What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 190 added, 264 removed, 299 unchanged (60% of the section changed)

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Our Other Services offerings are often cross-sold with Compression Operations.

Trends and Outlook

We provide contract compression infrastructure for customers in the oil and gas industry.

Our assets are specifically utilized in natural gas compression applications in the Permian Basin, Eagle Ford Shale and other U.S.

Our customers are dependent on these applications to produce natural gas and oil and transport it to end markets.

Our assets are central to meeting growing global natural gas and oil demand.

Furthermore, the long-life nature of our assets and our fixed-revenue contracts help to protect our business from the impact of industry and broader macroeconomic cycles.

Unconventional resources, large-scale centralized gathering and multi-well pad operations require more horsepower than conventional resources, driving demand for our large horsepower compression units.

Upstream and midstream companies have increasingly prioritized capital discipline and return of capital to stockholders.

We believe that our customers will increasingly continue to outsource their compression infrastructure needs to reduce capital expenditures outside of their core business and benefit from our technical skill and expertise.

We believe that the industry is facing uncertainties and continued pressures from regulators and shifting sentiments from investors and other stakeholders, primarily related to broader adoption of emission reduction targets and other sustainability initiatives.

Many energy companies, including some of our customers, have announced significant GHG emission reduction initiatives.

We expect to partially benefit from this trend as 96% of our current fleet is capable of operating in the most stringent emissions regulatory environments in the U.S., which require emissions of 0.5g/bhp-hr NOx or less.

A growing number of our customers are evaluating potential opportunities in electric compression infrastructure and we are well positioned to support them in these strategic initiatives.

Eighty-four percent of our compression assets are strategically deployed in the Permian Basin and Eagle Ford Shale, which the United States Energy Information Administration (“EIA”) expects to maintain significant production volumes through at least 2050.

We believe these two regions have the largest and lowest-cost unconventional resources in the U.S.

exhibiting strong recent growth of natural gas and crude oil production from the two regions of 13% and 12%, respectively, on an average annual basis from 2017 to 2022.

Additionally, there are significant U.S.

liquefied natural gas (“LNG”) export projects in development, and overall LNG export capacity is expected to meaningfully grow over the next decade, in particular

along the U.S.

Gulf Coast with liquefaction capacity expected to grow 41% from 14.5 MTPA in 2022 to 20.5 MTPA in 2025 from projects that have declared final investment decisions as of June 30, 2023.

We expect this to translate into Permian Basin and Eagle Ford Shale natural gas production growth, requiring substantial additional compression horsepower.

We believe these regions will play an increasingly important role in global energy security as the world continues to require reliable and growing natural gas and oil production to support increasing global energy demand.

Ultimately, the extent to which our business will be impacted by the factors described above, as well as future developments beyond our control, cannot be predicted with reasonable certainty.

However, we continue to believe in the long-term demand for our compression operations given the necessity of compression in gathering, processing and transportation of natural gas and centralized gas lift of oil.

The foregoing market data and certain other statistical information is based on the EIA’s Annual Energy Outlook 2023, released on March 16, 2023 (the “EIA Report”).

Although we believe the EIA Report is reliable as of its date, we have not independently verified the accuracy or completeness of the information contained therein.

Some data is also based on our good faith estimates and our management’s understanding of industry conditions.

The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section entitled “Risk Factors” in the IPO Prospectus.

Those and other factors could cause results to differ materially from those expressed in these publications.

How We Evaluate Our Operations

Revenue-Generating Horsepower

Revenue-generating horsepower growth is the primary driver of our revenue growth, and it is the base measure for evaluating our efficiency of capital deployed.

Revenue-generating horsepower includes compression units that are operating under contract and generating revenue and compression units which are available to be deployed and for which we have a signed contract or are subject to a firm commitment from our customer.

Horsepower Utilization

We calculate horsepower utilization as (i) revenue-generating horsepower divided by (ii) fleet horsepower.

The primary reason for tracking and analyzing our horsepower utilization is to determine the percentage of our fleet that is currently generating revenue for future cash flow generation and the efficiency of our capital deployed.

Revenue-Generating Horsepower per Revenue-Generating Compression Unit

We calculate revenue-generating horsepower per revenue-generating compression unit as (i) total revenue-generating horsepower divided by (ii) total revenue-generating compression units.

The primary reason for tracking and analyzing our revenue-generating horsepower per revenue-generating compression unit is to determine our expected operational and financial performance.

One of our measures of financial performance is the amount of revenue generated quarterly and annually as revenue is an indicator of our overall business growth.

We measure our revenue under two operating segments, Compression Operations and Other Services.

We consider our Compression Operations revenue to be our core operations and it will continue to be the largest revenue source for the Company.

Adjusted Gross Margin

We track Adjusted Gross Margin on an absolute dollar basis and as a percentage of revenue.

We define Adjusted Gross Margin as revenue less cost of operations, exclusive of depreciation and amortization expense.

We believe that Adjusted Gross Margin is useful to external users as a supplemental measure of our operating profitability.

Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units.

Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP.

Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other

To compensate for the limitations of Adjusted Gross Margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted Gross Margin, to evaluate our operating profitability.

See “—Non-GAAP Financial Measures.”

Adjusted EBITDA

We track Adjusted EBITDA on an absolute dollar basis and as a percentage of revenue.

We define Adjusted EBITDA as net income before interest expense, net plus, (i) tax expense (benefit);

(ii) depreciation and amortization;

(iii) unrealized loss (gain) on derivatives;

(iv) equity compensation expense;

(v) transaction expenses;

(vi) loss (gain) on sale of assets;

and (vii) impairment of compression equipment.

Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors, commercial banks and other financial institutions, 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 pay dividends;

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 reconciliation, they 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, revenues, net income, operating income, 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 Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.

See “—Non-GAAP Financial Measures.”

Sources of Our Revenues

Compression Operations

Compression Operations revenue consists of operating company-owned and customer-owned compression infrastructure for our customers, pursuant to fixed-revenue contracts to enable the production, gathering and transportation of natural gas and oil.

Additionally, revenue from these fixed-revenue contracts can include mobilization and demobilization charges that are directly reimbursable by our customers.

Other Services

Other Services revenue consists of a full range of contract services to support the needs of our customers including station construction, maintenance and overhaul, and other ancillary time and material based offerings.

Principal Components of our Cost Structure

Compression Operations

Compression Operations expenses consist of direct and indirect expenses related to operating compression infrastructure assets, such as labor, supplies, machinery, freight, and crane expenses.

Other Services

Other Services expenses consist of compressor station construction and other ancillary expenses to support the needs of customers, including parts, labor, and materials.

Depreciation and Amortization

Depreciation expense consists primarily of depreciation on property, plant and equipment purchased and leasehold improvements.

Amortization expense consists primarily of amortization of intangible assets related to trade name and customer relationships.

Selling, General and Administrative Expense

Selling, General and Administrative expenses primarily consist of compensation and benefits-related costs associated with our finance, legal, human resources, information technology, administrative, and sales and marketing functions.

Selling, General, and Administrative costs also consist of third-party professional service fees for external legal, accounting and other consulting services, rent and lease charges, insurance costs, and software expense.

Long-lived Asset Impairment

Long-lived assets, including property, plant, and equipment, and other finite-lived identifiable intangible assets, are reviewed for impairment whenever events or changes in circumstances, including the removal of compression units from the active fleet, indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the asset.

Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value.

There were no indicators that the carrying amount may not be recoverable for the six months ended June 30, 2023 and 2022.

Interest Expense, Net

Interest expense, net relates to interest incurred on outstanding borrowings under our ABL Facility (as defined below), the Term Loan (as defined below), the impact of interest rate swaps, and amortization of debt issuance cost, net of interest income earned on cash balances.

Unrealized Gain (Loss) on Derivatives

Unrealized gain (loss) on derivatives results from changes in the mark-to-market valuation of derivative instruments related to interest rate swaps whereby we have exchanged variable interest rates for fixed interest rates and entered into interest rate collars which represent a simultaneous purchase of a cap rate with the sale of a floor rate.

Derivative instruments are used to manage our exposure to fluctuations in the variable interest rate of the ABL Facility and the Term Loan and thereby mitigate the risks and costs associated with financing activities.

We have not designated any derivative instruments as hedge for accounting purposes and we do not enter into such instruments for speculative trading purposes.

Gains and losses on derivatives are presented in the other income and expense section of the consolidated statements of operations as unrealized gain or loss on derivatives.

Operational Highlights

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

As of June 30,

The following table summarizes certain horsepower, unit count and horsepower utilization percentages for our fleet for the periods presented.

As of September 30, Percentage

Operating Data (at period end):

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Horsepower utilization (4) 99.9 % 99.7 % 0.2 %

Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is compression units that do not have a signed contract or are not subject to a firm commitment from our customer and are no longer generating revenue.

Fleet horsepower excludes 32,340 and 60,025 of non-marketable or obsolete horsepower as of June 30, 2023 and 2022, respectively.

(1) Fleet horsepower includes revenue-generating horsepower and idle horsepower, which is comprised of compression units that do not have a signed contract or are not subject to a firm commitment from our customer and are no longer generating revenue.

Fleet horsepower excludes 31,520 and 60,025 of non-marketable or obsolete horsepower as of September 30, 2023 and 2022, respectively.

(2) Revenue-generating horsepower includes compression units that are operating under contract and generating revenue and compression units which are available to be deployed and for which we have a signed contract or are subject to a firm commitment from our customer.

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(4) Horsepower utilization is calculated as (i) revenue-generating horsepower divided by (ii) fleet horsepower.

The 3.1% and 3.3% increase in fleet horsepower and revenue-generating horsepower, respectively, were primarily attributable to an increase in the purchase and deployment of new compression units through organic growth with our existing customer base as well as select new customers in the key regions in which we operate.

The 3.4% and 3.6% increase in fleet horsepower and revenue-generating horsepower, respectively, were primarily attributable to the purchase and deployment of new compression units through organic growth with our existing customer base as well as select new customers in the key regions in which we operate.

The 2.6% increase in revenue-generating horsepower per revenue-generating compression unit was due to the purchase and deployment of new, large horsepower units.

Financial Results of Operations

Three months ended June 30, 2023 compared to the three months ended June 30, 2022

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

The following table presents selected financial and operating information for the periods presented ( in thousands ):

For the Three Months Ended June 30,

For the Three Months Ended

September 30,

Compression operations $ 186,673 $ 163,662 14.1 %

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Selling, general and administrative expenses 19,648 11,190 75.6 %

Loss (gain) on sale of fixed assets

Gain on sale of capital assets — (818) nm

Total operating expenses 170,025 124,392 36.7 %

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Interest expense, net (39,710) (49,859) (20.4) %

Realized gain on derivatives

Unrealized (loss) gain on derivatives

Other (expense) income

Total other expense

Loss on extinguishment of debt (6,757) — nm

Gain on derivatives 15,141 51,862 (70.8) %

Other income (expense) 38 (19) (300.0) %

Total other income (expenses) (31,288) 1,984 (1,677.0) %

Income before income taxes 29,670 60,237

Income tax expense 7,904 14,337 (44.9) %

Net income $ 21,766 $ 45,900 (52.6) %

Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $18.8 million (11.6%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

$20.0 million of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average revenue per revenue-generating horsepower per month.

This was partially offset by a $1.2 million decrease in freight and crane charges that are directly reimbursable by our customers.

Compression Operations revenue increased $23.0 million (14.1%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

Substantially all, or $22.9 million, of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations and due to an increase in average revenue per revenue-generating horsepower per month.

Other Services

Other Services revenue increased $7.3 million (51.2%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This increase was primarily due to a $4.9 million increase in revenue from station construction services driven primarily by progress on new stations and a $2.4 million increase in revenue from parts and service, driven by increased customer demand.

Other Services revenue increased $25.3 million (133.4%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This increase was primarily due to a $24.3 million increase in revenue from

station construction services driven primarily by increases in demand and scope of station projects, and a $1.0 million increase in revenue from parts and service, driven by increased customer demand.

Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $6.7 million (11.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This was primarily due to a $2.7 million increase in direct expenses, driven by increases in pricing and volume of fluids and parts to support increased activity, a $3.8 million increase in direct labor expenses related to increased headcount and salaries, a $1.1 million increase in indirect expenses;

partially offset by a $0.9 million decrease in freight and crane charges that are directly reimbursable by our customers.

Compression Operations expenses increased $9.6 million (17.2%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This was primarily due to a $4.6 million increase in direct expenses, driven by increases in pricing and volume of lubricant oil and coolant and parts to support increased activity, a $3.0 million increase in direct labor expenses related to increased headcount and salaries, a $1.9 million increase in indirect expenses, and a $0.1 million increase in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services expense increased $6.3 million (53.7%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This was primarily due to a $4.4 million increase in expenses from station construction services driven primarily by progress on new stations and a $1.9 million increase in expenses from parts and service costs.

Other Services expense increased $24.8 million (176.6%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 This increase was primarily due to a $23.7 million increase in expenses from station construction services driven primarily by increases in demand and scope of station projects, and $1.1 million from parts and service, driven by increased customer demand.

Depreciation and Amortization

Depreciation and Amortization increased $2.0 million (4.7%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Depreciation and Amortization increased $2.0 million (4.5%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.

Selling, General and Administrative Expense

Selling, General and Administrative expenses increased $1.7 million (14.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This was primarily due to a $1.1 million increase in professional fees mainly related to transaction costs and a $0.6 million increase in other overhead expenses, primarily as a result of insurance, advertising, entertainment and office expenses.

Selling, General and Administrative expenses increased $8.5 million (75.6%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This was primarily due to a $2.5 million increase in stock compensation expense mainly related to share-based compensation awards granted as part of the IPO, a $2.0 million increase in bad debt expense related to expected credit losses from a customer in bankruptcy experiencing financial distress, a $1.1 million increase in labor and benefits, mainly related to increased headcount and salaries, a $1.1 million increase in professional fees mainly related to transaction costs and a $0.6 million increase in other overhead expenses, primarily as a result of higher insurance, office expenses, and other general administrative expenses.

Interest Expense, Net

Interest expense increased $24.2 million (65.5%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This increase is primarily due (i) to the full period impact of an increase in borrowings under the ABL Facility and Term Loan, of which $825 million of which was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest rates on the ABL Facility and Term Loan.

Realized Gain on Derivatives

On June 29, 2023, the Company terminated its interest rate swaps and collars attributable to the Term Loan, resulting in the realization of $25.8 million in gains resulting from changes in the market value of such swaps and collars since their inception due to an increase in LIBOR rates.

No such gains were realized in the three months ended June 30, 2022.

Unrealized (Loss) Gain on Derivatives

Unrealized (loss) gain on derivatives decreased $0.2 million (6.2%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This is primarily related to a $24.8 million unrealized loss on settlement of the interest rate swaps and collars from the term loan;

offset by a $21.2 million unrealized gain on the change in market value of our interest rate swaps and collars during the three months ended June 30, 2023 due to an increase in the long-term SOFR yield curve, as compared to a $3.4 million unrealized loss on the change in market value of our interest rate swaps and collars during the three months ended June 30, 2022 due to an decrease in the long-term SOFR and LIBOR yield curves.

Interest expense, net decreased $10.1 million (20.4%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This decrease is primarily due to the extinguishment of the Term Loan in July 2023;

partially offset by an increase in the effective interest rate on the ABL Facility.

Loss on Extinguishment of Debt

Loss on extinguishment of debt increased $6.8 million related to the write off of debt issuance costs and other fees as a result of the extinguishment of the Term Loan during the three months ended September 30, 2023.

No such loss was recognized in the three months ended September 30, 2022.

Gain on Derivatives

Gain on derivatives decreased $36.7 million (70.8%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This is primarily related to an $8.0 million increase in the fair value of derivatives due to an increase in the long-term SOFR yield curve and cash received on derivatives of $7.2 million, as compared to a $53.9 million increase in the fair value of derivatives due to an increase in the long-term SOFR yield curve and cash paid on derivatives of $2.0 during the three months ended September 30, 2023 and 2022, respectively.

Income tax expense

Income tax expense increased by $3.1 million (110.4%) for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

This was primarily due to an increase in pre-tax income of $11.7 million for the three months ended June 30, 2023 compared to pre-tax income for the three months ended June 30, 2022.

Income tax expense decreased by $6.4 million (44.9%) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

This was primarily due to a decrease in pre-tax income of $45.0 million for the three months ended September 30, 2023 compared to pre-tax income for the three months ended September 30, 2022.

Financial Results of Operations

Six months ended June 30, 2023 compared to the six months ended June 30, 2022

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

The following table presents selected financial and operating information for the periods presented (in thousands) :

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

Compression operations $ 545,989 $ 483,965 12.8 %

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Selling, general and administrative expenses 46,171 32,760 40.9 %

Loss (gain) on sale of fixed assets

Gain on sale of capital assets (721) (825) (12.6) %

Total operating expenses 441,028 363,631 21.3 %

2 unchanged sentences

Interest expense, net (182,030) (104,616) 74.0 %

Realized gain on derivatives

Unrealized (loss) gain on derivatives

Total other expense

Loss on extinguishment of debt (6,757) — nm

Gain on derivatives 42,080 76,972 (45.3) %

Other income (expense) 39 (10) (490.0) %

Total other expenses (146,668) (27,654) 430.4 %

Income before income taxes 36,705 136,852 (73.2) %

Income tax expense 9,765 32,496 (70.0) %

Net income $ 26,940 $ 104,356 (74.2) %

Revenues and Sources of Income

Compression Operations

Compression Operations revenue increased $39.0 million (12.2%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

$39.2 million of the increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations (consistent with increased operating activity in the oil and gas industry) and due to an increase in average revenue per revenue-generating horsepower per month.

This was partially offset by a $0.2 million decrease in freight and crane charges that are directly reimbursable by our customers.

Compression Operations revenue increased $62.0 million (12.8%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The $62.0 million increase was the result of an increase in average revenue-generating horsepower as a result of increased demand for our compression operations and due to an increase in average revenue per revenue-generating horsepower per month.

Other Services

Other Services revenue increased $8.9 million (35.4%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This increase was primarily due to a $5.5 million increase in revenue from station construction services driven primarily by progress on new stations and $3.4 million from parts and service.

Other Services revenue increased $34.2 million (77.5%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This increase was primarily due to a $29.8 million increase in revenues from station construction services driven primarily by increases in demand and scope of station projects, and $4.4 million from parts and service, driven by increased customer demand.

Operating Costs and Other Expenses

Compression Operations

Compression Operations expenses increased $16.5 million (14.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This was primarily due to a $7.0 million increase in direct expenses, driven by increases in pricing and volume of fluids and parts to support increased activity, a $6.8 million increase in direct labor expenses related to increased headcount and salaries, a $2.9 million increase in indirect expenses;

Compression Operations expenses increased $26.1 million (15.6%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This was primarily due to a $11.6 million increase in direct expenses, driven by increases in pricing and volume of lubricant oil and coolant and parts to support increased activity, a $9.9 million increase in direct labor expenses related to increased headcount and salaries, a $4.7 million increase in indirect expenses;

partially offset by a $0.1 million decrease in freight and crane charges that are directly reimbursable by our customers.

Other Services

Other Services expense increased $6.5 million (31.5%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This was primarily due to a $3.9 million increase in expenses from station construction services driven primarily by progress on new stations and $2.6 million from parts and service costs, driven by increased customer demand.

Other Services expense increased $31.3 million (90.3%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This was primarily due to a $27.6 million increase in expenses from station construction services driven primarily by increases in demand and scope of station projects and $3.7 million from parts and service, driven by increased customer demand.

Depreciation and Amortization

Depreciation and Amortization increased $4.5 million (5.3%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Depreciation and Amortization increased $6.5 million (5.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This was primarily due to an increase in compression equipment purchased, which resulted in increased depreciation associated with that equipment.

Selling, General and Administrative Expense

Selling, General and Administrative expenses increased $5.0 million (23.0%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This was primarily due to a $2.3 million increase in labor and benefit expenses (including $0.3 million of equity compensation), a $1.5 million increase in other overhead expenses, primarily as a result of increased travel, advertising, entertainment and office expenses and insurance, and a $1.2 million increase in professional fees mainly associated with transaction costs.

Selling, General and Administrative expenses increased $13.4 million (40.9%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This was primarily due to a $3.1 million increase in labor and benefits, mainly related to increased headcount and salaries, a $2.8 million increase in stock compensation expense related to equity compensation plans, a $2.0 million increase in bad debt expense related to expected credit losses from a customer in bankruptcy experiencing financial distress, a $2.5 million increase in professional fees mainly related to transactions costs, and a $2.5 million increase in other overhead expenses, primarily as a result of higher insurance, entertainment and office expenses.

Interest Expense, Net

Interest expense increased $57.2 million (91.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Interest expense, net increased $77.4 million (74.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This is primarily due to (i) an increase in borrowings under the ABL Facility and Term Loan, of which $825 million was related to the May 2022 recapitalization (as discussed in Note 9 (“Debt and Credit Facilities”) to the Condensed Consolidated Financial Statements included elsewhere in this Report) and (ii) increased effective interest rates on the ABL Facility and Term Loan.

Realized Gain on Derivatives

No such gains were realized in the six months ended June 30, 2022.

Unrealized (Loss) Gain on Derivatives

Unrealized (loss) gain on derivatives decreased $54.4 million (-165.6%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This is primarily related to a $24.8 million unrealized loss on the settlement of the interest rate swaps and collars from the Term Loan;

offset by a $21.2 million unrealized gain on the change in market value of our existing interest rate swaps and collars during the six months ended June 30, 2023 due to an increase in the long-term SOFR yield curve, as compared to a $32.8 million unrealized gain on the change in market value of our interest rate swaps and collars during the six months ended June 30, 2022 due to an increase in the long-term SOFR and LIBOR yield curves.

This was partially offset by the extinguishment of the Term Loan in July 2023.

Loss on Extinguishment of Debt

Loss on extinguishment of debt increased $6.8 million related to the write off debt issuance costs and other fees as a result of the extinguishment of the Term Loan during the nine months ended September 30, 2023.

No such loss was recognized in the nine months ended September 30, 2022.

Gain on Derivatives

Gain on derivatives decreased $34.9 million (45.3%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This is primarily related to a $25.8 million settlement on the termination of derivatives attributable to the Term Loan and $29.8 million cash received on derivative settlements on our interest rate swaps and collars, offset by a decrease in the change in fair value of the derivatives of $13.5 million during the nine months ended September 30, 2023, as compared to a $9.7 million cash paid on derivatives on our interest rate swaps and collars, offset by an increase in the change in fair value of derivatives of $86.7 million during the nine months ended September 30, 2022 due to an increase in the long-term SOFR and LIBOR yield curves.

Income tax expense

Income tax expense decreased by $16.3 million (-89.8%) for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

This was primarily due to a decrease in pre-tax income of $69.6 million for the six months ended June 30, 2023 compared to pre-tax income for the six months ended June 30, 2022.

Income tax expense decreased by $22.7 million (70.0%) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

This was primarily due to a decrease in pre-tax income of $114.5 million for the nine months ended September 30, 2023 compared to pre-tax income for the nine months ended September 30, 2022.

Liquidity and Capital Resources

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Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under the ABL Facility.

Our cash flow is affected by numerous factors including prices and demand for our infrastructure compression assets, conditions in the financial markets and other factors.

Our cash flow is affected by numerous factors including prices and demand for our compression infrastructure assets, conditions in the financial markets and other factors.

We believe cash generated by operating activities will be sufficient to service our debt, fund working capital, fund our estimated capital expenditures and, as our board of directors may determine from time to time in its discretion, pay dividends.

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• Growth Capital Expenditures:

(1) capital expenditures made to expand the operating capacity or operating income capacity of assets by acquisition of additional compression units, (2) capital expenditures made to maintain the operating capacity or operating income capacity of assets by acquisition of replacement compression units and (3) capital expenditures not related to our compression units—such as trucks, wash trailers, crane trucks, leasehold improvements, technology hardware and software and related implementation expenditures, furniture and fixtures, and other general items that are typically capitalized to operate the business that have a useful life beyond one year.

(1) capital expenditures made to expand the operating capacity or operating income capacity of assets by acquisition of additional compression units, (2) capital expenditures made to maintain the operating capacity or operating income capacity of assets by acquisition of replacement compression units and (3) capital expenditures on assets required to operate the business but not including compression units—such as trucks, wash trailers, crane trucks, leasehold improvements, technology hardware and software and related implementation expenditures, furniture and fixtures, and other general items that are typically capitalized and that have a useful life beyond one year.

We make capital expenditures not related to our compression units (as described in clause (3) above) if and when necessary to support the operations of our revenue-generating horsepower.

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Maintenance capital expenditures are related to overhauls of significant components of our compression equipment, such as the engine and compressor, which return the components to a like-new condition, but do not modify the application for which the compression equipment was designed.

For the six months ended June 30, 2023, growth capital expenditures were $68.3 million and maintenance capital expenditures were $15.7 million.

For the six months ended June 30, 2022, growth capital expenditures were $126.6 million and maintenance capital expenditures were $17.4 million.

The decrease in growth capital expenditures was primarily related to the timing of new compressor equipment purchases to support organic growth.

For the nine months ended September 30, 2023, growth capital expenditures were $124.0 million and maintenance capital expenditures were $28.1 million.

For the nine months ended September 30, 2022, growth capital expenditures were $163.2 million and maintenance capital expenditures were $27.8 million.

The decrease in growth capital expenditures was primarily related to an adjustment to our capital allocation framework in conjunction with the Company's IPO and subsequent desire to pay a regular dividend.

The decrease in maintenance capital expenditures was primarily a result of a decrease in scheduled unit overhauls that occurred based on the age and operating hours of such units.

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The timing, amount and financing of dividends, if any, will be subject to the discretion of our board of directors from time to time.

On October 24, 2023, our board of directors declared a quarterly cash dividend to be paid on November 10, 2023 to all stockholders of record as of the close of business on November 3, 2023.

See Note 20 (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report.

Over the long-term, we expect to fund any dividends and our budgeted growth capital expenditures using our Discretionary Cash Flow.

In the event our Discretionary Cash Flow is insufficient for the purpose of funding any such dividends and our budgeted growth capital expenditures for such period, we may fund such shortfall (i) with additional borrowings under our ABL Facility, which as of June 30, 2023 had $375 million available (subject to the requirement that our availability under the borrowing base under the ABL Facility exceeds the greater of (x) 10% of the total commitments under the facility of $2.2 billion or (y) $200 million or (ii) reduce our growth capital expenditures for such period.

In the event our Discretionary Cash Flow is insufficient for the purpose of funding any such dividends and our budgeted growth capital expenditures for such period, we may fund such shortfall (i) with additional borrowings under our ABL Facility, which as of September 30, 2023 had $396.2 million available (subject to the requirement that our availability, in the case of dividends, under the ABL Facility exceeds the greater of (x) 10% of the total commitments under the facility of $2.2 billion or (y) $200 million) or (ii) reduce our growth capital expenditures for such period.

Any such additional borrowings under our ABL Facility will result in an increase in our interest expense for such period.

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Contractual Obligations

Our material contractual obligations as of June 30, 2023 consisted of the following:

Our material contractual obligations as of September 30, 2023 consisted of the following:

• Long-term debt of $1.8 billion, which is due in 2028.

See Note 19 (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report;

Purchase commitments of $129.2 million are due within 12 months, primarily consisting of commitments to purchase compression units.

• Purchase commitments of $215.7 million, of which $182.9 million is expected to be settled within the next twelve months;

primarily consisting of future commitments to purchase new compression units ordered but not received.

See Note 13 (“Commitments and Contingencies”) to the Condensed Consolidated Financial Statements included elsewhere in this Report.

Other Commitments

As of June 30, 2023, other commitments include operating lease payments totaling $58.5 million.

As of September 30, 2023, other commitments include operating lease payments totaling $52.6 million.

Sources of Cash

The following table summarizes our cash flows for the six months ended June 30, 2023, and 2022 ( in thousands ):

Six Months Ended June 30,

The following table summarizes our cash flows for the nine months ended September 30, 2023, and 2022 ( in thousands ):

Nine Months Ended September 30,

Net cash provided by operating activities $ 203,699 $ 186,854 $ 16,845

Net cash used in investing activities (144,563) (191,770) 47,207

Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net cash used in financing activities (73,439) (2,543) (70,896)

Net decrease in cash and cash equivalents $ (14,303) $ (7,459) $ (6,844)

Operating Activities

The $9.7 million decrease in net cash provided by operating activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a $53.3 million decrease in net income, adjusted for non-cash items which is mainly related to a $54.4 million increase in unrealized loss on derivative instruments, and a $6.8 million decrease in working capital primarily consisting of an increase in accounts receivable due to an increase in revenue from compression operations, an increase in prepaid expenses and other current assets due to an increase in deferred IPO costs, a decrease in accrued liabilities due to payment made to vendors during the year;

partially offset by an increase in accounts payable, contract liabilities.

The $16.8 million increase in net cash provided by operating activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a $38.9 million increase in Adjusted Gross Margin and an increase in cash received on derivatives of $65.3 million, partially offset by an increase of interest expense, net of $77.4 million;

further impacted by changes in working capital such as a decrease in inventory purchases of $10.1 million, an increase in contract liability of $10.8 million, an increase in accounts receivable, net of $26.4 million, and an increase in prepaid expenses and other current assets of $4.3 million.

Investing Activities

The $53.0 million decrease in net cash used in investing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to lower levels of both maintenance and growth capital expenditures.

The $47.2 million decrease in net cash used in investing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a $54.4 million decrease in growth capital expenditures offset by a $7.0 million decrease in proceeds from sale of assets and a $0.3 million increase in maintenance capital expenditures.

Financing Activities

The $14.2 million increase in net cash used in financing activities for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 was primarily due to a decrease in borrowings on debt instruments of $721.9 million, an increase in payments on debt instruments of $83.3 million, and an increase in payments of debt issuance cost of $4.6 million.

This was offset by a decrease in equity distribution of $795.7 million.

The $70.9 million increase in net cash used in financing activities for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to a decrease in borrowings on debt instruments of $652.6 million, an increase in payments on debt instruments of $475.9 million, an increase in offering costs of $9.2 million, an increase in payments of debt issuance cost of $5.0 million, and an increase in payment related to loss on extinguishment of debt of $1.8 million.

This was offset by an increase in net proceeds from the IPO of $277.9 million and a decrease in equity distribution of $795.7 million.

Description of Indebtedness

Asset Based Lending Facility

As of January 1, 2022, a wholly-owned subsidiary of Kodiak had an ABL Facility with unaffiliated secured lenders and JPMorgan Chase Bank, N.A., as administrative agent.

On March 22, 2023, wholly-owned subsidiaries of Kodiak entered into the Fourth Amended and Restated ABL Credit Agreement with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (as amended or restated from time to time, the “ABL Credit Agreement”), whereby the total facility (among other things) was increased to $2.2 billion and certain changes were made to our financial covenants and maturity date.

On May 31, 2023, the ABL Credit Agreement was amended to, among other things, permit distributions of overallotment proceeds from the IPO and revise the terms related to the payment and prepayment of the Term Loan.

On June 27, 2023, the ABL Credit Agreement was further amended to remove the ability to make distributions related to overallotment proceeds from the IPO and to instead require prepayment of the obligations and cash collateralization of any letter of credit exposure upon the issuance of any equity interests by Kodiak pursuant to the overallotment in the IPO.

In connection with the IPO, the Company became a borrower under the ABL Facility.

As of September 30, 2023, there was $14.7 million letters of credit outstanding under the ABL Facility.

The maturity date of the ABL Facility is March 22, 2028.

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The ABL Credit Agreement requires that we meet certain financial ratios.

Commencing with the first fiscal quarter ending after the completion of the IPO, our fixed charge coverage ratio will be replaced by an interest coverage ratio (as defined in the ABL Credit Agreement) that may not be less than 2.50 to 1.00, determined as of the last day of each fiscal quarter.

Commencing with the first fiscal quarter ending after the completion of the IPO but prior to the occurrence of certain issuances of unsecured debt (for purposes of this description, an “Unsecured Debt Issuance”), our Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (i) 5.25 to 1.00 for the fiscal quarters ending September 30, 2023 and December 31, 2023, (ii) 5.00 to 1.00 for the fiscal quarter ending March 31, 2024, (iii) 4.75 to 1.00 for the fiscal quarter ending June 30, 2024 and (iv) 4.50 to 1.00 for each fiscal quarter ending on or after September 30, 2024.

Commencing with the first fiscal quarter ending after both the completion of the IPO and the occurrence of an unsecured debt issuance, (a) our Leverage Ratio, determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 5.75 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 5.25 to 1.00 for each fiscal quarter ending thereafter;

and (b) our Secured Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (x) 3.50 to 1.00 for the first four fiscal quarters ending after the occurrence of the unsecured debt issuance and (y) 3.00 to 1.00 for each fiscal quarter ending thereafter.

Commencing with the first fiscal quarter ended September 30, 2023, we must maintain an interest coverage ratio (as defined in the ABL Credit Agreement) of not less than 2.50 to 1.00, determined as of the last day of each fiscal quarter.

Additionally, commencing with the first fiscal quarter ending after the completion of the IPO but prior to the occurrence of certain issuances of unsecured debt (for purposes of this description, an “Unsecured Debt Issuance”), our Leverage Ratio (as defined in the ABL Credit Agreement), determined quarterly as of the last day of each fiscal quarter, may not exceed (i) 5.25 to 1.00 for the fiscal quarters ending September 30, 2023 and December 31, 2023, (ii) 5.00 to 1.00 for the fiscal quarter ending March 31, 2024, (iii) 4.75 to 1.00 for the fiscal quarter ending June 30, 2024 and (iv) 4.50 to 1.00 for each fiscal quarter ending on or after September 30, 2024.

All obligations under the ABL Facility are collateralized by essentially all the assets of the Company.

We were in compliance with all covenants as of June 30, 2023 and December 31, 2022.

We were in compliance with all covenants as of September 30, 2023 and December 31, 2022.

The ABL Credit Agreement also restricts the Company’s ability to:

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and consolidate, merge or sell all or substantially all of the Company’s assets.

The applicable interest rate under the ABL Facility is (i) in the case of SOFR-based borrowings, the Term SOFR or Daily Simple SOFR rate then in effect (subject to a floor of 0%) plus 0.10% plus a spread that depends on our Leverage Ratio as of the most recent determination date ranging from 2.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 3.00% if our Leverage Ratio is greater than 5.50:1.00 and (ii) in the case of prime rate-based borrowings, the prime rate (subject to a floor of 2.5%) plus a spread that depends on our Leverage Ratio as of the most recent determination date ranging from 1.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 2.00% if our Leverage Ratio is greater than 5.50:1.00.

The applicable interest rates as of June 30, 2023 were 10.25% (prime rate plus 2.00%) and 8.34% (Term SOFR rate plus 0.10% plus 3.00%).

a floor of 2.5%) plus a spread that depends on our Leverage Ratio as of the most recent determination date ranging from 1.00% if our Leverage Ratio is less than or equal to 3.00:1.00 to 2.00% if our Leverage Ratio is greater than 5.50:1.00.

The applicable interest rates as of September 30, 2023 were 10.25% (prime rate plus 1.75%) and 8.28% (Term SOFR rate plus 0.10% plus 2.75%).

The applicable interest rates as of December 31, 2022 were 9.50% (prime rate plus 2.00%) and 7.60% (Term SOFR rate plus 0.10% plus 3.00%).

We pay an annualized commitment fee of 0.25% on the unused portion of our ABL Facility if borrowings are greater than 50% of total commitments and 0.50% on the unused portion on the ABL Facility if borrowings are less than 50% of total commitments.

As of January 1, 2022, a wholly-owned subsidiary of Kodiak had a term loan (the “Term Loan”) pursuant to a credit agreement with unaffiliated unsecured lenders and Wells Fargo Bank, N.A., as administrative agent.

On May 19, 2022, we entered into the Term Loan Credit Agreement (as amended from time to time, the “Term Loan Credit Agreement”) whereby we increased the aggregate commitments under the Term Loan from $400 million to $1 billion and made certain changes to our financial covenants, including (i) the financial covenants were not measured for the second quarter of 2022 and (ii) the maximum Leverage Ratio (calculated based on the ratio of Consolidated Total Debt to Consolidated EBITDA, each as defined in the Term Loan Credit Agreement) was increased to 7.50x through the first quarter of 2023;

7.25x thereafter through the third quarter of 2023;

7.00x thereafter through the first quarter of 2024;

6.75x thereafter through the first quarter of 2025;

6.50x thereafter through the first quarter of 2026;

6.25x thereafter through the fourth quarter of 2026;

and 6.00x in the first quarter of 2027 and thereafter.

We were in compliance with all financial covenants as of June 30, 2023 and December 31, 2022.

On March 31, 2023, our wholly-owned subsidiary entered into the First Amendment to the Term Loan Credit Agreement, which extended the maturity date to September 22, 2028.

Lender fees and costs totaling $0.75 million were incurred for this amendment and will be amortized over the life of the loans to interest expense.

Borrowings under the Term Loan incurred interest at the following applicable rates:

interest rates were based on 6.00% plus an alternate base rate and 7.00% plus an adjusted eurocurrency rate for alternate base rate loans and eurocurrency loans, respectively.

The interest rates were 12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.

As disclosed in Note 19 - (“Subsequent Events”) to the Condensed Consolidated Financial Statements included elsewhere in this Report, we used the net proceeds of our IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under our ABL Facility, to repay $300 million of borrowings outstanding under the Term Loan on July 3, 2023.

On July 3, 2023, we used the net proceeds of our IPO, together with the proceeds resulting from the Term Loan Derivative Settlement and borrowings under our ABL Facility, to repay $300 million of borrowings outstanding under the Term Loan.

In connection with the IPO, all of the Company’s and its subsidiaries’ remaining obligations under the Term Loan were assumed by a parent entity of Kodiak Holdings, and the Company’s obligations thereunder were terminated.

As a result, the Company is no longer a borrower or guarantor under, nor otherwise obligated with respect to the debt outstanding under the Term Loan.

We were in compliance with all financial covenants as of December 31, 2022 and through the date of termination.

The applicable interest rates were 12.16% and 10.67% as of June 30, 2023 and December 31, 2022, respectively.

Derivatives and Hedging Activities

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We believe that Adjusted Gross Margin is useful as a supplemental measure to our operating profitability.

Adjusted Gross Margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP.

Adjusted Gross Margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per compression unit costs for lubricant oils and coolants, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units.

Adjusted Gross Margin should not be considered an alternative to, or more

meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP.

Moreover, Adjusted Gross Margin as presented may not be comparable to similarly titled measures of other companies.

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Adjusted Gross Margin for Compression Operations

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Total revenues $ 186,673 $ 163,662 $ 545,989 $ 483,965

Cost of operations (excluding depreciation and amortization)

Cost of sales (excluding depreciation and amortization) (65,470) (55,872) (193,257) (167,145)

Depreciation and amortization (46,087) (44,111) (136,414) (129,913)

Gross margin $ 75,116 $ 63,679 $ 216,318 $ 186,907

Gross margin percentage 40.2% 38.9% 39.6% 38.6%

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Adjusted Gross Margin for Other Services

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

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Total revenues $ 44,310 $ 18,983 $ 78,412 $ 44,172

Cost of operations (excluding depreciation and amortization)

Cost of sales (excluding depreciation and amortization) (38,820) (14,037) (65,907) (34,638)

Depreciation and amortization — — — —

Gross margin $ 5,490 $ 4,946 $ 12,505 $ 9,534

Gross margin percentage 12.4% 26.1% 15.9% 21.6%

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Adjusted EBITDA and Adjusted EBITDA Percentage

We define Adjusted EBITDA as net income before interest expense, net plus, (i) tax expense (benefit);

(ii) depreciation and amortization;

(iii) realized loss (gain) on derivatives;

(iv) unrealized loss (gain) on derivatives;

(v) equity compensation expense;

(vi) transaction expenses;

(vii) loss (gain) on sale of assets;

and (viii) impairment of compression equipment.

We define Adjusted EBITDA as net income (loss) before interest expense, net:

income tax expense (benefit);

and depreciation and amortization;

plus (i) loss on extinguishment of debt;

(ii) loss (gain) on derivatives;

(iii) equity compensation expense;

(iv) transaction expenses;

(v) loss (gain) on sale of assets;

and (vi) impairment of compression equipment.

We define Adjusted EBITDA Percentage as Adjusted EBITDA divided by total revenues.

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The following table reconciles net income, the most directly comparable GAAP financial measure, to Adjusted EBITDA, its most directly comparable Non-GAAP financial measure, for each of the periods presented (in thousands) :

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net income $ 21,766 $ 45,900 $ 26,940 $ 104,356

Interest expense, net 39,710 49,859 182,030 104,616

Income tax expense 7,904 14,337 9,765 32,496

Depreciation and amortization 46,087 44,111 136,414 129,913

Realized (gain) on derivatives

Unrealized loss (gain) on derivatives

Loss on extinguishment of debt 6,757 — 6,757 —

Gain on derivatives (15,141) (51,862) (42,080) (76,972)

Equity compensation expense (1) 2,544 — 3,452 619

Transaction expenses (2) 440 — 1,713 1,600

Gain on sale of assets

Gain on sale of capital assets — (818) (721) (825)

Adjusted EBITDA $ 110,067 $ 101,527 $ 324,270 $ 295,803

Adjusted EBITDA Percentage 47.7% 55.6% 51.9% 56.0%

For the six months ended June 30, 2023 and 2022 there were $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense related to the Time-Vesting Units.

(1) For the three months ended September 30, 2023, there was $2.5 million of non-cash adjustments for equity compensation expense.

For the three months ended September 30, 2022, there was no such adjustment.

For the nine months ended September 30, 2023 and 2022, there were $3.4 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense.

(2) Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs.

The following table reconciles net cash provided by operating activities to Adjusted EBITDA for each of the periods presented (in thousands) :

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net cash provided by operating activities $ 85,731 $ 59,207 $ 203,699 $ 186,854

Interest expense, net 39,710 49,859 182,030 104,616

Deferred tax provision (benefit)

Realized gain on derivatives

Income tax expense 7,904 14,337 9,765 32,496

Deferred tax provision (5,551) (11,833) (6,312) (26,807)

Cash (received) paid on derivatives (7,163) 1,992 (55,631) 9,704

Loss on extinguishment of debt 2,398 — 2,398 —

Transaction expenses (1) 440 — 1,713 1,600

Other (2) (3,705) (5,066) (16,814) (11,978)

Change in operating assets and liabilities (9,697) (6,969) 3,422 (682)

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Discretionary Cash Flow

We define Discretionary Cash Flow as net cash provided by operating activities less maintenance capital expenditures, transaction expenses, certain changes in operating assets and liabilities and certain other expenses.

We define Discretionary Cash Flow as net cash provided by operating activities less (i) maintenance capital expenditures;(ii) gain on sale of capital assets;

(iii) certain changes in operating assets and liabilities;

and (iv) certain other expenses;

plus (x) cash loss on extinguishment of debt;

and (y) transaction expenses.

We believe Discretionary Cash Flow is a useful liquidity and performance measure and supplemental financial measure for us in assessing our ability to pay cash dividends to our stockholders, make growth capital expenditures and assess our operating performance.

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Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less maintenance and growth capital expenditures, transaction expenses, certain changes in operating assets and liabilities and certain other expenses.

We define Free Cash Flow as net cash provided by operating activities less (i) maintenance capital expenditures;(ii) gain on sale of capital assets;

(iii) certain changes in operating assets and liabilities;

(iv) certain other expenses;

and (v) net growth capital expenditures;

plus (x) cash loss on extinguishment of debt;

(y) transaction expenses;

and (z) proceeds from sale of capital assets.

We believe Free Cash Flow is a liquidity measure and useful supplemental financial measure for us in assessing our ability to pursue business opportunities and investments to grow our business and to service our debt.

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The following table reconciles net cash provided by operating activities, to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Net cash provided by operating activities $ 85,731 $ 59,207 $ 203,699 $ 186,854

Maintenance capital expenditures (1) (12,312) (10,340) (28,056) (27,771)

Loss on extinguishment of debt 2,398 — 2,398 —

Transaction expenses (2) 440 — 1,713 1,600

Gain on sale of assets

Gain on sale of capital assets — (818) (721) (825)

Change in operating assets and liabilities (9,697) (6,969) 3,422 (682)

Other (3) (3,516) (7) (4,833) (1,700)

Discretionary Cash Flow $ 63,044 $ 41,073 $ 177,622 $ 157,476

Growth capital expenditures (4)(5) (55,671) (36,572) (124,015) (163,162)

Proceeds from sale of assets

Proceeds from sale of capital assets — 8,010 1,055 8,023

Free Cash Flow $ 7,373 $ 12,511 $ 54,662 $ 2,337

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(3) Includes non-cash lease expense, provision for credit losses and inventory reserve.

For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively.

For the six months ended June 30, 2023 and 2022, growth capital expenditures includes a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively.

For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively.

For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively.

Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity.

(4) For the three months ended September 30, 2023 and 2022, growth capital expenditures include a $16.4 million increase and a $6.8 million decrease in accrued capital expenditures, respectively.

For the nine months ended September 30, 2023 and 2022, growth capital expenditures includes a $6.5 million increase and a $8.8 million decrease in accrued capital expenditures, respectively.

(5) For the three months ended September 30, 2023 and 2022, there were $3.5 million and $1.7 million of non-unit growth capital expenditures, respectively.

For the nine months ended September 30, 2023 and 2022, there were $10.7 million and $3.9 million of non-unit growth capital expenditures, respectively.

Remaining amounts for the nine months ended September 30, 2023 and 2022 represent growth capital expenditures to expand our compression fleet.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as growth capital expenditures.

The following table reconciles net income to Discretionary Cash Flow and Free Cash Flow, for each of the periods presented (in thousands):

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

Net income $ 21,766 $ 45,900 $ 26,940 $ 104,356

Depreciation and amortization 46,087 44,111 136,414 129,913

Unrealized loss (gain) on derivatives

Deferred tax provision (benefit)

Change in fair value of derivatives (7,978) (53,854) 13,551 (86,676)

Loss on extinguishment of debt 6,757 — 6,757 —

Deferred tax provision 5,551 11,833 6,312 26,807

Amortization of debt issuance costs 189 4,241 11,260 9,453

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Transaction expenses (2) 440 — 1,713 1,600

Gain on sale of assets

Gain on sale of capital assets — (818) (721) (825)

Maintenance capital expenditures (3) (12,312) (10,340) (28,056) (27,771)

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Growth capital expenditures (4)(5) (55,671) (36,572) (124,015) (163,162)

Proceeds from sale of assets

Proceeds from sale of capital assets — 8,010 1,055 8,023

Free Cash Flow $ 7,373 $ 12,511 $ 54,662 $ 2,337

For the six months ended June 30, 2023 and 2022, there were $0.9 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense related to the Time Vesting Units.

(1) For the three months ended September 30, 2023, there was $2.5 million of non-cash adjustments for equity compensation expense.

For the three months ended September 30, 2022, there was no such adjustment.

For the nine months ended September 30, 2023 and 2022, there were $3.4 million and $0.6 million, respectively, of non-cash adjustments for equity compensation expense.

(2) Represents certain costs associated with non-recurring professional services, our equity owners’ expenses and other costs.

(3) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Cash Requirements—Capital Expenditures” for information regarding amounts designated as maintenance capital expenditures.

For the three months ended June 30, 2023 and 2022, growth capital expenditures include a $2.0 million and a $10.1 million decrease in accrued capital expenditures, respectively.

For the six months ended June 30, 2023 and 2022, growth capital expenditures include a $10.0 million and a $1.9 million decrease in accrued capital expenditures, respectively.

For the three months ended June 30, 2023 and 2022, there were $4.8 million and $1.7 million of non-unit growth capital expenditures, respectively.

For the six months ended June 30, 2023 and 2022, there were $7.2 million and $2.2 million of non-unit growth capital expenditures, respectively.

Remaining amounts for the six months ended June 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity.

(4) For the three months ended September 30, 2023 and 2022, growth capital expenditures include a $16.4 million increase and a $6.8 million decrease in the change in accrued capital expenditures, respectively.

For the nine months ended September 30, 2023 and 2022, growth capital expenditures include a $6.5 million increase and a $8.8 million decrease in the change in accrued capital expenditures, respectively.

(5) For the three months ended September 30, 2023 and 2022, there were $3.5 million and $1.7 million of non-unit growth capital expenditures, respectively.

For the nine months ended September 30, 2023 and 2022, there were $10.7 million and $3.9 million of non-unit growth capital expenditures, respectively.

Remaining amounts for the nine months ended September 30, 2023 and 2022 represent growth capital expenditures to expand our operating capacity.

7 unchanged sentences

Goodwill acquired in connection with business combinations represents the excess of consideration over the fair value of net assets acquired.

Certain assumptions and estimates are employed in determining the fair value of assets acquired and liabilities assumed.

Certain assumptions and estimates are employed in determining the fair value of assets acquired and

liabilities assumed.

Goodwill is not amortized, but is reviewed for impairment annually, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered.

6 unchanged sentences

While we believe that our estimates of current value are reasonable, if actual results differ from the estimates and judgments used including such items as future cash flows and the volatility inherent in markets which we serve, impairment charges against the carrying value of those assets could be required in the future.

No events or circumstances occurring that indicated that the fair value of the entity may be below its carrying amount.

No goodwill impairment was recorded for the three and six months ended June 30, 2023 and 2022.

No events or circumstances occurred that indicated that the fair value of the entity may be below its carrying amount;

therefore, no goodwill impairment was recorded for the three and nine months ended September 30, 2023 and 2022.

Impairment of Long-Lived Assets

3 unchanged sentences

Impairment losses are recognized in the period in which the impairment occurs and represent the excess of the asset carrying value over its fair value estimated future undiscounted net cash flows.

No impairment was recorded for the three and six months ended June 30, 2023 and 2022.

No impairment was recorded for the three and nine months ended September 30, 2023 and 2022.

Estimated Useful Lives of Property, Plant and Equipment

1 unchanged sentence

Depreciation is computed on a straight-line basis using useful lives that are estimated based on assumptions and judgments that reflect both historical experience and expectations regarding future use of our assets.

The use of different assumptions and judgments in the calculation of depreciation, especially those involving useful lives, would likely result in significantly different net book values of our assets and results of operations.

The use of different assumptions and judgments in the calculation of depreciation, especially those involving useful lives, would result in significantly different net book values of our assets and results of operations.

Commitments and Contingencies

8 unchanged sentences

We record legal costs as incurred, and all recorded legal liabilities are revised, as required, as better information becomes available to us.

As of June 30, 2023, based on the information currently available, we have accrued a contingent liability of approximately $28.4 million relating to the Sales Tax Audit for the periods currently under audit classified in accrued liabilities on the consolidated balance sheet.

As of September 30, 2023, based on the information currently available, we have accrued a contingent liability of approximately $28.7 million relating to the Sales Tax Audit for the periods currently under audit classified in accrued liabilities on the consolidated balance sheet.

For the year ended December 31, 2020, we wrote off an outstanding receivable balance of $3.7 million, due to us from a previous acquisition, to bad debt expense.

Additionally, we recorded a contingent liability of $3.7 million related to the remaining 50% of the receivable balance due to the seller in accrued liabilities.

As of June 30, 2023, none of the outstanding receivables had been collected.

As of June 30, 2023, there are no other legal matters for which resolution could have a material adverse effect on the consolidated financial statements.

As of September 30, 2023, none of the outstanding receivables had been collected.

As of September 30, 2023, there are no other legal matters for which resolution could have a material adverse effect on the consolidated financial statements.

Fair Value of Derivative Instruments

2 unchanged sentences

We record derivative instruments at fair value using level 2 inputs of the fair value hierarchy.

The interest rate swaps and interest rate collars are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs including interest rate curves and credit spreads.

As of June 30, 2023, $43.8 million was recorded for the fair value of the asset of the derivative instruments compared to $65.3 million asset of the derivative instruments recorded as of December 31, 2022.

The interest rate swaps and interest rate collars are valued using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs from actively quoted public markets.

including interest rate curves and credit spreads.

As of September 30, 2023, $51.8 million was recorded for the fair value of the asset of the derivative instruments compared to $65.3 million asset of the derivative instruments recorded as of December 31, 2022.

Recently Adopted Accounting Pronouncements

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis