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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(MARK ONE)

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2016

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM               TO               .

 

Commission File No. 001-35779

 

USA Compression Partners, LP

(Exact name of registrant as specified in its charter)

 

 

(512) 473-2662

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

As of August 2, 2016, there were 54,866,123 common units outstanding.

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.Financial Statements

 

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(Dollars in thousands, except unit amounts)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except unit amounts)

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital

Six Months Ended June 30, 2016

(Dollars and units in thousands)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1)  Organization and Summary of Significant Accounting Policies

 

(a)  Organization

 

USA Compression Partners, LP (the “Partnership”) is a publicly traded Delaware limited partnership formed to own its subsidiaries, through which it operates the business.  The common units representing limited partner interests in the Partnership (“common units”) are listed on the New York Stock Exchange (“NYSE”) under the symbol “USAC.”  USA Compression GP, LLC, the general partner of the Partnership (the “General Partner”), is owned by USA Compression Holdings, LLC (“USA Compression Holdings”).  Unless the context requires otherwise, references to “we,” “us,” “our,” or the “Partnership” are intended to mean the business and operations of the Partnership and its wholly owned, consolidated subsidiaries (the “Operating Subsidiaries”).

 

The Partnership, through its Operating Subsidiaries, provides compression services under term contracts with customers in the natural gas and crude oil industry, using natural gas compression packages that it designs, engineers, owns, operates and maintains.  The unaudited condensed consolidated financial statements include the accounts of the Partnership and the Operating Subsidiaries, and all intercompany balances and transactions have been eliminated in consolidation.

 

The Partnership’s ownership is as follows:

 

 

Partnership net income is allocated to the partners, both general and limited, in proportion to their respective interest in the Partnership.

 

(b)  Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared on the same basis as the audited consolidated financial statements included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2015 filed on February 11, 2016 (our “2015 Annual Report”).  In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position as of June 30, 2016 and December 31, 2015, and the results of operations for the three and six months ended June 30, 2016 and 2015, changes in partners’ capital for the six months ended June 30, 2016 and the statements of cash flows for the six months ended June 30, 2016 and 2015 in accordance with U.S. generally accepted accounting principles (“GAAP”).  Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.  Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).  Therefore, these consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2015 contained in our 2015 Annual Report.

 

(c)  Use of Estimates

 

The unaudited condensed consolidated financial statements of the Partnership have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that exist at the date of the unaudited condensed consolidated financial statements.  Although these estimates are based on management’s available knowledge of current and expected future events, actual results could differ from these estimates.

 

(d)  Inventories

 

Inventory consists of serialized and non-serialized parts used primarily in the repair of compression units.  Serialized parts inventory is valued at the lower of cost or market value using the specific identification method, while non-serialized parts inventory is valued using the weighted average cost method.  Purchases of these assets are considered operating activities in the Unaudited Condensed Consolidated Statement of Cash Flows.

 

Significant components of inventories as of June 30, 2016 and December 31, 2015 are as follows (in thousands):

 

 

 

(e)  Identifiable Intangible Assets

 

As of June 30, 2016, identifiable intangible assets, net consisted of the following (in thousands):

 

 

Identifiable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to the Partnership’s future cash flows. The estimated useful lives range from 4 to 30 years.  Accumulated amortization of intangible assets was $18.2 million and $16.4 million as of June 30, 2016 and December 31, 2015, respectively.

 

The Partnership assesses identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  The Partnership did not record any impairment of identifiable intangible assets for the three and six months ended June 30, 2016 or for the three and six months ended June 30, 2015.

 

(f)  Property and Equipment

 

Property and equipment are carried at cost.  Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over 3 to 5 years.  Ordinary maintenance and repairs are charged to cost of operations, exclusive of depreciation and amortization.  Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:

 

 

See more information on property and equipment in Note 3 to our unaudited condensed consolidated financial statements.

 

(g)  Impairments of Long-Lived Assets

 

Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written-down to estimated fair value.  An asset shall be tested for impairment when events or circumstances indicate that its carrying value may not be recoverable or will no longer be utilized in the operating fleet.  The most common circumstance requiring compression units to be tested for impairment is when idle units do not meet the performance characteristics of the Partnership’s active revenue generating horsepower.  The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.  If the carrying value exceeds the sum of the undiscounted cash flows associated with the operating fleet, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized.  The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet assets the Partnership recently sold or a review of other assets recently offered for sale by third parties, or the estimated component value of the equipment the Partnership plans to use.

 

During the three and six months ended June 30, 2016, the Partnership evaluated the future deployment of its idle fleet under current market conditions and determined to retire and either sell or re-utilize the key components of 5 compression units, with a total of approximately 1,700 horsepower, that were previously used to provide services in the Partnership’s business.  During the three and six months ended June 30, 2015, the Partnership evaluated the future deployment of its idle fleet under current market conditions and determined to retire and either sell or re-utilize the key components of 166 compression units, with a total of approximately 58,000 horsepower, that were previously used to provide services in the Partnership’s business.  In both periods, the cause of the impairment was related to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emission standards without retrofitting.  We determined that this equipment was unlikely to be accepted by customers under current market conditions.  This compression equipment was written down to its respective estimated salvage value, measured using quoted market prices, or the estimated component value of the equipment the Partnership plans to use.  As a result of the Partnership’s decision to retire, sell or re-utilize these compressor units, management performed an impairment review and based on that review, recorded a $0.7 million impairment of long-lived assets in the three and six months ended June 30, 2016.  The Partnership recorded a $26.8 million impairment of long-lived assets in the three and six months ended June 30, 2015.

 

(h)  Fair Value Measurements

 

Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements.  The standards apply to recurring and nonrecurring financial and non-financial assets and liabilities that require or permit fair value measurements.  Among the required disclosures is the fair value hierarchy of inputs the Partnership uses to value an asset or a liability.  The three levels of the fair value hierarchy are described as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access at the measurement date.

 

Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

As of June 30, 2016 and 2015, the Partnership’s financial instruments consisted primarily of cash and cash equivalents, trade accounts receivable, trade accounts payable and long-term debt.  The book values of cash and cash equivalents, trade accounts receivable and trade accounts payable are representative of fair value due to their short-term maturity.  The carrying amount of long-term debt approximates fair value due to the floating interest rates associated with the debt.

 

Phantom unit awards granted to employees under the USA Compression Partners, LP 2013 Long-Term Incentive Plan (the “LTIP”) are accounted for as a liability, and such liability is re-measured on a quarterly basis.  The liability is based on the publicly quoted price of the Partnership’s common units, which is considered a Level 1 input.  As of

June 30, 2016 and December 31, 2015, the total unit-based compensation liability was $3.2 million and $2.0 million, respectively.

 

(i)  Operating Segment

 

The Partnership operates in a single business segment, the compression services business.

 

(j)  Pass Through Taxes

 

Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.

 

(2)  Trade Accounts Receivable

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  The allowance for doubtful accounts, which was $0.7 million and $2.1 million at June 30, 2016 and December 31, 2015, respectively, is the Partnership’s best estimate of the amount of probable credit losses included in the Partnership’s existing accounts receivable.  The Partnership determines the allowance based upon historical write-off experience and specific customer circumstances.  The determination of the allowance for doubtful accounts requires us to make estimates and judgments regarding our customers’ ability to pay amounts due.  On an ongoing basis, we conduct an evaluation of the financial strength of our customers based on payment history, the overall business climate in which our customers operate and specific identification of customer bad debt and make adjustments to the allowance as necessary.  Our evaluation of our customers’ financial strength is based on the aging of their respective receivables balance, customer correspondence, financial information and third-party credit ratings.  Our evaluation of the business climate in which our customers operate is based on a review of various publicly-available materials regarding our customers’ industries, including the solvency of various companies in the industry.  The aforementioned factors reviewed by the Partnership led to an increase in the allowance account during the twelve months ended December 31, 2015.  During the three and six months ended June 30, 2016, the Partnership decreased its allowance for doubtful accounts by $0.6 million and $1.4 million, respectively.  This was due in part to collections on accounts that had previously been reserved due to bankruptcy or significantly delinquent balances.  Also contributing to the decrease in the allowance for doubtful accounts during the three months ended June 30, 2016 was the write-off of $0.2 million of accounts that had been previously reserved.  The Partnership does not have any off-balance-sheet credit exposure related to its customers.  Since the overall energy industry continues to be volatile, it is not certain that the factors leading to an increase in the allowance for doubtful accounts during 2015, or the subsequent decrease during 2016, will continue.

 

(3)  Property and Equipment

 

Property and equipment consisted of the following as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

We recognized $22.5 million and $20.6 million of depreciation expense on property and equipment for the three months ended June 30, 2016 and 2015, respectively.  We recognized $43.7 million and $40.4 million of depreciation expense on property and equipment for the six months ended June 30, 2016 and 2015, respectively.

 

As of June 30, 2016 and December 31, 2015, there was $16.7 million and $13.1 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.

 

During the three and six months ended June 30, 2015, insurance recoveries of $0.2 million were received on previously impaired compression equipment.  During the three and six months ended June 30, 2016, we transferred property and equipment and incurred a $1.0 million loss associated with the portion of the property and equipment that was not transferable.  Each of these are reported within the Loss (gain) on sale of assets line in the Unaudited Condensed Consolidated Statements of Operations.

 

(4)  Installment Receivable

 

On June 30, 2014, the Partnership entered into a FMV Bargain Purchase Option Grant Agreement (the “Capital Lease Transaction”) with a customer, pursuant to which the Partnership granted a bargain purchase option to the customer with respect to certain compressor packages leased to the customer (each a “Subject Compressor Package”).  The bargain purchase option provides the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term.

 

The Capital Lease Transaction was accounted for as a sales type lease and resulted in a current installment receivable of $3.1 million and $3.0 million as of June 30, 2016 and December 31, 2015, respectively, included in Other accounts receivable, and a long-term installment receivable of $15.7 million and $17.3 million, respectively.

 

Revenue and interest income related to the Capital Lease Transaction is recognized over the lease term which is 7 years.  The Partnership recognizes maintenance revenue within Contract operations revenue and interest income within Interest expense, net on the Statements of Operations.  For each of the three months ended June 30, 2016 and 2015, maintenance revenue related to the Capital Lease Transaction was $0.3 million.  For each of the six months ended June 30, 2016 and 2015, maintenance revenue related to the Capital Lease Transaction was $0.6 million. Interest income was $0.4 million in each of the three months ended June 30, 2016 and 2015 and $0.7 million and $0.8 million in the six months ended June 30, 2016 and 2015, respectively.

 

(5)  Accrued Liabilities

 

Other current liabilities included accrued payroll and benefits and accrued property taxes.  The Partnership recognized $5.7 million and $7.1 million of accrued payroll and benefits as of June 30, 2016 and December 31, 2015, respectively.  The Partnership recognized $6.0 million and $4.1 million of accrued property taxes as of June 30, 2016 and December 31, 2015, respectively.

 

(6)  Income Tax Expense

 

The Partnership is not a taxable entity for U.S. federal income tax purposes or for the majority of states that impose an income tax.  Therefore, income taxes are not levied at the entity level, but rather on the individual partners of the Partnership.  Accordingly, the accompanying unaudited condensed consolidated financial statements do not include a provision for federal and state income taxes.

 

The Partnership is subject to the Revised Texas Franchise Tax (“Texas Margin Tax”).  The Texas Margin Tax is computed on modified gross margin.  The Partnership does not do business in any other state where a similar tax is applied.

 

Components of income tax expense are as follows (in thousands):

 

 

Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered.  The tax effects of temporary differences that give rise to deferred tax liabilities are as follows (in thousands):

 

 

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 740-10 (“ASC 740-10”) provides guidance on measurement and recognition in accounting for income tax uncertainties and provides related guidance on derecognition, classification, disclosure, interest, and penalties.  As of June 30, 2016, the Partnership had no material unrecognized tax benefits (as defined in ASC 740-10).  The Partnership does not expect to incur interest charges or penalties related to our tax positions, but if such charges or penalties are incurred, the Partnership’s policy is to account for interest charges as Interest expense, net and penalties as Income tax expense in the Unaudited Condensed Consolidated Statements of Operations.

 

(7)  Long-Term Debt

 

The long-term debt of the Partnership, of which there is no current portion, consisted of the following as of June 30, 2016 and December 31, 2015 (in thousands):

 

 

Revolving Credit Facility

 

In March 2016, the Partnership entered into a third amendment to its revolving credit facility, which amended the credit agreement to, among other things, (i) modify the leverage ratio covenant to be (A) 5.95 to 1.0 as of the end of the respective fiscal quarters ending June 30, 2016 and September 30, 2016, (B) 5.75 to 1.0 as of the end of the fiscal quarter ending December 31, 2016, (C) 5.50 to 1.0 as of the end of the respective fiscal quarters ending March 31, 2017 and June 30, 2017, (D) 5.25 to 1.0 as of the end of the respective fiscal quarters ending September 30, 2017 and December 31, 2017 and (E) 5.00 to 1.0 thereafter, and (ii) amend certain other provisions of the credit agreement, all as more fully set forth in the third amendment.

 

In connection with entering into the third amendment, the Partnership paid certain amendment fees to the lenders party thereto and paid a certain arrangement fee to the arranger of the third amendment in the amount of $2.0 million, collectively, during the six months ended June 30, 2016.  The Partnership paid $3.4 million in various loan fees and costs incurred related to the second amendment to our revolving credit facility during the six months ended June 30, 2015.  An immaterial amount of such fees were paid during the three months ended June 30, 2016 and no such fees were paid during the three months ended June 30, 2015.  These fees were capitalized to loan costs and will be amortized through January 2020. 

 

As of June 30, 2016, the Partnership was in compliance with all of its covenants under its revolving credit facility.

 

As of June 30, 2016, the Partnership had outstanding borrowings under its revolving credit facility of $735.1 million, $364.9 million of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $146.0 million.  The Partnership’s interest rate in effect for all borrowings under its revolving credit facility as of June 30, 2016 and December 31, 2015 was 2.51% and 2.26%, respectively, with a weighted average interest rate of 2.47% and 2.19% during the three months ended June 30, 2016 and 2015, respectively, and 2.47% and 2.19% during the six months ended June 30, 2016 and 2015, respectively. There were no letters of credit issued as of June 30, 2016 or 2015.

 

In the event that any of the Operating Subsidiaries guarantees any series of the debt securities as described in the Partnership’s registration statement filed on Form S-3 (Reg. No. 333-193724), such guarantees will be full and unconditional and made on a joint and several basis for the benefit of each holder and the Trustee.  However, such guarantees will be subject to release, subject to certain limitations, as follows (i) upon the sale, exchange or transfer, whether by way of a merger or otherwise, to any Person that is not an Affiliate of the Partnership, of all the Partnership’s direct or indirect limited partnership or other equity interest in such Subsidiary Guarantor; or (ii) upon the Partnership’s or USA Compression Finance Corp.’s (together, the “Issuers”) delivery of a written notice to the Trustee of the release or discharge of all guarantees by such Subsidiary Guarantor of any Debt of the Issuers other than obligations arising under the indenture governing such debt and any debt securities issued under such indenture, except a discharge or release by or as a result of payment under such guarantees.  Capitalized terms used but not defined in this paragraph are defined in the Form of Indenture filed as exhibit 4.1 to such registration statement.

 

The revolving credit facility matures in January 2020 and the Partnership expects to maintain this facility for the term.

 

(8)  Partners’ Capital

 

Common Units and General Partner Interest

 

As of June 30, 2016, the Partnership had 54,866,123 common units outstanding.  USA Compression Holdings held 23,328,315 common units as of June 30, 2016 and controlled the General Partner which held an approximate 1.40% general partner interest (the “General Partner’s Interest”) and the incentive distribution rights (“IDRs”).  The number of common units outstanding on this date includes 14,048,588 common units issued through the conversion of subordinated units on a one-for-one basis on February 16, 2016.  See the Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital.

 

Subordinated Units

 

Upon the payment of the February 12, 2016 cash distribution, the Partnership satisfied the requirements contained in the Partnership’s limited partnership agreement for the automatic conversion of all outstanding subordinated units into common units on a one-for-one basis.  As a result, on February 16, 2016, all of the outstanding subordinated units converted to common units on a one-for-one basis.  The conversion of subordinated units does not impact the amount of cash distributions we pay or the total number of our outstanding units. 

 

Cash Distributions

 

The Partnership has declared quarterly distributions per unit to limited partner unitholders of record, including holders of common, subordinated units and phantom units and distributions paid to the General Partner, including the General Partner’s Interest and IDRs, as follows (dollars in millions, except distribution per unit):

 

 

Announced Quarterly Distribution

 

On July 21, 2016, the Partnership announced a cash distribution of $0.525 per unit on its common units.  The distribution will be paid on August 12, 2016 to unitholders of record as of the close of business on August 2, 2016.  USA Compression Holdings, the owner of approximately 42.5% of the Partnership’s outstanding limited partner interests, has elected to reinvest 50% of this distribution with respect to its units pursuant to the Partnership’s distribution reinvestment plan (the “DRIP”).

 

Dividend Reinvestment Program

 

During the six months ended June 30, 2016 and 2015, distributions of $21.3 million and $27.0 million, respectively, were reinvested under the DRIP resulting in the issuance of 2.1 million and 1.3 million common units, respectively.  Such distributions are treated as non-cash transactions in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows. 

 

Earnings Per Common and Subordinated Unit

 

The computations of earnings per common unit and subordinated unit are based on the weighted average number of common units and subordinated units, respectively, outstanding during the applicable period.  The subordinated units and the General Partner’s Interest (including its IDRs) meet the definition of participating securities as defined by the FASB’s Accounting Standards Codification Topic 260 Earnings Per Share; therefore, the Partnership is required to use the two-class method in the computation of earnings per unit.  Basic earnings per common and subordinated unit are determined by dividing net income allocated to the common and subordinated units, respectively, after deducting the amount allocated to the General Partner (including distributions to the General Partner on the General Partner’s Interest and its IDRs), by the weighted average number of outstanding common and subordinated units, respectively, during the period.  Net income is allocated to the common units, subordinated units and the General Partner’s Interest (including its IDRs) based on their respective shares of the distributed and undistributed earnings for the period.  To the extent cash distributions exceed net income for the period, the excess distributions are allocated to all participating units outstanding based on their respective ownership percentages.  Diluted earnings per unit are computed using the treasury stock method, which considers the potential issuance of limited partner units associated with the LTIP.  Unvested phantom units are not included in basic earnings per unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per unit.  For the three and six months ended June 30, 2015, approximately 74,000 and 106,000 incremental phantom units, respectively, were excluded from the calculation of diluted units because the impact was anti-dilutive.

 

Due to the conversion of subordinated units to common units in February 2016, the subordinated units did not participate in any of the distributed earnings for the six month period, resulting in a negative earnings per unit value for the six months ended June 30, 2016.

 

Incentive Distribution Rights

 

The General Partner holds all of the IDRs. The following table illustrates the percentage allocations of Available Cash from Operating Surplus between the unitholders and the General Partner based on the specified target distribution levels.  The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the General Partner and the unitholders in any Available Cash from Operating Surplus the Partnership distributes up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.”  The percentage interests shown for the Partnership’s unitholders and the General Partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution.  The percentage interests set forth below for the General Partner include its General Partner’s Interest, and assume the General Partner has contributed any additional capital necessary to maintain its General Partner’s Interest, the General Partner has not transferred the IDRs and there are no arrearages on common units.

 

 

 

 

 

(9)  Transactions with Related Parties

 

John Chandler, who has served as a director of the General Partner since October 2013, has served as a director of a customer since October 2014.  During the three months ended June 30, 2016 and 2015, the Partnership recognized $2.2 million and $2.2 million, respectively, and $4.4 million and $4.0 million during the six months ended June 30, 2016 and 2015, respectively, in revenue on compression services and $1.1 million and $1.3 million in accounts receivable from this customer on the Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 and the Unaudited Condensed Consolidated Balance Sheet as of June 30, 2016 and December 31, 2015, respectively.

 

(10)  Commitments and Contingencies

 

(a)  Major Customers

 

The Partnership did not have revenue from any single customer representing greater than 10% of total revenue for the three or six months ended June 30, 2016.    The Partnership had revenue from one customer representing 10.3% and 10.5% of total revenue for the three and six months ended June 30, 2015, respectively.  No other customer represented greater than 10% of total revenue for the three and six months ended June 30, 2015.

 

(b)  Litigation

 

From time to time, the Partnership and its subsidiaries may be involved in various claims and litigation arising in the ordinary course of business.  In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on the Partnership’s consolidated financial position, results of operations or cash flows.

 

(c)  Equipment Purchase Commitments

 

The Partnership’s future capital commitments are comprised of binding commitments under purchase orders for new compression units and serialized parts ordered but not received.  The commitments as of June 30, 2016 were $7.2 million, all of which are expected to be settled within the next twelve months.

 

(d)  Sales Tax Contingency

 

The Partnership is subject to a number of state and local taxes that are not income-based.  As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due.  We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability.  As of June 30, 2016, we have accrued a liability of $0.2 million for additional taxes.  We believe that it is reasonably possible that we could incur losses beyond what has been accrued.  Due to uncertainty related to the documentation required by certain state auditors, we are unable at this time to project a reasonable range of the extent of losses we may incur beyond what we have accrued. 

 

(11)  Recent Accounting Pronouncement

 

In July 2015, the FASB agreed to defer by one year the mandatory effective date of its revenue recognition standard to annual and interim periods in fiscal years beginning after December 15, 2017, but will also provide entities the option to adopt it as of the original effective date.  The option to use either a retrospective or cumulative-effect transition method will not change.  The Partnership is currently evaluating the impact, if any, of this Accounting Standards Update (“ASU”) on its consolidated financial statements.

 

Also in July 2015, the FASB issued an ASU that changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value.  This ASU requires prospective adoption for inventory measurements for annual and interim periods in fiscal years beginning after December 15, 2016.  Early adoption is permitted. The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements.

 

In February 2016, the FASB issued a new leasing standard that increases transparency and comparability among organizations by, among other things, requiring lessees to recognize lease assets and lease liabilities on the balance sheet

and requiring both lessees/lessors to disclose expanded qualitative and quantitative information about leasing arrangements.  Lessor accounting will remain substantially similar to current U.S. GAAP but with some changes to conform and align guidance with the new lessee guidance and other areas within U.S. GAAP, such as Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.  This ASU requires modified retrospective adoption, with elective reliefs, and becomes effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2018.  The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements.

 

In March 2016, the FASB issued an ASU that clarifies the implementation guidance on principal versus agent considerations.  The amendments are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations within the revenue recognition update.  The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of the revenue recognition update.  The Partnership is currently evaluating the impact, if any, of this ASU along with the revenue recognition ASU, on its consolidated financial statements.

 

In March 2016, the FASB issued an ASU that simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  For public business entities, the amendments within this ASU are effective for annual and interim periods in fiscal years beginning after December 15, 2016.  Early adoption is permitted.  The Partnership is currently evaluating the impact, if any, of this ASU on its consolidated financial statements.

 

 

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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” or similar words or the negative 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:

 

 

 

 

 

 

 

 

 

 

 

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 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.

 

Overview

 

We provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales.  The 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 with attractive natural gas and crude oil production growth, which are generally found in these shale and unconventional resource plays.  While our business focuses largely on compression services serving infrastructure installations, including centralized natural gas gathering systems and processing facilities, which utilize large horsepower compression units, typically in shale plays, we also provide compression services in more mature conventional basins, including gas lift applications on crude oil wells employing horizontal drilling techniques.  Gas lift and other artificial lift technologies are critical to the enhancement of production of oil from horizontal wells operating in tight shale plays.

 

Operating Highlights

 

The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented.

 

 

 

 

 

 

 

 

 

 

 

The 5.3% increase in fleet horsepower as of June 30, 2016 over the fleet horsepower as of June 30, 2015 was attributable to the compression units added to our fleet to meet the then expected incremental demand by new and current customers for our compression services.  The 1.9% decrease in average revenue generating horsepower for the three months ended June 30, 2016 over June 30, 2015 was primarily attributable to an increase in the amount of time contracting new compression units and an increase in the amount of compression units returned to us.  The 2.0% and 1.4% decrease in average revenue per revenue generating horsepower per month for the three and six months ended June 30, 2016 over June 30, 2015, respectively, was primarily due to reduced pricing in the small horsepower portion of our fleet over the three and six months ended June 30, 2016 as compared to pricing for those units over the three and six months ended June 30, 2015.

 

Average horsepower utilization decreased approximately 4.4% during the three months ended June 30, 2016 compared to the three months ended June 30, 2015.  The decrease in average horsepower utilization is primarily attributable to the following changes as a percentage of total available horsepower: (1) a 4% increase in our average fleet of compression units returned to us not yet under contract and (2) a 2.8% decrease in horsepower that is on-contract or pending-contract but not yet active.  The decrease in average horsepower utilization was offset by a 3.0% increase in idle horsepower under repair, as a percentage of total available horsepower, which is excluded from the average horsepower utilization calculation until such repair is complete.  We believe the decrease in average horsepower utilization is the result of a delay in planned projects of certain of our customers, continued optimization of existing compression service requirements and our selective pursuit of what we deem to be the most attractive opportunities.  The above described fluctuation in utilization components explains the changes in both period end and average horsepower utilization between the six months ended June 30, 2016 and the six months ended June 30, 2015.

 

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased approximately 4.5% during the three months ended June 30, 2016 compared to the three months ended June 30, 2015.  The decrease is primarily attributable to the following changes as a percentage of total fleet horsepower: (1) a 3.5% increase in our average idle fleet from compression units returned to us and (2) a 3.0% increase in idle horsepower under repair offset by (3) a 2.0% decrease in our average idle fleet composed of new compression units.  The increase in units returned to us is believed to be a result of our customers’ optimization of their compression service requirements.  The above described fluctuation in utilization components explains the changes in both period end and average horsepower utilization based on revenue generating horsepower and fleet horsepower between the six months ended June 30, 2016 and the six months ended June 30, 2015.

 

Financial Results of Operations

 

Three months ended June 30, 2016 compared to the three months ended June 30, 2015

 

The following table summarizes our results of operations for the periods presented (dollars in thousands):

 

 

 

Contract operations revenue.  During the three months ended June 30, 2016, we experienced a year-to-year decrease in demand for our compression services driven by decreased operating activity in natural gas and crude oil production and continued optimization of existing compression service requirements, resulting in a 1.9% decrease in average

revenue generating horsepower and a $2.8 million decrease in our contract operations revenue.  Average revenue per revenue generating horsepower per month decreased from $15.83 for the three months ended June 30, 2015 to $15.52 for the three months ended June 30, 2016, a decrease of 2.0%, attributable, in part, to reduced pricing in the small horsepower portion of our fleet, offset by slightly improved pricing in the large horsepower portion of our fleet.  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.  Because the demand for our services is driven primarily by production of natural gas, we focus our activities in areas of attractive growth, which are generally found in certain shale and unconventional resource plays.  Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers.

 

Parts and service revenue.  Parts and service revenue was earned on freight and crane charges that are directly reimbursable by our customers, for which we earn little to no margin, and maintenance work and general contract services on customer-owned units and infrastructure, for which we earn lower margins than our contract operations.  We offered these services as a courtesy to our customers and the demand fluctuates from period to period based on the varying needs of our customers.

 

Cost of operations, exclusive of depreciation and amortization. The $0.4 million decrease in cost of operations consisted of a $0.8 million decrease in direct expenses such as parts and fluids expenses and a $0.3 million decrease in expenses related to our vehicle fleet, offset by a $0.6 million increase in indirect expenses, the majority of which were higher property and other taxes.

 

Gross operating margin. The $2.5 million decrease in Gross operating margin, or 0.7% decrease in Gross operating margin percentage, was primarily due to a decrease in revenues during the three months ended June 30, 2016, partially offset by a decrease in operating expenses.  

 

Selling, general and administrative expense.  The $0.8 million increase in selling, general and administrative expense for the three months ended June 30, 2016 was primarily attributable to a $1.8 million increase in unit-based compensation expense, offset by a $0.8 million decrease in bad debt expense. 

 

Depreciation and amortization expense.  The $1.9 million increase in depreciation and amortization expense was entirely related to an increase in gross property and equipment balances during the three months ended June 30, 2016 compared to gross balances during the three months ended June 30, 2015.  There was no variance in amortization expense between the same periods, as intangible assets are amortized on a straight-line basis and there has been no change in gross identifiable intangible assets between the periods.

 

Loss (gain) on sale of assets. During the three months ended June 30, 2016 we transferred property and equipment and incurred a $1.0 million loss associated with the portion of the property and equipment that was not transferable. 

 

Impairment on compression equipment. The $0.7 million and $26.8 million impairment charge during the three months ended June 30, 2016 and 2015, respectively, resulted from our evaluation of the future deployment of our current idle fleet under the current market conditions.  Our evaluation determined that due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emission standards without retrofitting, this equipment was unlikely to be accepted by customers under current market conditions.  As a result of our evaluation during the three months ended June 30, 2016 and 2015, we determined to retire and either sell or re-utilize the key components of 5 and 166 compression units, respectively, with a total of approximately 1,700 and 58,000 horsepower, respectively, that had been previously used to provide compression services in our business. 

 

Interest expense, net. The $0.7 million increase in interest expense, net was primarily attributable to the impact of an increase in the weighted average interest rate.  Our revolving credit facility bore an interest rate of 2.51% and 2.19% at June 30, 2016 and 2015, respectively, and a weighted average interest rate of 2.47% and 2.19% for the three months ended June 30, 2016 and 2015, respectively.  The increase in interest rate was offset by a $1.5 million decrease in average outstanding borrowings under our revolving credit facility, for which average borrowings were $739.8 million for the three months ended June 30, 2016 compared to $741.3 million for the three months ended June 30, 2015. 

 

Six months ended June 30, 2016 compared to the six months ended June 30, 2015

 

The following table summarizes our results of operations for the periods presented (dollars in thousands):

 

 

Contract operations revenue.  During the six months ended June 30, 2016, we experienced a year-to-year decrease in demand for our compression services driven by decreased operating activity in natural gas and crude oil production and continued optimization of existing compression service requirements, and a decrease in average revenue per revenue generating horsepower per month resulting in a $2.5 million decrease in our contract operations revenue.  Average revenue per revenue generating horsepower per month decreased from $15.84 for the six months ended June 30, 2015 to $15.62 for the six months ended June 30, 2016, a decrease of 1.4%, attributable, in part, to reduced pricing in the small horsepower portion of our fleet, offset by improved pricing in the large horsepower portion of our fleet.  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.  Because the demand for our services is driven primarily by production of natural gas, we focus our activities in areas of attractive growth, which are generally found in certain shale and unconventional resource plays.  Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers.

 

Parts and service revenue.  Parts and service revenue was earned on freight and crane charges that are directly reimbursable by our customers, for which we earn little to no margin, and maintenance work and general contract services on customer-owned units and infrastructure, for which we earn lower margins than our contract operations.  We offered these services as a courtesy to our customers and the demand fluctuates from period to period based on the varying needs of our customers.

 

Cost of operations, exclusive of depreciation and amortization. The $1.2 million increase in cost of operations was primarily attributable to a $1.3 million increase in indirect expenses, the majority of which were higher property and other taxes, a $0.8 million increase in retail parts and service expenses, which have a corresponding increase in parts and service revenue, and a $0.7 million increase in direct labor expenses associated with our contract operations, offset by a $1.2 million decrease in direct expenses such as parts and fluids expenses and a $0.3 million decrease in expenses related to our vehicle fleet.