What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-02 compared with 2021-08-03 · 110 added, 102 removed, 314 unchanged (40% of the section changed)

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• 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;

• changes in general economic conditions, including inflation, 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;

• uncertainty regarding the timing, pace and extent of an economic recovery in the U.S.

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• renegotiation of material terms of customer contracts;

• competitive conditions in our industry;

• competitive conditions in our industry, including competition for employees in a tight labor market;

• our ability to realize the anticipated benefits of acquisitions;

• actions taken by our customers, competitors and third-party operators;

• changes in the availability and cost of capital;

• changes in the availability and cost of capital, including changes to interest rates under our Credit Agreement;

• operating hazards, natural disasters, epidemics, pandemics (such as COVID-19), weather-related delays, casualty losses and other matters beyond our control;

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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

2021 2020 2021 2020

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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 June 30, 2021 and 2020 was 79.0% and 84.1%, respectively.

Horsepower utilization based on revenue generating horsepower and fleet horsepower as of September 30, 2021 and 2020 was 79.2% and 80.8%, 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, 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.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three months ended September 30, 2021 and 2020 was 79.0% and 81.7%, respectively.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the nine months ended September 30, 2021 and 2020 was 79.7% and 85.8%, respectively.

The 1.0% decrease in fleet horsepower as of September 30, 2021 compared to September 30, 2020 was primarily due to (i) the exercise of a lease purchase option on certain compression units by a customer during the current period, (ii) compression units impaired since the previous period, partially offset by (iii) compression units added to our fleet primarily for specific customer demand for our compression services.

The 1.1% decrease in total available horsepower as of September 30, 2021 compared to September 30, 2020 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the current period and compression units impaired since the previous period.

The 3.0% decrease in revenue generating horsepower as of September 30, 2021 compared to September 30, 2020 was primarily due to returns of compression

units from our customers, which also caused a 1.4% 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 compression service requirements by our customers.

The 1.1% decrease in average revenue per revenue generating horsepower per month during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to reduced pricing in our small horsepower fleet.

The 1.7% decrease and 0.9% increase in average horsepower per revenue generating compression unit during the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020, respectively, were driven primarily by the composition of compression unit returns.

Average horsepower utilization decreased to 82.3% during the three months ended September 30, 2021 compared to 83.9% during the three months ended September 30, 2020.

The 1.9% decrease in average horsepower utilization was primarily due to (i) a 2.3% increase in our idle horsepower from compression units returned to us, partially offset by (ii) a 0.9% increase in horsepower that is on-contract or pending-contract but not yet active.

Average horsepower utilization decreased to 82.6% during the nine months ended September 30, 2021 compared to 88.1% during the nine months ended September 30, 2020.

The 6.2% decrease in average horsepower utilization was 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 compression service requirements by our customers during the three and nine months ended September 30, 2021.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 79.0% during the three months ended September 30, 2021 compared to 81.7% during the three months ended September 30, 2020.

The 3.3% decrease in average horsepower utilization based on revenue generating horsepower and fleet horsepower was primarily due to (i) a 3.8% increase in our average idle horsepower from compression units returned to us, partially offset by (ii) a 1.3% decrease in our average idle horsepower composed of new compression units.

Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 79.7% during the nine months ended September 30, 2021 compared to 85.8% during the nine months ended September 30, 2020.

The 7.1% decrease in average horsepower utilization based on revenue generating horsepower and fleet horsepower was primarily due to an increase in our average idle horsepower from compression units returned to us.

Financial Results of Operations

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

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

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 $ 151,622 $ 156,632 (3.2) %

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Selling, general and administrative 13,524 12,716 6.4 %

Gain on disposition of assets (1,105) (787) 40.4 %

Loss on disposition of assets 48 1,686 *

Impairment of compression equipment — 1,706 *

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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.

The $5.0 million decrease in contract operations revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compression service requirements by our customers since the previous period, which resulted in a 4.2% decrease in average revenue generating horsepower.

The decrease in average revenue generating horsepower per month was 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.

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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.

The $2.1 million increase in parts and service revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to an increase in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a 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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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.

The $2.4 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to (i) a $1.9 million increase in retail parts and services expenses, which had a corresponding increase in parts and service revenue , (ii) a $1.6 million increase in property taxes, (iii) a $1.2 million increase in outside maintenance costs due to greater use of third-party labor during the current period, and (iv) a $0.7 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs, partially offset by (v) a $2.2 million decrease in direct expenses, primarily driven by fluids and parts, and (vi) a $0.7 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.

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.

The $0.8 million decrease in depreciation and amortization expense for the three months ended September 30, 2021 compared to the three months ended September 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.

The $0.8 million increase in selling, general and administrative expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to (i) a $2.2 million increase in unit-based compensation expense and (ii) a $0.5 million increase in other taxes primarily due to refunds received in the prior period, partially offset by (iii) a $1.1 million decrease in the provision for expected credit losses and (iv) a $0.6 million decrease in employee-related expenses.

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

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

Loss on disposition of assets.

The $1.6 million decrease in loss on disposition of assets for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to losses recognized on compression asset disposals in the prior 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 $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 the current market conditions at the time.

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 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.

As a result of our evaluation during the three months ended September 30, 2020, we determined to retire 16 compressor units for a total of approximately 3,900 horsepower that was 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.

Interest expense, net was consistent period over period as our average outstanding borrowings and the applicable weighted average interest rate under the Credit Agreement were consistent during both periods.

Average outstanding borrowings under the Credit Agreement were $479.2 million and $468.9 million for the three months ended September 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 2.92% and 2.90% for the three months ended September 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 increase in income tax expense for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily related to current taxes associated with the Texas Margin Tax.

Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020

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 $ 455,947 $ 492,419 (7.4) %

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Contract operations revenue.

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.

The $36.5 million decrease in contract operations revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compression service requirements by our customers since the previous period.

These factors resulted in a 7.3% decrease in average revenue generating horsepower and a 1.1% decrease in average revenue per revenue generating horsepower per month, which decreased to $16.59 for the nine months ended September 30, 2021 compared to $16.77 for the nine months ended September 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 $1.9 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.

Parts and service revenue was consistent period over period and is related to 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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Cost of operations, exclusive of depreciation and amortization .

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 $12.5 million decrease in cost of operations, exclusive of depreciation and amortization, for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to (i) a $6.7 million decrease in direct labor expenses, (ii) a $4.5 million decrease in

direct expenses, driven by fluids and parts, (iii) a $3.8 million decrease in non-income taxes, primarily due to sales tax refunds received in the current period related to prior periods, and (iv) a $0.8 million decrease in training and other indirect expenses, partially offset by (v) a $2.3 million increase in outside maintenance expenses due to greater use of third-party labor during the current period and (vi) a $0.8 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs.

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 $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.

The $0.4 million increase in depreciation and amortization expense for the nine months ended September 30, 2021 compared to the nine months ended September 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 $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 $2.8 million decrease in selling, general and administrative expense for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to (i) a $6.1 million decrease in the provision for expected credit losses, (ii) a $2.2 million decrease in employee-related expenses, and (iii) a $1.9 million decrease in severance charges primarily due to the departure of one of our executives during the prior period, partially offset by (iv) a $7.9 million increase in unit-based compensation expense.

The change to the provision for expected credit losses is related to improved market conditions for customers due to the recovery in crude oil prices and higher natural gas 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.

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.

The $2.2 million increase in gain on disposition of assets for the nine months ended September 30, 2021 compared to the nine months ended September 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 $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 $5.0 million and $5.6 million impairments of compression equipment for the nine months ended September 30, 2021 and 2020, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under the current market conditions at the time.

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 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.

As a result of our evaluations during the nine months ended September 30, 2021 and 2020, we determined to retire 22 and 27 compressor units, respectively, for a total of approximately 9,600 and 9,000 horsepower, respectively, that were previously used to provide compression services in our business.

Impairment of goodwill.

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Interest expense, net .

The $0.3 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.

The $0.6 million increase in interest expense, net for the nine months ended September 30, 2021 compared to the nine months ended September 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 $485.3 million and $446.0 million for the nine months ended September 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 3.01% and 3.36% for the nine months ended September 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.

The $0.4 million decrease in income tax expense for the nine months ended September 30, 2021 compared to the nine months ended September 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 June 30, Percent

Change Six Months Ended June 30, Percent

(1) Three Months Ended

September 30, Percent

Change Nine Months Ended

September 30, Percent

2021 2020 2021 2020

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Gross margin.

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.

The $4.7 million decrease in gross margin for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due to (i) a $3.0 million decrease in revenues and (ii) a $2.4 million increase in cost of operations, exclusive of depreciation and amortization, offset by (iii) a $0.8 million decrease in depreciation and amortization.

The $24.5 million decrease in gross margin for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to (i) a $36.6 million decrease in revenues and (ii) a $0.4 million increase in depreciation and amortization, offset by (iii) a $12.5 million decrease in cost of operations, exclusive of depreciation and amortization.

Adjusted gross margin.

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.

The $5.5 million decrease in Adjusted gross margin for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due to a $3.0 million decrease in revenues and a $2.4 million increase in cost of operations, exclusive of depreciation and amortization.

The $24.2 million decrease in Adjusted gross margin for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to a $36.6 million decrease in revenues, offset by a $12.5 million decrease in cost of operations, exclusive of depreciation and amortization.

Adjusted EBITDA.

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.

The $4.3 million decrease in Adjusted EBITDA for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to a $5.5 million decrease in Adjusted gross margin, partially offset by a $1.3 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $16.4 million decrease in Adjusted EBITDA for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a $24.2 million decrease in Adjusted gross margin, partially offset by a $8.7 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $4.9 million decrease in DCF for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was primarily due to (i) a $5.5 million decrease in Adjusted gross margin and (ii) a $0.5 million increase in maintenance capital expenditures, partially offset by (iii) a $1.3 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses.

The $13.2 million decrease in DCF for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to (i) a $24.2 million decrease in Adjusted gross margin, partially offset by (ii) a $8.7 million decrease in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses, and (iii) a $3.2 million decrease in maintenance capital expenditures.

Coverage Ratios .

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.

The decreases in DCF Coverage Ratio and Cash Coverage Ratio for the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily due to the decrease 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, 2021 and 2020 were $9.5 million and $13.2 million, respectively.

Our aggregate maintenance capital expenditures for the nine months ended September 30, 2021 and 2020 were $14.8 million and $17.9 million, respectively.

We currently plan to spend approximately $20.0 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 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,

Our expansion capital expenditures for the nine months ended September 30, 2021 and 2020 were $25.9 million and $84.6 million, respectively.

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

Nine Months Ended September 30,

Net cash provided by operating activities $ 184,368 $ 195,651

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Net cash provided by operating activities .

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.

The $11.3 million decrease in net cash provided by operating activities for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to a $19.4 million decrease in net income, as adjusted for non-cash items, and changes in working capital.

Net cash used in investing activities .

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.

The $70.5 million decrease in net cash used in investing activities for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a $68.5 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, and a $1.8 million increase in proceeds received from disposition of property and equipment.

Net cash used in financing activities .

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.

The $59.0 million increase in net cash used in financing activities for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was primarily due to a decrease in net borrowings of $62.3 million under the Credit Agreement and a $1.2 million increase in cash distributions on common units.

These changes were partially offset by a decrease of $3.6 million in financing costs incurred in connection with the Credit Agreement amendment in the prior period.

Revolving Credit Facility

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.

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

As of September 30, 2021, we had outstanding borrowings under the Credit Agreement of $505.7 million, $1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $114.3 million.

As of October 28, 2021, we had outstanding borrowings under the Credit Agreement of $483.1 million.

On the Amendment Effective Date, we amended the Credit Agreement to, among other items, increase the maximum funded debt to EBITDA ratio to 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 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.

The amendment also provides that, during the Covenant Relief Period, the availability requirement in order to make restricted payments from capital contributions and from available cash are each increased from $100 million to $250 million and the availability requirement in order to make prepayments of our senior notes, any subordinated indebtedness or any other indebtedness for borrowed money is increased from $100 million to $250 million.

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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 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.

As of September 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 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.

During the nine months ended September 30, 2021, distributions of $1.3 million were reinvested under the DRIP resulting in the issuance of 89,135 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,

2021 2020 2021 2020

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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,

2021 2020 2021 2020

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Unit-based compensation expense (1) 3,482 1,332 11,924 4,071

Transaction expenses (2) — 136 — 136

Severance charges 190 130 416 2,963

Gain on disposition of assets (1,105) (787) (2,360) (1,801)

Loss (gain) on disposition of assets 48 1,686 (2,312) (115)

Impairment of compression equipment (3) — 1,706 4,953 5,629

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Interest income on capital lease — (87) (48) (316)

Transaction expenses — (136) — (136)

Severance charges (190) (130) (416) (2,963)

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________________________________

(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.

(1) For the three and nine months ended September 30, 2021, unit-based compensation expense included $1.0 million and $3.2 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $0.2 million for the nine months ended September 30, 2021 related to the cash portion of any settlement of phantom unit awards upon vesting.

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 $0.5 million for the nine months ended September 30, 2020 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 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.

(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.

(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

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

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

of operating performance and liquidity.

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

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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,

2021 2020 2021 2020

4 unchanged sentences

Unit-based compensation expense (1) 3,482 1,332 11,924 4,071

Transaction expenses (2) — 136 — 136

Severance charges 190 130 416 2,963

Gain on disposition of assets (1,105) (787) (2,360) (1,801)

Loss (gain) on disposition of assets 48 1,686 (2,312) (115)

Impairment of compression equipment (3) — 1,706 4,953 5,629

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Maintenance capital expenditures 5,259 4,727 14,790 17,946

Transaction expenses — (136) — (136)

Severance charges (190) (130) (416) (2,963)

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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 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,

2021 2020 2021 2020

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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