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 ended March 31, 2020, 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 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
for the 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 the Organization of the Petroleum Exporting Countries ("OPEC") and
Russia (together with OPEC 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 in
the 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.
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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 the U.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 the Energy 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, Eagle Ford and the Mid-Continent, where associated
gas volumes are produced in connection with crude oil. 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 in March 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 and the relative stability of prices during
the third quarter of 2020, drilling activity expectations have not materially
changed as many E&P companies, including some of our customers, have maintained
their reduced capital expenditure forecasts for the remainder of 2020. We expect
the resulting decrease in new production to in turn negatively affect the demand
for new compression services in the near term and potentially reduce the need
for us to spend capital on new compression units for deployment in associated
gas producing regions; that said, reports of decreasing domestic crude oil
inventory in storage may be an indicator of improving longer-term crude oil
fundamentals which may positively impact basins where associated gas volumes are
produced. The impact on existing production of crude oil and natural gas,
however, is far less certain. Variables such as takeaway capacity, flaring
considerations, 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.
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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 production in the
U.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 the U.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.
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 market volatility or regional
uncertainty. 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 these producing regions primarily contain natural gas, if natural gas
prices remain resilient 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,
including natural gas futures market, 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, caused severe volatility in crude oil prices, on the natural gas side,
relatively more moderate demand destruction coupled with associated gas
production decreases have somewhat supported natural gas prices. The overall
outlook for our compression services will depend, in part, on the strength and
duration 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 the factors
described above, as well as future developments beyond our control, cannot be
predicted with reasonable certainty. However, we continue to 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.
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 the U.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.
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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 September 30,              Percent               Nine Months Ended September 30,              Percent
                                              2020                   2019                Change                  2020                   2019                Change
Fleet horsepower (at period end) (1)        3,725,053             3,678,804                  1.3  %            3,725,053             3,678,804                  1.3  %
Total available horsepower (at period
end) (2)                                    3,732,553             3,692,554                  1.1  %            3,732,553             3,692,554                  1.1  %
Revenue generating horsepower (at
period end) (3)                             3,009,773             3,278,947                 (8.2) %            3,009,773             3,278,947                 (8.2) %
Average revenue generating horsepower
(4)                                         3,042,786             3,258,125                 (6.6) %            3,184,952             3,269,702                 (2.6) %
Average revenue per revenue generating
horsepower per month (5)               $        16.62           $     16.73                 (0.7) %       $        16.77           $     16.59                  1.1  %
Revenue generating compression units
(at period end)                                 3,984                 4,546                (12.4) %                3,984                 4,546                (12.4) %
Average horsepower per revenue
generating compression unit (6)                   754                   721                  4.6  %                  742                   718                  3.3  %
Horsepower utilization (7):
At period end                                    83.2   %              93.7  %             (11.2) %                 83.2   %              93.7  %             (11.2) %
Average for the period (8)                       83.9   %              93.9  %             (10.6) %                 88.1   %              94.2  %              (6.5) %


______________________
(1)Fleet horsepower is horsepower for compression units that have been delivered
to us (and excludes units on order). As of September 30, 2020, we had
approximately 7,500 horsepower on order, which we expect to be delivered in
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, excluding standby or other temporary rates, for all units at the end of
each month in the period by the sum of the revenue generating horsepower at the
end of each month in the period.
(6)Calculated as the average of the month-end revenue generating horsepower per
revenue generating compression unit for each of the months in the period.
(7)Horsepower utilization is calculated as (i) the sum of (a) revenue generating
horsepower, (b) horsepower in our fleet that is under contract but is not yet
generating revenue, and (c) horsepower not yet in our fleet that is under
contract but not yet generating revenue and that is subject to a purchase order,
divided by (ii) total available horsepower less idle horsepower that is under
repair. Horsepower utilization based on revenue generating horsepower and fleet
horsepower as of September 30, 2020 and 2019 was 80.8% 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 ended September 30, 2020 and 2019 was 81.7% and 88.9%,
respectively. Average horsepower utilization based on revenue generating
horsepower and fleet horsepower for the nine months ended September 30, 2020 and
2019 was 85.8% and 89.8%, respectively.
The 1.3% increase in fleet horsepower as of September 30, 2020 compared to
September 30, 2019 was attributable to compression units added to our fleet
primarily for specific customer demand of our compression services. The 8.2%
decrease in revenue generating horsepower as of September 30, 2020 compared to
September 30, 2019 was primarily due to returns of compression units from our
customers, which also caused a 12.4% decrease in revenue generating compression
units over the same period. The returns of compression units from our customers
were due to a decrease in demand for compression services driven by a decline in
U.S. crude oil and natural gas activity.
The 4.6% and 3.3% increases in average horsepower per revenue generating
compression unit during the three and nine months ended September 30, 2020
compared to the three and nine months ended September 30, 2019, respectively,
were primarily due to a greater number of compression unit returns related to
our small horsepower fleet than related to our large horsepower fleet.
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The 0.7% decrease in average revenue per revenue generating horsepower per month
during the three months ended September 30, 2020 compared to the three months
ended September 30, 2019 was primarily due to reduced pricing in the small
horsepower portion of our fleet in the current period. The 1.1% increase in
average revenue per revenue generating horsepower per month during the nine
months ended September 30, 2020 compared to the nine months ended September 30,
2019 was primarily due to contracts on new compression units and selective price
increases on the existing large horsepower portion of our fleet, partially
offset by reduced pricing in the small horsepower portion of our fleet.
Average horsepower utilization decreased to 83.9% during the three months ended
September 30, 2020 compared to 93.9% during the three months ended September 30,
2019. The 10.6% decrease in average horsepower utilization is primarily due to
(1) a 9.1% increase in our average idle fleet from compression units returned to
us and (2) a 3.4% decrease in horsepower that is on-contract or pending-contract
but not yet active. Average horsepower utilization decreased to 88.1% during the
nine months ended September 30, 2020 compared to 94.2% during the nine months
ended September 30, 2019. The 6.5% decrease in average horsepower utilization is
primarily due to (1) a 5.6% increase in our average idle fleet from compression
units returned to us and (2) a 3.2% decrease in horsepower that is on-contract
or pending-contract but not yet active. The decreases in average horsepower
utilization are due to a decrease in demand for compression services driven by a
decline in U.S. crude oil and natural gas activity.
Average horsepower utilization based on revenue generating horsepower and fleet
horsepower decreased to 81.7% and 85.8% during the three and nine months ended
September 30, 2020, respectively, compared to 88.9% and 89.8% during the three
and nine months ended September 30, 2019, respectively. The 8.1% and 4.5%
decreases in average horsepower utilization based on revenue generating
horsepower during the three and nine months ended September 30, 2020,
respectively, were both primarily attributable to an increase in our average
idle fleet from compression units returned to us. 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 in U.S. crude oil and natural gas activity.
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Financial Results of Operations
Three months ended September 30, 2020 compared to the three months ended
September 30, 2019
The following table summarizes our results of operations for the periods
presented (dollars in thousands):
                                                             Three Months Ended September 30,            Percent
                                                                 2020                2019                Change
Revenues:
Contract operations                                          $  156,632          $ 166,197                    (5.8) %
Parts and service                                                 1,986              4,460                   (55.5) %
Related party                                                     3,048              5,099                   (40.2) %
Total revenues                                                  161,666            175,756                    (8.0) %
Costs and expenses:
Cost of operations, exclusive of depreciation and
amortization                                                     46,715             57,423                   (18.6) %
Depreciation and amortization                                    60,072             57,513                     4.4  %
Selling, general and administrative                              12,716             16,631                   (23.5) %
Loss (gain) on disposition of assets                              1,686             (1,975)                  *
Impairment of compression equipment                               1,706                  -                   *

Total costs and expenses                                        122,895            129,592                    (5.2) %
Operating income                                                 38,771             46,164                   (16.0) %
Other income (expense):
Interest expense, net                                           (32,004)           (32,626)                   (1.9) %
Other                                                                20                 21                    (4.8) %
Total other expense                                             (31,984)           (32,605)                   (1.9) %
Net income before income tax expense                              6,787             13,559                   (49.9) %
Income tax expense                                                  268                244                     9.8  %
Net income                                                   $    6,519          $  13,315                   (51.0) %


______________________
*Not meaningful
Contract operations revenue. The $9.6 million decrease in contract operations
revenue for the three months ended September 30, 2020 compared to the three
months ended September 30, 2019 was due to a decline in demand for compression
services driven by a decrease in U.S. crude oil and natural gas activity. This
decline in demand resulted in a 6.6% decrease in average revenue generating
horsepower and a 0.7% decrease in average revenue per revenue generating
horsepower per month which decreased to $16.62 for the three months ended
September 30, 2020 compared to $16.73 for the three months ended September 30,
2019. Our contract operations revenue was not materially impacted by any
renegotiations of our contracts during the period with our customers.
Additionally, 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 $2.5 million decrease in parts and service
revenue for the three months ended September 30, 2020 compared to the three
months ended September 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 $2.1 million decrease in related party revenue for the three months
ended September 30, 2020 compared to the three months ended September 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.
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Cost of operations, exclusive of depreciation and amortization. The $10.7
million decrease in cost of operations, exclusive of depreciation and
amortization, for the three months ended September 30, 2020 compared to the
three months ended September 30, 2019 was primarily due to (1) a $3.3 million
decrease in retail parts and services expenses, which have a corresponding
decrease in parts and service revenue, (2) a $3.1 million decrease in direct
expenses, such as parts and fluids expenses, (3) a $2.4 million decrease in
direct labor expenses, (4) a $0.8 million decrease in expenses related to our
vehicle fleet and (5) a $0.4 million decrease in training and other indirect
expenses. The decreases in parts, fluids, direct labor, vehicle expenses,
training and other indirect expenses are primarily driven by the decrease in
average revenue generating horsepower and reduced headcount during the current
period.
Depreciation and amortization expense. The $2.6 million increase in depreciation
and amortization expense for the three months ended September 30, 2020 compared
to the three months ended September 30, 2019 was primarily related to
compression units placed in service to meet then existing demand for our
compression services by new and current customers.
Selling, general and administrative expense. The $3.9 million decrease in
selling, general and administrative expense for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 was
primarily due to (1) a $1.7 million decrease in employee-related expenses, (2) a
$0.8 million decrease in unit-based compensation expense and (3) a $0.7 million
decrease in other taxes expense due to prior year refunds received during the
current period.
The decrease in employee-related expenses is primarily due to reduced headcount
during the current period. The decrease in unit-based compensation expense is
primarily due to the overall decrease in our unit price as of September 30, 2020
as compared to June 30, 2020 and September 30, 2019, and the related
mark-to-market change to our unit-based compensation liability.
Impairment of compression equipment. The $1.7 million impairment of compression
equipment for the three months ended September 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 ended September 30, 2020,
we determined to retire 16 compressor units, for a total of approximately 3,900
horsepower, that were previously used to provide compression services in our
business. No impairment was recorded for the three months ended September 30,
2019.
Interest expense, net. The $0.6 million decrease in interest expense, net for
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019 was primarily 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 2.90% and 4.81% for the three months ended September 30, 2020 and
2019, respectively, and average outstanding borrowings under the Credit
Agreement were $468.9 million and $357.6 million for the three months ended
September 30, 2020 and 2019, respectively.
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Nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019
The following table summarizes our results of operations for the periods
presented (dollars in thousands):
                                                              Nine Months Ended September 30,             Percent
                                                                  2020                2019                Change
Revenues:
Contract operations                                          $   492,419          $ 493,110                    (0.1) %
Parts and service                                                  7,770             11,544                   (32.7) %
Related party                                                      9,127             15,523                   (41.2) %
Total revenues                                                   509,316            520,177                    (2.1) %
Costs and expenses:
Cost of operations, exclusive of depreciation and
amortization                                                     155,848            170,693                    (8.7) %
Depreciation and amortization                                    179,172            173,220                     3.4  %
Selling, general and administrative                               45,416             48,836                    (7.0) %
Gain on disposition of assets                                       (115)              (389)                  (70.4) %
Impairment of compression equipment                                5,629              3,234                    74.1  %
Impairment of goodwill                                           619,411                  -                   *
Total costs and expenses                                       1,005,361            395,594                   *
Operating income (loss)                                         (496,045)           124,583                   *
Other income (expense):
Interest expense, net                                            (96,297)           (94,162)                    2.3  %
Other                                                                 67                 53                    26.4  %
Total other expense                                              (96,230)           (94,109)                    2.3  %
Net income (loss) before income tax expense                     (592,275)            30,474                   *
Income tax expense                                                   983                623                    57.8  %
Net income (loss)                                            $  (593,258)         $  29,851                   *


______________________
*Not meaningful
Contract operations revenue. Contract operations revenue for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
was consistent between periods. Average revenue per revenue generating
horsepower per month increased 1.1% to $16.77 for the nine months ended
September 30, 2020 compared to $16.59 for the nine months ended September 30,
2019, partially offset by a 2.6% decrease in average revenue generating
horsepower due to a decrease in demand for compression services driven by a
decline in U.S. crude oil and natural gas activity. Our contract operations
revenue was not materially impacted by any renegotiations of our contracts
during the period with our customers. Additionally, 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 $3.8 million decrease in parts and service
revenue for the nine months ended September 30, 2020 compared to the nine months
ended September 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 $6.4 million decrease in related party revenue for the nine months
ended September 30, 2020 compared to the nine months ended September 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 $14.8
million decrease in cost of operations, exclusive of depreciation and
amortization, for the nine months ended September 30, 2020 compared to the nine
months ended
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September 30, 2019 was primarily due to (1) a $6.8 million decrease in direct
expenses, such as parts and fluids expenses, (2) a $4.8 million decrease in
retail parts and services expenses, which have a corresponding decrease in parts
and service revenue,(3) a $4.4 million decrease in direct labor expenses, (4) a
$2.4 million decrease in expenses related to our vehicle fleet and (5) a
$0.9 million decrease in training and other indirect expenses. The decreases in
parts, fluids, direct labor, vehicle expenses, training and other indirect
expenses are primarily driven by the decrease in average revenue generating
horsepower and reduced headcount during the current period. The decreases were
offset by (6) a $4.5 million increase in ad valorem tax expense, due primarily
to refunds received during the prior period.
Depreciation and amortization expense. The $6.0 million increase in depreciation
and amortization expense for the nine months ended September 30, 2020 compared
to the nine months ended September 30, 2019 was primarily related to compression
units placed in service to meet then existing demand for our compression
services by new and current customers.
Selling, general and administrative expense. The $3.4 million decrease in
selling, general and administrative expense for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily due to (1) a $3.9 million decrease in unit-based compensation expense,
(2) a $2.3 million decrease in employee-related expenses, (3) a $1.1 million
decrease in third-party professional fees and (4) a $0.7 million decrease in
other taxes expense. These decreases were offset by (5) a $3.4 million increase
in the provision for expected credit losses and (6) a $1.6 million increase in
severance charges.
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 third-party professional fees are related to reduced headcount and
cost savings, respectively. The decrease in other taxes expense is due to prior
year sales tax refunds received in the current period. 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.
Impairment of compression equipment. The $5.6 million and $3.2 million
impairments of compression equipment for the nine months ended September 30,
2020 and September 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 nine months ended September 30, 2020
and September 30, 2019, we determined to retire 27 and 14 compressor units,
respectively, for a total of approximately 9,000 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 of March 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 nine months ended September 30, 2020. No
impairment was recorded for the nine months ended September 30, 2019.
Interest expense, net. The $2.1 million increase in interest expense, net for
the nine months ended September 30, 2020 compared to the nine months ended
September 30, 2019 was primarily attributable to a full nine months of interest
expense incurred in the current period on the Senior Notes 2027 issued in March
2019, 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 3.36% and 4.98% for the nine months ended September 30, 2020 and
2019, respectively, and average outstanding borrowings under the Credit
Agreement were $446.0 million and $524.6 million for the nine months ended
September 30, 2020 and 2019, respectively.
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Other Financial Data
The following table summarizes other financial data for the periods presented
(dollars in thousands):
                                         Three Months Ended                                          Nine Months Ended
                                            September 30,                   Percent                    September 30,                   Percent

Other Financial Data: (1)              2020               2019               Change               2020               2019               Change
Gross margin                       $  54,879          $  60,820                 (9.8) %       $ 174,296          $ 176,264                 (1.1) %
Adjusted gross margin (2)          $ 114,951          $ 118,333                 (2.9) %       $ 353,468          $ 349,484                  1.1  %
Adjusted gross margin
percentage (3)                          71.1  %            67.3  %               5.6  %            69.4  %            67.2  %               3.3  %
Adjusted EBITDA                    $ 103,940          $ 104,327                 (0.4) %       $ 315,605          $ 310,412                  1.7  %
Adjusted EBITDA percentage
(3)                                     64.3  %            59.4  %               8.2  %            62.0  %            59.7  %               3.9  %
DCF                                $  56,911          $  54,933                  3.6  %       $ 170,299          $ 163,847                  3.9  %
DCF Coverage Ratio                     1.12x              1.08x                  3.7  %           1.12x              1.13x                 (0.9) %
Cash Coverage Ratio                    1.13x              1.09x                  3.7  %           1.13x              1.13x                    -  %


______________________
(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 $5.9 million, or 9.8%, decrease in gross margin for the three
months ended September 30, 2020 compared to the three months ended September 30,
2019 was due to (1) a $14.1 million decrease in revenues and (2) a $2.6 million
increase in depreciation and amortization, offset by (3) a $10.7 million
decrease in cost of operations, exclusive of depreciation and amortization.
The $2.0 million, or 1.1%, decrease in gross margin for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was due
to (1) a $10.9 million decrease in revenues and (2) a $6.0 million increase in
depreciation and amortization, offset by (3) a $14.8 million decrease in cost of
operations, exclusive of depreciation and amortization.
Adjusted gross margin. The $3.4 million, or 2.9%, decrease in Adjusted gross
margin for the three months ended September 30, 2020 compared to the three
months ended September 30, 2019 was due to a $14.1 million decrease in revenues,
offset by a $10.7 million decrease in cost of operations, exclusive of
depreciation and amortization.
The $4.0 million, or 1.1%, increase in Adjusted gross margin for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019
was due to a $14.8 million decrease in cost of operations, exclusive of
depreciation and amortization, offset by a $10.9 million decrease in revenues.
Adjusted EBITDA. The $0.4 million, or 0.4%, decrease in Adjusted EBITDA for the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019 was primarily attributable to a $3.4 million decrease in
Adjusted gross margin, partially offset by a $2.9 million decrease in selling,
general and administrative expenses, excluding unit-based compensation expense,
severance charges and transaction expenses.
The $5.2 million, or 1.7%, increase in Adjusted EBITDA for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily attributable to a $4.0 million increase in Adjusted gross margin and a
$0.8 million decrease in selling, general and administrative expenses, excluding
unit-based compensation expense, severance charges and transaction expenses.
DCF. The $2.0 million, or 3.6%, increase in DCF for the three months ended
September 30, 2020 compared to the three months ended September 30, 2019 was
primarily attributable to (1) a $2.9 million decrease in selling, general and
administrative expenses, excluding unit-based compensation expense, severance
charges and transaction expenses, (2) a $2.3 million decrease in maintenance
capital expenditures, and (3) a $0.8 million decrease in cash interest expense,
net. These changes were partially offset by (4) a $3.4 million decrease in
Adjusted gross margin.
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The $6.5 million, or 3.9%, increase in DCF for the nine months ended
September 30, 2020 compared to the nine months ended September 30, 2019 was
primarily attributable to (1) a $4.0 million increase in Adjusted gross margin
and (2) a $3.9 million decrease in maintenance capital expenditures and (3) a
$0.8 million decrease in selling, general and administrative expenses, excluding
unit-based compensation expense, severance charges and transaction expenses.
These changes were partially offset by (4) a $1.6 million increase in cash
interest expense, net.
Coverage Ratios. The increase in DCF Coverage Ratio and Cash Coverage Ratio for
the three months ended September 30, 2020 compared to the three months ended
September 30, 2019 was attributable to the increase in DCF.
DCF Coverage Ratio and Cash Coverage Ratio were consistent for the nine months
ended September 30, 2020 compared to the nine months ended September 30, 2019.
An increase in cash distributions paid on common units in the current period due
to the conversion of 6,397,965 Class B Units, which did not participate in
distributions, to common units on a one-for-one basis on July 30, 2019 were
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.
On August 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 ending September 30, 2020 and ending with the fiscal
quarter ending December 31, 2021 and provide for relief from certain covenants
until December 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
nine months ended September 30, 2020 and 2019 were $17.9 million and
$21.8 million, respectively. We currently plan to spend approximately $25.0
million in maintenance capital expenditures for the year 2020, including parts
consumed from inventory.
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Without giving effect to any equipment we may acquire pursuant to any future
acquisitions, we currently have budgeted between $90.0 million and $100.0
million in expansion capital expenditures for the year 2020. Our expansion
capital expenditures for the nine months ended September 30, 2020 and 2019 were
$84.6 million and $136.9 million, respectively.
As of September 30, 2020, we had binding commitments to purchase $6.3 million of
additional compression units, which we expect to be delivered in 2020.
Cash Flows
The following table summarizes our sources and uses of cash for the nine months
ended September 30, 2020 and 2019 (in thousands):
                                                   Nine Months Ended 

September 30,


                                                         2020               

2019


Net cash provided by operating activities   $        195,651                   $ 208,880
Net cash used in investing activities                (94,190)               

(108,227)


Net cash used in financing activities               (101,469)               

(100,750)




Net cash provided by operating activities. The $13.2 million decrease in net
cash provided by operating activities for the nine months ended September 30,
2020 compared to the nine months ended September 30, 2019 was primarily
attributable to a $5.0 million increase in net income, as adjusted for non-cash
items, offset by changes in working capital.
Net cash used in investing activities. The $14.0 million decrease in net cash
used in investing activities for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 was primarily attributable
to (1) a $36.3 million decrease in capital expenditures, for purchases of new
compression units, related equipment and reconfiguration costs, offset by (2) a
$19.8 million decrease in proceeds from disposition of property and equipment
and (3) a $2.4 million decrease in proceeds from insurance recovery.
Net cash used in financing activities. The $0.7 million increase in net cash
used in financing activities for the nine months ended September 30, 2020
compared to the nine months ended September 30, 2019 was primarily attributable
to (1) an $0.8 million decrease in net borrowings and (2) a $10.4 million
increase in cash distributions paid on common units primarily due to the
conversion of 6,397,965 Class B Units, which did not participate in
distributions, to common units on a one-for-one basis on July 30, 2019. These
changes were partially offset by a decrease in financing costs of $9.7 million
due primarily to the issuance of the Senior Notes 2027 in March 2019.
Revolving Credit Facility
As of September 30, 2020, we were in compliance with all of our covenants under
the Credit Agreement. As of September 30, 2020, we had outstanding borrowings
under the Credit Agreement of $496.9 million, $1.1 billion of borrowing base
availability and, subject to compliance with the applicable financial covenants,
available borrowing capacity of $411.8 million.
As of October 29, 2020, we had outstanding borrowings under the Credit Agreement
of $466.0 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 ending September 30, 2020 and December 31, 2020, (ii) 5.50
to 1.00 for the fiscal quarters ending March 31, 2021 and June 30, 2021 and
(iii) 5.25 to 1.00 for the fiscal quarters ending September 30, 2021 and
December 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 ending September 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 ending December 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.
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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 of September 30, 2020, we had $725.0 million and $750.0 million aggregate
principal amount outstanding on our Senior Notes 2026 and Senior Notes 2027,
respectively.
The Senior Notes 2026 are due on April 1, 2026 and accrue interest at the rate
of 6.875% per year. Interest on the Senior Notes 2026 is payable semi-annually
in arrears on each of April 1 and October 1.
The Senior Notes 2027 are due on September 1, 2027 and accrue interest at the
rate of 6.875% per year. Interest on the Senior Notes 2027 is payable
semi-annually in arrears on each of March 1 and September 1.
For more detailed descriptions of the Senior Notes 2026 and Senior Notes 2027,
see Note 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 nine months ended September 30, 2020, distributions of $1.4 million
were reinvested under the DRIP resulting in the issuance of 140,318 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):
                                                Three Months Ended September 30,       Nine Months Ended September 30,
                                                    2020                2019               2020                2019
Total revenues                                  $  161,666          $ 175,756          $  509,316          $ 520,177
Cost of operations, exclusive of depreciation
and amortization                                   (46,715)           (57,423)           (155,848)          (170,693)
Depreciation and amortization                      (60,072)           (57,513)           (179,172)          (173,220)
Gross margin                                    $   54,879          $  60,820          $  174,296          $ 176,264
Depreciation and amortization                       60,072             57,513             179,172            173,220
Adjusted gross margin                           $  114,951          $ 118,333          $  353,468          $ 349,484


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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 expenses, loss (gain) on disposition of assets and
other. We view Adjusted EBITDA as one of management's primary tools for
evaluating our results of operations, and we track this item on a monthly basis
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.
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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):
                                                Three Months Ended 

September 30, Nine Months Ended September 30,


                                                    2020                2019                2020                2019
Net income (loss)                               $    6,519          $  13,315          $  (593,258)         $  29,851
Interest expense, net                               32,004             32,626               96,297             94,162
Depreciation and amortization                       60,072             57,513              179,172            173,220
Income tax expense                                     268                244                  983                623
EBITDA                                          $   98,863          $ 103,698          $  (316,806)         $ 297,856
Interest income on capital lease                        87                159                  316                530
Unit-based compensation expense (1)                  1,332              2,090                4,071              7,930
Transaction expenses (2)                               136                  4                  136                555
Severance charges                                      130                351                2,963                696
Loss (gain) on disposition of assets                 1,686             (1,975)                (115)              (389)
Impairment of compression equipment (3)              1,706                  -                5,629              3,234
Impairment of goodwill (4)                               -                  -              619,411                  -
Adjusted EBITDA                                 $  103,940          $ 104,327          $   315,605          $ 310,412
Interest expense, net                              (32,004)           (32,626)             (96,297)           (94,162)
Non-cash interest expense                            2,167              1,965                6,113              5,620
Income tax expense                                    (268)              (244)                (983)              (623)
Interest income on capital lease                       (87)              (159)                (316)              (530)
Transaction expenses                                  (136)                (4)                (136)              (555)
Severance charges                                     (130)              (351)              (2,963)              (696)
Other                                                   78                152                4,050                652

Changes in operating assets and liabilities (25,341) (11,766)

             (29,422)           (11,238)

Net cash provided by operating activities $ 48,219 $ 61,294 $ 195,651 $ 208,880

______________________


(1)For the three and nine months ended September 30, 2020, unit-based
compensation expense included $0.7 million and $2.5 million, respectively, of
cash payments related to quarterly payments of DERs on outstanding phantom unit
awards and $0.0 million and $0.5 million, respectively, related to the cash
portion of any settlement of phantom unit awards upon vesting. For the three and
nine months ended September 30, 2019, unit-based compensation expense included
$0.6 million and $1.9 million, respectively, of cash payments related to
quarterly payments of DERs on outstanding phantom unit awards and $0.1 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 expenses.
(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 nine
months ended September 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.
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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 expenses, severance charges, loss (gain) on
disposition of assets, proceeds from insurance recovery and other, less
distributions on Preferred Units and maintenance capital expenditures.
We believe DCF is an important measure of operating performance because it
allows management, investors and others to compare 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.
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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):
                                                 Three Months Ended 

September 30, Nine Months Ended September 30,


                                                     2020                2019                2020                2019
Net income (loss)                                $    6,519          $  13,315          $  (593,258)         $  29,851
Non-cash interest expense                             2,167              1,965                6,113              5,620
Depreciation and amortization                        60,072             57,513              179,172            173,220
Non-cash income tax expense                              78                151                  350                352
Unit-based compensation expense (1)                   1,332              2,090                4,071              7,930
Transaction expenses (2)                                136                  4                  136                555
Severance charges                                       130                351                2,963                696
Loss (gain) on disposition of assets                  1,686             (1,975)                (115)              (389)
Impairment of compression equipment (3)               1,706                  -                5,629              3,234
Impairment of goodwill (4)                                -                  -              619,411                  -
Distributions on Preferred Units                    (12,188)           (12,188)             (36,563)           (36,563)
Proceeds from insurance recovery                          -                737                  336              1,164
Maintenance capital expenditures (5)                 (4,727)            (7,030)             (17,946)           (21,823)
DCF                                              $   56,911          $  54,933          $   170,299          $ 163,847
Maintenance capital expenditures                      4,727              7,030               17,946             21,823
Transaction expenses                                   (136)                (4)                (136)              (555)
Severance charges                                      (130)              (351)              (2,963)              (696)
Distributions on Preferred Units                     12,188             12,188               36,563             36,563
Other                                                     -               (736)               3,364               (864)

Changes in operating assets and liabilities (25,341) (11,766)

             (29,422)           (11,238)

Net cash provided by operating activities $ 48,219 $ 61,294 $ 195,651 $ 208,880

______________________


(1)For the three and nine months ended September 30, 2020, unit-based
compensation expense included $0.7 million and $2.5 million, respectively, of
cash payments related to quarterly payments of DERs on outstanding phantom unit
awards and $0.0 million and $0.5 million, respectively, related to the cash
portion of any settlement of phantom unit awards upon vesting. For the three and
nine months ended September 30, 2019, unit-based compensation expense included
$0.6 million and $1.9 million, respectively, of cash payments related to
quarterly payments of DERs on outstanding phantom unit awards and $0.1 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 expenses.
(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 nine
months ended September 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.
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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):
                                                 Three Months Ended September 30,       Nine Months Ended September 30,
                                                     2020                2019               2020                2019
DCF                                              $   56,911          $  54,933          $  170,299          $ 163,847

Distributions for DCF Coverage Ratio (1) $ 50,874 $ 50,723 $ 152,503 $ 145,412

Distributions reinvested in the DRIP (2) $ 490 $ 282 $ 1,601 $ 744



Distributions for Cash Coverage Ratio (3)        $   50,384          $  50,441          $  150,902          $ 144,668

DCF Coverage Ratio                                    1.12x              1.08x               1.12x              1.13x

Cash Coverage Ratio                                   1.13x              1.09x               1.13x              1.13x


______________________
(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.
(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.
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