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OFFON

USA COMPRESSION PARTNERS, LP

(USAC)
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USA COMPRESSION PARTNERS LP : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

05/04/2021 | 04:28pm EDT
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 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 U.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 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 U.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
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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) %


______________________
(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)                  *


______________________
*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 

March 31,

                                                         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 ended March 31, 2021
compared to the three months ended March 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 ended March 31, 2021 compared
to the three months ended March 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.
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Net cash used in financing activities. The $27.3 million increase in net cash
used in financing activities for the three months ended March 31, 2021 compared
to the three months ended March 31, 2020 was primarily attributable to net
borrowings of $28.9 million for the three months ended March 31, 2021 compared
to $56.6 million for the three months ended March 31, 2020.
Revolving Credit Facility
As of March 31, 2021, we were in compliance with all of our covenants under the
Credit Agreement. As of March 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 of April 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 ending March 31, 2021 and June 30, 2021 and (ii) 5.25 to
1.00 for the fiscal quarters ending September 30, 2021 and December 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 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, 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 of March 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 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 mature 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 2020 Annual Report.
DRIP
During the three months ended March 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
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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.
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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 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 $ 50,077

______________________

(1)For the three months ended March 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 ended March 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.
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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 $ 50,077

______________________

(1)For the three months ended March 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 ended March 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.
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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 March 31,
                                                   2021                        2020
DCF                                          $      52,580                  $ 54,702

Distributions for DCF Coverage Ratio (1)     $      50,937                  

$ 50,779


Distributions reinvested in the DRIP (2)     $         401                  

$ 612


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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