What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 95 added, 173 removed, 216 unchanged (55% of the section changed)

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.

USA Compression Partners, LP (the “Partnership”) is a Delaware limited partnership that operates as one of the nation’s largest independent providers of natural gas compression services in terms of total compression fleet horsepower.

We are managed by our general partner, USA Compression GP, LLC (the “General Partner”), which is wholly owned by Energy Transfer.

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• 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;

• 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, 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;

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• 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;

• operating hazards, natural disasters, epidemics, pandemics, weather-related impacts, casualty losses, and other matters beyond our control;

• the deterioration of the financial condition of our customers, which may result in the initiation of bankruptcy proceedings with respect to certain customers;

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• 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.

New factors emerge from time to time, and it is not possible for us to predict or anticipate all factors that could affect 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.

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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

oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.

All subsequent written and 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

2022 2021 2022 2021

Three Months Ended March 31, Increase

2023 2022 (Decrease)

Fleet horsepower (at period end) (1) 3,725,111 3,687,518 1.0 %

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Average revenue per revenue-generating horsepower per month (5)

$ 18.19 $ 16.87 7.8 %

Revenue-generating compression units (at period end) 4,170 3,949 5.6 %

Average horsepower per revenue-generating compression unit (6)

780 756 3.2 %

Horsepower utilization (7):

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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.

As of March 31, 2023, we had 147,500 large horsepower on order for delivery, all of which is expected to be delivered by year-end 2023.

(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.

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(7) Horsepower utilization is calculated as (i) the sum of (a) revenue-generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair.

Horsepower utilization based on revenue generating horsepower and fleet horsepower as of September 30, 2022 and 2021 was 84.3% and 79.2%, respectively.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower as of March 31, 2023, and 2022, was 87.5% and 81.0%, 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.

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.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three months ended March 31, 2023, and 2022, was 87.2% and 80.7%, respectively.

The 4.4% increase in total available horsepower as of March 31, 2023, compared to March 31, 2022, primarily was due to new compression units added to our fleet to meet incremental demand from customers for our compression services.

The 9.1% increase in revenue-generating horsepower and 5.6% increase in revenue-generating compression units as of March 31, 2023, compared to March 31, 2022, primarily were driven by the redeployment of certain previously idle compression units due to increased demand for our services, commensurate with increased operating activity and production levels in the basins in which we operate.

The 7.8% increase in average revenue per revenue-generating horsepower per month for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to CPI-based and other price increases on customer contracts that occur as market conditions permit on our existing fleet.

The 3.2% increase in average horsepower per revenue-generating compression unit during the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was due to both the redeployment of, and addition of new, larger-horsepower compression units.

Horsepower utilization increased to 92.7% as of March 31, 2023, compared to 86.1% as of March 31, 2022.

The increase 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 compression units as well as new compression units added to the fleet.

The increase in horsepower utilization resulted from increased demand for our services, consistent with increased operating activity and production levels in the basins in which we operate.

The above-stated factors also drove the increase in average horsepower utilization for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower increased to 87.5% as of March 31, 2023, compared to 81.0% as of March 31, 2022.

The increase in horsepower utilization based on revenue-generating horsepower and fleet horsepower primarily was driven by the redeployment of certain previously idle compression units due to increased demand for our services, consistent with increased operating activity and production levels in the basins in which we operate.

The above-stated factor also drove the increase in average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Financial Results of Operations

Three months ended September 30, 2022 compared to the three months ended September 30, 2021

Three months ended March 31, 2023, compared to the three months ended March 31, 2022

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

Three Months Ended September 30, Percent

Three Months Ended March 31, Increase

2023 2022 (Decrease)

Contract operations $ 188,539 $ 157,668 19.6 %

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Selling, general, and administrative 19,101 15,265 25.1 %

Loss on disposition of assets 1,118 48 *

Gain on disposition of assets (376) (179) *

Impairment of compression equipment 1,191 432 *

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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.

The $30.9 million increase in contract operations revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to (i) an 8.8% increase in average revenue-generating horsepower as a result of increased demand for our services, consistent with increased operating activity and production levels in the basins in which we operate, (ii) a 7.8% increase in average revenue per revenue-generating horsepower per month, as a result of CPI-based and other price increases on customer contracts that occur as market conditions permit, and (iii) an increase in revenues attributable to natural gas compression station services and natural gas treating services.

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.

The $2.0 million increase in parts and service revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, 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.

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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.

The $0.9 million increase in related-party revenue for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to increased average revenue-generating horsepower under contract with these entities and increased average revenue per revenue-generating horsepower per month, consistent with the overall increase to our contract operations revenue.

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.

The $12.9 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to (i) a $7.4 million increase in direct expenses, primarily driven by fluids and parts due to higher costs and increased usage associated with increased revenue-generating horsepower, (ii) a $2.2 million increase in direct labor costs primarily due to higher employee costs and increased headcount associated with increased revenue-generating horsepower, (iii) a $1.7 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period, and (iv) a $1.0 million increase in retail parts and service expenses, for which a corresponding increase in parts and service revenue also occurred.

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.

The $0.4 million increase in depreciation and amortization expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to compression unit overhauls and new compression units placed in service to meet increased demand by customers.

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.

The $3.8 million increase in selling, general, and administrative expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to a $3.1 million increase 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 March 31, 2023.

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 $1.2 million and $0.4 million impairments of compression equipment for the three months ended March 31, 2023, and 2022, respectively, primarily were the result of our evaluations of the future deployment of our idle fleet 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.

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

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):

(i) unmarketability of certain compression units into the foreseeable future, (ii) excessive maintenance costs associated with certain fleet assets, and (iii) prohibitive retrofitting costs that likely would prevent certain compression units from securing customer acceptance.

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

As a result of our evaluation during the three months ended March 31, 2023, and 2022, we retired six and ten compression units, respectively, representing approximately 8,700 and 1,400 of aggregate horsepower, respectively, that previously were used to provide compression services in our business.

Interest expense, net .

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 %

The $8.0 million increase in interest expense, net for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to higher weighted-average interest rates and increased borrowings under the Credit Agreement.

The weighted-average interest rate applicable to borrowings under the Credit Agreement was 7.15% and 2.84% for the three months ended March 31, 2023, and 2022, respectively, and average outstanding borrowings under the Credit Agreement were $670.0 million for the three months ended March 31, 2023, compared to $540.1 million for the three months ended March 31, 2022.

Income tax expense .

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

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:

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.

The $0.3 million increase in income tax expense for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was related to taxes associated with the Texas Margin Tax.

Other Financial Data

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(1) Three Months Ended

September 30, Percent

Change Nine Months Ended

September 30, Percent

2022 2021 2022 2021

March 31, Increase

2023 2022 (Decrease)

Gross margin $ 70,973 $ 50,616 40.2 %

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DCF $ 62,613 $ 50,146 24.9 %

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 %

DCF Coverage Ratio 1.21 x 0.98 x 23.5 %

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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.

(1) Adjusted gross margin, Adjusted EBITDA, Distributable Cash Flow (“DCF”), and DCF 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”.

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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.

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

$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.

The $20.4 million increase in gross margin for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was due to (i) a $33.7 million increase in revenues, partially offset by (ii) a $12.9 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $0.4 million increase in depreciation and amortization.

Adjusted gross margin and Adjusted gross margin percentage.

The $20.8 million increase in Adjusted gross margin for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was due to a $33.7 million increase in revenues, partially offset by a $12.9 million increase in cost of operations, exclusive of depreciation and amortization.

The 0.9% decrease in Adjusted gross margin percentage primarily was due to the inflation-driven increase in cost of operations, exclusive of depreciation and amortization, that preceded related CPI-based and other price increases on customer contracts that occur as market conditions permit.

Adjusted EBITDA and Adjusted EBITDA percentage .

The $19.7 million increase in Adjusted EBITDA for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to a $20.8 million increase in Adjusted gross margin, partially offset by a $1.0 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, transaction expenses, and severance charges.

The 0.3% decrease in Adjusted EBITDA percentage primarily was due to the inflation-driven increase in cost of operations, exclusive of depreciation and amortization, that preceded related CPI-based and other price increases on customer contracts that occur as market conditions permit.

The $12.5 million increase in DCF for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to (i) a $20.8 million increase in Adjusted gross margin and (ii) a $0.8 million decrease in maintenance capital expenditures, partially offset by (iii) an $8.0 million increase in cash interest expense, net and (iv) a $1.0 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, transaction expenses, and severance charges.

DCF Coverage Ratio .

The increase in DCF Coverage Ratio for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, 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

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.

We operate in a capital-intensive industry, and our primary liquidity needs include financing the purchase of additional compression units, making other capital expenditures, servicing our debt, funding working capital, and paying cash distributions on our outstanding preferred and common equity.

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 believe cash generated by operating activities and, where necessary, borrowings under the Credit Agreement will be sufficient to service our debt, fund working capital, fund our estimated expansion capital expenditures, fund our maintenance capital expenditures, and pay distributions to our unitholders for the next 12 months.

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.

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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:

Our capital requirements primarily have consisted of, and we anticipate that our capital requirements will continue primarily to consist 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;

• 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.

• 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 at the time of replacement were not 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.

Our aggregate maintenance capital expenditures for the three months ended March 31, 2023, and 2022, were $5.0 million and $5.8 million, respectively.

We currently plan to spend approximately $26.0 million in maintenance capital expenditures for the year 2023, 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 $260.0 million and $270.0 million in expansion capital expenditures for the year 2023.

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.

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,

Our expansion capital expenditures for the three months ended March 31, 2023, and 2022, were $51.2 million and $20.1 million, respectively.

As of March 31, 2023, we had binding commitments to purchase $144.7 million worth of additional compression units and serialized parts, all of which is expected to be settled by year-end 2023.

The following table summarizes our sources and uses of cash for the three months ended March 31, 2023, and 2022, (in thousands):

Three Months Ended March 31,

Net cash provided by operating activities $ 42,338 $ 35,054

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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.

The $7.3 million increase in net cash provided by operating activities for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was due to a $12.4 million increase in net income, as adjusted for non-cash items, partially offset by changes in other working capital.

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.

The $21.1 million increase in net cash used in investing activities for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, was primarily due to a $21.2 million increase in capital expenditures, for purchases of new compression units, reconfiguration costs, and other equipment.

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.

The $13.8 million decrease in net cash used in financing activities for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily was due to a $13.9 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.

As of March 31, 2023, we had outstanding borrowings under the Credit Agreement of $709.1 million, $890.9 million of availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $374.5 million.

As of March 31, 2023, we were in compliance with all of our covenants under the Credit Agreement.

As of April 27, 2023, we had outstanding borrowings under the Credit Agreement of $715.0 million.

For a more detailed description of the Credit Agreement, see Note 7 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 2022 Annual Report.

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.

As of March 31, 2023, 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.

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For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027, see Note 7 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 2022 Annual Report.

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.

Interest-Rate Swap

In April 2023, we entered into an interest-rate swap to manage interest-rate risk associated with the floating-rate Credit Agreement.

See Note 13 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report for additional information on the swap.

During the three months ended March 31, 2023, distributions of $0.6 million were reinvested under the DRIP resulting in the issuance of 29,983 common units.

Such distributions are treated as non-cash transactions in the accompanying unaudited condensed consolidated statements of cash flows included under Part I, Item 1 “Financial Statements” of this report.

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We believe 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 primarily is impacted 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.

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The following table reconciles Adjusted gross margin to gross margin, its most directly comparable GAAP financial measure, for each of the periods presented (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Total revenues $ 197,124 $ 163,412

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• 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.

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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.

compensation expense related to equity awards granted to employees also is a meaningful business expense.

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.

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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

Three Months Ended March 31,

Net income $ 10,941 $ 3,254

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EBITDA $ 110,567 $ 94,182

Interest income on capital lease — — — 48

Unit-based compensation expense (1) 6,779 3,710

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Severance charges — 251

Loss (gain) on disposition of assets 1,118 48 1,970 (2,312)

Gain on disposition of assets (376) (179)

Impairment of compression equipment (3) 1,191 432

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Income tax expense (350) (26)

Interest income on capital lease — — — (48)

Transaction expenses — (27)

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________________________________

(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.

(1) For the three months ended March 31, 2023, and 2022, unit-based compensation expense included $1.1 million each period of cash payments related to quarterly payments of DERs on outstanding phantom unit awards.

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

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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.

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.

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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

Three Months Ended March 31,

Net income $ 10,941 $ 3,254

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Depreciation and amortization 59,486 59,064

Non-cash income tax expense (benefit) (33) 32 (216) (101)

Non-cash income tax benefit (15) (204)

Unit-based compensation expense (1) 6,779 3,710

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Severance charges — 251

Loss (gain) on disposition of assets 1,118 48 1,970 (2,312)

Gain on disposition of assets (376) (179)

Impairment of compression equipment (3) 1,191 432

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________________________________

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

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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

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.

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

We believe DCF Coverage Ratio is an important measure of operating performance because it permits 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, as presented, may not be comparable to similarly titled measures of other companies.

The following table summarizes our DCF Coverage Ratio for the periods presented (dollars in thousands):

Three Months Ended March 31,

DCF $ 62,613 $ 50,146

Distributions for DCF Coverage Ratio (1) $ 51,585 $ 51,123

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

DCF Coverage Ratio 1.21 x 0.98 x

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(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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis