USA Compression Partners, LP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. All references in this section to the Partnership, as well as the terms “our,” “we,” “us,” and “its” refer to USA Compression Partners, LP, together with its consolidated subsidiaries, unless the context otherwise requires or where otherwise indicated. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report contains “forward-looking statements.” All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects, and expectations concerning our business, results of operations, and financial condition. Many of these statements can be identified by words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “continue,” “if,” “outlook,” “will,” “could,” “should,” or similar words or the negatives thereof. Known material factors that could cause our actual results to differ from those represented within these forward-looking statements are described in Part I, Item 1A “Risk Factors” of our annual report on Form 10-K for the year ended December 31, 2022, filed on February 14, 2023 (our “2022 Annual Report”), as well as our subsequent filings with the SEC. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things: • changes in general economic conditions, including inflation or supply chain disruptions and changes in economic conditions of the crude oil and natural gas industries, including any impact from the ongoing military conflict involving Russia and Ukraine; • changes in the long-term supply of and demand for crude oil and natural gas, including as a result of the severity and duration of world health events, related economic repercussions, actions taken by governmental authorities and other third parties in response to such events, and the resulting disruption in the oil and gas industry and impact on demand for oil and gas; • competitive conditions in our industry, including competition for employees in a tight labor market; • changes in the availability and cost of capital, including changes to interest rates; • renegotiation of material terms of customer contracts; • actions taken by our customers, competitors, and third-party operators; • operating hazards, natural disasters, epidemics, pandemics, 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; • the restrictions on our business that are imposed under our long-term debt agreements; • information technology risks including the risk from cyberattacks; • the effects of existing and future laws and governmental regulations; • the effects of future litigation; and • our ability to realize the anticipated benefits of acquisitions. New factors emerge from time to time, and it is not possible for us to predict or anticipate all factors that could affect results reflected in the forward-looking statements contained herein. Should one or more of the risks or uncertainties described in this Quarterly Report on Form 10-Q occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. All forward-looking statements included in this report are based on information available to us as of the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. 16 Table of Contents 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 March 31, Increase 2023 2022 (Decrease) Fleet horsepower (at period end) (1) 3,725,111 3,687,518 1.0 % Total available horsepower (at period end) (2) 3,872,611 3,710,018 4.4 % Revenue-generating horsepower (at period end) (3) 3,260,535 2,987,624 9.1 % Average revenue-generating horsepower (4) 3,241,296 2,978,422 8.8 % 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): At period end 92.7 % 86.1 % 7.7 % Average for the period (8) 92.6 % 84.9 % 9.1 % ________________________________ (1) Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). 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. Total available horsepower excludes new horsepower on order for which we do not have an executed compression services contract. (3) Revenue-generating horsepower is horsepower under contract for which we are billing a customer. (4) Calculated as the average of the month-end revenue-generating horsepower for each of the months in the period. (5) Calculated as the average of the result of dividing the contractual monthly rate, excluding standby or other temporary rates, for all units at the end of each month in the period by the sum of the revenue-generating horsepower at the end of each month in the period. (6) Calculated as the average of the month-end revenue-generating horsepower per revenue-generating compression unit for each of the months in the period. (7) Horsepower utilization is calculated as (i) the sum of (a) revenue-generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair. Horsepower utilization based on revenue-generating horsepower and fleet horsepower as of 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 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. 17 Table of Contents 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 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 March 31, Increase 2023 2022 (Decrease) Revenues: Contract operations $ 188,539 $ 157,668 19.6 % Parts and service 3,878 1,926 101.3 % Related party 4,707 3,818 23.3 % Total revenues 197,124 163,412 20.6 % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 66,665 53,732 24.1 % Depreciation and amortization 59,486 59,064 0.7 % Selling, general, and administrative 19,101 15,265 25.1 % Gain on disposition of assets (376) (179) * Impairment of compression equipment 1,191 432 * Total costs and expenses 146,067 128,314 13.8 % Operating income 51,057 35,098 45.5 % Other income (expense): Interest expense, net (39,790) (31,838) 25.0 % Other 24 20 20.0 % Total other expense (39,766) (31,818) 25.0 % Net income before income tax expense 11,291 3,280 244.2 % Income tax expense 350 26 * Net income $ 10,941 $ 3,254 236.2 % ________________________________ * Not meaningful Contract operations revenue . 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. 18 Table of Contents 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 $2.0 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. Related-party revenue . Related-party revenue was earned through related-party transactions that occur in the ordinary course of business with various affiliated entities of Energy Transfer. The $0.9 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 $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 $0.4 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 $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 $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 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 . 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 . 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. 19 Table of Contents Other Financial Data The following table summarizes other financial data for the periods presented (dollars in thousands): Other Financial Data: (1) Three Months Ended March 31, Increase 2023 2022 (Decrease) Gross margin $ 70,973 $ 50,616 40.2 % Adjusted gross margin $ 130,459 $ 109,680 18.9 % Adjusted gross margin percentage (2) 66.2 % 67.1 % (0.9) % Adjusted EBITDA $ 118,161 $ 98,423 20.1 % Adjusted EBITDA percentage (2) 59.9 % 60.2 % (0.3) % DCF $ 62,613 $ 50,146 24.9 % DCF Coverage Ratio 1.21 x 0.98 x 23.5 % ________________________________ (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”. (2) Adjusted gross margin percentage and Adjusted EBITDA percentage are calculated as a percentage of revenue. Gross margin. 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. DCF . 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 Overview 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 20 Table of Contents 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. Capital Expenditures The compression services business is capital intensive, requiring significant investment to maintain, expand, and upgrade existing operations. 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; and • expansion capital expenditures, which are capital expenditures made to expand the operating capacity or operating-income capacity of assets, including by acquisition of compression units or through modification of existing compression units to increase their capacity, or to replace certain partially or fully depreciated assets that 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 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 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. Cash Flows 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, 2023 2022 Net cash provided by operating activities $ 42,338 $ 35,054 Net cash used in investing activities (40,861) (19,714) Net cash used in financing activities (1,506) (15,325) Net cash provided by operating activities . 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 $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 $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. 21 Table of Contents Revolving Credit Facility 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. Senior Notes 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. Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1. The Senior Notes 2027 are due on September 1, 2027, and accrue interest at the rate of 6.875% per year. Interest on the Senior Notes 2027 is payable semi-annually in arrears on each of March 1 and September 1. For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027, see Note 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. 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. 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. 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. Non-GAAP Financial Measures Adjusted Gross Margin Adjusted gross margin is a non-GAAP financial measure. We define Adjusted gross margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe Adjusted gross margin is useful to investors as a supplemental measure of our operating profitability. Adjusted gross margin 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. Moreover, our Adjusted gross margin, as presented, may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our cost structure. To compensate for the limitations of Adjusted gross margin as a measure of our performance, we believe it is important to consider gross margin determined under GAAP, as well as Adjusted gross margin, to evaluate our operating profitability. 22 Table of Contents 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 March 31, 2023 2022 Total revenues $ 197,124 $ 163,412 Cost of operations, exclusive of depreciation and amortization (66,665) (53,732) Depreciation and amortization (59,486) (59,064) Gross margin $ 70,973 $ 50,616 Depreciation and amortization 59,486 59,064 Adjusted gross margin $ 130,459 $ 109,680 Adjusted EBITDA We define EBITDA as net income (loss) before net interest expense, depreciation and amortization expense, and income tax expense (benefit). We define Adjusted EBITDA as EBITDA plus impairment of compression equipment, impairment of goodwill, interest income on capital leases, unit-based compensation expense (benefit), severance charges, certain transaction expenses, loss (gain) on disposition of assets, and other. We view Adjusted EBITDA as one of management’s primary tools for evaluating our results of operations, and we track this item on a monthly basis as an absolute amount and as a percentage of revenue compared to the prior month, year-to-date, prior year, and budget. Adjusted EBITDA is used as a supplemental financial measure by our management and external users of our financial statements, such as investors and commercial banks, to assess: • the financial performance of our assets without regard to the impact of financing methods, capital structure, or the historical cost basis of our assets; • the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; • the ability of our assets to generate cash sufficient to make debt payments and pay distributions; and • our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure. We believe Adjusted EBITDA provides useful information to investors because, when viewed in conjunction with our GAAP results and the accompanying reconciliations, it may provide a more complete assessment of our performance as compared to considering solely GAAP results. We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses to evaluate the results of our business. Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), cash flows from operating activities, or any other measure presented in accordance with GAAP. Moreover, our Adjusted EBITDA, as presented, may not be comparable to similarly titled measures of other companies. Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, and the interest cost of acquiring compression equipment also are necessary elements of our aggregate costs. Unit-based compensation expense related to equity awards granted to employees also is a meaningful business expense. Therefore, measures that exclude these cost elements have material limitations. To compensate for these limitations, we believe that it is important to consider net income (loss) and net cash provided by operating activities as determined under GAAP, as well as Adjusted EBITDA, to evaluate our financial performance and liquidity. Our Adjusted EBITDA excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these excluded items may vary among companies. Management compensates for the limitations of Adjusted EBITDA as an analytical tool by reviewing comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into their decision making. 23 Table of Contents 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 March 31, 2023 2022 Net income $ 10,941 $ 3,254 Interest expense, net 39,790 31,838 Depreciation and amortization 59,486 59,064 Income tax expense 350 26 EBITDA $ 110,567 $ 94,182 Unit-based compensation expense (1) 6,779 3,710 Transaction expenses (2) — 27 Severance charges — 251 Gain on disposition of assets (376) (179) Impairment of compression equipment (3) 1,191 432 Adjusted EBITDA $ 118,161 $ 98,423 Interest expense, net (39,790) (31,838) Non-cash interest expense 1,822 1,822 Income tax expense (350) (26) Transaction expenses — (27) Severance charges — (251) Other (15) (704) Changes in operating assets and liabilities (37,490) (32,345) Net cash provided by operating activities $ 42,338 $ 35,054 ________________________________ (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. (2) Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these expenses. (3) Represents non-cash charges incurred to decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows. Distributable Cash Flow We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery, and other, less distributions on Preferred Units and maintenance capital expenditures. We believe DCF is an important measure of operating performance because it allows management, investors, and others to compare the cash flows that we generate (after distributions on the Preferred Units but prior to any retained cash reserves established by the General Partner and the effect of the DRIP) to the cash distributions that we expect to pay our common unitholders. DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), cash flows from operating activities, or any other measure presented in accordance with GAAP. Moreover, our DCF, as presented, may not be comparable to similarly titled measures of other companies. Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment, and maintenance capital expenditures are necessary components of our aggregate costs. Unit-based compensation expense related to equity awards granted to employees also is a meaningful business expense. Therefore, measures that exclude these cost elements have material limitations. To compensate for these limitations, we believe that it is important to consider net income (loss) and net cash provided by operating activities as determined under 24 Table of Contents GAAP, as well as DCF, to evaluate our financial performance and liquidity. Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these excluded items may vary among companies. Management compensates for the limitations of DCF as an analytical tool by reviewing comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into their decision making. 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 March 31, 2023 2022 Net income $ 10,941 $ 3,254 Non-cash interest expense 1,822 1,822 Depreciation and amortization 59,486 59,064 Non-cash income tax benefit (15) (204) Unit-based compensation expense (1) 6,779 3,710 Transaction expenses (2) — 27 Severance charges — 251 Gain on disposition of assets (376) (179) Impairment of compression equipment (3) 1,191 432 Distributions on Preferred Units (12,187) (12,187) Maintenance capital expenditures (4) (5,028) (5,844) DCF $ 62,613 $ 50,146 Maintenance capital expenditures 5,028 5,844 Transaction expenses — (27) Severance charges — (251) Distributions on Preferred Units 12,187 12,187 Other — (500) Changes in operating assets and liabilities (37,490) (32,345) Net cash provided by operating activities $ 42,338 $ 35,054 ________________________________ (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. (2) Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these expenses. (3) Represents non-cash charges incurred to decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4) Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related cash flow. 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. 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. 25 Table of Contents The following table summarizes our DCF Coverage Ratio for the periods presented (dollars in thousands): Three Months Ended March 31, 2023 2022 DCF $ 62,613 $ 50,146 Distributions for DCF Coverage Ratio (1) $ 51,585 $ 51,123 DCF Coverage Ratio 1.21 x 0.98 x ________________________________ (1) Represents distributions to the holders of our common units as of the record date. Critical Accounting Estimates The Partnership’s critical accounting estimates are described in Part II, Item 7 “Critical Accounting Estimates” of our 2022 Annual Report. There have been no material changes to our critical accounting estimates since the date of our 2022 Annual Report. 26 Table of Contents