Item 2. Management’s Discussion and Analysis
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
USA Compression Partners, LP (the “Partnership”) is a growth-oriented Delaware limited partnership. We are managed by our general partner, USA Compression GP, LLC (the “General Partner”), which is wholly owned by Energy Transfer. All references in this section to the Partnership, as well as the terms “our,” “we,” “us” and “its” refer to USA Compression Partners, LP, together with its consolidated subsidiaries, unless the context otherwise requires or where otherwise indicated.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements.” All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects, and expectations concerning our business, results of operations, and financial condition. Many of these statements can be identified by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “continue,” “if,” “outlook,” “will,” “could,” “should,” or similar words or the negatives thereof.
Known material factors that could cause our actual results to differ from those represented within these forward-looking statements are described in Part I, Item 1A “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2021, filed on February 15, 2022 (our “2021 Annual Report”), as well as our subsequent filings with the SEC. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:
• changes in general economic conditions, including inflation or supply chain disruptions and changes in economic conditions of the crude oil and natural gas industries, including any impact from the ongoing military conflict involving Russia and Ukraine;
• changes in the long-term supply of and demand for crude oil and natural gas, including as a result of the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions, actions taken by governmental authorities and other third parties in response to such events, and the resulting disruption in the oil and gas industry and impact on demand for oil and gas;
• competitive conditions in our industry, including competition for employees in a tight labor market;
• changes in the availability and cost of capital, including changes to interest rates;
• renegotiation of material terms of customer contracts;
• actions taken by our customers, competitors, and third-party operators;
• operating hazards, natural disasters, epidemics, pandemics (such as COVID-19), weather-related impacts, casualty losses, and other matters beyond our control;
• operational challenges relating to COVID-19 and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts, and supply chain disruptions;
• the deterioration of the financial condition of our customers, which may result in the initiation of bankruptcy proceedings with respect to certain customers;
• the restrictions on our business that are imposed under our long-term debt agreements;
• information technology risks, including the risk from cyberattacks;
• the effects of existing and future laws and governmental regulations;
• the effects of future litigation; and
• our ability to realize the anticipated benefits of acquisitions.
New factors emerge from time to time, and it is not possible for us to predict or anticipate all factors that could affect the results reflected in the forward-looking statements contained herein. Should one or more of the risks or uncertainties described in this Quarterly Report on Form 10-Q occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.
All forward-looking statements included in this report are based on information available to us as of the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. All subsequent written and
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oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.
Operating Highlights
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 September 30, Percent
Change Nine Months Ended September 30, Percent
Change
2022 2021 2022 2021
Fleet horsepower (at period end) (1) 3,711,205 3,687,601 0.6 % 3,711,205 3,687,601 0.6 %
Total available horsepower (at period end) (2) 3,761,205 3,690,361 1.9 % 3,761,205 3,690,361 1.9 %
Revenue generating horsepower (at period end) (3) 3,128,845 2,919,362 7.2 % 3,128,845 2,919,362 7.2 %
Average revenue generating horsepower (4) 3,090,910 2,914,100 6.1 % 3,032,406 2,951,142 2.8 %
Average revenue per revenue generating horsepower per month (5) $ 17.53 $ 16.62 5.5 % $ 17.20 $ 16.59 3.7 %
Revenue generating compression units (at period end) 4,034 3,928 2.7 % 4,034 3,928 2.7 %
Average horsepower per revenue generating compression unit (6) 767 741 3.5 % 761 749 1.6 %
Horsepower utilization (7):
At period end 90.9 % 83.0 % 9.5 % 90.9 % 83.0 % 9.5 %
Average for the period (8) 90.3 % 82.3 % 9.7 % 87.7 % 82.6 % 6.2 %
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(1) Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As of September 30, 2022, we had 175,000 large horsepower on order for delivery, 75,000 of which is expected to be delivered within the next twelve months and 100,000 horsepower thereafter.
(2) Total available horsepower is revenue generating horsepower under contract for which we are billing a customer, horsepower in our fleet that is under contract but is not yet generating revenue, horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, and idle horsepower. Total available horsepower excludes new horsepower on order for which we do not have an executed compression services contract.
(3) Revenue generating horsepower is horsepower under contract for which we are billing a customer.
(4) Calculated as the average of the month-end revenue generating horsepower for each of the months in the period.
(5) Calculated as the average of the result of dividing the contractual monthly rate, excluding standby or other temporary rates, for all units at the end of each month in the period by the sum of the revenue generating horsepower at the end of each month in the period.
(6) Calculated as the average of the month-end revenue generating horsepower per revenue generating compression unit for each of the months in the period.
(7) Horsepower utilization is calculated as (i) the sum of (a) revenue generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair. Horsepower utilization based on revenue generating horsepower and fleet horsepower as of September 30, 2022 and 2021 was 84.3% and 79.2%, 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 September 30, 2022 and 2021 was 83.4% and 79.0%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the nine months ended September 30, 2022 and 2021 was 82.1% and 79.7%, respectively.
The 1.9% increase in total available horsepower as of September 30, 2022, compared to September 30, 2021, primarily was due to compression units added to our fleet to meet incremental demand from customers for our compression services.
The 7.2% increase in revenue generating horsepower and 2.7% increase in revenue generating compression units as of September 30, 2022, compared to September 30, 2021, primarily were driven by the redeployment of existing compression units due to increased demand for our services commensurate with increased operating activity in the oil and gas industry.
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The 5.5% and 3.7% increases in average revenue per revenue generating horsepower per month during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, respectively, primarily were due to select price increases on our existing fleet.
The 3.5% and 1.6% increases in average horsepower per revenue generating compression unit during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, respectively, primarily were due to the composition of existing compression units redeployed.
Horsepower utilization increased to 90.9% as of September 30, 2022, compared to 83.0% as of September 30, 2021. The increase in horsepower utilization primarily was due to an increase in revenue generating horsepower and an increase in horsepower that is under contract but not yet generating revenue, which was driven by a combination of the redeployment of certain previously idle units as well as new units added to the fleet. We believe the increase in horsepower utilization is the result of increased demand for our services, consistent with increased operating activity in the oil and gas industry. The above-stated factors also drove the increase in average horsepower utilization for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021.
Horsepower utilization based on revenue generating horsepower and fleet horsepower increased to 84.3% as of September 30, 2022, compared to 79.2% as of September 30, 2021. The increase in horsepower utilization based on revenue generating horsepower and fleet horsepower primarily was driven by the redeployment of certain previously idle units due to increased demand for our services, consistent with increased operating activity in the oil and gas industry. The above-stated factor also drove the increase in average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three and nine months ended September 30, 2022, as compared to the three and nine months ended September 30, 2021.
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Financial Results of Operations
Three months ended September 30, 2022 compared to the three months ended September 30, 2021
The following table summarizes our results of operations for the periods presented (dollars in thousands):
Three Months Ended September 30, Percent
Change
2022 2021
Revenues:
Contract operations $ 171,019 $ 151,622 12.8 %
Parts and service 4,901 4,122 18.9 %
Related party 3,693 2,883 28.1 %
Total revenues 179,613 158,627 13.2 %
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization 59,453 49,159 20.9 %
Depreciation and amortization 58,772 59,265 (0.8) %
Selling, general and administrative 14,663 13,524 8.4 %
Loss on disposition of assets 1,118 48 *
Impairment of compression equipment 504 — *
Total costs and expenses 134,510 121,996 10.3 %
Operating income 45,103 36,631 23.1 %
Other income (expense):
Interest expense, net (35,142) (32,222) 9.1 %
Other 27 18 50.0 %
Total other expense (35,115) (32,204) 9.0 %
Net income before income tax expense 9,988 4,427 125.6 %
Income tax expense 376 312 20.5 %
Net income $ 9,612 $ 4,115 133.6 %
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* Not meaningful
Contract operations revenue. The $19.4 million increase in contract operations revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to (i) a 6.1% increase in average revenue generating horsepower as a result of increased demand for our services, consistent with increased operating activity in the oil and gas industry, (ii) select price increases on our existing fleet under contract, resulting in a 5.5% increase in average revenue per revenue generating horsepower per month, and (iii) an increase in revenues attributable to natural gas treating services.
Contract operations revenue was not materially impacted by contract renegotiations during the period with our customers. Additionally, average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not differ significantly from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in their primary term during the period.
Parts and service revenue . The $0.8 million increase in parts and service revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to an increase in maintenance work performed on units at customer locations that are outside the scope of our core maintenance activities and that are offered as a convenience and in directly reimbursable freight and crane charges that are the financial responsibility of the customers. Demand for retail parts and services fluctuates from period to period based on varying customer needs.
Related-party revenue . Related-party revenue was earned through related-party transactions that occur in the ordinary course of business with various affiliated entities of Energy Transfer. The $0.8 million increase in related party revenue for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to revenue recognized from entities acquired by Energy Transfer since the previously comparable period.
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Cost of operations, exclusive of depreciation and amortization . The $10.3 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to (i) a $7.6 million increase in direct expenses, primarily driven by fluids and parts, (ii) a $1.3 million increase in direct labor costs due to increased activity, and (iii) a $1.1 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period.
The increase in fluids primarily was related to higher commodity prices and increased usage associated with higher revenue generating horsepower.
Depreciation and amortization expense . The $0.5 million decrease in depreciation and amortization expense for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to asset disposals and assets reaching the end of their depreciable lives.
Selling, general, and administrative expense . The $1.1 million increase in selling, general, and administrative expense for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to (i) a $1.1 million decrease to the allowance for credit losses recorded in the prior comparable period and (ii) a $0.4 million increase in severance charges, primarily attributable to the departure of one of our executives during the third quarter of 2022, partially offset by (iii) a $0.5 million decrease in unit-based compensation expense, attributable to mark-to-market changes to our unit-based compensation liability that occurred as a result of changes to our per-unit trading price as of September 30, 2022.
Loss on disposition of assets. The $1.1 million increase in loss on disposition of assets for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to various disposals of non-compression assets.
Impairment of compression equipment. The $0.5 million impairment of compression equipment for the three months ended September 30, 2022, primarily resulted from our evaluation of the potential future deployment of idle fleet assets under then-existing market conditions. The primary circumstances supporting these impairments were: (i) unmarketability of units into the foreseeable future, (ii) excessive maintenance costs associated with certain fleet assets, and (iii) excessive retrofitting costs that likely would prevent certain units from securing customer acceptance. 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 September 30, 2022, we retired two compressor units with approximately 1,100 aggregate horsepower that previously were used to provide compression services in our business.
No impairment was recorded for the three months ended September 30, 2021 .
Interest expense, net . The $2.9 million increase in interest expense, net, for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to higher weighted-average interest rates and increased borrowings under the Credit Agreement, partially offset by a decrease in amortization of debt issuance costs attributable to the amendment and restatement of the Credit Agreement since the prior comparable period.
The weighted-average interest rate applicable to borrowings under the Credit Agreement was 4.94% and 2.92% for the three months ended September 30, 2022, and 2021, respectively, and average outstanding borrowings under the Credit Agreement were $576.0 million and $479.2 million for the three months ended September 30, 2022, and 2021, respectively.
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Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
The following table summarizes our results of operations for the periods presented (dollars in thousands):
Nine Months Ended September 30, Percent
Change
2022 2021
Revenues:
Contract operations $ 492,656 $ 455,947 8.1 %
Parts and service 10,432 7,978 30.8 %
Related party 11,398 8,777 29.9 %
Total revenues 514,486 472,702 8.8 %
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization 168,343 143,391 17.4 %
Depreciation and amortization 176,795 179,522 (1.5) %
Selling, general and administrative 43,842 42,612 2.9 %
Loss (gain) on disposition of assets 1,970 (2,312) *
Impairment of compression equipment 936 4,953 *
Total costs and expenses 391,886 368,166 6.4 %
Operating income 122,600 104,536 17.3 %
Other income (expense):
Interest expense, net (100,059) (96,860) 3.3 %
Other 68 88 (22.7) %
Total other expense (99,991) (96,772) 3.3 %
Net income before income tax expense 22,609 7,764 191.2 %
Income tax expense 657 590 11.4 %
Net income $ 21,952 $ 7,174 206.0 %
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* Not meaningful
Contract operations revenue. The $36.7 million increase in contract operations revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to (i) select price increases on our existing fleet under contract, resulting in a 3.7% increase in average revenue per revenue generating horsepower per month, (ii) a 2.8% increase in average revenue generating horsepower as a result of increased demand for our services, consistent with increased operating activity in the oil and gas industry, and (iii) an increase in revenue attributable to natural gas treating services.
Contract operations revenue was not materially impacted by contract renegotiations during the period with our customers. Additionally, average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not differ significantly from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in their primary term during the period.
Parts and service revenue . The $2.5 million increase in parts and service revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to an increase in maintenance work performed on units at customer locations that are outside the scope of our core maintenance activities and that are offered as a convenience and in directly reimbursable freight and crane charges that are the financial responsibility of the customers. Demand for retail parts and services fluctuates from period to period based on varying customer needs.
Related-party revenue . Related-party revenue was earned through related-party transactions that occur in the ordinary course of business with various affiliated entities of Energy Transfer. The $2.6 million increase in related-party revenue for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to revenue recognized from entities acquired by Energy Transfer since the previously comparable period.
Cost of operations, exclusive of depreciation and amortization . The $25.0 million increase in cost of operations, exclusive of depreciation and amortization, for the nine months ended September 30, 2022, compared to the nine months ended
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September 30, 2021, primarily was due to (i) a $12.2 million increase in direct expenses, primarily driven by fluids and parts, (ii) a $4.0 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period, (iii) a $2.3 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs, (iv) a $2.2 million increase in non-income taxes, primarily due to sales tax refunds received in the prior comparable period, (v) a $2.1 million increase in direct labor costs due to higher employee costs, and (vi) a $1.5 million increase in retail parts and service expenses, for which a corresponding increase in parts and service revenue also occurred.
The increases in fluids and fuel costs primarily were related to higher commodity prices and increased usage associated with higher revenue generating horsepower.
Depreciation and amortization expense . The $2.7 million decrease in depreciation and amortization expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to asset disposals and assets reaching the end of their depreciable lives.
Selling, general, and administrative expense . The $1.2 million increase in selling, general, and administrative expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to (i) a $1.7 million decrease to the allowance for credit losses, resulting from a $2.4 million reversal of previously recognized credit losses in the prior comparable period versus a $0.7 million reversal to expense in the current period, (ii) a $0.6 million increase in professional fees, and (iii) a $0.5 million increase in severance charges, primarily attributable to the departure of one of our executives during the third quarter of 2022, partially offset by (iv) a $2.2 million decrease in unit-based compensation expense, attributable to mark-to-market changes to our unit-based compensation liability that occurred as a result of changes to our per-unit trading price as of September 30, 2022.
Loss (gain) on disposition of assets. The $4.3 million decrease in loss (gain) on disposition of assets for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to the exercise of a lease purchase option on certain compression units by a customer during the prior comparable period. The remaining change primarily relates to various disposals of non-compression assets.
Impairment of compression equipment. The $0.9 million and $5.0 million impairments of compression equipment for the nine months ended September 30, 2022, and 2021, respectively, primarily resulted from our evaluation of the potential future deployment of idle fleet assets under then-existing market conditions. The primary circumstances supporting these impairments were: (i) unmarketability of units into the foreseeable future, (ii) excessive maintenance costs associated with certain fleet assets, and (iii) excessive retrofitting costs that likely would prevent certain units from securing customer acceptance. These compression units were written down to their respective estimated salvage values, if any.
As a result of our evaluations during the nine months ended September 30, 2022, and 2021, we retired 12 and 22 compressor units, respectively, with approximately 2,500 and 9,600 aggregate horsepower, respectively, that previously were used to provide compression services in our business.
Interest expense, net . The $3.2 million increase in interest expense, net, for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to higher weighted-average interest rates and increased borrowings under the Credit Agreement, partially offset by a decrease in amortization of debt issuance costs attributable to the amendment and restatement of the Credit Agreement since the prior comparable period.
The weighted-average interest rate applicable to borrowings under the Credit Agreement was 3.79% and 3.01% for the nine months ended September 30, 2022, and 2021, respectively, and average outstanding borrowings under the Credit Agreement were $561.1 million and $485.3 million for the nine months ended September 30, 2022, and 2021, respectively.
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Other Financial Data
The following table summarizes other financial data for the periods presented (dollars in thousands):
Other Financial Data: (1) Three Months Ended
September 30, Percent
Change Nine Months Ended
September 30, Percent
Change
2022 2021 2022 2021
Gross margin $ 61,388 $ 50,203 22.3 % $ 169,348 $ 149,789 13.1 %
Adjusted gross margin $ 120,160 $ 109,468 9.8 % $ 346,143 $ 329,311 5.1 %
Adjusted gross margin percentage (2) 66.9 % 69.0 % (3.0) % 67.3 % 69.7 % (3.4) %
Adjusted EBITDA $ 109,156 $ 99,634 9.6 % $ 312,987 $ 299,175 4.6 %
Adjusted EBITDA percentage (2) 60.8 % 62.8 % (3.2) % 60.8 % 63.3 % (3.9) %
DCF $ 55,181 $ 51,973 6.2 % $ 160,903 $ 157,089 2.4 %
DCF Coverage Ratio 1.07 x 1.02 x 4.9 % 1.04 x 1.03 x 1.0 %
Cash Coverage Ratio 1.08 x 1.03 x 4.9 % 1.06 x 1.04 x 1.9 %
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(1) Adjusted gross margin, Adjusted EBITDA, Distributable Cash Flow (“DCF”), DCF Coverage Ratio, and Cash Coverage Ratio are all non-GAAP financial measures. Definitions of each measure, as well as reconciliations of each measure to its most directly comparable financial measure(s) calculated and presented in accordance with GAAP, can be found below under the caption “Non-GAAP Financial Measures.”
(2) Adjusted gross margin percentage and Adjusted EBITDA percentage are calculated as a percentage of revenue.
Gross margin. The $11.2 million increase in gross margin for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was due to (i) a $21.0 million increase in revenues and (ii) a $0.5 million decrease in depreciation and amortization, partially offset by (iii) a $10.3 million increase in cost of operations, exclusive of depreciation and amortization.
The $19.6 million increase in gross margin for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was due to (i) a $41.8 million increase in revenues and (ii) a $2.7 million decrease in depreciation and amortization, partially offset by (iii) a $25.0 million increase in cost of operations, exclusive of depreciation and amortization.
Adjusted gross margin. The $10.7 million increase in Adjusted gross margin for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, was due to a $21.0 million increase in revenues, partially offset by a $10.3 million increase in cost of operations, exclusive of depreciation and amortization.
The $16.8 million increase in Adjusted gross margin for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was due to a $41.8 million increase in revenues, partially offset by a $25.0 million increase in cost of operations, exclusive of depreciation and amortization.
Adjusted EBITDA. The $9.5 million increase in Adjusted EBITDA for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to a $10.7 million increase in Adjusted gross margin, partially offset by a $1.2 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense and severance charges.
The $13.8 million increase in Adjusted EBITDA for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to a $16.8 million increase in Adjusted gross margin, partially offset by a $3.0 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, severance charges, and transaction expenses.
DCF. The $3.2 million increase in DCF for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily was due to (i) a $10.7 million increase in Adjusted gross margin, partially offset by (ii) a $3.4 million increase in cash interest expense, net, (iii) a $2.8 million increase in maintenance capital expenditures, and (iv) a $1.2 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense and severance charges.
The $3.8 million increase in DCF for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to (i) a $16.8 million increase in Adjusted gross margin, partially offset by (ii) a $5.3 million increase in maintenance capital expenditures, (iii) a $4.6 million increase in cash interest expense, net, and (iv) a
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$3.0 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, severance charges, and transaction expenses.
Coverage Ratios . The increases in DCF Coverage Ratio and Cash Coverage Ratio for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, primarily was due to the increase in DCF, partially offset by increased distributions due to an increase in the number of outstanding common units.
Liquidity and Capital Resources
Overview
We operate in a capital-intensive industry, and our primary liquidity needs are to finance the purchase of additional compression units, make other capital expenditures, service our debt, fund working capital, and pay distributions. Our principal sources of liquidity include cash generated by operating activities, borrowings under the Credit Agreement, and issuances of debt and equity securities, including common units under the DRIP.
We typically utilize cash generated by operating activities and, where necessary, borrowings under the Credit Agreement to service our debt, fund working capital, fund our estimated expansion capital expenditures, fund our maintenance capital expenditures, and pay distributions to our unitholders. Covenants in the Credit Agreement and other debt instruments require that we maintain certain leverage ratios, and if we anticipate that we may violate those covenants in the future we could: (i) delay discretionary capital spending and reduce operating expenses; (ii) request an amendment to the Credit Agreement; (iii) reduce or suspend distributions to our unitholders; or (iv) issue equity securities, including under the DRIP.
Because we distribute all of our available cash, which excludes prudent operating reserves, we expect to fund any future expansion capital expenditures or acquisitions primarily with capital from external financing sources, such as borrowings under the Credit Agreement and issuances of debt and equity securities, including under the DRIP.
Capital Expenditures
The compression services business is capital intensive, requiring significant investment to maintain, expand, and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist primarily of, the following:
• maintenance capital expenditures, which are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, to replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related operating income; and
• expansion capital expenditures, which are capital expenditures made to expand the operating capacity or operating income capacity of assets, including by acquisition of compression units or through modification of existing compression units to increase their capacity, or to replace certain partially or fully depreciated assets that were not currently generating operating income.
We classify capital expenditures as maintenance or expansion on an individual-asset basis. 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 nine months ended September 30, 2022, and 2021, were $20.0 million and $14.8 million, respectively. We currently plan to spend approximately $26.0 million in maintenance capital expenditures for the year 2022, including parts consumed from inventory.
Without giving effect to any equipment that we may acquire pursuant to any future acquisitions, we currently plan to spend between $120.0 million and $130.0 million in expansion capital expenditures for the year 2022. Our expansion capital expenditures for the nine months ended September 30, 2022, and 2021, were $99.0 million and $25.9 million, respectively.
As of September 30, 2022, we had binding commitments to purchase $167.6 million worth of additional compression units, $66.8 million of which is expected to be settled within the next twelve months and $100.8 million of which is expected to be settled in the remainder of 2023.
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Cash Flows
The following table summarizes our sources and uses of cash for the nine months ended September 30, 2022 and 2021 (in thousands):
Nine Months Ended September 30,
2022 2021
Net cash provided by operating activities $ 178,491 $ 184,368
Net cash used in investing activities (86,415) (23,666)
Net cash used in financing activities (92,070) (160,454)
Net cash provided by operating activities . The $5.9 million decrease in net cash provided by operating activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was due to changes in working capital, partially offset by a $10.3 million increase in net income, as adjusted for non-cash items.
Net cash used in investing activities . The $62.7 million increase in net cash used in investing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was due to (i) a $58.7 million increase in capital expenditures, for purchases of new compression units, reconfiguration costs, and other equipment, (ii) a $3.1 million decrease in proceeds from disposition of property and equipment, and (iii) a $1.0 million decrease in proceeds received from insurance recovery.
Net cash used in financing activities . The $68.4 million decrease in net cash used in financing activities for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily was due to a $70.1 million increase in net borrowings under the Credit Agreement.
Revolving Credit Facility
As of September 30, 2022, we had outstanding borrowings under the Credit Agreement of $618.4 million, $981.6 million of availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $286.6 million. As of September 30, 2022, we were in compliance with all of our covenants under the Credit Agreement.
As of October 27, 2022, we had outstanding borrowings under the Credit Agreement of $613.1 million.
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 9 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2021 Annual Report.
Senior Notes
As of September 30, 2022, we had $725.0 million and $750.0 million aggregate principal amount outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively.
The Senior Notes 2026 are due on April 1, 2026, and accrue interest at the rate of 6.875% per year. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1.
The Senior Notes 2027 are due 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.
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 9 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2021 Annual Report.
DRIP
During the nine months ended September 30, 2022, distributions of $1.6 million were reinvested under the DRIP, resulting in the issuance of 93,309 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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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 Adjusted gross margin is useful to investors as a supplemental measure 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 presented in accordance with GAAP. Moreover, our 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 cost structure. To compensate for the limitations of Adjusted gross margin as a measure of our performance, we believe 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):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Total revenues $ 179,613 $ 158,627 $ 514,486 $ 472,702
Cost of operations, exclusive of depreciation and amortization (59,453) (49,159) (168,343) (143,391)
Depreciation and amortization (58,772) (59,265) (176,795) (179,522)
Gross margin $ 61,388 $ 50,203 $ 169,348 $ 149,789
Depreciation and amortization 58,772 59,265 176,795 179,522
Adjusted gross margin $ 120,160 $ 109,468 $ 346,143 $ 329,311
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 leases, unit-based compensation expense (benefit), 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 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 the 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 pay distributions; and
• 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 Adjusted EBITDA provides useful information to investors because, when viewed in conjunction with our GAAP results and the accompanying reconciliations, it may provide a more complete assessment of our performance as compared to solely considering GAAP results. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses to evaluate 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 presented in accordance with GAAP. 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 also are necessary elements of our aggregate costs. Unit-based
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compensation expense related to equity awards granted to employees also is a meaningful business expense. Therefore, measures that exclude these cost elements have material limitations. To compensate for these limitations, we believe that it is important to consider net income (loss) and net cash provided by operating activities as determined under GAAP, as well as Adjusted EBITDA, to evaluate our financial performance and liquidity. Our Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these excluded items may vary among companies. Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into their decision making.
The following table reconciles Adjusted EBITDA to net income 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 9,612 $ 4,115 $ 21,952 $ 7,174
Interest expense, net 35,142 32,222 100,059 96,860
Depreciation and amortization 58,772 59,265 176,795 179,522
Income tax expense 376 312 657 590
EBITDA $ 103,902 $ 95,914 $ 299,463 $ 284,146
Interest income on capital lease — — — 48
Unit-based compensation expense (1) 3,008 3,482 9,716 11,924
Transaction expenses (2) — — 27 —
Severance charges 624 190 875 416
Loss (gain) on disposition of assets 1,118 48 1,970 (2,312)
Impairment of compression equipment (3) 504 — 936 4,953
Adjusted EBITDA $ 109,156 $ 99,634 $ 312,987 $ 299,175
Interest expense, net (35,142) (32,222) (100,059) (96,860)
Non-cash interest expense 1,814 2,288 5,451 6,866
Income tax expense (376) (312) (657) (590)
Interest income on capital lease — — — (48)
Transaction expenses — — (27) —
Severance charges (624) (190) (875) (416)
Other (33) (1,118) (916) (2,501)
Changes in operating assets and liabilities (25,586) (22,783) (37,413) (21,258)
Net cash provided by operating activities $ 49,209 $ 45,297 $ 178,491 $ 184,368
________________________________
(1) For the three and nine months ended September 30, 2022, unit-based compensation expense included $1.1 million and $3.4 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $1.1 million for the three and nine months ended September 30, 2022, related to the cash portion of any settlement of phantom unit awards upon vesting. 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. The remainder of 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 decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows.
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Distributable Cash Flow
We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, 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 the cash flows that 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 that we expect to pay our common unitholders.
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 presented in accordance with GAAP. 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 components of our aggregate costs. Unit-based compensation expense related to equity awards granted to employees also is a meaningful business expense. Therefore, measures that exclude these cost elements have material limitations. To compensate for these limitations, we believe that it is important to consider net income (loss) and net cash provided by operating activities as determined under GAAP, as well as DCF, to evaluate our financial performance and liquidity. Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these excluded items may vary among companies. Management compensates for the limitations of DCF as an analytical tool by reviewing comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into their decision making.
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The following table reconciles DCF to net income 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 September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Net income $ 9,612 $ 4,115 $ 21,952 $ 7,174
Non-cash interest expense 1,814 2,288 5,451 6,866
Depreciation and amortization 58,772 59,265 176,795 179,522
Non-cash income tax expense (benefit) (33) 32 (216) (101)
Unit-based compensation expense (1) 3,008 3,482 9,716 11,924
Transaction expenses (2) — — 27 —
Severance charges 624 190 875 416
Loss (gain) on disposition of assets 1,118 48 1,970 (2,312)
Impairment of compression equipment (3) 504 — 936 4,953
Distributions on Preferred Units (12,188) (12,188) (36,563) (36,563)
Maintenance capital expenditures (4) (8,050) (5,259) (20,040) (14,790)
DCF $ 55,181 $ 51,973 $ 160,903 $ 157,089
Maintenance capital expenditures 8,050 5,259 20,040 14,790
Transaction expenses — — (27) —
Severance charges (624) (190) (875) (416)
Distributions on Preferred Units 12,188 12,188 36,563 36,563
Other — (1,150) (700) (2,400)
Changes in operating assets and liabilities (25,586) (22,783) (37,413) (21,258)
Net cash provided by operating activities $ 49,209 $ 45,297 $ 178,491 $ 184,368
________________________________
(1) For the three and nine months ended September 30, 2022, unit-based compensation expense included $1.1 million and $3.4 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $1.1 million for the three and nine months ended September 30, 2022, related to the cash portion of any settlement of phantom unit awards upon vesting. 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. The remainder of 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 decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows.
(4) Reflects actual maintenance capital expenditures for the period presented. 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 the period’s DCF divided by distributions declared to common unitholders in respect of such period. Cash Coverage Ratio is defined as the period’s 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 permit management, investors, and others to assess our ability to pay cash distributions to common unitholders out of 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.
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The following table summarizes certain coverage ratios for the periods presented (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
DCF $ 55,181 $ 51,973 $ 160,903 $ 157,089
Distributions for DCF Coverage Ratio (1) $ 51,447 $ 50,975 $ 153,989 $ 152,872
Distributions reinvested in the DRIP (2) $ 555 $ 472 $ 1,616 $ 1,312
Distributions for Cash Coverage Ratio (3) $ 50,892 $ 50,503 $ 152,373 $ 151,560
DCF Coverage Ratio 1.07 x 1.02 x 1.04 x 1.03 x
Cash Coverage Ratio 1.08 x 1.03 x 1.06 x 1.04 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.
Critical Accounting Estimates
The Partnership’s critical accounting estimates are described in Part II, Item 7 “Critical Accounting Estimates” of our 2021 Annual Report. There have been no material changes to our critical accounting estimates since the date of our 2021 Annual Report.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.