What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-03 compared with 2021-05-04 · 161 added, 88 removed, 255 unchanged (49% of the section changed)

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such restrictions are designed to protect public health but also have the effect of reducing demand for crude oil and natural gas;

• the severity and duration of world health events, including the COVID-19 outbreak, related economic repercussions, actions taken by governmental authorities and other third parties in response to the pandemic and the resulting disruption in the oil and gas industry and negative impact on demand for oil and gas, which continues to negatively impact our business;

• the severity and duration of world health events, including the COVID-19 outbreak, related economic repercussions, actions taken by governmental authorities and other third parties in response to the pandemic, which has caused and may in the future cause disruptions in the oil and gas industry and negatively impact demand for oil and gas;

• changes in general economic conditions and changes in economic conditions of the crude oil and natural gas industries specifically, including the ability of members of the Organization of the Petroleum Exporting Countries (“OPEC”) and Russia (together with OPEC and other allied producing countries, “OPEC+”) to agree on and comply with supply limitations;

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New factors emerge from time to time, and it is not possible for us to predict all such factors.

Should one or more of the risks or uncertainties described in this Quarterly Report

occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.

Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.

All forward-looking statements included in this report are based on information available to us on the date of this report and speak only as of the date of this report.

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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 March 31, Percent

Three Months Ended June 30, Percent

Change Six Months Ended June 30, Percent

2021 2020 2021 2020

Fleet horsepower (at period end) (1) 3,686,584 3,718,092 (0.8) % 3,686,584 3,718,092 (0.8) %

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(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 March 31, 2021 and 2020 was 80.3% and 89.5%, respectively.

Horsepower utilization based on revenue generating horsepower and fleet horsepower as of June 30, 2021 and 2020 was 79.0% and 84.1%, 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 March 31, 2021 and 2020 was 80.4% and 89.8%, respectively.

The 0.4% increase in fleet horsepower as of March 31, 2021 compared to March 31, 2020 was primarily attributable to compression units added to our fleet primarily for specific customer demand of our compression services, partially offset by compression units impaired since the previous period.

The 9.9% decrease in revenue generating horsepower as of March 31, 2021 compared to March 31, 2020 was primarily due to returns of compression units from our customers, which also caused a 12.7% decrease in revenue generating compression units over the same period.

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

crude oil and natural gas activity since the previous period.

The 3.7% increase in average horsepower per revenue generating compression unit during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was driven primarily by the composition of compression unit returns.

The 1.7% decrease in average revenue per revenue generating horsepower per month during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to reduced pricing in our small horsepower fleet.

Average horsepower utilization decreased to 83.1% during the three months ended March 31, 2021 compared to 92.5% during the three months ended March 31, 2020.

The 10.2% decrease in average horsepower utilization is primarily due to an increase in our average idle horsepower from compression units returned to us.

The increase in average idle horsepower is primarily due to a decrease in demand for compression services driven by decreased U.S.

crude oil and natural gas activity since the previous period.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 80.4% during the three months ended March 31, 2021 compared to 89.8% during the three months ended March 31, 2020.

The 10.5% decrease in average horsepower utilization based on revenue generating horsepower was primarily attributable to an increase in our average idle horsepower from compression units returned to us.

The increase in average idle horsepower is primarily due to a decrease in demand for compression services driven by decreased U.S.

crude oil and natural gas activity since the previous period.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three months ended June 30, 2021 and 2020 was 79.6% and 86.0%, respectively.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the six months ended June 30, 2021 and 2020 was 80.0% and 87.9%, respectively.

The 0.8% decrease in fleet horsepower as of June 30, 2021 compared to June 30, 2020 was primarily due to (i) compression units impaired since the previous period, (ii) the exercise of a lease purchase option on certain compression units by a customer during the current period, partially offset by (iii) compression units added to our fleet primarily for specific customer demand for our compression services.

The 1.2% decrease in total available horsepower as of June 30, 2021 compared to June 30, 2020 was primarily due to compression units impaired since the previous period and the exercise of a lease purchase option on certain compression units by a customer during the current period.

The 6.8% decrease in revenue generating horsepower as of June 30, 2021 compared to June 30, 2020 was primarily due to returns of compression units from our

customers, which also caused a 6.5% decrease in revenue generating compression units over the same period.

The returns of compression units from our customers were primarily due to continued capital discipline and optimization of existing compressions service requirements by our customers.

The 1.4% and 1.5% decreases in average revenue per revenue generating horsepower per month during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, respectively, were primarily due to reduced pricing in our small horsepower fleet.

The 0.7% and 2.2% increases in average horsepower per revenue generating compression unit during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020, respectively, were driven primarily by the composition of compression unit returns.

Average horsepower utilization decreased to 82.4% and 82.7% during the three and six months ended June 30, 2021, respectively, compared to 88.0% and 90.2% during the three and six months ended June 30, 2020, respectively.

The 6.4% and 8.3% decreases in average horsepower utilization were primarily due to an increase in our average idle horsepower from compression units returned to us.

The increases in average idle horsepower are primarily due to continued capital discipline and optimization of existing compressions service requirements by our customers during the three and six months ended June 30, 2021, as well as decreased U.S.

crude oil and natural gas activity, as evidenced by a lower average rig count in the U.S.

during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 79.6% and 80.0% during the three and six months ended June 30, 2021, respectively, compared to 86.0% and 87.9% during the three and six months ended June 30, 2020, respectively.

The 7.4% and 9.0% decreases in average horsepower utilization based on revenue generating horsepower and fleet horsepower were primarily due to an increase in our average idle horsepower from compression units returned to us.

crude oil and natural gas activity, as evidenced by a lower average rig count in the U.S.

during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

Financial Results of Operations

Three months ended March 31, 2021 compared to the three months ended March 31, 2020

Three months ended June 30, 2021 compared to the three months ended June 30, 2020

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

Three Months Ended March 31, Percent

Three Months Ended June 30, Percent

Contract operations $ 151,800 $ 162,993 (6.9) %

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Impairment of compression equipment 2,403 3,923 (38.7) %

Total costs and expenses 121,417 133,757 (9.2) %

Operating income 35,145 34,894 0.7 %

Other income (expense):

Interest expense, net (32,350) (31,815) 1.7 %

Other 45 24 *

Total other expense (32,305) (31,791) 1.6 %

Net income before income tax expense 2,840 3,103 (8.5) %

Income tax expense 152 419 (63.7) %

Net income $ 2,688 $ 2,684 0.1 %

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* Not meaningful

Contract operations revenue.

The $11.2 million decrease in contract operations revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compressions service requirements by our customers since the previous period.

These factors resulted in a 7.7% decrease in average revenue generating horsepower and a 1.4% decrease in average revenue per revenue generating horsepower per month which decreased to $16.55 for the three months ended June 30, 2021 compared to $16.79 for the three months ended June 30, 2020.

These decreases were partially offset by compression units moving from standby to full billing rate since the previous period.

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 $0.9 million decrease in parts and service revenue for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 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.

Related party revenue .

Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ET and was consistent period over period.

Cost of operations, exclusive of depreciation and amortization .

The $4.4 million decrease in cost of operations, exclusive of depreciation and amortization, for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to (i) a $4.5 million decrease in non-income taxes, primarily due to sales tax refunds received in the current period related to prior periods, (ii) a $1.7 million decrease in direct labor expenses, which were primarily driven by the decrease in average revenue generating horsepower and reduced headcount in the current period, (iii) a $0.9 million decrease in retail parts and services expenses, which had a corresponding decrease in parts and service revenue, partially offset by (iv) a $1.4 million increase in direct expenses, primarily related to higher fluids supplier pricing, and (v) a $0.9 million increase in outside maintenance costs due to greater use of third-party labor during the current period.

Depreciation and amortization expense .

The $1.1 million decrease in depreciation and amortization expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to lower vehicle depreciation related to a decrease in our vehicle fleet in the current period.

Selling, general and administrative expense .

The $5.0 million decrease in selling, general and administrative expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to a $2.2 million decrease in the provision for expected credit losses and a $1.8 million decrease in severance charges primarily related to the departure of one of our executives during the prior period.

The change to the provision for expected credit losses is related to improved market conditions for customers due to a recovery in crude oil prices in the current period as compared to the prior period, where we made provision for the potential negative impact to our customers of low crude oil prices driven by decreased demand due to the COVID-19 pandemic and the global oversupply of crude oil during that time.

Gain on disposition of assets.

The $0.3 million increase in gain on disposition of assets for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the current period.

Impairment of compression equipment.

The $2.4 million and $3.9 million impairments of compression equipment for the three months ended June 30, 2021 and 2020, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

The primary causes for these impairments were:

(i) units were not considered marketable in the foreseeable future, (ii) units were subject to excessive maintenance costs or (iii) units were unlikely to be accepted by customers due to certain performance characteristics of the unit, such as the inability to meet current quoting criteria without excessive retrofitting costs.

These compression units were written down to their respective estimated salvage values, if any.

As a result of our evaluation during the three months ended June 30, 2021 and 2020, we determined to retire 10 and 11 compressor units, respectively, for a total of approximately 4,000 and 5,100 horsepower, respectively, that were previously used to provide compression services in our business.

Interest expense, net .

The $0.5 million increase in interest expense, net for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily attributable to increased borrowings under the Credit Agreement.

Average outstanding borrowings under the Credit Agreement were $494.4 million and $455.6 million for the three months ended June 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 3.05% and 3.09% for the three months ended June 30, 2021 and 2020, respectively.

Income tax expense.

The $0.3 million decrease in income tax expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily related to deferred taxes associated with the Texas Margin Tax.

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

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

Six Months Ended June 30, Percent

Contract operations $ 304,325 $ 335,787 (9.4) %

Parts and service 3,856 5,784 (33.3) %

Related party 5,894 6,079 (3.0) %

Total revenues 314,075 347,650 (9.7) %

Costs and expenses:

Cost of operations, exclusive of depreciation and amortization 94,232 109,133 (13.7) %

Depreciation and amortization 120,257 119,100 1.0 %

Selling, general and administrative 29,088 32,700 (11.0) %

Gain on disposition of assets (2,360) (1,801) 31.0 %

Impairment of compression equipment 4,953 3,923 26.3 %

Impairment of goodwill — 619,411 *

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Contract operations revenue.

The $20.3 million decrease in contract operations revenue for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to a decrease in demand for compression services driven by decreased U.S.

crude oil and natural gas activity since the previous period.

This decline in demand resulted in a 9.8% decrease in average revenue generating horsepower and a 1.7% decrease in average revenue per revenue generating horsepower per month which decreased to $16.60 for the three months ended March 31, 2021 compared to $16.89 for the three months ended March 31, 2020.

The $31.5 million decrease in contract operations revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compressions service requirements by our customers since the previous period, as well as decreased U.S.

crude oil and natural gas activity, as evidenced by the lower average rig count in the U.S.

during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.

These factors resulted in an 8.8% decrease in average revenue generating horsepower and a 1.5% decrease in average revenue per revenue generating horsepower per month which decreased to $16.58 for the six months ended June 30, 2021 compared to $16.84 for the six months ended June 30, 2020.

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

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Parts and service revenue .

The $1.0 million decrease in parts and service revenue for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 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 $1.9 million decrease in parts and service revenue for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 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.

Related party revenue .

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

Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ET and was consistent period over period.

Cost of operations, exclusive of depreciation and amortization .

The $10.5 million decrease in cost of operations, exclusive of depreciation and amortization, for the three months ended March 31, 2021 compared to the three months ended March 31,

2020 was primarily due to (1) a $4.2 million decrease in direct labor expenses, (2) a $3.8 million decrease in direct expenses, such as parts and fluids expenses, (3) a $0.9 million decrease in ad valorem tax expenses, (4) a $0.7 million decrease in retail parts and services expenses, which had a corresponding decrease in parts and service revenue, and (5) a $0.6 million decrease in training and other indirect expenses.

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

The $14.9 million decrease in cost of operations, exclusive of depreciation and amortization, for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to (i) a $5.9 million decrease in direct labor expenses, (ii) a $5.3 million decrease in non-income taxes, primarily due to sales tax refunds received in the current period related to prior periods, (iii) a $2.3 million decrease in direct expenses, such as fluids and parts, (iv) a $1.6 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue, and (v) a $0.9 million decrease in training and other indirect expenses.

The decreases in direct labor, fluids and parts, training and other indirect 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 a $1.1 million increase in outside maintenance expenses due to greater use of third-party labor during the current period.

Depreciation and amortization expense .

The $2.3 million increase in depreciation and amortization expense for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily related to compression unit overhauls and new compression units placed in service throughout 2020 to meet then existing demand by customers.

The $1.2 million increase in depreciation and amortization expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily related to compression unit overhauls and new compression units placed in service throughout 2020 to meet then existing demand by customers, partially offset by lower vehicle depreciation related to a decrease in our vehicle fleet in the current period.

Selling, general and administrative expense .

The $1.4 million increase in selling, general and administrative expense for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to (1) a $6.0 million increase in unit-based compensation expense, partially offset by (2) a $2.8 million decrease in the provision for expected credit losses and (3) a $1.5 million decrease in employee-related expenses.

The increase in unit-based compensation expense is primarily due to the overall increase in our unit price as of March 31, 2021 as compared to our unit price as of March 31, 2020, which experienced a sharp decrease driven by the decline in crude oil prices caused by the decreased demand due to the COVID-19 pandemic and the global oversupply of crude oil during that period, and the related mark-to-market change to our unit-based compensation liability.

The $3.6 million decrease in selling, general and administrative expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to (i) a $5.0 million decrease in the provision for expected credit losses, (ii) a $2.0 million decrease in severance charges primarily due to the departure of one of our executives during the prior period, and (iii) a $1.7 million decrease in employee-related expenses.

These decreases were partially offset by a $5.7 million increase in unit-based compensation expense.

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

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

The increase in unit-based compensation expense is primarily due to the overall increase in our unit price as of June 30, 2021 as compared to June 30, 2020, and the related mark-to-market change to our unit-based compensation liability.

Gain on disposition of assets.

The $0.6 million increase in gain on disposition of assets for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the current period.

Impairment of compression equipment.

The $2.6 million impairment of compression equipment for the three months ended March 31, 2021 was primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

The $5.0 million and $3.9 million impairments of compression equipment for the six months ended June 30, 2021 and 2020, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions.

The primary causes for these impairments were:

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These compression units were written down to their respective estimated salvage values, if any.

As a result of our evaluation during the three months ended March 31, 2021, we determined to retire 12 compressor units, for a total of approximately 5,600 horsepower, that were previously used to provide compression services in our business.

No impairment was recorded for the three months ended March 31, 2020 .

As a result of our evaluations during the six months ended June 30, 2021 and 2020, we determined to retire 22 and 11 compressor units, respectively, for a total of approximately 9,600 and 5,100 horsepower, respectively, that were previously used to provide compression services in our business.

Impairment of goodwill.

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Interest expense, net .

The $0.2 million decrease in interest expense, net for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 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 3.06% and 4.10% for the three months ended March 31, 2021 and 2020, respectively, and average outstanding borrowings under the Credit Agreement were $482.4 million and $414.2 million for the three months ended March 31, 2021 and 2020, respectively.

The $0.3 million increase in interest expense, net for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to increased borrowings under the Credit Agreement, partially offset by lower weighted average interest rates under the Credit Agreement.

Average outstanding borrowings under the Credit Agreement were $488.5 million and $434.4 million for the six months ended June 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 3.06% and 3.60% for the six months ended June 30, 2021 and 2020, respectively.

Income tax expense.

The $0.4 million decrease in income tax expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily related to deferred taxes associated with the Texas Margin Tax.

Other Financial Data

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Other Financial Data:

(1) Three Months Ended March 31, Percent

(1) Three Months Ended June 30, Percent

Change Six Months Ended June 30, Percent

2021 2020 2021 2020

Gross margin $ 51,731 $ 58,345 (11.3) % $ 99,586 $ 119,417 (16.6) %

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DCF $ 52,536 $ 58,686 (10.5) % $ 105,116 $ 113,388 (7.3) %

DCF Coverage Ratio 1.03 x 1.08 x (4.6) %

Cash Coverage Ratio 1.04 x 1.09 x (4.6) %

DCF Coverage Ratio 1.03 x 1.15 x (10.4) % 1.03 x 1.12 x (8.0) %

Cash Coverage Ratio 1.04 x 1.17 x (11.1) % 1.04 x 1.13 x (8.0) %

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Definitions of each measure, as well as reconciliations of each measure to its most directly comparable financial measure(s) calculated and presented in accordance with GAAP, can be found below under the caption “Non-GAAP Financial Measures.”

(2) Adjusted gross margin was previously presented as gross operating margin.

The definition of Adjusted gross margin is identical to the definition of gross operating margin previously presented.

For the definition of Adjusted gross margin, please refer to the “Non-GAAP Financial Measures” section below.

(2) Adjusted gross margin percentage and Adjusted EBITDA percentage are calculated as a percentage of revenue.

Gross margin.

The $13.2 million decrease in gross margin for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was due to (1) a $21.5 million decrease in revenues and (2) a $2.3 million increase in depreciation and amortization, offset by (3) a $10.5 million decrease in cost of operations, exclusive of depreciation and amortization.

The $6.6 million decrease in gross margin for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was due to (i) a $12.1 million decrease in revenues, offset by (ii) a $4.4 million decrease in cost of operations, exclusive of depreciation and amortization, and (iii) a $1.1 million decrease in depreciation and amortization.

The $19.8 million decrease in gross margin for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to (i) a $33.6 million decrease in revenues and (ii) a $1.2 million increase in depreciation and amortization, offset by (iii) a $14.9 million decrease in cost of operations, exclusive of depreciation and amortization.

Adjusted gross margin.

The $10.9 million decrease in Adjusted gross margin for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was due to a $21.5 million decrease in revenues, offset by a $10.5 million decrease in cost of operations, exclusive of depreciation and amortization.

The $7.7 million decrease in Adjusted gross margin for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was due to a $12.1 million decrease in revenues, offset by a $4.4 million decrease in cost of operations, exclusive of depreciation and amortization.

The $18.7 million decrease in Adjusted gross margin for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was due to a $33.6 million decrease in revenues, offset by a $14.9 million decrease in cost of operations, exclusive of depreciation and amortization.

Adjusted EBITDA.

The $6.6 million decrease in Adjusted EBITDA for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to a $10.9 million decrease in Adjusted gross margin, partially offset by a $4.5 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense and severance charges.

The $2.1 million decrease in DCF for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to (1) a $10.9 million decrease in Adjusted gross margin, partially offset by (2) a $4.5 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense and severance charges, and (3) a $4.3 million decrease in maintenance capital expenditures.

The $5.5 million decrease in Adjusted EBITDA for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to a $7.7 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 and severance charges.

The $12.1 million decrease in Adjusted EBITDA for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to a $18.7 million decrease in Adjusted gross margin, partially offset by a $7.3 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense and severance charges.

The $6.2 million decrease in DCF for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to (i) a $7.7 million decrease in Adjusted gross margin and (ii) a $0.6 million increase in maintenance capital expenditures, partially offset by (iii) a $2.9 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense and severance charges.

The $8.3 million decrease in DCF for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to (i) a $18.7 million decrease in Adjusted gross margin, partially offset by (ii) a $7.3 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense and severance charges, and (iii) a $3.7 million decrease in maintenance capital expenditures.

Coverage Ratios .

The decrease in DCF Coverage Ratio and Cash Coverage Ratio for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to the decrease in DCF.

The decreases in DCF Coverage Ratio and Cash Coverage Ratio for the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 was primarily due to the decrease in DCF.

Liquidity and Capital Resources

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We typically utilize cash generated by operating activities and, where necessary, borrowings under the Credit Agreement to service our debt, fund working capital, fund our estimated expansion capital expenditures, fund our maintenance capital expenditures and pay distributions to our unitholders.

In response to current market conditions, we have reduced our planned

capital spending significantly for 2021 compared to previous years.

In response to current market conditions, we have reduced our planned capital spending significantly for 2021 compared to previous years.

However, if market conditions worsen, this could further reduce our cash generated by operating activities and increase our leverage.

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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 three months ended March 31, 2021 and 2020 were $4.5 million and $8.8 million, respectively.

Our aggregate maintenance capital expenditures for the six months ended June 30, 2021 and 2020 were $9.5 million and $13.2 million, respectively.

We currently plan to spend approximately $22.0 million in maintenance capital expenditures for the year 2021, including parts consumed from inventory.

Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between $30.0 million and $40.0 million in expansion capital expenditures for the year 2021.

Our expansion capital expenditures for the three months ended March 31, 2021 and 2020 were $4.2 million and $46.5 million, respectively.

The following table summarizes our sources and uses of cash for the three months ended March 31, 2021 and 2020 (in thousands):

Three Months Ended March 31,

Our expansion capital expenditures for the six months ended June 30, 2021 and 2020 were $12.4 million and $69.3 million, respectively.

The following table summarizes our sources and uses of cash for the six months ended June 30, 2021 and 2020 (in thousands):

Six Months Ended June 30,

Net cash provided by operating activities $ 139,071 $ 147,432

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Net cash provided by operating activities .

The $10.5 million decrease in net cash provided by operating activities for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to an $8.7 million decrease in net income, as adjusted for non-cash items, and changes in working capital.

The $8.4 million decrease in net cash provided by operating activities for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was attributable to a $14.0 million decrease in net income, as adjusted for non-cash items, and changes in working capital.

Net cash used in investing activities .

The $37.9 million decrease in net cash used in investing activities for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to a $39.1 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, partially offset by a $1.5 million decrease in proceeds received from disposition of property and equipment.

The $53.5 million decrease in net cash used in investing activities for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to a $52.0 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs and a $1.3 million increase in proceeds received from disposition of property and equipment.

Net cash used in financing activities .

The $27.3 million increase in net cash used in financing activities for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily attributable to net borrowings of $28.9 million for the three months ended March 31, 2021 compared to $56.6 million for the three months ended March 31, 2020.

The $45.2 million increase in net cash used in financing activities for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily attributable to net payments of $0.4 million for the six months ended June 30, 2021 compared to net borrowings of $45.1 million for the six months ended June 30, 2020 under the Credit Agreement.

Revolving Credit Facility

As of March 31, 2021, we were in compliance with all of our covenants under the Credit Agreement.

As of March 31, 2021, we had outstanding borrowings under the Credit Agreement of $502.7 million, $1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $203.9 million.

As of April 29, 2021, we had outstanding borrowings under the Credit Agreement of $479.2 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) 5.50 to 1.00 for the fiscal quarters ending March 31, 2021 and June 30, 2021 and (ii) 5.25 to 1.00 for the fiscal quarters ending September 30, 2021 and December 31, 2021 (reverting to 5.00 to 1.00 for each fiscal quarter thereafter).

As of June 30, 2021, we were in compliance with all of our covenants under the Credit Agreement.

As of June 30, 2021, we had outstanding borrowings under the Credit Agreement of $473.4 million, $1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $217.4 million.

As of July 29, 2021, we had outstanding borrowings under the Credit Agreement of $453.1 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) 5.50 to 1.00 for the fiscal quarter ending June 30, 2021 and (ii) 5.25 to 1.00 for the fiscal quarters ending September 30, 2021 and December 31, 2021 (reverting to 5.00 to 1.00 for each fiscal quarter thereafter).

In addition, the amendment provides that the 0.5 increase in maximum funded debt to EBITDA ratio applicable to certain future acquisitions (for the six consecutive month period in which any such acquisition occurs) is only available beginning with the fiscal quarter ending September 30, 2021, and in any case shall not increase the maximum funded debt to EBITDA ratio above 5.50 to 1.00.

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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 2020 Annual Report.

As of March 31, 2021, we had $725.0 million and $750.0 million aggregate principal amount outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively.

As of June 30, 2021, 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 mature 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 2020 Annual Report.

During the three months ended March 31, 2021, distributions of $0.5 million were reinvested under the DRIP resulting in the issuance of 33,981 common units.

During the six months ended June 30, 2021, distributions of $0.9 million were reinvested under the DRIP resulting in the issuance of 60,735 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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We believe that Adjusted gross margin is useful as a supplemental measure to investors 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 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 is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units.

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.

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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 March 31,

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

2021 2020 2021 2020

Total revenues $ 156,562 $ 168,651 $ 314,075 $ 347,650

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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 (benefit), severance charges, certain transaction expenses, 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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Moreover, our Adjusted EBITDA as presented may not be comparable to similarly titled measures of other companies.

Because we use capital assets, depreciation, impairment of compression equipment, gain on disposition of assets and the interest cost of acquiring compression equipment are also necessary elements of our costs.

Unit-based compensation expense (benefit) related to equity awards to employees is also a necessary component of our business.

Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets and the interest cost of acquiring compression equipment are also necessary elements of our costs.

Unit-based compensation expense related to equity awards to employees is also a necessary component of our business.

Therefore, measures that exclude these elements have material limitations.

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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 March 31,

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

2021 2020 2021 2020

Net income (loss) $ 2,688 $ 2,684 $ 3,059 $ (599,777)

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Interest income on capital lease — 105 48 229

Unit-based compensation expense (benefit) (1) 4,182 (1,829)

Unit-based compensation expense (1) 4,260 4,568 8,442 2,739

Severance charges 13 2,416 226 2,833

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________________________________

(1) For the three months ended March 31, 2021 and 2020, unit-based compensation expense included $1.1 million and $0.9 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards.

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

(1) For the three and six months ended June 30, 2021, unit-based compensation expense included $1.1 million and $2.2 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.2 million for each period related to the cash portion of any settlement of phantom units awards upon vesting.

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 for each period related to the cash portion of any settlement of phantom units 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 non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows.

(3) For further discussion of our goodwill impairment recorded for the three months ended March 31, 2020, see “Financial Results of Operations” above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report.

(3) 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.

Distributable Cash Flow

We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, 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 (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), 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.

Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions.

DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity.

of operating performance and liquidity.

Moreover, our DCF as presented may not be comparable to similarly titled measures of other companies.

Because we use capital assets, depreciation, impairment of compression equipment, gain on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs.

Unit-based compensation expense (benefit) related to equity awards to employees is also a necessary component of our business.

Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs.

Unit-based compensation expense related to equity awards to employees is also a necessary component of our business.

Therefore, measures that exclude these elements have material limitations.

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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 March 31,

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

2021 2020 2021 2020

Net income (loss) $ 2,688 $ 2,684 $ 3,059 $ (599,777)

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Non-cash income tax expense (benefit) (34) 149 (133) 272

Unit-based compensation expense (benefit) (1) 4,182 (1,829)

Unit-based compensation expense (1) 4,260 4,568 8,442 2,739

Severance charges 13 2,416 226 2,833

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________________________________

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

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 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) 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 March 31,

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

2021 2020 2021 2020

DCF $ 52,536 $ 58,686 $ 105,116 $ 113,388

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Distributions for Cash Coverage Ratio (3) $ 50,521 $ 50,351 $ 101,057 $ 100,518

DCF Coverage Ratio 1.03 x 1.08 x

Cash Coverage Ratio 1.04 x 1.09 x

DCF Coverage Ratio 1.03 x 1.15 x 1.03 x 1.12 x

Cash Coverage Ratio 1.04 x 1.17 x 1.04 x 1.13 x

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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