USA pression Partners(USAC) - 2019 Q4 - Annual Report

PART I Business USA Compression Partners, LP is a leading independent provider of natural gas compression services in the U.S., operating under fixed-fee contracts for infrastructure applications in key shale plays Overview The company is a major U.S. natural gas compression service provider with a large fleet, operating in key shale plays under fixed-fee, take-or-pay contracts - As of December 31, 2019, the company's fleet totaled 3,682,968 horsepower, with an additional 56,500 horsepower on order for 2020 delivery[16] - The company provides compression services in numerous U.S. shale plays, including the Utica, Marcellus, Permian Basin, and Eagle Ford[17] - Services are provided under fixed-fee, take-or-pay contracts with initial terms typically ranging from six months to five years, minimizing direct exposure to commodity price fluctuations[20][21] Recent Developments The company completed significant financial and strategic transactions, including a $1.7 billion acquisition, a $750 million senior notes issuance, and a $500 million preferred unit placement, while increasing credit facility capacity Recent Senior Notes Issuances | Notes Series | Principal Amount | Interest Rate | Issue Date | Maturity Date | | :--- | :--- | :--- | :--- | :--- | | Senior Notes 2027 | $750.0 million | 6.875% | Mar 7, 2019 | Sep 1, 2027 | | Senior Notes 2026 | $725.0 million | 6.875% | Mar 23, 2018 | Apr 1, 2026 | - On April 2, 2018, the company acquired the USA Compression Predecessor (CDM) from ETO for approximately $1.7 billion, consisting of cash, common units, and Class B units[29] - The company completed a $500 million private placement of Series A Preferred Units and Warrants and increased its credit facility borrowing capacity from $1.1 billion to $1.6 billion on the Transactions Date[33][35] Our Operations The company operates a modern, large-horsepower compression fleet, providing comprehensive services to over 375 energy companies, with significant revenue concentration and reliance on key suppliers Compression Fleet Summary as of Dec 31, 2019 | Unit Horsepower | Fleet Horsepower | Number of Units | Total Horsepower (incl. on order) | Percent of Total Horsepower | | :--- | :--- | :--- | :--- | :--- | | <400 (Small) | 516,674 | 3,031 | 516,674 | 13.8% | | >400 (Large) | 3,166,294 | 2,420 | 3,222,794 | 86.2% | | Total | 3,682,968 | 5,451 | 3,739,468 | 100.0% | Key Operating Data (Year Ended Dec 31) | Operating Data | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Fleet horsepower (at period end) | 3,682,968 | 3,597,097 | 2.4% | | Revenue generating horsepower (at period end) | 3,310,024 | 3,262,470 | 1.5% | | Average revenue generating horsepower | 3,279,374 | 2,760,029 | 18.8% | | Horsepower utilization (at period end) | 93.7% | 94.0% | (0.3)% | | Average horsepower utilization | 94.1% | 91.4% | 3.0% | - The top ten customers accounted for approximately 33% of revenue for the year ended December 31, 2019[47] - The company relies on a limited number of suppliers for critical components, including Caterpillar for engines and Ariel Corporation for compressor frames[48] Environmental and Safety Regulations The company is subject to stringent environmental and safety regulations, including air emissions, climate change, and hydraulic fracturing rules, which can incur significant compliance costs and liabilities - The company is subject to complex environmental regulations, and failure to comply can result in significant penalties and operational interruptions[53] - Under standard contracts, the customer is typically responsible for obtaining air emissions permits. However, the company must comply with regulations like the EPA's Quad Z rule, which requires emissions control equipment on certain engines[55][56] - Climate change legislation and regulations concerning greenhouse gases (GHGs) could increase compliance costs, restrict operations, or reduce demand for services. The EPA has adopted rules for GHG reporting and emissions from power plants[62][64][71] - Increased regulation of hydraulic fracturing, a key process for many customers, under laws like the Safe Drinking Water Act (SDWA) could lead to delays and increased costs, potentially reducing demand for compression services[75] Risk Factors The company faces significant business, investment, and tax risks, including cash flow insufficiency, commodity price dependence, customer concentration, high debt, limited unitholder rights, and potential corporate tax treatment Risks Related to Our Business Business risks include insufficient cash for distributions, dependence on oil and gas production, customer concentration, intense competition, high debt levels, and increasing environmental compliance costs - The company requires $50.7 million per quarter for common unit distributions and $12.2 million per quarter for preferred unit distributions, which must be paid first[84][85] - The ten largest customers accounted for approximately 33% of revenue for the year ended December 31, 2019[90] - As of December 31, 2019, total debt was $1.9 billion. The credit agreement requires maintaining a maximum leverage ratio, which steps down from 5.5x to 5.0x after December 31, 2019[108][109] - Goodwill and other intangible assets totaled $619.4 million and $363.2 million, respectively, as of December 31, 2019, and are subject to impairment risk from a prolonged economic downturn[121] Risks Inherent in an Investment in Us Investment risks stem from the MLP structure, including limited unitholder voting rights, conflicts of interest with the General Partner controlled by ETO, and the General Partner's call right if ownership exceeds 80% - Common unitholders have limited voting rights and cannot elect the General Partner or its board of directors[152] - Energy Transfer (ETO) controls the General Partner, creating conflicts of interest where it may favor its own interests over those of the Partnership's unitholders[154] - The Partnership Agreement modifies and reduces the fiduciary duties the General Partner would otherwise owe to unitholders under state law[158][161] - If the General Partner and its affiliates own more than 80% of outstanding common units, they have the right to purchase all remaining units at the current market price[169] Tax Risks to Common Unitholders Key tax risks include potential corporate tax treatment, unitholders being allocated taxable income without cash distributions, and new IRS audit rules potentially reducing distributable cash - If the partnership were treated as a corporation for tax purposes, its cash available for distribution would be substantially reduced due to entity-level taxation[176][178] - Unitholders are required to pay taxes on their share of the partnership's taxable income, regardless of whether they receive cash distributions[183] - Under new IRS audit rules, the partnership may be required to pay taxes resulting from audit adjustments directly, which could reduce cash available for distribution to current unitholders, even for adjustments related to prior years[187] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[203] Properties The company does not own material storage or maintenance facilities, with its headquarters comprising 19,297 square feet of leased office space in Austin, Texas - The company's headquarters is located at 111 Congress Avenue, Austin, Texas 78701, consisting of 19,297 square feet of leased office space[204] Legal Proceedings The company is involved in ordinary course legal matters, but management expects no material adverse effect on its financial position, results, or cash flows - Management does not expect the resolution of ordinary course legal matters to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[205] Mine Safety Disclosures The company reports no mine safety disclosures - None[206] PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Partnership's common units trade on the NYSE, with 96.7 million common and 500,000 preferred units outstanding as of February 2020, and quarterly distributions prioritize preferred unitholders - Common units trade on the NYSE under the symbol "USAC"[212] - As of February 13, 2020, there were 96,650,859 common units and 500,000 Preferred Units outstanding[209][210] - The partnership agreement requires quarterly distribution of all "available cash" after establishing reserves for business conduct, legal compliance, and future distributions[214] Selected Financial Data This section provides five years of selected historical financial data, including key income statement, balance sheet, and cash flow items, along with definitions and reconciliations of non-GAAP measures Selected Historical Financial Data Total revenues increased to $698.4 million in 2019, with net income reaching $39.1 million, and Adjusted EBITDA and DCF showing strong growth, while total assets remained stable at $3.7 billion Selected Financial Data (in thousands) | Metric | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $698,365 | $584,352 | $276,671 | | Gross operating margin | $471,062 | $369,628 | $151,467 | | Operating income (loss) | $168,384 | $65,311 | $(262,668) | | Net income (loss) | $39,132 | $(10,551) | $(264,734) | | Adjusted EBITDA | $419,640 | $320,475 | $130,348 | | Distributable Cash Flow (DCF) | $221,868 | $177,757 | $109,326 | | Capital expenditures | $199,928 | $241,179 | $175,508 | | Total assets (at period end) | $3,730,407 | $3,774,649 | $1,718,953 | | Long-term debt, net (at period end) | $1,852,360 | $1,759,058 | $— | Non-GAAP Financial Measures The company utilizes non-GAAP measures like Gross Operating Margin, Adjusted EBITDA, and Distributable Cash Flow (DCF) to assess performance, with 2019 Adjusted EBITDA at $419.6 million and DCF at $221.9 million - Gross Operating Margin is defined as revenue less cost of operations, exclusive of depreciation and amortization expense[225] - Adjusted EBITDA is used by management to assess financial performance without regard to financing methods, capital structure, or historical cost basis[226] - Distributable Cash Flow (DCF) is used to compare cash flows generated to the cash distributions expected to be paid to common unitholders[234] Reconciliation of Net Income to Adjusted EBITDA (2019, in thousands) | Line Item | Amount | | :--- | :--- | | Net income | $39,132 | | Interest expense, net | $127,146 | | Depreciation and amortization | $231,447 | | Income tax expense | $2,186 | | EBITDA | $399,911 | | Other adjustments (unit-based comp, impairments, etc.) | $19,729 | | Adjusted EBITDA | $419,640 | Reconciliation of Net Income to DCF (2019, in thousands) | Line Item | Amount | | :--- | :--- | | Net income | $39,132 | | Add back non-cash items (D&A, etc.) | $265,257 | | Less: Distributions on Preferred Units | $(48,750) | | Less: Maintenance capital expenditures | $(29,592) | | Other adjustments | $(4,179) | | DCF | $221,868 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting a 19.5% revenue increase in 2019 driven by higher horsepower and pricing, alongside liquidity, capital resources, debt, and critical accounting policies General Trends and Outlook Management anticipates continued demand for compression services, driven by forecasted increases in U.S. natural gas production to 94.7 Bcf/d and crude oil production to 13.3 million bbl/d in 2020 - The EIA forecasts U.S. dry natural gas production to increase by 3% to 94.7 Bcf/d in 2020, supporting demand for compression services[267] - Henry Hub natural gas spot prices are expected to average $2.33/MMBtu in 2020, down from $2.57/MMBtu in 2019[268] - U.S. crude oil production is forecasted to average 13.3 million bbl/d in 2020, up 9% from 2019, with most growth coming from the Permian and Delaware Basins, which will increase demand for handling associated natural gas[273] Financial Results of Operations Total revenues increased 19.5% to $698.4 million in 2019, with gross operating margin up 27.4% to $471.1 million, and net income turning around to $39.1 million from a $10.6 million loss Results of Operations (Year Ended Dec 31, in thousands) | Line Item | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $698,365 | $584,352 | 19.5% | | Gross operating margin | $471,062 | $369,628 | 27.4% | | Operating income | $168,384 | $65,311 | 157.8% | | Interest expense, net | $(127,146) | $(78,377) | 62.2% | | Net income (loss) | $39,132 | $(10,551) | 470.9% | - The $117.3 million increase in contract operations revenue was driven by the inclusion of the Partnership's historical assets for the full year and a 3.5% increase in average revenue per revenue generating horsepower per month[287] - The $4.6 million decrease in SG&A expense was mainly due to a $5.9 million decrease in transaction and severance expenses related to the 2018 Transactions[292] Liquidity and Capital Resources The company's liquidity is driven by operating cash flow, which increased to $300.6 million in 2019, and a credit facility with $484.4 million available capacity, against $2.8 billion in total contractual obligations Cash Flow Summary (Year Ended Dec 31, in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $300,580 | $226,340 | | Net cash used in investing activities | $(144,490) | $(779,663) | | Net cash provided by (used in) financing activities | $(156,179) | $549,409 | - 2020 budgeted capital expenditures are $110.0-$120.0 million for expansion and approximately $32.0 million for maintenance[315][316] - As of December 31, 2019, the company had $484.4 million of available borrowing capacity under its $1.6 billion credit facility[317] Contractual Cash Obligations as of Dec 31, 2019 (in thousands) | Obligation | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $1,877,722 | $— | $— | $402,722 | $1,475,000 | | Interest on long-term debt | $807,487 | $123,253 | $246,507 | $208,274 | $229,453 | | Equipment and capital purchases | $49,267 | $49,267 | $— | $— | $— | | Operating and finance lease obligations | $36,078 | $5,311 | $8,587 | $7,773 | $14,407 | | Total | $2,770,554 | $177,831 | $255,094 | $618,769 | $1,718,860 | Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition for fixed-fee contracts, annual goodwill impairment testing (no impairment in 2019), and long-lived asset impairment reviews, which resulted in $5.9 million and $8.7 million charges in 2019 and 2018 respectively - Revenue from contract operations is recognized ratably over the term of the fixed-fee contracts as services are provided[331] - Goodwill is tested for impairment annually on October 1. The 2019 and 2018 qualitative assessments concluded that it was not more likely than not that the fair value of the reporting unit was less than its carrying value[334][337] - The company recorded impairment charges on compression equipment of $5.9 million in 2019 and $8.7 million in 2018 after evaluating the future deployment prospects of its idle fleet[342] Quantitative and Qualitative Disclosures About Market Risk The company faces indirect commodity price risk and direct interest rate risk, with a 1% rate change impacting annual interest expense by approximately $4.0 million, alongside credit risk from energy industry receivables - The company has no direct exposure to commodity prices but is indirectly affected by long-term price levels that influence customer production and demand for compression services[346] - As of December 31, 2019, the company had $402.7 million of variable-rate debt. A one percent change in the effective interest rate would impact annual interest expense by approximately $4.0 million[347] Financial Statements and Supplementary Data This item refers to the consolidated financial statements and supplementary data presented in Part IV, Item 15 of the report - The financial statements and supplementary data are presented in Part IV, Item 15 of the Form 10-K[350] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[351] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the independent auditor issuing an unqualified opinion - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2019[352] - Management assessed internal control over financial reporting as effective as of December 31, 2019, using the criteria set forth by the 2013 COSO framework[355] - The independent auditor, Grant Thornton LLP, issued an unqualified opinion on the effectiveness of the Partnership's internal control over financial reporting as of December 31, 2019[356] Other Information The company reports no other information - None[365] PART III Directors, Executive Officers and Corporate Governance The Partnership is managed by its General Partner, controlled by ETO, with a nine-member Board including three independent directors, and established Audit and Compensation Committees - The General Partner, owned by ETO, manages the Partnership's operations. Its Board has nine members, three of whom are independent[368][369] - The Board has standing Audit and Compensation committees. The Audit Committee is comprised solely of independent directors[375][377] - The Board has adopted Corporate Governance Guidelines and a Code of Business Conduct and Ethics, which are available on the company's website[381] Executive Compensation The executive compensation program emphasizes competitive, at-risk incentive pay, including annual cash bonuses based on financial and safety targets, and long-term equity awards in phantom units - The compensation philosophy emphasizes performance-based, "at-risk" pay, targeting the 50th percentile of the market for total compensation[411] - The annual cash bonus for 2019 was based on achieving targets for Adjusted EBITDA (30% weighting), DCF (30%), Leverage Ratio (30%), and Safety (10%)[427] - Long-term incentives are granted as time-based phantom units with a five-year incremental vesting schedule (60% after year three, 40% after year five)[440] 2019 Summary Compensation for NEOs | Name | Position | Total Compensation ($) | | :--- | :--- | :--- | | Eric D. Long | President and CEO | 5,459,946 | | Matthew C. Liuzzi | CFO and Treasurer | 2,629,726 | | William G. Manias | COO | 2,301,985 | | David A. Smith | VP, President, Northeast Region | 1,502,392 | | Sean T. Kimble | VP, Human Resources | 1,294,056 | - The CEO pay ratio for 2019 was estimated to be 46.2 to 1, based on the CEO's total compensation of $5,459,946 and the median employee's total compensation of $118,073[495][498] Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters This section details beneficial ownership of common units as of February 2020, with Energy Transfer Operating, L.P. holding 47.65% and all directors and officers owning 1.18%, alongside information on LTIP authorized securities Security Ownership of Certain Beneficial Owners (as of Feb 13, 2020) | Name of Beneficial Owner | Percentage of Common Units | | :--- | :--- | | Energy Transfer Operating, L.P. | 47.65% | | Invesco Ltd. | 19.30% | | EIG Veteran Equity Aggregator, L.P. | 11.55% | | All directors and officers as a group (14 persons) | 1.18% | - As of December 31, 2019, there were 6,805,000 securities remaining available for future issuance under the company's equity compensation plan (LTIP)[511] Certain Relationships and Related Party Transactions, and Director Independence The company has a Services Agreement with USAC Management and engages in transactions with Energy Transfer affiliates, recognizing $20.0 million in revenue from them in 2019, with provisions for resolving conflicts of interest - The Partnership reimburses USAC Management, an affiliate of the General Partner, for all expenses incurred on its behalf, including employee compensation[515] Key Transactions with Energy Transfer (2019) | Transaction | Amount/Value | | :--- | :--- | | Quarterly distributions paid to Energy Transfer | $86.6 million | | Revenue for compression services | $20.0 million | | Receivable from ETO for sales tax contingency | $44.9 million | - The Partnership Agreement contains provisions to resolve conflicts of interest with the General Partner, which may be approved by a conflicts committee, a majority vote of unaffiliated unitholders, or determined by the General Partner to be on fair terms[522] Principal Accountant Fees and Services This section discloses $1.1 million in total fees paid to Grant Thornton LLP for audit services in 2019, all of which were pre-approved by the Audit Committee Accountant Fees (in millions) | Fee Type | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $1.1 | $1.5 | | Audit-Related Fees | $— | $— | | Tax Fees | $— | $— | | All Other Fees | $— | $— | | Total | $1.1 | $1.5 | - The Audit Committee pre-approved 100% of the audit and non-audit services provided by the independent registered public accounting firm[529] PART IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the Form 10-K, including key agreements, debt indentures, compensation plans, and required certifications - This item contains a list of all exhibits filed with the report, such as the Contribution Agreement, Equity Restructuring Agreement, Credit Agreement, and various indentures for senior notes[532] - Certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act are included as exhibits[538] Financial Statements and Notes This section presents the audited consolidated financial statements for 2017-2019, including balance sheets, statements of operations, changes in partners' capital, and cash flows, along with detailed accounting notes Report of Independent Registered Public Accounting Firm Grant Thornton LLP issued an unqualified opinion on the financial statements, noting a change in accounting principle for leases and identifying the Goodwill Impairment Assessment as a critical audit matter - The auditor, Grant Thornton LLP, issued an unqualified opinion on the financial statements[546] - The report highlights a change in accounting principle for leases due to the adoption of the new leasing standard (ASC Topic 842)[548] - The Goodwill Impairment Assessment was identified as a critical audit matter due to the significant judgments involved in management's qualitative assessment[552][553] Consolidated Financial Statements Consolidated financial statements show total assets of $3.73 billion as of December 2019, with 2019 total revenues of $698.4 million and net income of $39.1 million, a significant improvement from 2018 Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total current assets | $230,923 | $217,740 | | Property and equipment, net | $2,482,943 | $2,521,488 | | Goodwill | $619,411 | $619,411 | | Total assets | $3,730,407 | $3,774,649 | | Total current liabilities | $189,375 | $149,599 | | Long-term debt, net | $1,852,360 | $1,759,058 | | Total liabilities | $2,072,500 | $1,918,484 | | Total partners' capital | $1,180,598 | $1,378,856 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total revenues | $698,365 | $584,352 | $276,671 | | Operating income (loss) | $168,384 | $65,311 | $(262,668) | | Net income (loss) | $39,132 | $(10,551) | $(264,734) | | Net loss per common unit | $(0.02) | $(0.43) | N/A | Notes to Consolidated Financial Statements The notes provide detailed explanations of financial statements, covering basis of presentation, long-term debt, preferred units, and commitments and contingencies, including sales tax issues - The financial statements reflect the USA Compression Predecessor as the accounting acquirer in the April 2, 2018 reverse merger, with its historical financials used for periods prior to the transaction date[579] - As of Dec 31, 2019, long-term debt consisted of a $402.7 million balance on the revolving credit facility and $1.475 billion in senior notes (net of deferred financing costs)[671] - The company has 500,000 Series A Preferred Units outstanding, which are convertible into common units starting in April 2021 and are classified as temporary equity due to a redemption feature exercisable by holders starting in 2028[707][710][711] - The company has open sales tax audits with the Texas Comptroller regarding the applicability of a manufacturing exemption. Any liability for periods prior to the CDM Acquisition is covered by an indemnity from ETO, for which a $44.9 million receivable is recorded[779][780]