USA Compression Partners, LP 10-Q

ITEM 1. Financial Statements USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Balance Sheets (in thousands) March 31, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 6 $ 35 Accounts receivable, net of allowances for credit losses of $ 1,246 and $ 1,164 , respectively 80,208 83,822 Related-party receivables 246 52 Inventories 96,346 93,754 Prepaid expenses and other assets 9,134 8,784 Total current assets 185,940 186,447 Property and equipment, net 2,174,487 2,172,924 Lease right-of-use assets 17,640 18,195 Identifiable intangible assets, net 267,687 275,032 Other assets 12,120 13,126 Total assets $ 2,657,874 $ 2,665,724 Liabilities, Preferred Units, and Partners’ Deficit Current liabilities: Accounts payable $ 39,444 $ 35,303 Accrued liabilities 54,896 76,016 Deferred revenue 61,628 62,345 Total current liabilities 155,968 173,664 Long-term debt, net 2,170,421 2,106,649 Operating lease liabilities 15,510 16,146 Other liabilities 7,127 8,255 Total liabilities 2,349,026 2,304,714 Commitments and contingencies Preferred Units 477,309 477,309 Partners’ deficit: Common units, 98,258 and 98,228 units issued and outstanding, respectively ( 177,273 ) ( 125,111 ) Warrants 8,812 8,812 Total partners’ deficit ( 168,461 ) ( 116,299 ) Total liabilities, Preferred Units, and partners’ deficit $ 2,657,874 $ 2,665,724 See accompanying notes to unaudited condensed consolidated financial statements. 1 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Operations (in thousands, except per unit amounts) Three Months Ended March 31, 2023 2022 Revenues: Contract operations $ 188,539 $ 157,668 Parts and service 3,878 1,926 Related party 4,707 3,818 Total revenues 197,124 163,412 Costs and expenses: Cost of operations, exclusive of depreciation and amortization 66,665 53,732 Depreciation and amortization 59,486 59,064 Selling, general, and administrative 19,101 15,265 Gain on disposition of assets ( 376 ) ( 179 ) Impairment of compression equipment 1,191 432 Total costs and expenses 146,067 128,314 Operating income 51,057 35,098 Other income (expense): Interest expense, net ( 39,790 ) ( 31,838 ) Other 24 20 Total other expense ( 39,766 ) ( 31,818 ) Net income before income tax expense 11,291 3,280 Income tax expense 350 26 Net income 10,941 3,254 Less: distributions on Preferred Units ( 12,187 ) ( 12,187 ) Net loss attributable to common unitholders’ interests $ ( 1,246 ) $ ( 8,933 ) Weighted-average common units outstanding – basic and diluted 98,247 97,365 Basic and diluted net loss per common unit $ ( 0.01 ) $ ( 0.09 ) Distributions declared per common unit for respective periods $ 0.525 $ 0.525 See accompanying notes to unaudited condensed consolidated financial statements. 2 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital (Deficit) (in thousands, except per unit amounts) For the Three Months Ended March 31, 2023 Common units Warrants Total Partners’ capital (deficit) ending balance, December 31, 2022 $ ( 125,111 ) $ 8,812 $ ( 116,299 ) Distributions and DERs, $ 0.525 per unit ( 51,602 ) — ( 51,602 ) Issuance of common units under the DRIP 617 — 617 Unit-based compensation for equity classified awards 69 — 69 Net loss attributable to common unitholders’ interests ( 1,246 ) — ( 1,246 ) Partners’ capital (deficit) ending balance, March 31, 2023 $ ( 177,273 ) $ 8,812 $ ( 168,461 ) For the Three Months Ended March 31, 2022 Common units Warrants Total Partners’ capital ending balance, December 31, 2021 $ 87,129 $ 13,979 $ 101,108 Distributions and DERs, $ 0.525 per unit ( 51,137 ) — ( 51,137 ) Issuance of common units under the DRIP 516 — 516 Unit-based compensation for equity classified awards 64 — 64 Net loss attributable to common unitholders’ interests ( 8,933 ) — ( 8,933 ) Partners’ capital ending balance, March 31, 2022 $ 27,639 $ 13,979 $ 41,618 See accompanying notes to unaudited condensed consolidated financial statements. 3 Table of Contents USA COMPRESSION PARTNERS, LP Unaudited Condensed Consolidated Statements of Cash Flows (in thousands) Three Months Ended March 31, 2023 2022 Cash flows from operating activities: Net income $ 10,941 $ 3,254 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 59,486 59,064 Provision for expected credit losses — ( 500 ) Amortization of debt issuance costs 1,822 1,822 Unit-based compensation expense 6,779 3,710 Deferred income tax benefit ( 15 ) ( 204 ) Gain on disposition of assets ( 376 ) ( 179 ) Impairment of compression equipment 1,191 432 Changes in assets and liabilities: Accounts receivable and related-party receivables, net 3,420 ( 1,138 ) Inventories ( 13,328 ) ( 5,161 ) Prepaid expenses and other current assets ( 350 ) ( 919 ) Other assets 1,177 869 Accounts payable 454 ( 2,202 ) Accrued liabilities and deferred revenue ( 28,863 ) ( 23,794 ) Net cash provided by operating activities 42,338 35,054 Cash flows from investing activities: Capital expenditures, net ( 41,397 ) ( 20,230 ) Proceeds from disposition of property and equipment 536 467 Proceeds from insurance recovery — 49 Net cash used in investing activities ( 40,861 ) ( 19,714 ) Cash flows from financing activities: Proceeds from revolving credit facility 266,470 214,978 Payments on revolving credit facility ( 203,338 ) ( 165,785 ) Cash distributions on common units ( 52,093 ) ( 51,767 ) Cash distributions on Preferred Units ( 12,187 ) ( 12,187 ) Deferred financing costs ( 251 ) ( 423 ) Other ( 107 ) ( 141 ) Net cash used in financing activities ( 1,506 ) ( 15,325 ) Increase (decrease) in cash and cash equivalents ( 29 ) 15 Cash and cash equivalents, beginning of period 35 — Cash and cash equivalents, end of period $ 6 $ 15 Supplemental cash flow information: Cash paid for interest, net of capitalized amounts $ 63,167 $ 54,712 Supplemental non-cash transactions: Non-cash distributions to certain common unitholders (DRIP) $ 617 $ 516 Transfers from inventories to property and equipment, net $ 10,636 $ 1,118 Changes in capital expenditures included in accounts payable and accrued liabilities $ 2,922 $ 1,874 Changes in financing costs included in accounts payable and accrued liabilities $ 134 $ ( 146 ) See accompanying notes to unaudited condensed consolidated financial statements. 4 Table of Contents USA COMPRESSION PARTNERS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) Organization and Description of Business Unless otherwise indicated, the terms “our,” “we,” “us,” “the Partnership,” and similar language refer to USA Compression Partners, LP, collectively with its consolidated subsidiaries. We are a Delaware limited partnership. Through our operating subsidiaries, we provide natural gas compression services to customers under fixed-term contracts in the natural gas and crude oil industries, using compression packages that we design, engineer, own, operate, and maintain. We also own and operate a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling, and dehydration. We provide compression services in shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara, and Fayetteville shales. USA Compression GP, LLC, a Delaware limited liability company, serves as our general partner and is referred to herein as the “General Partner.” The General Partner is wholly owned by Energy Transfer. The accompanying unaudited condensed consolidated financial statements include the accounts of the Partnership and its subsidiaries, all of which are wholly owned by us. (2) Basis of Presentation and Significant Accounting Policies Basis of Presentation Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to SEC rules and regulations. In the opinion of our management, financial information presented herein reflects all normal recurring adjustments necessary for the fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with SEC rules and regulations. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2022, filed on February 14, 2023 (our “2022 Annual Report”). Use of Estimates Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities that existed as of the date of the unaudited condensed consolidated financial statements. Although these estimates were based on management’s available knowledge of current and expected future events, actual results could differ from these estimates. Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents consist of all cash balances. We consider investments in highly liquid financial instruments purchased with an original maturity of 90 days or less to be cash equivalents. Trade Accounts Receivable Trade accounts receivable are recorded at their invoiced amounts. Allowance for Credit Losses We evaluate allowance for credit losses with reference to our trade accounts receivable balances, which are measured at amortized cost. Due to the short-term nature of our trade accounts receivable, we consider the amortized cost of trade accounts receivable to equal the receivable’s carrying amounts, excluding the allowance for credit losses. 5 Table of Contents Our determination of the allowance for credit losses requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. We continuously evaluate the financial strength of our customers and the overall business climate in which our customers operate, and make adjustments to the allowance for credit losses as necessary. We evaluate the financial strength of our customers by reviewing the aging of their receivables owed to us, our collection experiences with the customer, correspondence, financial information, and third-party credit ratings. We evaluate the business climate in which our customers operate by reviewing various publicly available materials regarding our customers’ industry, including the solvency of various companies in the industry. Inventories Inventories consist of serialized and non-serialized parts primarily used on compression units. All inventories are stated at the lower of cost or net realizable value. Serialized parts inventories are determined using the specific-identification cost method, while non-serialized parts inventories are determined using the weighted-average cost method. Purchases of inventories are considered operating activities within the unaudited condensed consolidated statements of cash flows. Property and Equipment Property and equipment are carried at cost except for (i) certain acquired assets which are recorded at fair value on their respective acquisition dates and (ii) impaired assets which are recorded at fair value as of the last impairment evaluation date for which an adjustment was required. Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over three to five years . Ordinary maintenance and repairs are charged to cost of operations, exclusive of depreciation and amortization. When property and equipment is retired or sold, the associated carrying value and the related accumulated depreciation are removed from our accounts and any related gains or losses are recorded within the unaudited condensed consolidated statements of operations within the period of sale or disposition. Capitalized interest is calculated by multiplying our monthly effective interest rate on outstanding variable-rate indebtedness by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was $ 0.3 million and $ 0.1 million for the three months ended March 31, 2023, and 2022, respectively. Impairment of Long-Lived Assets The carrying value of long-lived assets that are not expected to be recovered from future cash flows are written down to estimated fair value. We test long-lived assets for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recoverable or will no longer be utilized within the operating fleet. The most common circumstance requiring compression units to be evaluated for impairment involves idle units that do not meet the desired performance characteristics of our revenue-generating horsepower. The carrying value of a long-lived asset is not recoverable if the asset’s carrying value exceeds the sum of the undiscounted cash flows expected to be generated from the use and eventual disposition of the asset. If the carrying value of the long-lived asset exceeds the sum of the undiscounted cash flows associated with the asset, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units that we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to continue using. Refer to Note 5 for more detailed information about impairment charges during the three months ended March 31, 2023, and 2022. Identifiable Intangible Assets Identifiable intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The estimated useful lives of our intangible assets range from 15 to 25 years. Revenue Recognition Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally, this occurs with the provision of services or the transfer of goods. Revenue is measured at the amount of consideration we expect to receive in exchange for providing services or transferring goods. Incidental items, if any, that are immaterial in the context of the contract are recognized as expenses. 6 Table of Contents Income Taxes USA Compression Partners, LP is organized as a partnership for U.S. federal and state income tax purposes. As a result, our partners are responsible for U.S. federal and state income taxes on their distributive share of our items of income, gain, loss, or deduction. Texas also imposes an entity-level income tax on partnerships that is based on Texas-sourced taxable margin (the “Texas Margin Tax”). Texas Margin Tax impacts are included within our unaudited condensed consolidated financial statements. Our wholly owned finance subsidiary, USA Compression Finance Corp. (“Finance Corp”), is a corporation for U.S. federal and state income tax purposes and any resulting tax impacts attributable to Finance Corp are included within our unaudited condensed consolidated financial statements. Pass-Through Taxes Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis. Fair-Value Measurements Accounting standards applicable to fair-value measurements establish a framework for measuring fair value and stipulate disclosures about fair-value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair-value measurements. Among the required disclosures is the fair-value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair-value hierarchy are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date. Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. As of March 31, 2023, and December 31, 2022, our financial instruments primarily consisted of cash and cash equivalents, trade accounts receivable, trade accounts payable, and long-term debt. The book values of cash and cash equivalents, trade accounts receivable, and trade accounts payable are representative of fair value due to their short-term maturities. Our revolving credit facility applies floating interest rates to amounts drawn under the facility; therefore, the carrying amount of our revolving credit facility approximates its fair value. The fair value of our Senior Notes 2026 and Senior Notes 2027 were estimated using quoted prices in inactive markets and are considered Level 2 measurements. The following table summarizes the aggregate principal amount and fair value of our Senior Notes 2026 and Senior Notes 2027 (in thousands): March 31, 2023 December 31, 2022 Senior Notes 2026, aggregate principal $ 725,000 $ 725,000 Fair value of Senior Notes 2026 706,875 706,875 Senior Notes 2027, aggregate principal 750,000 750,000 Fair value of Senior Notes 2027 714,375 725,625 Operating Segment We operate in a single business segment, the compression services business. (3) Trade Accounts Receivable The allowance for credit losses, which was $ 1.2 million at both March 31, 2023, and December 31, 2022, represents our best estimate of the amount of probable credit losses included within our existing accounts receivable balance. For the three months ended March 31, 2022, we recognized a reversal of $ 0.5 million to our provision for expected credit losses. Favorable market conditions for customers, attributable to sustained increases in commodity prices, was the primary factor supporting the recorded decrease to the allowance for credit losses for the three months ended March 31, 2022. 7 Table of Contents (4) Inventories Components of inventories are as follows (in thousands): March 31, 2023 December 31, 2022 Serialized parts $ 47,461 $ 46,923 Non-serialized parts 48,885 46,831 Total inventories $ 96,346 $ 93,754 (5) Property and Equipment and Identifiable Intangible Assets Property and Equipment Property and equipment consisted of the following (in thousands): March 31, 2023 December 31, 2022 Compression and treating equipment $ 3,703,658 $ 3,658,000 Computer equipment 30,980 34,941 Automobiles and vehicles 37,618 34,947 Leasehold improvements 8,997 8,997 Buildings 3,464 3,464 Furniture and fixtures 797 795 Land 77 77 Total property and equipment, gross 3,785,591 3,741,221 Less: accumulated depreciation and amortization ( 1,611,104 ) ( 1,568,297 ) Total property and equipment, net $ 2,174,487 $ 2,172,924 Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows: Compression and treating equipment, acquired new 25 years Compression and treating equipment, acquired used 5 - 25 years Furniture and fixtures 3 - 10 years Vehicles and computer equipment 1 - 10 years Buildings 5 years Leasehold improvements 5 years Depreciation expense on property and equipment and gain on disposition of assets were as follows (in thousands): Three Months Ended March 31, 2023 2022 Depreciation expense $ 52,141 $ 51,720 Gain on disposition of assets 376 179 On a quarterly basis, we evaluate the future deployment of our idle fleet assets under current market conditions. For 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. As a result, we recorded an impairment of compression equipment of $ 1.2 million and $ 0.4 million for the three months ended March 31, 2023, and 2022, respectively. The primary circumstances supporting these impairments were: (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. 8 Table of Contents Identifiable Intangible Assets Identifiable intangible assets, net consisted of the following (in thousands): Customer Relationships Trade Names Total Net balance as of December 31, 2022 $ 250,744 $ 24,288 $ 275,032 Amortization expense ( 6,526 ) ( 819 ) ( 7,345 ) Net balance as of March 31, 2023 $ 244,218 $ 23,469 $ 267,687 Accumulated amortization of intangible assets was $ 283.0 million and $ 275.6 million as of March 31, 2023, and December 31, 2022, respectively. (6) Other Current Liabilities Components of other current liabilities included the following (in thousands): March 31, 2023 December 31, 2022 Accrued interest expense $ 7,601 $ 32,763 Accrued unit-based compensation liability 23,345 17,743 Accrued capital expenditures 12,950 10,028 (7) Long-term Debt Our long-term debt, of which there is no current portion, consisted of the following (in thousands): March 31, 2023 December 31, 2022 Senior Notes 2026, aggregate principal $ 725,000 $ 725,000 Senior Notes 2027, aggregate principal 750,000 750,000 Less: deferred financing costs, net of amortization ( 13,667 ) ( 14,307 ) Total senior notes, net 1,461,333 1,460,693 Revolving credit facility 709,088 645,956 Total long-term debt, net $ 2,170,421 $ 2,106,649 Revolving Credit Facility The Credit Agreement matures on December 8, 2026, except that if any portion of the Senior Notes 2026 are outstanding on December 31, 2025, the Credit Agreement will mature on December 31, 2025. The Credit Agreement has an aggregate commitment of $ 1.6 billion (subject to availability under our borrowing base). The Partnership’s obligations under the Credit Agreement are guaranteed by the guarantors party to the Credit Agreement, which currently consists of all of the Partnership’s subsidiaries. In addition, under the Credit Agreement the Partnership’s Secured Obligations (as defined therein) are secured by: (i) substantially all of the Partnership’s assets and substantially all of the assets of the guarantors party to the Credit Agreement, excluding real property and other customary exclusions; and (ii) all of the equity interests of the Partnership’s U.S. restricted subsidiaries (subject to customary exceptions). 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. Our weighted-average interest rate in effect for all borrowings under the Credit Agreement for the three months ended March 31, 2023, was 7.15 %, and our weighted-average interest rate under the Credit Agreement as of March 31, 2023, was 7.38 %. There were no letters of credit issued under the Credit Agreement as of March 31, 2023. We pay an annualized commitment fee of 0.375 % on the unused portion of the aggregate commitment. The Credit Agreement permits us to make distributions of available cash to unitholders so long as (i) no default under the facility has occurred, is continuing, or would result from the distribution; (ii) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants; and (iii) immediately prior to and after giving 9 Table of Contents effect to such distribution, (a) on or before September 30, 2023, we have availability under the Credit Agreement of at least $ 250 million and (b) after September 30, 2023, we have availability under the Credit Agreement of at least $ 100 million. The Credit Agreement also contains various financial covenants, including covenants requiring us to maintain: • a minimum EBITDA (as defined in the Credit Agreement) interest coverage ratio of 2.5 to 1.0, determined as of the last day of each fiscal quarter, with EBITDA and interest expense annualized for the most-recent fiscal quarter; • a ratio of total secured indebtedness to EBITDA not greater than 3.0 to 1.0 or less than 0.0 to 1.0, determined as of the last day of each fiscal quarter, with EBITDA annualized for the most-recent fiscal quarter; and • a maximum funded debt-to-EBITDA ratio, determined as of the last day of each fiscal quarter with EBITDA annualized for the most-recent fiscal quarter, of (i) 5.50 to 1.00 through the third quarter of 2023 and (ii) 5.25 to 1.00 thereafter. In addition, the Partnership may increase the applicable ratio by 0.25 for any fiscal quarter during which a Specified Acquisition (as defined in the Credit Agreement) occurs and for the following two fiscal quarters, but in no event shall the maximum ratio exceed 5.50 to 1.00 for any fiscal quarter as a result of such increase. As of March 31, 2023, we were in compliance with all of our covenants under the Credit Agreement. The Credit Agreement is a “revolving credit facility” that includes a lockbox arrangement, whereby remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility. Senior Notes 2026 On March 23, 2018, the Partnership and Finance Corp co-issued the Senior Notes 2026. The Senior Notes 2026 mature on April 1, 2026 and accrue interest at the rate of 6.875 % per year. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1. The indenture governing the Senior Notes 2026 (the “2026 Indenture”) contains certain financial covenants that we must comply with in order to make certain restricted payments as described in the 2026 Indenture. As of March 31, 2023, we were in compliance with such financial covenants under the 2026 Indenture. The Senior Notes 2026 are fully and unconditionally guaranteed (the “2026 Guarantees”), jointly and severally, on a senior unsecured basis by all of our existing subsidiaries (other than Finance Corp), and will be fully and unconditionally guaranteed, jointly and severally, by each of our future restricted subsidiaries that either borrows under, or guarantees, the Credit Agreement or guarantees certain of our other indebtedness (collectively, the “Guarantors”). The Senior Notes 2026 and the 2026 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2026 and the 2026 Guarantees effectively are subordinated in right of payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinate to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2026. Senior Notes 2027 On March 7, 2019, the Partnership and Finance Corp co-issued the Senior Notes 2027. The Senior Notes 2027 mature on September 1, 2027 and accrue interest at the rate of 6.875 % per year. Interest on the Senior Notes 2027 is payable semi-annually in arrears on each of March 1 and September 1. The indenture governing the Senior Notes 2027 (the “2027 Indenture”) contains certain financial covenants that we must comply with in order to make certain restricted payments as described in the 2027 Indenture. As of March 31, 2023, we were in compliance with such financial covenants under the 2027 Indenture. The Senior Notes 2027 are fully and unconditionally guaranteed (the “2027 Guarantees”), jointly and severally, on a senior unsecured basis by the Guarantors. The Senior Notes 2027 and the 2027 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2027 and the 2027 Guarantees effectively are subordinated in right of payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinate to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2027. 10 Table of Contents We have no assets or operations independent of our subsidiaries, and there are no significant restrictions on our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100 % owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act of 1933, as amended. (8) Preferred Units We had 500,000 Preferred Units outstanding as of March 31, 2023, and December 31, 2022, respectively, with a face value of $ 1,000 per Preferred Unit. The Preferred Units rank senior to our common units with respect to distributions and liquidation rights. The holders of the Preferred Units are entitled to receive cumulative quarterly cash distributions equal to $ 24.375 per Preferred Unit. We have declared and paid per-unit quarterly cash distributions to the holders of the Preferred Units of record as follows: Payment Date Distribution per Preferred Unit February 4, 2022 $ 24.375 May 6, 2022 24.375 August 5, 2022 24.375 November 4, 2022 24.375 Total 2022 distributions $ 97.50 February 3, 2023 $ 24.375 Announced Quarterly Distribution On April 13, 2023, we declared a cash distribution of $ 24.375 per unit on our Preferred Units. The distribution will be paid on May 5, 2023, to the holders of the Preferred Units of record as of the close of business on April 24, 2023. Changes in the Preferred Units’ balance are as follows (in thousands): Preferred Units Balance as of December 31, 2022 $ 477,309 Net income allocated to Preferred Units 12,187 Cash distributions on Preferred Units ( 12,187 ) Balance as of March 31, 2023 $ 477,309 Redemption and Conversion Features As of April 2, 2023, 100 % of the Preferred Units are convertible, at the option of the holder, into common units in accordance with the terms of our Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”). The conversion rate for the Preferred Units is the quotient of (i) the sum of (a) $ 1,000 , plus (b) any unpaid cash distributions on the applicable Preferred Unit, divided by (ii) $ 20.0115 for each Preferred Unit. As of April 2, 2023, we have the option to redeem all or any portion of the Preferred Units then outstanding, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement. On or after April 2, 2028, each holder of the Preferred Units will have the right to require us to redeem all or a portion of their Preferred Units, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement, which we may elect to pay up to 50 % in common units, subject to certain additional limits. 11 Table of Contents (9) Partners’ Deficit Common Units The change in common units outstanding was as follows: Common Units Outstanding Number of common units outstanding, December 31, 2022 98,227,656 Issuance of common units under the DRIP 29,983 Number of common units outstanding, March 31, 2023 98,257,639 As of March 31, 2023, Energy Transfer held 46,056,228 common units, including 8,000,000 common units held by the General Partner and controlled by Energy Transfer. Cash Distributions We have declared and paid per-unit quarterly distributions to our limited partner unitholders of record, including holders of our common and phantom units, as follows (dollars in millions, except distribution per unit): Payment Date Distribution per Limited Partner Unit Amount Paid to Common Unitholders Amount Paid to Phantom Unitholders Total Distribution February 4, 2022 $ 0.525 $ 51.1 $ 1.2 $ 52.3 May 6, 2022 0.525 51.1 1.2 52.3 August 5, 2022 0.525 51.4 1.1 52.5 November 4, 2022 0.525 51.5 1.0 52.5 Total 2022 distributions $ 2.10 $ 205.1 $ 4.5 $ 209.6 February 3, 2023 $ 0.525 $ 51.6 $ 1.1 $ 52.7 Announced Quarterly Distribution On April 13, 2023, we announced a cash distribution of $ 0.525 per unit on our common units. The distribution will be paid on May 5, 2023, to common unitholders of record as of the close of business on April 24, 2023. DRIP 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. Warrants As of March 31, 2023, and December 31, 2022, we had warrants outstanding to purchase 10,000,000 common units with a strike price of $ 19.59 per common unit that may be exercised by the holders at any time prior to April 2, 2028. Loss Per Unit The computation of loss per unit is based on the weighted-average number of participating securities, which includes our common units and certain equity-based awards outstanding during the applicable period. Basic loss per unit is determined by dividing net income (loss) allocated to participating securities after deducting the amount distributed on Preferred Units, by the weighted-average number of participating securities outstanding during the period. Loss attributable to unitholders is allocated to participating securities based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income (loss) attributable to unitholders for the period, the excess distributions are allocated to all participating securities outstanding based on their respective ownership percentages. Diluted loss per unit is computed using the treasury stock method, which considers the potential issuance of limited partner units associated with our long-term incentive plan and warrants. Unvested phantom units and unexercised warrants are not included in basic loss per unit, as they are not considered to be participating securities, but are included in the calculation of diluted loss per unit to the extent they are dilutive, and in the case of warrants to the extent they are considered “in the money.” 12 Table of Contents For the three months ended March 31, 2023, approximately 1.1 million and 477,000 incremental unvested phantom units and “in the money” outstanding warrants, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive. For the three months ended March 31, 2022, approximately 803,000 and 13,000 incremental unvested phantom units and “in the money” then-outstanding warrants, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive . Our outstanding warrants not “in the money” were excluded from the calculation for the three months ended March 31, 2022. (10) Revenue Recognition Disaggregation of Revenue The following table disaggregates our revenue by type of service (in thousands): Three Months Ended March 31, 2023 2022 Contract operations revenue $ 193,142 $ 161,486 Retail parts and services revenue 3,982 1,926 Total revenues $ 197,124 $ 163,412 The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands): Three Months Ended March 31, 2023 2022 Services provided over time: Primary term $ 148,726 $ 108,297 Month-to-month 44,416 53,189 Total services provided over time 193,142 161,486 Services provided or goods transferred at a point in time 3,982 1,926 Total revenues $ 197,124 $ 163,412 Deferred Revenue We record deferred revenue when cash payments are received or due in advance of our performance. Components of deferred revenue were as follows (in thousands): Balance sheet location March 31, 2023 December 31, 2022 Current (1) Deferred revenue $ 61,628 $ 62,345 Noncurrent Other liabilities 1,815 2,789 Total $ 63,443 $ 65,134 ________________________________ (1) We recognized $ 53.0 million of revenue during the three months ended March 31, 2023, related to our deferred revenue balance as of December 31, 2022. Performance Obligations As of March 31, 2023, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to our contract operations revenue was $ 725.9 million. We expect to recognize these remaining performance obligations as follows (in thousands): 2023 (remainder) 2024 2025 2026 Thereafter Total Remaining performance obligations $ 339,873 $ 231,943 $ 74,426 $ 50,863 $ 28,792 $ 725,897 13 Table of Contents (11) Transactions with Related Parties We provide compression services to entities affiliated with Energy Transfer, which as of March 31, 2023, owned approximately 47 % of our limited partner interests and 100 % of the General Partner. Revenue recognized from those entities affiliated with Energy Transfer on our unaudited condensed consolidated statements of operations were as follows (in thousands): Three Months Ended March 31, 2023 2022 Related-party revenues $ 4,707 $ 3,818 We had approximately $ 246,000 and $ 52,000 of related-party receivables on our unaudited condensed consolidated balance sheets as of March 31, 2023, and December 31, 2022, respectively, from those entities affiliated with Energy Transfer. (12) Commitments and Contingencies (a) Major Customers We did not have revenue from any single customer representing 10% or more of total revenues for the three months ended March 31, 2023, or 2022. (b) Litigation From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. (c) Equipment Purchase Commitments Our future capital commitments are comprised of binding commitments under purchase orders for new compression units ordered but not received. The commitments as of March 31, 2023, were $ 144.7 million, all of which is expected to be settled by year-end 2023. (d) Sales Tax Contingency Our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have either claimed or issued an assessment that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and others in our industry have disputed these claims and assessments based on either existing tax statutes or published guidance by the taxing authorities. We currently are protesting certain assessments made by the Oklahoma Tax Commission (“OTC”). We believe it is reasonably possible that we could incur losses related to this assessment depending on whether the administrative law judge assigned by the OTC accepts our position that the transactions are not taxable and we ultimately lose any and all subsequent legal challenges to such determination. We estimate that the range of losses we could incur is from $ 0 to approximately $ 23.8 million, including penalties and interest. (e) Environmental Our operations are subject to federal, state, and local laws, rules, and regulations regarding water quality, hazardous and solid waste management, air quality control, and other environmental matters. These laws, rules, and regulations require that we conduct our operations in a specified manner and to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections, and other approvals. Failure to comply with applicable environmental laws, rules, and regulations may expose us to significant fines, penalties, and/or interruptions in operations. Our environmental policies and procedures are designed to achieve compliance with such applicable laws, rules, and regulations. These evolving laws, rules, and regulations, and claims for damages to property, employees, other persons, and the environment resulting from current or past operations may result in significant expenditures and liabilities in the future. 14 Table of Contents (13) Subsequent Event In April 2023, we entered into an interest-rate swap to manage interest-rate risk associated with the floating-rate Credit Agreement. The interest-rate swap’s notional principal amount is $ 700 million and has a mandatory termination date of April 2025. Under the interest-rate swap, we pay a fixed interest rate of 3.785 % and receive floating interest rate payments that are indexed to the one-month SOFR. 15 Table of Contents