USA pression Partners(USAC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements, emphasizing a significant Q1 2020 goodwill impairment and net loss Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Data | Account | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total current assets | $214,087 | $230,923 | | Property and equipment, net | $2,419,437 | $2,482,943 | | Goodwill | $— | $619,411 | | Total assets | $3,011,332 | $3,730,407 | | Total current liabilities | $145,814 | $189,375 | | Long-term debt, net | $1,949,176 | $1,852,360 | | Total liabilities | $2,132,354 | $2,072,500 | | Total partners' capital | $401,669 | $1,180,598 | - Total assets decreased significantly from $3.73 billion at year-end 2019 to $3.01 billion as of September 30, 2020, primarily due to the complete impairment of goodwill[13] Unaudited Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | 9 Months 2020 (in thousands) | 9 Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Total revenues | $161,666 | $175,756 | $509,316 | $520,177 | | Operating income (loss) | $38,771 | $46,164 | $(496,045) | $124,583 | | Impairment of goodwill | $— | $— | $619,411 | $— | | Net income (loss) | $6,519 | $13,315 | $(593,258) | $29,851 | | Basic net income (loss) per common unit | $(0.06) | $0.02 | $(6.51) | $0.01 | - For the nine months ended September 30, 2020, the company reported a net loss of $593.3 million, primarily driven by a $619.4 million goodwill impairment charge, compared to a net income of $29.9 million in the same period of 2019[15] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $195,651 | $208,880 | | Net cash used in investing activities | $(94,190) | $(108,227) | | Net cash used in financing activities | $(101,469) | $(100,750) | | Decrease in cash and cash equivalents | $(8) | $(97) | - Net cash from operating activities decreased slightly to $195.7 million for the first nine months of 2020 from $208.9 million in the prior-year period. Net cash used in investing activities decreased due to lower capital expenditures[23] Notes to Unaudited Condensed Consolidated Financial Statements - The company provides compression services under fixed-term contracts to the natural gas and crude oil industries, primarily in U.S. shale plays[26] - In Q1 2020, the company identified impairment indicators including declines in its common unit price, global commodity prices, and the COVID-19 pandemic. A quantitative test resulted in a goodwill impairment charge of $619.4 million[64][66] - For the nine months ended September 30, 2020, the company recorded impairments of compression equipment totaling $5.6 million, related to 27 retired compressor units[59] - On August 3, 2020, the company amended its Credit Agreement to provide temporary covenant relief, including an increase to the maximum funded debt to EBITDA ratio, through December 31, 2021[82][85] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial impact of market volatility and the COVID-19 pandemic, detailing operational adjustments and a major goodwill impairment Trends and Outlook - The significant drop in crude oil prices in March 2020 and the impact of the COVID-19 pandemic have created uncertainty and are expected to negatively affect demand for new compression services in the near term, particularly in regions with associated gas production[129] - Management believes the longer-term outlook for natural gas fundamentals remains positive, supported by resilient baseload demand and the potential for a more balanced market, which could support business activities and utilization[131][132] Operating Highlights Key Operating Metrics | Metric | Q3 2020 | Q3 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue generating horsepower (at period end) | 3,009,773 | 3,278,947 | (8.2)% | | Average revenue generating horsepower | 3,042,786 | 3,258,125 | (6.6)% | | Average horsepower utilization (for the period) | 83.9% | 93.9% | (10.6)% | - The decrease in revenue generating horsepower and utilization was primarily due to returns of compression units from customers, driven by a decline in U.S. crude oil and natural gas activity[138][141] Financial Results of Operations Q3 2020 vs Q3 2019 Results | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $161,666 | $175,756 | (8.0)% | | Cost of operations | $46,715 | $57,423 | (18.6)% | | Operating income | $38,771 | $46,164 | (16.0)% | | Net income | $6,519 | $13,315 | (51.0)% | Nine Months 2020 vs 2019 Results | Metric | 9 Months 2020 (in thousands) | 9 Months 2019 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Total revenues | $509,316 | $520,177 | (2.1)% | | Operating income (loss) | $(496,045) | $124,583 | N/A | | Impairment of goodwill | $619,411 | $— | N/A | | Net income (loss) | $(593,258) | $29,851 | N/A | - The $619.4 million goodwill impairment in Q1 2020 was the primary driver of the significant operating loss and net loss for the nine-month period[169] Non-GAAP Financial Measures Key Non-GAAP Financial Metrics | Metric | Q3 2020 (in thousands) | Q3 2019 (in thousands) | 9 Months 2020 (in thousands) | 9 Months 2019 (in thousands) | | :--- | :--- | :--- | :--- | | Adjusted gross margin | $114,951 | $118,333 | $353,468 | $349,484 | | Adjusted EBITDA | $103,940 | $104,327 | $315,605 | $310,412 | | Distributable Cash Flow (DCF) | $56,911 | $54,933 | $170,299 | $163,847 | | DCF Coverage Ratio | 1.12x | 1.08x | 1.12x | 1.13x | - Adjusted EBITDA remained relatively stable year-over-year for both the third quarter and nine-month periods, reflecting effective cost management despite revenue declines[177][178] Liquidity and Capital Resources - Primary liquidity sources are cash from operations and borrowings under the Credit Agreement. In response to market conditions, the company has reduced capital spending and operating expenses for 2020[183][184] - The company amended its Credit Agreement on August 3, 2020, to increase the maximum leverage ratio and provide other covenant relief through the end of 2021[185][194] - Budgeted expansion capital expenditures for 2020 are between $90.0 million and $100.0 million, a reduction from prior levels. Maintenance capital expenditures are planned at approximately $25.0 million[187][188] - As of September 30, 2020, the company had $411.8 million of available borrowing capacity under its revolving credit facility[193] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks including indirect commodity price exposure, interest rate risk on variable-rate debt, and heightened customer credit risk - The company has no direct exposure to commodity prices but is indirectly affected as low prices can reduce demand for its services. A 1% decrease in average revenue generating horsepower would result in an annual revenue decrease of approximately $6.6 million[225] - As of September 30, 2020, the company had $496.9 million in variable-rate debt. A 1% change in the effective interest rate would impact annual interest expense by approximately $5.0 million[226] - Credit risk is a concern, as financial difficulties among significant customers, exacerbated by the COVID-19 pandemic and market volatility, could materially impact the business[228] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2020, with no material changes in internal control - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[230] - No changes occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[231] PART II. OTHER INFORMATION Legal Proceedings The company reports that it is not involved in any legal proceedings expected to have a material adverse effect on its financial position or operations - In management's opinion, the resolution of any current legal matters arising in the ordinary course of business is not expected to have a material adverse effect on the company's financials[234] Risk Factors This section directs investors to the risk factors previously disclosed in the company's 2019 Annual Report on Form 10-K and Q1 2020 Form 10-Q - The company refers readers to its 2019 Form 10-K and Q1 2020 Form 10-Q for a detailed discussion of risk factors[235] Exhibits This section lists the documents filed as exhibits with the Form 10-Q, including CEO/CFO certifications and Inline XBRL financial data - The report includes CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and provides financial statements in Inline XBRL format[236]