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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-10-31 · 90 added, 157 removed, 239 unchanged (51% of the section changed)

6 unchanged sentences

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”), in Part II, Item 1A “Risk Factors” in our Quarterly Report for the quarter ended March 31, 2023, as well as our subsequent filings with the SEC.

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, 2023, filed on February 13, 2024 (our “2023 Annual Report”), as well as our subsequent filings with the SEC.

Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

• changes in general economic conditions, including inflation or supply chain disruptions and changes in economic conditions of the crude oil and natural gas industries, including any impact from the ongoing military conflict involving Russia and Ukraine;

• changes in economic conditions of the crude oil and natural gas industries, including any impact from the ongoing military conflict involving Russia and Ukraine or the conflict in the Middle East;

• changes in general economic conditions, including inflation or supply chain disruptions;

• 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;

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The following table summarizes certain horsepower and horsepower-utilization percentages for the periods presented and excludes certain gas-treating assets for which horsepower is not a relevant metric.

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

2023 2022 Increase 2023 2022 Increase

Three Months Ended March 31, Increase

2024 2023 (Decrease)

Fleet horsepower (at period end) (1) 3,833,715 3,725,111 2.9 %

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

As of September 30, 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.

As of March 31, 2024, we had 5,000 large horsepower on order for delivery, all of which was delivered in April 2024.

(2) Total available horsepower is revenue-generating horsepower under contract for which we are billing a customer, horsepower in our fleet that is under contract but is not yet generating revenue, horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, and idle horsepower.

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

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

Horsepower utilization based on revenue-generating horsepower and fleet horsepower as of March 31, 2024 and 2023, was 91.2% and 87.5%, 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 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 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 nine months ended September 30, 2023, as compared to the three and nine months ended September 30, 2022.

Average horsepower utilization based on revenue-generating horsepower and fleet horsepower for the three months ended March 31, 2024 and 2023, was 91.0% and 87.2%, respectively.

The 2.9% increase in fleet horsepower as of March 31, 2024, compared to March 31, 2023, primarily was driven by new compression units added to our fleet to meet incremental demand from customers for our compression services.

The increases in revenue-generating horsepower, revenue-generating compression units, average horsepower per revenue-generating compression unit, horsepower utilization, and horsepower utilization based on revenue-generating horsepower and fleet horsepower as of or for the three months ended March 31, 2024, compared to March 31, 2023, primarily were driven by the addition and deployment of new, and redeployment of existing, large-horsepower compression units due to increased demand for our services commensurate with an overall increase in U.S.

oil and gas production levels.

The 9.7% increase in average revenue per revenue-generating horsepower per month for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was 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.

Financial Results of Operations

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 September 30, Increase

2023 2022 (Decrease)

Contract operations $ 204,716 $ 171,019 19.7 %

Parts and service 7,153 4,901 45.9 %

Related party 5,216 3,693 41.2 %

Total revenues 217,085 179,613 20.9 %

Costs and expenses:

Cost of operations, exclusive of depreciation and amortization 74,928 59,453 26.0 %

Depreciation and amortization 64,101 58,772 9.1 %

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

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

Impairment of compression equipment 882 504 *

Total costs and expenses 156,131 134,510 16.1 %

Operating income 60,954 45,103 35.1 %

Other income (expense):

Interest expense, net (43,257) (35,142) 23.1 %

Gain on derivative instrument 3,437 — *

Other 23 27 (14.8) %

Total other expense (39,797) (35,115) 13.3 %

Net income before income tax expense 21,157 9,988 111.8 %

Income tax expense 255 376 (32.2) %

Net income $ 20,902 $ 9,612 117.5 %

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* Not meaningful

Contract operations revenue .

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 $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.

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 $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 $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 $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 $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 $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:

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

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

As a result of our evaluation during the three months ended 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 $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 $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

Three months ended March 31, 2024, compared to the three months ended March 31, 2023

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

Nine Months Ended September 30,

Three Months Ended March 31,

2024 2023 Increase

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Interest expense, net (46,666) (39,790) 17.3 %

Loss on extinguishment of debt (4,966) — *

Gain on derivative instrument 8,771 — *

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Contract operations revenue .

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.

The $29.6 million increase in contract operations revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) a 9.7% 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 (ii) a 7.1% increase in average revenue-generating horsepower as a result of increased demand for our services, commensurate with an overall increase in U.S.

oil and gas production levels.

Parts and service revenue .

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.

The $1.6 million increase in parts and service revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, 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 $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.

The $1.0 million increase in related-party revenue for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to an increase in revenues attributable to natural gas treating services driven by increased demand for these services from these entities.

Cost of operations, exclusive of depreciation and amortization .

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.

The $8.4 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) a $5.0 million increase in direct labor costs due to increased headcount associated with increased revenue-generating horsepower and higher employee costs, (ii) a $4.1 million increase in direct expenses, primarily driven by increased spending on fluids and parts resulting from higher costs and increased usage associated with increased revenue-generating horsepower, (iii) a $0.8 million increase in retail parts and service expenses, for which a corresponding increase in parts and service revenue also occurred, (iv) a $0.6 million increase in other indirect expenses primarily due to increased consumption and costs of supplies associated with increased revenue-generating horsepower, partially offset by (v) a $2.5 million decrease in outside maintenance costs due to lower use of third-party labor during the current period.

Depreciation and amortization expense .

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.

The $3.8 million increase in depreciation and amortization expense for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) overhauls and major improvements to compression units, (ii) new trucks in our vehicle fleet, and (iii) new compression units placed in service to meet incremental demand from customers.

Selling, general, and administrative expense .

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.

The $3.7 million increase in selling, general, and administrative expense for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) a $2.0 million increase in professional fees primarily related to an initiative to improve business performance, (ii) a $1.0 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 March 31, 2024, and (iii) a $0.5 million increase in employee-related expenses driven by increased headcount.

Impairment of compression equipment .

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 $1.2 million impairment of compression equipment for the three months ended March 31, 2023 primarily resulted from our evaluation of the future deployment of our idle fleet under then-current 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 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.

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

There was no impairment of compression equipment for the three months ended March 31, 2024.

Interest expense, net .

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.

The $6.9 million increase in interest expense, net for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to increased borrowings and higher weighted-average interest rates under the Credit Agreement.

The average outstanding borrowings under the Credit Agreement were $886.9 million and $670.0 million for the three months ended March 31, 2024 and 2023, respectively, and the weighted-average interest rate applicable to borrowings under the Credit Agreement was 7.99% and 7.15% for the three months ended March 31, 2024 and 2023, respectively.

Loss on extinguishment of debt.

The $5.0 million loss on extinguishment of debt for the three months ended March 31, 2024 resulted from the satisfaction and discharge of the Senior Notes 2026, which constituted a legal defeasance under GAAP (the “Defeasance”).

This loss consists of the write-off of deferred financing costs of $4.3 million and the difference between (i) the purchase price of U.S.

government securities of $748.8 million, which were used for the Defeasance, and (ii) the aggregate outstanding principal balance and accrued interest of the Senior Notes 2026 of $748.1 million at the time of Defeasance.

For additional information regarding the Defeasance of the Senior Notes 2026, see Note 8 to our unaudited condensed consolidated financial statements under Part I, Item 1 “Financial Statements” of this report.

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 $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 $0.4 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.

The $8.8 million gain on derivative instrument for the three months ended March 31, 2024, resulted from the increase in fair value of the interest-rate swap due to an increase in the interest-rate forward curve and cash received during the current period.

We had no derivative instruments outstanding for the three months ended March 31, 2023.

Other Financial Data

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(1) Three Months Ended

September 30, Increase Nine Months Ended

September 30, Increase

2023 2022 (Decrease) 2023 2022 (Decrease)

March 31, Increase

2024 2023 (Decrease)

Gross margin $ 90,953 $ 70,973 28.2 %

4 unchanged sentences

DCF $ 86,589 $ 62,613 38.3 %

DCF Coverage Ratio 1.39 x 1.07 x 29.9 % 1.30 x 1.04 x 25.0 %

DCF Coverage Ratio 1.41 x 1.21 x 16.5 %

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Gross margin.

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.

The $20.0 million increase in gross margin for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to (i) a $32.2 million increase in revenues, offset by (ii) an $8.4 million increase in cost of operations, exclusive of depreciation and amortization, and (iii) a $3.8 million increase in depreciation and amortization.

Adjusted gross margin and Adjusted gross margin percentage.

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.

The $23.7 million increase in Adjusted gross margin for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to a $32.2 million increase in revenues, offset by an $8.4 million increase in cost of operations, exclusive of depreciation and amortization.

The 1.1% increase in Adjusted gross margin percentage for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to inflation-driven pressures easing within cost of operations, exclusive of depreciation and amortization, and CPI-based and other market-based price increases on customer contracts that occur as market conditions permit.

Adjusted EBITDA and Adjusted EBITDA percentage .

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.

The $21.2 million increase in Adjusted EBITDA for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to a $23.7 million increase in Adjusted gross margin, partially offset by a $2.5 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, transaction expenses, and severance charges.

The 0.9% increase in Adjusted EBITDA percentage for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to inflation-driven pressures easing within cost of operations, exclusive of depreciation and amortization, and CPI-based and other market-based price increases on customer contracts that occur as market conditions permit.

The $24.0 million increase in DCF for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) a $23.7 million increase in Adjusted gross margin, (ii) a $7.8 million decrease in distributions on Preferred Units following the conversion of 320,000 Preferred Units into 15,990,804 common units during 2024, (iii) a $2.4 million increase in cash received on derivative instrument, partially offset by (iv) a $6.7 million increase in cash interest expense, net, (v) a $2.5 million increase in selling, general, and administrative expenses, excluding unit-based compensation expense, transaction expenses, and severance charges, and (vi) a $0.7 million increase in maintenance capital expenditures.

For additional information regarding the conversion of the Preferred Units, see Note 9 to our unaudited condensed consolidated financial statements under Part I, Item 1 “Financial Statements” of this report.

DCF Coverage Ratio .

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.

The increase in DCF Coverage Ratio for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to the increase in DCF, partially offset by increased distributions due to an increase in the number of common units, largely attributable to the conversion of 320,000 Preferred Units into 15,990,804 common units during 2024 and the conversion of warrants into 2,360,488 common units during 2023.

Liquidity and Capital Resources

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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 nine months ended September 30, 2023 and 2022, were $18.6 million and $20.0 million, respectively.

Our aggregate maintenance capital expenditures for the three months ended March 31, 2024 and 2023, were $5.8 million and $5.0 million, respectively.

We currently plan to spend approximately $32.0 million in maintenance capital expenditures for the year 2024, 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 $115.0 million and $125.0 million in expansion capital expenditures for the year 2024.

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,

Our expansion capital expenditures for the three months ended March 31, 2024 and 2023, were $104.8 million and $51.2 million, respectively.

As of March 31, 2024, we had binding commitments to purchase $5.9 million worth of additional compression units and serialized parts, all of which is expected to be settled within the next twelve months.

The following table summarizes our sources and uses of cash for the three months ended March 31, 2024 and 2023, (in thousands):

Three Months Ended March 31,

Net cash provided by operating activities $ 65,917 $ 42,338

Net cash used in investing activities (98,573) (40,861)

Net cash used in financing activities (26,919) (92,070)

Net cash provided by (used in) financing activities 32,653 (1,506)

Net cash provided by operating activities .

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.

The $23.6 million increase in net cash provided by operating activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) an increase in cash flows from a $23.7 million increase in Adjusted gross margin and (ii) an $18.4 million decrease in cash paid for interest,

net of capitalized amounts, driven by the Defeasance of the Senior Notes 2026, partially offset by (iii) a $17.7 million increase in inventory purchases.

Net cash used in investing activities .

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 $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.

The $57.7 million increase in net cash used in investing activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to a $57.2 million increase in capital expenditures, for purchases of new compression units, overhauls and major improvements, and purchases of other equipment, and a $0.5 million decrease in proceeds from disposition of property and equipment.

Net cash provided by (used in) financing activities .

The $34.2 million decrease in net cash used in financing activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily was due to (i) a $1.0 billion increase in proceeds from issuance of the Senior Notes 2029, partially offset by (ii) a $748.8 million increase in investments in government securities purchased in connection with the Defeasance of the Senior Notes 2026, (iii) a $198.8 million decrease in net borrowings under the Credit Agreement, (iv) a $16.6 million increase in deferred financing costs driven by the issuance of the Senior Notes 2029, and (v) a $2.6 million increase in common unit distributions.

Revolving Credit Facility

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.

As of March 31, 2024, we had outstanding borrowings under the Credit Agreement of $736.1 million and, after accounting for outstanding letters of credit in the amount of $0.5 million, $863.4 million of remaining unused availability, of which, due to restrictions related to compliance with the applicable financial covenants, $429.3 million was available to be drawn.

As of March 31, 2024, we were in compliance with all of our covenants under the Credit Agreement.

As of May 2, 2024, we had outstanding borrowings under the Credit Agreement of $782.5 million and outstanding letters of credit of $0.5 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 2023 Annual Report.

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.

Interest on the Senior Notes 2026 is payable semi-annually in arrears on each of April 1 and October 1.

As of March 31, 2024, we had $750.0 million and $1.0 billion aggregate principal amount outstanding on our Senior Notes 2027 and Senior Notes 2029, respectively.

On March 5, 2024, we provided notice to the holders of our Senior Notes 2026 that, contingent on receipt of the proceeds from the Senior Notes 2029, the Senior Notes 2026 would be redeemed at par on April 4, 2024.

On March 18, 2024, utilizing a portion of the proceeds from the Senior Notes 2029, we deposited government securities with the trustee to satisfy and discharge the Senior Notes 2026 under the Indenture governing the notes.

This satisfaction and discharge constituted a legal defeasance, or the Defeasance, under GAAP as of March 18, 2024 of the full outstanding principal balance of $725.0 million.

The Senior Notes 2026 were redeemed in full at par on April 4, 2024.

The Senior Notes 2027 are due on September 1, 2027, and accrue interest at the rate of 6.875% per year.

Interest on the Senior Notes 2027 is payable semi-annually in arrears on each of March 1 and September 1.

For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027, see Note 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.

The Senior Notes 2029 are due on March 15, 2029, and accrue interest at the rate of 7.125% per year.

Interest on the Senior Notes 2029 is payable semi-annually in arrears on each of March 15 and September 15, commencing on September 15, 2024.

Net proceeds from the Senior Notes 2029 were used for the Defeasance, with the remainder used to reduce outstanding borrowings under our Credit Agreement.

For more detailed descriptions of the Defeasance, Senior Notes 2027, and Senior Notes 2029, see Note 8 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report and, for the Senior Notes 2027, Note 10 to the consolidated financial statements in Part II, Item 8 “Financial Statements and Supplementary Data” included in our 2023 Annual Report.

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 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.

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.

We have an interest-rate swap outstanding to manage interest-rate risk associated with the floating-rate Credit Agreement, see Note 7 to our unaudited condensed consolidated financial statements in Part I, Item 1 “Financial Statements” of this report for additional information on this interest-rate swap.

During the three months ended March 31, 2024, distributions of $0.4 million were reinvested under the DRIP resulting in the issuance of 17,050 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 September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Total revenues $ 229,276 $ 197,124

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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, loss (gain) on derivative instrument, 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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• our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.

We believe Adjusted EBITDA provides useful information to investors because, when viewed in conjunction with our GAAP results and the accompanying reconciliations, it may provide a more complete assessment of our performance as

compared to considering solely GAAP results.

We also believe that external users of our financial statements benefit from having access to the same financial measures that management uses to evaluate the results of our business.

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The following table reconciles Adjusted EBITDA to net income and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):

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

2023 2022 2023 2022

Three Months Ended March 31,

Net income $ 23,573 $ 10,941

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Loss (gain) on disposition of assets 1,254 (376)

Loss on extinguishment of debt (3) 4,966 —

Gain on derivative instrument (8,771) —

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________________________________

(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.

(1) For the three months ended March 31, 2024 and 2023, unit-based compensation expense included $1.0 million and $1.1 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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We believe it is useful to investors to exclude these expenses.

(3) This loss on extinguishment of debt is a result of the Defeasance of the Senior Notes 2026.

This amount represents the write-off of deferred financing costs of $4.3 million and the difference between (i) the purchase price of U.S.

government securities of $748.8 million and (ii) the aggregate outstanding principal balance and accrued interest of the Senior Notes 2026 of $748.1 million at the time of Defeasance.

(4) Represents non-cash charges incurred to decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows.

Distributable Cash Flow

We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, loss (gain) on disposition of assets, change in fair value of derivative instrument, 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, loss on extinguishment of debt, 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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The following table reconciles DCF to net income and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands):

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

2023 2022 2023 2022

Three Months Ended March 31,

Net income $ 23,573 $ 10,941

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Depreciation and amortization 63,251 59,486

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

Non-cash income tax expense (benefit) 60 (15)

Unit-based compensation expense (1) 7,769 6,779

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Loss (gain) on disposition of assets 1,254 (376)

Loss on extinguishment of debt (3) 4,966 —

Change in fair value of derivative instrument (6,349) —

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Distributions on Preferred Units 4,388 12,187

Other — — — (700)

Changes in operating assets and liabilities (30,602) (37,490)

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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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We believe it is useful to investors to exclude these expenses.

(3) This loss on extinguishment of debt is a result of the Defeasance of the Senior Notes 2026.

This amount represents the write-off of deferred financing costs of $4.3 million and the difference between (i) the purchase price of U.S.

government securities of $748.8 million and (ii) the aggregate outstanding principal balance and accrued interest of the Senior Notes 2026 of $748.1 million at the time of Defeasance.

(4) Represents non-cash charges incurred to decrease the carrying value of long-lived assets with recorded values that are not expected to be recovered through future cash flows.

(5) During 2024, 320,000 Preferred Units were converted into 15,990,804 common units, all of which occurred on or prior to the distribution record date.

(6) Reflects actual maintenance capital expenditures for the period presented.

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

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

2023 2022 2023 2022

Three Months Ended March 31,

DCF $ 86,589 $ 62,613

Distributions for DCF Coverage Ratio (1) $ 61,422 $ 51,585

DCF Coverage Ratio 1.39 x 1.07 x 1.30 x 1.04 x

DCF Coverage Ratio 1.41 x 1.21 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