USA Compression Partners, LP 10-Q

ITEM 1. Financial Statements USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Balance Sheets (in thousands) March 31, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 15 $ — Accounts receivable: Trade, net of allowances for credit losses of $ 1,493 and $ 2,057 , respectively 69,581 68,175 Other 212 39 Related party receivables 45,124 44,941 Inventories 89,799 85,816 Prepaid expenses and other assets 6,935 6,016 Total current assets 211,666 204,987 Property and equipment, net 2,193,007 2,222,336 Lease right-of-use assets 19,929 20,173 Identifiable intangible assets, net 297,067 304,411 Other assets 15,283 16,072 Total assets $ 2,736,952 $ 2,767,979 Liabilities, Preferred Units and Partners’ Capital Current liabilities: Accounts payable $ 22,688 $ 22,538 Accrued liabilities 92,513 113,891 Deferred revenue 51,853 51,216 Total current liabilities 167,054 187,645 Long-term debt, net 2,023,183 1,973,234 Operating lease liabilities 18,066 18,551 Other liabilities 9,722 10,132 Total liabilities 2,218,025 2,189,562 Commitments and contingencies Preferred Units 477,309 477,309 Partners’ capital: Common units, 97,377 and 97,345 units issued and outstanding, respectively 27,639 87,129 Warrants 13,979 13,979 Total partners’ capital 41,618 101,108 Total liabilities, Preferred Units and partners’ capital $ 2,736,952 $ 2,767,979 See accompanying notes to unaudited condensed consolidated financial statements. 1 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Operations (in thousands, except per unit amounts) Three Months Ended March 31, 2022 2021 Revenues: Contract operations $ 157,668 $ 152,525 Parts and service 1,926 2,038 Related party 3,818 2,950 Total revenues 163,412 157,513 Costs and expenses: Cost of operations, exclusive of depreciation and amortization 53,732 48,628 Depreciation and amortization 59,064 61,030 Selling, general and administrative 15,265 13,800 Gain on disposition of assets ( 179 ) ( 1,255 ) Impairment of compression equipment 432 2,550 Total costs and expenses 128,314 124,753 Operating income 35,098 32,760 Other income (expense): Interest expense, net ( 31,838 ) ( 32,288 ) Other 20 25 Total other expense ( 31,818 ) ( 32,263 ) Net income before income tax expense 3,280 497 Income tax expense 26 126 Net income 3,254 371 Less: distributions on Preferred Units ( 12,187 ) ( 12,187 ) Net loss attributable to common unitholders’ interests $ ( 8,933 ) $ ( 11,816 ) Weighted average common units outstanding – basic and diluted 97,365 96,989 Basic and diluted net loss per common unit $ ( 0.09 ) $ ( 0.12 ) Distributions declared per common unit for respective periods $ 0.525 $ 0.525 See accompanying notes to unaudited condensed consolidated financial statements. 2 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital (in thousands, except per unit amounts) For the Three Months Ended March 31, 2022 Common units Warrants Total Partners’ capital ending balance, December 31, 2021 $ 87,129 $ 13,979 $ 101,108 Distributions and DERs, $ 0.525 per unit ( 51,137 ) — ( 51,137 ) Issuance of common units under the DRIP 516 — 516 Unit-based compensation for equity classified awards 64 — 64 Net loss attributable to common unitholders’ interests ( 8,933 ) — ( 8,933 ) Partners’ capital ending balance, March 31, 2022 $ 27,639 $ 13,979 $ 41,618 For the Three Months Ended March 31, 2021 Common units Warrants Total Partners’ capital ending balance, December 31, 2020 $ 323,676 $ 13,979 $ 337,655 Vesting of phantom units 391 — 391 Distributions and DERs, $ 0.525 per unit ( 50,931 ) — ( 50,931 ) Issuance of common units under the DRIP 463 — 463 Unit-based compensation for equity classified awards 52 — 52 Net loss attributable to common unitholders’ interests ( 11,816 ) — ( 11,816 ) Partners’ capital ending balance, March 31, 2021 $ 261,835 $ 13,979 $ 275,814 See accompanying notes to unaudited condensed consolidated financial statements. 3 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) Three Months Ended March 31, 2022 2021 Cash flows from operating activities: Net income $ 3,254 $ 371 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 59,064 61,030 Provision for expected credit losses ( 500 ) ( 1,250 ) Amortization of debt issuance costs 1,822 2,281 Unit-based compensation expense 3,710 4,182 Deferred income tax benefit ( 204 ) ( 99 ) Gain on disposition of assets ( 179 ) ( 1,255 ) Impairment of compression equipment 432 2,550 Changes in assets and liabilities: Accounts receivable and related party receivables, net ( 1,138 ) ( 2,779 ) Inventories ( 5,161 ) ( 3,261 ) Prepaid expenses and other current assets ( 919 ) ( 479 ) Other assets 869 706 Accounts payable ( 2,202 ) 1,316 Accrued liabilities and deferred revenue ( 23,794 ) ( 23,701 ) Net cash provided by operating activities 35,054 39,612 Cash flows from investing activities: Capital expenditures, net ( 20,230 ) ( 6,185 ) Proceeds from disposition of property and equipment 467 420 Proceeds from insurance recovery 49 1,559 Net cash used in investing activities ( 19,714 ) ( 4,206 ) Cash flows from financing activities: Proceeds from revolving credit facility 214,978 190,511 Payments on revolving credit facility ( 165,785 ) ( 161,633 ) Cash paid related to net settlement of unit-based awards — ( 289 ) Cash distributions on common units ( 51,767 ) ( 51,571 ) Cash distributions on Preferred Units ( 12,187 ) ( 12,187 ) Deferred financing costs ( 423 ) — Other ( 141 ) ( 140 ) Net cash used in financing activities ( 15,325 ) ( 35,309 ) Increase in cash and cash equivalents 15 97 Cash and cash equivalents, beginning of period — 2 Cash and cash equivalents, end of period $ 15 $ 99 Supplemental cash flow information: Cash paid for interest, net of capitalized amounts $ 54,712 $ 55,391 Cash paid for income taxes $ — $ 13 Supplemental non-cash transactions: Non-cash distributions to certain common unitholders (DRIP) $ 516 $ 463 Transfers from inventories to property and equipment $ 1,118 $ 3,139 Changes in capital expenditures included in accounts payable and accrued liabilities $ 1,874 $ ( 800 ) Changes in financing costs included in accounts payable and accrued liabilities $ ( 146 ) $ 139 See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents USA COMPRESSION PARTNERS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Organization and Description of Business Unless otherwise indicated, the terms “our,” “we,” “us,” “the Partnership” and similar language refer to USA Compression Partners, LP, collectively with its consolidated subsidiaries. We are a Delaware limited partnership. Through our operating subsidiaries, we provide compression services under fixed-term contracts with customers in the natural gas and crude oil industries, using natural gas compression packages that we design, engineer, own, operate and maintain. We also own and operate a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling and dehydration. We primarily provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales. USA Compression GP, LLC, a Delaware limited liability company, serves as our general partner and is referred to herein as the “General Partner.” The General Partner is wholly owned by Energy Transfer. The accompanying unaudited condensed consolidated financial statements include the accounts of the Partnership and its subsidiaries, all of which are wholly owned by us. (2) Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC. In the opinion of our management, such financial information reflects all normal recurring adjustments necessary for a fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2021 filed on February 15, 2022 (our “2021 Annual Report”). Use of Estimates Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that existed at the date of the unaudited condensed consolidated financial statements. Although these estimates were based on management’s available knowledge of current and expected future events, actual results could differ from these estimates. Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of all cash balances. We consider investments in highly liquid financial instruments purchased with an original maturity of 90 days or less to be cash equivalents. Trade Accounts Receivable Trade accounts receivable are recorded at the invoiced amount. Allowance for Credit Losses We evaluate our allowance for credit losses related to our trade accounts receivable measured at amortized cost. Due to the short-term nature of our trade accounts receivable, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses. 5 Table of Contents Our determination of the allowance for credit losses requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. We continuously evaluate the financial strength of our customers and the overall business climate in which our customers operate, and make adjustments to the allowance for credit losses as necessary. We evaluate the financial strength of our customers by reviewing the aging of their receivables, our collection experience with the customer, correspondence, financial information and third-party credit ratings. We evaluate the business climate in which our customers operate by reviewing various publicly available materials regarding our customers’ industry, including the solvency of various companies in the industry. Inventories Inventories consist of serialized and non-serialized parts used primarily on compression units. All inventories are stated at the lower of cost or net realizable value. Serialized parts inventories are determined using the specific identification cost method, while non-serialized parts inventories are determined using the weighted average cost method. Purchases of inventories are considered operating activities on the unaudited condensed consolidated statements of cash flows. Property and Equipment Property and equipment are carried at cost except for (i) certain acquired assets which are recorded at fair value on their respective acquisition dates and (ii) impaired assets which are recorded at fair value on the last impairment evaluation date for which an adjustment was required. Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over three to five years . Ordinary maintenance and repairs are charged to cost of operations, exclusive of depreciation and amortization. When property and equipment is retired or sold, its carrying value and the related accumulated depreciation are removed from our accounts and any associated gains or losses are recorded on the unaudited condensed consolidated statements of operations in the period of sale or disposition. Capitalized interest is calculated by multiplying our monthly effective interest rate on outstanding debt by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was approximately $ 138,000 and $ 3,000 for the three months ended March 31, 2022 and 2021, respectively. Impairment of Long-Lived Assets Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written down to estimated fair value. We test long-lived assets for impairment when events or circumstances indicate that the assets’ carrying value may not be recoverable or will no longer be utilized in the operating fleet. The most common circumstance requiring compression units to be evaluated for impairment is when idle units do not meet the desired performance characteristics of our active revenue generating horsepower. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value of the long-lived asset exceeds the sum of the undiscounted cash flows associated with the asset, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. Refer to Note 5 for more detailed information about impairment charges during the three months ended March 31, 2022 and 2021. Identifiable Intangible Assets Identifiable intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The estimated useful lives of our intangible assets range from 15 to 25 years. Revenue Recognition Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of our services or goods. Revenue is measured at the amount of consideration we expect to receive in exchange for providing services or transferring goods. Incidental items, if any, that are immaterial in the context of the contract are recognized as expenses. 6 Table of Contents Income Taxes USA Compression Partners, LP is organized as a partnership for U.S. federal and state income tax purposes. As a result, our partners are responsible for U.S. federal and state income taxes based upon their distributive share of our items of income, gain, loss or deduction. USA Compression Finance Corp. (“Finance Corp”) is a corporation for U.S. federal and state income tax purposes and such tax impacts are included in the accompanying unaudited condensed consolidated financial statements. Texas imposes an entity-level income tax on partnerships that is based on Texas sourced taxable margin (the “Texas Margin Tax”). We have included in the unaudited condensed consolidated financial statements a provision for the Texas Margin Tax. Pass Through Taxes Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis. Fair Value Measurements Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair value hierarchy are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of March 31, 2022, our financial instruments consisted primarily of cash and cash equivalents, trade accounts receivable, trade accounts payable and long-term debt. The book values of cash and cash equivalents, trade accounts receivable and trade accounts payable are representative of fair value due to their short-term maturities. The carrying amount of our revolving credit facility approximates fair value due to the floating interest rates associated with the debt. The fair value of our Senior Notes 2026 and Senior Notes 2027 were estimated using quoted prices in inactive markets and are considered Level 2 measurements. The following table summarizes the aggregate principal amount and fair value of our Senior Notes 2026 and Senior Notes 2027 (in thousands): March 31, 2022 December 31, 2021 Senior Notes 2026, aggregate principal $ 725,000 $ 725,000 Fair value of Senior Notes 2026 732,250 755,813 Senior Notes 2027, aggregate principal 750,000 750,000 Fair value of Senior Notes 2027 755,625 787,500 Operating Segment We operate in a single business segment, the compression services business. (3) Trade Accounts Receivable The allowance for credit losses, which was $ 1.5 million and $ 2.1 million as of March 31, 2022 and December 31, 2021, respectively, is our best estimate of the amount of probable credit losses included in our existing accounts receivable. 7 Table of Contents The following summarizes activity within our trade accounts receivable allowance for credit losses balance (in thousands): Allowance for Credit Losses Balance as of December 31, 2021 $ 2,057 Current-period provision for expected credit losses ( 500 ) Writeoffs charged against the allowance ( 64 ) Balance as of March 31, 2022 $ 1,493 For the three months ended March 31, 2022, we recognized a reversal of $ 0.5 million of our provision for expected credit losses. Improved market conditions for customers due to higher commodity prices was the primary factor contributing to the decrease to the allowance for credit losses for the three months ended March 31, 2022. For the three months ended March 31, 2021, we recognized a reversal of $ 1.3 million of our provision for expected credit losses. Improved market conditions for customers due to the recovery in commodity prices was the primary factor contributing to the decrease to the allowance for credit losses for the three months ended March 31, 2021. (4) Inventories Components of inventories are as follows (in thousands): March 31, 2022 December 31, 2021 Serialized parts $ 47,629 $ 44,642 Non-serialized parts 42,170 41,174 Total inventories $ 89,799 $ 85,816 (5) Property and Equipment and Identifiable Intangible Assets Property and Equipment Property and equipment consisted of the following (in thousands): March 31, 2022 December 31, 2021 Compression and treating equipment $ 3,539,222 $ 3,522,083 Computer equipment 55,396 54,013 Automobiles and vehicles 32,506 31,919 Leasehold improvements 8,849 8,847 Buildings 5,334 5,334 Furniture and fixtures 1,106 1,105 Land 77 77 Total property and equipment, gross 3,642,490 3,623,378 Less: accumulated depreciation and amortization ( 1,449,483 ) ( 1,401,042 ) Total property and equipment, net $ 2,193,007 $ 2,222,336 Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Compression equipment, acquired new 25 years Compression equipment, acquired used 5 - 25 years Furniture and fixtures 3 - 10 years Vehicles and computer equipment 1 - 10 years Buildings 5 years Leasehold improvements 5 years 8 Table of Contents Depreciation expense on property and equipment and gain on disposition of assets were as follows (in thousands): Three Months Ended March 31, 2022 2021 Depreciation expense $ 51,720 $ 53,685 Gain on disposition of assets 179 1,255 On a quarterly basis, we evaluate the future deployment of our idle fleet under current market conditions. For the three months ended March 31, 2022 and 2021 , we determined to retire 10 and 12 compressor units, respectively, for a total of approximately 1,400 and 5,600 horsepower, respectively, that were previously used to provide compression services in our business. As a result, we recorded impairments of compression equipment of $ 0.4 million and $ 2.6 million for the three months ended March 31, 2022 and 2021 , respectively. 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. Identifiable Intangible Assets Identifiable intangible assets, net consisted of the following (in thousands): Customer Relationships Trade Names Total Net balance as of December 31, 2021 $ 276,848 $ 27,563 $ 304,411 Amortization expense ( 6,526 ) ( 818 ) ( 7,344 ) Net balance as of March 31, 2022 $ 270,322 $ 26,745 $ 297,067 Accumulated amortization of intangible assets was $ 253.6 million and $ 246.3 million as of March 31, 2022 and December 31, 2021, respectively. (6) Other Current Liabilities Components of other current liabilities included the following (in thousands): March 31, 2022 December 31, 2021 Accrued sales tax contingencies (1) $ 44,923 $ 44,923 Accrued interest expense 6,467 30,850 Accrued unit-based compensation liability 15,780 13,280 ________________________________ (1) Refer to Note 13 for further information on the accrued sales tax contingencies . (7) Lease Accounting Lessor Accounting We granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provided the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term. Prior to the customer exercising its bargain purchase option during the second quarter of 2021, revenue and interest income related to the lease was recognized over the lease term. We recognized maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue and interest income for the three months ended March 31, 2021 were $ 0.3 million and $ 0.1 million, respectively. 9 Table of Contents (8) Long-term Debt Our long-term debt, of which there is no current portion, consisted of the following (in thousands): March 31, 2022 December 31, 2021 Senior Notes 2026, aggregate principal $ 725,000 $ 725,000 Senior Notes 2027, aggregate principal 750,000 750,000 Less: deferred financing costs, net of amortization ( 17,352 ) ( 18,108 ) Total senior notes, net 1,457,648 1,456,892 Revolving credit facility 565,535 516,342 Total long-term debt, net $ 2,023,183 $ 1,973,234 Revolving Credit Facility The Credit Agreement has an aggregate commitment of $ 1.6 billion (subject to availability under our borrowing base), with a further potential increase of up to $ 200 million. The Partnership's obligations under the Credit Agreement are guaranteed by the guarantors party to the Credit Agreement, which currently consists of all of the Partnership's subsidiaries. The Credit Agreement matures on December 8, 2026, except that if any portion of the Senior Notes 2026 are outstanding on December 31, 2025, the Credit Agreement will mature on December 31, 2025. As of March 31, 2022, we had outstanding borrowings under the Credit Agreement of $ 565.5 million, $ 1.0 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $ 224.4 million. Our weighted-average interest rate in effect for all borrowings under the Credit Agreement as of March 31, 2022 was 3.17 %, with a weighted-average interest rate of 2.84 % for the three months ended March 31, 2022. There were no letters of credit issued as of March 31, 2022. We pay a commitment fee of 0.375 % on the unused portion of the Credit Agreement. The Credit Agreement permits us to make distributions of available cash to unitholders so long as (i) no default under the facility has occurred, is continuing or would result from the distribution, (ii) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants, and (iii) immediately prior to and after giving effect to such distribution, (a) on or before September 30, 2023, we have availability under the Credit Agreement of at least $ 250 million and (b) after September 30, 2023, we have availability under the Credit Agreement of at least $ 100 million. The Credit Agreement also contains various financial covenants, including covenants requiring us to maintain: • a minimum EBITDA to interest coverage ratio of 2.5 to 1.0, determined as of the last day of each fiscal quarter, with EBITDA and interest expense annualized for the fiscal quarter most recently ended; • a ratio of total secured indebtedness to EBITDA not greater than 3.0 to 1.0 or less than 0.0 to 1.0, determined as of the last day of each fiscal quarter, with EBITDA annualized for the fiscal quarter most recently ended; and • a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter with EBITDA annualized for the fiscal quarter most recently ended, (i) 5.75 to 1.00 through the second fiscal quarter of 2022, (ii) 5.50 to 1.00 from the third quarter of 2022 through the third quarter of 2023 and (iii) 5.25 to 1.00 thereafter. In addition, the Partnership may increase the applicable ratio by 0.25 for any fiscal quarter during which a Specified Acquisition (as defined in the Credit Agreement) occurs and the following two fiscal quarters, but in no event shall the maximum ratio exceed 5.50 to 1.00 for any fiscal quarter as a result of such increase. As of March 31, 2022, we were in compliance with all of our covenants under the Credit Agreement. The Credit Agreement is a “revolving credit facility” that includes a lock box arrangement, whereby remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility. Senior Notes 2026 On March 23, 2018, USA Compression Partners, LP and Finance Corp, co-issued the Senior Notes 2026. The Senior Notes 2026 mature on April 1, 2026 and accrue interest at the rate of 6.875 % per year. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1. 10 Table of Contents The indenture governing the Senior Notes 2026 (the “2026 Indenture”) contains certain financial ratios that we must comply with in order to make certain restricted payments as described in the 2026 Indenture. As of March 31, 2022, we were in compliance with such financial covenants under the 2026 Indenture. The Senior Notes 2026 are fully and unconditionally guaranteed (the “2026 Guarantees”), jointly and severally, on a senior unsecured basis by all of our subsidiaries (other than Finance Corp), and will be fully and unconditionally guaranteed, jointly and severally, by each of our future restricted subsidiaries that either borrows under, or guarantees, the Credit Agreement or guarantees certain of our other indebtedness (collectively, the “Guarantors”). The Senior Notes 2026 and the 2026 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2026 and the 2026 Guarantees are effectively subordinated in right of payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2026. Senior Notes 2027 On March 7, 2019, USA Compression Partners, LP and Finance Corp co-issued the Senior Notes 2027. The Senior Notes 2027 mature on September 1, 2027 and accrue interest at the rate of 6.875 % per year. Interest on the Senior Notes 2027 is payable semi-annually in arrears on each of March 1 and September 1. The indenture governing the Senior Notes 2027 (the “2027 Indenture”) contains certain financial ratios that we must comply with in order to make certain restricted payments as described in the 2027 Indenture. As of March 31, 2022, we were in compliance with such financial covenants under the 2027 Indenture. The Senior Notes 2027 are fully and unconditionally guaranteed (the “2027 Guarantees”), jointly and severally, on a senior unsecured basis by the Guarantors. The Senior Notes 2027 and the 2027 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2027 and the 2027 Guarantees are effectively subordinated in right of payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2027. We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100 % owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act. (9) Preferred Units We had 500,000 Preferred Units outstanding as of March 31, 2022 and December 31, 2021, respectively, with a face value of $ 1,000 per Preferred Unit. The Preferred Units rank senior to the common units with respect to distributions and rights upon liquidation. The holders of the Preferred Units are entitled to receive cumulative quarterly cash distributions equal to $ 24.375 per Preferred Unit. We have declared and paid quarterly cash distributions per unit to the holders of the Preferred Units of record as follows: Payment Date Distribution per Preferred Unit February 5, 2021 $ 24.375 May 7, 2021 24.375 August 6, 2021 24.375 November 5, 2021 24.375 2021 total distributions $ 97.500 February 4, 2022 $ 24.375 11 Table of Contents Announced Quarterly Distribution On April 14, 2022, we declared a cash distribution of $ 24.375 per unit on our Preferred Units. The distribution will be paid on May 6, 2022 to the holders of the Preferred Units of record as of the close of business on April 25, 2022. Changes in the Preferred Units balance are as follows (in thousands): Preferred Units Balance as of December 31, 2021 $ 477,309 Net income allocated to Preferred Units 12,187 Cash distributions on Preferred Units ( 12,187 ) Balance as of March 31, 2022 $ 477,309 Redemption and Conversion Features 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 % on or after April 2, 2023. The conversion rate for the Preferred Units is the quotient of (a) the sum of (i) $ 1,000 , plus (ii) any unpaid cash distributions on the applicable Preferred Unit, divided by (b) $ 20.0115 for each Preferred Unit. 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 holder of the Preferred Units 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. (10) Partners’ Capital Common Units The change in common units outstanding was as follows: Units Outstanding Number of units outstanding as of December 31, 2021 97,344,707 Issuance of common units under the DRIP 32,648 Number of units outstanding as of March 31, 2022 97,377,355 As of March 31, 2022, Energy Transfer held 46,056,228 common units, including 8,000,000 common units held by the General Partner and controlled by Energy Transfer. Cash Distributions We have declared and paid quarterly distributions per unit to our limited partner unitholders of record, including holders of our common and phantom units, as follows (dollars in millions, except distribution per unit): Payment Date Distribution per Limited Partner Unit Amount Paid to Common Unitholders Amount Paid to Phantom Unitholders Total Distribution February 5, 2021 $ 0.525 $ 50.9 $ 1.1 $ 52.0 May 7, 2021 0.525 50.9 1.1 52.0 August 6, 2021 0.525 51.0 1.1 52.1 November 5, 2021 0.525 51.0 1.0 52.0 2021 total distributions $ 2.10 $ 203.8 $ 4.3 $ 208.1 February 4, 2022 $ 0.525 $ 51.1 $ 1.2 $ 52.3 12 Table of Contents Announced Quarterly Distribution On April 14, 2022, we announced a cash distribution of $ 0.525 per unit on our common units. The distribution will be paid on May 6, 2022 to common unitholders of record as of the close of business on April 25, 2022. DRIP During the three months ended March 31, 2022, distributions of $ 0.5 million were reinvested under the DRIP resulting in the issuance of 32,648 common units. Warrants As of March 31, 2022 and December 31, 2021, we had two tranches of warrants outstanding, which includes warrants to purchase (i) 5,000,000 common units with a strike price of $ 17.03 per common unit and (ii) 10,000,000 common units with a strike price of $ 19.59 per common unit (collectively, the “Warrants”). The Warrants may be exercised by the holders at any time before April 2, 2028. Loss Per Unit The computation of loss per unit is based on the weighted average number of participating securities, which includes our common units and certain equity-based awards, outstanding during the applicable period. Basic loss per unit is determined by dividing net income (loss) allocated to participating securities after deducting the amount distributed on Preferred Units, by the weighted average number of participating securities outstanding during the period. Loss attributable to unitholders is allocated to participating securities based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income (loss) attributable to unitholders for the period, the excess distributions are allocated to all participating securities outstanding based on their respective ownership percentages. Diluted loss per unit is computed using the treasury stock method, which considers the potential issuance of limited partner units associated with our long-term incentive plan and Warrants. Unvested phantom units and unexercised Warrants are not included in basic loss per unit, as they are not considered to be participating securities, but are included in the calculation of diluted loss per unit to the extent they are dilutive, and in the case of Warrants to the extent that they were considered “in the money.” For the three months ended March 31, 2022, approximately 803,000 and 13,000 incremental unvested phantom units and “in the money” outstanding Warrants, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive. Our outstanding Warrants not “in the money” were excluded from the calculation for the three months ended March 31, 2022. For the three months ended March 31, 2021, approximately 710,000 incremental unvested phantom units were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive, and our outstanding Warrants were no t included in the computation as they are not considered “in the money” for the period. (11) Revenue Recognition Disaggregation of Revenue The following table disaggregates our revenue by type of service (in thousands): Three Months Ended March 31, 2022 2021 Contract operations revenue $ 161,486 $ 155,469 Retail parts and services revenue 1,926 2,044 Total revenues $ 163,412 $ 157,513 13 Table of Contents The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands): Three Months Ended March 31, 2022 2021 Services provided over time: Primary term $ 108,297 $ 106,561 Month-to-month 53,189 48,908 Total services provided over time 161,486 155,469 Services provided or goods transferred at a point in time 1,926 2,044 Total revenues $ 163,412 $ 157,513 Contract Assets We record contract assets when we have completed performance under a contract but our right to consideration is not yet unconditional. We had no contract assets as of March 31, 2022 and December 31, 2021. Deferred Revenue We record deferred revenue when cash payments are received or due in advance of our performance. Components of deferred revenue were as follows (in thousands): Balance sheet location March 31, 2022 December 31, 2021 Current (1) Deferred revenue $ 51,853 $ 51,216 Noncurrent Other liabilities 4,740 4,823 Total $ 56,593 $ 56,039 ________________________________ (1) We recognized $ 42.1 million of revenue during the three months ended March 31, 2022 related to our deferred revenue balance as of December 31, 2021. Performance Obligations As of March 31, 2022, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to our contract operations revenue was $ 437.3 million. We expect to recognize these remaining performance obligations as follows (in thousands): 2022 (remainder) 2023 2024 2025 Thereafter Total Remaining performance obligations $ 236,615 $ 126,839 $ 46,478 $ 17,181 $ 10,140 $ 437,253 (12) Transactions with Related Parties We provide compression services to entities affiliated with Energy Transfer, which as of March 31, 2022 owned approximately 47 % of our limited partner interests and 100 % of the General Partner. Revenue recognized from such affiliated Energy Transfer entities on our unaudited condensed consolidated statements of operations were as follows (in thousands): Three Months Ended March 31, 2022 2021 Related party revenues $ 3,818 $ 2,950 We had approximately $ 201,000 and $ 18,000 within related party receivables on our unaudited condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively, from such affiliated Energy Transfer entities. Additionally, the Partnership had a $ 44.9 million related party receivable from Energy Transfer as of March 31, 2022 and December 31, 2021 related to indemnification for sales tax contingencies. See Note 13 for more information related to such sales tax contingencies. 14 Table of Contents (13) Commitments and Contingencies (a) Major Customers We did not have revenue from any single customer representing 10% or more of total revenue for the three months ended March 31, 2022 or 2021. (b) Litigation From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows. (c) Equipment Purchase Commitments Our future capital commitments are comprised of binding commitments under purchase orders for new compression units ordered but not received. The commitments as of March 31, 2022 were $ 60.8 million, all of which is expected to be settled within the next twelve months and $ 40.1 million of which we expect to settle in the remainder of 2022. (d) Sales Tax Contingencies Our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have either claimed or issued an assessment that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and others in our industry have disputed these claims and assessments based on either existing tax statutes or published guidance by the taxing authorities. We are currently protesting certain assessments made by the Oklahoma Tax Commission (“OTC”). We believe it is reasonably possible that we could incur losses related to this assessment depending on whether the administrative law judge assigned by the OTC accepts our position that the transactions are not taxable and we ultimately lose any and all subsequent legal challenges to such determination. We estimate that the range of losses we could incur is from $ 0 to approximately $ 21.0 million, including penalty and interest. As of March 31, 2022 and December 31, 2021, we have recorded a $ 44.9 million accrued liability and $ 44.9 million related party receivable from Energy Transfer related to open audits with the Office of the Texas Comptroller of Public Accounts (the “Comptroller”), wherein the Comptroller has challenged the applicability of the manufacturing exemption. For more information, see Note 16 to the consolidated financial statements included in our 2021 Annual Report. (14) Subsequent Event On April 27, 2022, the tranche of warrants with the right to purchase 5,000,000 common units with a strike price of $ 17.03 per common unit was exercised in full by the holders. The exercise of the warrants was net settled by the Partnership for 534,308 common units. 15 Table of Contents