USA pression Partners(USAC) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, statements of operations, changes in partners' capital, and cash flows, with detailed notes on organization and accounting policies Unaudited Condensed Consolidated Balance Sheets | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | | Total assets | $2,719,892 | $2,767,979 | | Total liabilities | $2,254,648 | $2,189,562 | | Total partners' capital (deficit) | $(12,065) | $101,108 | | Long-term debt, net | $2,017,326 | $1,973,234 | Unaudited Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Total revenues | $171,461 | $156,562 | 9.5% | | Net income | $9,086 | $2,688 | 238.0% | | Basic and diluted net loss per common unit | $(0.03) | $(0.10) | -70.0% | | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | :--------- | | Total revenues | $334,873 | $314,075 | 6.6% | | Net income | $12,340 | $3,059 | 303.4% | | Basic and diluted net loss per common unit | $(0.12) | $(0.22) | -45.5% | Unaudited Condensed Consolidated Statements of Changes in Partners' Capital (Deficit) | Metric | December 31, 2021 (in thousands) | June 30, 2022 (in thousands) | | :------------------------------------------ | :------------------------------- | :--------------------------- | | Partners' capital ending balance | $101,108 | $(12,065) | | Distributions and DERs (6 months ended June 30, 2022) | N/A | $(102,291) | | Exercise and conversion of warrants into common units | N/A | $5,167 | Unaudited Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------- | | Net cash provided by operating activities | $129,282 | $139,071 | $(9,789) | | Net cash used in investing activities | $(42,870) | $(10,269) | $(32,601) | | Net cash used in financing activities | $(86,412) | $(128,802) | $42,390 | | Capital expenditures, net | $(43,818) | $(15,435) | $(28,383) | Notes to Unaudited Condensed Consolidated Financial Statements (1) Organization and Description of Business - USA Compression Partners, LP provides natural gas compression and treating services under fixed-term contracts in the natural gas and crude oil industries, primarily in various U.S. shale plays[22] - The General Partner, USA Compression GP, LLC, is wholly owned by Energy Transfer[23] (2) Basis of Presentation and Summary of Significant Accounting Policies - The unaudited condensed consolidated financial statements are prepared in accordance with GAAP and SEC rules, reflecting normal recurring adjustments[24] - Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results expected for the full year[25] - The company operates in a single business segment: compression services[47] (3) Trade Accounts Receivable | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Allowance for credit losses | $1,254 | $2,057 | - The allowance for credit losses decreased by $0.7 million for the six months ended June 30, 2022, primarily due to favorable market conditions for customers driven by higher commodity prices[49] (4) Inventories | Component | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------ | :----------------------------- | :------------------------------- | | Serialized parts | $46,619 | $44,642 | | Non-serialized parts | $43,585 | $41,174 | | Total inventories | $90,204 | $85,816 | (5) Property and Equipment and Identifiable Intangible Assets | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :---------------------------------- | :----------------------------- | :------------------------------- | | Total property and equipment, net | $2,178,383 | $2,222,336 | | Identifiable intangible assets, net | $289,722 | $304,411 | | Impairment of Compression Equipment | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :---------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Impairment charge | $432 | $4,953 | - Impairments were due to units not being marketable, excessive maintenance costs, or inability to meet customer performance criteria without significant retrofitting[55] (6) Other Current Liabilities | Component | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :---------------------------------- | :----------------------------- | :------------------------------- | | Accrued sales tax contingencies | $44,923 | $44,923 | | Accrued interest expense | $31,951 | $30,850 | | Accrued capital expenditures | $14,544 | $3,521 | (7) Lease Accounting - A customer exercised a bargain purchase option during the second quarter of 2021, resulting in a $1.1 million gain on disposition of assets[60] (8) Long-term Debt | Debt Instrument | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------ | :----------------------------- | :------------------------------- | | Senior Notes 2026 | $725,000 | $725,000 | | Senior Notes 2027 | $750,000 | $750,000 | | Revolving credit facility | $558,664 | $516,342 | | Total long-term debt, net | $2,017,326 | $1,973,234 | - As of June 30, 2022, the company had $360.9 million in available borrowing capacity under its $1.6 billion revolving credit facility, with a weighted-average interest rate of 4.13%[64] - The company was in compliance with all covenants under the Credit Agreement and Senior Notes indentures as of June 30, 2022[66][69][72] (9) Preferred Units - There were 500,000 Preferred Units outstanding as of June 30, 2022, and December 31, 2021, with a face value of $1,000 per unit[75] - Holders of Preferred Units are entitled to cumulative quarterly cash distributions of $24.375 per unit[75] - Preferred Units are convertible into common units, with conversion options phasing in from April 2, 2021, to April 2, 2023[78] (10) Partners' Capital (Deficit) | Metric | December 31, 2021 | June 30, 2022 | | :------------------------------------------ | :------------------ | :-------------- | | Common units outstanding | 97,344,707 | 97,940,715 | - Cash distributions of $0.525 per common unit were declared quarterly[81] - During the six months ended June 30, 2022, $1.0 million in distributions were reinvested under the DRIP, resulting in the issuance of 61,700 common units[83] - Warrants to purchase 5,000,000 common units were exercised in full on April 27, 2022, resulting in the net settlement for 534,308 common units[85] (11) Revenue Recognition | Revenue Type | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :-------------------------- | :-------------------------------------------- | :------------------------------------------ | | Contract operations revenue | $167,853 | $329,339 | | Retail parts and services | $3,608 | $5,534 | | Total revenues | $171,461 | $334,873 | - As of June 30, 2022, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to contract operations revenue was $505.6 million, expected to be recognized through 2025 and thereafter[92] (12) Transactions with Related Parties | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Related party revenues | $3,887 | $2,944 | $7,705 | $5,894 | - A $44.9 million related party receivable from Energy Transfer exists as of June 30, 2022, related to indemnification for sales tax contingencies[93] (13) Commitments and Contingencies - No single customer represented 10% or more of total revenue for the three and six months ended June 30, 2022 or 2021[94] - Equipment purchase commitments totaled $53.2 million as of June 30, 2022, with $24.2 million expected to be settled in the remainder of 2022[96] - The company estimates a range of losses from $0 to approximately $19.5 million related to sales tax assessments by the Oklahoma Tax Commission[98] - A $44.9 million accrued liability for Texas sales tax contingencies is indemnified by a related party receivable from Energy Transfer[99] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial condition and operational performance, highlighting key metrics, financial results, liquidity, capital resources, and non-GAAP reconciliations Operating Highlights | Metric | June 30, 2022 | June 30, 2021 | Change (%) | | :------------------------------------------ | :------------ | :------------ | :--------- | | Fleet horsepower (at period end) | 3,695,955 | 3,686,584 | 0.3% | | Revenue generating horsepower (at period end) | 3,048,498 | 2,912,628 | 4.7% | | Horsepower utilization (at period end) | 88.4% | 81.9% | 7.9% | | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (%) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :--------- | | Average revenue per revenue generating horsepower per month | $17.20 | $16.55 | 3.9% | - The increase in horsepower utilization was primarily due to increased revenue generating horsepower and horsepower under contract but not yet generating revenue, driven by increased demand for services in the oil and gas industry[113] Financial Results of Operations Three months ended June 30, 2022 compared to the three months ended June 30, 2021 | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------------------------------ | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Total revenues | $171,461 | $156,562 | 9.5% | | Contract operations revenue | $163,969 | $151,800 | 8.0% | | Parts and service revenue | $3,605 | $1,818 | 98.3% | | Net income | $9,086 | $2,688 | 238.0% | - Contract operations revenue increased due to select price increases on the existing fleet (3.9% increase in average revenue per revenue generating horsepower per month) and a 2.8% increase in average revenue generating horsepower[117] - Cost of operations (exclusive of depreciation and amortization) increased by $9.6 million (20.9%) due to higher direct expenses (fluids, parts), non-income taxes, retail parts and services expenses, vehicle fleet expenses, and direct labor costs[121] - No impairment of compression equipment was recorded for the three months ended June 30, 2022, compared to $2.4 million in the prior year[125][127] Six months ended June 30, 2022 compared to the six months ended June 30, 2021 | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :--------- | | Total revenues | $334,873 | $314,075 | 6.6% | | Contract operations revenue | $321,637 | $304,325 | 5.7% | | Parts and service revenue | $5,531 | $3,856 | 43.4% | | Net income | $12,340 | $3,059 | 303.4% | - Contract operations revenue increased due to select price increases (2.7% increase in average revenue per revenue generating horsepower per month), a 1.1% increase in average revenue generating horsepower, and increased natural gas treating services[131] - Cost of operations (exclusive of depreciation and amortization) increased by $14.7 million (15.6%) due to higher direct expenses (fluids, parts), outside maintenance costs, non-income taxes, vehicle fleet expenses, retail parts and services expenses, and direct labor costs[135] - Impairment of compression equipment decreased to $0.4 million for the six months ended June 30, 2022, from $5.0 million in the prior year[140] Other Financial Data | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :-------------------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Gross margin | $57,344 | $51,731 | 10.9% | | Adjusted gross margin | $116,303 | $110,958 | 4.8% | | Adjusted EBITDA | $105,408 | $99,988 | 5.4% | | DCF | $55,576 | $52,536 | 5.8% | | DCF Coverage Ratio | 1.08x | 1.03x | 4.9% | | Cash Coverage Ratio | 1.09x | 1.04x | 4.8% | | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :--------- | | Gross margin | $107,960 | $99,586 | 8.4% | | Adjusted gross margin | $225,983 | $219,843 | 2.8% | | Adjusted EBITDA | $203,831 | $199,541 | 2.1% | | DCF | $105,722 | $105,116 | 0.6% | | DCF Coverage Ratio | 1.03x | 1.03x | 0.0% | | Cash Coverage Ratio | 1.04x | 1.04x | 0.0% | Liquidity and Capital Resources - Primary liquidity needs include financing capital expenditures, servicing debt, funding working capital, and paying distributions, primarily sourced from operating activities, Credit Agreement borrowings, and debt/equity issuances[155] | Capital Expenditures | Six Months Ended June 30, 2022 (in millions) | Six Months Ended June 30, 2021 (in millions) | | :--------------------------- | :------------------------------------------- | :------------------------------------------- | | Maintenance capital expenditures | $12.0 | $9.5 | | Expansion capital expenditures | $52.3 | $12.4 | - Projected maintenance capital expenditures for 2022 are approximately $23.0 million, and expansion capital expenditures are projected between $100.0 million and $110.0 million[158][159] - Net cash provided by operating activities decreased by $9.8 million for the six months ended June 30, 2022, compared to the prior year, primarily due to changes in working capital[162] - Net cash used in investing activities increased by $32.6 million, mainly due to a $28.4 million increase in capital expenditures for new compression units and reconfiguration costs[163] Non-GAAP Financial Measures Adjusted Gross Margin - Adjusted gross margin is defined as revenue less cost of operations, exclusive of depreciation and amortization expense, and is used as a supplemental measure of operating profitability[171] | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------ | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Adjusted gross margin | $116,303 | $110,958 | 4.8% | | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------------ | :------------------------------------------ | :------------------------------------------ | :--------- | | Adjusted gross margin | $225,983 | $219,843 | 2.8% | Adjusted EBITDA - Adjusted EBITDA is a key management tool for evaluating results of operations, assessing financial performance, viability of capital expenditure projects, and the ability to generate cash for debt payments and distributions[173] | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------- | :-------------------------------------------- | :-------------------------------------------- | :--------- | | Adjusted EBITDA | $105,408 | $99,988 | 5.4% | | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :------------- | :------------------------------------------ | :------------------------------------------ | :--------- | | Adjusted EBITDA | $203,831 | $199,541 | 2.1% | Distributable Cash Flow - Distributable Cash Flow (DCF) is an important measure for comparing basic cash flows generated (after Preferred Unit distributions and prior to retained cash reserves) to expected cash distributions to common unitholders[180] | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Change (%) | | :----- | :-------------------------------------------- | :-------------------------------------------- | :--------- | | DCF | $55,576 | $52,536 | 5.8% | | Metric | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | Change (%) | | :----- | :------------------------------------------ | :------------------------------------------ | :--------- | | DCF | $105,722 | $105,116 | 0.6% | Coverage Ratios - DCF Coverage Ratio and Cash Coverage Ratio are used to gauge the company's ability to pay cash distributions to common unitholders[187] | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Change (%) | | :------------------ | :------------------------------- | :------------------------------- | :--------- | | DCF Coverage Ratio | 1.08x | 1.03x | 4.9% | | Cash Coverage Ratio | 1.09x | 1.04x | 4.8% | | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | Change (%) | | :------------------ | :----------------------------- | :----------------------------- | :--------- | | DCF Coverage Ratio | 1.03x | 1.03x | 0.0% | | Cash Coverage Ratio | 1.04x | 1.04x | 0.0% | ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including commodity price, interest rate, and credit risks related to customer receivables - The company has no direct exposure to fluctuating commodity prices but is indirectly affected by demand for natural gas and crude oil, with a 1% decrease in average revenue generating horsepower potentially leading to an annual $6.1 million decrease in revenue[192] - As of June 30, 2022, the company had $558.7 million in variable-rate indebtedness, and a 1% change in the effective interest rate would result in an annual $5.6 million change in interest expense[193] - Credit risk is associated with receivables for services provided, and significant customer credit problems could materially impact the business[195] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2022[197] - No material changes in internal control over financial reporting occurred during the last fiscal quarter[198] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings The company is involved in ordinary course legal proceedings, with management not anticipating material adverse effects on financial position, operations, or cash flows - Resolution of legal proceedings is not expected to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[201] ITEM 1A. Risk Factors This section directs readers to comprehensive risk factors detailed in the 2021 Annual Report on Form 10-K and subsequent SEC filings - Security holders and potential investors are advised to consider risk factors outlined in the 2021 Annual Report on Form 10-K and subsequent SEC filings[202] ITEM 6. Exhibits This section lists all documents filed, furnished, or incorporated by reference, including organizational documents, executive certifications, and XBRL financial data - The report includes certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and Inline XBRL financial data (Exhibit 101.1)[203] SIGNATURES This section contains official signatures of authorized officers Matthew C. Liuzzi and G. Tracy Owens, certifying the report on August 2, 2022 - The report was signed on August 2, 2022, by Matthew C. Liuzzi (Vice President, Chief Financial Officer and Treasurer) and G. Tracy Owens (Vice President of Finance and Chief Accounting Officer)[207]