What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-10-31 compared with 2023-08-01 · 96 added, 88 removed, 300 unchanged (38% of the section changed)

9 unchanged sentences

• 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;

• changes in the long-term supply of and demand for crude oil and natural gas, including as a result of actions taken by governmental authorities and other third parties in response to world health 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;

8 unchanged sentences

• the effects of future litigation.

• 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.

2 unchanged sentences

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 June 30, Six Months Ended June 30,

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

2023 2022 Increase 2023 2022 Increase

13 unchanged sentences

(1) Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order).

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.

As of September 30, 2023, we had 100,000 large horsepower on order for delivery, all of which is expected to be delivered within the next twelve months and 62,500 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.

5 unchanged sentences

(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 June 30, 2023, and 2022, was 90.1% and 82.5%, respectively.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower as of September 30, 2023, and 2022, was 90.9% and 84.3%, 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 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.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three months ended September 30, 2023, and 2022, was 90.0% and 83.4%, respectively.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the nine months ended September 30, 2023, and 2022, was 88.7% and 82.1%, respectively.

The 2.0% increase in total available horsepower and 0.7% increase in fleet horsepower as of September 30, 2023, compared to September 30, 2022, primarily were driven by 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 8.5% increase in revenue-generating horsepower and 5.4% increase in revenue-generating compression units as of September 30, 2023, compared to September 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 9.0% and 8.4% increases in average revenue per revenue-generating horsepower per month for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 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 3.4% increases in average horsepower per revenue-generating compression unit during the three and nine months ended September 30, 2023, compared to the three and nine months ended September 30, 2022, respectively, were due to both the redeployment of, and addition of new, larger-horsepower compression units.

Horsepower utilization increased to 93.9% as of September 30, 2023, compared to 90.9% as of September 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 above-stated factors also drove the increase in average horsepower utilization for the three and nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022.

Horsepower utilization based on revenue-generating horsepower and fleet horsepower increased to 90.9% as of September 30, 2023, compared to 84.3% as of September 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.

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

Financial Results of Operations

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

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

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

Three Months Ended June 30, Increase

Three Months Ended September 30, Increase

2023 2022 (Decrease)

7 unchanged sentences

Selling, general, and administrative 20,085 14,663 37.0 %

Gain on disposition of assets 309 1,031 *

Loss (gain) on disposition of assets (3,865) 1,118 *

Impairment of compression equipment 882 504 *

12 unchanged sentences

Contract operations revenue .

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.

The $33.7 million increase in contract operations revenue for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to (i) a 9.0% 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, (ii) an 8.6% 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, and (iii) a $6.5 million increase in revenues attributable to natural gas treating services.

Average revenue per revenue-generating horsepower per month associated with our compression services provided on a month-to-month basis did not differ significantly from the average revenue per revenue-generating horsepower per month associated with our compression services provided under contracts in their primary term during the period.

Parts and service revenue .

The $0.5 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.

The $2.3 million increase in parts and service revenue for the three months ended September 30, 2023, compared to the three months ended September 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.

1 unchanged sentence

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 $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.

The $1.5 million increase in related-party revenue for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to an increase in revenues attributable to natural gas treating services driven by increased demand for these services from 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 $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.

The $15.5 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to (i) a $6.5 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 $4.2 million increase in direct labor costs due to increased headcount associated with increased revenue-generating horsepower and higher employee costs, (iii) a $2.5 million increase in retail parts and service expenses, for which a corresponding increase in parts and service revenue also occurred, (iv) a $0.7 million increase in other indirect expenses primarily due to increased consumption and costs of supplies associated with increased revenue-generating horsepower, and (v) a $0.6 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period.

Depreciation and amortization expense .

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.

The $5.3 million increase in depreciation and amortization expense for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to new compression units placed in service to meet incremental demand from customers and overhauls and major improvements to compression units.

Selling, general, and administrative expense .

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.

The $5.4 million increase in selling, general, and administrative expense for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to (i) a $5.0 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 September 30, 2023 and (ii) a $0.8 million increase in employee-related expenses driven by higher employee costs and increased headcount, partially offset by (iii) a $0.5 million decrease in severance charges, primarily attributable to the departure of one of our executives during the third quarter of 2022.

Loss (gain) on disposition of assets.

The $3.9 million gain on disposition of assets for the three months ended September 30, 2023 primarily was due to the sale of certain natural gas treating assets to an existing customer.

The $1.1 million loss on disposition of assets for the three months ended September 30, 2022 primarily was due to various disposals of assets.

Impairment of compression equipment .

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 $0.9 million and $0.5 million impairments of compression equipment for the three months ended September 30, 2023 and 2022, respectively, primarily resulted from our evaluation of the future deployment of our idle fleet under then-existing market conditions.

The primary circumstances supporting these impairments were:

1 unchanged sentence

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

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.

As a result of our evaluation during the three months ended September 30, 2023 and 2022, respectively, we retired three and two compression units, respectively, representing approximately 2,100 and 1,100 of aggregate horsepower, respectively, that previously were used to provide compression services in our business.

Interest expense, net .

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.

The $8.1 million increase in interest expense, net for the three months ended September 30, 2023, compared to the three months ended September 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 7.88% and 4.94% for the three months ended September 30, 2023 and 2022, respectively, and average outstanding borrowings under the Credit Agreement were $770.5 million and $576.0 million for the three months ended September 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 $3.4 million gain on derivative instrument for the three months ended September 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 September 30, 2022.

Nine months ended September 30, 2023, compared to the nine months ended September 30, 2022

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

Six Months Ended June 30,

Nine Months Ended September 30,

2023 2022 Increase

22 unchanged sentences

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.

The $97.6 million increase in contract operations revenue for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to (i) an 8.9% 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 $19.9 million increase in revenues attributable to 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.

The $4.7 million increase in parts and service revenue for the nine months ended September 30, 2023, compared to the nine months ended September 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.

1 unchanged sentence

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.

The $4.4 million increase in related-party revenue for the nine months ended September 30, 2023, compared to the nine months ended September 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.

The $43.2 million increase in cost of operations, exclusive of depreciation and amortization, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to (i) a $22.0 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 $9.4 million increase in direct labor costs due to increased headcount associated with increased revenue-generating horsepower and higher employee costs, (iii) a $4.5 million increase in retail parts and service expenses, for which a corresponding increase in parts and service revenue also occurred, (iv) a $3.8 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period, (v) a $1.2 million increase in other indirect expenses primarily due to increased consumption and costs of supplies associated with increased revenue-generating horsepower, and (vi) a $0.9 million increase in expenses related to our vehicle fleet, primarily due to increased usage and maintenance costs associated with increased revenue-generating horsepower.

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.

The $6.8 million increase in depreciation and amortization expense for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to new compression units placed in service to meet incremental demand from customers and overhauls and major improvements to compression units.

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.

The $10.3 million increase in selling, general, and administrative expense for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to (i) a $7.9 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 September 30, 2023, (ii) a $1.9 million increase in employee-related expenses driven by higher employee costs and increased headcount, and (iii) a $0.7 million reversal of previously recognized credit losses in the prior comparable period, partially offset by (iv) a $0.7 million decrease in severance charges, primarily attributable to the departure of one of our executives during the third quarter of 2022.

Loss (gain) on disposition of assets.

The $3.9 million gain on disposition of assets for the nine months ended September 30, 2023 primarily was due to the sale of certain natural gas treating assets to an existing customer.

The $2.0 million loss on disposition of assets for the nine months ended September 30, 2022 primarily was due to various disposals of assets.

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 $12.3 million and $0.9 million impairments of compression equipment for the nine months ended September 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:

1 unchanged sentence

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.

As a result of our evaluations during the nine months ended September 30, 2023 and 2022, we retired 42 and 12 compression units, respectively, with approximately 37,700 and 2,500 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.

The $25.0 million increase in interest expense, net for the nine months ended September 30, 2023, compared to the nine months ended September 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 7.57% and 3.79% for the nine months ended September 30, 2023 and 2022, respectively, and average outstanding borrowings under the Credit Agreement were $728.5 million and $561.1 million for the nine months ended September 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.

The $18.0 million gain on derivative instrument for the nine months ended September 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 nine months ended September 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.

The $0.4 million increase in income tax expense for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was related to taxes associated with the Texas Margin Tax.

Other Financial Data

2 unchanged sentences

(1) Three Months Ended

June 30, Increase Six Months Ended

June 30, Increase

September 30, Increase Nine Months Ended

September 30, Increase

2023 2022 (Decrease) 2023 2022 (Decrease)

11 unchanged sentences

Gross margin.

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.

The $16.7 million increase in gross margin for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was due to (i) a $37.5 million increase in revenues, offset by (ii) a $15.5 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $5.3 million increase in depreciation and amortization.

The $56.6 million increase in gross margin for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was due to (i) a $106.6 million increase in revenues, offset by (ii) a $43.2 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $6.8 million increase in depreciation and amortization.

Adjusted gross margin and Adjusted gross margin percentage.

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.

The $22.0 million increase in Adjusted gross margin for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, was due to a $37.5 million increase in revenues, offset by a $15.5 million increase in cost of operations, exclusive of depreciation and amortization.

The $63.5 million increase in Adjusted gross margin for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was due to a $106.6 million increase in revenues, offset by a $43.2 million increase in cost of operations, exclusive of depreciation and amortization.

The 1.4% decreases in Adjusted gross margin percentage for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 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 $19.6 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.

The $21.0 million increase in Adjusted EBITDA for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to a $22.0 million increase in Adjusted gross margin, partially offset by a $0.9 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, transaction expenses, and severance charges.

The $60.3 million increase in Adjusted EBITDA for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to a $63.5 million increase in Adjusted gross margin, partially offset by a $3.1 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges, and transaction expenses.

The 0.8% and 0.7% decreases in Adjusted EBITDA percentage for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 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 $16.4 million increase in DCF for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, primarily was due to (i) a $22.0 million increase in Adjusted gross margin, (ii) a $2.5 million

increase in cash received on derivative instrument, and (iii) a $0.9 million decrease in maintenance capital expenditures, partially offset by (iv) an $8.1 million increase in cash interest expense, net and (v) a $0.9 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense and severance charges.

The $40.3 million increase in DCF for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to (i) a $63.5 million increase in Adjusted gross margin, (ii) a $3.7 million increase in cash received on derivative instrument, and (iii) $1.4 million decrease in maintenance capital expenditures, partially offset by (iii) a $25.0 million increase in cash interest expense, net and (iv) a $3.1 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 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.

The increase in DCF Coverage Ratio for the three and nine months ended September 30, 2023, compared to the three and nine months ended September 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

10 unchanged sentences

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 six months ended June 30, 2023, and 2022, were $11.4 million and $12.0 million, respectively.

Our aggregate maintenance capital expenditures for the nine months ended September 30, 2023 and 2022, were $18.6 million and $20.0 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 $270.0 million and $280.0 million in expansion capital expenditures for the year 2023.

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,

Our expansion capital expenditures for the nine months ended September 30, 2023 and 2022, were $185.3 million and $99.0 million, respectively.

As of September 30, 2023, we had binding commitments to purchase $101.3 million worth of additional compression units and serialized parts, all of which is expected to be settled within the next twelve months and $63.0 million of which is expected to be settled by year-end 2023.

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

Nine Months Ended September 30,

Net cash provided by operating activities $ 180,281 $ 178,491

2 unchanged sentences

Net cash provided by operating activities .

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.

The $1.8 million increase in net cash provided by operating activities for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to (i) a $63.5 million increase in Adjusted gross margin, partially offset by (ii) a $31.2 million increase in inventory purchases and (iii) a $27.1 million increase in cash paid for interest expense, net of capitalized amounts.

Net cash used in investing activities .

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.

The $67.0 million increase in net cash used in investing activities for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to a $71.0 million increase in capital expenditures, for purchases of new compression units, overhauls and major improvements, and purchases of other equipment, partially offset by a $4.1 million increase in proceeds from disposition of property and equipment.

Net cash used in financing activities .

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.

The $65.2 million decrease in net cash used in financing activities for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, primarily was due to a $65.1 million increase in net borrowings under the Credit Agreement.

Revolving Credit Facility

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.

As of September 30, 2023, we had outstanding borrowings under the Credit Agreement of $813.1 million, $786.9 million of availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $434.3 million.

The increase in available borrowing capacity compared to the second quarter of 2023 primarily was due to the inclusion this quarter of recurring tax expenses, consistent with the calculation of EBITDA under the Credit Agreement.

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

As of October 26, 2023, we had outstanding borrowings under the Credit Agreement of $850.0 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 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.

As of September 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.

6 unchanged sentences

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.

In October 2023, we modified this interest-rate swap.

See Note 14 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report for additional information on the modified interest-rate swap.

During the nine months ended September 30, 2023, distributions of $1.5 million were reinvested under the DRIP resulting in the issuance of 71,589 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.

10 unchanged sentences

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

14 unchanged sentences

• 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.

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.

8 unchanged sentences

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

21 unchanged sentences

________________________________

(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.

(1) For the three and nine months ended September 30, 2023, unit-based compensation expense included $1.1 million and $3.3 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards.

For the three and nine months ended September 30, 2022, unit-based compensation expense included $1.1 million and $3.4 million, respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and $1.1 million for the three and nine months ended September 30, 2022, related to the cash portion of the settlement of phantom unit awards upon vesting.

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

14 unchanged sentences

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

2 unchanged sentences

Depreciation and amortization 64,101 58,772 183,626 176,795

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

Non-cash income tax benefit (65) (33) (46) (216)

Unit-based compensation expense (1) 8,024 3,008 17,652 9,716

15 unchanged sentences

________________________________

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

9 unchanged sentences

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

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

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

2023 2022 2023 2022

8 unchanged sentences

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