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, which has caused and may in the future cause disruptions in the oil and gas industry and negatively impact demand for oil and gas; •changes in general economic conditions, including inflation, 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, including competition for employees in a tight labor market; •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, including changes to interest rates under our Credit Agreement; •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 occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements. 18 -------------------------------------------------------------------------------- Table of Contents All forward-looking statements included in this report are based on information available to us on the date of this report and speak only as of the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Operating Highlights The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented and excludes certain gas treating assets for which horsepower is not a relevant metric. Three Months Ended September 30, Percent Nine Months Ended September 30, Percent 2021 2020 Change 2021 2020 Change Fleet horsepower (at period end) (1) 3,687,601 3,725,053 (1.0) % 3,687,601 3,725,053 (1.0) % Total available horsepower (at period end) (2) 3,690,361 3,732,553 (1.1) % 3,690,361 3,732,553 (1.1) % Revenue generating horsepower (at period end) (3) 2,919,362 3,009,773 (3.0) % 2,919,362 3,009,773 (3.0) % Average revenue generating horsepower (4) 2,914,100 3,042,786 (4.2) % 2,951,142 3,184,952 (7.3) % Average revenue per revenue generating horsepower per month (5)$ 16.62 $ 16.62 - %$ 16.59 $ 16.77 (1.1) % Revenue generating compression units (at period end) 3,928 3,984 (1.4) % 3,928 3,984 (1.4) % Average horsepower per revenue generating compression unit (6) 741 754 (1.7) % 749 742 0.9 % Horsepower utilization (7): At period end 83.0 % 83.2 % (0.2) % 83.0 % 83.2 % (0.2) % Average for the period (8) 82.3 % 83.9 % (1.9) % 82.6 % 88.1 % (6.2) %
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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 ofSeptember 30, 2021 and 2020 was 79.2% and 80.8%, 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 endedSeptember 30, 2021 and 2020 was 79.0% and 81.7%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the nine months endedSeptember 30, 2021 and 2020 was 79.7% and 85.8%, respectively. The 1.0% decrease in fleet horsepower as ofSeptember 30, 2021 compared toSeptember 30, 2020 was primarily due to (i) the exercise of a lease purchase option on certain compression units by a customer during the current period, (ii) compression units impaired since the previous period, partially offset by (iii) compression units added to our fleet primarily for specific customer demand for our compression services. The 1.1% decrease in total available horsepower as ofSeptember 30, 2021 compared toSeptember 30, 2020 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the current period and compression units impaired since the previous period. The 3.0% decrease in revenue generating horsepower as ofSeptember 30, 2021 compared toSeptember 30, 2020 was primarily due to returns of compression 19 -------------------------------------------------------------------------------- Table of Contents units from our customers, which also caused a 1.4% decrease in revenue generating compression units over the same period. The returns of compression units from our customers were primarily due to continued capital discipline and optimization of existing compression service requirements by our customers. The 1.1% decrease in average revenue per revenue generating horsepower per month during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to reduced pricing in our small horsepower fleet. The 1.7% decrease and 0.9% increase in average horsepower per revenue generating compression unit during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 , respectively, were driven primarily by the composition of compression unit returns. Average horsepower utilization decreased to 82.3% during the three months endedSeptember 30, 2021 compared to 83.9% during the three months endedSeptember 30, 2020 . The 1.9% decrease in average horsepower utilization was primarily due to (i) a 2.3% increase in our idle horsepower from compression units returned to us, partially offset by (ii) a 0.9% increase in horsepower that is on-contract or pending-contract but not yet active. Average horsepower utilization decreased to 82.6% during the nine months endedSeptember 30, 2021 compared to 88.1% during the nine months endedSeptember 30, 2020 . The 6.2% decrease in average horsepower utilization was primarily due to an increase in our average idle horsepower from compression units returned to us. The increases in average idle horsepower are primarily due to continued capital discipline and optimization of existing compression service requirements by our customers during the three and nine months endedSeptember 30, 2021 . Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 79.0% during the three months endedSeptember 30, 2021 compared to 81.7% during the three months endedSeptember 30, 2020 . The 3.3% decrease in average horsepower utilization based on revenue generating horsepower and fleet horsepower was primarily due to (i) a 3.8% increase in our average idle horsepower from compression units returned to us, partially offset by (ii) a 1.3% decrease in our average idle horsepower composed of new compression units. Average horsepower utilization based on revenue generating horsepower and fleet horsepower decreased to 79.7% during the nine months endedSeptember 30, 2021 compared to 85.8% during the nine months endedSeptember 30, 2020 . The 7.1% decrease in average horsepower utilization based on revenue generating horsepower and fleet horsepower was primarily due to an increase in our average idle horsepower from compression units returned to us. The increases in average idle horsepower are primarily due to continued capital discipline and optimization of existing compression service requirements by our customers during the three and nine months endedSeptember 30, 2021 . 20 -------------------------------------------------------------------------------- Table of Contents Financial Results of Operations Three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 The following table summarizes our results of operations for the periods presented (dollars in thousands): Three Months Ended September 30, Percent 2021 2020 Change Revenues: Contract operations$ 151,622 $ 156,632 (3.2) % Parts and service 4,122 1,986 * Related party 2,883 3,048 (5.4) % Total revenues 158,627 161,666 (1.9) % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 49,159 46,715 5.2 % Depreciation and amortization 59,265 60,072 (1.3) % Selling, general and administrative 13,524 12,716 6.4 % Loss on disposition of assets 48 1,686 * Impairment of compression equipment - 1,706 * Total costs and expenses 121,996 122,895 (0.7) % Operating income 36,631 38,771 (5.5) % Other income (expense): Interest expense, net (32,222) (32,004) 0.7 % Other 18 20 (10.0) % Total other expense (32,204) (31,984) 0.7 % Net income before income tax expense 4,427 6,787 (34.8) % Income tax expense 312 268 16.4 % Net income$ 4,115 $ 6,519 (36.9) %
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*Not meaningful Contract operations revenue. The$5.0 million decrease in contract operations revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compression service requirements by our customers since the previous period, which resulted in a 4.2% decrease in average revenue generating horsepower. The decrease in average revenue generating horsepower per month was partially offset by compression units moving from standby to full billing rate since the previous period. Our contract operations revenue was not materially impacted by any renegotiations of our contracts during the period with our customers. Additionally, average revenue per revenue generating horsepower per month associated with our compression services provided on a month-to-month basis did not significantly differ from the average revenue per revenue generating horsepower per month associated with our compression services provided under contracts in their primary term during the period. Parts and service revenue. The$2.1 million increase in parts and service revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to an increase 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 ET and was consistent period over period. 21 -------------------------------------------------------------------------------- Table of Contents Cost of operations, exclusive of depreciation and amortization. The$2.4 million increase in cost of operations, exclusive of depreciation and amortization, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to (i) a$1.9 million increase in retail parts and services expenses, which had a corresponding increase in parts and service revenue, (ii) a$1.6 million increase in property taxes, (iii) a$1.2 million increase in outside maintenance costs due to greater use of third-party labor during the current period, and (iv) a$0.7 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs, partially offset by (v) a$2.2 million decrease in direct expenses, primarily driven by fluids and parts, and (vi) a$0.7 million decrease in direct labor expenses, which were primarily driven by the decrease in average revenue generating horsepower and reduced headcount in the current period. Depreciation and amortization expense. The$0.8 million decrease in depreciation and amortization expense for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to lower vehicle depreciation related to a decrease in our vehicle fleet in the current period. Selling, general and administrative expense. The$0.8 million increase in selling, general and administrative expense for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to (i) a$2.2 million increase in unit-based compensation expense and (ii) a$0.5 million increase in other taxes primarily due to refunds received in the prior period, partially offset by (iii) a$1.1 million decrease in the provision for expected credit losses and (iv) a$0.6 million decrease in employee-related expenses. The increase in unit-based compensation expense is primarily due to the overall change in our unit price as ofSeptember 30, 2021 , 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 the recovery in crude oil prices and higher natural gas prices in the current period as compared to the prior period. The decrease in employee-related expenses is primarily due to reduced headcount during the current period and cost saving measures. Loss on disposition of assets. The$1.6 million decrease in loss on disposition of assets for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to losses recognized on compression asset disposals in the prior period. Impairment of compression equipment. The$1.7 million impairment of compression equipment for the three months endedSeptember 30, 2020 was primarily the result of our evaluations of the future deployment of our idle fleet under the current market conditions at the time. 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 endedSeptember 30, 2020 , we determined to retire 16 compressor units for a total of approximately 3,900 horsepower that was previously used to provide compression services in our business. Interest expense, net. Interest expense, net was consistent period over period as our average outstanding borrowings and the applicable weighted average interest rate under the Credit Agreement were consistent during both periods. Average outstanding borrowings under the Credit Agreement were$479.2 million and$468.9 million for the three months endedSeptember 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 2.92% and 2.90% for the three months endedSeptember 30, 2021 and 2020, respectively. Income tax expense. The increase in income tax expense for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily related to current taxes associated with the Texas Margin Tax. 22 -------------------------------------------------------------------------------- Table of Contents Nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 The following table summarizes our results of operations for the periods presented (dollars in thousands): Nine Months Ended September 30, Percent 2021 2020 Change Revenues: Contract operations$ 455,947 $ 492,419 (7.4) % Parts and service 7,978 7,770 2.7 % Related party 8,777 9,127 (3.8) % Total revenues 472,702 509,316 (7.2) % Costs and expenses: Cost of operations, exclusive of depreciation and amortization 143,391 155,848 (8.0) % Depreciation and amortization 179,522 179,172 0.2 % Selling, general and administrative 42,612 45,416 (6.2) % Gain on disposition of assets (2,312) (115) * Impairment of compression equipment 4,953 5,629 (12.0) % Impairment of goodwill - 619,411 * Total costs and expenses 368,166 1,005,361 * Operating income (loss) 104,536 (496,045) * Other income (expense): Interest expense, net (96,860) (96,297) 0.6 % Other 88 67 31.3 % Total other expense (96,772) (96,230) 0.6 % Net income (loss) before income tax expense 7,764 (592,275) * Income tax expense 590 983 (40.0) % Net income (loss)$ 7,174 $ (593,258) *
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*Not meaningful Contract operations revenue. The$36.5 million decrease in contract operations revenue for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to a decrease in demand for compression services driven by continued capital discipline and optimization of existing compression service requirements by our customers since the previous period. These factors resulted in a 7.3% decrease in average revenue generating horsepower and a 1.1% decrease in average revenue per revenue generating horsepower per month, which decreased to$16.59 for the nine months endedSeptember 30, 2021 compared to$16.77 for the nine months endedSeptember 30, 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. Parts and service revenue was consistent period over period and is related to 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 ET and was consistent period over period. Cost of operations, exclusive of depreciation and amortization. The$12.5 million decrease in cost of operations, exclusive of depreciation and amortization, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to (i) a$6.7 million decrease in direct labor expenses, (ii) a$4.5 million decrease in 23 -------------------------------------------------------------------------------- Table of Contents direct expenses, driven by fluids and parts, (iii) a$3.8 million decrease in non-income taxes, primarily due to sales tax refunds received in the current period related to prior periods, and (iv) a$0.8 million decrease in training and other indirect expenses, partially offset by (v) a$2.3 million increase in outside maintenance expenses due to greater use of third-party labor during the current period and (vi) a$0.8 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs. The decreases in direct labor, fluids and parts, training and other indirect expenses are primarily driven by the decrease in average revenue generating horsepower and reduced headcount during the current period. Depreciation and amortization expense. The$0.4 million increase in depreciation and amortization expense for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily related to compression unit overhauls and new compression units placed in service throughout 2020 to meet then existing demand by customers, partially offset by lower vehicle depreciation related to a decrease in our vehicle fleet in the current period. Selling, general and administrative expense. The$2.8 million decrease in selling, general and administrative expense for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to (i) a$6.1 million decrease in the provision for expected credit losses, (ii) a$2.2 million decrease in employee-related expenses, and (iii) a$1.9 million decrease in severance charges primarily due to the departure of one of our executives during the prior period, partially offset by (iv) a$7.9 million increase in unit-based compensation expense. The change to the provision for expected credit losses is related to improved market conditions for customers due to the recovery in crude oil prices and higher natural gas 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 during the current period and cost saving measures. The increase in unit-based compensation expense is primarily due to the overall change in our unit price as ofSeptember 30, 2021 , and the related mark-to-market change to our unit-based compensation liability. Gain on disposition of assets. The$2.2 million increase in gain on disposition of assets for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the current period. Impairment of compression equipment. The$5.0 million and$5.6 million impairments of compression equipment for the nine months endedSeptember 30, 2021 and 2020, respectively, were primarily the result of our evaluations of the future deployment of our idle fleet under the current market conditions at the time. 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 evaluations during the nine months endedSeptember 30, 2021 and 2020, we determined to retire 22 and 27 compressor units, respectively, for a total of approximately 9,600 and 9,000 horsepower, respectively, that were previously used to provide compression services in our business. Impairment of goodwill. During the first quarter of 2020 certain potential impairment indicators 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 ofMarch 31, 2020 . We performed a quantitative goodwill impairment test as ofMarch 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 endedMarch 31, 2020 . We had no remaining goodwill on our unaudited condensed consolidated balance sheets subsequent to the goodwill impairment for the three months endedMarch 31, 2020 . Interest expense, net. The$0.6 million increase in interest expense, net for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to increased borrowings under the Credit Agreement, partially offset by lower weighted average interest rates under the Credit Agreement. Average outstanding borrowings under the Credit Agreement were$485.3 million and$446.0 million for the nine months endedSeptember 30, 2021 and 2020, respectively, and the weighted average interest rate applicable to borrowings under the Credit Agreement was 3.01% and 3.36% for the nine months endedSeptember 30, 2021 and 2020, respectively. 24 -------------------------------------------------------------------------------- Table of Contents Income tax expense. The$0.4 million decrease in income tax expense for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily related to deferred taxes associated with the Texas Margin Tax. Other Financial Data The following table summarizes other financial data for the periods presented (dollars in thousands): Three Months Ended Nine Months Ended September 30, Percent September 30, Percent
Other Financial Data: (1) 2021 2020 Change 2021 2020 Change Gross margin$ 50,203 $ 54,879 (8.5) %$ 149,789 $ 174,296 (14.1) % Adjusted gross margin$ 109,468 $ 114,951 (4.8) %$ 329,311 $ 353,468 (6.8) % Adjusted gross margin percentage (2) 69.0 % 71.1 % (3.0) % 69.7 % 69.4 % 0.4 % Adjusted EBITDA$ 99,634 $ 103,940 (4.1) %$ 299,175 $ 315,605 (5.2) % Adjusted EBITDA percentage (2) 62.8 % 64.3 % (2.3) % 63.3 % 62.0 % 2.1 % DCF$ 51,973 $ 56,911 (8.7) %$ 157,089 $ 170,299 (7.8) % DCF Coverage Ratio 1.02 x 1.12 x (8.9) % 1.03 x 1.12 x (8.0) % Cash Coverage Ratio 1.03 x 1.13 x (8.8) % 1.04 x 1.13 x (8.0) %
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(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 percentage and Adjusted EBITDA percentage are
calculated as a percentage of revenue.
Gross margin. The $4.7 million decrease in gross margin for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020
was due to (i) a $3.0 million decrease in revenues and (ii) a $2.4 million
increase in cost of operations, exclusive of depreciation and amortization,
offset by (iii) a $0.8 million decrease in depreciation and amortization.
The $24.5 million decrease in gross margin for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 was due
to (i) a $36.6 million decrease in revenues and (ii) a $0.4 million increase in
depreciation and amortization, offset by (iii) a $12.5 million decrease in cost
of operations, exclusive of depreciation and amortization.
Adjusted gross margin. The $5.5 million decrease in Adjusted gross margin for
the three months ended September 30, 2021 compared to the three months ended
September 30, 2020 was due to a $3.0 million decrease in revenues and a $2.4
million increase in cost of operations, exclusive of depreciation and
amortization.
The $24.2 million decrease in Adjusted gross margin for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 was due
to a $36.6 million decrease in revenues, offset by a $12.5 million decrease in
cost of operations, exclusive of depreciation and amortization.
Adjusted EBITDA. The $4.3 million decrease in Adjusted EBITDA for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 was primarily due to a $5.5 million decrease in Adjusted gross margin,
partially offset by a $1.3 million decrease in selling, general and
administrative expenses, excluding unit-based compensation expense, severance
charges and transaction expenses.
The $16.4 million decrease in Adjusted EBITDA for the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020 was
primarily due to a $24.2 million decrease in Adjusted gross margin, partially
offset by a $8.7 million decrease in selling, general and administrative
expenses, excluding unit-based compensation expense, severance charges and
transaction expenses.
DCF. The $4.9 million decrease in DCF for the three months ended September 30,
2021 compared to the three months ended September 30, 2020 was primarily due to
(i) a $5.5 million decrease in Adjusted gross margin and (ii) a $0.5 million
increase in maintenance capital expenditures, partially offset by (iii) a
$1.3 million decrease in selling, general and administrative expenses, excluding
unit-based compensation expense, severance charges and transaction expenses.
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The $13.2 million decrease in DCF for the nine months ended September 30, 2021
compared to the nine months ended September 30, 2020 was primarily due to (i) a
$24.2 million decrease in Adjusted gross margin, partially offset by (ii) a
$8.7 million decrease in selling, general and administrative expenses, excluding
unit-based compensation expense, severance charges and transaction expenses, and
(iii) a $3.2 million decrease in maintenance capital expenditures.
Coverage Ratios. The decreases in DCF Coverage Ratio and Cash Coverage Ratio for
the three and nine months ended September 30, 2021 compared to the three and
nine months ended September 30, 2020 was primarily due 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 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
nine months ended September 30, 2021 and 2020 were $14.8 million and
$17.9 million , respectively. We currently plan to spend approximately $20.0
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 nine months ended September 30, 2021 and 2020 were $25.9
million and $84.6 million , respectively.
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Cash Flows
The following table summarizes our sources and uses of cash for the nine months
ended September 30, 2021 and 2020 (in thousands):
Nine
Months Ended
2021 2020
Net cash provided by operating activities $ 184,368 $ 195,651
Net cash used in investing activities (23,666) (94,190)
Net cash used in financing activities (160,454) (101,469)
Net cash provided by operating activities. The$11.3 million decrease in net cash provided by operating activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was due to a$19.4 million decrease in net income, as adjusted for non-cash items, and changes in working capital. Net cash used in investing activities. The$70.5 million decrease in net cash used in investing activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to a$68.5 million decrease in capital expenditures, for purchases of new compression units, related equipment and reconfiguration costs, and a$1.8 million increase in proceeds received from disposition of property and equipment. Net cash used in financing activities. The$59.0 million increase in net cash used in financing activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to a decrease in net borrowings of$62.3 million under the Credit Agreement and a$1.2 million increase in cash distributions on common units. These changes were partially offset by a decrease of$3.6 million in financing costs incurred in connection with the Credit Agreement amendment in the prior period. Revolving Credit Facility As ofSeptember 30, 2021 , we were in compliance with all of our covenants under the Credit Agreement. As ofSeptember 30, 2021 , we had outstanding borrowings under the Credit Agreement of$505.7 million ,$1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of$114.3 million . As ofOctober 28, 2021 , we had outstanding borrowings under the Credit Agreement of$483.1 million . On the Amendment Effective Date, we amended the Credit Agreement to, among other items, increase the maximum funded debt to EBITDA ratio to 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 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 ofSeptember 30, 2021 , we had$725.0 million and$750.0 million aggregate principal amount outstanding on our Senior Notes 2026 and Senior Notes 2027, respectively. 27 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 30, 2021 , distributions of$1.3 million were reinvested under the DRIP resulting in the issuance of 89,135 common units. Such distributions are treated as non-cash transactions in the accompanying unaudited condensed consolidated statements of cash flows included under Part I, Item 1 "Financial Statements" of this report. Non-GAAP Financial Measures Adjusted Gross Margin Adjusted gross margin is a non-GAAP financial measure. We define Adjusted gross margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that Adjusted gross margin is useful as a supplemental measure to investors of our operating profitability. Adjusted gross margin is impacted primarily by the pricing trends for service operations and cost of operations, including labor rates for service technicians, volume and per unit costs for lubricant oils, quantity and pricing of routine preventative maintenance on compression units and property tax rates on compression units. Adjusted gross margin should not be considered an alternative to, or more meaningful than, gross margin or any other measure of financial performance presented in accordance with GAAP. Moreover, Adjusted gross margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of Adjusted gross margin as a measure of our performance, we believe that it is important to consider gross margin determined under GAAP, as well as Adjusted gross margin, to evaluate our operating profitability. The following table reconciles Adjusted gross margin to gross margin, its most directly comparable GAAP financial measure, for each of the periods presented (in thousands): Three Months EndedSeptember 30 ,
Nine Months Ended
2021 2020 2021 2020
Total revenues $ 158,627 $ 161,666 $ 472,702 $ 509,316
Cost of operations, exclusive of
depreciation and amortization (49,159) (46,715) (143,391) (155,848)
Depreciation and amortization (59,265) (60,072) (179,522) (179,172)
Gross margin $ 50,203 $ 54,879 $ 149,789 $ 174,296
Depreciation and amortization 59,265 60,072 179,522 179,172
Adjusted gross margin $ 109,468 $ 114,951 $ 329,311 $ 353,468
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, loss (gain) on disposition of
assets and other. We view Adjusted EBITDA as one of management's primary tools
for evaluating our results of operations, and we track this item on a monthly
basis both as an absolute amount and as a percentage of revenue compared to the
prior month, year-to-date, prior year and budget. Adjusted EBITDA is used as a
supplemental financial measure by our management and external users of our
financial statements, such as investors and commercial banks, to assess:
•the financial performance of our assets without regard to the impact of
financing methods, capital structure or historical cost basis of our assets;
•the viability of capital expenditure projects and the overall rates of return
on alternative investment opportunities;
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•the ability of our assets to generate cash sufficient to make debt payments and
to pay distributions; and
•our operating performance as compared to those of other companies in our
industry without regard to the impact of financing methods and capital
structure.
We believe that Adjusted EBITDA provides useful information to investors
because, when viewed with our GAAP results and the accompanying reconciliations,
it may provide a more complete understanding of our performance than GAAP
results alone. We also believe that external users of our financial statements
benefit from having access to the same financial measures that management uses
in evaluating the results of our business.
Adjusted EBITDA should not be considered an alternative to, or more meaningful
than, net income (loss), operating income (loss), cash flows from operating
activities or any other measure of financial performance or liquidity presented
in accordance with GAAP as measures of operating performance and liquidity.
Moreover, our Adjusted EBITDA as presented may not be comparable to similarly
titled measures of other companies.
Because we use capital assets, depreciation, impairment of compression
equipment, loss (gain) on disposition of assets and the interest cost of
acquiring compression equipment are also necessary elements of our costs.
Unit-based compensation expense related to equity awards to employees is also a
necessary component of our business. Therefore, measures that exclude these
elements have material limitations. To compensate for these limitations, we
believe that it is important to consider both net income (loss) and net cash
provided by operating activities determined under GAAP, as well as Adjusted
EBITDA, to evaluate our financial performance and our liquidity. Our Adjusted
EBITDA excludes some, but not all, items that affect net income (loss) and net
cash provided by operating activities, and these measures may vary among
companies. Management compensates for the limitations of Adjusted EBITDA as an
analytical tool by reviewing the comparable GAAP measures, understanding the
differences between the measures and incorporating this knowledge into their
decision making processes.
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The following table reconciles Adjusted EBITDA to net income (loss) and net cash
provided by operating activities, its most directly comparable GAAP financial
measures, for each of the periods presented (in thousands):
Three Months Ended September 30,
Nine Months Ended
2021 2020 2021 2020
Net income (loss) $ 4,115 $ 6,519 $ 7,174 $ (593,258)
Interest expense, net 32,222 32,004 96,860 96,297
Depreciation and amortization 59,265 60,072 179,522 179,172
Income tax expense 312 268 590 983
EBITDA $ 95,914 $ 98,863 $ 284,146 $ (316,806)
Interest income on capital lease - 87 48 316
Unit-based compensation expense (1) 3,482 1,332 11,924 4,071
Transaction expenses (2) - 136 - 136
Severance charges 190 130 416 2,963
Loss (gain) on disposition of assets 48 1,686 (2,312) (115)
Impairment of compression equipment (3) - 1,706 4,953 5,629
Impairment of goodwill (4) - - - 619,411
Adjusted EBITDA $ 99,634 $ 103,940 $ 299,175 $ 315,605
Interest expense, net (32,222) (32,004) (96,860) (96,297)
Non-cash interest expense 2,288 2,167 6,866 6,113
Income tax expense (312) (268) (590) (983)
Interest income on capital lease - (87) (48) (316)
Transaction expenses - (136) - (136)
Severance charges (190) (130) (416) (2,963)
Other (1,118) 78 (2,501) 4,050
Changes in operating assets and
liabilities (22,783) (25,341) (21,258) (29,422)
Net cash provided by operating activities
________________________________
(1)For the three and nine months endedSeptember 30, 2021 , unit-based compensation expense included$1.0 million and$3.2 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.2 million for the nine months endedSeptember 30, 2021 related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and nine months endedSeptember 30, 2020 , unit-based compensation expense included$0.7 million and$2.5 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.5 million for the nine months endedSeptember 30, 2020 related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these expenses. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the nine months endedSeptember 30, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. 30 -------------------------------------------------------------------------------- Table of Contents Distributable Cash Flow We define DCF as net income (loss) plus non-cash interest expense, non-cash income tax expense (benefit), depreciation and amortization expense, unit-based compensation expense (benefit), impairment of compression equipment, impairment of goodwill, certain transaction expenses, severance charges, loss (gain) on disposition of assets, proceeds from insurance recovery and other, less distributions on Preferred Units and maintenance capital expenditures. We believe DCF is an important measure of operating performance because it allows management, investors and others to compare basic cash flows we generate (after distributions on the Preferred Units but prior to any retained cash reserves established by the General Partner and the effect of the DRIP) to the cash distributions we expect to pay our common unitholders. Using DCF, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. DCF should not be considered an alternative to, or more meaningful than, net income (loss), operating income (loss), cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP as measures of operating performance and liquidity. Moreover, our DCF as presented may not be comparable to similarly titled measures of other companies. Because we use capital assets, depreciation, impairment of compression equipment, loss (gain) on disposition of assets, the interest cost of acquiring compression equipment and maintenance capital expenditures are necessary elements of our costs. Unit-based compensation expense related to equity awards to employees is also a necessary component of our business. Therefore, measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is important to consider both net income (loss) and net cash provided by operating activities determined under GAAP, as well as DCF, to evaluate our financial performance and our liquidity. Our DCF excludes some, but not all, items that affect net income (loss) and net cash provided by operating activities, and these measures may vary among companies. Management compensates for the limitations of DCF as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into their decision making processes. 31 -------------------------------------------------------------------------------- Table of Contents The following table reconciles DCF to net income (loss) and net cash provided by operating activities, its most directly comparable GAAP financial measures, for each of the periods presented (in thousands): Three Months EndedSeptember 30 ,
Nine Months Ended
2021 2020 2021 2020
Net income (loss) $ 4,115 $ 6,519 $ 7,174 $ (593,258)
Non-cash interest expense 2,288 2,167 6,866 6,113
Depreciation and amortization 59,265 60,072 179,522 179,172
Non-cash income tax expense (benefit) 32 78 (101) 350
Unit-based compensation expense (1) 3,482 1,332 11,924 4,071
Transaction expenses (2) - 136 - 136
Severance charges 190 130 416 2,963
Loss (gain) on disposition of assets 48 1,686 (2,312) (115)
Impairment of compression equipment (3) - 1,706 4,953 5,629
Impairment of goodwill (4) - - - 619,411
Distributions on Preferred Units (12,188) (12,188) (36,563) (36,563)
Proceeds from insurance recovery - - - 336
Maintenance capital expenditures (5) (5,259) (4,727) (14,790) (17,946)
DCF $ 51,973 $ 56,911 $ 157,089 $ 170,299
Maintenance capital expenditures 5,259 4,727 14,790 17,946
Transaction expenses - (136) - (136)
Severance charges (190) (130) (416) (2,963)
Distributions on Preferred Units 12,188 12,188 36,563 36,563
Other (1,150) - (2,400) 3,364
Changes in operating assets and
liabilities (22,783) (25,341) (21,258) (29,422)
Net cash provided by operating activities
________________________________
(1)For the three and nine months endedSeptember 30, 2021 , unit-based compensation expense included$1.0 million and$3.2 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.2 million for the nine months endedSeptember 30, 2021 related to the cash portion of any settlement of phantom unit awards upon vesting. For the three and nine months endedSeptember 30, 2020 , unit-based compensation expense included$0.7 million and$2.5 million , respectively, of cash payments related to quarterly payments of DERs on outstanding phantom unit awards and$0.5 million for the nine months endedSeptember 30, 2020 related to the cash portion of any settlement of phantom unit awards upon vesting. The remainder of the unit-based compensation expense for all periods was related to non-cash adjustments to the unit-based compensation liability. (2)Represents certain expenses related to potential and completed transactions and other items. We believe it is useful to investors to exclude these expenses. (3)Represents non-cash charges incurred to write down long-lived assets with recorded values that are not expected to be recovered through future cash flows. (4)For further discussion of our goodwill impairment recorded for the nine months endedSeptember 30, 2020 , see "Financial Results of Operations" above and Note 5 to our unaudited condensed consolidated financial statements in Part I, Item 1 "Financial Statements" of this report. (5)Reflects actual maintenance capital expenditures for the period presented. Maintenance capital expenditures are capital expenditures made to maintain the operating capacity of our assets and extend their useful lives, replace partially or fully depreciated assets, or other capital expenditures that are incurred in maintaining our existing business and related cash flow. 32 -------------------------------------------------------------------------------- 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 September 30, Nine Months Ended September 30, 2021 2020 2021 2020 DCF$ 51,973 $ 56,911 $ 157,089 $ 170,299 Distributions for DCF Coverage Ratio (1)$ 50,975 $ 50,874 $ 152,872 $ 152,503 Distributions reinvested in the DRIP (2) $ 472$ 490 $ 1,312$ 1,601 Distributions for Cash Coverage Ratio (3)$ 50,503 $ 50,384 $ 151,560 $ 150,902 DCF Coverage Ratio 1.02 x 1.12 x 1.03 x 1.12 x Cash Coverage Ratio 1.03 x 1.13 x 1.04 x 1.13 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.
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