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Item 5. Market for Registrant’s Common Equity

2022-02-15 compared with 2021-02-16 · 5 added, 207 removed, 23 unchanged (90% of the section changed)

2 unchanged sentences

As of February 10, 2022, we had 97,377,355 common units outstanding.

ETO owns 100% of the membership interests in the General Partner and, as of February 11, 2021, beneficially owns approximately 47% of our outstanding common units.

Energy Transfer owns 100% of the membership interests in the General Partner and, as of February 10, 2022, beneficially owns approximately 47% of our outstanding common units.

As of February 10, 2022, we had outstanding 500,000 Preferred Units representing limited partner interests in the Partnership, all of which were held by Preferred Unitholders.

1 unchanged sentence

The Preferred Unitholders are entitled to receive cumulative quarterly cash distributions equal to $24.375 per Preferred Unit.

The Preferred Units are convertible, at the option of the Preferred Unitholders, into common units in accordance with the terms of the Partnership Agreement as follows:

one third on or after April 2, 2021, two thirds on or after April 2, 2022, and the remainder on or after April 2, 2023.

On or after April 2, 2023, we have the option to redeem all or any portion of the Preferred Units then outstanding.

On or after April 2, 2028, the Preferred Unitholders have the right to require us to redeem all or a portion of the Preferred Units then outstanding, the purchase price for which we may elect to pay up to 50% in common units, subject to certain additional limits.

The Preferred Units are convertible, at the option of the holder, into common units in accordance with the terms of our Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) as follows:

one third on or after April 2, 2021, two thirds on or after April 2, 2022, and 100% are convertible on or after April 2, 2023.

On or after April 2, 2023, we have the option to redeem all or any portion of the Preferred Units then outstanding, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement.

On or after April 2, 2028, each Preferred Unitholder will have the right to require us to redeem all or a portion of their Preferred Units, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement, which we may elect to pay up to 50% in common units, subject to certain additional limits.

Our common units, which represent limited partner interests in us, are listed on the New York Stock Exchange (“NYSE”) under the symbol “USAC.”

15 unchanged sentences

For disclosures regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters”.

Selected Financial Data

SELECTED HISTORICAL FINANCIAL DATA

In the table below we have presented certain selected financial data for USA Compression Partners, LP and the USA Compression Predecessor for each of the years in the five-year period ended December 31, 2020, which has been derived from our audited consolidated financial statements for the years ended December 31, 2020, 2019, 2018, 2017 and 2016.

USA Compression Predecessor has been determined to be the historical predecessor of the Partnership for financial reporting purposes because ET LP controlled the USA Compression Predecessor prior to the CDM Acquisition and obtained control of the Partnership through its acquisition of the General Partner.

For periods prior to the Transactions Date, the table presents selected financial data for the USA Compression Predecessor and periods after the Transactions Date refer to the Partnership.

The following information should be read together with Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 8 “Financial Statements and Supplementary Data”.

Our operating results incorporate a number of significant estimates and uncertainties.

Such matters could cause the data included herein not to be indicative of our future financial condition or results of operations.

A discussion of our critical accounting estimates and how these estimates could impact our future financial condition and results of operations is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Part II, Item 7 of this report.

In addition, a discussion of the risk factors that could affect our business and future financial condition and results of operations is included under Part I, Item 1A “Risk Factors” of this report.

Additionally, Note 2 – Basis of Presentation and Significant Accounting Policies and Note 17 – Commitments and Contingencies under Part II, Item 8 “Financial Statements and Supplementary Data” of this report provide descriptions of areas where estimates and judgments and contingent liabilities could result in different amounts being recognized in our accompanying consolidated financial statements.

We believe that investors benefit from having access to the same financial measures utilized by management.

The following table includes the non-GAAP financial measures of Adjusted gross margin, Adjusted EBITDA and Distributable Cash Flow (or “DCF”).

For definitions of Adjusted gross margin, Adjusted EBITDA and DCF, and reconciliations of such measures to their most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Non-GAAP Financial Measures” below.

Year Ended December 31,

2020 2019 2018 2017 2016

(in thousands, except per unit amounts)

Contract operations $ 644,194 $ 664,162 $ 546,896 $ 249,346 $ 239,143

Parts and service 11,117 14,236 20,402 10,085 7,921

Related party 12,372 19,967 17,054 17,240 16,873

Total revenues 667,683 698,365 584,352 276,671 263,937

Costs and expenses:

Costs of operations, exclusive of depreciation and amortization 205,939 227,303 214,724 125,204 112,898

Depreciation and amortization 238,968 231,447 213,692 166,558 155,134

Selling, general and administrative 59,981 64,397 68,995 24,944 22,739

Loss (gain) on disposition of assets 146 940 12,964 (367) 120

Impairment of compression equipment 8,090 5,894 8,666 — —

Impairment of goodwill 619,411 — — 223,000 —

Total costs and expenses 1,132,535 529,981 519,041 539,339 290,891

Operating income (loss) (464,852) 168,384 65,311 (262,668) (26,954)

Other income (expense):

Interest expense, net (128,633) (127,146) (78,377) — —

Other 86 80 41 (223) (153)

Total other expense (128,547) (127,066) (78,336) (223) (153)

Net income (loss) before income tax expense (benefit) (593,399) 41,318 (13,025) (262,891) (27,107)

Income tax expense (benefit) 1,333 2,186 (2,474) 1,843 (163)

Net income (loss) (594,732) 39,132 (10,551) $ (264,734) $ (26,944)

distributions on Preferred Units (48,750) (48,750) (36,430)

Net loss attributable to common and Class B unitholders’ interests (1) $ (643,482) $ (9,618) $ (46,981)

Basic and diluted net loss per common unit (1) $ (6.65) $ (0.02) $ (0.43)

Basic and diluted net loss per Class B Unit (1) $ — $ (2.13) $ (2.33)

Cash distributions declared per common unit (1) $ 2.10 $ 2.10 $ 1.575

Other financial data:

Gross margin $ 222,776 $ 239,615 $ 155,936 $ (15,091) $ (4,095)

Adjusted gross margin (2) $ 461,744 $ 471,062 $ 369,628 $ 151,467 $ 151,039

Adjusted EBITDA (2) $ 413,898 $ 419,640 $ 320,475 $ 130,348 $ 131,686

DCF (2) $ 220,766 $ 221,868 $ 177,757 $ 109,326 $ 123,442

Capital expenditures $ 118,856 $ 199,928 $ 241,179 $ 175,508 $ 59,234

Cash flows provided by (used in):

Operating activities $ 293,198 $ 300,580 $ 226,340 $ 135,956 $ 130,063

Investing activities $ (105,099) $ (144,490) $ (779,663) $ (142,458) $ (36,767)

Financing activities $ (188,107) $ (156,179) $ 549,409 $ (3,666) $ (90,367)

Balance sheet data (at period end):

Working capital (3) $ 29,283 $ 41,548 $ 68,141 $ 27,091 $ 62,424

Total assets $ 2,948,700 $ 3,730,407 $ 3,774,649 $ 1,718,953 $ 1,960,416

Long-term debt, net $ 1,927,005 $ 1,852,360 $ 1,759,058 $ — $ —

Partners’ capital and predecessor parent company net investment $ 337,655 $ 1,180,598 $ 1,378,856 $ 1,664,870 $ 1,929,223

________________________

(1) Net loss attributable to common and Class B unitholders’ interests and net loss per unit are not applicable to the USA Compression Predecessor as the USA Compression Predecessor had no outstanding common or Class B units prior to the Transactions.

On July 30, 2019, 6,397,965 Class B Units automatically converted into common units on a one-for-one basis, resulting in the issuance of 6,397,965 common units to ETO.

Following the conversion, there are no longer Class B Units outstanding.

(2) Please refer to “Non-GAAP Financial Measures” below.

(3) Working capital is defined as current assets minus current liabilities.

Non-GAAP Financial Measures

Adjusted Gross Margin

Adjusted gross margin is a non-GAAP financial measure.

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

We believe that Adjusted gross margin is useful 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 should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP.

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

Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs.

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

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):

Year Ended December 31,

2020 2019 2018 2017 2016

Total revenues $ 667,683 $ 698,365 $ 584,352 $ 276,671 $ 263,937

Cost of operations, exclusive of depreciation and amortization (205,939) (227,303) (214,724) (125,204) (112,898)

Depreciation and amortization (238,968) (231,447) (213,692) (166,558) (155,134)

Gross margin $ 222,776 $ 239,615 $ 155,936 $ (15,091) $ (4,095)

Depreciation and amortization 238,968 231,447 213,692 166,558 155,134

Adjusted gross margin $ 461,744 $ 471,062 $ 369,628 $ 151,467 $ 151,039

Adjusted EBITDA

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

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

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

Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess:

• the financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

• the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities;

• the ability of our assets to generate cash sufficient to make debt payments and to pay distributions;

• our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.

We believe that Adjusted EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it may provide a more complete understanding of our performance than GAAP results alone.

We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses in evaluating the results of our business.

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

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

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.

To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as Adjusted EBITDA, to evaluate our financial performance and our liquidity.

Our Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies.

Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes.

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):

Year Ended December 31,

2020 2019 2018 2017 2016

Net income (loss) $ (594,732) $ 39,132 $ (10,551) $ (264,734) $ (26,944)

Interest expense, net 128,633 127,146 78,377 — —

Depreciation and amortization 238,968 231,447 213,692 166,558 155,134

Income tax expense (benefit) 1,333 2,186 (2,474) 1,843 (163)

EBITDA $ (225,798) $ 399,911 $ 279,044 $ (96,333) $ 128,027

Interest income on capital lease 383 672 709 — —

Unit-based compensation expense (1) 8,400 10,814 11,740 4,048 3,539

Transaction expenses (2) 136 578 4,181 — —

Severance charges 3,130 831 3,171 — —

Loss (gain) on disposition of assets 146 940 12,964 (367) 120

Impairment of compression equipment (3) 8,090 5,894 8,666 — —

Impairment of goodwill (4) 619,411 — — 223,000 —

Adjusted EBITDA $ 413,898 $ 419,640 $ 320,475 $ 130,348 $ 131,686

Interest expense, net (128,633) (127,146) (78,377) — —

Non-cash interest expense 8,402 7,607 5,080 — —

Income tax (expense) benefit (1,333) (2,186) 2,474 (1,843) 163

Interest income on capital lease (383) (672) (709) — —

Transaction expenses (136) (578) (4,181) — —

Severance charges (3,130) (831) (3,171) — —

Other 4,230 2,426 (2,030) 24 (748)

Changes in operating assets and liabilities 283 2,320 (13,221) 7,427 (1,038)

Net cash provided by operating activities $ 293,198 $ 300,580 $ 226,340 $ 135,956 $ 130,063

________________________

(1) For the years ended December 31, 2020, 2019 and 2018, unit-based compensation expense included $3.2 million, $2.5 million and $1.3 million of cash payments related to quarterly payments of DERs on outstanding phantom unit awards, respectively, and $0.5 million, $0.6 million and $3.7 million related to the cash portion of any settlement of phantom unit awards upon vesting, respectively.

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.

(4) For further discussion of our goodwill impairment recorded for the year ended December 31, 2020, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates – Goodwill – Impairment Assessments”.

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, 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.

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, 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.

To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as DCF, to evaluate our financial performance and our liquidity.

Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies.

Management compensates for the limitations of DCF as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes.

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):

Year Ended December 31,

2020 2019 2018 2017 2016

Net income (loss) $ (594,732) $ 39,132 $ (10,551) $ (264,734) $ (26,944)

Non-cash interest expense 8,402 7,607 5,080 — —

Depreciation and amortization 238,968 231,447 213,692 166,558 155,134

Non-cash income tax expense (benefit) 530 1,376 (2,663) 1,801 (155)

Unit-based compensation expense (1) 8,400 10,814 11,740 4,048 3,539

Transaction expenses (2) 136 578 4,181 — —

Severance charges 3,130 831 3,171 — —

Loss (gain) on disposition of assets 146 940 12,964 (367) 120

Impairment of compression equipment (3) 8,090 5,894 8,666 — —

Impairment of goodwill (4) 619,411 — — 223,000 —

Distributions on Preferred Units (48,750) (48,750) (36,430) — —

Proceeds from insurance recovery 336 1,591 409 — —

Maintenance capital expenditures (5) (23,301) (29,592) (32,502) (20,980) (8,252)

DCF $ 220,766 $ 221,868 $ 177,757 $ 109,326 $ 123,442

Maintenance capital expenditures 23,301 29,592 32,502 20,980 8,252

Transaction expenses (136) (578) (4,181) — —

Severance charges (3,130) (831) (3,171) — —

Distributions on Preferred Units 48,750 48,750 36,430 — —

Other 3,364 (541) 224 (1,777) (593)

Changes in operating assets and liabilities 283 2,320 (13,221) 7,427 (1,038)

Net cash provided by operating activities $ 293,198 $ 300,580 $ 226,340 $ 135,956 $ 130,063

________________________

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.

Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related cash flow.

Coverage Ratios

DCF Coverage Ratio is defined as DCF divided by distributions declared to common unitholders in respect of such period.

Cash Coverage Ratio is defined as DCF divided by cash distributions expected to be paid to common unitholders in respect of such period, after taking into account the non-cash impact of the DRIP.

We believe DCF Coverage Ratio and Cash Coverage Ratio are important measures of operating performance because they allow management, investors and others to gauge our ability to pay cash distributions to common unitholders using the cash flows that we generate.

Our DCF Coverage Ratio and Cash Coverage Ratio as presented may not be comparable to similarly titled measures of other companies.

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

Year Ended December 31,

2020 2019 2018 (4) 2017 (5) 2016 (5)

DCF $ 220,766 $ 221,868 $ 177,757 $ 109,326 $ 123,442

Distributions for DCF Coverage Ratio (1) $ 203,409 $ 196,144 $ 141,699

Distributions reinvested in the DRIP (2) $ 2,064 $ 1,045 $ 688

Distributions for Cash Coverage Ratio (3) $ 201,345 $ 195,099 $ 141,011

DCF Coverage Ratio 1.09 x 1.13 x 1.25 x

Cash Coverage Ratio 1.10 x 1.14 x 1.26 x

________________________

(1) Represents distributions to the holders of our common units as of the record date.

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

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

(4) Distributions for the year ended December 31, 2018 reflect only three quarters of distributions as the USA Compression Predecessor did not pay distributions prior to the Transactions Date.

DCF, however, reflects a full year of DCF.

On a pro forma basis, both the DCF Coverage Ratio and Cash Coverage Ratio for the year ended December 31, 2018 were 1.10x when using comparable three quarters of DCF and three quarters of distributions.

(5) DCF Coverage Ratio and Cash Coverage Ratio are not applicable to the USA Compression Predecessor as the USA Compression Predecessor had no outstanding common units for each period.

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-K

Item 5. Market for Registrant’s Common Equity