See more information on property and equipment in Note 3 to our unaudited condensed consolidated financial statements.
(g) Impairments 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 tested for impairment is when idle units do not meet the performance characteristics of our active revenue generating horsepower.
During the three and six months ended June 30, 2017, we evaluated the future deployment of our idle fleet under current market conditions and determined to retire, sell or re-utilize key components of compression units with a total of 5,246 and 8,006 horsepower, respectively,
which were previously used to provide compression services in our business. The cause of the impairment was due to the type of units, which were not marketable, and were subject to excessive maintenance costs.
These compression units were written down to their respective estimated salvage value, if any.
During the three and six months ended June 30, 2016, we evaluated the future deployment of our idle fleet under then-current market conditions and determined to retire, sell or re-utilize key components of compression units with a total of approximately 1,700 horsepower,
which were previously used to provide compression services in our business. The cause of the impairment was related to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet then-current emission standards without retrofitting. We determined that this equipment was unlikely to be accepted by customers under then-current market conditions.
These compression units were written down to their respective estimated salvage value, if any.
As a result of our decision to retire, sell or re-utilize key components of these compression units, we
recorded $2.6 million and $3.7 million of impairment of long-lived assets in the three and six months ended June 30, 2017, respectively, and $0.7 million of impairment of long-lived assets in the three and six months ended June 30, 2016.
(h)
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 nonrecurring 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.
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.
Phantom unit awards granted to employees under the USA Compression Partners, LP 2013 Long-Term Incentive Plan (the “LTIP”) are accounted for as a liability, and such liability is re-measured on a quarterly basis. The liability is based on the publicly quoted price of our common units, which is considered a Level 1 input, and is recorded within the accrued liabilities caption on the Unaudited Condensed Consolidated Balance Sheets.
Net liabilities measured at fair value on a recurring basis are summarized below
(in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Assets (Liabilities)
|
|
Level 1
|
|
Level 1
|
Unit-based compensation liability
|
|
$
|
(3,868)
|
|
$
|
(7,043)
|
As of June 30, 2017 and December 31, 2016, 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 long-term debt approximates fair value due to the floating interest rates associated with the debt.
(i)
Operating Segment
We operate in a single business segment, the compression services business.
(j)
Pass Through Taxes
Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.
(2) Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts, which was $0.6 million and $0.7 million at June 30, 2017 and December 31, 2016, respectively, is our best estimate of the amount of probable credit losses included in our existing accounts receivable. We determine the allowance based upon historical write-off experience and specific customer circumstances. The determination of the allowance for doubtful accounts requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. On an ongoing basis, we conduct an evaluation of 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. During the six months ended June 30, 2017, we reduced our allowance for doubtful accounts by $0.1 million,
and
during the three and six months ended June 30, 2016, we reduced our allowance for doubtful accounts by $0.6 million and $1.4 million, respectively. Reductions for such periods were
due primarily to collections on
accounts that had previously been reserved.
(3) Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Compression equipment
|
|
$
|
1,589,146
|
|
$
|
1,551,157
|
Furniture and fixtures
|
|
|
611
|
|
|
625
|
Automobiles and vehicles
|
|
|
19,075
|
|
|
18,979
|
Computer equipment
|
|
|
24,633
|
|
|
23,394
|
Leasehold improvements
|
|
|
1,533
|
|
|
1,392
|
Total Property and equipment, gross
|
|
|
1,634,998
|
|
|
1,595,547
|
Less: accumulated depreciation and amortization
|
|
|
(372,100)
|
|
|
(327,973)
|
Total Property and equipment, net
|
|
$
|
1,262,898
|
|
$
|
1,267,574
|
We recognized $23.6 million and $22.5 million of depreciation expense on property and equipment for the three months ended June 30, 2017 and 2016, respectively.
We recognized $46.9 million and $43.7 million of depreciation expense on property and equipment for the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017 and December 31, 2016, there was $7.2 million and $1.4 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.
During the six months ended June 30, 2017, we recognized a $0.2 million gain on the sale of a compression unit.
During the three and six months ended June 30, 2016, we abandoned certain assets and incurred a $1.0 million loss.
Each of these is reported within the Loss (gain) on disposition of assets caption in the Unaudited Condensed Consolidated Statements of Operations.
(4)
Installment Receivable
On June 30, 2014, we entered into a FMV Bargain Purchase Option Grant Agreement (the “BPO Capital Lease Transaction”) with a customer, pursuant to which we granted a bargain purchase option to the 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, which is 7 years.
On November 1, 2016, we entered into a Formula Price Purchase Agreement (the “FPP Capital Lease Transaction”) with a customer with respect to certain assets leased to the customer that the customer will purchase at the end of the lease term. The customer has the option to purchase these assets in April and October of each year with the final option occurring in May 2021.
Both capital leases were accounted for as sales type leases resulting in a current installment receivable included in other accounts receivable of $8.7 million and $8.9 million as of June 30, 2017 and December 31, 2016, respectively, and a long-term installment receivable of $12.4 million and $14.1 million as of such period ends, respectively.
Revenue and interest income related to both capital leases is recognized over the respective lease terms. We recognize maintenance revenue within Contract operations revenue and interest income within Interest expense, net on the Unaudited Condensed Consolidated Statements of Operations. For both of the three and six months ended June 30, 2017 and 2016, maintenance revenue related to the BPO Capital Lease Transaction was $0.3 million and $0.6 million, respectively. There is no maintenance revenue component to the FPP Capital Lease Transaction. Interest income related to both capital leases was $0.4 million in each of the three months ended June 30, 2017 and 2016, and $0.8 million and $0.7 million in the six months ended June 30, 2017 and 2016, respectively.
(5)
Accrued Liabilities
Accrued liabilities include accrued payroll and benefits and accrued property taxes. We recognized $5.4 million and $6.9 million of accrued payroll and benefits as of June 30, 2017 and December 31, 2016, respectively. We recognized $5.2 million and $6.6 million of accrued property taxes as of June 30, 2017 and December 31, 2016, respectively.
(6) Long-Term Debt
Our first lien long-term debt, of which there is no current portion, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Revolving Credit Facility
|
|
$
|
725,000
|
|
$
|
685,371
|
In March 2016, we entered into a third amendment to our revolving credit facility, which amended the credit agreement to, among other things, (i) modify the leverage ratio covenant to be (A) 5.50 to 1.0 as of the end of the fiscal quarter ending June 30, 2017, (B) 5.25 to 1.0 as of the end of the respective fiscal quarters ending September 30, 2017 and December 31, 2017 and (C) 5.00 to 1.0 thereafter, and (ii) amend certain other provisions of the credit agreement, all as more fully set forth in the third amendment.
In connection with entering into the third amendment, we paid certain amendment fees to the lenders party thereto and paid a certain arrangement fee to the arranger of the third amendment in the amount of $2.0 million, collectively, during the six months ended June 30, 2016. These fees were capitalized to loan costs and will be amortized through January 2020. No such fees were paid during the three or six months ended June 30, 2017.
As of June 30, 2017 we were in compliance with all of our covenants under our revolving credit facility.
As of June 30, 2017, we had outstanding borrowings under our revolving credit facility of $725.0 million, $317.8 million of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $82.0 million. Our interest rate in effect for all borrowings under our revolving credit facility as of June 30, 2017 and December 31, 2016 was 3.14% and 2.94%, respectively, with a weighted average interest rate of 3.03% and 2.47% during the three months ended June 30, 2017 and 2016, respectively,
and 3.01% and 2.47% during the six months ended June 30, 2017 and 2016, respectively
. There were no letters of credit issued as of June 30, 2017 or 2016.
In the event that any of the operating subsidiaries guarantees any series of the debt securities as described in our registration statements on Form S-3, such guarantees will be full and unconditional and made on a joint and several basis for the benefit of each holder and the Trustee. However, such guarantees will be subject to release, subject to certain limitations, as follows (i) upon the sale, exchange or transfer, whether by way of a merger or otherwise, to any Person that is not our affiliate, of all of our direct or indirect limited partnership or other equity interest in such Subsidiary Guarantor; or (ii) upon our or USA Compression Finance Corp.’s (together, the “Issuers”) delivery of a written notice to the Trustee of the release or discharge of all guarantees by such Subsidiary Guarantor of any Debt of the Issuers other than obligations arising under the indenture governing such debt and any debt securities issued under such indenture, except a discharge or release by or as a result of payment under such guarantees. Capitalized terms used but not defined in this paragraph are defined in the Form of Indenture filed as exhibit 4.1 to such registration statement.
Our operating subsidiaries and USA Compression Finance Corp. are our only existing subsidiaries. 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. 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 of 1933, as amended.
Our revolving credit facility matures in January 2020 and we expect to maintain this facility for the term.
(7)
Partners’ Capital
Common Units and General Partner Interest
As of June 30, 2017, we had 61,574,965 common units outstanding. USA Compression Holdings held 24,513,199 common units as of June 30, 2017 and controlled our General Partner, which held an approximate 1.3% general partner interest (the “General Partner’s Interest”) and the incentive distribution rights (“IDRs”). See the Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital.
Cash Distributions
We have declared quarterly distributions per unit to limited partner unitholders of record, including holders of common and phantom units, and distributions paid to the General Partner, including the General Partner’s Interest and IDRs, as follows (in millions, except distribution per unit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution per
|
|
Amount Paid to
|
|
Amount Paid to
|
|
Amount Paid to
|
|
|
|
|
|
Limited Partner
|
|
Common
|
|
General
|
|
Phantom
|
|
Total
|
|
Payment Date
|
|
Unit
|
|
Unitholders
|
|
Partner
|
|
Unitholders
|
|
Distribution
|
|
May 13, 2016
|
|
$
|
0.525
|
|
$
|
28.4
|
|
$
|
0.7
|
|
$
|
0.7
|
|
$
|
29.8
|
|
August 12, 2016
|
|
$
|
0.525
|
|
$
|
28.8
|
|
$
|
0.7
|
|
$
|
0.7
|
|
$
|
30.2
|
|
November 14, 2016
|
|
$
|
0.525
|
|
$
|
29.1
|
|
$
|
0.7
|
|
$
|
0.6
|
|
$
|
30.4
|
|
February 14, 2017
|
|
$
|
0.525
|
|
$
|
31.9
|
|
$
|
0.7
|
|
$
|
0.8
|
|
$
|
33.4
|
|
May 12, 2017
|
|
$
|
0.525
|
|
$
|
32.1
|
|
$
|
0.7
|
|
$
|
0.6
|
|
$
|
33.4
|
|
Announced Quarterly Distribution
On July 20, 2017, we announced a cash distribution of $0.525 per unit on our common units. The distribution will be paid on August 11, 2017 to unitholders of record as of the close of business on August 1, 2017. USA Compression Holdings, the owner of approximately 39.8% of our outstanding limited partner interests, has elected to reinvest 50% of this distribution with respect to its units pursuant to our distribution reinvestment plan (the “DRIP”).
Distribution Reinvestment Plan
During the six months ended June 30, 2017 and 2016, distributions of $10.7 million and $21.3 million, respectively, were reinvested under the DRIP resulting in the issuance of 0.6 million and 2.1 million common units, respectively. Such distributions are treated as non-cash transactions in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.
(8) Transactions with Related Parties
John Chandler, who has served as a director of our General Partner since October 2013, has served as a director of one of our customers since October 2014. During the three months ended June 30, 2017 and 2016, we recognized $1.9 million and $2.2 million, respectively,
and $3.8 million and $4.4 million during the six months ended June 30, 2017 and 2016, respectively,
in revenue from compression services provided to this customer in the Unaudited Condensed Consolidated Statements of Operations. We recognized $0.7 million and $1.1 million in accounts receivable from this customer on the Unaudited Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016, respectively.
We provide compression services to entities affiliated with Riverstone/Carlyle Global Energy and Power Fund IV, L.P. (“Riverstone”), which owns a majority of the membership interests in USA Compression Holdings. As of June 30, 2017, USA Compression Holdings owned and controlled our General Partner and owned 39.8% of our limited partner interests. During the three and six months ended June 30, 2017, we recognized $0.2 and $0.4 million, respectively, in revenue from compression services from such affiliated entities in the Unaudited Condensed Consolidated Statements of Operations. We recognized no revenue from such controlled entities during the three and six months ended June 30, 2016. We may provide compression services to additional entities affiliated with Riverstone in the future, and any significant transactions will be disclosed.
(9) 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 six months ended June 30, 2017 or 2016.
(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. The commitments as of June 30, 2017 were $106.1 million, which are expected to be settled throughout 2017 and 2018. Subsequent to June 30, 2017, we ordered an additional 75,000 horsepower for delivery during 2018 which will cost an additional $63.6 million.
(d) Sales Tax Contingency
Our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have 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 entities in our industry, have disputed these claims based on existing tax statutes which provide for manufacturing exemptions on the transactions in question. We continue to work with the state taxing authority in providing them the documentation available to us to support the position we have taken with regard to the disputed transactions. We have recognized a liability of $0.1 million related to this issue; however, we believe it is reasonably possible that we could incur additional losses for this matter depending on whether the taxing authority accepts our documentation as sufficient to support our position that the disputed transactions are not taxable and the impact of any potential resulting litigation. Management estimates that the range of losses we could incur related to this matter is from $0.1 million to approximately $3.0 million. The upper end of this range assumes that we will be unable to apply the manufacturing exemption to any of the transactions in question, which management believes is remote.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
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” or similar words or the negative 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 industry 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 and to integrate the acquired assets with our existing fleet;
|
|
·
|
|
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;
|
|
·
|
|
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. The 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 (“EIA”), the production and transportation volumes in these shale plays are expected to increase over the long term due to the comparably 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 installations, 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, thus
reducing the hydrostatic pressure and allowing 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.
Operating Highlights
The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Fleet horsepower (at period end) (1)
|
|
|
1,736,988
|
|
|
1,718,757
|
|
|
1,736,988
|
|
|
1,718,757
|
|
Total available horsepower (at period end) (2)
|
|
|
1,861,728
|
|
|
1,728,237
|
|
|
1,861,728
|
|
|
1,728,237
|
|
Revenue generating horsepower (at period end) (3)
|
|
|
1,477,992
|
|
|
1,359,523
|
|
|
1,477,992
|
|
|
1,359,523
|
|
Average revenue generating horsepower (4)
|
|
|
1,465,401
|
|
|
1,378,496
|
|
|
1,435,803
|
|
|
1,394,535
|
|
Average revenue per revenue generating horsepower per month (5)
|
|
$
|
14.95
|
|
$
|
15.52
|
|
$
|
14.97
|
|
$
|
15.62
|
|
Revenue generating compression units (at period end)
|
|
|
2,694
|
|
|
2,558
|
|
|
2,694
|
|
|
2,558
|
|
Average horsepower per revenue generating compression unit (6)
|
|
|
548
|
|
|
530
|
|
|
546
|
|
|
528
|
|
Horsepower utilization (7):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At period end
|
|
|
92.6
|
%
|
|
86.0
|
%
|
|
92.6
|
%
|
|
86.0
|
%
|
Average for the period (8)
|
|
|
91.2
|
%
|
|
86.1
|
%
|
|
89.7
|
%
|
|
87.4
|
%
|
|
(1)
|
|
Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As of June 30, 2017, we had 139,480 horsepower on order, of which 66,980 horsepower is ordered for delivery during the remainder of 2017. Subsequent to June 30, 2017, we ordered an additional 75,000 horsepower for delivery during 2018.
|
|
(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 a 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 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 June 30, 2017 and 2016 was 85.1% and 79.1%, 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 June 30, 2017 and 2016 was 84.3% and 80.4%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the six months ended June 30, 2017 and 2016 was 82.6% and 81.4%, respectively.
|
The 1.1% increase in fleet horsepower as of June 30, 2017 over the fleet horsepower as of June 30, 2016 was attributable to the compression units added to our fleet to meet the then expected incremental demand by new and current customers for our compression services. The 6.3% and 3.0% increases in average revenue generating horsepower during the three and six months ended June 30, 2017 over June 30, 2016, respectively, were primarily due to organic growth in our large horsepower fleet. The 3.7% and 4.2% decreases in average revenue per revenue generating horsepower per month for the three and six months ended June 30, 2017 over June 30, 2016, respectively, were primarily due to (1) reduced pricing in the small horsepower portion of our fleet in the current period and (2)
an increase in the average horsepower per revenue generating compression unit in the current period, resulting from an increase in the number of our large horsepower compression units which generally generate lower average revenue per revenue generating horsepower than do small horsepower compression units.
Average horsepower utilization increased to 91.2% during the three months ended June 30, 2017 compared to 86.1% during the three months ended June 30, 2016. The 5.1% increase in average horsepower utilization is primarily attributable to the following changes as a percentage of total available horsepower: (1) a 9.1% increase in horsepower that is under contract but not yet generating revenue and (2) a 1.6% decrease in our average fleet of compression units returned to us not yet under contract, offset by (3) a 4.1% decrease in idle horsepower under repair, which is excluded from the average horsepower utilization calculation until such repair is complete. We believe the increase in average horsepower utilization is the result of increased demand for our services commensurate with increased operating activity in the oil and gas industry. The above noted fluctuation in utilization components describes the change in both period end and average horsepower utilization between the six months ended June 30, 2017 and 2016.
Average horsepower utilization based on revenue generating horsepower and fleet horsepower increased to 84.3% during the three months ended June 30, 2017 compared to 80.4% during the three months ended June 30, 2016. The 3.9% increase is primarily attributable to an increase in total active horsepower as a result of the following changes as a percentage of total fleet horsepower: (1) a 4.0% decrease in idle horsepower under repair and (2) a 2.6% decrease in our average idle fleet composed of new compression units, offset by (3) a 2.8% increase in our average idle fleet from compression units returned to us. The overall decrease in idle horsepower is the result of increased demand for our services commensurate with increased operating activity in the oil and gas industry. These factors also describe the variances in both period end and average horsepower utilization based on revenue generating horsepower and fleet horsepower between the six months ended June 30, 2017 and 2016.
Financial Results of Operations
Three months ended June 30, 2017 compared to the three months ended June 30, 2016
The following table summarizes our results of operations for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percent
|
|
|
2017
|
|
2016
|
|
Change
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Contract operations
|
|
$
|
63,325
|
|
$
|
62,785
|
|
0.9
|
%
|
Parts and service
|
|
|
2,689
|
|
|
726
|
|
270.4
|
%
|
Total revenues
|
|
|
66,014
|
|
|
63,511
|
|
3.9
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of operations, exclusive of depreciation and amortization
|
|
|
21,583
|
|
|
18,654
|
|
15.7
|
%
|
Gross operating margin
|
|
|
44,431
|
|
|
44,857
|
|
(0.9)
|
%
|
Other operating and administrative costs and expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,632
|
|
|
11,180
|
|
(4.9)
|
%
|
Depreciation and amortization
|
|
|
24,534
|
|
|
23,412
|
|
4.8
|
%
|
Loss (gain) on disposition of assets
|
|
|
(13)
|
|
|
1,072
|
|
(101.2)
|
%
|
Impairment of compression equipment
|
|
|
2,601
|
|
|
693
|
|
275.3
|
%
|
Total other operating and administrative costs and expenses
|
|
|
37,754
|
|
|
36,357
|
|
3.8
|
%
|
Operating income
|
|
|
6,677
|
|
|
8,500
|
|
(21.4)
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(6,002)
|
|
|
(5,139)
|
|
16.8
|
%
|
Other
|
|
|
12
|
|
|
7
|
|
71.4
|
%
|
Total other expense
|
|
|
(5,990)
|
|
|
(5,132)
|
|
16.7
|
%
|
Net income before income tax expense
|
|
|
687
|
|
|
3,368
|
|
(79.6)
|
%
|
Income tax expense
|
|
|
134
|
|
|
94
|
|
42.6
|
%
|
Net income
|
|
$
|
553
|
|
$
|
3,274
|
|
(83.1)
|
%
|
Contract operations revenue
.
During the three months ended June 30, 2017, we experienced a year-to-year increase in demand for our compression services driven by increased operating activity in natural gas and crude oil production, resulting in a $0.5 million increase in our contract operations revenue. Average revenue generating horsepower increased 6.3% during the three months ended June 30, 2017 over June 30, 2016 while a
verage revenue per revenue generating
horsepower per month decreased from $15.52 for the three months ended June 30, 2016 to $14.95 for the three months ended June 30, 2017, a decrease of 3.7%,
attributable, in part, to reduced pricing in the current period in the small horsepower portion of our fleet
. The decrease in average revenue per revenue generating horsepower per month was also attributable to the 3.4% increase in the average horsepower per revenue generating compression unit in the current period, as large horsepower compression units typically generate lower average monthly revenue per revenue generating horsepower than do small horsepower compression units. Average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in the primary term. Our contract operations revenue was not materially impacted by any renegotiations of our contracts with our customers during the period.
Parts and service revenue
.
Parts and service revenue was earned primarily on the installation of equipment ancillary to compression operations. The $2.0 million increase in parts and service revenue was primarily attributable to a $1.1 million increase in revenue associated with installation services and a $0.8 million increase in freight and crane charges that are directly reimbursable by our customers and maintenance work on units at our customers’ locations that are outside the scope of our core maintenance activities. We offer these services as a courtesy to our customers and the demand fluctuates from period to period based on the varying needs of our customers.
Cost of operations, exclusive of depreciation and amortization
. The $2.9 million increase in cost of operations
was primarily attributable to a $1.4 million increase in retail parts and service expenses, which included $0.7 million of additional costs associated with our installation services. Excluding the $0.7 million of additional costs, retail parts and services expense increased $0.7 million reflective of a corresponding increase in this component of parts and services revenue. Additionally during the period, we experienced a $1.3 million increase in direct expenses, such as parts maintenance and fluids expenses, primarily driven by an increase in fluids prices and an increase in maintenance activity during the current period.
Gross operating margin.
The $0.4 million decrease in gross operating margin was primarily due to an increase in direct expenses, partially offset by an increase in contract operations revenue, and the $0.4 million of gross operating margin we earned from our installation services during the three months ended June 30, 2017.
Selling, general and administrative expense
.
The $0.5 million decrease in selling, general and administrative expense for the three months ended June 30, 2017 was primarily attributable to a $0.6 million decrease in unit-based compensation expense. Unit-based compensation expense decreased primarily due to (1) a fewer number of outstanding phantom units as of June 30, 2017 compared to June 30, 2016 and (2) a fewer number of outstanding phantom units on which distribution equivalent rights were paid as of each record date during the comparable periods.
Depreciation and amortization expense
.
The $1.1 million increase in depreciation and amortization expense was primarily related to an increase in gross property and equipment balances during the three months ended June 30, 2017 compared to gross balances during the three months ended June 30, 2016. There was no variance in amortization expense between the same periods, as intangible assets are amortized on a straight-line basis and there has been no change in gross identifiable intangible assets between the periods.
Loss (gain) on disposition of assets
. During the three months ended June 30, 2016, we abandoned certain assets and incurred a $1.0 million loss.
Impairment of compression equipment.
The $2.6 million and $0.7 million impairment charge during the three months ended June 30, 2017 and 2016, respectively, resulted from our evaluation of the future deployment of our current idle fleet under current market conditions. As a result of our evaluation, we determined to retire, sell or re-utilize key components of compression units with a total of 5,246 and approximately 1,700 horsepower, respectively, which were previously used to provide compression services in our business.
The cause of the impairment during the three months ended June 30, 2017 was due to the type of units, which were not marketable, and were subject to excessive maintenance costs. The cause of the impairment during the three months ended June 30, 2016 was
due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emission standards without retrofitting.
We determined that this equipment was unlikely to be accepted by customers under then-current market conditions.
Interest expense, net
. The $0.9 million increase in interest expense, net was primarily attributable to an
increase in our weighted average interest rate under our revolving credit facility.
Our revolving credit facility bore an interest rate of 3.14% and 2.51% at June 30, 2017 and 2016, respectively, and a weighted average interest rate of 3.03% and 2.47% for the three months ended June 30, 2017 and 2016, respectively. The increase in our weighted average interest rate was partially offset by an $11.6 million decrease in average outstanding borrowings under our revolving credit facility. Average outstanding borrowings under our revolving credit facility
were $728.2 million for the
three months ended June 30, 2017 compared to $739.8 million for the three months ended June 30, 2016. During December 2016, we completed a public equity offering and utilized the net proceeds of $80.9 million to reduce indebtedness outstanding under our revolving credit facility.
Six months ended June 30, 2017 compared to the six months ended June 30, 2016
The following table summarizes our results of operations for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
Percent
|
|
|
2017
|
|
2016
|
|
Change
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Contract operations
|
|
$
|
123,757
|
|
$
|
127,063
|
|
(2.6)
|
%
|
Parts and service
|
|
|
8,289
|
|
|
2,815
|
|
194.5
|
%
|
Total revenues
|
|
|
132,046
|
|
|
129,878
|
|
1.7
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of operations, exclusive of depreciation and amortization
|
|
|
44,105
|
|
|
39,483
|
|
11.7
|
%
|
Gross operating margin
|
|
|
87,941
|
|
|
90,395
|
|
(2.7)
|
%
|
Other operating and administrative costs and expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
21,755
|
|
|
20,919
|
|
4.0
|
%
|
Depreciation and amortization
|
|
|
48,685
|
|
|
45,506
|
|
7.0
|
%
|
Loss (gain) on disposition of assets
|
|
|
(257)
|
|
|
950
|
|
(127.1)
|
%
|
Impairment of compression equipment
|
|
|
3,713
|
|
|
693
|
|
435.8
|
%
|
Total other operating and administrative costs and expenses
|
|
|
73,896
|
|
|
68,068
|
|
8.6
|
%
|
Operating income
|
|
|
14,045
|
|
|
22,327
|
|
(37.1)
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(11,676)
|
|
|
(10,201)
|
|
14.5
|
%
|
Other
|
|
|
19
|
|
|
14
|
|
35.7
|
%
|
Total other expense
|
|
|
(11,657)
|
|
|
(10,187)
|
|
14.4
|
%
|
Net income before income tax expense
|
|
|
2,388
|
|
|
12,140
|
|
(80.3)
|
%
|
Income tax expense
|
|
|
283
|
|
|
328
|
|
(13.7)
|
%
|
Net income
|
|
$
|
2,105
|
|
$
|
11,812
|
|
(82.2)
|
%
|
Contract operations revenue
.
During the six months ended June 30, 2017, we experienced a year-to-year decrease in demand for our compression services, resulting in a $3.3 million decrease in our contract operations revenue. Average revenue generating horsepower increased 3.0% during the six months ended June 30, 2017 over June 30, 2016 while a
verage revenue per revenue generating horsepower per month decreased from $15.62 for the six months ended June 30, 2016 to $14.97 for the six months ended June 30, 2017, a decrease of 4.2%,
attributable, in part, to reduced pricing in the current period in the small horsepower portion of our fleet
. The decrease in average revenue per revenue generating horsepower per month was also attributable to the 3.4% increase in the average horsepower per revenue generating compression unit in the current period, as large horsepower compression units typically generate lower average monthly revenue per revenue generating horsepower than do small horsepower compression units. Average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in the primary term. Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers.
Parts and service revenue
.
Parts and service revenue was earned primarily on the installation of equipment ancillary to compression operations. The $5.5 million increase in parts and service revenue was primarily attributable to a $5.4 million increase in revenue associated with installation services.
Cost of operations, exclusive of depreciation and amortization
. The $4.6 million increase in cost of operations
was primarily attributable to a $3.2 million increase in retail parts and service expenses, which included $2.9 million of additional costs associated with our installation services. Excluding the $2.9 million of additional costs, retail parts and services expense increased $0.3 million. Additionally during the period, we experienced a $1.8 million increase in direct expenses, such as parts maintenance and fluids expenses primarily driven by an increase in fluids prices and an increase in maintenance activity during the current period.
Gross operating margin.
The $2.5 million decrease in gross operating margin was primarily due to a decrease in contract operations revenue and an increase in direct expenses, partially offset by the $2.5 million of gross operating margin we earned from our installation services during the six months ended June 30, 2017.
Selling, general and administrative expense
.
The $0.8 million increase in selling, general and administrative expense was primarily attributable to (1) a $1.0 million increase in bad debt expense, due primarily to a $1.1 million recovery of bad debt expense during the six months ended June 30, 2016, and (2) a $0.5 million increase in unit-based compensation expense, offset by (3) a $0.9 million decrease in payroll and benefits expenses. Unit-based compensation expense increased primarily due to (1) the increase in our unit price as of June 30, 2017 compared to June 30, 2016 and (2) the increase in our unit price on the vesting date of phantom units during 2017 as compared to 2016. The decrease in payroll and benefits expenses is due to a decrease in our selling, general and administrative employee headcount in the six months ended June 30, 2017 compared to June 30, 2016.
Depreciation and amortization expense
.
The $3.2 million increase in depreciation and amortization expense was primarily related to an increase in gross property and equipment balances during the six months ended June 30, 2017 compared to gross balances during the six months ended June 30, 2016. There was no variance in amortization expense between the same periods, as intangible assets are amortized on a straight-line basis and there has been no change in gross identifiable intangible assets between the periods.
Loss (gain) on disposition of assets
. During the six months ended June 30, 2017, we recognized a $0.2 million gain on the sale of a compression unit. During the six months ended June 30, 2016, we abandoned certain assets and incurred a $1.0 million loss.
Impairment of compression equipment.
The $3.7 million and $0.7 million impairment charge during the six months ended June 30, 2017 and 2016, respectively, resulted from our evaluation of the future deployment of our current idle fleet under the current market conditions. As a result of our evaluation, we determined to retire, sell or re-utilize key components of compression units with a total of 8,006 and approximately 1,700 horsepower, respectively, which were previously used to provide compression services in our business.
The cause of the impairment during the six months ended June 30, 2017 was due to the type of units, which were not marketable, and were subject to excessive maintenance costs. The cause of the impairment during the six months ended June 30, 2016 was
due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emission standards without retrofitting.
We determined that this equipment was unlikely to be accepted by customers under then-current market conditions.
Interest expense, net
. The $1.5 million increase in interest expense, net was primarily attributable to an
increase in our weighted average interest rate under our revolving credit facility.
Our revolving credit facility bore an interest rate of 3.14% and 2.51% at June 30, 2017 and 2016, respectively, and a weighted average interest rate of 3.01% and 2.47% for the six months ended June 30, 2017 and 2016, respectively. The increase in our weighted average interest rate was partially offset by a $26.6 million decrease in average outstanding borrowings under our revolving credit facility. Average outstanding borrowings under our revolving credit facility
were $715.8 million for the
six months ended June 30, 2017 compared to $742.4 million for the six months ended June 30, 2016. During December 2016, we completed a public equity offering and utilized the net proceeds of $80.9 million to reduce indebtedness outstanding under our revolving credit facility.
Other Financial Data
The following table summarizes other financial data for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Percent
|
|
|
Six Months Ended June 30,
|
|
Percent
|
|
Other Financial Data: (1)
|
|
2017
|
|
|
2016
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
Change
|
|
Gross operating margin
|
|
$
|
44,431
|
|
|
$
|
44,857
|
|
(0.9)
|
%
|
|
$
|
87,941
|
|
|
$
|
90,395
|
|
(2.7)
|
%
|
Gross operating margin percentage (2)
|
|
|
67.3
|
%
|
|
|
70.6
|
%
|
(4.7)
|
%
|
|
|
66.6
|
%
|
|
|
69.6
|
%
|
(4.3)
|
%
|
Adjusted EBITDA
|
|
$
|
36,740
|
|
|
$
|
37,149
|
|
(1.1)
|
%
|
|
$
|
72,743
|
|
|
$
|
75,553
|
|
(3.7)
|
%
|
Adjusted EBITDA percentage (2)
|
|
|
55.7
|
%
|
|
|
58.5
|
%
|
(4.8)
|
%
|
|
|
55.1
|
%
|
|
|
58.2
|
%
|
(5.3)
|
%
|
DCF (3)
|
|
$
|
27,073
|
|
|
$
|
30,490
|
|
(11.2)
|
%
|
|
$
|
54,296
|
|
|
$
|
62,403
|
|
(13.0)
|
%
|
DCF Coverage Ratio (3)
|
|
|
0.81
|
x
|
|
|
1.03
|
x
|
(21.4)
|
%
|
|
|
0.82
|
x
|
|
|
1.07
|
x
|
(23.4)
|
%
|
Cash Coverage Ratio
|
|
|
1.03
|
x
|
|
|
1.33
|
x
|
(22.6)
|
%
|
|
|
1.03
|
x
|
|
|
1.49
|
x
|
(30.9)
|
%
|
|
(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.
|
|
(3)
|
|
Definitions of DCF and DCF Coverage Ratio can be found below under the caption “—Non-GAAP Financial Measures”
.
|
Adjusted EBITDA.
Adjusted EBITDA during the three months ended June 30, 2017 decreased $0.4 million, or 1.1%, over the three months ended June 30, 2016, primarily due to a $0.4 million decrease in gross operating margin during the three months ended June 30, 2017.
Adjusted EBITDA during the six months ended June 30, 2017 decreased $2.8 million, or 3.7%, over the six months ended June 30, 2016, primarily due to a $2.5 million decrease in gross operating margin and $0.5 million higher selling, general and administrative expenses, excluding unit-based compensation expense and severance and other non-recurring charges, during the six months ended June 30, 2017.
DCF.
The $3.4 million, or 11.2%, decrease in
DCF
during the three months ended June 30, 2017 was
primarily attributable to (1) a $0.4 million decrease in gross operating margin, (2) a $2.0 million increase in maintenance capital expenditures and (3) a $0.9 million increase in cash interest expense, net, during the comparable period. Maintenance capital expenditures were higher during the three months ended June 30, 2017 than the three months ended June 30, 2016 due to increased maintenance activity during the current period.
The $8.1 million, or 13.0%, decrease in DCF during the six months ended June 30, 2017 was primarily attributable to (1) a $2.5 million decrease in gross operating margin, (2) $0.5 million higher selling, general and administrative expenses, excluding unit-based compensation expense and severance and other non-recurring charges, (3) a $3.8 million increase in maintenance capital expenditures and (4) a $1.4 million increase in cash interest expense, net, during the comparable period. Maintenance capital expenditures were higher during the six months ended June 30, 2017 than the six months ended June 30, 2016 due to increased maintenance activity during the current period.
Coverage Ratios
. The disproportionate decrease in Cash Coverage Ratio (as compared to DCF Coverage Ratio) for the six months ended June 30, 2017 compared to June 30, 2016 is due to period-to-period decreases in DRIP participation by USA Compression Holdings.
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 our revolving credit facility and issuances of debt and equity securities, including under the DRIP.
We believe cash generated by operating activities and, where necessary, borrowings under our revolving credit facility will be sufficient to service our debt, fund working capital, fund our estimated 2017 expansion capital expenditures, fund our maintenance capital expenditures and pay distributions through the remainder of 2017. 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 our revolving credit facility 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 six months ended June 30, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2017
|
|
2016
|
Net cash provided by operating activities
|
|
$
|
52,272
|
|
$
|
58,457
|
Net cash used in investing activities
|
|
$
|
(32,600)
|
|
$
|
(24,644)
|
Net cash used in financing activities
|
|
$
|
(19,418)
|
|
$
|
(33,813)
|
Net cash provided by operating activities
. The $6.2 million decrease in net cash provided by operating activities for the six months ended June 30, 2017
was due primarily to $2.5 million lower gross operating margin, adjustments to non-cash and other items and changes in our working capital.
Net cash used in investing activities
. Net cash used in investing activities for the six months ended June 30, 2017 and 2016 related primarily to purchases of new compression units, reconfiguration costs and related equipment.
Net cash used in financing activities
. During the six months ended June 30, 2017, we borrowed $39.6 million, on a net basis, primarily to
support our purchases of new compression units, reconfiguration costs and related equipment, as described above
. Additionally, we paid cash related to net settlement of unit-based awards in the amount of $2.8 million and
made cash distributions to our unitholders of $56.2 million.
During the six months ended June 30, 2016, we borrowed $5.9 million, on a net basis, primarily to support our purchases of new compression units, reconfiguration costs and related equipment, as described above. Additionally, we paid various loan fees and incurred costs in respect of our revolving credit facility in the amount of $2.0 million and made cash distributions to our unitholders of $37.6 million.
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 six months ended June 30, 2017 and 2016 were $6.9 million and $3.0 million, respectively.
We currently plan to spend approximately $12.5 million in maintenance capital expenditures during 2017, including parts consumed from inventory and property and equipment.
Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between $95 million and $105 million in expansion capital expenditures during 2017.
Our expansion capital expenditures for the six months ended June 30, 2017 and 2016 were $39.6 million and $20.7 million, respectively. Previously reported expansion capital expenditures for the six months ended June 30, 2016 included the change in capital expenditures included in accounts payable and accrued liabilities as of June 30, 2016. As of June 30 2017, we had binding commitments to purchase $106.1 million of additional units and serialized parts, of which we expect $49.7 million to be delivered in the remainder of 2017. Subsequent to June 30, 2017, we ordered an additional 75,000 horsepower for delivery during 2018 which will cost an additional $63.6 million.
Revolving Credit Facility
As of June 30, 2017 we were in compliance with all of our covenants under our revolving credit facility. As of June 30, 2017, we had outstanding borrowings under our revolving credit facility of $725.0 million, $317.8 million of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $82.0 million. One of the financial covenants under our revolving credit facility permits a maximum leverage ratio of (A) 5.50 to 1.0 as of the end of the fiscal quarter ending June 30, 2017, (B) 5.25 to 1.0 as of the end of the respective fiscal quarters ending September 30, 2017 and December 31, 2017 and (C) 5.00 to 1.0 thereafter, in each case subject to a provision for increases in such thresholds by 0.5 in connection with certain future acquisitions for the six consecutive month period following the period in which any such acquisition occurs. We expect to remain in compliance with our covenants throughout the next twelve months. If our current cash flow projections prove to be inaccurate, we expect to be able to remain in compliance with such financial covenants by one or more of the following actions: issue equity in conjunction with the acquisition of another business; issue equity in a public or private offering; request a modification of our covenants from our bank group; reduce distributions from our current distribution rate or obtain an equity infusion pursuant to the terms of our revolving credit facility.
As of August 2, 2017, we had outstanding borrowings under our revolving credit facility of $731.1 million.
For a more detailed description of our revolving credit facility, please see Note 6 to the unaudited condensed consolidated financial statements under Part I, Item 1 of this report and Note 7 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed on February 13, 2017 (our “2016 Annual Report”).
Distribution Reinvestment Plan
During the six months ended June 30, 2017, distributions of $10.7 million were reinvested under the DRIP resulting in the issuance of 0.6 million 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.
For a more detailed description of the DRIP, please see Note 7 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report and Note 8 to the consolidated financial statements included in our 2016 Annual 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.
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 June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract operations
|
|
$
|
63,325
|
|
$
|
62,785
|
|
$
|
123,757
|
|
$
|
127,063
|
|
Parts and service
|
|
|
2,689
|
|
|
726
|
|
|
8,289
|
|
|
2,815
|
|
Total revenues
|
|
|
66,014
|
|
|
63,511
|
|
|
132,046
|
|
|
129,878
|
|
Cost of operations, exclusive of depreciation and amortization
|
|
|
21,583
|
|
|
18,654
|
|
|
44,105
|
|
|
39,483
|
|
Gross operating margin
|
|
|
44,431
|
|
|
44,857
|
|
|
87,941
|
|
|
90,395
|
|
Other operating and administrative costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
10,632
|
|
|
11,180
|
|
|
21,755
|
|
|
20,919
|
|
Depreciation and amortization
|
|
|
24,534
|
|
|
23,412
|
|
|
48,685
|
|
|
45,506
|
|
Loss (gain) on disposition of assets
|
|
|
(13)
|
|
|
1,072
|
|
|
(257)
|
|
|
950
|
|
Impairment of compression equipment
|
|
|
2,601
|
|
|
693
|
|
|
3,713
|
|
|
693
|
|
Total other operating and administrative costs and expenses
|
|
|
37,754
|
|
|
36,357
|
|
|
73,896
|
|
|
68,068
|
|
Operating income
|
|
$
|
6,677
|
|
$
|
8,500
|
|
$
|
14,045
|
|
$
|
22,327
|
|
Adjusted EBITDA
We define EBITDA as net income before net interest expense, depreciation and amortization expense, and income tax expense. 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 our primary management tools, 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 make 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 provides 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, 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.
Because we use capital assets, depreciation and the interest cost of acquiring compression equipment are also necessary elements of our costs. Expense associated with 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 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 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 management’s decision making processes.
The following table reconciles Adjusted EBITDA to net income 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
553
|
|
$
|
3,274
|
|
$
|
2,105
|
|
$
|
11,812
|
|
Interest expense, net
|
|
|
6,002
|
|
|
5,139
|
|
|
11,676
|
|
|
10,201
|
|
Depreciation and amortization
|
|
|
24,534
|
|
|
23,412
|
|
|
48,685
|
|
|
45,506
|
|
Income tax expense
|
|
|
134
|
|
|
94
|
|
|
283
|
|
|
328
|
|
EBITDA
|
|
$
|
31,223
|
|
$
|
31,919
|
|
$
|
62,749
|
|
$
|
67,847
|
|
Impairment of compression equipment
|
|
|
2,601
|
|
|
693
|
|
|
3,713
|
|
|
693
|
|
Interest income on capital lease
|
|
|
408
|
|
|
362
|
|
|
839
|
|
|
737
|
|
Unit-based compensation expense (1)
|
|
|
2,402
|
|
|
3,022
|
|
|
5,347
|
|
|
4,834
|
|
Severance charges
|
|
|
58
|
|
|
81
|
|
|
120
|
|
|
492
|
|
Other
|
|
|
61
|
|
|
—
|
|
|
232
|
|
|
—
|
|
Loss (gain) on disposition of assets
|
|
|
(13)
|
|
|
1,072
|
|
|
(257)
|
|
|
950
|
|
Adjusted EBITDA
|
|
$
|
36,740
|
|
$
|
37,149
|
|
$
|
72,743
|
|
$
|
75,553
|
|
Interest expense, net
|
|
|
(6,002)
|
|
|
(5,139)
|
|
|
(11,676)
|
|
|
(10,201)
|
|
Income tax expense
|
|
|
(134)
|
|
|
(94)
|
|
|
(283)
|
|
|
(328)
|
|
Interest income on capital lease
|
|
|
(408)
|
|
|
(362)
|
|
|
(839)
|
|
|
(737)
|
|
Non-cash interest expense
|
|
|
547
|
|
|
548
|
|
|
1,094
|
|
|
1,015
|
|
Severance charges
|
|
|
(58)
|
|
|
(81)
|
|
|
(120)
|
|
|
(492)
|
|
Other
|
|
|
(61)
|
|
|
—
|
|
|
(232)
|
|
|
—
|
|
Changes in operating assets and liabilities
|
|
|
3,362
|
|
|
4,476
|
|
|
(8,415)
|
|
|
(6,353)
|
|
Net cash provided by operating activities
|
|
$
|
33,986
|
|
$
|
36,497
|
|
$
|
52,272
|
|
$
|
58,457
|
|
|
(1)
|
|
For the three and six months ended June 30, 2017, unit-based compensation expense included $0.6 million and $1.4 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards
and, for the six months ended June 30, 2017, $0.4 million
related to the cash portion of any settlement of phantom unit awards upon vesting.
For the three and six months ended June 30, 2016, unit-based compensation expense included $0.7 million and $1.5 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on phantom unit
|
awards and, for the six months ended June 30, 2016, $0.1 million related to the cash portion of any settlement of phantom unit awards upon vesting.
The remainder of the unit-based compensation expense for both periods was related to non-cash adjustments to the unit-based compensation liability.
|
Distributable Cash Flow
We define DCF as net income plus non-cash interest expense, non-cash income tax expense, 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 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 (prior to any retained cash reserves established by our general partner and the effect of the DRIP) to the cash distributions we expect to pay our unitholders. Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions.
DCF should not be considered as an alternative to, or more meaningful than, net income, 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, loss (gain) on disposition of assets, and maintenance capital expenditures are necessary elements of our costs. Expense related to 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 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 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 management’s decision making processes.
The following table reconciles DCF to net income 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 June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
553
|
|
$
|
3,274
|
|
$
|
2,105
|
|
$
|
11,812
|
|
Plus: Non-cash interest expense
|
|
|
547
|
|
|
548
|
|
|
1,094
|
|
|
1,015
|
|
Plus: Non-cash income tax expense
|
|
|
20
|
|
|
32
|
|
|
129
|
|
|
134
|
|
Plus: Depreciation and amortization
|
|
|
24,534
|
|
|
23,412
|
|
|
48,685
|
|
|
45,506
|
|
Plus: Unit-based compensation expense (1)
|
|
|
2,402
|
|
|
3,022
|
|
|
5,347
|
|
|
4,834
|
|
Plus: Impairment of compression equipment
|
|
|
2,601
|
|
|
693
|
|
|
3,713
|
|
|
693
|
|
Plus: Severance charges
|
|
|
58
|
|
|
81
|
|
|
120
|
|
|
492
|
|
Plus: Other
|
|
|
61
|
|
|
—
|
|
|
232
|
|
|
—
|
|
Less: Loss (gain) on disposition of assets
|
|
|
(13)
|
|
|
1,072
|
|
|
(257)
|
|
|
950
|
|
Less: Maintenance capital expenditures (2)
|
|
|
(3,690)
|
|
|
(1,644)
|
|
|
(6,872)
|
|
|
(3,033)
|
|
DCF
|
|
$
|
27,073
|
|
$
|
30,490
|
|
$
|
54,296
|
|
$
|
62,403
|
|
Plus: Maintenance capital expenditures
|
|
|
3,690
|
|
|
1,644
|
|
|
6,872
|
|
|
3,033
|
|
Plus: Changes in operating assets and liabilities
|
|
|
3,362
|
|
|
4,476
|
|
|
(8,415)
|
|
|
(6,353)
|
|
Less: Other
|
|
|
(139)
|
|
|
(113)
|
|
|
(481)
|
|
|
(626)
|
|
Net cash provided by operating activities
|
|
$
|
33,986
|
|
$
|
36,497
|
|
$
|
52,272
|
|
$
|
58,457
|
|
|
(1)
|
|
For the three and six months ended June 30, 2017, unit-based compensation expense included $0.6 million and $1.4 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on outstanding phantom unit awards
and, for the six months ended June 30, 2017, $0.4 million
related to the cash portion of any settlement of phantom unit awards upon vesting.
For the three and six months ended June 30, 2016, unit-based compensation expense included $0.7 million and $1.5 million, respectively, of cash payments related to quarterly payments of distribution equivalent rights on phantom unit
|
awards and, for the six months ended June 30, 2016, $0.1 million related to the cash portion of any settlement of phantom unit awards upon vesting.
The remainder of the unit-based compensation expense for both periods was related to non-cash adjustments to the unit-based compensation liability.
|
|
(2)
|
|
Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets, to maintain the operating capacity of our assets and extend their useful lives, 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 less cash distributions to be paid to our general partner and IDRs in respect of such period, divided by distributions declared to limited partner unitholders in respect of such period. Cash Coverage Ratio is defined as DCF less cash distributions to be paid to our general partner and IDRs in respect of such period, divided by cash distributions expected to be paid to limited partner 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 limited partner 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.
The following table summarizes certain coverage ratios for the periods presented (dollar
s in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
DCF
|
|
$
|
27,073
|
|
$
|
30,490
|
|
$
|
54,296
|
|
$
|
62,403
|
|
Less: Cash distributions to general partner and IDRs
|
|
|
751
|
|
|
715
|
|
|
1,500
|
|
|
1,426
|
|
DCF attributable to limited partner interest
|
|
$
|
26,322
|
|
$
|
29,775
|
|
$
|
52,796
|
|
$
|
60,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions for DCF Coverage Ratio (1)
|
|
$
|
32,327
|
|
$
|
28,805
|
|
$
|
64,446
|
|
$
|
57,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions reinvested in the DRIP (2)
|
|
$
|
6,733
|
|
$
|
6,483
|
|
$
|
13,368
|
|
$
|
16,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions for Cash Coverage Ratio (3)
|
|
$
|
25,594
|
|
$
|
22,322
|
|
$
|
51,078
|
|
$
|
40,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DCF Coverage Ratio
|
|
|
0.81
|
|
|
1.03
|
|
|
0.82
|
|
|
1.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Coverage Ratio
|
|
|
1.03
|
|
|
1.33
|
|
|
1.03
|
|
|
1.49
|
|
|
(1)
|
|
Represents distributions to the holders of our common units as of the record date for each period.
|
|
(2)
|
|
Represents distributions to holders enrolled in the DRIP as of the record date for each period. The amount for the three and six months ended June 30, 2017 is based on an estimate as of the record date.
|
|
(3)
|
|
Represents cash distributions declared for common units not participating in the DRIP for each period.
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Off-Balance Sheet Arrangements
We have no off-balance sheet financing activities.
Recent Accounting Pronouncements
For discussion on specific recent accounting pronouncements affecting us, please see Note 10 to our unaudited condensed consolidated financial statements under Part I, Item 1 of this report.