What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-04 · 126 added, 125 removed, 370 unchanged (40% of the section changed)

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In addition to our natural gas infrastructure applications, a portion of our fleet is used in connection with gas lift applications on crude oil production targeted by horizontal drilling techniques and can be accomplished by both small and large horsepower compression equipment.

Domestic natural gas production generally occurs in either primarily gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins such as the Permian and Delaware Basins and the Mid-Continent, where associated gas volumes are a byproduct of crude oil production.

Domestic natural gas production generally occurs in either primarily gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins such as the Permian and Delaware Basins, Eagle Ford and the Mid-Continent, where associated gas volumes are produced in connection with crude oil.

Over the past several years, relative stability in commodity prices has encouraged investment in domestic exploration and production (“E&P”) and midstream infrastructure across the energy industry, particularly in the low-cost basins characterized by associated gas and crude oil production.

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While our business is focused on providing compression services and does not have any direct exposure to commodity prices, we have indirect exposure to commodity prices as overall levels of activity across the energy industry are influenced by the commodity price environment.

For example, despite the quick rebound in crude oil prices during the second quarter of 2020, drilling activity expectations have not materially changed as many E&P companies, including some of our customers, maintained their reduced capital expenditure forecasts from the first quarter of 2020 for the remainder of 2020.

We expect the resulting decrease in new production to in turn negatively affect the demand for new compression services and potentially reduce the need for us to spend capital on new compression units for deployment in associated gas producing regions.

For example, despite the quick rebound in crude oil prices during the second quarter of 2020 and the relative stability of prices during the third quarter of 2020, drilling activity expectations have not materially changed as many E&P companies, including some of our customers, have maintained their reduced capital expenditure forecasts for the remainder of 2020.

We expect the resulting decrease in new production to in turn negatively affect the demand for new compression services in the near term and potentially reduce the need for us to spend capital on new compression units for deployment in associated gas producing regions;

that said, reports of decreasing domestic crude oil inventory in storage may be an indicator of improving longer-term crude oil fundamentals which may positively impact basins where associated gas volumes are produced.

The impact on existing production of crude oil and natural gas, however, is far less certain.

Variables such as takeaway capacity, flaring considerations, potential production prorationing, reservoir pressure and flow rates, high switching costs associated with large horsepower compressors (borne by our customers), and specific company dynamics may all factor into producers’ decisions with respect to their existing production.

Variables such as takeaway capacity, flaring considerations, reservoir pressure and flow rates, high switching costs associated with large horsepower compressors (borne by our customers), and specific company dynamics may all factor into producers’ decisions with respect to their existing production.

For example, as wells age, and the reservoir pressures naturally continue to decline, more horsepower may be required to meet the customer’s operational needs.

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Unlike crude oil, natural gas production and prices have been influenced by different drivers over the recent past, as there is no OPEC+ equivalent in the global natural gas market and therefore the price of natural gas is generally determined by market forces of supply and demand rather than by a centralized market coordinator.

Over the past several years, increased gas

production in the U.S.

Over the past several years, increased gas production in the U.S.

driven by large volumes of gas produced from shale sources has been a main driver of an overall drop in natural gas prices.

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became a net exporter of natural gas into global markets in 2017.

We expect this baseload natural gas demand will continue to drive long-term domestic natural gas production despite low natural gas prices.

In addition to the relatively stable supply, demand and price fundamentals of natural gas, we believe that the geographic diversity and portability of our assets should help mitigate the impact of current market volatility.

We expect this baseload natural gas demand will continue to drive long-term domestic natural gas production.

While we expect that the reduction in the production of associated gas and demand for our services in certain regions that began in the first quarter of 2020 will continue for the remainder of 2020, we remain optimistic that such reduction in production will have a positive impact on both natural gas prices and the utilization of our assets in other regions primarily tied to natural gas prospects, such as the Marcellus, Utica and Haynesville shales.

Given that these are primarily gas shales, we believe it is reasonable to expect that these areas could see additional capital inflows to take advantage of relatively more attractive economics and offset the reduced supply of associated natural gas in other regions, which could increase demand for our services in these shales.

Given these producing regions primarily contain natural gas, if natural gas prices remain resilient we believe it is reasonable to expect that these areas could see additional capital inflows to take advantage of relatively more attractive economics and offset the reduced supply of associated natural gas in other regions, which could increase demand for our services in these shales.

Should such demand increase exceed our current compression capability in these shales, the design flexibility of our compression units making them capable of rapid reconfiguration and deployment would allow us to meet such demand by relocating units to these areas.

On the whole, we believe the longer-term outlook for natural gas fundamentals remains positive, as market signs point to a more balanced gas market toward the end of 2020 and into 2021.

On the whole, we believe the longer-term outlook for natural gas fundamentals remains positive, as market signs, including natural gas futures market, point to a more balanced gas market toward the end of 2020 and into 2021.

In summary, the outlook for commodity prices is mixed and could have a varying impact on our business.

Whereas several factors, including uncertain future demand, have recently caused severe volatility in crude oil prices, on the natural gas side, relatively more moderate demand destruction coupled with anticipated associated gas production decreases have somewhat counterbalanced softness in pricing and expectations of full gas storage going into the fall, thereby providing some support to natural gas futures prices.

The overall outlook for our compression services will depend, in part, on the timing and extent of recovery in the commodity markets, and we believe the potential for natural gas to recover more quickly than crude oil should help support our business activities and overall utilization and pricing.

Whereas several factors, including uncertain future demand, caused severe volatility in crude oil prices, on the natural gas side, relatively more moderate demand destruction coupled with associated gas production decreases have somewhat supported natural gas prices.

The overall outlook for our compression services will depend, in part, on the strength and duration of recovery in the commodity markets, and we believe the potential for natural gas to recover more quickly than crude oil should help support our business activities and overall utilization and pricing.

While we anticipate that current and projected commodity prices and the related impact to activity levels in both the upstream and midstream sectors will impact our business, we cannot predict the ultimate magnitude of that impact and expect it to be varied across our operations, depending on the region, customer, nature of compression application, contract term and other factors.

We believe our customers’ mid- to long-term expectations regarding commodity prices and the cost they would incur to return our large horsepower equipment will provide an incentive for our customers to keep it in the field following expiration of the primary term, whereas we believe there is likely to be greater pressure on utilization and pricing with respect to our smaller horsepower equipment.

Ultimately, the extent to which our business will be impacted by recent market developments depends on the factors described above as well as future developments beyond our control, which are highly uncertain and cannot be predicted.

In response to these market events and uncertainties, in the first quarter of this year we cut our already reduced 2020 growth capital spending budget by 25% and reduced operating expenses by 10%;

and we are prepared to cut spending further should the need arise.

While current market volatility makes the near-term unpredictable, we believe that overall the long-term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas as well as the production of crude oil, although we cannot predict any possible changes in such demand with reasonable certainty.

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 that overall the long-term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas as well as the production of crude oil.

COVID-19 Update

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The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric.

Three Months Ended June 30, Percent

Change Six Months Ended June 30, Percent

Three Months Ended September 30, Percent

Change Nine Months Ended September 30, Percent

2020 2019 2020 2019

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(1) Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order).

As of June 30, 2020, we had approximately 18,000 horsepower on order, all of which we expect to be delivered during the remainder of 2020.

As of September 30, 2020, we had approximately 7,500 horsepower on order, which we expect to be delivered in 2020.

(2) Total available horsepower is revenue generating horsepower under contract for which we are billing a customer, horsepower in our fleet that is under contract but is not yet generating revenue, horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, and idle horsepower.

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(4) Calculated as the average of the month-end revenue generating horsepower for each of the months in the period.

(5) Calculated as the average of the result of dividing the contractual monthly rate for all units at the end of each month in the period by the sum of the revenue generating horsepower at the end of each month in the period.

(5) Calculated as the average of the result of dividing the contractual monthly rate, excluding standby or other temporary rates, for all units at the end of each month in the period by the sum of the revenue generating horsepower at the end of each month in the period.

(6) Calculated as the average of the month-end revenue generating horsepower per revenue generating compression unit for each of the months in the period.

(7) Horsepower utilization is calculated as (i) the sum of (a) revenue generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair.

Horsepower utilization based on revenue generating horsepower and fleet horsepower as of June 30, 2020 and 2019 was 84.1% and 89.1%, respectively.

Horsepower utilization based on revenue generating horsepower and fleet horsepower as of September 30, 2020 and 2019 was 80.8% and 89.1%, respectively.

(8) Calculated as the average utilization for the months in the period based on utilization at the end of each month in the period.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three months ended June 30, 2020 and 2019 was 86.0% and 89.9%, respectively.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the six months ended June 30, 2020 and 2019 was 87.9% and 90.3%, respectively.

The 1.7% increase in fleet horsepower as of June 30, 2020 compared to June 30, 2019 was attributable to compression units added to our fleet to meet then expected incremental demand by new and current customers for our compression services.

The 4.1% decrease in revenue generating horsepower as of June 30, 2020 compared to June 30, 2019 was primarily due to returns of compression units from our customers, which also caused a 6.9% decrease in revenue generating compression units over the same period, partially offset by a 3.2% increase in average horsepower per revenue generating compression unit due to the organic growth in our large horsepower fleet.

The 1.1% and 1.9% increases in average revenue per revenue generating horsepower per month during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, respectively, were both primarily due to contracts on new compression units and selective price increases on the existing fleet.

Average horsepower utilization decreased to 88.0% during the three months ended June 30, 2020 compared to 94.6% during the three months ended June 30, 2019.

The 7.0% decrease in average horsepower utilization is primarily due to (1) a

6.2% increase in our average idle fleet from compression units returned to us and (2) a 3.9% decrease in horsepower that is on-contract or pending-contract but not yet active.

Average horsepower utilization decreased to 90.2% during the six months ended June 30, 2020 compared to 94.4% during the six months ended June 30, 2019.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three months ended September 30, 2020 and 2019 was 81.7% and 88.9%, respectively.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the nine months ended September 30, 2020 and 2019 was 85.8% and 89.8%, respectively.

The 1.3% increase in fleet horsepower as of September 30, 2020 compared to September 30, 2019 was attributable to compression units added to our fleet primarily for specific customer demand of our compression services.

The 8.2% decrease in revenue generating horsepower as of September 30, 2020 compared to September 30, 2019 was primarily due to returns of compression units from our customers, which also caused a 12.4% decrease in revenue generating compression units over the same period.

The returns of compression units from our customers were due to a decrease in demand for compression services driven by a decline in U.S.

crude oil and natural gas activity.

The 4.6% and 3.3% increases in average horsepower per revenue generating compression unit during the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019, respectively, were primarily due to a greater number of compression unit returns related to our small horsepower fleet than related to our large horsepower fleet.

The 0.7% decrease in average revenue per revenue generating horsepower per month during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to reduced pricing in the small horsepower portion of our fleet in the current period.

The 1.1% increase in average revenue per revenue generating horsepower per month during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to contracts on new compression units and selective price increases on the existing large horsepower portion of our fleet, partially offset by reduced pricing in the small horsepower portion of our fleet.

Average horsepower utilization decreased to 83.9% during the three months ended September 30, 2020 compared to 93.9% during the three months ended September 30, 2019.

The 10.6% decrease in average horsepower utilization is primarily due to (1) a 9.1% increase in our average idle fleet from compression units returned to us and (2) a 3.4% decrease in horsepower that is on-contract or pending-contract but not yet active.

We believe the decreases in average horsepower utilization are due to a decrease in demand for compression services driven by a decline in U.S.

Average horsepower utilization decreased to 88.1% during the nine months ended September 30, 2020 compared to 94.2% during the nine months ended September 30, 2019.

The 6.5% decrease in average horsepower utilization is primarily due to (1) a 5.6% increase in our average idle fleet from compression units returned to us and (2) a 3.2% decrease in horsepower that is on-contract or pending-contract but not yet active.

The decreases in average horsepower utilization are due to a decrease in demand for compression services driven by a decline in U.S.

crude oil and natural gas activity.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 86.0% and 87.9% during the three and six months ended June 30, 2020, respectively, compared to 89.9% and 90.3% during the three and six months ended June 30, 2019, respectively.

The 4.3% and 2.7% decreases in average horsepower utilization based on revenue generating horsepower during the three and six months ended June 30, 2020, respectively, were both primarily attributable to an increase in our average idle fleet from compression units returned to us.

We believe the decreases in average horsepower utilization based on revenue generating horsepower and fleet horsepower are due to a decrease in demand for compression services driven by a decline in U.S.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 81.7% and 85.8% during the three and nine months ended September 30, 2020, respectively, compared to 88.9% and 89.8% during the three and nine months ended September 30, 2019, respectively.

The 8.1% and 4.5% decreases in average horsepower utilization based on revenue generating horsepower during the three and nine months ended September 30, 2020, respectively, were both primarily attributable to an increase in our average idle fleet from compression units returned to us.

The decreases in average horsepower utilization based on revenue generating horsepower and fleet horsepower are due to a decrease in demand for compression services driven by a decline in U.S.

crude oil and natural gas activity.

Financial Results of Operations

Three months ended June 30, 2020 compared to the three months ended June 30, 2019

Three months ended September 30, 2020 compared to the three months ended September 30, 2019

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

Three Months Ended June 30, Percent

Three Months Ended September 30, Percent

Contract operations $ 156,632 $ 166,197 (5.8) %

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Contract operations revenue.

Contract operations revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was consistent between periods.

Average revenue per revenue generating horsepower per month increased by 1.1% to $16.79 for the three months ended June 30, 2020 compared to $16.60 for the three months ended June 30, 2019, which was offset by a 2.4% decrease in average revenue generating horsepower due to a decline in demand for compression services driven by a decrease in U.S.

The $9.6 million decrease in contract operations revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to a decline in demand for compression services driven by a decrease in U.S.

crude oil and natural gas activity.

from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in their primary term during the period.

This decline in demand resulted in a 6.6% decrease in average revenue generating horsepower and a 0.7% decrease in average revenue per revenue generating horsepower per month which decreased to $16.62 for the three months ended September 30, 2020 compared to $16.73 for the three months ended September 30, 2019.

Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers.

Additionally, 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 their primary term during the period.

Parts and service revenue .

The $1.7 million decrease in parts and service revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers.

The $2.5 million decrease in parts and service revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers.

Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers.

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Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO.

The $3.4 million decrease in related party revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO.

The $2.1 million decrease in related party revenue for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO.

Cost of operations, exclusive of depreciation and amortization .

The $6.3 million decrease in cost of operations, exclusive of depreciation and amortization, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to (1) a $5.2 million decrease in direct expenses, such as parts and fluids expenses, (2) a $2.5 million decrease in direct labor expenses, (3) a $1.2 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue, and (4) a $1.1 million decrease in expenses related to our vehicle fleet.

The decreases in parts, fluids, direct labor and vehicle expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period.

The decreases were offset by (5) a $4.6 million increase in ad valorem tax expense, due primarily to refunds received during the prior period.

The $10.7 million decrease in cost of operations, exclusive of depreciation and amortization, for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to (1) a $3.3 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue, (2) a $3.1 million decrease in direct expenses, such as parts and fluids expenses, (3) a $2.4 million decrease in direct labor expenses, (4) a $0.8 million decrease in expenses related to our vehicle fleet and (5) a $0.4 million decrease in training and other indirect expenses.

The decreases in parts, fluids, direct labor, vehicle expenses, training and other indirect expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period.

Depreciation and amortization expense .

The $3.6 million increase in depreciation and amortization expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily related to compression units placed in service to meet then expected incremental demand for our compression services by new and current customers.

The $2.6 million increase in depreciation and amortization expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily related to compression units placed in service to meet then existing demand for our compression services by new and current customers.

Selling, general and administrative expense .

The $4.1 million increase in selling, general and administrative expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to (1) a $1.9 million increase in the provision for expected credit losses, (2) a $1.9 million increase in severance charges and (3) a $1.9 million increase in unit-based compensation expense.

These increases were partially offset by (4) a $0.9 million decrease in employee-related expenses and (5) a $0.5 million decrease in transaction-related expenses.

The change to the provision for expected credit losses is related to low crude oil prices driven by decreased demand due to the COVID-19 pandemic and the global oversupply of crude oil during the current period.

The increase in severance charges is primarily related to the departure of one of our executives during the current period.

The increase in unit-based compensation expense is primarily due to the increase in our unit price as of June 30, 2020 as compared to March 31, 2020, and the related mark-to-market change to our unit-based compensation liability.

The $3.9 million decrease in selling, general and administrative expense for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily due to (1) a $1.7 million decrease in employee-related expenses, (2) a $0.8 million decrease in unit-based compensation expense and (3) a $0.7 million decrease in other taxes expense due to prior year refunds received during the current period.

The decrease in employee-related expenses is primarily due to reduced headcount during the current period.

The decrease in unit-based compensation expense is primarily due to the overall decrease in our unit price as of September 30, 2020 as compared to June 30, 2020 and September 30, 2019, and the related mark-to-market change to our unit-based compensation liability.

Impairment of compression equipment.

The $3.9 million impairment of compression equipment for the three months ended June 30, 2020 was primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

The $1.7 million impairment of compression equipment for the three months ended September 30, 2020 was primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

Our evaluations determined that due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emissions standards without excessive retrofitting costs, this equipment was unlikely to be accepted by customers under current market conditions.

As a result of our evaluations during the three months ended June 30, 2020, we determined to retire 11 compressor units, for a total of approximately 5,100 horsepower, that were previously used to provide compression services in our business.

No impairment was recorded for the three months ended June 30, 2019 .

As a result of our evaluations during the three months ended September 30, 2020, we determined to retire 16 compressor units, for a total of approximately 3,900 horsepower, that were previously used to provide compression services in our business.

No impairment was recorded for the three months ended September 30, 2019 .

Interest expense, net .

The $0.9 million decrease in interest expense, net for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was attributable to lower weighted average interest rates under the Credit Agreement, offset by increased borrowings under the Credit Agreement.

The weighted average interest rate applicable to borrowings under the Credit Agreement was 3.09% and 5.05% for the three months ended June 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were $455.6 million and $355.4 million for the three months ended June 30, 2020 and 2019, respectively.

Six months ended June 30, 2020 compared to the six months ended June 30, 2019

The $0.6 million decrease in interest expense, net for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily attributable to lower weighted average interest rates under the Credit Agreement, offset by increased borrowings under the Credit Agreement.

The weighted average interest rate applicable to borrowings under the Credit Agreement was 2.90% and 4.81% for the three months ended September 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were $468.9 million and $357.6 million for the three months ended September 30, 2020 and 2019, respectively.

Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019

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

Six Months Ended June 30, Percent

Nine Months Ended September 30, Percent

Contract operations $ 492,419 $ 493,110 (0.1) %

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Selling, general and administrative 45,416 48,836 (7.0) %

Loss (gain) on disposition of assets (1,801) 1,586 *

Gain on disposition of assets (115) (389) (70.4) %

Impairment of compression equipment 5,629 3,234 74.1 %

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Contract operations revenue.

The $8.9 million increase in contract operations revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a 1.9% increase in average revenue per revenue generating horsepower per month which increased to $16.84 for the six months ended June 30, 2020 compared to $16.53 for the six months ended June 30, 2019, partially offset by a 0.6% decrease in average revenue generating horsepower due to a decrease in demand for compression services driven by a decline in U.S.

Contract operations revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was consistent between periods.

Average revenue per revenue generating horsepower per month increased 1.1% to $16.77 for the nine months ended September 30, 2020 compared to $16.59 for the nine months ended September 30, 2019, partially offset by a 2.6% decrease in average revenue generating horsepower due to a decrease in demand for compression services driven by a decline in U.S.

crude oil and natural gas activity.

Our contract operations revenue was not materially impacted by any renegotiations of our contracts with our customers, and average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in their primary term during the period.

Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers.

Parts and service revenue .

The $1.3 million decrease in parts and service revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers.

The $3.8 million decrease in parts and service revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers.

Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers.

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Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO.

The $4.3 million decrease in related party revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO.

The $6.4 million decrease in related party revenue for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO.

Cost of operations, exclusive of depreciation and amortization .

The $4.1 million decrease in cost of operations, exclusive of depreciation and amortization, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to (1) a $3.6 million decrease in direct expenses, such as parts and fluids expenses, (2) a $2.0 million decrease in

direct labor expenses, (3) a $1.6 million decrease in expenses related to our vehicle fleet and (4) a $1.4 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue.

The decreases in parts, fluids, direct labor and vehicle expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period.

The decreases were partially offset by (5) a $5.0 million increase in ad valorem tax expense, due primarily to refunds received during the prior period.

The $14.8 million decrease in cost of operations, exclusive of depreciation and amortization, for the nine months ended September 30, 2020 compared to the nine months ended

September 30, 2019 was primarily due to (1) a $6.8 million decrease in direct expenses, such as parts and fluids expenses, (2) a $4.8 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue,(3) a $4.4 million decrease in direct labor expenses, (4) a $2.4 million decrease in expenses related to our vehicle fleet and (5) a $0.9 million decrease in training and other indirect expenses.

The decreases were offset by (6) a $4.5 million increase in ad valorem tax expense, due primarily to refunds received during the prior period.

Depreciation and amortization expense .

The $3.4 million increase in depreciation and amortization expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily related to compression units placed in service to meet then expected incremental demand for our compression services by new and current customers.

The $6.0 million increase in depreciation and amortization expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily related to compression units placed in service to meet then existing demand for our compression services by new and current customers.

Selling, general and administrative expense .

The $0.5 million increase in selling, general and administrative expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to (1) a $3.4 million increase in the provision for expected credit losses and (2) a $2.0 million increase in severance charges.

These increases were offset by (3) a $3.1 million decrease in unit-based compensation expense, (4) a $0.7 million decrease in third-party professional fees, (5) a $0.6 million decrease in employee-related expenses and (6) a $0.6 million decrease in transaction-related expenses.

The $3.4 million decrease in selling, general and administrative expense for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily due to (1) a $3.9 million decrease in unit-based compensation expense, (2) a $2.3 million decrease in employee-related expenses, (3) a $1.1 million decrease in third-party professional fees and (4) a $0.7 million decrease in other taxes expense.

These decreases were offset by (5) a $3.4 million increase in the provision for expected credit losses and (6) a $1.6 million increase in severance charges.

The decrease in unit-based compensation expense is primarily due to the decrease in our unit price in the current period and the related mark-to-market change to our unit-based compensation liability.

The decreases in employee-related expenses and third-party professional fees are related to reduced headcount and cost savings, respectively.

The decrease in other taxes expense is due to prior year sales tax refunds received in the current period.

The increase in severance charges is primarily related to the departure of one of our executives during the current period.

The decreases in employee-related expenses and professional fees are related to reduced headcount and cost savings, respectively.

Impairment of compression equipment.

The $3.9 million and $3.2 million impairments of compression equipment for the six months ended June 30, 2020 and June 30, 2019, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

The $5.6 million and $3.2 million impairments of compression equipment for the nine months ended September 30, 2020 and September 30, 2019, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

As a result of our evaluations during the six months ended June 30, 2020 and June 30, 2019, we determined to retire 11 and 14 compressor units, respectively, for a total of approximately 5,100 and 4,700 horsepower, respectively, that were previously used to provide compression services in our business.

As a result of our evaluations during the nine months ended September 30, 2020 and September 30, 2019, we determined to retire 27 and 14 compressor units, respectively, for a total of approximately 9,000 and 4,700 horsepower, respectively, that were previously used to provide compression services in our business.

Impairment of goodwill.

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which together indicated the fair value of the reporting unit was less than its carrying amount as of March 31, 2020.

Management determined fair value using a weighted combination of the income approach and the market approach and, as a result, recognized a $619.4 million impairment of goodwill for the six months ended June 30, 2020 .

No impairment was recorded for the six months ended June 30, 2019 .

No impairment was recorded for the nine months ended September 30, 2019 .

Interest expense, net .

The $2.8 million increase in interest expense, net for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a full six months of interest expense incurred in the current period on the Senior Notes 2027 issued in March 2019, which were used to reduce borrowings under the Credit Agreement, partially offset by reduced borrowings and lower weighted average interest rates under the Credit Agreement.

The weighted average interest rate applicable to borrowings under the Credit Agreement was 3.60% and 5.06% for the six months ended June 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were $434.4 million and $610.1 million for the six months ended June 30, 2020 and 2019, respectively.

The $2.1 million increase in interest expense, net for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to a full nine months of interest expense incurred in the current period on the Senior Notes 2027 issued in March 2019, partially offset by reduced borrowings and lower weighted average interest rates under the Credit Agreement.

The weighted average interest rate applicable to borrowings under the Credit Agreement was 3.36% and 4.98% for the nine months ended September 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were $446.0 million and $524.6 million for the nine months ended September 30, 2020 and 2019, respectively.

Other Financial Data

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Other Financial Data:

(1) Three Months Ended June 30, Percent

Change Six Months Ended June 30, Percent

(1) Three Months Ended

September 30, Percent

Change Nine Months Ended

September 30, Percent

2020 2019 2020 2019

15 unchanged sentences

Gross margin.

The $2.3 million decrease in gross margin for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due to (1) a $5.0 million decrease in revenues and (2) a $3.6 million increase in depreciation and amortization, offset by (3) a $6.3 million decrease in cost of operations, exclusive of depreciation and amortization.

The $4.0 million increase in gross margin for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to (1) a $4.1 million decrease in cost of operations, exclusive of depreciation and amortization and (2) a $3.2 million increase in revenues, offset by (3) a $3.4 million increase in depreciation and amortization.

The $5.9 million, or 9.8%, decrease in gross margin for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to (1) a $14.1 million decrease in revenues and (2) a $2.6 million increase in depreciation and amortization, offset by (3) a $10.7 million decrease in cost of operations, exclusive of depreciation and amortization.

The $2.0 million, or 1.1%, decrease in gross margin for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to (1) a $10.9 million decrease in revenues and (2) a $6.0 million increase in depreciation and amortization, offset by (3) a $14.8 million decrease in cost of operations, exclusive of depreciation and amortization.

Adjusted gross margin.

The $1.3 million increase in Adjusted gross margin for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was due to a $6.3 million decrease in cost of operations, exclusive of depreciation and amortization, offset by a $5.0 million decrease in revenues.

The $7.4 million increase in Adjusted gross margin for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was due to a $4.1 million decrease in cost of operations, exclusive of depreciation and amortization, and a $3.2 million increase in revenues.

The $3.4 million, or 2.9%, decrease in Adjusted gross margin for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was due to a $14.1 million decrease in revenues, offset by a $10.7 million decrease in cost of operations, exclusive of depreciation and amortization.

The $4.0 million, or 1.1%, increase in Adjusted gross margin for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was due to a $14.8 million decrease in cost of operations, exclusive of depreciation and amortization, offset by a $10.9 million decrease in revenues.

Adjusted EBITDA.

The $0.8 million, or 0.7%, increase in Adjusted EBITDA for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to a $1.3 million increase in Adjusted gross margin, partially offset by a $0.9 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $5.6 million, or 2.7%, increase in Adjusted EBITDA for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a $7.4 million increase in Adjusted gross margin, partially offset by a $2.2 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $4.6 million, or 8.6%, increase in DCF for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to (1) a $3.5 million decrease in maintenance capital expenditures, (2) a $1.3 million increase in Adjusted gross margin and (3) a $0.8 million decrease in cash interest expense, net.

These changes were partially offset by (4) a $0.9 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $4.5 million, or 4.1%, increase in DCF for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to (1) a $7.4 million increase in Adjusted gross margin and (2) a $1.6 million decrease

in maintenance capital expenditures.

These changes were partially offset by (3) a $2.5 million increase in cash interest expense, net, and (4) a $2.2 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $0.4 million, or 0.4%, decrease in Adjusted EBITDA for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily attributable to a $3.4 million decrease in Adjusted gross margin, partially offset by a $2.9 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $5.2 million, or 1.7%, increase in Adjusted EBITDA for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to a $4.0 million increase in Adjusted gross margin and a $0.8 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $2.0 million, or 3.6%, increase in DCF for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was primarily attributable to (1) a $2.9 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses, (2) a $2.3 million decrease in maintenance capital expenditures, and (3) a $0.8 million decrease in cash interest expense, net.

These changes were partially offset by (4) a $3.4 million decrease in Adjusted gross margin.

The $6.5 million, or 3.9%, increase in DCF for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to (1) a $4.0 million increase in Adjusted gross margin and (2) a $3.9 million decrease in maintenance capital expenditures and (3) a $0.8 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

These changes were partially offset by (4) a $1.6 million increase in cash interest expense, net.

Coverage Ratios .

The increase in DCF Coverage Ratio and Cash Coverage Ratio for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to the increase in DCF, offset by an increase in cash distributions paid on common units in the current period due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019.

The decrease in DCF Coverage Ratio and Cash Coverage Ratio for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to an increase in cash distributions paid on common units in the current period due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019, offset by an increase in DCF.

The increase in DCF Coverage Ratio and Cash Coverage Ratio for the three months ended September 30, 2020 compared to the three months ended September 30, 2019 was attributable to the increase in DCF.

DCF Coverage Ratio and Cash Coverage Ratio were consistent for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

An increase in cash distributions paid on common units in the current period due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019 were offset by an increase in DCF.

Liquidity and Capital Resources

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Over the long term, we expect that our maintenance capital expenditure requirements will continue to increase as the overall size and age of our fleet increases.

Our aggregate maintenance capital expenditures for the six months ended June 30, 2020 and 2019 were $13.2 million and $14.8 million, respectively.

Our aggregate maintenance capital expenditures for the nine months ended September 30, 2020 and 2019 were $17.9 million and $21.8 million, respectively.

We currently plan to spend approximately $25.0 million in maintenance capital expenditures for the year 2020, including parts consumed from inventory.

Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between $90.0 million and $100.0 million in expansion capital expenditures for the year 2020.

Our expansion capital expenditures for the six months ended June 30, 2020 and 2019 were $69.3 million and $84.0 million, respectively.

As of June 30, 2020, we had binding commitments to purchase $18.3 million of additional compression units and serialized parts, all of which we expect to be delivered during the remainder of 2020.

The following table summarizes our sources and uses of cash for the six months ended June 30, 2020 and 2019 (in thousands):

Six Months Ended June 30,

Our expansion capital expenditures for the nine months ended September 30, 2020 and 2019 were $84.6 million and $136.9 million, respectively.

As of September 30, 2020, we had binding commitments to purchase $6.3 million of additional compression units, which we expect to be delivered in 2020.

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2020 and 2019 (in thousands):

Nine Months Ended September 30,

Net cash provided by operating activities $ 195,651 $ 208,880

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Net cash provided by operating activities .

The $0.2 million decrease in net cash provided by operating activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to a $4.5 million increase in net income, as adjusted for non-cash items, offset by changes in working capital.

The $13.2 million decrease in net cash provided by operating activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to a $5.0 million increase in net income, as adjusted for non-cash items, offset by changes in working capital.

Net cash used in investing activities .

The $12.2 million decrease in net cash used in investing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to (1) a $20.4 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, offset by (2) a $6.6 million decrease in proceeds from disposition of property and equipment and (3) a $1.7 million decrease in proceeds from insurance recovery.

The $14.0 million decrease in net cash used in investing activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to (1) a $36.3 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, offset by (2) a $19.8 million decrease in proceeds from disposition of property and equipment and (3) a $2.4 million decrease in proceeds from insurance recovery.

Net cash used in financing activities .

The $11.9 million increase in net cash used in financing activities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily attributable to (1) an $18.7 million decrease in net borrowings and (2) a $7.0 million increase in cash distributions paid on common units primarily due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019.

These changes were partially offset by a decrease in financing costs of $13.2 million due to the issuance of the Senior Notes 2027 in March 2019.

The $0.7 million increase in net cash used in financing activities for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 was primarily attributable to (1) an $0.8 million decrease in net borrowings and (2) a $10.4 million increase in cash distributions paid on common units primarily due to the conversion of 6,397,965 Class B Units, which did not participate in distributions, to common units on a one-for-one basis on July 30, 2019.

These changes were partially offset by a decrease in financing costs of $9.7 million due primarily to the issuance of the Senior Notes 2027 in March 2019.

Revolving Credit Facility

As of June 30, 2020, we were in compliance with all of our covenants under the Credit Agreement.

As of June 30, 2020, we had outstanding borrowings under the Credit Agreement of $447.8 million, $1.2 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $151.1 million.

As of July 30, 2020, we had outstanding borrowings under the Credit Agreement of $436.0 million.

As of September 30, 2020, we were in compliance with all of our covenants under the Credit Agreement.

As of September 30, 2020, we had outstanding borrowings under the Credit Agreement of $496.9 million, $1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $411.8 million.

As of October 29, 2020, we had outstanding borrowings under the Credit Agreement of $466.0 million.

On the Amendment Effective Date, we amended the Credit Agreement to, among other items, increase the maximum funded debt to EBITDA ratio to (i) 5.75 to 1.00 for the fiscal quarters ending September 30, 2020 and December 31, 2020, (ii) 5.50 to 1.00 for the fiscal quarters ending March 31, 2021 and June 30, 2021 and (iii) 5.25 to 1.00 for the fiscal quarters ending September 30, 2021 and December 31, 2021 (reverting back to 5.00 to 1.00 for each fiscal quarter thereafter).

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For a more detailed description of the Credit Agreement, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report and Note 10 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2019 Annual Report.

As of June 30, 2020, we had $725.0 million and $750.0 million outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively.

As of September 30, 2020, we had $725.0 million and $750.0 million aggregate principal amount outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively.

The Senior Notes 2026 are due on April 1, 2026 and accrue interest at the rate of 6.875% per year.

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For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report and Note 10 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2019 Annual Report.

During the six months ended June 30, 2020, distributions of $0.9 million were reinvested under the DRIP resulting in the issuance of 96,592 common units.

During the nine months ended September 30, 2020, distributions of $1.4 million were reinvested under the DRIP resulting in the issuance of 140,318 common units.

Such distributions are treated as non-cash transactions in the accompanying unaudited condensed consolidated statements of cash flows included under Part I, Item 1 “Financial Statements” of this report.

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The following table reconciles Adjusted gross margin to gross margin, its most directly comparable 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,

2020 2019 2020 2019

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We define EBITDA as net income (loss) before net interest expense, depreciation and amortization expense, and income tax expense.

We define Adjusted EBITDA as EBITDA plus impairment of compression equipment, impairment of goodwill, interest income on capital lease, unit-based compensation expense, severance charges, certain transaction fees, loss (gain) on disposition of assets and other.

We define Adjusted EBITDA as EBITDA plus impairment of compression equipment, impairment of goodwill, interest income on capital lease, unit-based compensation expense, severance charges, certain transaction expenses, loss (gain) on disposition of assets and other.

We view Adjusted EBITDA as one of management’s primary tools for evaluating our results of operations, and we track this item on a monthly basis both as an absolute amount and as a percentage of revenue compared to the prior month, year-to-date, prior year and budget.

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The following table reconciles Adjusted EBITDA to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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______________________

(1) For the three and six months ended June 30, 2020, unit-based compensation expense included $0.9 million and $1.8 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.5 million each period related to the cash portion of any settlement of phantom unit awards upon vesting.

For the three and six months ended June 30, 2019, unit-based compensation expense included $0.6 million and $1.3 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.3 million and $0.6 million, respectively, related to the cash portion of any settlement of phantom unit awards upon vesting.

(1) For the three and nine months ended September 30, 2020, unit-based compensation expense included $0.7 million and $2.5 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.0 million and $0.5 million, respectively, related to the cash portion of any settlement of phantom unit awards upon vesting.

For the three and nine months ended September 30, 2019, unit-based compensation expense included $0.6 million and $1.9 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.1 million and $0.6 million, respectively, related to the cash portion of any settlement of phantom unit awards upon vesting.

The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability.

(2) Represents certain expenses related to potential and completed transactions and other items.

We believe it is useful to investors to exclude these fees.

We believe it is useful to investors to exclude these expenses.

(3) Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows.

(4) For further discussion of our goodwill impairment recorded for the six months ended June 30, 2020, see “Financial Results of Operations” above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report.

(4) For further discussion of our goodwill impairment recorded for the nine months ended September 30, 2020, see “Financial Results of Operations” above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report.

Distributable Cash Flow

We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense, depreciation and amortization expense, unit-based compensation expense, impairment of compression equipment, impairment of goodwill, certain transaction fees, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery and other, less distributions on Preferred Units and maintenance capital expenditures.

We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense, depreciation and amortization expense, unit-based compensation expense, impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery and other, less distributions on Preferred Units and maintenance capital expenditures.

We believe DCF is an important measure of operating performance because it allows management, investors and others to compare basic cash flows we generate (after distributions on the Preferred Units but prior to any retained cash reserves established by the General Partner and the effect of the DRIP) to the cash distributions we expect to pay our common unitholders.

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The following table reconciles DCF to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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______________________

The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability.

(2) Represents certain expenses related to potential and completed transactions and other items.

We believe it is useful to investors to exclude these fees.

We believe it is useful to investors to exclude these expenses.

(3) Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows.

(5) Reflects actual maintenance capital expenditures for the period presented.

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The following table summarizes certain coverage ratios for the periods presented (dollars in thousands):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2020 2019 2020 2019

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(2) Represents distributions to holders enrolled in the DRIP as of the record date.

The amounts for the three and six months ended June 30, 2020 are based on an estimate as of the record date.

(3) Represents cash distributions declared for common units not participating in the DRIP.

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We do not intend to hedge our indirect exposure to fluctuating commodity prices.

A one percent decrease in average revenue generating horsepower for the six months ended June 30, 2020 would result in an annual decrease of approximately $6.6 million in revenue and $4.5 million in Adjusted gross margin.

A one percent decrease in average revenue generating horsepower for the nine months ended September 30, 2020 would result in an annual decrease of approximately $6.6 million in revenue and $4.5 million in Adjusted gross margin.

Adjusted gross margin is a non-GAAP financial measure.

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We are exposed to market risk due to variable interest rates under our financing arrangements.

As of June 30, 2020, we had $447.8 million of variable-rate indebtedness outstanding at a weighted average interest rate of 2.77%.

A one percent increase or decrease in the effective interest rate on our variable-rate outstanding debt as of June 30, 2020 would result in an annual increase or decrease in our interest expense of approximately $4.5 million.

As of September 30, 2020, we had $496.9 million of variable-rate indebtedness outstanding at a weighted average interest rate of 3.03%.

A one percent increase or decrease in the effective interest rate on our variable-rate outstanding debt as of September 30, 2020 would result in an annual increase or decrease in our interest expense of approximately $5.0 million.

For further information regarding our exposure to interest rate fluctuations on our debt obligations, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 “Financial Statements” of this report.

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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