What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-01 compared with 2023-05-02 · 151 added, 74 removed, 237 unchanged (49% of the section changed)

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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:

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• the restrictions on our business that are imposed under our long-term debt agreements;

• information technology risks including the risk from cyberattacks;

• information technology risks including the risk from cyberattacks, cybersecurity breaches, and other disruptions to our information systems;

• the effects of existing and future laws and governmental regulations;

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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 March 31, Increase

2023 2022 (Decrease)

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 Increase 2023 2022 Increase

Fleet horsepower (at period end) (1) 3,716,177 3,695,955 0.5 % 3,716,177 3,695,955 0.5 %

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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 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.

As of June 30, 2023, we had 120,000 large horsepower on order for delivery, all of which is expected to be delivered within the next twelve months and 95,000 large horsepower 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 March 31, 2023, and 2022, was 87.5% and 81.0%, respectively.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower as of June 30, 2023, and 2022, was 90.1% and 82.5%, 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.

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.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three months ended June 30, 2023, and 2022, was 89.0% and 82.1%, respectively.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the six months ended June 30, 2023, and 2022, was 88.1% and 81.4%, respectively.

The 2.3% increase in total available horsepower as of June 30, 2023, compared to June 30, 2022, primarily was due to new compression units added to our fleet to meet incremental demand from customers for our compression services, partially offset by compression units impaired since the previous period.

The 9.8% increase in revenue-generating horsepower and 5.1% increase in revenue-generating compression units as of June 30, 2023, compared to June 30, 2022, primarily were driven by both the redeployment of, and addition of new, larger-horsepower compression units due to increased demand for our services commensurate with increased production levels in the basins in which we operate.

The 8.4% and 8.2% increases in average revenue per revenue-generating horsepower per month for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively, primarily were due to higher market-based rates on newly deployed and redeployed compression units, and CPI-based and other market-based price increases on existing customer contracts that occur as market conditions permit.

The 3.7% and 3.6% increases in average horsepower per revenue-generating compression unit during the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively, were due to both the redeployment of, and addition of new, larger-horsepower compression units.

Horsepower utilization increased to 93.7% as of June 30, 2023, compared to 88.4% as of June 30, 2022.

The increase primarily was due to an increase in revenue-generating horsepower, which was driven by a combination of the redeployment of certain previously idle compression units as well as the deployment of new compression units added to the fleet.

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

The above-stated factors also drove the increase in average horsepower utilization for the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower increased to 90.1% as of June 30, 2023, compared to 82.5% as of June 30, 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 as well as the deployment of new compression units added to the fleet.

The increase in horsepower utilization based on revenue-generating horsepower and fleet horsepower resulted from increased demand for our services, consistent with increased production levels in the basins in which we operate.

The above-stated factors also drove the increase in average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three and six months ended June 30, 2023, as compared to the three and six months ended June 30, 2022.

Financial Results of Operations

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

Three months ended June 30, 2023, compared to the three months ended June 30, 2022

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

Three Months Ended March 31, Increase

Three Months Ended June 30, Increase

2023 2022 (Decrease)

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Interest expense, net (42,045) (33,079) 27.1 %

Gain on derivative instrument 14,550 — *

Other 57 21 171.4 %

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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.

The $33.0 million increase in contract operations revenue for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to (i) a 9.3% increase in average revenue-generating horsepower as a result of increased demand for our services, consistent with increased production levels in the basins in which we operate, (ii) an 8.4% increase in average revenue per revenue-generating horsepower per month, as a result of higher market-based rates on newly deployed and redeployed compression units, and CPI-based and other market-based price increases on existing customer contracts that occur as market conditions permit, and (iii) a $7.2 million 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 $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.

The $0.5 million increase in parts and service revenue for the three months ended June 30, 2023, compared to the three months ended June 30, 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 $0.9 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.

The $1.9 million increase in related-party revenue for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to (i) an increase in revenues attributable to natural gas treating services driven by increased demand for these services from these entities, (ii)

increased average revenue-generating horsepower under contract with these entities, and (iii) 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.

The $14.8 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to (i) an $8.2 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 $3.0 million increase in direct labor costs due to increased headcount associated with increased revenue-generating horsepower and higher employee costs, (iii) a $1.5 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.

The $1.1 million increase in depreciation and amortization expense for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to compression unit overhauls and new compression units placed in service to meet incremental demand from 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.

The $1.0 million increase in selling, general, and administrative expense for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to an increase in employee-related expenses driven by increased headcount and higher employee costs.

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 $10.3 million impairment of compression equipment for the three months ended June 30, 2023, primarily was the result of our evaluation of the future deployment of our idle fleet under then-existing market conditions.

The primary circumstances supporting these impairments were:

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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.

As a result of our evaluation during the three months ended June 30, 2023, we retired 33 compression units, representing approximately 26,900 of aggregate horsepower, that previously were used to provide compression services in our business.

No impairment was recorded for the three months ended June 30, 2022.

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.

The $9.0 million increase in interest expense, net for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to increased borrowings and higher weighted-average interest rates under the Credit Agreement.

Average outstanding borrowings under the Credit Agreement were $745.1 million for the three months ended June 30, 2023, compared to $566.8 million for the three months ended June 30, 2022, and the weighted-average interest rate applicable to borrowings under the Credit Agreement was 7.63% and 3.59% for the three months ended June 30, 2023, and 2022, respectively.

Gain on derivative instrument.

In April 2023, we entered into an interest-rate swap in which we pay a fixed interest rate and receive floating interest rate payments that are indexed to the one-month SOFR.

The $14.6 million gain on derivative instrument for the three months ended June 30, 2023, resulted from the increase in fair value of the interest-rate swap due to an increase in the interest-rate forward curve during the current period.

We had no derivative instruments outstanding for the three months ended June 30, 2022.

Six months ended June 30, 2023, compared to the six months ended June 30, 2022

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

Six Months Ended June 30,

2023 2022 Increase

Contract operations $ 385,521 $ 321,637 19.9 %

Parts and service 7,980 5,531 44.3 %

Related party 10,543 7,705 36.8 %

Total revenues 404,044 334,873 20.7 %

Costs and expenses:

Cost of operations, exclusive of depreciation and amortization 136,587 108,890 25.4 %

Depreciation and amortization 119,525 118,023 1.3 %

Selling, general, and administrative 34,051 29,179 16.7 %

Loss (gain) on disposition of assets (67) 852 *

Impairment of compression equipment 11,464 432 *

Total costs and expenses 301,560 257,376 17.2 %

Operating income 102,484 77,497 32.2 %

Other income (expense):

Interest expense, net (81,835) (64,917) 26.1 %

Gain on derivative instrument 14,550 — *

Other 81 41 97.6 %

Total other expense (67,204) (64,876) 3.6 %

Net income before income tax expense 35,280 12,621 179.5 %

Income tax expense 755 281 168.7 %

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.

Net income $ 34,525 $ 12,340 179.8 %

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* Not meaningful

Contract operations revenue.

The $63.9 million increase in contract operations revenue for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) a 9.1% increase in average revenue-generating horsepower as a result of increased demand for our services, consistent with increased production levels in the basins in which we operate, (ii) an 8.2% increase in average revenue per revenue-generating horsepower per month, as a result of higher market-based rates on newly deployed and redeployed compression units, and CPI-based and other market-based price increases on existing customer contracts that occur as market conditions permit, and (iii) a $13.4 million increase in revenues attributable to natural gas compression station services and natural gas treating services.

Parts and service revenue .

The $2.4 million increase in parts and service revenue for the six months ended June 30, 2023, compared to the six months ended June 30, 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 $2.8 million increase in related-party revenue for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) an increase in revenues attributable to natural gas treating services driven by increased demand for these services from these entities, (ii) increased average revenue-generating horsepower under contract with these entities, and (iii) 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 $27.7 million increase in cost of operations, exclusive of depreciation and amortization, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) a $15.6 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 $5.2 million increase in direct labor costs due to increased headcount associated with increased revenue-generating horsepower and higher employee costs, (iii) a $3.2 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period, and (iv) a $2.0 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 $1.5 million increase in depreciation and amortization expense for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to compression unit overhauls and new compression units placed in service to meet incremental demand from customers.

Selling, general, and administrative expense .

The $4.9 million increase in selling, general, and administrative expense for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) a $2.9 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 June 30, 2023, (ii) a $1.1 million increase in employee-related expenses driven by increased headcount and higher employee costs, and (iii) a $0.7 million reversal of previously recognized credit losses in the prior comparable period.

Impairment of compression equipment.

The $11.5 million and $0.4 million impairments of compression equipment for the six months ended June 30, 2023, and 2022, respectively, primarily resulted from our evaluation of the future deployment of idle fleet assets 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 evaluations during the six months ended June 30, 2023, and 2022, we retired 39 and 10 compression units, respectively, with approximately 35,600 and 1,400 aggregate horsepower, respectively, that previously were used to provide compression services in our business.

Interest expense, net .

The $16.9 million increase in interest expense, net for the six months ended June 30, 2023, compared to the six months ended June 30, 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 7.40% and 3.21% for the six months ended June 30, 2023, and 2022, respectively, and average outstanding borrowings under the Credit Agreement were $707.7 million and $553.5 million for the six months ended June 30, 2023, and 2022, respectively.

Gain on derivative instrument.

In April 2023, we entered into an interest-rate swap in which we pay a fixed interest rate and receive floating interest rate payments that are indexed to the one-month SOFR.

The $14.6 million gain on derivative instrument for the six months ended June 30, 2023, resulted from the increase in fair value of the interest-rate swap due to an increase in the interest-rate forward curve during the current period.

We had no derivative instruments outstanding for the six months ended June 30, 2022.

Income tax expense.

The $0.5 million increase in income tax expense for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was related to taxes associated with the Texas Margin Tax.

Other Financial Data

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(1) Three Months Ended

March 31, Increase

2023 2022 (Decrease)

June 30, Increase Six Months Ended

June 30, Increase

2023 2022 (Decrease) 2023 2022 (Decrease)

Gross margin $ 76,959 $ 57,344 34.2 % $ 147,932 $ 107,960 37.0 %

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DCF $ 67,038 $ 55,576 20.6 % $ 129,651 $ 105,722 22.6 %

DCF Coverage Ratio 1.21 x 0.98 x 23.5 %

DCF Coverage Ratio 1.30 x 1.08 x 20.4 % 1.26 x 1.03 x 22.3 %

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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.

The $19.6 million increase in gross margin for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was due to (i) a $35.5 million increase in revenues, partially offset by (ii) a $14.8 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $1.1 million increase in depreciation and amortization.

The $40.0 million increase in gross margin for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was due to (i) a $69.2 million increase in revenues, partially offset by (ii) a $27.7 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $1.5 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.

The $20.7 million increase in Adjusted gross margin for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, was due to a $35.5 million increase in revenues, partially offset by a $14.8 million increase in cost of operations, exclusive of depreciation and amortization.

The $41.5 million increase in Adjusted gross margin for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was due to a $69.2 million increase in revenues, offset by a $27.7 million increase in cost of operations, exclusive of depreciation and amortization.

The 1.6% and 1.3% decreases in Adjusted gross margin percentage for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively, primarily were due to the inflation-driven increase in cost of operations, exclusive of depreciation and amortization, that preceded related CPI-based and other market-based 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.

The $19.6 million increase in Adjusted EBITDA for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to a $20.7 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 $39.3 million increase in Adjusted EBITDA for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to a $41.5 million increase in Adjusted gross margin, partially offset by a $2.2 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges, and transaction expenses.

The 1.1% and 0.7% decreases in Adjusted EBITDA percentage for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively, primarily were due to the inflation-driven increase in cost of operations, exclusive of depreciation and amortization, that preceded related CPI-based and other market-based price increases on customer contracts that occur as market conditions permit.

The $11.5 million increase in DCF for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, primarily was due to (i) a $20.7 million increase in Adjusted gross margin and (ii) a $1.2 million increase in cash

received on derivative instrument, partially offset by (iii) a $9.0 million increase in cash interest expense, net and (iv) a $1.2 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense and severance charges.

The $23.9 million increase in DCF for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) a $41.5 million increase in Adjusted gross margin and (ii) a $1.2 million increase in cash received on derivative instrument, partially offset by (iii) a $16.9 million increase in cash interest expense, net and (iv) a $2.2 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges, and transaction expenses.

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.

The increase in DCF Coverage Ratio for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 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 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.

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.

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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.

Our aggregate maintenance capital expenditures for the six months ended June 30, 2023, and 2022, were $11.4 million and $12.0 million, respectively.

We currently plan to spend approximately $25.0 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.

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,

Our expansion capital expenditures for the six months ended June 30, 2023, and 2022, were $122.8 million and $52.3 million, respectively.

As of June 30, 2023, we had binding commitments to purchase $121.4 million worth of additional compression units and serialized parts, all of which is expected to be settled within the next twelve months and $95.7 million of which is expected to be settled by year-end 2023.

The following table summarizes our sources and uses of cash for the six months ended June 30, 2023, and 2022, (in thousands):

Six Months Ended June 30,

Net cash provided by operating activities $ 130,209 $ 129,282

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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.

The $0.9 million increase in net cash provided by operating activities for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to (i) a $41.5 million increase in Adjusted gross margin, partially offset by (ii) a $20.7 million increase in inventory purchases and (iii) a $17.9 million increase in cash paid for interest expense, net of capitalized amounts.

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.

The $62.4 million increase in net cash used in investing activities for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to a $62.6 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.

The $61.5 million decrease in net cash used in financing activities for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, primarily was due to a $62.2 million increase in net borrowings under the Credit Agreement.

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.

As of June 30, 2023, we had outstanding borrowings under the Credit Agreement of $750.4 million, $849.6 million of availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $327.6 million.

As of June 30, 2023, we were in compliance with all of our covenants under the Credit Agreement.

As of July 27, 2023, we had outstanding borrowings under the Credit Agreement of $765.0 million.

For a more detailed description of the Credit Agreement, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report and Note 9 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2022 Annual Report.

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.

As of June 30, 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 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report and Note 9 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2022 Annual Report.

Interest-Rate Swap

Derivative Instrument

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.

See Note 7 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report for additional information on the interest-rate swap.

During the six months ended June 30, 2023, distributions of $1.0 million were reinvested under the DRIP resulting in the issuance of 50,800 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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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,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Total revenues $ 206,920 $ 171,461 $ 404,044 $ 334,873

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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.

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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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net income $ 23,584 $ 9,086 $ 34,525 $ 12,340

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Severance charges 44 — 44 251

Gain on disposition of assets (376) (179)

Loss (gain) on disposition of assets 309 1,031 (67) 852

Gain on derivative instrument (14,550) — (14,550) —

Impairment of compression equipment (3) 10,273 — 11,464 432

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Severance charges (44) — (44) (251)

Cash received on derivative instrument 1,216 — 1,216 —

Other 34 (179) 19 (883)

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(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.

(1) For the three and six months ended June 30, 2023, unit-based compensation expense included $1.1 million and $2.2 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards.

For the three and six months ended June 30, 2022, unit-based compensation expense included $1.2 million and $2.3 million, respectively, 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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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 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, change in fair value of derivative instrument, 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.

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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 March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net income $ 23,584 $ 9,086 $ 34,525 $ 12,340

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Depreciation and amortization 60,039 58,959 119,525 118,023

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

Non-cash income tax expense (benefit) 34 21 19 (183)

Unit-based compensation expense (1) 2,849 2,998 9,628 6,708

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Severance charges 44 — 44 251

Gain on disposition of assets (376) (179)

Loss (gain) on disposition of assets 309 1,031 (67) 852

Change in fair value of derivative instrument (13,334) — (13,334) —

Impairment of compression equipment (3) 10,273 — 11,464 432

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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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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.

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 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,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

DCF $ 67,038 $ 55,576 $ 129,651 $ 105,722

Distributions for DCF Coverage Ratio (1) $ 51,596 $ 51,419 $ 103,181 $ 102,542

DCF Coverage Ratio 1.21 x 0.98 x

DCF Coverage Ratio 1.30 x 1.08 x 1.26 x 1.03 x

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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