USA COMPRESSION PARTNERS, LP 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," "if," "outlook," "will," "could," "should," or similar words or the negatives 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 the long-term supply of and demand for crude oil and natural gas, including as a result of uncertainty regarding the length of time it will take forthe United States and the rest of the world to slow the spread of the COVID-19 virus to the point where applicable authorities are comfortable easing current restrictions on various commercial and economic activities; such restrictions are designed to protect public health but also have the effect of significantly reducing demand for crude oil and natural gas; •the severity and duration of world health events, including the recent COVID-19 outbreak, related economic repercussions, actions taken by governmental authorities and other third parties in response to the pandemic and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which is negatively impacting our business; •changes in general economic conditions and changes in economic conditions of the crude oil and natural gas industries specifically, including the current significant surplus in the supply of oil and actions by the members of theOrganization of the Petroleum Exporting Countries ("OPEC") andRussia (together withOPEC and other allied producing countries, "OPEC+") with respect to oil production levels and announcements of potential changes in such levels, including the ability of the OPEC+ countries to agree on and comply with supply limitations; •uncertainty regarding the timing, pace and extent of an economic recovery inthe United States and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for the compression and treating services we provide and the commercial opportunities available to us; •the deterioration of the financial condition of our customers; •renegotiation of material terms of customer contracts; •competitive conditions in our industry; •our ability to realize the anticipated benefits of acquisitions; •actions taken by our customers, competitors and third-party operators; •changes in the availability and cost of capital; •operating hazards, natural disasters, epidemics, pandemics (such as COVID-19), weather-related delays, casualty losses and other matters beyond our control; •operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; •the effects of existing and future laws and governmental regulations; and •the effects of future litigation. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. 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 20 -------------------------------------------------------------------------------- Table of Co n t ents 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. Trends and Outlook We provide compression services in a number of shale plays throughout theU.S. , including the Utica, Marcellus,Permian Basin ,Delaware Basin ,Eagle Ford , Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales. 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 theEnergy Information Agency , the production and transportation volumes in these shale plays are expected to increase over the long term due to the comparatively attractive economic returns as compared to 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 operational design flexibility inherent in our compression units. A significant amount of our assets are utilized in natural gas infrastructure applications typically located in shale plays, primarily in centralized gathering systems and processing facilities utilizing large horsepower compression units. Given the infrastructure nature of these applications and long-term investment horizon of our customers, we have generally experienced stability in service rates and higher sustained utilization relative to other businesses more directly tied to drilling activity and wellhead economics. In addition to our natural gas infrastructure applications, a portion of our fleet is used in connection with gas lift applications on crude oil production targeted by horizontal drilling techniques and can be accomplished by both small and large horsepower compression equipment. Domestic natural gas production generally occurs in either primarily gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins such as the Permian and Delaware Basins and the Mid-Continent, where associated gas volumes are a byproduct of crude oil production. Over the past several years, relative stability in commodity prices has encouraged investment in domestic exploration and production ("E&P") and midstream infrastructure across the energy industry, particularly in the low-cost basins characterized by associated gas and crude oil production. The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the last several years as it is a critical method to transport associated gas volumes or enhance crude oil production through gas lift, allowing our customers to produce additional crude oil at more economically attractive levels. However, recent events have impacted and may continue to impact our operations in areas driven by associated gas and crude oil production. The considerable oil price drop inMarch 2020 due to the collapse of discussions among OPEC+,Saudi Arabia's announcement that it would be discounting its price, and increasing its supply, of crude oil into the global market and the ongoing global impact, both real and perceived, on crude oil demand from the COVID-19 pandemic has created additional uncertainty regarding the demand for compression services in certain of our operating areas. While our business is focused on providing compression services and does not have any direct exposure to commodity prices, we have indirect exposure to commodity prices as overall levels of activity across the energy industry are influenced by the commodity price environment. For example, because oil prices have continued to remain depressed as the supply into the market has continued, demand has yet to rebound and there has been increasing concern over the level of available domestic storage, many E&P companies, including some of our customers, have responded by significantly cutting planned capital spending budgets for the remainder of 2020. We expect the resulting decrease in production to in turn negatively affect the demand for new compression services and potentially reduce the need for us to spend capital on new compression units for deployment in associated gas producing regions. The impact on existing production of crude oil and natural gas, however, is far less certain. Variables such as takeaway capacity, flaring considerations, potential production prorationing, reservoir pressure and flow rates, high switching costs associated with large horsepower compressors (borne by our customers), and specific company dynamics may all factor into producers' decisions with respect to their existing production. For example, as wells age, and the reservoir pressures naturally continue to decline, more horsepower may be required to meet the customer's operational needs. In contrast, small horsepower gas lift applications have historically been more susceptible to commodity price swings, and we have experienced, and may continue to experience, some pressure on service rates and utilization in small horsepower gas lift applications. We cannot predict with reasonable certainty the effect on utilization of our assets servicing existing production in these regions. Unlike crude oil, natural gas production and prices have been influenced by different drivers over the recent past, as there is no OPEC+ equivalent in the global natural gas market and therefore the price of natural gas is generally determined by market forces of supply and demand rather than by a centralized market coordinator. Over the past several years, increased gas production in theU.S. driven by large volumes of gas produced from shale sources has been a main driver of an overall drop in natural gas prices. This sustained low natural gas price environment has helped create relatively resilient baseload demand for 21 -------------------------------------------------------------------------------- Table of Co n t ents natural gas for domestic use in power generation and industrial purposes such as chemical plants and other types of manufacturing. Also, the development of long-term export infrastructure has continued to occur alongside the low natural gas price environment, and theU.S. became a net exporter of natural gas into global markets in 2017. We expect this baseload natural gas demand will continue to drive long-term domestic natural gas production despite low natural gas prices. In addition to the relatively stable supply, demand and price fundamentals of natural gas, we believe that the geographic diversity and portability of our assets should help mitigate the impact of current market volatility. While we expect a reduction in the production of associated gas and demand for our services in certain regions beginning mid-year 2020, we remain optimistic that such reduction will have a positive impact on both natural gas prices and the utilization of our assets in other regions primarily tied to natural gas prospects, such as the Marcellus, Utica and Haynesville Shales. Given that these are primarily gas shales, we believe it is reasonable to expect that these areas could see additional capital inflows to take advantage of relatively more attractive economics and offset the reduced supply of associated natural gas in other regions, which could increase demand for our services in these shales. Should such demand increase exceed our current compression capability in these shales, the design flexibility of our compression units making them capable of rapid reconfiguration and deployment would allow us to meet such demand by relocating units to these areas. On the whole, we believe the longer-term outlook for natural gas fundamentals remains positive, as market signs point to a more balanced gas market toward the end of 2020 and into 2021. In summary, the outlook for commodity prices is mixed and could have a varying impact on our business. Whereas oversupply, severe demand destruction due to COVID-19 and lack of domestic storage capacity have recently driven crude oil prices to historically low levels, on the natural gas side, relatively more moderate expected demand destruction coupled with anticipated associated gas production decreases have somewhat counterbalanced softness in pricing and expectations of full gas storage going into the fall, thereby providing some support to natural gas futures prices. The overall outlook for our compression services will depend, in part, on the timing and extent of recovery in the commodity markets, and we believe the potential for natural gas to recover more quickly than crude oil should help support our business activities and overall utilization and pricing. While we anticipate that current and projected commodity prices and the related impact to activity levels in both the upstream and midstream sectors will impact our business, we cannot predict the ultimate magnitude of that impact and expect it to be varied across our operations, depending on the region, customer, nature of compression application, contract term and other factors. We believe our customers' mid- to long-term expectations regarding commodity prices and the cost they would incur to return our large horsepower equipment will provide an incentive for our customers to keep it in the field following expiration of the primary term, whereas we believe there is likely to be greater pressure on utilization and pricing with respect to our smaller horsepower equipment. Ultimately, the extent to which our business will be impacted by recent market developments depends on the factors described above as well as future developments beyond our control, which are highly uncertain and cannot be predicted. In response to these market events and uncertainties, we have cut our already reduced 2020 growth capital spending budget by 25% and reduced operating expenses by 10%; and we are prepared to cut spending further should the need arise. While current market volatility makes the near-term unpredictable, we believe that overall the long-term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas as well as the production of crude oil, although we cannot predict any possible changes in such demand with reasonable certainty. COVID-19 Update In the first quarter of 2020, the COVID-19 pandemic prompted several states and municipalities in which we operate to take extraordinary and wide-ranging actions to contain and combat the outbreak and spread of the virus, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. To the extent COVID-19 continues or worsens, governments may impose additional similar restrictions. To date, our field operations have continued largely uninterrupted as theU.S. Department of Homeland Security designated our industry part of our country's critical infrastructure. Thus far, remote work and other COVID-19 related conditions have not significantly impacted our ability to maintain operations or caused us to incur significant additional expenses; however, we are unable to predict the duration or ultimate impact of current and potential future COVID-19 mitigation measures. 22 -------------------------------------------------------------------------------- Table of Co n t ents Operating Highlights The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric. Three Months Ended March 31, Percent 2020 2019 Change Fleet horsepower (at period end) (1) 3,705,550 3,619,898 2.4 % Total available horsepower (at period end) (2) 3,727,905 3,720,023 0.2 %
Revenue generating horsepower (at period end) (3) 3,316,666
3,293,903 0.7 %
Average revenue generating horsepower (4) 3,320,724 3,280,601 1.2 %
Average revenue per revenue generating horsepower per month (5)
$ 16.89 $ 16.45 2.7 %
Revenue generating compression units (at period end) 4,516
4,595 (1.7) %
Average horsepower per revenue generating compression unit (6)
731 714 2.4 %
Horsepower utilization (7):
At period end 92.0 % 94.5 % (2.6) %
Average for the period (8) 92.5 % 94.2 % (1.8) %
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(1)Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As ofMarch 31, 2020 , we had approximately 35,000 horsepower on order, all of which we expect to be delivered during the remainder of 2020. (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 an executed 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 that 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 ofMarch 31, 2020 and 2019 was 89.5% and 91.0%, 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 endedMarch 31, 2020 and 2019 was 89.8% and 90.8%, respectively. The 2.4% increase in fleet horsepower as ofMarch 31, 2020 compared toMarch 31, 2019 was attributable to compression units added to our fleet to meet then expected incremental demand by new and current customers for our compression services. The 0.7% increase in revenue generating horsepower as ofMarch 31, 2020 compared toMarch 31, 2019 was primarily due to organic growth in our large horsepower fleet. The increase was due to a 2.4% increase in average horsepower per revenue generating compression unit due to the organic growth in our large horsepower fleet, partially offset by a 1.7% decrease in revenue generating compression units related to returns of compression units from our customers. The 2.7% increase in average revenue per revenue generating horsepower per month during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily due to contracts on new compression units and selective price increases on the existing fleet. Average horsepower utilization decreased to 92.5% during the three months endedMarch 31, 2020 compared to 94.2% during the three months endedMarch 31, 2019 . The 1.8% decrease in average horsepower utilization is primarily due to (1) a 2.4% decrease in horsepower that is on-contract or pending-contract but not yet active and (2) a 1.5% increase in our average idle fleet from compression units returned to us. Average horsepower utilization based on revenue generating horsepower and 23 -------------------------------------------------------------------------------- Table of Co n t ents fleet horsepower decreased to 89.8% during the three months endedMarch 31, 2020 compared to 90.8% during the three months endedMarch 31, 2019 . The 1.1% decrease is primarily attributable to an increase in our average idle fleet from compression units returned to us. We believe these decreases are the result of a delay in planned projects of certain of our customers. Financial Results of Operations Three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 The following table summarizes our results of operations for the periods presented (dollars in thousands): Three Months Ended March 31, Percent 2020 2019 Change Revenues: Contract operations$ 172,794 $ 163,976 5.4 % Parts and service 3,048 2,684 13.6 % Related party 3,157 4,086 (22.7) % Total revenues 178,999 170,746 4.8 % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 59,165 57,025 3.8 % Gross operating margin 119,834 113,721 5.4 %
Other operating and administrative costs and expenses: Selling, general and administrative
12,385 15,995 (22.6) %
Depreciation and amortization 58,762 58,924 (0.3) %
Loss (gain) on disposition of assets (1,014) 40 *
Impairment of compression equipment - 3,234 *
Impairment of goodwill 619,411 - *
Total other operating and administrative costs and
expenses 689,544 78,193 *
Operating income (loss) (569,710) 35,528 *
Other income (expense):
Interest expense, net (32,478) (28,857) 12.5 %
Other 23 20 15.0 %
Total other expense (32,455) (28,837) 12.5 %
Net income (loss) before income tax expense (602,165) 6,691 *
Income tax expense 296 104 *
Net income (loss) $ (602,461) $ 6,587 *
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*Not meaningful
Contract operations revenue. The $8.8 million increase in contract operations
revenue for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 was primarily attributable to a year-to-year increase in
demand for our compression services driven by increased U.S. production of crude
oil and natural gas as average revenue per revenue generating horsepower per
month increased 2.7% to $16.89 for the three months ended March 31, 2020
compared to $16.45 for the three months ended March 31, 2019 . Our contract
operations revenue was not materially impacted by any renegotiations of our
contracts with our customers, and 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 during the period.
Parts and service revenue. The $0.4 million increase in parts and service
revenue for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 was primarily attributable to an increase in maintenance
work performed on units at our customers' locations that are outside the scope
of our core maintenance activities and offered as a
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courtesy to our customers, and freight and crane charges that are directly
reimbursable by customers. Demand for retail parts and services fluctuates from
period to period based on the varying needs of our customers.
Related party revenue. Related party revenue was earned through related party
transactions in the ordinary course of business with various affiliated entities
of ETO. The $0.9 million decrease in related party revenue for the three months
ended March 31, 2020 compared to the three months ended March 31, 2019 was
primarily attributable to a decrease in contract operations revenue with various
affiliated entities of ETO.
Cost of operations, exclusive of depreciation and amortization. The $2.1 million
increase in cost of operations, exclusive of depreciation and amortization, for
the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 was primarily due to (1) a $1.5 million increase in direct
expenses, such as parts and fluids expenses and (2) a $0.5 million increase in
direct labor expenses. These increases are primarily driven by the increase in
average revenue generating horsepower during the current period.
Gross operating margin. The $6.1 million increase in gross operating margin for
the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 was primarily due to an increase in revenues, partially offset by
an increase in cost of operations, exclusive of depreciation and amortization,
due to the increase in average revenue generating horsepower.
Selling, general and administrative expense. The $3.6 million decrease in
selling, general and administrative expense for the three months ended March 31,
2020 compared to the three months ended March 31, 2019 was primarily due to a
$5.0 million decrease in unit-based compensation expense, partially offset by a
$1.5 million increase in the provision for expected credit losses.
The decrease in unit-based compensation expense is primarily due to the decrease
in our unit price in the current period and the related mark-to-market change to
our unit-based compensation liability. The changes to unit-based compensation
and the provision for expected credit losses are both related to the sharp
decline in crude oil prices driven by decreased demand due to the COVID-19
pandemic and the global oversupply of crude oil.
Depreciation and amortization expense. The $0.2 million decrease in depreciation
and amortization expense for the three months ended March 31, 2020 compared to
the three months ended March 31, 2019 was primarily related to a $1.3 million
decrease in non-compression unit related depreciation, partially offset by an
increase of $1.1 million in compression unit related depreciation due to the
increase in fleet horsepower.
Loss (gain) on disposition of assets. The $1.0 million gain on disposition of
assets for three months ended March 31, 2020 was due to $0.7 million in
insurance recoveries on compression unit fixed assets and $0.3 million in
disposals of non-compression unit fixed assets.
Impairment of compression equipment. The $3.2 million impairment of compression
equipment for the three months ended March 31, 2019 was primarily the result of
our evaluations of the future deployment of our idle fleet under then-current
market conditions. Our evaluations determined that due to certain performance
characteristics of the impaired equipment, such as excessive maintenance costs
and the inability of the equipment to meet then-current emissions standards
without excessive retrofitting costs, this equipment was unlikely to be accepted
by customers under then-current market conditions.
As a result of our evaluations during the three months ended March 31, 2019 , we
determined to retire or re-utilize key components of 14 compressor units, or
approximately 4,700 horsepower, that were previously used to provide services in
our business. No impairment was recorded for the three months ended March 31,
2020 .
Impairment of goodwill. During the first quarter of 2020 certain potential
impairment indicators were identified, specifically (i) the decline in the
market price of our common units, (ii) the decline in global commodity prices,
and (iii) the COVID-19 pandemic; which together indicated the fair value of the
reporting unit was less than its carrying amount as of March 31, 2020 .
Management determined fair value using a weighted combination of the income
approach and the market approach and, as a result, recognized a $619.4 million
impairment of goodwill for the three months ended March 31, 2020 . No impairment
was recorded for the three months ended March 31, 2019 .
Interest expense, net. The $3.6 million increase in interest expense, net for
the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 was primarily attributable to a full quarter of interest expense
incurred in the current period on the Senior Notes 2027 issued in March 2019 ,
which were used to reduce borrowings under the Credit Agreement, partially
offset by reduced borrowings and lower weighted average interest rates under the
Credit Agreement.
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The weighted average interest rate applicable to borrowings under the Credit
Agreement was 4.10% and 5.07% for the three months ended March 31, 2020 and
2019, respectively, and average outstanding borrowings under the Credit
Agreement were $414.2 million and $868.7 million for the three months ended
March 31, 2020 and 2019, respectively.
Other Financial Data
The following table summarizes other financial data for the periods presented
(dollars in thousands):
Three Months Ended
March 31, Percent
Other Financial Data: (1) 2020 2019 Change
Gross operating margin $ 119,834 $ 113,721 5.4 %
Gross operating margin percentage (2) 66.9 % 66.6 % 0.5 %
Adjusted EBITDA $ 106,184 $ 101,377 4.7 %
Adjusted EBITDA percentage (2) 59.3 % 59.4 % (0.2) %
DCF $ 54,702 $ 54,852 (0.3) %
DCF Coverage Ratio 1.08x 1.16x (6.9) %
Cash Coverage Ratio 1.09x 1.16x (6.0) %
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(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.
Adjusted EBITDA. The $4.8 million , or 4.7%, increase in Adjusted EBITDA for the
three months ended March 31, 2020 compared to the three months ended March 31,
2019 was primarily attributable to a $6.1 million increase in gross operating
margin, partially offset by a $1.3 million increase in selling, general and
administrative expenses, excluding transaction expenses, unit-based compensation
expense (income) and other non-recurring charges.
DCF. The $0.2 million , or 0.3%, decrease in DCF for the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 was primarily
attributable to (1) a $3.3 million increase in cash interest expense, net, (2) a
$1.9 million increase in maintenance capital expenditures and (3) a $1.3 million
increase in selling, general and administrative expenses, excluding transaction
expenses, unit-based compensation expense (income) and other non-recurring
charges. These decreases were partially offset by a $6.1 million increase in
gross operating margin.
Coverage Ratios. The decreases in DCF Coverage Ratio and Cash Coverage Ratio for
the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 were primarily attributable to an increase in cash distributions
paid on common units in the current period due to the conversion of 6,397,965
Class B Units , which did not participate in distributions, to common units on a
one-for-one basis on July 30, 2019 .
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 the Credit Agreement and issuances of debt and equity
securities, including under the DRIP.
We typically utilize cash generated by operating activities and, where
necessary, borrowings under the Credit Agreement to service our debt, fund
working capital, fund our estimated expansion capital expenditures, fund our
maintenance capital expenditures and pay distributions to our unitholders. In
response to current market conditions, we have reduced our capital spending and
operating expenses through the remainder of 2020. However, if market conditions
related to COVID-19 and the global oversupply of crude oil persist, this could
eventually reduce our cash generated by operating activities and increase our
leverage. Covenants in the Credit Agreement and other debt instruments require
that we maintain certain leverage ratios, and if we predict that we may violate
those covenants in the future we could: (i) delay discretionary capital spending
and further reduce operating expenses; (ii) request an amendment to the Credit
Agreement; or (iii) reduce or suspend distributions to our unitholders.
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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 the Credit Agreement 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 three months
ended March 31, 2020 and 2019 (in thousands):
Three Months Ended
March 31,
2020 2019
Net cash provided by operating activities
Net cash provided by operating activities. The$2.3 million increase in net cash provided by operating activities for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily attributable to a$2.9 million increase in net income, as adjusted for non-cash items. Net cash used in investing activities. The$7.4 million increase in net cash used in investing activities for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily attributable to an$8.9 million increase in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, offset by a$1.6 million increase in proceeds from disposition of property and equipment. Net cash used in financing activities. The$5.0 million decrease in net cash used in financing activities for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily attributable to a decrease in financing costs of$13.1 million due to the issuance of the Senior Notes 2027 inMarch 2019 , partially offset by (1) a$5.3 million decrease in net borrowings and (2) a$3.6 million increase in cash distributions paid on common units primarily due to the conversion of 6,397,965 ClassB Units , which did not participate in distributions, to common units on a one-for-one basis onJuly 30, 2019 . 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 three months endedMarch 31, 2020 and 2019 were$8.8 million and$6.9 million , respectively. We currently plan to spend approximately$30.0 million in maintenance capital expenditures for the year 2020, including parts consumed from inventory. Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between$80.0 million and$90.0 million in expansion capital expenditures for the year 2020. Our expansion capital expenditures for the three months endedMarch 31, 2020 and 2019 were$46.5 million and$33.0 million , respectively. As ofMarch 31, 2020 , we had binding commitments to purchase$33.5 million of additional compression units and serialized parts, all of which we expect to be delivered during the remainder of 2020. 27 -------------------------------------------------------------------------------- Table of Co n t ents Revolving Credit Facility As ofMarch 31, 2020 , we were in compliance with all of our covenants under the Credit Agreement. As ofMarch 31, 2020 , we had outstanding borrowings under the Credit Agreement of$459.3 million ,$1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of$185.9 million . As ofApril 30, 2020 , we had outstanding borrowings under the Credit Agreement of$432.9 million . For a more detailed description of the Credit Agreement, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report and Note 10 to the consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" included in our 2019 Annual Report. Senior Notes As ofMarch 31, 2020 , we had$725.0 million and$750.0 million outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively. The Senior Notes 2026 are due onApril 1, 2026 and accrue interest at the rate of 6.875% per year. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each ofApril 1 andOctober 1 . The Senior Notes 2027 are due onSeptember 1, 2027 and accrue interest at the rate of 6.875% per year. Interest on the Senior Notes 2027 is payable semi-annually in arrears on each ofMarch 1 andSeptember 1 . For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report and Note 10 to the consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" included in our 2019 Annual Report. DRIP During the three months endedMarch 31, 2020 , distributions of$0.3 million were reinvested under the DRIP resulting in the issuance of 18,883 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 "Financial Statements" of this 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 (loss) 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 (loss) determined under GAAP, as well as gross operating margin, to evaluate our operating profitability. 28 -------------------------------------------------------------------------------- Table of Co n t ents The following table reconciles gross operating margin to operating income (loss), its most directly comparable GAAP financial measure, for each of the periods presented (in thousands): Three Months Ended March 31, 2020 2019 Revenues: Contract operations$ 172,794 $ 163,976 Parts and service 3,048 2,684 Related party 3,157 4,086 Total revenues 178,999 170,746 Cost of operations, exclusive of depreciation and amortization 59,165 57,025 Gross operating margin $
119,834
12,385 15,995
Depreciation and amortization 58,762 58,924
Loss (gain) on disposition of assets (1,014) 40
Impairment of compression equipment - 3,234
Impairment of goodwill 619,411 -
Total other operating and administrative costs and expenses 689,544 78,193
Operating income (loss) $ (569,710) $ 35,528
Adjusted EBITDA
We define EBITDA as net income (loss) 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 (income),
severance charges, certain transaction fees, loss (gain) on disposition of
assets and other. We view Adjusted EBITDA as one of management's primary tools
for evaluating our results of operations, 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 pay 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 may provide 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 (loss), operating income (loss), 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, impairment of compression
equipment, loss (gain) on disposition of assets and the interest cost of
acquiring compression equipment are also necessary elements of our costs.
Unit-based compensation expense (income) 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 (loss) 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
29
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Table of Co n t ents
affect net income (loss) 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 their decision making processes.
The following table reconciles Adjusted EBITDA to net income (loss) 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
March 31,
2020 2019
Net income (loss) $ (602,461) $ 6,587
Interest expense, net 32,478 28,857
Depreciation and amortization 58,762 58,924
Income tax expense 296 104
EBITDA $ (510,925) $ 94,472
Interest income on capital lease 124 194
Unit-based compensation expense (income) (1) (1,829) 3,134 Transaction expenses (2)
- 86
Severance charges 417 217
Loss (gain) on disposition of assets (1,014) 40
Impairment of compression equipment (3) - 3,234
Impairment of goodwill (4) 619,411 -
Adjusted EBITDA $ 106,184 $ 101,377
Interest expense, net (32,478) (28,857)
Non-cash interest expense 1,986 1,680
Income tax expense (296) (104)
Interest income on capital lease (124) (194)
Transaction expenses - (86)
Severance charges (417) (217)
Other 1,623 14
Changes in operating assets and liabilities (26,401) (25,844)
Net cash provided by operating activities
______________________
(1)For the three months endedMarch 31, 2020 and 2019, unit-based compensation expense included$0.9 million and$0.7 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0 and$0.3 million , respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense (income) for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the three months endedMarch 31, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. Distributable Cash Flow We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense, depreciation and amortization expense, unit-based compensation expense (income), 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 distributions on Preferred Units and maintenance capital expenditures. 30 -------------------------------------------------------------------------------- Table of Co n t ents We believe DCF is an important measure of operating performance because it allows management, investors and others to compare basic cash flows we generate (after distributions on the Preferred Units but prior to any retained cash reserves established by the General Partner and the effect of the DRIP) to the cash distributions we expect to pay our common unitholders. Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), 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, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs. Unit-based compensation expense (income) 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 (loss) 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 (loss) 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 their decision making processes. 31 -------------------------------------------------------------------------------- Table of Co n t ents The following table reconciles DCF to net income (loss) 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 March 31, 2020 2019 Net income (loss)$ (602,461) $ 6,587 Non-cash interest expense 1,986 1,680 Depreciation and amortization 58,762 58,924 Non-cash income tax expense 123 14
Unit-based compensation expense (income) (1) (1,829) 3,134 Transaction expenses (2)
- 86
Severance charges 417 217
Loss (gain) on disposition of assets (1,014) 40
Impairment of compression equipment (3) - 3,234
Impairment of goodwill (4) 619,411 -
Distributions on Preferred Units (12,187) (12,187)
Proceeds from insurance recovery 336 44
Maintenance capital expenditures (5) (8,842) (6,921)
DCF $ 54,702 $ 54,852
Maintenance capital expenditures 8,842 6,921
Transaction expenses - (86)
Severance charges (417) (217)
Distributions on Preferred Units 12,187 12,187
Other 1,164 (44)
Changes in operating assets and liabilities (26,401) (25,844)
Net cash provided by operating activities
______________________
(1)For the three months endedMarch 31, 2020 and 2019, unit-based compensation expense included$0.9 million and$0.7 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0 and$0.3 million , respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense (income) for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the three months endedMarch 31, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. (5)Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, 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 divided by distributions declared to common unitholders in respect of such period. Cash Coverage Ratio is defined as DCF divided by cash distributions expected to be paid to common 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 common 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. 32 -------------------------------------------------------------------------------- Table of Co n t ents The following table summarizes certain coverage ratios for the periods presented (dollars in thousands): Three Months Ended March 31, 2020 2019 DCF$ 54,702 $ 54,852
Distributions for DCF Coverage Ratio (1)
Distributions reinvested in the DRIP (2)
Distributions for Cash Coverage Ratio (3)
DCF Coverage Ratio 1.08x 1.16x
Cash Coverage Ratio 1.09x 1.16x
______________________
(1)Represents distributions to the holders of our common units as of the record
date.
(2)Represents distributions to holders enrolled in the DRIP as of the record
date.
(3)Represents cash distributions declared for common units not participating in
the DRIP.
Off-Balance Sheet Arrangements
We have no off-balance sheet financing activities.
Recent Accounting Pronouncements
For discussion on specific recent accounting pronouncements affecting us, see
Note 14 to our unaudited condensed consolidated financial statements under Part
I, Item 1 "Financial Statements" of this report.
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Table of Co n t ents
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