USA pression Partners(USAC) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements Unaudited condensed financial statements for H1 2020 show a significant net loss, primarily due to a $619.4 million goodwill impairment, despite stable operating cash flow Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total current assets | $216,983 | $230,923 | | Property and equipment, net | $2,455,586 | $2,482,943 | | Goodwill | $— | $619,411 | | Total assets | $3,057,689 | $3,730,407 | | Total current liabilities | $187,436 | $189,375 | | Long-term debt, net | $1,899,070 | $1,852,360 | | Total liabilities | $2,122,742 | $2,072,500 | | Total partners' capital | $457,638 | $1,180,598 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $168,651 | $173,675 | $347,650 | $344,421 | | Operating income (loss) | $34,894 | $42,891 | $(534,816) | $78,419 | | Impairment of goodwill | $— | $— | $619,411 | $— | | Net income (loss) | $2,684 | $9,949 | $(599,777) | $16,536 | | Net loss attributable to common unitholders | $(9,504) | $(2,239) | $(624,152) | $(7,839) | | Basic and diluted net loss per common unit | $(0.10) | $0.01 | $(6.45) | $(0.01) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $147,432 | $147,586 | | Net cash used in investing activities | $(63,796) | $(75,949) | | Net cash used in financing activities | $(83,644) | $(71,734) | - In the first quarter of 2020, the company recognized a goodwill impairment charge of $619.4 million due to declining common unit market price, falling global commodity prices, and the COVID-19 pandemic[62][64] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses market volatility's impact, including a $619.4 million goodwill impairment, decreased horsepower utilization, and strategic responses like reduced spending and credit agreement amendments Trends and Outlook Mixed outlook due to volatile commodity prices and COVID-19 impacts demand, but natural gas fundamentals offer long-term support, prompting cuts in capital spending and operating expenses - The significant drop in crude oil prices in March 2020, coupled with demand impact from the COVID-19 pandemic, created uncertainty for compression services demand, especially in associated gas production regions[125] - The company expects the long-term outlook for natural gas to remain positive, with a more balanced market anticipated toward the end of 2020 and into 2021, which should support business activities[128][129] - In response to market events, the company cut its 2020 growth capital spending budget by 25% and reduced operating expenses by 10% in the first quarter[131] Operating Highlights Operating performance shows increased fleet horsepower but decreased revenue-generating horsepower and utilization, while average revenue per horsepower increased due to new contracts and price adjustments Key Operating Metrics Comparison | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | % Change | | :--- | :--- | :--- | :--- | | Fleet horsepower (at period end) | 3,718,092 | 3,657,362 | 1.7% | | Revenue generating horsepower (at period end) | 3,125,909 | 3,259,795 | (4.1)% | | Average revenue per revenue generating HP/month | $16.79 | $16.60 | 1.1% | | Horsepower utilization (average for the period) | 88.0% | 94.6% | (7.0)% | - The decrease in average horsepower utilization for Q2 2020 was primarily due to a 6.2% increase in the average idle fleet from returned compression units and a 3.9% decrease in horsepower that is on-contract but not yet active[139] Financial Results of Operations Q2 2020 saw decreased revenues and net income, while H1 2020 revenues slightly increased but resulted in a $599.8 million net loss driven by a $619.4 million goodwill impairment Q2 2020 vs Q2 2019 Results (in thousands) | Metric | Q2 2020 | Q2 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $168,651 | $173,675 | (2.9)% | | Cost of operations (excl. D&A) | $49,968 | $56,245 | (11.2)% | | Operating income | $34,894 | $42,891 | (18.6)% | | Net income | $2,684 | $9,949 | (73.0)% | Six Months 2020 vs 2019 Results (in thousands) | Metric | H1 2020 | H1 2019 | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $347,650 | $344,421 | 0.9% | | Impairment of goodwill | $619,411 | $— | N/A | | Operating income (loss) | $(534,816) | $78,419 | N/A | | Net income (loss) | $(599,777) | $16,536 | N/A | - A goodwill impairment of $619.4 million was recognized in the first quarter of 2020 due to declines in the company's common unit price, global commodity prices, and the impact of the COVID-19 pandemic[167] Other Financial Data (Non-GAAP) Non-GAAP financial measures, including Adjusted EBITDA and Distributable Cash Flow, demonstrated resilience with increases for both Q2 and H1 2020 despite market challenges Non-GAAP Financial Measures (in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Adjusted gross margin | $118,683 | $117,430 | $238,517 | $231,151 | | Adjusted EBITDA | $105,481 | $104,708 | $211,665 | $206,085 | | DCF | $58,686 | $54,062 | $113,388 | $108,914 | | DCF Coverage Ratio | 1.15x | 1.14x | 1.12x | 1.15x | - The increase in Adjusted EBITDA for Q2 2020 was primarily driven by a $1.3 million increase in Adjusted Gross Margin, demonstrating effective cost management[177] - The increase in DCF for Q2 2020 was primarily due to a $3.5 million decrease in maintenance capital expenditures and the increase in Adjusted Gross Margin[179] Liquidity and Capital Resources Liquidity is supported by operations and credit facility, with reduced capital expenditures and a recent credit agreement amendment increasing the maximum leverage ratio for greater financial flexibility - On August 3, 2020, the company amended its Credit Agreement to increase the maximum funded debt to EBITDA ratio, raising it to 5.75x for the second half of 2020, and providing tiered relief through 2021[187][196] - The company has budgeted $80.0 million to $90.0 million for expansion capital expenditures and approximately $30.0 million for maintenance capital expenditures for the full year 2020[189][190] - As of June 30, 2020, the company had available borrowing capacity of $151.1 million under its Credit Agreement[195] Quantitative and Qualitative Disclosures About Market Risk Key market risks include indirect commodity price exposure, interest rate fluctuations on variable-rate debt, and increased credit risk due to economic impacts on customers - The company has no direct exposure to commodity prices, but a 1% decrease in average revenue-generating horsepower would result in an annual revenue decrease of approximately $6.6 million[227] - As of June 30, 2020, the company had $447.8 million in variable-rate debt, where a 1% change in the interest rate would result in an annual change in interest expense of approximately $4.5 million[228] - Credit risk exposure has increased due to the financial strain on customers from the COVID-19 pandemic and crude oil market volatility[230] Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2020[232] - There were no material changes to the company's internal control over financial reporting during the second quarter of 2020[233] PART II. OTHER INFORMATION Legal Proceedings Ongoing legal proceedings are not expected to materially impact the company's financial position, results of operations, or cash flows - Management does not expect any ongoing legal proceedings to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[236] Risk Factors This section refers readers to comprehensive risk factors detailed in the 2019 Form 10-K and Q1 2020 Form 10-Q - The report refers readers to the risk factors detailed in the 2019 Form 10-K and the Q1 2020 Form 10-Q[237] Exhibits This section lists exhibits filed with the quarterly report, including CEO/CFO certifications and the Credit Agreement Amendment - A key exhibit filed with this report is Amendment No. 1 to the Credit Agreement, dated August 3, 2020[238]