USA COMPRESSION PARTNERS, LP DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This report contains "forward-looking statements." All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects and expectations concerning our business, results of operations and financial condition. You can identify many of these statements by looking for 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 in these forward-looking statements are described in Part I, Item IA "Risk Factors" of our 2019 Annual Report, Part II, Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , as well as our subsequent filings with theSEC . 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 the long-term supply of and demand for crude oil and natural gas, including as a result of uncertainty regarding the length of time it will take forthe United States and the rest of the world to slow the spread of COVID-19 to the point where applicable authorities are comfortable continuing to ease, or declining to reinstate certain restrictions on various commercial and economic activities; such restrictions are designed to protect public health but also have the effect of significantly reducing demand for crude oil and natural gas; •the severity and duration of world health events, including the recent COVID-19 outbreak, related economic repercussions, actions taken by governmental authorities and other third parties in response to the pandemic and the resulting severe disruption in the oil and gas industry and negative impact on demand for oil and gas, which continues to negatively impact our business; •changes in general economic conditions and changes in economic conditions of the crude oil and natural gas industries specifically, including the ability of members of theOrganization of the Petroleum Exporting Countries ("OPEC") andRussia (together withOPEC and other allied producing countries, "OPEC+") to agree on and comply with supply limitations; •uncertainty regarding the timing, pace and extent of an economic recovery inthe United States and elsewhere, which in turn will likely affect demand for crude oil and natural gas and therefore the demand for the compression and treating services we provide and the commercial opportunities available to us; •the deterioration of the financial condition of our customers, which may result in the initiation of bankruptcy proceedings with respect to customers; •renegotiation of material terms of customer contracts; •competitive conditions in our industry; •our ability to realize the anticipated benefits of acquisitions; •actions taken by our customers, competitors and third-party operators; •changes in the availability and cost of capital; •operating hazards, natural disasters, epidemics, pandemics (such as COVID-19), weather-related delays, casualty losses and other matters beyond our control; •operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts and supply chain disruptions; •the effects of existing and future laws and governmental regulations; and •the effects of future litigation. Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any consequent worsening of the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. 21 -------------------------------------------------------------------------------- Table of Contents All forward-looking statements included in this report are based on information available to us on the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Trends and Outlook We provide compression services in a number of shale plays throughout theU.S. , including the Utica, Marcellus,Permian Basin ,Delaware Basin ,Eagle Ford , Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales. Demand for our services is driven by the domestic production of natural gas and crude oil. As such, we have focused our activities in areas of attractive natural gas and crude oil production growth, which are generally found in these shale and unconventional resource plays. According to studies promulgated by theEnergy Information Agency , the production and transportation volumes in these shale plays are expected to increase over the long term due to the comparatively attractive economic returns as compared to returns achieved in many conventional basins. Furthermore, the changes in production volumes and pressures of shale plays over time require a wider range of compression services than in conventional basins. We believe we are well-positioned to meet these changing operating conditions due to the operational design flexibility inherent in our compression units. A significant amount of our assets are utilized in natural gas infrastructure applications typically located in shale plays, primarily in centralized gathering systems and processing facilities utilizing large horsepower compression units. Given the infrastructure nature of these applications and long-term investment horizon of our customers, we have generally experienced stability in service rates and higher sustained utilization relative to other businesses more directly tied to drilling activity and wellhead economics. In addition to our natural gas infrastructure applications, a portion of our fleet is used in connection with gas lift applications on crude oil production targeted by horizontal drilling techniques and can be accomplished by both small and large horsepower compression equipment. Domestic natural gas production generally occurs in either primarily gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins such as the Permian and Delaware Basins and the Mid-Continent, where associated gas volumes are a byproduct of crude oil production. Over the past several years, relative stability in commodity prices has encouraged investment in domestic exploration and production ("E&P") and midstream infrastructure across the energy industry, particularly in the low-cost basins characterized by associated gas and crude oil production. The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the last several years as it is a critical method to transport associated gas volumes or enhance crude oil production through gas lift, allowing our customers to produce additional crude oil at more economically attractive levels. However, recent events have impacted and may continue to impact our operations in areas driven by associated gas and crude oil production. The considerable crude oil price drop inMarch 2020 due to the collapse of discussions among members of OPEC+,Saudi Arabia's announcement that it would be discounting its price, and increasing its supply, of crude oil into the global market and the ongoing global impact, both real and perceived, on crude oil demand from the COVID-19 pandemic has created additional uncertainty regarding the demand for compression services in certain of our operating areas. While our business is focused on providing compression services and does not have any direct exposure to commodity prices, we have indirect exposure to commodity prices as overall levels of activity across the energy industry are influenced by the commodity price environment. For example, despite the quick rebound in crude oil prices during the second quarter of 2020, drilling activity expectations have not materially changed as many E&P companies, including some of our customers, maintained their reduced capital expenditure forecasts from the first quarter of 2020 for the remainder of 2020. We expect the resulting decrease in new production to in turn negatively affect the demand for new compression services and potentially reduce the need for us to spend capital on new compression units for deployment in associated gas producing regions. The impact on existing production of crude oil and natural gas, however, is far less certain. Variables such as takeaway capacity, flaring considerations, potential production prorationing, reservoir pressure and flow rates, high switching costs associated with large horsepower compressors (borne by our customers), and specific company dynamics may all factor into producers' decisions with respect to their existing production. For example, as wells age, and the reservoir pressures naturally continue to decline, more horsepower may be required to meet the customer's operational needs. In contrast, small horsepower gas lift applications have historically been more susceptible to commodity price swings, and we have experienced, and may continue to experience, some pressure on service rates and utilization in small horsepower gas lift applications. We cannot predict with reasonable certainty the effect on utilization of our assets servicing existing production in these regions. Unlike crude oil, natural gas production and prices have been influenced by different drivers over the recent past, as there is no OPEC+ equivalent in the global natural gas market and therefore the price of natural gas is generally determined by market forces of supply and demand rather than by a centralized market coordinator. Over the past several years, increased gas 22 -------------------------------------------------------------------------------- Table of Contents production in theU.S. driven by large volumes of gas produced from shale sources has been a main driver of an overall drop in natural gas prices. This sustained low natural gas price environment has helped create relatively resilient baseload demand for natural gas for domestic use in power generation and for industrial purposes such as chemical plants and other types of manufacturing. Also, the development of long-term export infrastructure has continued to occur alongside the low natural gas price environment, and theU.S. became a net exporter of natural gas into global markets in 2017. We expect this baseload natural gas demand will continue to drive long-term domestic natural gas production despite low natural gas prices. In addition to the relatively stable supply, demand and price fundamentals of natural gas, we believe that the geographic diversity and portability of our assets should help mitigate the impact of current market volatility. While we expect that the reduction in the production of associated gas and demand for our services in certain regions that began in the first quarter of 2020 will continue for the remainder of 2020, we remain optimistic that such reduction in production will have a positive impact on both natural gas prices and the utilization of our assets in other regions primarily tied to natural gas prospects, such as the Marcellus, Utica and Haynesville Shales. Given that these are primarily gas shales, we believe it is reasonable to expect that these areas could see additional capital inflows to take advantage of relatively more attractive economics and offset the reduced supply of associated natural gas in other regions, which could increase demand for our services in these shales. Should such demand increase exceed our current compression capability in these shales, the design flexibility of our compression units making them capable of rapid reconfiguration and deployment would allow us to meet such demand by relocating units to these areas. On the whole, we believe the longer-term outlook for natural gas fundamentals remains positive, as market signs point to a more balanced gas market toward the end of 2020 and into 2021. In summary, the outlook for commodity prices is mixed and could have a varying impact on our business. Whereas several factors, including uncertain future demand, have recently caused severe volatility in crude oil prices, on the natural gas side, relatively more moderate demand destruction coupled with anticipated associated gas production decreases have somewhat counterbalanced softness in pricing and expectations of full gas storage going into the fall, thereby providing some support to natural gas futures prices. The overall outlook for our compression services will depend, in part, on the timing and extent of recovery in the commodity markets, and we believe the potential for natural gas to recover more quickly than crude oil should help support our business activities and overall utilization and pricing. While we anticipate that current and projected commodity prices and the related impact to activity levels in both the upstream and midstream sectors will impact our business, we cannot predict the ultimate magnitude of that impact and expect it to be varied across our operations, depending on the region, customer, nature of compression application, contract term and other factors. We believe our customers' mid- to long-term expectations regarding commodity prices and the cost they would incur to return our large horsepower equipment will provide an incentive for our customers to keep it in the field following expiration of the primary term, whereas we believe there is likely to be greater pressure on utilization and pricing with respect to our smaller horsepower equipment. Ultimately, the extent to which our business will be impacted by recent market developments depends on the factors described above as well as future developments beyond our control, which are highly uncertain and cannot be predicted. In response to these market events and uncertainties, in the first quarter of this year we cut our already reduced 2020 growth capital spending budget by 25% and reduced operating expenses by 10%; and we are prepared to cut spending further should the need arise. While current market volatility makes the near-term unpredictable, we believe that overall the long-term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas as well as the production of crude oil, although we cannot predict any possible changes in such demand with reasonable certainty. COVID-19 Update Beginning in the first quarter of 2020, the COVID-19 pandemic prompted several states and municipalities in which we operate to take extraordinary and wide-ranging actions to contain and combat the outbreak and spread of the virus, including mandates for many individuals to substantially restrict daily activities and for many businesses to curtail or cease normal operations. While many states have begun to recover from the COVID-19 pandemic and states have largely reopened their economies to varying extents, in several states the COVID-19 outbreak is worsening, and a reinstatement of severe restrictions may occur in these states. For as long as COVID-19 continues or worsens, governments may impose additional similar restrictions or reinstate previously lifted ones. To date, our field operations have continued largely uninterrupted as theU.S. Department of Homeland Security designated our industry part of our country's critical infrastructure. Thus far, remote work and other COVID-19 related conditions have not significantly impacted our ability to maintain operations or caused us to incur significant additional expenses; however, we are unable to predict the duration or ultimate impact of current and potential future COVID-19 mitigation measures. 23 -------------------------------------------------------------------------------- Table of Contents Operating Highlights The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric. Three Months Ended June 30, Percent Six Months Ended June 30, Percent 2020 2019 Change 2020 2019 Change Fleet horsepower (at period end) (1) 3,718,092 3,657,362 1.7 % 3,718,092 3,657,362 1.7 % Total available horsepower (at period end) (2) 3,736,392 3,709,662 0.7 % 3,736,392 3,709,662 0.7 % Revenue generating horsepower (at period end) (3) 3,125,909 3,259,795 (4.1) % 3,125,909 3,259,795 (4.1) % Average revenue generating horsepower (4) 3,191,348 3,270,379 (2.4) % 3,256,036 3,275,490 (0.6) % Average revenue per revenue generating horsepower per month (5)$ 16.79 $ 16.60 1.1 %$ 16.84 $ 16.53 1.9 % Revenue generating compression units (at period end) 4,206 4,518 (6.9) % 4,206 4,518 (6.9) % Average horsepower per revenue generating compression unit (6) 743 720 3.2 % 737 717 2.8 % Horsepower utilization (7): At period end 86.2 % 94.5 % (8.8) % 86.2 % 94.5 % (8.8) % Average for the period (8) 88.0 % 94.6 % (7.0) % 90.2 % 94.4 % (4.4) % ______________________ (1)Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As ofJune 30, 2020 , we had approximately 18,000 horsepower on order, all of which we expect to be delivered during the remainder of 2020. (2)Total available horsepower is revenue generating horsepower under contract for which we are billing a customer, horsepower in our fleet that is under contract but is not yet generating revenue, horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, and idle horsepower. Total available horsepower excludes new horsepower on order for which we do not have an executed compression services contract. (3)Revenue generating horsepower is horsepower under contract for which we are billing a customer. (4)Calculated as the average of the month-end revenue generating horsepower for each of the months in the period. (5)Calculated as the average of the result of dividing the contractual monthly rate for all units at the end of each month in the period by the sum of the revenue generating horsepower at the end of each month in the period. (6)Calculated as the average of the month-end revenue generating horsepower per revenue generating compression unit for each of the months in the period. (7)Horsepower utilization is calculated as (i) the sum of (a) revenue generating horsepower, (b) horsepower in our fleet that is under contract but is not yet generating revenue, and (c) horsepower not yet in our fleet that is under contract but not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair. Horsepower utilization based on revenue generating horsepower and fleet horsepower as ofJune 30, 2020 and 2019 was 84.1% and 89.1%, 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 endedJune 30, 2020 and 2019 was 86.0% and 89.9%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the six months endedJune 30, 2020 and 2019 was 87.9% and 90.3%, respectively. The 1.7% increase in fleet horsepower as ofJune 30, 2020 compared toJune 30, 2019 was attributable to compression units added to our fleet to meet then expected incremental demand by new and current customers for our compression services. The 4.1% decrease in revenue generating horsepower as ofJune 30, 2020 compared toJune 30, 2019 was primarily due to returns of compression units from our customers, which also caused a 6.9% decrease in revenue generating compression units over the same period, partially offset by a 3.2% increase in average horsepower per revenue generating compression unit due to the organic growth in our large horsepower fleet. The 1.1% and 1.9% increases in average revenue per revenue generating horsepower per month during the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 , respectively, were both primarily due to contracts on new compression units and selective price increases on the existing fleet. Average horsepower utilization decreased to 88.0% during the three months endedJune 30, 2020 compared to 94.6% during the three months endedJune 30, 2019 . The 7.0% decrease in average horsepower utilization is primarily due to (1) a 24 -------------------------------------------------------------------------------- Table of Contents 6.2% increase in our average idle fleet from compression units returned to us and (2) a 3.9% decrease in horsepower that is on-contract or pending-contract but not yet active. Average horsepower utilization decreased to 90.2% during the six months endedJune 30, 2020 compared to 94.4% during the six months endedJune 30, 2019 . The 4.4% decrease in average horsepower utilization is primarily due to (1) a 3.8% increase in our average idle fleet from compression units returned to us and (2) a 3.1% decrease in horsepower that is on-contract or pending-contract but not yet active. We believe the decreases in average horsepower utilization are due to a decrease in demand for compression services driven by a decline inU.S. crude oil and natural gas activity. Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 86.0% and 87.9% during the three and six months endedJune 30, 2020 , respectively, compared to 89.9% and 90.3% during the three and six months endedJune 30, 2019 , respectively. The 4.3% and 2.7% decreases in average horsepower utilization based on revenue generating horsepower during the three and six months endedJune 30, 2020 , respectively, were both primarily attributable to an increase in our average idle fleet from compression units returned to us. We believe the decreases in average horsepower utilization based on revenue generating horsepower and fleet horsepower are due to a decrease in demand for compression services driven by a decline inU.S. crude oil and natural gas activity. Financial Results of Operations Three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 The following table summarizes our results of operations for the periods presented (dollars in thousands): Three Months Ended June 30, Percent 2020 2019 Change Revenues: Contract operations$ 162,993 $ 162,937 - % Parts and service 2,736 4,400 (37.8) % Related party 2,922 6,338 (53.9) % Total revenues 168,651 173,675 (2.9) % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 49,968 56,245 (11.2) % Depreciation and amortization 60,338 56,783 6.3 % Selling, general and administrative 20,315 16,210 25.3 % Loss (gain) on disposition of assets (787) 1,546 * Impairment of compression equipment 3,923 - * Total costs and expenses 133,757 130,784 2.3 % Operating income 34,894 42,891 (18.6) % Other income (expense): Interest expense, net (31,815) (32,679) (2.6) % Other 24 12 * Total other expense (31,791) (32,667) (2.7) % Net income before income tax expense 3,103 10,224 (69.6) % Income tax expense 419 275 52.4 % Net income$ 2,684 $ 9,949 (73.0) % ______________________ *Not meaningful Contract operations revenue. Contract operations revenue for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was consistent between periods. Average revenue per revenue generating horsepower per month increased by 1.1% to$16.79 for the three months endedJune 30, 2020 compared to$16.60 for the three months endedJune 30, 2019 , which was offset by a 2.4% decrease in average revenue generating horsepower due to a decline in demand for compression services driven by a decrease inU.S. crude oil and natural gas activity. Our contract operations revenue was not materially impacted by any renegotiations of our contracts with our customers, and average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ 25 -------------------------------------------------------------------------------- Table of Contents 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$1.7 million decrease in parts and service revenue for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers' locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers. Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers. Related party revenue. Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO. The$3.4 million decrease in related party revenue for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO. Cost of operations, exclusive of depreciation and amortization. The$6.3 million decrease in cost of operations, exclusive of depreciation and amortization, for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily due to (1) a$5.2 million decrease in direct expenses, such as parts and fluids expenses, (2) a$2.5 million decrease in direct labor expenses, (3) a$1.2 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue, and (4) a$1.1 million decrease in expenses related to our vehicle fleet. The decreases in parts, fluids, direct labor and vehicle expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period. The decreases were offset by (5) a$4.6 million increase in ad valorem tax expense, due primarily to refunds received during the prior period. Depreciation and amortization expense. The$3.6 million increase in depreciation and amortization expense for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily related to compression units placed in service to meet then expected incremental demand for our compression services by new and current customers. Selling, general and administrative expense. The$4.1 million increase in selling, general and administrative expense for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily due to (1) a$1.9 million increase in the provision for expected credit losses, (2) a$1.9 million increase in severance charges and (3) a$1.9 million increase in unit-based compensation expense. These increases were partially offset by (4) a$0.9 million decrease in employee-related expenses and (5) a$0.5 million decrease in transaction-related expenses. The change to the provision for expected credit losses is related to low crude oil prices driven by decreased demand due to the COVID-19 pandemic and the global oversupply of crude oil during the current period. The increase in severance charges is primarily related to the departure of one of our executives during the current period. The increase in unit-based compensation expense is primarily due to the increase in our unit price as ofJune 30, 2020 as compared toMarch 31, 2020 , and the related mark-to-market change to our unit-based compensation liability. The decrease in employee-related expenses is primarily due to reduced headcount during the current period. Impairment of compression equipment. The$3.9 million impairment of compression equipment for the three months endedJune 30, 2020 was primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions. Our evaluations determined that due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emissions standards without excessive retrofitting costs, this equipment was unlikely to be accepted by customers under current market conditions. As a result of our evaluations during the three months endedJune 30, 2020 , we determined to retire 11 compressor units, for a total of approximately 5,100 horsepower, that were previously used to provide compression services in our business. No impairment was recorded for the three months endedJune 30, 2019 . Interest expense, net. The$0.9 million decrease in interest expense, net for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was attributable to lower weighted average interest rates under the Credit Agreement, offset by increased borrowings under the Credit Agreement. The weighted average interest rate applicable to borrowings under the Credit Agreement was 3.09% and 5.05% for the three months endedJune 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were$455.6 million and$355.4 million for the three months endedJune 30, 2020 and 2019, respectively. 26 -------------------------------------------------------------------------------- Table of Contents Six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 The following table summarizes our results of operations for the periods presented (dollars in thousands): Six Months Ended June 30, Percent 2020 2019 Change Revenues: Contract operations$ 335,787 $ 326,913 2.7 % Parts and service 5,784 7,084 (18.4) % Related party 6,079 10,424 (41.7) % Total revenues 347,650 344,421 0.9 % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 109,133 113,270 (3.7) % Depreciation and amortization 119,100 115,707 2.9 % Selling, general and administrative 32,700 32,205 1.5 % Loss (gain) on disposition of assets (1,801) 1,586 * Impairment of compression equipment 3,923 3,234 21.3 % Impairment of goodwill 619,411 - * Total costs and expenses 882,466 266,002 * Operating income (loss) (534,816) 78,419 * Other income (expense): Interest expense, net (64,293) (61,536) 4.5 % Other 47 32 46.9 % Total other expense (64,246) (61,504) 4.5 % Net income (loss) before income tax expense (599,062) 16,915 * Income tax expense 715 379 88.7 % Net income (loss)$ (599,777) $ 16,536 * ______________________ *Not meaningful Contract operations revenue. The$8.9 million increase in contract operations revenue for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to a 1.9% increase in average revenue per revenue generating horsepower per month which increased to$16.84 for the six months endedJune 30, 2020 compared to$16.53 for the six months endedJune 30, 2019 , partially offset by a 0.6% decrease in average revenue generating horsepower due to a decrease in demand for compression services driven by a decline inU.S. crude oil and natural gas activity. Our contract operations revenue was not materially impacted by any renegotiations of our contracts with our customers, and average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ 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$1.3 million decrease in parts and service revenue for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to a reduction in maintenance work performed on units at our customers' locations that are outside the scope of our core maintenance activities and offered as a courtesy to our customers, and freight and crane charges that are directly reimbursable by customers. Demand for retail parts and services fluctuates from period to period based on the varying needs of our customers. Related party revenue. Related party revenue was earned through related party transactions in the ordinary course of business with various affiliated entities of ETO. The$4.3 million decrease in related party revenue for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was attributable to a decrease in parts and service revenue, as well as a decrease in contract operations revenue due to the expiration of contracts with various affiliated entities of ETO. Cost of operations, exclusive of depreciation and amortization. The$4.1 million decrease in cost of operations, exclusive of depreciation and amortization, for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily due to (1) a$3.6 million decrease in direct expenses, such as parts and fluids expenses, (2) a$2.0 million decrease in 27 -------------------------------------------------------------------------------- Table of Contents direct labor expenses, (3) a$1.6 million decrease in expenses related to our vehicle fleet and (4) a$1.4 million decrease in retail parts and services expenses, which have a corresponding decrease in parts and service revenue. The decreases in parts, fluids, direct labor and vehicle expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period. The decreases were partially offset by (5) a$5.0 million increase in ad valorem tax expense, due primarily to refunds received during the prior period. Depreciation and amortization expense. The$3.4 million increase in depreciation and amortization expense for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily related to compression units placed in service to meet then expected incremental demand for our compression services by new and current customers. Selling, general and administrative expense. The$0.5 million increase in selling, general and administrative expense for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily due to (1) a$3.4 million increase in the provision for expected credit losses and (2) a$2.0 million increase in severance charges. These increases were offset by (3) a$3.1 million decrease in unit-based compensation expense, (4) a$0.7 million decrease in third-party professional fees, (5) a$0.6 million decrease in employee-related expenses and (6) a$0.6 million decrease in transaction-related expenses. The change to the provision for expected credit losses is related to low crude oil prices driven by decreased demand due to the COVID-19 pandemic and the global oversupply of crude oil during the current period. The increase in severance charges is primarily related to the departure of one of our executives during the current period. The decrease in unit-based compensation expense is primarily due to the decrease in our unit price in the current period and the related mark-to-market change to our unit-based compensation liability. The decreases in employee-related expenses and professional fees are related to reduced headcount and cost savings, respectively. Impairment of compression equipment. The$3.9 million and$3.2 million impairments of compression equipment for the six months endedJune 30, 2020 andJune 30, 2019 , respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under current market conditions. Our evaluations determined that due to certain performance characteristics of the impaired equipment, such as excessive maintenance costs and the inability of the equipment to meet current emissions standards without excessive retrofitting costs, this equipment was unlikely to be accepted by customers under current market conditions. As a result of our evaluations during the six months endedJune 30, 2020 andJune 30, 2019 , we determined to retire 11 and 14 compressor units, respectively, for a total of approximately 5,100 and 4,700 horsepower, respectively, that were previously used to provide compression services in our business. Impairment of goodwill. During the first quarter of 2020 certain potential impairment indicators were identified, specifically (i) the decline in the market price of our common units, (ii) the decline in global commodity prices, and (iii) the COVID-19 pandemic; which together indicated the fair value of the reporting unit was less than its carrying amount as ofMarch 31, 2020 . Management determined fair value using a weighted combination of the income approach and the market approach and, as a result, recognized a$619.4 million impairment of goodwill for the six months endedJune 30, 2020 . No impairment was recorded for the six months endedJune 30, 2019 . Interest expense, net. The$2.8 million increase in interest expense, net for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to a full six months of interest expense incurred in the current period on the Senior Notes 2027 issued inMarch 2019 , which were used to reduce borrowings under the Credit Agreement, partially offset by reduced borrowings and lower weighted average interest rates under the Credit Agreement. The weighted average interest rate applicable to borrowings under the Credit Agreement was 3.60% and 5.06% for the six months endedJune 30, 2020 and 2019, respectively, and average outstanding borrowings under the Credit Agreement were$434.4 million and$610.1 million for the six months endedJune 30, 2020 and 2019, respectively. 28 -------------------------------------------------------------------------------- Table of Contents Other Financial Data The following table summarizes other financial data for the periods presented (dollars in thousands): Three Months Ended June 30, Percent Six Months Ended June 30, Percent Other Financial Data: (1) 2020 2019 Change 2020 2019 Change Gross margin$ 58,345 $ 60,647 (3.8) %$ 119,417 $ 115,444 3.4 % Adjusted gross margin (2)$ 118,683 $ 117,430 1.1 %$ 238,517 $ 231,151 3.2 % Adjusted gross margin percentage (3) 70.4 % 67.6 % 4.1 % 68.6 % 67.1 % 2.2 % Adjusted EBITDA$ 105,481 $ 104,708 0.7 %$ 211,665 $ 206,085 2.7 % Adjusted EBITDA percentage (3) 62.5 % 60.3 % 3.6 % 60.9 % 59.8 % 1.8 % DCF$ 58,686 $ 54,062 8.6 %$ 113,388 $ 108,914 4.1 % DCF Coverage Ratio 1.15x 1.14x 0.9 % 1.12x 1.15x (2.6) % Cash Coverage Ratio 1.17x 1.15x 1.7 % 1.13x 1.16x (2.6) % ______________________ (1)Adjusted gross margin, Adjusted EBITDA, Distributable Cash Flow ("DCF"), DCF Coverage Ratio and Cash Coverage Ratio are all non-GAAP financial measures. Definitions of each measure, as well as reconciliations of each measure to its most directly comparable financial measure(s) calculated and presented in accordance with GAAP, can be found below under the caption "Non-GAAP Financial Measures." (2)Adjusted gross margin was previously presented as gross operating margin. The definition of Adjusted gross margin is identical to the definition of gross operating margin previously presented. For the definition of Adjusted gross margin, please refer to the "Non-GAAP Financial Measures" section below. (3)Adjusted gross margin percentage and Adjusted EBITDA percentage are calculated as a percentage of revenue. Gross margin. The$2.3 million decrease in gross margin for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was due to (1) a$5.0 million decrease in revenues and (2) a$3.6 million increase in depreciation and amortization, offset by (3) a$6.3 million decrease in cost of operations, exclusive of depreciation and amortization. The$4.0 million increase in gross margin for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was due to (1) a$4.1 million decrease in cost of operations, exclusive of depreciation and amortization and (2) a$3.2 million increase in revenues, offset by (3) a$3.4 million increase in depreciation and amortization. Adjusted gross margin. The$1.3 million increase in Adjusted gross margin for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was due to a$6.3 million decrease in cost of operations, exclusive of depreciation and amortization, offset by a$5.0 million decrease in revenues. The$7.4 million increase in Adjusted gross margin for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was due to a$4.1 million decrease in cost of operations, exclusive of depreciation and amortization, and a$3.2 million increase in revenues. Adjusted EBITDA. The$0.8 million , or 0.7%, increase in Adjusted EBITDA for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily attributable to a$1.3 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, severance charges and transaction expenses. The$5.6 million , or 2.7%, increase in Adjusted EBITDA for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to a$7.4 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. DCF. The$4.6 million , or 8.6%, increase in DCF for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily attributable to (1) a$3.5 million decrease in maintenance capital expenditures, (2) a$1.3 million increase in Adjusted gross margin and (3) a$0.8 million decrease in cash interest expense, net. These changes were partially offset by (4) a$0.9 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses. The$4.5 million , or 4.1%, increase in DCF for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to (1) a$7.4 million increase in Adjusted gross margin and (2) a$1.6 million decrease 29 -------------------------------------------------------------------------------- Table of Contents in maintenance capital expenditures. These changes were partially offset by (3) a$2.5 million increase in cash interest expense, net, and (4) a$2.2 million increase in selling, general and administrative expenses, excluding unit-based compensation expense, severance charges and transaction expenses. Coverage Ratios. The increase in DCF Coverage Ratio and Cash Coverage Ratio for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 was primarily attributable to the increase in DCF, offset by an increase in cash distributions paid on common units in the current period due to the conversion of 6,397,965 ClassB Units , which did not participate in distributions, to common units on a one-for-one basis onJuly 30, 2019 . The decrease in DCF Coverage Ratio and Cash Coverage Ratio for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to an increase in cash distributions paid on common units in the current period due to the conversion of 6,397,965 ClassB Units , which did not participate in distributions, to common units on a one-for-one basis onJuly 30, 2019 , offset by an increase in DCF. Liquidity and Capital Resources Overview We operate in a capital-intensive industry, and our primary liquidity needs are to finance the purchase of additional compression units and make other capital expenditures, service our debt, fund working capital, and pay distributions. Our principal sources of liquidity include cash generated by operating activities, borrowings under the Credit Agreement and issuances of debt and equity securities, including common units under the DRIP. We typically utilize cash generated by operating activities and, where necessary, borrowings under the Credit Agreement to service our debt, fund working capital, fund our estimated expansion capital expenditures, fund our maintenance capital expenditures and pay distributions to our unitholders. In response to current market conditions, we have reduced our capital spending and operating expenses through the remainder of 2020. However, if market conditions related to COVID-19 and the global oversupply of crude oil persist, this could eventually reduce our cash generated by operating activities and increase our leverage. Covenants in the Credit Agreement and other debt instruments require that we maintain certain leverage ratios, and if we predict that we may violate those covenants in the future we could: (i) delay discretionary capital spending and further reduce operating expenses; (ii) request an amendment to the Credit Agreement; or (iii) reduce or suspend distributions to our unitholders. OnAugust 3, 2020 (the "Amendment Effective Date"), we amended the Credit Agreement to, among other items, increase the maximum leverage ratio beginning with the fiscal quarter endingSeptember 30, 2020 and ending with the fiscal quarter endingDecember 31, 2021 and provide for relief from certain covenants untilDecember 31, 2021 . Please see "Revolving Credit Facility" below for additional information regarding the amendment. Because we distribute all of our available cash, which excludes prudent operating reserves, we expect to fund any future expansion capital expenditures or acquisitions primarily with capital from external financing sources, such as borrowings under the Credit Agreement and issuances of debt and equity securities, including under the DRIP. Capital Expenditures The compression services business is capital intensive, requiring significant investment to maintain, expand and upgrade existing operations. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist primarily of, the following: •maintenance capital expenditures, which are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, to replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related operating income; and •expansion capital expenditures, which are capital expenditures made to expand the operating capacity or operating income capacity of assets, including by acquisition of compression units or through modification of existing compression units to increase their capacity, or to replace certain partially or fully depreciated assets that were not currently generating operating income. We classify capital expenditures as maintenance or expansion on an individual asset basis. Over the long term, we expect that our maintenance capital expenditure requirements will continue to increase as the overall size and age of our fleet increases. Our aggregate maintenance capital expenditures for the six months endedJune 30, 2020 and 2019 were$13.2 million and$14.8 million , respectively. We currently plan to spend approximately$30.0 million in maintenance capital expenditures for the year 2020, including parts consumed from inventory. 30 -------------------------------------------------------------------------------- Table of Contents Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently have budgeted between$80.0 million and$90.0 million in expansion capital expenditures for the year 2020. Our expansion capital expenditures for the six months endedJune 30, 2020 and 2019 were$69.3 million and$84.0 million , respectively. As ofJune 30, 2020 , we had binding commitments to purchase$18.3 million of additional compression units and serialized parts, all of which we expect to be delivered during the remainder of 2020. Cash Flows The following table summarizes our sources and uses of cash for the six months endedJune 30, 2020 and 2019 (in thousands): Six Months Ended June 30, 2020
2019
Net cash provided by operating activities$ 147,432 $
147,586
Net cash used in investing activities (63,796)
(75,949)
Net cash used in financing activities (83,644)
(71,734)
Net cash provided by operating activities. The$0.2 million decrease in net cash provided by operating activities for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to a$4.5 million increase in net income, as adjusted for non-cash items, offset by changes in working capital. Net cash used in investing activities. The$12.2 million decrease in net cash used in investing activities for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to (1) a$20.4 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, offset by (2) a$6.6 million decrease in proceeds from disposition of property and equipment and (3) a$1.7 million decrease in proceeds from insurance recovery. Net cash used in financing activities. The$11.9 million increase in net cash used in financing activities for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 was primarily attributable to (1) an$18.7 million decrease in net borrowings and (2) a$7.0 million increase in cash distributions paid on common units primarily due to the conversion of 6,397,965 ClassB Units , which did not participate in distributions, to common units on a one-for-one basis onJuly 30, 2019 . These changes were partially offset by a decrease in financing costs of$13.2 million due to the issuance of the Senior Notes 2027 inMarch 2019 . Revolving Credit Facility As ofJune 30, 2020 , we were in compliance with all of our covenants under the Credit Agreement. As ofJune 30, 2020 , we had outstanding borrowings under the Credit Agreement of$447.8 million ,$1.2 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of$151.1 million . As ofJuly 30, 2020 , we had outstanding borrowings under the Credit Agreement of$436.0 million . On the Amendment Effective Date, we amended the Credit Agreement to, among other items, increase the maximum funded debt to EBITDA ratio to (i) 5.75 to 1.00 for the fiscal quarters endingSeptember 30, 2020 andDecember 31, 2020 , (ii) 5.50 to 1.00 for the fiscal quarters endingMarch 31, 2021 andJune 30, 2021 and (iii) 5.25 to 1.00 for the fiscal quarters endingSeptember 30, 2021 andDecember 31, 2021 (reverting back to 5.00 to 1.00 for each fiscal quarter thereafter). In addition, the amendment provides that the 0.5 increase in maximum funded debt to EBITDA ratio applicable to certain future acquisitions (for the six consecutive month period in which any such acquisition occurs) is only available beginning with the fiscal quarter endingSeptember 30, 2021 , and in any case shall not increase the maximum funded debt to EBITDA ratio above 5.50 to 1.00. The amendment also provides that, from the Amendment Effective Date until the last day of the fiscal quarter endingDecember 31, 2021 (the "Covenant Relief Period"), the availability requirement in order to make restricted payments from capital contributions and from available cash are each increased from$100 million to$250 million and the availability requirement in order to make prepayments of our senior notes, any subordinated indebtedness or any other indebtedness for borrowed money is increased from$100 million to$250 million . In addition, during the Covenant Relief Period, the applicable margin for Eurodollar borrowings is increased from a range of 2.00% - 2.75% to a range of 2.25% - 3.00%. The amendment further provides that the Partnership becomes guarantor of the obligations of all other guarantors under the Credit Agreement. 31 -------------------------------------------------------------------------------- Table of Contents 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 10 to the consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" included in our 2019 Annual Report. Senior Notes As ofJune 30, 2020 , we had$725.0 million and$750.0 million outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively. The Senior Notes 2026 are due onApril 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 ofApril 1 andOctober 1 . The Senior Notes 2027 are due onSeptember 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 ofMarch 1 andSeptember 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 10 to the consolidated financial statements in Part II, Item 8 "Financial Statements and Supplementary Data" included in our 2019 Annual Report. DRIP During the six months endedJune 30, 2020 , distributions of$0.9 million were reinvested under the DRIP resulting in the issuance of 96,592 common units. Such distributions are treated as non-cash transactions in the accompanying unaudited condensed consolidated statements of cash flows included under Part I, Item 1 "Financial Statements" of this report. Non-GAAP Financial Measures Adjusted Gross Margin Adjusted gross margin is a non-GAAP financial measure. We define Adjusted gross margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted gross margin is useful as a supplemental measure to investors of our operating profitability. Adjusted gross margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted gross margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of Adjusted gross margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted gross margin, to evaluate our operating profitability. The following table reconciles Adjusted gross margin to gross margin, its most directly comparable GAAP financial measure, for each of the periods presented (in thousands): Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Total revenues$ 168,651 $ 173,675 $ 347,650 $ 344,421 Cost of operations, exclusive of depreciation and amortization (49,968) (56,245) (109,133) (113,270) Depreciation and amortization (60,338) (56,783) (119,100) (115,707) Gross margin$ 58,345 $ 60,647 $ 119,417 $ 115,444 Depreciation and amortization 60,338 56,783 119,100 115,707 Adjusted gross margin$ 118,683 $ 117,430 $ 238,517 $ 231,151 32
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Adjusted EBITDA
We define EBITDA as net income (loss) before net interest expense, depreciation
and amortization expense, and income tax expense. We define Adjusted EBITDA as
EBITDA plus impairment of compression equipment, impairment of goodwill,
interest income on capital lease, unit-based compensation expense, severance
charges, certain transaction fees, loss (gain) on disposition of assets and
other. We view Adjusted EBITDA as one of management's primary tools for
evaluating our results of operations, and we track this item on a monthly basis
both as an absolute amount and as a percentage of revenue compared to the prior
month, year-to-date, prior year and budget. Adjusted EBITDA is used as a
supplemental financial measure by our management and external users of our
financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of
financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return
on alternative investment opportunities;
•the ability of our assets to generate cash sufficient to make debt payments and
to pay distributions; and
•our operating performance as compared to those of other companies in our
industry without regard to the impact of financing methods and capital
structure.
We believe that Adjusted EBITDA provides useful information to investors
because, when viewed with our GAAP results and the accompanying reconciliations,
it may provide a more complete understanding of our performance than GAAP
results alone. We also believe that external users of our financial statements
benefit from having access to the same financial measures that management uses
in evaluating the results of our business.
Adjusted EBITDA should not be considered an alternative to, or more meaningful
than, net income (loss), operating income (loss), cash flows from operating
activities or any other measure of financial performance or liquidity presented
in accordance with GAAP as measures of operating performance and liquidity.
Moreover, our Adjusted EBITDA as presented may not be comparable to similarly
titled measures of other companies.
Because we use capital assets, depreciation, impairment of compression
equipment, loss (gain) on disposition of assets and the interest cost of
acquiring compression equipment are also necessary elements of our costs.
Unit-based compensation expense related to equity awards to employees is also a
necessary component of our business. Therefore, measures that exclude these
elements have material limitations. To compensate for these limitations, we
believe that it is important to consider both net income (loss) and net cash
provided by operating activities determined under GAAP, as well as Adjusted
EBITDA, to evaluate our financial performance and our liquidity. Our Adjusted
EBITDA excludes some, but not all, items that affect net income (loss) and net
cash provided by operating activities, and these measures may vary among
companies. Management compensates for the limitations of Adjusted EBITDA as an
analytical tool by reviewing the comparable GAAP measures, understanding the
differences between the measures and incorporating this knowledge into their
decision making processes.
33
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The following table reconciles Adjusted EBITDA to net income (loss) and net cash
provided by operating activities, its most directly comparable GAAP financial
measures, for each of the periods presented (in thousands):
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Net income (loss) $ 2,684 $ 9,949 $ (599,777) $ 16,536
Interest expense, net 31,815 32,679 64,293 61,536
Depreciation and amortization 60,338 56,783 119,100 115,707
Income tax expense 419 275 715 379
EBITDA $ 95,256 $ 99,686 $ (415,669) $ 194,158
Interest income on capital lease 105 177 229 371
Unit-based compensation expense (1) 4,568 2,706 2,739 5,840
Transaction expenses (2) - 465 - 551
Severance charges 2,416 128 2,833 345
Loss (gain) on disposition of assets (787) 1,546 (1,801) 1,586
Impairment of compression equipment (3) 3,923 - 3,923 3,234
Impairment of goodwill (4) - - 619,411 -
Adjusted EBITDA $ 105,481 $ 104,708 $ 211,665 $ 206,085
Interest expense, net (31,815) (32,679) (64,293) (61,536)
Non-cash interest expense 1,960 1,975 3,946 3,655
Income tax expense (419) (275) (715) (379)
Interest income on capital lease (105) (177) (229) (371)
Transaction expenses - (465) - (551)
Severance charges (2,416) (128) (2,833) (345)
Other 2,349 486 3,972 500
Changes in operating assets and liabilities 22,320 26,372 (4,081) 528
Net cash provided by operating activities $ 97,355 $
99,817
______________________
(1)For the three and six months endedJune 30, 2020 , unit-based compensation expense included$0.9 million and$1.8 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.5 million each period related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and six months endedJune 30, 2019 , unit-based compensation expense included$0.6 million and$1.3 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.3 million and$0.6 million , respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the six months endedJune 30, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. 34 -------------------------------------------------------------------------------- Table of Contents Distributable Cash Flow We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense, depreciation and amortization expense, unit-based compensation expense, impairment of compression equipment, impairment of goodwill, certain transaction fees, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery and other, less distributions on Preferred Units and maintenance capital expenditures. We believe DCF is an important measure of operating performance because it allows management, investors and others to compare basic cash flows 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 we expect to pay our common unitholders. Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our DCF as presented may not be comparable to similarly titled measures of other companies. Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs. Unit-based compensation expense related to equity awards to employees is also a necessary component of our business. Therefore, measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as DCF, to evaluate our financial performance and our liquidity. Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of DCF as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes. 35 -------------------------------------------------------------------------------- Table of Contents The following table reconciles DCF to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands): Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Net income (loss)$ 2,684 $ 9,949 $ (599,777) $ 16,536 Non-cash interest expense 1,960 1,975 3,946 3,655 Depreciation and amortization 60,338 56,783 119,100 115,707 Non-cash income tax expense 149 187 272 201 Unit-based compensation expense (1) 4,568 2,706 2,739 5,840 Transaction expenses (2) - 465 - 551 Severance charges 2,416 128 2,833 345 Loss (gain) on disposition of assets (787) 1,546 (1,801) 1,586 Impairment of compression equipment (3) 3,923 - 3,923 3,234 Impairment of goodwill (4) - - 619,411 - Distributions on Preferred Units (12,188) (12,188) (24,375) (24,375) Proceeds from insurance recovery - 383 336 427 Maintenance capital expenditures (5) (4,377) (7,872) (13,219) (14,793) DCF$ 58,686 $ 54,062 $ 113,388 $ 108,914 Maintenance capital expenditures 4,377 7,872 13,219 14,793 Transaction expenses - (465) - (551) Severance charges (2,416) (128) (2,833) (345) Distributions on Preferred Units 12,188 12,188 24,375 24,375 Other 2,200 (84) 3,364 (128) Changes in operating assets and liabilities 22,320 26,372 (4,081) 528 Net cash provided by operating activities$ 97,355 $
99,817
______________________
(1)For the three and six months endedJune 30, 2020 , unit-based compensation expense included$0.9 million and$1.8 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.5 million each period related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and six months endedJune 30, 2019 , unit-based compensation expense included$0.6 million and$1.3 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.3 million and$0.6 million , respectively, related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these fees. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the six months endedJune 30, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. (5)Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related cash flow. 36 -------------------------------------------------------------------------------- Table of Contents Coverage Ratios DCF Coverage Ratio is defined as DCF divided by distributions declared to common unitholders in respect of such period. Cash Coverage Ratio is defined as DCF divided by cash distributions expected to be paid to common unitholders in respect of such period, after taking into account the non-cash impact of the DRIP. We believe DCF Coverage Ratio and Cash Coverage Ratio are important measures of operating performance because they allow management, investors and others to gauge our ability to pay cash distributions to common unitholders using the cash flows that we generate. Our DCF Coverage Ratio and Cash Coverage Ratio as presented may not be comparable to similarly titled measures of other companies. The following table summarizes certain coverage ratios for the periods presented (dollars in thousands): Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 DCF$ 58,686 $ 54,062 $ 113,388 $ 108,914 Distributions for DCF Coverage Ratio (1)$ 50,850 $
47,356
Distributions reinvested in the DRIP (2) $ 653 $
236
Distributions for Cash Coverage Ratio (3)$ 50,197 $ 47,120 $ 100,364 $ 94,227 DCF Coverage Ratio 1.15x 1.14x 1.12x 1.15x Cash Coverage Ratio 1.17x 1.15x 1.13x 1.16x ______________________ (1)Represents distributions to the holders of our common units as of the record date. (2)Represents distributions to holders enrolled in the DRIP as of the record date. The amounts for the three and six months endedJune 30, 2020 are based on an estimate as of the record date. (3)Represents cash distributions declared for common units not participating in the DRIP. Off-Balance Sheet Arrangements We have no off-balance sheet financing activities. Recent Accounting Pronouncements For discussion on specific recent accounting pronouncements affecting us, see Note 14 to our unaudited condensed consolidated financial statements under Part I, Item 1 "Financial Statements" of this report. 37
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