
See accompanying notes to unaudited condensed consolidated financial statements.
4
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine Months Ended September 30, | ||||||
| 2019 |
| 2018 | |||
Cash flows from operating activities: | ||||||
Net income (loss) | $ | | $ | ( | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||
Depreciation and amortization |
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Bad debt expense | | | ||||
Amortization of debt issuance costs |
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Unit-based compensation expense |
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Deferred income tax expense (benefit) | | ( | ||||
Loss (gain) on disposition of assets |
| ( |
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Impairment of compression equipment | | | ||||
Changes in assets and liabilities: | ||||||
Accounts receivable and related party receivables, net |
| ( |
| ( | ||
Inventories |
| ( |
| ( | ||
Prepaid expenses and other current assets |
| ( |
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Other noncurrent assets |
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| ( | ||
Other noncurrent liabilities | ( | — | ||||
Accounts payable and related party payables |
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| ( | ||
Accrued liabilities and deferred revenue |
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Net cash provided by operating activities |
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Cash flows from investing activities: | ||||||
Capital expenditures, net |
| ( |
| ( | ||
Proceeds from disposition of property and equipment | | | ||||
Proceeds from insurance recovery | | | ||||
Acquisitions of USA Compression Predecessor | — | ( | ||||
Assumed cash acquired in business combination of USA Compression Partners, LP | — | | ||||
Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Proceeds from revolving credit facility |
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Proceeds from issuance of senior notes | | — | ||||
Payments on revolving credit facility |
| ( |
| ( | ||
Proceeds from issuance of Preferred Units and Warrants, net | — | | ||||
Cash paid related to net settlement of unit-based awards | ( | ( | ||||
Cash distributions on common units |
| ( |
| ( | ||
Cash distributions on Preferred Units | ( | ( | ||||
Financing costs |
| ( |
| ( | ||
Contributions from Parent, net | — | | ||||
Other | ( | — | ||||
Net cash provided by (used in) financing activities |
| ( |
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Decrease in cash and cash equivalents |
| ( |
| ( | ||
Cash and cash equivalents, beginning of period |
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Cash and cash equivalents, end of period | $ | | $ | | ||
Supplemental cash flow information: | ||||||
Cash paid for interest, net of capitalized amounts | $ | | $ | | ||
Cash paid for taxes | $ | | $ | | ||
Supplemental non-cash transactions: | ||||||
Non-cash distributions to certain common unitholders (DRIP) | $ | | $ | | ||
Transfers from inventories to property and equipment | $ | | $ | | ||
Changes in capital expenditures included in accounts payable and accrued liabilities | $ | | $ | ( | ||
Conversion of Class B Units to common units | $ | | $ | — | ||
Predecessor’s non-cash distribution to Predecessor’s Parent | $ | — | $ | ( | ||
Issuance of common units for the CDM Acquisition | $ | — | $ | | ||
Issuance of Class B Units for the CDM Acquisition | $ | — | $ | | ||
Issuance of common units for the Equity Restructuring | $ | — | $ | | ||
See accompanying notes to unaudited condensed consolidated financial statements.
5
USA COMPRESSION PARTNERS, LP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Description of Business
Unless the context otherwise requires or where otherwise indicated, the terms “our,” “we,” “us,” “the Partnership” and similar language when used in the present or future tense and for periods on and subsequent to April 2, 2018 (the “Transactions Date”) refer to USA Compression Partners, LP, collectively with its consolidated operating subsidiaries, including the USA Compression Predecessor. Unless the context otherwise requires or where otherwise indicated, the term “USA Compression Predecessor,” as well as the terms “our,” “we,” “us” and “its” when used in a historical context or in reference to periods prior to the Transactions Date, refer to CDM Resource Management LLC and CDM Environmental & Technical Services LLC collectively, which has been deemed to be the predecessor of the Partnership for financial reporting purposes.
We are a Delaware limited partnership. Through our operating subsidiaries, we provide compression services under fixed-term contracts with customers in the natural gas and crude oil industries, using natural gas compression packages that we design, engineer, own, operate and maintain. We primarily provide compression services in a number of shale plays throughout the United States, including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales.
USA Compression GP, LLC, a Delaware limited liability company, serves as our general partner and is referred to herein as the “General Partner.” The General Partner has been wholly owned by Energy Transfer Operating, L.P. (“ETO”) since October 2018, when Energy Transfer Equity, L.P. (“ETE”) and Energy Transfer Partners, L.P. (“ETP”) completed the merger of ETP with a wholly owned subsidiary of ETE in a unit-for-unit exchange (the “ETE Merger”). Following the closing of the ETE Merger, ETE changed its name to “Energy Transfer LP” (“ET LP”) and ETP changed its name to “Energy Transfer Operating, L.P.” Upon the closing of the ETE Merger, ETE contributed to ETO
The USA Compression Predecessor owned and operated a fleet of compressors used to provide natural gas compression services for customer specific systems. The USA Compression Predecessor also owned and operated a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling, and dehydration. The USA Compression Predecessor had operations located in Texas, Oklahoma, Louisiana, Arkansas, Pennsylvania, New Mexico, Colorado, Ohio, and West Virginia.
CDM Acquisition
On the Transactions Date, we consummated the transactions contemplated by the Contribution Agreement dated January 15, 2018, pursuant to which, among other things, we acquired all of the issued and outstanding membership interests of the USA Compression Predecessor from ETO (the “CDM Acquisition”) in exchange for aggregate consideration of approximately $
General Partner Purchase Agreement
On the Transactions Date, and in connection with the closing of the CDM Acquisition, we consummated the transactions contemplated by the Purchase Agreement dated January 15, 2018, by and among ET LP, Energy Transfer Partners, L.L.C., USA Compression Holdings, LLC (“USA Compression Holdings”) and, solely for certain purposes therein, R/C IV USACP Holdings, L.P. and ETO, pursuant to which, among other things, ET LP acquired from USA Compression Holdings (i) all of the outstanding limited liability company interests in the General Partner and (ii)
6
Equity Restructuring Agreement
On the Transactions Date, and in connection with the closing of the CDM Acquisition, we consummated the transactions contemplated by the Equity Restructuring Agreement dated January 15, 2018, pursuant to which, among other things, the Partnership, the General Partner and ET LP agreed to cancel the Partnership’s Incentive Distribution Rights and convert the General Partner Interest (as defined in the Equity Restructuring Agreement) into a non-economic general partner interest, in exchange for the Partnership’s issuance of
The CDM Acquisition, GP Purchase and Equity Restructuring are collectively referred to as the “Transactions.”
(2) Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Partnership
The unaudited condensed consolidated financial statements give effect to the business combination and the Transactions discussed above under the acquisition method of accounting, and the business combination has been accounted for in accordance with the applicable reverse merger accounting guidance. ET LP acquired a controlling financial interest in us through the acquisition of the General Partner. As a result, the USA Compression Predecessor is deemed to be the accounting acquirer of the Partnership because its ultimate parent company obtained control of the Partnership through its control of the General Partner. Consequently, the USA Compression Predecessor is deemed to be the predecessor of the Partnership for financial reporting purposes, and the historical financial statements of the Partnership reflect the USA Compression Predecessor for all periods prior to the closing of the Transactions, which occurred on the Transactions Date.
The USA Compression Predecessor’s assets and liabilities retained their historical carrying values. Additionally, the Partnership’s assets acquired and liabilities assumed by the USA Compression Predecessor in the business combination were recorded at their fair values measured as of the Transactions Date. The excess of the assumed purchase price of the Partnership over the estimated fair values of the Partnership’s net assets acquired was recorded as goodwill. The assumed purchase price and fair value of the Partnership was determined using acceptable fair value methods. Additionally, the USA Compression Predecessor was reflected at ET LP’s historical cost, and the difference between the consideration paid by the Partnership and ET LP’s historical carrying values (net book value) at the Transactions Date was recorded to partners’ capital.
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As noted above, the historical condensed consolidated financial statements of the Partnership reflect the historical condensed consolidated financial statements of the USA Compression Predecessor in accordance with the applicable accounting and financial reporting guidance. Therefore, the historical condensed consolidated financial statements are comprised of the USA Compression Predecessor for periods prior to the Transactions Date. The historical condensed consolidated financial statements are also comprised of the condensed consolidated balance sheet and statement of operations of the Partnership, which includes the USA Compression Predecessor, as of and for all periods subsequent to the Transactions Date.
In the opinion of our management, such financial information reflects all normal recurring adjustments necessary for a fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019 (our “2018 Annual Report”).
USA Compression Predecessor
ETO allocated various corporate overhead expenses to the USA Compression Predecessor based on a percentage of assets, net income (loss), or adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). These
7
allocations are not necessarily indicative of the cost that the USA Compression Predecessor would have incurred had it operated as an independent standalone entity. The USA Compression Predecessor also historically relied upon ETO for funding operating and capital expenditures as necessary. As a result, the historical financial statements of the USA Compression Predecessor may not fully reflect or be indicative of what the USA Compression Predecessor’s balance sheet, results of operations and cash flows would have been or will be in the future.
Certain expenses incurred by ETO are only indirectly attributable to the USA Compression Predecessor. As a result, certain assumptions and estimates are made in order to allocate a reasonable share of such expenses to the USA Compression Predecessor, so that the accompanying financial statements reflect substantially all costs of doing business. The allocations and related estimates and assumptions are described more fully in Note 12.
Certain amounts of the USA Compression Predecessor’s revenues are derived from related party transactions, as described more fully in Note 12.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances. We consider investments in highly liquid financial instruments purchased with an original maturity of 90 days or less to be cash equivalents.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our determination of the allowance for doubtful accounts requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. We continuously evaluate the financial strength of our customers based on payment history, the overall business climate in which our customers operate and specific identification of customer bad debt and make adjustments to the allowance as necessary. Our evaluation of our customers’ financial strength is based on the aging of their respective receivables balance, customer correspondence, financial information and third-party credit ratings. Our evaluation of the business climate in which our customers operate is based on a review of various publicly available materials regarding our customers’ industries, including the solvency of various companies in the industry.
The USA Compression Predecessor determined its allowance for doubtful accounts based upon historical write-off experience and specific identification of unrecoverable amounts.
Inventories
Inventories consist of serialized and non-serialized parts used primarily in the repair of compression units. All inventories are stated at the lower of cost or net realizable value. Serialized parts inventories are determined using the specific identification method, while non-serialized parts inventories are determined using the weighted average cost method. Purchases of inventories are considered operating activities on the unaudited condensed consolidated statements of cash flows.
Property and Equipment
Property and equipment are carried at cost except for (i) certain acquired assets which are recorded at fair value on their respective acquisition dates and (ii) impaired assets which are recorded at fair value on the last impairment evaluation date for which an adjustment was required. Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over three to
When property and equipment is retired or sold, its carrying value and the related accumulated depreciation are removed from our accounts and any associated gains or losses are recorded on our statements of operations in the period of sale or disposition.
Capitalized interest is calculated by multiplying the Partnership’s monthly effective interest rate on outstanding debt by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was $
8
Impairment of Long-Lived Assets
Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written-down to estimated fair value. We test long-lived assets for impairment when events or circumstances indicate that the assets’ carrying value may not be recoverable or will no longer be utilized in the operating fleet. The most common circumstance requiring compression units to be evaluated for impairment is when idle units do not meet the desired performance characteristics of our active revenue generating horsepower.
The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows associated with the operating fleet, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.
Refer to Note 5 for more detailed information about impairment charges during the three and nine months ended September 30, 2019 and 2018.
Identifiable Intangible Assets
Identifiable intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The estimated useful lives of our intangible assets range from 15 to
We assess identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We did not record any impairment of identifiable intangible assets during the three and nine months ended September 30, 2019 and 2018.
Goodwill
Goodwill represents consideration paid in excess of the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized, but is reviewed for impairment annually based on the carrying values as of October 1, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered.
We did not record any impairment of goodwill during the three and nine months ended September 30, 2019 and 2018.
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of our services or goods. Revenue is measured at the amount of consideration we expect to receive in exchange for providing services or transferring goods. Incidental items, if any, that are immaterial in the context of the contract are recognized as expenses.
Pass Through Taxes
Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.
Fair Value Measurements
Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
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Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability.
As of September 30, 2019, our financial instruments consisted primarily of cash and cash equivalents, trade accounts receivable, trade accounts payable and long-term debt. The book values of cash and cash equivalents, trade accounts receivable and trade accounts payable are representative of fair value due to their short-term maturities. The carrying amount of our revolving credit facility approximates fair value due to the floating interest rates associated with the debt.
The fair value of our Senior Notes 2026 and Senior Notes 2027, both defined in Note 8, were estimated using quoted prices in inactive markets and are considered Level 2 measurements.
The following table summarizes the aggregate principal amount and fair value of our Senior Notes 2026 and Senior Notes 2027 (in thousands):
September 30, 2019 | December 31, 2018 | |||||
Level 2 | Level 2 | |||||
Senior Notes 2026, aggregate principal | $ | | $ | | ||
Fair value of Senior Notes 2026 | | | ||||
Senior Notes 2027, aggregate principal | $ | | $ | — | ||
Fair value of Senior Notes 2027 | | — | ||||
Use of Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that existed at the date of the unaudited condensed consolidated financial statements. Although these estimates were based on management’s available knowledge of current and expected future events, actual results could differ from these estimates.
Operating Segment
We operate in a single business segment, the compression services business.
Adoption of Lease Accounting Standard
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which has amended the FASB Accounting Standards Codification (“ASC”) and introduced ASC Topic 842, Leases (“ASC Topic 842”). On January 1, 2019, we adopted ASC Topic 842, which is effective for interim and annual reporting periods beginning on or after December 15, 2018. ASC Topic 842 requires entities to recognize lease assets and liabilities on the balance sheet for all leases with a term of more than one year, including operating leases, which historically were not recorded on the balance sheet in accordance with the prior standard.
To adopt ASC Topic 842, we recognized a cumulative catch-up adjustment to the opening balance sheet presented January 1, 2019 related to certain leases that existed as of that date. As permitted, we have not retrospectively modified our consolidated financial statements for comparative purposes. The adoption of the standard had an impact on our consolidated balance sheet, but did not have an impact on our consolidated statements of operations or cash flows. As a result of adoption, we have recorded additional net right-of-use (“ROU”) lease assets and lease liabilities of approximately $
To adopt ASC Topic 842, we elected the package of practical expedients permitted under the transition guidance within the standard. The expedient package allowed us not to reassess whether existing contracts contained a lease, the lease classification of existing leases and initial direct cost for existing leases. In addition to the package of practical expedients, we have elected not to capitalize amounts pertaining to leases with terms less than twelve months, to use the portfolio approach to determine discount rates, not to separate non-lease components from lease components and not to apply the use of hindsight to the active lease population.
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Cumulative-effect adjustments made to the opening balance sheet at January 1, 2019 were as follows (in thousands):
Balance at | Adjustments Due to | ||||||||||
Balance Sheet | December 31, 2018, as | ASC Topic 842 | Balance at | ||||||||
Assets (liabilities) | Line Item | Previously Reported | (Leases) | January 1, 2019 | |||||||
Operating lease right-of-use assets | Other assets | $ | — | $ | | $ | | ||||
Operating lease liabilities, current | Accrued liabilities | — | ( | ( | |||||||
Operating lease liabilities, long-term | Other liabilities | — | ( | ( | |||||||
Additional disclosures related to lease accounting are included in Note 7.
(3) Trade Accounts Receivable
The allowance for doubtful accounts, which was $
During the nine months ended September 30, 2019, we recognized bad debt expense of $
During the three and nine months ended September 30, 2018, we increased our allowance for doubtful accounts by $
(4) Inventories
Components of inventories are as follows (in thousands):
| September 30, 2019 |
| December 31, 2018 | |||
Serialized parts | $ | | $ | | ||
Non-serialized parts |
| |
| | ||
Total inventories | $ | | $ | | ||
(5) Property and Equipment and Identifiable Intangible Assets
Property and Equipment
Property and equipment consisted of the following (in thousands):
| September 30, 2019 |
| December 31, 2018 | |||
Compression and treating equipment | $ | | $ | | ||
Furniture and fixtures |
| |
| | ||
Automobiles and vehicles |
| |
| | ||
Computer equipment |
| |
| | ||
Buildings | | | ||||
Land | | | ||||
Leasehold improvements |
| |
| | ||
Total property and equipment, gross |
| |
| | ||
Less: accumulated depreciation and amortization |
| ( |
| ( | ||
Total property and equipment, net | $ | | $ | | ||
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Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Compression equipment, acquired new | 25 years | ||
Compression equipment, acquired used | |||
Furniture and fixtures | |||
Vehicles and computer equipment | |||
Buildings | |||
Leasehold improvements |
Depreciation expense on property and equipment was $
As of September 30, 2019 and December 31, 2018, there was $
During the three and nine months ended September 30, 2019, we recognized $
During the three and nine months ended September 30, 2018, we recognized $
On a quarterly basis, we evaluate the future deployment of our idle fleet under then-current market conditions. For the nine months ended September 30, 2019 and for the three and nine months ended September 30, 2018, we determined to retire or re-utilize key components of
The primary causes for these impairments were: (i) units were not considered marketable in the foreseeable future, (ii) units were subject to excessive maintenance costs or (iii) units were unlikely to be accepted by customers due to certain performance characteristics of the unit, such as the inability to meet then-current quoting criteria without excessive retrofitting costs. These compression units were written down to their respective estimated salvage values, if any.
Identifiable Intangible Assets
Identifiable intangible assets, net consisted of the following (in thousands):
| Customer |
|
| ||||||
Relationships | Trade Names | Total | |||||||
Net balance at December 31, 2018 | $ | | $ | | $ | | |||
Amortization expense |
| ( |
| ( |
| ( | |||
Net balance at September 30, 2019 | $ | | $ | | $ | | |||
Accumulated amortization of intangible assets was $
(6) Other Current Liabilities
As of September 30, 2019, accrued liabilities included $
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As of December 31, 2018, accrued liabilities included $
(7) Lease Accounting
Lessee Accounting
We maintain both finance leases and operating leases, primarily related to office space, warehouse facilities and certain corporate equipment. Our leases have remaining lease terms of up to
We determine if an arrangement is a lease at inception. Operating leases are included in other assets, accrued liabilities and other liabilities in our unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued liabilities and other liabilities in our unaudited condensed consolidated balance sheets.
ROU lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. ROU lease assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred.
For short-term leases (leases that have terms of twelve months or less upon commencement), lease payments are recognized on a straight line basis and no ROU assets are recorded. For certain equipment leases, such as office equipment, we account for the lease and non-lease components as a single lease component.
Components of lease expense consisted of the following (in thousands):
Three Months Ended | Nine Months Ended | |||||||
| Income Statement Line Item |
| September 30, 2019 |
| September 30, 2019 | |||
Operating lease costs: | ||||||||
Operating lease cost | Cost of operations, exclusive of depreciation and amortization | $ | | $ | | |||
Operating lease cost | Selling, general and administrative | | | |||||
Total operating lease costs | | | ||||||
Finance lease costs: | ||||||||
Amortization of lease assets | Depreciation and amortization | | | |||||
Short-term lease costs: | ||||||||
Short-term lease cost | Cost of operations, exclusive of depreciation and amortization | | | |||||
Short-term lease cost | Selling, general and administrative | | | |||||
Total short-term lease costs | | | ||||||
Variable lease costs: | ||||||||
Variable lease cost | Cost of operations, exclusive of depreciation and amortization | | | |||||
Variable lease cost | Selling, general and administrative | | | |||||
Total variable lease costs | | | ||||||
Total lease costs | $ | | $ | | ||||
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Supplemental balance sheet information related to leases consisted of the following (in thousands):
Operating Leases | ||||||||
Assets (liabilities) | Balance Sheet Line Item | September 30, 2019 | December 31, 2018 | |||||
Operating lease ROU assets | Other assets | $ | | $ | — | |||
Operating lease liabilities, current | Accrued liabilities | ( | — | |||||
Operating lease liabilities, long-term | Other liabilities | ( | — | |||||
Finance Leases | ||||||||
Assets (liabilities) | September 30, 2019 | December 31, 2018 | ||||||
Property and equipment, gross | $ | | $ | | ||||
Accumulated depreciation | ( | ( | ||||||
Property and equipment, net | | | ||||||
Accrued liabilities | ( | ( | ||||||
Other liabilities | ( | ( | ||||||
Other supplemental information related to leases was as follows:
Weighted Average Remaining Lease Term | September 30, 2019 | |||||||
Operating leases | ||||||||
Finance leases | ||||||||
Weighted Average Discount Rate | September 30, 2019 | |||||||
Operating leases | ||||||||
Finance leases | ||||||||
Supplemental cash flow information related to leases consisted of the following (in thousands):
Nine Months Ended | |||
September 30, 2019 | |||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | $ | ( | |
Operating cash flows from finance leases | ( | ||
Financing cash flows from finance leases | ( | ||
ROU assets obtained in exchange for lease obligations: | |||
Operating leases | $ | | |
Finance leases | | ||
Maturities of lease liabilities consisted of the following (in thousands):
Operating Leases | Finance Leases | Total | |||||||
2019 (remainder) | $ | | $ | | $ | | |||
2020 | | | | ||||||
2021 | | | | ||||||
2022 | | | | ||||||
2023 | | | | ||||||
Thereafter | | | | ||||||
Total lease payments | | | | ||||||
Less: present value discount | ( | ( | ( | ||||||
Present value of lease liabilities | $ | | $ | | $ | | |||
As of September 30, 2019, we have entered into additional operating leases that have not yet commenced with an estimated present value of $
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Lessor Accounting
We granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provides the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term in 2021.
We accounted for this option as a sales type lease resulting in a current installment receivable included in other accounts receivable of $
Revenue and interest income related to the lease is recognized over the lease term. We recognize maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue was $
Lease payments expected to be received subsequent to September 30, 2019 are as follows (in thousands):
Lease Payments | ||||||||
2019 (remainder) | $ | | ||||||
2020 | | |||||||
2021 | | |||||||
Total installment receivables | | |||||||
Less: present value discount | ( | |||||||
Present value of installment receivables | $ | | ||||||
ASC Topic 842 provides lessors with a practical expedient to not separate non-lease components from the associated lease components and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC Topic 606 Revenue from Contracts with Customers (“ASC Topic 606”) and certain conditions are met. Our contract operations services agreements meet these conditions and we consider the predominant component to be the non-lease components, resulting in the ongoing recognition of revenue following ASC Topic 606 guidance.
(8) Long-Term Debt
Our long-term debt, of which there is no current portion, consisted of the following (in thousands):
September 30, 2019 | December 31, 2018 | |||||
Revolving credit facility | $ | | $ | | ||
Senior Notes 2026, aggregate principal | | | ||||
Senior Notes 2027, aggregate principal | | — | ||||
Less: deferred financing costs, net of amortization | ( | ( | ||||
Total Senior Notes, net | | | ||||
Total long-term debt, net | $ | | $ | | ||
Revolving Credit Facility
As of September 30, 2019, we were in compliance with all of our covenants under the Sixth Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement has an aggregate commitment of $
As of September 30, 2019, we had outstanding borrowings under the Credit Agreement of $
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2019 was
The Credit Agreement permits us to make distributions of available cash to unitholders so long as (a) no default under the facility has occurred, is continuing or would result from the distribution, (b) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants and (c) immediately after giving effect to such distribution, we have availability under the Credit Agreement of at least $
The Credit Agreement also contains various financial covenants, including covenants requiring us to maintain:
● | a minimum EBITDA to interest coverage ratio of |
● | a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter, for the annualized trailing three months of (a) |
The Credit Agreement matures in April 2023 and we expect to maintain it for the term. The Credit Agreement is a “revolving credit facility” that includes a lock box arrangement, whereby remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility.
Senior Notes 2026
On March 23, 2018, the Partnership and its wholly owned finance subsidiary, USA Compression Finance Corp. (“Finance Corp”), co-issued $
The indenture governing the Senior Notes 2026 (the “2026 Indenture”) contains a Fixed Charge Coverage Ratio (as defined in the 2026 Indenture) that we must comply with in order to make certain Restricted Payments (as defined in the 2026 Indenture).
The Senior Notes 2026 are fully and unconditionally guaranteed (the “2026 Guarantees”), jointly and severally, on a senior unsecured basis by all of our existing subsidiaries (other than Finance Corp), and will be fully and unconditionally guaranteed, jointly and severally, by each of our future restricted subsidiaries that either borrows under, or guarantees, our revolving credit facility or guarantees certain of our other indebtedness (collectively, the “Guarantors”). The Senior Notes 2026 and the 2026 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’ and our existing and future senior indebtedness and senior to the Guarantors’ and our future subordinated indebtedness, if any. The Senior Notes 2026 and the 2026 Guarantees are effectively subordinated in right of payment to all of the Guarantors’ and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2026.
We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is
On January 14, 2019, the Partnership closed an exchange offer whereby holders of the Senior Notes 2026 exchanged all of the Senior Notes 2026 for an equivalent amount of senior notes (“2026 Exchange Notes”) registered under the Securities Act. The 2026 Exchange Notes are substantially identical to the Senior Notes 2026, except that the 2026 Exchange Notes have been registered with the SEC and do not contain the transfer restrictions, restrictive legends, registration rights or additional interest provisions of the Senior Notes 2026.
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Senior Notes 2027
On March 7, 2019, the Partnership and Finance Corp co-issued $
At any time prior to September 1, 2022, we may redeem up to
Prior to September 1, 2022, we may redeem all or a part of the Senior Notes 2027 at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date.
On or after September 1, 2022, we may redeem all or a part of the Senior Notes 2027 at redemption prices (expressed as percentages of the principal amount) set forth below, plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on September 1 of the years indicated below:
Year | Percentages | |||
2022 | % | |||
2023 | % | |||
2024 | % | |||
2025 and thereafter | % | |||
If we experience a change of control followed by a ratings decline, unless we have previously exercised or concurrently exercise our right to redeem the Senior Notes 2027 (as described above), we may be required to offer to repurchase the Senior Notes 2027 at a purchase price equal to
The indenture governing the Senior Notes 2027 (the “2027 Indenture”) contains a Fixed Charge Coverage Ratio (as defined in the 2027 Indenture) that we must comply with in order to make certain Restricted Payments (as defined in the 2027 Indenture).
In connection with issuing the Senior Notes 2027, we incurred certain issuance costs in the amount of $
The Senior Notes 2027 are fully and unconditionally guaranteed (the “2027 Guarantees”), jointly and severally, on a senior unsecured basis by the Guarantors. The Senior Notes 2027 and the 2027 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’ and our existing and future senior indebtedness, including the Exchange Notes, and senior to the Guarantors’ and our future subordinated indebtedness, if any. The Senior Notes 2027 and the 2027 Guarantees are effectively subordinated in right of payment to all of the Guarantors’ and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2027.
We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100% owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
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(9) Preferred Units and Warrants
On the Transactions Date, we completed a private placement of $
The Preferred Units rank senior to the common units with respect to distributions and rights upon liquidation. The Preferred Unitholders are entitled to receive cumulative quarterly cash distributions equal to $
The Preferred Units are presented as temporary equity in the mezzanine section of the unaudited condensed consolidated balance sheets because the redemption provisions exercisable on or after April 2, 2028 are outside the Partnership’s control. The Preferred Units have been recorded at their issuance date fair value, net of issuance cost. Net income allocations increase the carrying value and declared distributions decrease the carrying value of the Preferred Units. As the Preferred Units are not currently redeemable and it is not probable that they will become redeemable by us, adjustment to the initial carrying amount is not necessary and would only be required if it becomes probable that the Preferred Units would become redeemable by us.
Changes in the Preferred Units balance from December 31, 2018 through September 30, 2019 are summarized below (in thousands):
Preferred Units | |||
Balance at December 31, 2018 | $ | | |
Net income allocated to Preferred Units | | ||
Cash distributions on Preferred Units |
| ( | |
Balance at September 30, 2019 | $ | | |
The Warrants are presented within the equity section of the unaudited condensed consolidated balance sheets in accordance with GAAP as they are indexed to the Partnership’s common units and require physical settlement or net common unit settlement.
Refer to Note 12 for information about the rights EIG Veteran Equity Aggregator, L.P. (along with its affiliated funds, “EIG”) has to designate one of the members of the Board of Directors of USA Compression GP, LLC (the “Board”).
(10) Partners’ Capital
Common Units
As of September 30, 2019, we had
Class B Unit Conversion
On July 30, 2019,
Cash Distributions
As the USA Compression Predecessor is deemed to be the predecessor of the Partnership for financial reporting purposes, cash distributions paid by the Partnership related to periods prior to the Transactions Date are not included
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within the results of operations presented within the unaudited condensed consolidated financial statements for the nine months ended September 30, 2018.
We have declared quarterly distributions per unit to our limited partner unitholders of record, including holders of our common units and phantom units, as follows (dollars in millions, except distribution per unit):
Distribution per | Amount Paid to | Amount Paid to | |||||||||||
Limited Partner | Common | Phantom | Total | ||||||||||
Payment Date |
| Unit |
| Unitholders |
| Unitholders |
| Distribution |
| ||||
August 10, 2018 | $ | | $ | | $ | | $ | | |||||
November 9, 2018 | $ | | $ | | $ | | $ | | |||||
February 8, 2019 | $ | | $ | | $ | | $ | | |||||
May 10, 2019 | $ | | $ | | $ | | $ | | |||||
August 9, 2019 | $ | | $ | | $ | | $ | | |||||
Announced Quarterly Distribution
On October 17, 2019, we announced a cash distribution of $
Distribution Reinvestment Plan
During the nine months ended September 30, 2019, distributions of $
Earnings Per Unit
The computation of earnings per unit is based on the weighted average number of participating securities outstanding during the applicable period. Basic earnings per unit is determined by dividing net income (loss) allocated to participating securities after deducting the amount distributed on Preferred Units, by the weighted average number of participating securities outstanding during the period. Net income (loss) is allocated to participating securities based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income (loss) for the period, the excess distributions are allocated to all participating securities outstanding based on their respective ownership percentages. Diluted earnings per unit are computed using the treasury stock method, which considers the potential issuance of limited partner units associated with our long-term incentive plan and Warrants. The classes of participating securities include common units, Class B Units prior to July 30, 2019, and certain equity-based compensation awards. Unvested phantom units and unexercised Warrants are not included in basic earnings per unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per unit to the extent that they are dilutive, and in the case of Warrants to the extent they are considered “in the money.” For the three and nine months ended September 30, 2019, approximately
(11) Revenue Recognition
On January 1, 2018, we adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.
We identified no material impact on our historical revenues upon initial application of ASC Topic 606, and as such did not recognize any cumulative catch-up effect to the opening balance of our partners’ capital as of January 1, 2018. Additionally, the application of ASC Topic 606 had no material impact on any financial statement line items.
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The following table disaggregates our revenue by type of service (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Contract operations revenue | $ | | $ | | $ | | $ | | ||||
Retail parts and services revenue | | | | | ||||||||
Total revenues | $ | | $ | | $ | | $ | | ||||
The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Services provided or goods transferred at a point in time | $ | | $ | | $ | | $ | | ||||
Services provided over time: | ||||||||||||
Primary term | | | | | ||||||||
Month-to-month | | | | | ||||||||
Total revenues | $ | | $ | | $ | | $ | | ||||
Contract assets and trade accounts receivable
We record contract assets when we have completed performance under a contract but our right to consideration is not yet unconditional. We had no contract assets as of September 30, 2019 and December 31, 2018. There were no significant changes to our trade accounts receivable balances due to contract modifications or adjustments, or changes in time frame for a right to consideration to become unconditional during the period.
Deferred revenue
We record deferred revenue when cash payments are received or due in advance of our performance. The increase in the deferred revenue balance for the nine months ended September 30, 2019 is primarily driven by cash payments received or due in advance of satisfying our performance obligations under a contract. There was no significant change to our deferred revenue balance as a result of changes in time frame for a performance obligation to be satisfied during the period.
Practical expedients and exemptions
We have elected to apply the practical expedient in ASC 606-10-50-14 and as such do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
o
(12) Transactions with Related Parties
We provide compression services to entities affiliated with ETO, which as of September 30, 2019 owned approximately
We had $
ETO provided certain benefits to the USA Compression Predecessor employees which did not continue following the Transactions Date. ETO provided medical, dental and other healthcare benefits to the USA Compression Predecessor employees. The total amount incurred by ETO for the benefit of the USA Compression Predecessor employees for the nine months ended September 30, 2018 was $
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matching contribution to the USA Compression Predecessor employees’ 401(k) accounts. The total amount of matching contributions incurred for the benefit of the USA Compression Predecessor employees for the nine months ended September 30, 2018 was $
ETO allocated certain overhead costs associated with general and administrative services, including salaries and benefits, facilities, insurance, information services, human resources and other support departments to the USA Compression Predecessor which did not continue following the Transactions Date. Where costs incurred on the USA Compression Predecessor’s behalf could not be determined by specific identification, the costs were primarily allocated to the USA Compression Predecessor based on an average percentage of fixed assets, net income (loss) and adjusted EBITDA. The USA Compression Predecessor believes these allocations were a reasonable reflection of the utilization of services provided. However, the allocations may not fully reflect the expenses that would have been incurred had the USA Compression Predecessor been a standalone company during the periods presented. During the nine months ended September 30, 2018, ETO allocated general and administrative expenses of $
Pursuant to that certain Board Representation Agreement entered into by us, the General Partner, ET LP and EIG in connection with our private placement of Preferred Units and Warrants to EIG, EIG Management Company, LLC has the right to designate one of the members of the Board for so long as the holders of the Preferred Units hold more than
(13) Commitments and Contingencies
(a) Major Customers
We did not have revenue from any single customer representing 10% or more of total revenue for the three and nine months ended September 30, 2019 or 2018.
(b) Litigation
From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
(c) Equipment Purchase Commitments
Our future capital commitments are comprised of binding commitments under purchase orders for new compression units and serialized parts ordered but not received. Those commitments as of September 30, 2019 were $
(d) Sales Tax Contingency
Our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. The Office of the Texas Comptroller of Public Accounts (“Comptroller”) has claimed that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and other companies in our industry have disputed these claims based on existing tax statutes which provide for manufacturing exemptions on the transactions in question. The manufacturing exemptions are based on the fact that our natural gas compression equipment is used in the process of preparing natural gas for ultimate use and sale.
The USA Compression Predecessor has several open audits with the Comptroller for certain periods prior to the Transactions Date wherein the Comptroller has challenged the applicability of the manufacturing exemption. Any liability for the periods prior to the Transactions Date is covered by an indemnity between us and ETO. As of September 30, 2019, we have recorded a $
For more information, see Note 17 to the consolidated financial statements included in our 2018 Annual Report.
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(e) Self-Insurance
Effective January 1, 2019, we became self-insured for medical claims up to certain stop loss limits. Liabilities are accrued for self-insured claims when sufficient information is available to reasonably estimate the amount of the loss. As of September 30, 2019, we have recorded a $
(14) Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (“ASC Topic 326”): Measurement of Credit Losses on Financial Instruments. The amendments to ASC Topic 326 require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets. The amendments in this update are effective for interim and annual periods beginning after January 1, 2020, with early adoption permitted by one year. We plan to adopt this new standard on January 1, 2020 and expect that our adoption of this standard will not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (“ASC Topic 820”): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The amendments to ASC Topic 820 eliminate, add and modify certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. The amendments in this update are effective for interim and annual periods beginning on January 1, 2020, with early adoption permitted. We plan to adopt this new standard on January 1, 2020. We expect the impact to our disclosures will not be material and there to be no impact to our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (“ASC Subtopic 350-40”): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments to ASC Subtopic 350-40 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments to ASC Subtopic 350-40. The amendments in this update are effective for interim and annual periods beginning on January 1, 2020, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We plan to adopt this new standard, on a prospective basis, on January 1, 2020 and expect that our adoption of this standard will not have a material impact on our consolidated financial statements.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Following the Transactions described in Note 1 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report, CDM Resource Management LLC and CDM Environmental & Technical Services LLC, which together represent the CDM Compression Business (the “USA Compression Predecessor”), has been determined to be the historical predecessor of USA Compression Partners, LP (the “Partnership”) for financial reporting purposes. The USA Compression Predecessor is considered the predecessor of the Partnership because Energy Transfer LP (“ET LP”), through its wholly owned subsidiary Energy Transfer Partners, L.L.C., obtained control of the Partnership through its acquisition of USA Compression GP, LLC, the general partner of the Partnership (the “General Partner”).
The closing of the Transactions occurred on April 2, 2018 (the “Transactions Date”) and has been reflected in the consolidated financial statements of the Partnership.
In October 2018, Energy Transfer Equity, L.P. (“ETE”) and Energy Transfer Partners, L.P. (“ETP”) completed the merger of ETP with a wholly owned subsidiary of ETE in a unit-for-unit exchange (the “ETE Merger”). Following the closing of the ETE Merger, ETE changed its name to “Energy Transfer LP” (“ET LP”) and ETP changed its name to “Energy Transfer Operating, L.P.” (“ETO”). Upon the closing of the ETE Merger, ETE contributed to ETO 100% of the limited liability company interests in the General Partner. References herein to “ETO” refer to ETP for periods prior to the ETE Merger and ETO following the ETE Merger, and references to “ET LP” refer to ETE for periods prior to the ETE Merger and ET LP following the ETE Merger.
You should read this discussion and analysis of financial condition and results of operations in conjunction with the historical financial statements and accompanying notes included elsewhere in this report. All references in this section to the USA Compression Predecessor, as well as the terms “our,” “we,” “us” and “its” refer to the USA Compression Predecessor when used in an historical context or in reference to periods prior to the Transactions Date, unless the context otherwise requires or where otherwise indicated. All references in this section to the Partnership, as well as the terms “our,” “we,” “us” and “its” refer to USA Compression Partners, LP, together with its consolidated subsidiaries, including the USA Compression Predecessor, when used in the present or future tense and for periods subsequent to the Transactions Date, unless the context otherwise requires or where otherwise indicated.
This report contains “forward-looking statements.” All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects and expectations concerning our business, results of operations and financial condition. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “continue,” “if,” “outlook,” “will,” “could,” “should,” or similar words or the negatives thereof.
Known material factors that could cause our actual results to differ from those in these forward-looking statements are described in Part II, Item 1A (“Risk Factors”) and elsewhere in this report. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:
| ● | changes in general economic conditions and changes in economic conditions of the crude oil and natural gas industries specifically; |
| ● | competitive conditions in our industry; |
| ● | changes in the long-term supply of and demand for crude oil and natural gas; |
| ● | our ability to realize the anticipated benefits of acquisitions; |
| ● | actions taken by our customers, competitors and third-party operators; |
| ● | the deterioration of the financial condition of our customers; |
| ● | changes in the availability and cost of capital; |
| ● | operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control; |
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| ● | the effects of existing and future laws and governmental regulations; and |
| ● | the effects of future litigation. |
All forward-looking statements included in this report are based on information available to us on the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.
Overview
We provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales. Demand for our services is driven by the domestic production of natural gas and crude oil; as such, we have focused our activities in areas of attractive natural gas and crude oil production growth, which are generally found in these shale and unconventional resource plays. According to studies promulgated by the Energy Information Agency, the production and transportation volumes in these shale plays are expected to increase over the long term due to the comparatively attractive economic returns versus returns achieved in many conventional basins. Furthermore, the changes in production volumes and pressures of shale plays over time require a wider range of compression services than in conventional basins. We believe we are well-positioned to meet these changing operating conditions due to the flexibility of our compression units. While our business focuses largely on compression services serving infrastructure applications, including centralized natural gas gathering systems and processing facilities, which utilize large horsepower compression units, typically in shale plays, we also provide compression services in more mature conventional basins, including gas lift applications on crude oil wells targeted by horizontal drilling techniques. Gas lift, a process by which natural gas is injected into the production tubing of an existing producing well, in order to reduce the hydrostatic pressure and allow the oil to flow at a higher rate, and other artificial lift technologies are critical to the enhancement of oil production from horizontal wells operating in tight shale plays.
Factors Affecting the Comparability of our Operating Results
As described above, the USA Compression Predecessor has been deemed to be the accounting acquirer of the Partnership in accordance with applicable business combination accounting guidance, and, as a result, the historical financial statements reflect the results of operations of the USA Compression Predecessor for periods prior to the Transactions Date. Therefore, the Partnership’s future results of operations may not be comparable to the USA Compression Predecessor’s historical results of operations for the reasons described below.
The revenues generated by the Partnership consist of the revenues from compression services as well as related ancillary revenues, including those generated by the USA Compression Predecessor, subsequent to the Transactions Date. The historical revenues included within the Partnership’s financial statements relating to periods prior to the Transactions Date are only comprised of those of the USA Compression Predecessor.
Additionally, selling, general and administrative expenses will not be comparable to the selling, general and administrative expenses previously allocated to the USA Compression Predecessor by ETO. The Partnership’s selling, general and administrative expenses will also not be comparable to the historical USA Compression Predecessor’s selling, general and administrative expenses because the Partnership’s selling, general and administrative expenses will include the expenses associated with being a publicly traded master limited partnership, whereas the USA Compression Predecessor was operated as a component of a larger company.
The Partnership incurs interest on its long-term debt and makes distributions to its unitholders. The USA Compression Predecessor held no long-term debt and had no outstanding publicly traded equity securities. As a result, the Partnership’s long-term debt and related charges will not be comparable to the USA Compression Predecessor’s historical long-term debt and related charges.
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Operating Highlights
The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
Fleet horsepower (at period end) (1) |
| 3,678,804 |
| 3,613,647 | 3,678,804 |
| 3,613,647 | ||||||
Total available horsepower (at period end) (2) | 3,692,554 | 3,682,922 | 3,692,554 | 3,682,922 | |||||||||
Revenue generating horsepower (at period end) (3) | 3,278,947 | 3,217,923 | 3,278,947 | 3,217,923 | |||||||||
Average revenue generating horsepower (4) | 3,258,125 | 3,212,183 | 3,269,702 | 2,588,638 | |||||||||
Average revenue per revenue generating horsepower per month (5) | $ | 16.73 | $ | 16.17 | $ | 16.59 | $ | 15.98 | |||||
Revenue generating compression units (at period end) | 4,546 | 4,756 | 4,546 | 4,756 | |||||||||
Average horsepower per revenue generating compression unit (6) | 721 | 674 | 718 | 670 | |||||||||
Horsepower utilization (7): | |||||||||||||
At period end | 93.7 | % | 93.2 | % | 93.7 | % | 93.2 | % | |||||
Average for the period (8) | 93.9 | % | 92.8 | % | 94.2 | % | 90.6 | % | |||||
| (1) | Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As of September 30, 2019, we had approximately 56,000 horsepower on order, 8,750 horsepower of which we expect to be delivered in the remainder of 2019. |
| (2) | Total available horsepower is revenue generating horsepower under contract for which we are billing a customer, horsepower in our fleet that is under contract but is not yet generating revenue, horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, and idle horsepower. Total available horsepower excludes new horsepower on order for which we do not have an executed compression services contract. |
| (3) | Revenue generating horsepower is horsepower under contract for which we are billing a customer. |
| (4) | Calculated as the average of the month-end revenue generating horsepower for each of the months in the period. |
| (5) | Calculated as the average of the result of dividing the contractual monthly rate for all units at the end of each month in the period by the sum of the revenue generating horsepower at the end of each month in the period. |
| (6) | Calculated as the average of the month-end revenue generating horsepower per revenue generating compression unit for each of the months in the period. |
| (7) | Horsepower utilization is calculated as (i) the sum of (a) revenue generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract, not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair. Horsepower utilization based on revenue generating horsepower and fleet horsepower as of September 30, 2019 and 2018 was 89.1% and 89.0%, respectively. |
| (8) | Calculated as the average utilization for the months in the period based on utilization at the end of each month in the period. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three months ended September 30, 2019 and 2018 was 88.9% and 89.7%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the nine months ended September 30, 2019 and 2018 was 89.8% and 86.4%, respectively. |
The 1.8% increase in fleet horsepower as of September 30, 2019 over the fleet horsepower as of September 30, 2018 was attributable to compression units added to our fleet to meet incremental demand by new and current customers for our compression services. The 1.4% increase in average revenue generating horsepower during the three months ended September 30, 2019 over September 30, 2018 was primarily due to organic growth in our large horsepower fleet. The 26.3% increase in average revenue generating horsepower during the nine months ended September 30, 2019 over September 30, 2018 was primarily due to the inclusion of the Partnership’s historical assets for a portion of the nine months ended September 30, 2018 compared to the entire nine months ended September 30, 2019, in addition to organic growth in our large horsepower fleet. The 3.5% increase in average revenue per revenue generating horsepower per month during the three months ended September 30, 2019 over September 30, 2018 and the 3.8% increase in average
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revenue per revenue generating horsepower per month during the nine months ended September 30, 2019 over September 30, 2018 were primarily due to contracts on new compression units and selective price increases on the existing fleet.
Average horsepower utilization increased to 93.9% during the three months ended September 30, 2019 compared to 92.8% during the three months ended September 30, 2018. The 1.1% increase in average horsepower utilization is primarily attributable to increased demand for our services driven by increased U.S. production of crude oil and natural gas. The above noted fluctuation describes the change in period end horsepower utilization between the nine months ended September 30, 2019 and 2018 as well. Average horsepower utilization increased to 94.2% during the nine months ended September 30, 2019 compared to 90.6% during the nine months ended September 30, 2018. The 3.6% increase in average horsepower utilization is primarily attributable to the higher utilization of the Partnership’s fleet that was added to the USA Compression Predecessor’s fleet after the Transactions Date, which resulted in an increase in total active horsepower as a percentage of total fleet horsepower during the nine months ended September 30, 2019.
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Financial Results of Operations
Three months ended September 30, 2019 compared to the three months ended September 30, 2018
The following table summarizes our results of operations for the periods presented (dollars in thousands):
Three Months Ended September 30, | Percent | ||||||||
| 2019 |
| 2018 |
| Change | ||||
Revenues: | |||||||||
Contract operations | $ | 166,197 | $ | 158,664 | 4.7 | % | |||
Parts and service | 4,460 | 6,012 | (25.8) | % | |||||
Related party | 5,099 | 4,271 | 19.4 | % | |||||
Total revenues | 175,756 | 168,947 | 4.0 | % | |||||
Costs and expenses: | |||||||||
Cost of operations, exclusive of depreciation and amortization | 57,423 | 64,309 | (10.7) | % | |||||
Gross operating margin | 118,333 | 104,638 | 13.1 | % | |||||
Other operating and administrative costs and expenses: | |||||||||
Selling, general and administrative | 16,631 | 17,753 | (6.3) | % | |||||
Depreciation and amortization | 57,513 | 59,403 | (3.2) | % | |||||
Loss (gain) on disposition of assets | (1,975) | 1,250 | * | ||||||
Impairment of compression equipment | — | 2,292 | * | ||||||
Total other operating and administrative costs and expenses | 72,169 | 80,698 | (10.6) | % | |||||
Operating income | 46,164 | 23,940 | 92.8 | % | |||||
Other income (expense): | |||||||||
Interest expense, net | (32,626) | (25,443) | 28.2 | % | |||||
Other | 21 | 22 | (4.5) | % | |||||
Total other expense | (32,605) | (25,421) | 28.3 | % | |||||
Net income (loss) before income tax expense (benefit) | 13,559 | (1,481) | * | ||||||
Income tax expense (benefit) | 244 | (918) | 126.6 | % | |||||
Net income (loss) | $ | 13,315 | $ | (563) | * | ||||
*Not meaningful
Contract operations revenue. During the three months ended September 30, 2019, we experienced a year-to-year increase in demand for our compression services driven by increased U.S. production of crude oil and natural gas, resulting in an increase of $7.5 million in contract operations revenue. Average revenue generating horsepower increased 1.4% during the three months ended September 30, 2019 over September 30, 2018, while average revenue per revenue generating horsepower per month increased 3.5% from $16.17 for the three months ended September 30, 2018 to $16.73 for the three months ended September 30, 2019.
Parts and service revenue. The $1.6 million decrease in parts and service revenue was primarily attributable to a decrease in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers. Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers.
Related party revenue. Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO. The $0.8 million increase in related party revenue was primarily attributable to additional compression and related ancillary services demand from such affiliates.
Cost of operations, exclusive of depreciation and amortization. The $6.9 million decrease in cost of operations, exclusive of depreciation and amortization, was driven by (1) a $3.4 million decrease in outside maintenance services, (2) a $2.4 million decrease in ad valorem tax expense, due primarily to prior year refunds received during the three months ended September 30, 2019 and lower 2019 ad valorem tax rates, (3) a $1.9 million decrease in direct labor expenses and (4) a $1.3 million decrease in indirect expenses, such as transportation and freight expenses. These
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decreases were partially offset by a $2.6 million increase in direct expenses, such as parts and fluids expenses. The increase in direct parts and fluids is primarily driven by the increase in average revenue generating horsepower during the current period.
Gross operating margin. The $13.7 million increase in gross operating margin was primarily due to an increase in revenues due to the increase in average revenue generating horsepower and a decrease in cost of operations, exclusive of depreciation and amortization, during the three months ended September 30, 2019.
Selling, general and administrative expense. The $1.1 million decrease in selling, general and administrative expense for the three months ended September 30, 2019 was primarily attributable to a $1.3 million decrease in transaction expenses. Transaction expenses were lower during the three months ended September 30, 2019 due to the Transactions completed during 2018.
Depreciation and amortization expense. The $1.9 million decrease in depreciation and amortization expense for the three months ended September 30, 2019 was primarily related to increased depreciation for the three months ended September 30, 2018 to conform asset useful lives used by the USA Compression Predecessor to those used by the Partnership, partially offset by an increase in the gross property and equipment balances during the three months ended September 30, 2019 compared to the gross property and equipment balances during the three months ended September 30, 2018.
Interest expense, net. The $7.2 million increase in interest expense, net was primarily attributable to interest expense incurred on $750.0 million of 6.875% senior notes issued in March 2019, which were used to reduce borrowings under the Credit Agreement, partially offset by the decreased borrowings under the Credit Agreement. The weighted average interest rate applicable to borrowings under the Credit Agreement was 4.81% and 4.65% for the three months ended September 30, 2019 and September 30, 2018, respectively, and average outstanding borrowings under the Credit Agreement were $357.6 million for the three months ended September 30, 2019 compared to $972.3 million for the three months ended September 30, 2018.
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Nine months ended September 30, 2019 compared to the nine months ended September 30, 2018
The following table summarizes our results of operations for the periods presented (dollars in thousands):
Nine Months Ended September 30, | Percent | ||||||||
| 2019 |
| 2018 |
| Change | ||||
Revenues: | |||||||||
Contract operations | $ | 493,110 | $ | 383,732 | 28.5 | % | |||
Parts and service | 11,544 | 15,836 | (27.1) | % | |||||
Related party | 15,523 | 12,807 | 21.2 | % | |||||
Total revenues | 520,177 | 412,375 | 26.1 | % | |||||
Costs and expenses: | |||||||||
Cost of operations, exclusive of depreciation and amortization | 170,693 | 159,177 | 7.2 | % | |||||
Gross operating margin | 349,484 | 253,198 | 38.0 | % | |||||
Other operating and administrative costs and expenses: | |||||||||
Selling, general and administrative | 48,836 | 52,891 | (7.7) | % | |||||
Depreciation and amortization | 173,220 | 156,943 | 10.4 | % | |||||
Loss (gain) on disposition of assets | (389) | 12,328 | * | ||||||
Impairment of compression equipment | 3,234 | 2,292 | * | ||||||
Total other operating and administrative costs and expenses | 224,901 | 224,454 | 0.2 | % | |||||
Operating income | 124,583 | 28,744 | 333.4 | % | |||||
Other income (expense): | |||||||||
Interest expense, net | (94,162) | (51,125) | 84.2 | % | |||||
Other | 53 | 21 | * | ||||||
Total other expense | (94,109) | (51,104) | 84.2 | % | |||||
Net income (loss) before income tax expense (benefit) | 30,474 | (22,360) | * | ||||||
Income tax expense (benefit) | 623 | (1,624) | (138.4) | % | |||||
Net income (loss) | $ | 29,851 | $ | (20,736) | * | ||||
*Not meaningful
Contract operations revenue. The $109.4 million increase in contract operations revenue during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily attributable to the first three months of 2018 including only the results of the USA Compression Predecessor prior to the Transactions Date. Also, we have experienced a year-to-year increase in demand for our compression services driven by increased U.S. production of crude oil and natural gas. Average revenue generating horsepower increased 26.3% during the nine months ended September 30, 2019 over the nine months ended September 30, 2018 primarily due to the inclusion of the Partnership’s historical assets for a portion of the nine months ended September 30, 2018 compared to the entire nine months ended September 30, 2019, and average revenue per revenue generating horsepower per month increased 3.8% from $15.98 for the nine months ended September 30, 2018 to $16.59 for the nine months ended September 30, 2019.
Parts and service revenue. The $4.3 million decrease in parts and service revenue was primarily attributable to a decrease in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers. Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers.
Related party revenue. Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO. The $2.7 million increase in related party revenue was primarily attributable to additional compression and related ancillary services demand from such affiliates.
Cost of operations, exclusive of depreciation and amortization. The $11.5 million increase in cost of operations, exclusive of depreciation and amortization, was driven by (1) a $20.5 million increase in direct expenses, such as parts and fluids expenses, and (2) a $5.5 million increase in direct labor expenses, partially offset by (3) a $4.8 million decrease in ad valorem tax expense, due primarily to prior year refunds received during the nine months ended
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September 30, 2019 and lower 2019 ad valorem tax rates, (4) a $3.6 million decrease in other indirect expenses, (5) a $3.5 million decrease in outside maintenance services and (6) a $3.0 million decrease in retail parts and service expenses, which have a corresponding decrease in parts and service revenue. The increase in direct parts, fluids and labor is primarily driven by the increase in average revenue generating horsepower during the current period as a result of the addition of the Partnership’s historical assets after the Transactions Date.
Gross operating margin. The $96.3 million increase in gross operating margin was primarily due to an increase in revenues, partially offset by an increase in cost of operations, exclusive of depreciation and amortization, during the nine months ended September 30, 2019. These increases were primarily due to the addition of the Partnership’s historical assets after the Transactions Date and higher demand for our services driven by increased U.S. production of crude oil and natural gas.
Selling, general and administrative expense. The $4.1 million decrease in selling, general and administrative expense for the nine months ended September 30, 2019 was primarily attributable to (1) a $4.3 million decrease in transaction expenses and severance expenses, (2) a $3.0 million decrease in unit-based compensation expense and (3) a $3.0 million decrease in other miscellaneous expenses, partially offset by (4) a $3.1 million increase in payroll and benefits expenses and (5) a $2.6 million increase in professional fees expenses.
Unit-based compensation expense was lower for the nine months ended September 30, 2019 primarily due to the accelerated vesting of certain outstanding phantom units as a result of the change in control associated with the Transactions during the nine months ended September 30, 2018, partially offset by an increase in the number of outstanding unvested phantom units as of September 30, 2019 compared to September 30, 2018. Transaction expenses and severance expenses were lower during the nine months ended September 30, 2019 primarily due to the Transactions completed during the nine months ended September 30, 2018. Other miscellaneous expenses decreased primarily due to the expense allocation to the USA Compression Predecessor ending after the Transactions Date. Payroll and benefits expenses and professional fees increased due to the addition of the Partnership’s historical assets after the Transactions Date.
Depreciation and amortization expense. The $16.3 million increase in depreciation and amortization expense was primarily the result of the addition of the Partnership’s historical assets on the Transactions Date.
Interest expense, net. The $43.0 million increase in interest expense, net was primarily attributable to (1) higher overall debt balances for the nine months ended September 30, 2019 compared to September 30, 2018, as the USA Compression Predecessor had no borrowings prior to the Transactions Date, (2) interest expense incurred on $750.0 million of 6.875% senior notes issued in March 2019, which were used to reduce borrowings under the Credit Agreement, and (3) higher interest rates on borrowings under the Credit Agreement. These increases were partially offset by the decrease in borrowings under the Credit Agreement.
The weighted average interest rate applicable to borrowings under the Credit Agreement was 4.98% for the nine months ended September 30, 2019 compared to 4.60% for the period from the Transactions Date to September 30, 2018. Average outstanding borrowings under the Credit Agreement were $524.6 million for the nine months ended September 30, 2019 compared to $955.6 million for the period from the Transactions Date to September 30, 2018.
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Other Financial Data
The following table summarizes other financial data for the periods presented (dollars in thousands):
Three Months Ended September 30, | Percent | Nine Months Ended September 30, | Percent | |||||||||||||||||
Other Financial Data: (1) |
| 2019 |
|
| 2018 |
| Change |
|
| 2019 |
|
| 2018 |
| Change | |||||
Gross operating margin | $ | 118,333 | $ | 104,638 | 13.1 | % | $ | 349,484 | $ | 253,198 | 38.0 | % | ||||||||
Gross operating margin percentage (2) | 67.3 | % | 61.9 | % | 8.7 | % | 67.2 | % | 61.4 | % | 9.4 | % | ||||||||
Adjusted EBITDA | $ | 104,327 | $ | 90,132 | 15.7 | % | $ | 310,412 | $ | 217,219 | 42.9 | % | ||||||||
Adjusted EBITDA percentage (2) | 59.4 | % | 53.3 | % | 11.3 | % | 59.7 | % | 52.7 | % | 13.3 | % | ||||||||
DCF | $ | 54,933 | $ | 47,478 | 15.7 | % | $ | 163,847 | $ | 121,336 | 35.0 | % | ||||||||
DCF Coverage Ratio | 1.08 | x | 1.01 | x | 7.2 | % | 1.13 | x | 1.28 | x | (12.0) | % | ||||||||
Cash Coverage Ratio | 1.09 | x | 1.01 | x | 7.8 | % | 1.13 | x | 1.29 | x | (12.2) | % | ||||||||
| (1) | Gross operating margin, Adjusted EBITDA, Distributable Cash Flow (“DCF”), DCF Coverage Ratio and Cash Coverage Ratio are all non-GAAP financial measures. Definitions of each measure, as well as reconciliations of each measure to its most directly comparable financial measure(s) calculated and presented in accordance with GAAP, can be found below under the caption “Non-GAAP Financial Measures.” |
| (2) | Gross operating margin percentage and Adjusted EBITDA percentage are calculated as a percentage of revenue. |
Adjusted EBITDA. Adjusted EBITDA during the three months ended September 30, 2019 increased $14.2 million, or 15.7%, over the three months ended September 30, 2018, primarily due to a $13.7 million increase in gross operating margin and a $0.4 million decrease in selling, general and administrative expenses, excluding transaction expenses, unit-based compensation expense and other non-recurring charges, during the three months ended September 30, 2019.
Adjusted EBITDA during the nine months ended September 30, 2019 increased $93.2 million, or 42.9% over the nine months ended September 30, 2018, driven by the addition of the Partnership’s historical assets after the Transactions Date, which was the primary cause of a $96.3 million increase in gross operating margin. The increase was partially offset by a $3.3 million increase in selling, general and administrative expenses, excluding transaction expenses, unit-based compensation expense and other non-recurring charges, during the nine months ended September 30, 2019.
DCF. The $7.5 million, or 15.7%, increase in DCF during the three months ended September 30, 2019 over the three months ended September 30, 2018 was primarily attributable to a $13.7 million increase in gross operating margin and a $0.4 million decrease in selling, general and administrative expenses, excluding transaction expenses, unit-based compensation expense and other-non recurring charges, offset by a $6.7 million increase in cash interest expense, net, during the three months ended September 30, 2019.
The $42.5 million, or 35.0%, increase in DCF during the nine months ended September 30, 2019 over the nine months ended September 30, 2018 was driven by (1) the addition of the Partnership’s historical assets after the Transactions Date, which was the primary cause of a $96.3 million increase in gross operating margin, and (2) a $1.8 million decrease in maintenance capital expenditures. These increases were partially offset by (3) a $41.0 million increase in cash interest expense, net, (4) a $12.3 million increase in distributions on Preferred Units and (5) a $3.3 million increase in selling, general and administrative expenses, excluding transaction expenses, unit-based compensation expense and other non-recurring charges, during the nine months ended September 30, 2019.
Coverage Ratios. The decrease in DCF Coverage Ratio and Cash Coverage Ratio for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was attributable to the fact that distributions for the nine months ended September 30, 2018 reflect only two quarters of distributions, as the USA Compression Predecessor did not pay distributions prior to the Transactions Date, as well as additional distributions for the three months ended September 30, 2019 due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019.
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Liquidity and Capital Resources
Overview
We operate in a capital-intensive industry, and our primary liquidity needs are to finance the purchase of additional compression units and make other capital expenditures, service our debt, fund working capital, and pay distributions. Our principal sources of liquidity include cash generated by operating activities, borrowings under the Credit Agreement and issuances of debt and equity securities, including under the DRIP.
We believe cash generated by operating activities and, where necessary, borrowings under the Credit Agreement will be sufficient to service our debt, fund working capital, fund our estimated expansion capital expenditures, fund our maintenance capital expenditures and pay distributions through the remainder of 2019. Because we distribute all of our available cash, which excludes prudent operating reserves, we expect to fund any future expansion capital expenditures or acquisitions primarily with capital from external financing sources, such as borrowings under the Credit Agreement and issuances of debt and equity securities, including under the DRIP.
Cash Flows
The following table summarizes our sources and uses of cash for the nine months ended September 30, 2019 and 2018 (in thousands):
Nine Months Ended September 30, | ||||||
| 2019 |
| 2018 | |||
Net cash provided by operating activities | $ | 208,880 | $ | 133,200 | ||
Net cash used in investing activities | $ | (108,227) | $ | (715,849) | ||
Net cash provided by (used in) financing activities | $ | (100,750) | $ | 581,466 | ||
Net cash provided by operating activities. The $75.7 million increase in net cash provided by operating activities for the nine months ended September 30, 2019 was due primarily to (1) a $56.1 million increase in net income, as adjusted for non-cash items, as a result of the addition of the Partnership’s historical assets after the Transactions Date and a year-to-year increase in demand for our compression services and (2) a $19.6 million improvement in changes in assets and liabilities, driven by improved accounts receivable collections and partially offset by higher inventories.
Net cash used in investing activities. Net cash used in investing activities decreased $607.6 million for the nine months ended September 30, 2019 compared to September 30, 2018. This decrease was due to (1) $1.2 billion of cash paid, offset by $710.5 million of cash assumed, each as part of the CDM Acquisition for the nine months ended September 30, 2018, (2) a $66.8 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, (3) a $15.3 million increase in proceeds from disposition of property and equipment and (4) a $3.5 million increase in insurance proceeds received during the nine months ended September 30, 2019 for compression units previously damaged.
Net cash provided by (used in) financing activities. Net cash used in financing activities was $100.8 million for the nine months ended September 30, 2019 compared to net cash provided by financing activities of $581.5 million for the nine months ended September 30, 2018. This change was primarily due to (1) $479.1 million of net proceeds received during the nine months ended September 30, 2018 for the issuance of Preferred Units and Warrants used to partially fund the CDM Acquisition, (2) an increase of $24.5 million of cash distributions paid on Preferred Units during the nine months ended September 30, 2019, (3) an increase of $48.4 million in cash distributions paid on common units, as the USA Compression Predecessor did not pay distributions prior to the Transactions Date, (4) a decrease in net borrowings of $107.8 million for the nine months ended September 30, 2019, as additional borrowings for the nine months ended 2018 were made primarily to pay fees and expenses related to the CDM Acquisition, and (5) during the nine months ended September 30, 2018, the USA Compression Predecessor received $28.5 million in intercompany contributions from its former parent company.
During the nine months ended September 30, 2019, we received $750.0 million (before fees and expenses) from the issuance of the Senior Notes 2027. Additionally, and primarily in connection with the issuance of the Senior Notes 2027,
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we paid fees and expenses of $13.5 million. We used the net proceeds to reduce our borrowings under the Credit Agreement.
Capital Expenditures
The compression services business is capital intensive, requiring significant investment to maintain, expand and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist primarily of, the following:
| ● | maintenance capital expenditures, which are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, to replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related operating income; and |
| ● | expansion capital expenditures, which are capital expenditures made to expand the operating capacity or operating income capacity of assets, including by acquisition of compression units or through modification of existing compression units to increase their capacity, or to replace certain partially or fully depreciated assets that were not currently generating operating income. |
We classify capital expenditures as maintenance or expansion on an individual asset basis. Over the long term, we expect that our maintenance capital expenditure requirements will continue to increase as the overall size and age of our fleet increases. Our aggregate maintenance capital expenditures for the nine months ended September 30, 2019 and 2018 were $21.8 million and $23.6 million, respectively. We currently plan to spend approximately $28 million in maintenance capital expenditures for the year 2019, including parts consumed from inventory.
Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between $145 million and $155 million in expansion capital expenditures for the year 2019. Our expansion capital expenditures for the nine months ended September 30, 2019 and 2018 were $136.9 million and $167.5 million, respectively. As of September 30, 2019, we had binding commitments to purchase $47.7 million of additional compression units and serialized parts, $7.8 million of which we expect to spend for units to be delivered in the remainder of 2019.
Revolving Credit Facility
As of September 30, 2019, we were in compliance with all of our covenants under the Credit Agreement. As of September 30, 2019, we had outstanding borrowings under the Credit Agreement of $394.5 million, $1.2 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $410.4 million.
As of November 1, 2019, we had outstanding borrowings under the Credit Agreement of $375.2 million.
For a more detailed description of the Credit Agreement, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report and Note 10 to the consolidated financial statements included in our 2018 Annual Report.
Senior Notes 2026
On March 23, 2018, the Partnership and Finance Corp co-issued $725.0 million aggregate principal amount of senior notes due on April 1, 2026 (the “Senior Notes 2026”). The Senior Notes 2026 accrue interest at the rate of 6.875% per year. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1. The Senior Notes 2026 were used to fund a portion of the CDM Acquisition completed on the Transactions Date.
For a more detailed description of the Senior Notes 2026, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report and Note 10 to the consolidated financial statements included in our 2018 Annual Report.
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Senior Notes 2027
On March 7, 2019, the Partnership and Finance Corp co-issued $750.0 million aggregate principal amount of senior notes due on September 1, 2027 (the “Senior Notes 2027”). The Senior Notes 2027 accrue interest from March 7, 2019 at the rate of 6.875% per year. Interest on the Senior Notes 2027 is payable semi-annually in arrears on each of March 1 and September 1, with the first such payment having occurred on September 1, 2019. Net proceeds from the Senior Notes 2027 were used to reduce our outstanding borrowings under the Credit Agreement.
For a more detailed description of the Senior Notes 2027, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report.
Class B Unit Conversion
On July 30, 2019, 6,397,965 Class B Units automatically converted into common units on a one-for-one basis, resulting in the issuance of 6,397,965 common units to ETO. Following the conversion, there are no longer Class B Units outstanding.
Distribution Reinvestment Plan
During the nine months ended September 30, 2019, distributions of $0.7 million were reinvested under the DRIP resulting in the issuance of 44,605 common units. Such distributions are treated as non-cash transactions in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows included under Part I, Item 1 of this report.
Non-GAAP Financial Measures
Gross Operating Margin
Gross operating margin is a non-GAAP financial measure. We define gross operating margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that gross operating margin is useful as a supplemental measure of our operating profitability. Gross operating margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Gross operating margin should not be considered an alternative to, or more meaningful than, operating income or any other measure of financial performance presented in accordance with GAAP. Moreover, gross operating margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of gross operating margin as a measure of our performance, we believe that it is important to consider operating income determined under GAAP, as well as gross operating margin, to evaluate our operating profitability.
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The following table reconciles gross operating margin to operating income, its most directly comparable GAAP financial measure, for each of the periods presented (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Revenues: | |||||||||||||
Contract operations | $ | 166,197 | $ | 158,664 | $ | 493,110 | $ | 383,732 | |||||
Parts and service | 4,460 |
| 6,012 |
| 11,544 | 15,836 | |||||||
Related party | 5,099 | 4,271 | 15,523 | 12,807 | |||||||||
Total revenues | 175,756 | 168,947 | 520,177 | 412,375 | |||||||||
Cost of operations, exclusive of depreciation and amortization | 57,423 |
| 64,309 |
| 170,693 | 159,177 | |||||||
Gross operating margin | 118,333 | 104,638 | 349,484 | 253,198 | |||||||||
Other operating and administrative costs and expenses: | |||||||||||||
Selling, general and administrative | 16,631 |
| 17,753 |
| 48,836 | 52,891 | |||||||
Depreciation and amortization | 57,513 |
| 59,403 |
| 173,220 | 156,943 | |||||||
Loss (gain) on disposition of assets | (1,975) |
| 1,250 |
| (389) | 12,328 | |||||||
Impairment of compression equipment | — | 2,292 | 3,234 | 2,292 | |||||||||
Total other operating and administrative costs and expenses | 72,169 | 80,698 | 224,901 | 224,454 | |||||||||
Operating income | $ | 46,164 | $ | 23,940 | $ | 124,583 | $ | 28,744 | |||||
Adjusted EBITDA
We define EBITDA as net income (loss) before net interest expense, depreciation and amortization expense, and income tax expense (benefit). We define Adjusted EBITDA as EBITDA plus impairment of compression equipment, impairment of goodwill, interest income on capital lease, unit-based compensation expense, severance charges, certain transaction fees, loss (gain) on disposition of assets and other. We view Adjusted EBITDA as one of management’s primary tools for evaluating our results of operations, and we track this item on a monthly basis both as an absolute amount and as a percentage of revenue compared to the prior month, year-to-date, prior year and budget. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess:
| ● | the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets; |
| ● | the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; |
| ● | the ability of our assets to generate cash sufficient to make debt payments and to pay distributions; and |
| ● | our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. |
We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it may provide a more complete understanding of our performance than GAAP results alone. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.
Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income (loss), operating income, cash flows from operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.
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Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets and the interest cost of acquiring compression equipment are also necessary elements of our costs. Unit-based compensation expense related to equity awards to employees is also a necessary component of our business. Therefore, measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as Adjusted EBITDA, to evaluate our financial performance and our liquidity. Our Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes.
The following table reconciles Adjusted EBITDA to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||||
Net income (loss) | $ | 13,315 | $ | (563) | $ | 29,851 | $ | (20,736) | |||||
Interest expense, net | 32,626 | 25,443 | 94,162 | 51,125 | |||||||||
Depreciation and amortization | 57,513 | 59,403 | 173,220 | 156,943 | |||||||||
Income tax expense (benefit) | 244 | (918) | 623 | (1,624) | |||||||||
EBITDA | $ | 103,698 | $ | 83,365 | $ | 297,856 | $ | 185,708 | |||||
Interest income on capital lease | 159 | 225 | 530 | 498 | |||||||||
Unit-based compensation expense (1) | 2,090 | 1,892 | 7,930 | 10,891 | |||||||||
Transaction expenses (2) | 4 | 1,257 | 555 | 4,120 | |||||||||
Severance charges | 351 | (149) | 696 | 1,382 | |||||||||
Loss (gain) on disposition of assets | (1,975) | 1,250 | (389) | 12,328 | |||||||||
Impairment of compression equipment (3) | — | 2,292 | 3,234 | 2,292 | |||||||||
Adjusted EBITDA | $ | 104,327 | $ | 90,132 | $ | 310,412 | $ | 217,219 | |||||
Interest expense, net | (32,626) | (25,443) | (94,162) | (51,125) | |||||||||
Non-cash interest expense | 1,965 | 1,516 | 5,620 | 3,555 | |||||||||
Income tax (expense) benefit | (244) | 918 | (623) | 1,624 | |||||||||
Interest income on capital lease | (159) | (225) | (530) | (498) | |||||||||
Transaction expenses | (4) | (1,257) | (555) | (4,120) | |||||||||
Severance charges | (351) | 149 | (696) | (1,382) | |||||||||
Other | 152 | (688) | 652 | (1,230) | |||||||||
Changes in operating assets and liabilities | (11,766) | (26,272) | (11,238) | (30,843) | |||||||||
Net cash provided by operating activities | $ | 61,294 | $ | 38,830 | $ | 208,880 | $ | 133,200 | |||||
| (1) | For the three and nine months ended September 30, 2019, unit-based compensation expense included $0.6 million and $1.9 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards and $0.1 million and $0.6 million, respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and nine months ended September 30, 2018, unit-based compensation expense included $0.4 million and $0.8 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards in each period, and $3.7 million related to the cash portion of any settlement of phantom unit awards upon vesting for the nine months ended September 30, 2018. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. |
| (2) | Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. |
| (3) | Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. |
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Distributable Cash Flow
We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense, impairment of compression equipment, impairment of goodwill, certain transaction fees, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery and other, less distributions on Preferred Units and maintenance capital expenditures.
We believe DCF is an important measure of operating performance because it allows management, investors and others to compare basic cash flows we generate (after distributions on our Preferred Units but prior to any retained cash reserves established by the General Partner and the effect of the DRIP) to the cash distributions we expect to pay our common unitholders. Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions.
DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our DCF as presented may not be comparable to similarly titled measures of other companies.
Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs. Unit-based compensation expense related to equity awards to employees is also a necessary component of our business. Therefore, measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as DCF, to evaluate our financial performance and our liquidity. Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of DCF as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes.
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The following table reconciles DCF to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2019 |
| 2018 |
| 2019 |
| 2018 | |||||
Net income (loss) | $ | 13,315 | $ | (563) | $ | 29,851 | $ | (20,736) | ||||
Non-cash interest expense | 1,965 | 1,516 | 5,620 | 3,555 | ||||||||
Depreciation and amortization | 57,513 | 59,403 | 173,220 | 156,943 | ||||||||
Non-cash income tax expense (benefit) | 151 | (1,038) | 352 | (1,863) | ||||||||
Unit-based compensation expense (1) | 2,090 | 1,892 | 7,930 | 10,891 | ||||||||
Transaction expenses (2) | 4 | 1,257 | 555 | 4,120 | ||||||||
Severance charges | 351 | (149) | 696 | 1,382 | ||||||||
Loss (gain) on disposition of assets | (1,975) | 1,250 | (389) | 12,328 | ||||||||
Impairment of compression equipment (3) | — | 2,292 | 3,234 | 2,292 | ||||||||
Distributions on Preferred Units | (12,188) | (12,188) | (36,563) | (24,242) | ||||||||
Proceeds from insurance recovery | 737 | 253 | 1,164 | 253 | ||||||||
Maintenance capital expenditures (4) | (7,030) | (6,447) | (21,823) | (23,587) | ||||||||
DCF | $ | 54,933 | $ | 47,478 | $ | 163,847 | $ | 121,336 | ||||
Maintenance capital expenditures | 7,030 | 6,447 | 21,823 | 23,587 | ||||||||
Transaction expenses | (4) | (1,257) | (555) | (4,120) | ||||||||
Severance charges | (351) | 149 | (696) | (1,382) | ||||||||
Distributions on Preferred Units | 12,188 | 12,188 | 36,563 | 24,242 | ||||||||
Other | (736) | 97 | (864) | 380 | ||||||||
Changes in operating assets and liabilities | (11,766) | (26,272) | (11,238) | (30,843) | ||||||||
Net cash provided by operating activities | $ | 61,294 | $ | 38,830 | $ | 208,880 | $ | 133,200 | ||||
| (1) | For the three and nine months ended September 30, 2019, unit-based compensation expense included $0.6 million and $1.9 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards and $0.1 million and $0.6 million, respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and nine months ended September 30, 2018, unit-based compensation expense included $0.4 million and $0.8 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards in each period, and $3.7 million related to the cash portion of any settlement of phantom unit awards upon vesting for the nine months ended September 30, 2018. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. |
| (2) | Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. |
| (3) | Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. |
| (4) | Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related cash flow. |
Coverage Ratios
DCF Coverage Ratio is defined as DCF divided by distributions declared to common unitholders in respect of such period. Cash Coverage Ratio is defined as DCF divided by cash distributions expected to be paid to common unitholders in respect of such period, after taking into account the non-cash impact of the DRIP. We believe DCF Coverage Ratio and Cash Coverage Ratio are important measures of operating performance because they allow management, investors and others to gauge our ability to pay cash distributions to common unitholders using the cash flows that we generate. Our DCF Coverage Ratio and Cash Coverage Ratio as presented may not be comparable to similarly titled measures of other companies.
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The following table summarizes certain coverage ratios for the periods presented (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2019 |
| 2018 |
| 2019 |
| 2018 (4) | |||||||
DCF | $ | 54,933 | $ | 47,478 | $ | 163,847 | $ | 121,336 | |||||
Distributions for DCF Coverage Ratio (1) | $ | 50,723 | $ | 47,233 | $ | 145,412 | $ | 94,458 | |||||
Distributions reinvested in the DRIP (2) | $ | 282 | $ | 218 | $ | 744 | $ | 436 | |||||
Distributions for Cash Coverage Ratio (3) | $ | 50,441 | $ | 47,015 | $ | 144,668 | $ | 94,022 | |||||
DCF Coverage Ratio | 1.08 | 1.01 | 1.13 | 1.28 | |||||||||
Cash Coverage Ratio | 1.09 | 1.01 | 1.13 | 1.29 | |||||||||
| (1) | Represents distributions to the holders of our common units as of the record date. |
| (2) | Represents distributions to holders enrolled in the DRIP as of the record date. |
| (3) | Represents cash distributions declared for common units not participating in the DRIP. |
| (4) | Distributions for the nine months ended September 30, 2018 reflect only two quarters of distributions as the USA Compression Predecessor did not pay distributions prior to the Transactions Date. |
Off-Balance Sheet Arrangements
We have no off-balance sheet financing activities.
Recent Accounting Pronouncements
For discussion on specific recent accounting pronouncements affecting us, see Note 14 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report.
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
Commodity Price Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or crude oil in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. However, the demand for our compression services depends upon the continued demand for, and production of, natural gas and crude oil. Sustained changes in natural gas or crude oil prices over the long term could result in a decline in the production of natural gas or crude oil, which could result in reduced demand for our compression services. We do not intend to hedge our indirect exposure to fluctuating commodity prices. A 1% decrease in average revenue generating horsepower for the nine months ended September 30, 2019 would result in an annual decrease of approximately $6.5 million in revenue and $4.4 million in gross operating margin. Gross operating margin is a non-GAAP financial measure. For a reconciliation of gross operating margin to net income (loss), its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read “Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” of this report.
Interest Rate Risk
We are exposed to market risk due to variable interest rates under our financing arrangements.
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As of September 30, 2019, we had $394.5 million of variable-rate indebtedness outstanding at a weighted average interest rate of 4.98%. A 1% increase or decrease in the effective interest rate on our variable-rate outstanding debt at September 30, 2019 would result in an annual increase or decrease in our interest expense of approximately $3.9 million.
For further information regarding our exposure to interest rate fluctuations on our debt obligations, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report. Although we do not currently hedge our variable rate debt, we may, in the future, hedge all or a portion of such debt.
Credit Risk
Our credit exposure generally relates to receivables for services provided. If any significant customer of ours should have credit or financial problems resulting in a delay or failure to pay the amount it owes us, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
ITEM 4. | Controls and Procedures |
Management’s Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon the evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective as of September 30, 2019 at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | Legal Proceedings |
From time to time, we may be involved in various legal or governmental proceedings and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 1A. | Risk Factors |
Security holders and potential investors in our securities should carefully consider the risk factors set forth in Part I, “Item 1A. Risk Factors” of our 2018 Annual Report. We have identified these risk factors as important factors that could cause our actual results to differ materially from those contained in any written or oral forward-looking statements made by us or on our behalf.
ITEM 6. | Exhibits |
The following documents are filed, furnished or incorporated by reference as part of this report:
Exhibit No. |
| Description | |||
3.1 | |||||
3.2 | |||||
31.1 | * | ||||
31.2 | * | ||||
32.1 | # | ||||
32.2 | # | ||||
101.1 | * | The following materials from USA Compression Partners, LP’s Quarterly Report on Form 10-Q for the nine months ended September 30, 2019 formatted in Inline XBRL (eXtensible Business Reporting Language): (i) our Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) our Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) our Consolidated Statements of Changes in Partners’ Capital and Predecessor Parent Company Net Investment for the nine months ended September 30, 2019 and 2018, (iv) our Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, and (v) the related notes to our consolidated financial statements. | |||
104 | * | The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL (included with Exhibit 101) | |||
* | Filed herewith. |
# | Furnished herewith. Not considered to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 5, 2019 | USA Compression Partners, LP | ||
By: | USA Compression GP, LLC | ||
its General Partner | |||
By: | /s/ Matthew C. Liuzzi | ||
Matthew C. Liuzzi | |||
Vice President, Chief Financial Officer and Treasurer | |||
(Principal Financial Officer) | |||
By: | /s/ G. Tracy Owens | ||
G. Tracy Owens | |||
Vice President, Finance and Chief Accounting Officer | |||
(Principal Accounting Officer) | |||
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Eric D. Long, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of USA Compression Partners, LP (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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November 5, 2019 |
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/s/ Eric D. Long |
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Name: |
Eric D. Long |
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Title: |
President and Chief Executive Officer |
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13A-14(A) AND RULE 15D-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
I, Matthew C. Liuzzi, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of USA Compression Partners, LP (the “registrant”);
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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November 5, 2019 |
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/s/ Matthew C. Liuzzi |
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Name: |
Matthew C. Liuzzi |
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Title: |
Vice President, Chief Financial Officer and Treasurer |
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of USA Compression Partners, LP (the “Partnership”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Eric D. Long, as President and Chief Executive Officer of USA Compression GP, LLC, the general partner of the Partnership, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
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(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. |
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/s/ Eric D. Long |
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Eric D. Long |
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President and Chief Executive Officer |
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November 5, 2019 |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of USA Compression Partners, LP (the “Partnership”) for the quarter ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Matthew C. Liuzzi, as Vice President, Chief Financial Officer and Treasurer of USA Compression GP, LLC, the general partner of the Partnership, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
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(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Partnership. |
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/s/ Matthew C. Liuzzi |
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Matthew C. Liuzzi |
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Vice President, Chief Financial Officer and Treasurer |
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November 5, 2019 |
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A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Partnership and will be retained by the Partnership and furnished to the Securities and Exchange Commission or its staff upon request.