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 1A "Risk Factors" of our 2020 Annual Report on Form 10-K, 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 for theU.S. 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 reducing demand for crude oil and natural gas; •the severity and duration of world health events, including the COVID-19 outbreak, related economic repercussions, actions taken by governmental authorities and other third parties in response to the pandemic and the resulting 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 in theU.S. 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 restrictions on our business that are imposed under our long-term debt agreements; •information technology risks including the risk from cyberattack; •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 17 -------------------------------------------------------------------------------- Table of Contents occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. 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. Operating Highlights The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric. Three Months Ended March 31, Percent 2021 2020 Change Fleet horsepower (at period end) (1) 3,720,745 3,705,550 0.4 % Total available horsepower (at period end) (2) 3,724,885 3,727,905 (0.1) %
Revenue generating horsepower (at period end) (3) 2,987,627
3,316,666 (9.9) %
Average revenue generating horsepower (4) 2,994,418 3,320,724 (9.8) %
Average revenue per revenue generating horsepower per month (5)
$ 16.60 $ 16.89 (1.7) %
Revenue generating compression units (at period end) 3,942
4,516 (12.7) %
Average horsepower per revenue generating compression
unit (6) 758 731 3.7 %
Horsepower utilization (7):
At period end 83.1 % 92.0 % (9.7) %
Average for the period (8) 83.1 % 92.5 % (10.2) %
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(1)Fleet horsepower is horsepower for compression units that have been delivered
to us (and excludes units on order).
(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 March 31, 2021 and 2020 was 80.3% and 89.5%, respectively.
(8)Calculated as the average utilization for the months in the period based on
utilization at the end of each month in the period. Average horsepower
utilization based on revenue generating horsepower and fleet horsepower for the
three months ended March 31, 2021 and 2020 was 80.4% and 89.8%, respectively.
The 0.4% increase in fleet horsepower as of March 31, 2021 compared to March 31,
2020 was primarily attributable to compression units added to our fleet
primarily for specific customer demand of our compression services, partially
offset by compression units impaired since the previous period. The 9.9%
decrease in revenue generating horsepower as of March 31, 2021 compared to
March 31, 2020 was primarily due to returns of compression units from our
customers, which also caused a 12.7% decrease in revenue generating compression
units over the same period. The returns of compression units from our customers
were primarily due to a decrease in demand for compression services driven by
decreased U.S. crude oil and natural gas activity since the previous period.
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The 3.7% increase in average horsepower per revenue generating compression unit
during the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 was driven primarily by the composition of compression unit
returns. The 1.7% decrease in average revenue per revenue generating horsepower
per month during the three months ended March 31, 2021 compared to the three
months ended March 31, 2020 was primarily due to reduced pricing in our small
horsepower fleet.
Average horsepower utilization decreased to 83.1% during the three months ended
March 31, 2021 compared to 92.5% during the three months ended March 31, 2020 .
The 10.2% decrease in average horsepower utilization is primarily due to an
increase in our average idle horsepower from compression units returned to us.
The increase in average idle horsepower is primarily due to a decrease in demand
for compression services driven by decreased U.S. crude oil and natural gas
activity since the previous period.
Average horsepower utilization based on revenue generating horsepower and fleet
horsepower decreased to 80.4% during the three months ended March 31, 2021
compared to 89.8% during the three months ended March 31, 2020 . The 10.5%
decrease in average horsepower utilization based on revenue generating
horsepower was primarily attributable to an increase in our average idle
horsepower from compression units returned to us. The increase in average idle
horsepower is primarily due to a decrease in demand for compression services
driven by decreased U.S. crude oil and natural gas activity since the previous
period.
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Financial Results of Operations
Three months ended March 31, 2021 compared to the three months ended March 31,
2020
The following table summarizes our results of operations for the periods
presented (dollars in thousands):
Three Months Ended March 31, Percent
2021 2020 Change
Revenues:
Contract operations $ 152,525 $ 172,794 (11.7) %
Parts and service 2,038 3,048 (33.1) %
Related party 2,950 3,157 (6.6) %
Total revenues 157,513 178,999 (12.0) %
Costs and expenses:
Cost of operations, exclusive of depreciation and
amortization 48,628 59,165 (17.8) %
Depreciation and amortization 61,030 58,762 3.9 %
Selling, general and administrative 13,800 12,385 11.4 %
Gain on disposition of assets (1,255) (1,014) 23.8 %
Impairment of compression equipment 2,550 - *
Impairment of goodwill - 619,411 *
Total costs and expenses 124,753 748,709 *
Operating income (loss) 32,760 (569,710) *
Other income (expense):
Interest expense, net (32,288) (32,478) (0.6) %
Other 25 23 8.7 %
Total other expense (32,263) (32,455) (0.6) %
Net income (loss) before income tax expense 497 (602,165) *
Income tax expense 126 296 (57.4) %
Net income (loss) $ 371 $ (602,461) *
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*Not meaningful
Contract operations revenue. The $20.3 million decrease in contract operations
revenue for the three months ended March 31, 2021 compared to the three months
ended March 31, 2020 was primarily due to a decrease in demand for compression
services driven by decreased U.S. crude oil and natural gas activity since the
previous period. This decline in demand resulted in a 9.8% decrease in average
revenue generating horsepower and a 1.7% decrease in average revenue per revenue
generating horsepower per month which decreased to $16.60 for the three months
ended March 31, 2021 compared to $16.89 for the three months ended March 31,
2020 . 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 $1.0 million decrease in parts and service
revenue for the three months ended March 31, 2021 compared to the three months
ended March 31, 2020 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 and was consistent period over period.
Cost of operations, exclusive of depreciation and amortization. The $10.5
million decrease in cost of operations, exclusive of depreciation and
amortization, for the three months ended March 31, 2021 compared to the three
months ended March 31 ,
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2020 was primarily due to (1) a $4.2 million decrease in direct labor expenses,
(2) a $3.8 million decrease in direct expenses, such as parts and fluids
expenses, (3) a $0.9 million decrease in ad valorem tax expenses, (4) a
$0.7 million decrease in retail parts and services expenses, which had a
corresponding decrease in parts and service revenue, and (5) a $0.6 million
decrease in training and other indirect expenses. The decreases in direct labor,
parts, fluids, ad valorem tax, training and other indirect expenses are
primarily driven by the decrease in average revenue generating horsepower and
reduced headcount in the current period.
Depreciation and amortization expense. The $2.3 million increase in depreciation
and amortization expense for the three months ended March 31, 2021 compared to
the three months ended March 31, 2020 was primarily related to compression unit
overhauls and new compression units placed in service throughout 2020 to meet
then existing demand by customers.
Selling, general and administrative expense. The $1.4 million increase in
selling, general and administrative expense for the three months ended March 31,
2021 compared to the three months ended March 31, 2020 was primarily due to (1)
a $6.0 million increase in unit-based compensation expense, partially offset by
(2) a $2.8 million decrease in the provision for expected credit losses and (3)
a $1.5 million decrease in employee-related expenses.
The increase in unit-based compensation expense is primarily due to the overall
increase in our unit price as of March 31, 2021 as compared to our unit price as
of March 31, 2020 , which experienced a sharp decrease driven by the decline in
crude oil prices caused by the decreased demand due to the COVID-19 pandemic and
the global oversupply of crude oil during that period, and the related
mark-to-market change to our unit-based compensation liability. The change to
the provision for expected credit losses is related to improved market
conditions for customers due to a recovery in crude oil prices in the current
period as compared to the prior period, where we made provision for the
potential negative impact to our customers of low crude oil prices driven by
decreased demand due to the COVID-19 pandemic and the global oversupply of crude
oil during that time. The decrease in employee-related expenses is primarily due
to reduced headcount in the current period.
Impairment of compression equipment. The $2.6 million impairment of compression
equipment for the three months ended March 31, 2021 was primarily the result of
our evaluations of the future deployment of our idle fleet under current market
conditions. The primary causes for these impairments were: (i) units were not
considered marketable in the foreseeable future, (ii) units were subject to
excessive maintenance costs or (iii) units were unlikely to be accepted by
customers due to certain performance characteristics of the unit, such as the
inability to meet current quoting criteria without excessive retrofitting costs.
These compression units were written down to their respective estimated
salvage values, if any.
As a result of our evaluation during the three months ended March 31, 2021 , we
determined to retire 12 compressor units, for a total of approximately 5,600
horsepower, that were previously used to provide compression services in our
business. No impairment was recorded for the three months ended March 31, 2020 .
Impairment of goodwill. During the first quarter of 2020 certain potential
impairment indicators of goodwill 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 . We
performed a quantitative goodwill impairment test as of March 31, 2020 and
determined fair value using a weighted combination of the income approach and
the market approach and, as a result, recognized a goodwill impairment of
$619.4 million for the three months ended March 31, 2020 . We had no remaining
goodwill on our unaudited condensed consolidated balance sheets subsequent to
the goodwill impairment for the three months ended March 31, 2020 .
Interest expense, net. The $0.2 million decrease in interest expense, net for
the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 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 3.06% and 4.10% for the three months ended March 31, 2021 and
2020, respectively, and average outstanding borrowings under the Credit
Agreement were $482.4 million and $414.2 million for the three months ended
March 31, 2021 and 2020, 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 March 31, Percent
Other Financial Data: (1) 2021 2020 Change
Gross margin $ 47,855 $ 61,072 (21.6) %
Adjusted gross margin (2) $ 108,885 $ 119,834 (9.1) %
Adjusted gross margin percentage (3) 69.1 % 66.9 % 3.3 %
Adjusted EBITDA $ 99,553 $ 106,184 (6.2) %
Adjusted EBITDA percentage (3) 63.2 % 59.3 % 6.6 %
DCF $ 52,580 $ 54,702 (3.9) %
DCF Coverage Ratio 1.03 x 1.08 x (4.6) %
Cash Coverage Ratio 1.04 x 1.09 x (4.6) %
______________________
(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 $13.2 million decrease in gross margin for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020 was due
to (1) a $21.5 million decrease in revenues and (2) a $2.3 million increase in
depreciation and amortization, offset by (3) a $10.5 million decrease in cost of
operations, exclusive of depreciation and amortization.
Adjusted gross margin. The $10.9 million decrease in Adjusted gross margin for
the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 was due to a $21.5 million decrease in revenues, offset by a
$10.5 million decrease in cost of operations, exclusive of depreciation and
amortization.
Adjusted EBITDA. The $6.6 million decrease in Adjusted EBITDA for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020
was primarily attributable to a $10.9 million decrease in Adjusted gross margin,
partially offset by a $4.5 million decrease in selling, general and
administrative expenses, excluding unit-based compensation expense and severance
charges.
DCF. The $2.1 million decrease in DCF for the three months ended March 31, 2021
compared to the three months ended March 31, 2020 was primarily attributable to
(1) a $10.9 million decrease in Adjusted gross margin, partially offset by (2) a
$4.5 million decrease in selling, general and administrative expenses, excluding
unit-based compensation expense and severance charges, and (3) a $4.3 million
decrease in maintenance capital expenditures.
Coverage Ratios. The decrease in DCF Coverage Ratio and Cash Coverage Ratio for
the three months ended March 31, 2021 compared to the three months ended
March 31, 2020 was primarily attributable to the decrease 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 planned
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capital spending significantly for 2021 compared to previous years. However, if
market conditions worsen, this could further 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 reduce operating expenses;
(ii) request an amendment to the Credit Agreement; (iii) reduce or suspend
distributions to our unitholders; or (iv) issue equity securities, including
under the DRIP.
The Credit Agreement was amended on August 3, 2020 (the "Amendment Effective
Date") to amend, among other things, the requirements of certain covenants and
the date on which certain covenants in the Credit Agreement must be met
beginning on the Amendment Effective Date until the last day of the fiscal
quarter ending December 31, 2021 (the "Covenant Relief Period"). 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
three months ended March 31, 2021 and 2020 were $4.5 million and $8.8 million ,
respectively. We currently plan to spend approximately $22.0 million in
maintenance capital expenditures for the year 2021, including parts consumed
from inventory.
Without giving effect to any equipment we may acquire pursuant to any future
acquisitions, we currently have budgeted between $30.0 million and $40.0 million
in expansion capital expenditures for the year 2021. Our expansion capital
expenditures for the three months ended March 31, 2021 and 2020 were $4.2
million and $46.5 million , respectively.
Cash Flows
The following table summarizes our sources and uses of cash for the three months
ended March 31, 2021 and 2020 (in thousands):
Three Months Ended
2021 2020
Net cash provided by operating activities$ 39,612 $ 50,077 Net cash used in investing activities (4,206)
(42,070)
Net cash used in financing activities (35,309)
(8,015)
Net cash provided by operating activities. The$10.5 million decrease in net cash provided by operating activities for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was primarily attributable to an$8.7 million decrease in net income, as adjusted for non-cash items, and changes in working capital. Net cash used in investing activities. The$37.9 million decrease in net cash used in investing activities for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was primarily attributable to a$39.1 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, partially offset by a$1.5 million decrease in proceeds received from disposition of property and equipment. 23 -------------------------------------------------------------------------------- Table of Contents Net cash used in financing activities. The$27.3 million increase in net cash used in financing activities for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 was primarily attributable to net borrowings of$28.9 million for the three months endedMarch 31, 2021 compared to$56.6 million for the three months endedMarch 31, 2020 . Revolving Credit Facility As ofMarch 31, 2021 , we were in compliance with all of our covenants under the Credit Agreement. As ofMarch 31, 2021 , we had outstanding borrowings under the Credit Agreement of$502.7 million ,$1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of$203.9 million . As ofApril 29, 2021 , we had outstanding borrowings under the Credit Agreement of$479.2 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) 5.50 to 1.00 for the fiscal quarters endingMarch 31, 2021 andJune 30, 2021 and (ii) 5.25 to 1.00 for the fiscal quarters endingSeptember 30, 2021 andDecember 31, 2021 (reverting 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, during 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 secured obligations of all other guarantors under the Credit Agreement. 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 2020 Annual Report. Senior Notes As ofMarch 31, 2021 , 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 mature 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 mature 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 2020 Annual Report. DRIP During the three months endedMarch 31, 2021 , distributions of$0.5 million were reinvested under the DRIP resulting in the issuance of 33,981 common units. Such distributions are treated as non-cash transactions in the accompanying unaudited condensed consolidated statements of cash flows included under Part I, Item 1 "Financial Statements" of this report. Non-GAAP Financial Measures Adjusted Gross Margin Adjusted gross margin is a non-GAAP financial measure. We define Adjusted gross margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted gross margin is useful as a supplemental measure to investors of our operating profitability. Adjusted gross margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per unit costs for 24 -------------------------------------------------------------------------------- Table of Contents lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted gross margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of Adjusted gross margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted gross margin, to evaluate our operating profitability. The following table reconciles Adjusted gross margin to gross margin, its most directly comparable GAAP financial measure, for each of the periods presented (in thousands): Three Months Ended March 31, 2021 2020 Total revenues$ 157,513 $ 178,999 Cost of operations, exclusive of depreciation and amortization (48,628) (59,165) Depreciation and amortization (61,030) (58,762) Gross margin$ 47,855 $ 61,072 Depreciation and amortization 61,030 58,762 Adjusted gross margin$ 108,885 $ 119,834 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 (benefit), severance charges, certain transaction expenses, 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, gain on disposition of assets and the interest cost of acquiring compression equipment are also necessary elements of our costs. Unit-based compensation expense (benefit) 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. 25 -------------------------------------------------------------------------------- Table of Contents 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 March 31, 2021 2020 Net income (loss) $ 371$ (602,461) Interest expense, net 32,288 32,478 Depreciation and amortization 61,030 58,762 Income tax expense 126 296 EBITDA$ 93,815 $ (510,925) Interest income on capital lease 48 124 Unit-based compensation expense (benefit) (1) 4,182 (1,829) Severance charges 213 417 Gain on disposition of assets (1,255) (1,014) Impairment of compression equipment (2) 2,550 - Impairment of goodwill (3) - 619,411 Adjusted EBITDA$ 99,553 $ 106,184 Interest expense, net (32,288) (32,478) Non-cash interest expense 2,281 1,986 Income tax expense (126) (296) Interest income on capital lease (48) (124) Severance charges (213) (417) Other (1,349) 1,623 Changes in operating assets and liabilities (28,198) (26,401) Net cash provided by operating activities $
39,612
______________________
(1)For the three months endedMarch 31, 2021 and 2020, unit-based compensation expense included$1.1 million and$0.9 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards. The remainder of the unit-based compensation expense (benefit) for all periods was primarily related to non-cash adjustments to the unit-based compensation liability. (2)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. (3)For further discussion of our goodwill impairment recorded for the three months endedMarch 31, 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. Distributable Cash Flow We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, 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. 26 -------------------------------------------------------------------------------- Table of Contents Because we use capital assets, depreciation, impairment of compression equipment, 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 (benefit) 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. 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 March 31, 2021 2020 Net income (loss) $ 371$ (602,461) Non-cash interest expense 2,281 1,986 Depreciation and amortization 61,030 58,762 Non-cash income tax expense (benefit) (99) 123 Unit-based compensation expense (benefit) (1) 4,182 (1,829) Severance charges 213 417 Gain on disposition of assets (1,255) (1,014) Impairment of compression equipment (2) 2,550 - Impairment of goodwill (3) - 619,411 Distributions on Preferred Units (12,187) (12,187) Proceeds from insurance recovery - 336 Maintenance capital expenditures (4) (4,506) (8,842) DCF$ 52,580 $ 54,702 Maintenance capital expenditures 4,506 8,842 Severance charges (213) (417) Distributions on Preferred Units 12,187 12,187 Other (1,250) 1,164 Changes in operating assets and liabilities (28,198) (26,401) Net cash provided by operating activities $
39,612
______________________
(1)For the three months endedMarch 31, 2021 and 2020, unit-based compensation expense included$1.1 million and$0.9 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards. The remainder of the unit-based compensation expense (benefit) for all periods was primarily related to non-cash adjustments to the unit-based compensation liability. (2)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. (3)For further discussion of our goodwill impairment recorded for the three months endedMarch 31, 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. (4)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. 27 -------------------------------------------------------------------------------- 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): Three Months Ended March 31, 2021 2020 DCF$ 52,580 $ 54,702 Distributions for DCF Coverage Ratio (1)$ 50,937
Distributions reinvested in the DRIP (2) $ 401
Distributions for Cash Coverage Ratio (3)$ 50,536 $ 50,167 DCF Coverage Ratio 1.03 x 1.08 x Cash Coverage Ratio 1.04 x 1.09 x ______________________ (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. 28
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