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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to               .
Commission File No. 001-35779
USA Compression Partners, LP
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
75-2771546
(I.R.S. Employer
Identification No.)

111 Congress Avenue, Suite 2400
Austin, Texas
(Address of principal executive offices)
78701
(Zip Code)
(512) 473-2662
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common units representing limited partner interestsUSACNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer
Non-accelerated filer ☐
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No ☒
As of April 29, 2021, there were 97,022,290 common units outstanding.



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GLOSSARY
The abbreviations, acronyms and industry terminology used in this Quarterly Report are defined as follows:
COVID-19novel coronavirus 2019
Credit AgreementSixth Amended and Restated Credit Agreement by and among USA Compression Partners, LP, as borrower, USAC OpCo 2, LLC, USAC Leasing 2, LLC, USA Compression Partners, LLC, USAC Leasing, LLC, CDM Resource Management LLC, CDM Environmental & Technical Services LLC and USA Compression Finance Corp., the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as agent and a letter of credit issuer, JPMorgan Chase Bank, N.A., Barclays Bank PLC, Regions Capital Markets, a division of Regions Bank, RBC Capital Markets and Wells Fargo Bank, N.A., as joint lead arrangers and joint book runners, Barclays Bank PLC, Regions Bank, RBC Capital Markets and Wells Fargo Bank, N.A., as syndication agents, and MUFG Union Bank, N.A., SunTrust Bank and The Bank of Nova Scotia, as senior managing agents, as amended, and may be further amended from time to time
DERsdistribution equivalent rights
DRIPdistribution reinvestment plan
EBITDAearnings before interest, taxes, depreciation and amortization
ETOEnergy Transfer Operating, L.P., for periods prior to its merger with Energy Transfer LP, and to Energy Transfer LP following such merger
Exchange ActSecurities Exchange Act of 1934, as amended
GAAPgenerally accepted accounting principles of the United States of America
Preferred UnitsSeries A Preferred Units representing limited partner interests in USA Compression Partners, LP
SECUnited States Securities and Exchange Commission
Senior Notes 2026$725.0 million aggregate principal amount of senior notes due on April 1, 2026
Senior Notes 2027$750.0 million aggregate principal amount of senior notes due on September 1, 2027
U.S.United States of America

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PART I.  FINANCIAL INFORMATION
ITEM 1.    Financial Statements
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
March 31,
2021
December 31,
2020
Assets
Current assets:
Cash and cash equivalents$99 $2 
Accounts receivable:
Trade, net of allowances for credit losses of $3,541 and $4,982, respectively
69,685 63,727 
Other1,898 3,707 
Related party receivables44,923 45,043 
Inventories84,740 84,632 
Prepaid expenses and other assets2,923 2,444 
Total current assets204,268 199,555 
Property and equipment, net2,332,212 2,380,633 
Lease right-of-use assets22,220 22,766 
Identifiable intangible assets, net326,446 333,791 
Other assets10,805 11,955 
Total assets$2,895,951 $2,948,700 
Liabilities, Preferred Units and Partners’ Capital
Current liabilities:
Accounts payable$13,869 $13,531 
Accrued liabilities87,368 109,539 
Deferred revenue48,792 47,202 
Total current liabilities150,029 170,272 
Long-term debt, net1,956,751 1,927,005 
Operating lease liabilities20,643 21,220 
Other liabilities15,405 15,239 
Total liabilities2,142,828 2,133,736 
Commitments and contingencies
Preferred Units477,309 477,309 
Partners’ capital:
Common units, 97,022 and 96,962 units issued and outstanding, respectively
261,835 323,676 
Warrants13,979 13,979 
Total partners’ capital275,814 337,655 
Total liabilities, Preferred Units and partners’ capital$2,895,951 $2,948,700 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per unit amounts)
Three Months Ended March 31,
20212020
Revenues:
Contract operations$152,525 $172,794 
Parts and service2,038 3,048 
Related party2,950 3,157 
Total revenues157,513 178,999 
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization48,628 59,165 
Depreciation and amortization61,030 58,762 
Selling, general and administrative13,800 12,385 
Gain on disposition of assets(1,255)(1,014)
Impairment of compression equipment2,550  
Impairment of goodwill 619,411 
Total costs and expenses124,753 748,709 
Operating income (loss)32,760 (569,710)
Other income (expense):
Interest expense, net(32,288)(32,478)
Other25 23 
Total other expense(32,263)(32,455)
Net income (loss) before income tax expense497 (602,165)
Income tax expense126 296 
Net income (loss)371 (602,461)
Less: distributions on Preferred Units(12,187)(12,187)
Net loss attributable to common unitholders’ interests$(11,816)$(614,648)
Weighted average common units outstanding – basic and diluted96,989 96,707 
Basic and diluted net loss per common unit$(0.12)$(6.36)
Distributions declared per common unit for respective periods$0.525 $0.525 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital
(in thousands, except per unit amounts)
For the Three Months Ended March 31, 2021
Common unitsWarrantsTotal
Partners’ capital ending balance, December 31, 2020$323,676 $13,979 $337,655 
Vesting of phantom units391  391 
Distributions and DERs, $0.525 per unit
(50,931) (50,931)
Issuance of common units under the DRIP463  463 
Unit-based compensation for equity classified awards52  52 
Net loss attributable to common unitholders’ interests(11,816) (11,816)
Partners’ capital ending balance, March 31, 2021$261,835 $13,979 $275,814 
For the Three Months Ended March 31, 2020
Common unitsWarrantsTotal
Partners’ capital ending balance, December 31, 2019$1,166,619 $13,979 $1,180,598 
Vesting of phantom units1,065  1,065 
Distributions and DERs, $0.525 per unit
(50,755) (50,755)
Issuance of common units under the DRIP301  301 
Unit-based compensation for equity classified awards55  55 
Net loss attributable to common unitholders’ interests(614,648) (614,648)
Partners’ capital ending balance, March 31, 2020$502,637 $13,979 $516,616 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Three Months Ended March 31,
20212020
Cash flows from operating activities:
Net income (loss)$371 $(602,461)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization61,030 58,762 
Provision for expected credit losses(1,250)1,500 
Amortization of debt issuance costs2,281 1,986 
Unit-based compensation expense (benefit)4,182 (1,829)
Deferred income tax expense (benefit)(99)123 
Gain on disposition of assets(1,255)(1,014)
Impairment of compression equipment2,550  
Impairment of goodwill 619,411 
Changes in assets and liabilities:
Accounts receivable and related party receivables, net(2,779)7,120 
Inventories(3,261)(8,046)
Prepaid expenses and other current assets(479)(556)
Other assets706 754 
Accounts payable1,316 5,036 
Accrued liabilities and deferred revenue(23,701)(30,709)
Net cash provided by operating activities39,612 50,077 
Cash flows from investing activities:
Capital expenditures, net(6,185)(45,275)
Proceeds from disposition of property and equipment420 1,881 
Proceeds from insurance recovery1,559 1,324 
Net cash used in investing activities(4,206)(42,070)
Cash flows from financing activities:
Proceeds from revolving credit facility190,511 250,008 
Payments on revolving credit facility(161,633)(193,408)
Cash paid related to net settlement of unit-based awards(289)(644)
Cash distributions on common units(51,571)(51,381)
Cash distributions on Preferred Units(12,187)(12,187)
Deferred financing costs (153)
Other(140)(250)
Net cash used in financing activities(35,309)(8,015)
Increase (decrease) in cash and cash equivalents97 (8)
Cash and cash equivalents, beginning of period2 10 
Cash and cash equivalents, end of period$99 $2 
Supplemental cash flow information:
Cash paid for interest, net of capitalized amounts$55,391 $56,046 
Cash paid for income taxes$13 $ 
Supplemental non-cash transactions:
Non-cash distributions to certain common unitholders (DRIP)$463 $301 
Transfers from inventories to property and equipment$3,139 $7,576 
Changes in capital expenditures included in accounts payable and accrued liabilities$(800)$2,201 
Financing costs included in accounts payable and accrued liabilities$139 $268 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Description of Business
Unless otherwise indicated, the terms “our,” “we,” “us,” “the Partnership” and similar language refer to USA Compression Partners, LP, collectively with its consolidated operating subsidiaries.
We are a Delaware limited partnership. Through our operating subsidiaries, we provide compression services under fixed-term contracts with customers in the natural gas and crude oil industries, using natural gas compression packages that we design, engineer, own, operate and maintain. We also own and operate a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling, and dehydration. We primarily provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales.
USA Compression GP, LLC, a Delaware limited liability company, serves as our general partner and is referred to herein as the “General Partner.” As of March 31, 2021, the General Partner was wholly-owned by ETO. On April 1, 2021, Energy Transfer LP (“ET”), ETO and certain of their affiliates consummated an internal reorganization. In connection with the reorganization, ETO merged with and into ET, with ET surviving the merger (the “ETO Merger”). As a result of the ETO Merger, the General Partner became wholly-owned by ET.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Partnership and its operating subsidiaries, all of which are wholly-owned by us.
(2) Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC.
In the opinion of our management, such financial information reflects all normal recurring adjustments necessary for a fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2020 filed on February 16, 2021 (our “2020 Annual Report”).
Use of Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that existed at the date of the unaudited condensed consolidated financial statements. Although these estimates were based on management’s available knowledge of current and expected future events, actual results could differ from these estimates.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances. We consider investments in highly liquid financial instruments purchased with an original maturity of 90 days or less to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount.
Allowance for Credit Losses
We evaluate our allowance for credit losses related to our two financial assets measured at amortized cost: (i) trade accounts receivable and (ii) net investment in lease related to our sales-type lease discussed further in Note 7. Due to the short-
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term nature of our trade accounts receivable, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses.
Our determination of the allowance for credit losses requires us to make estimates and judgments regarding our customers’ ability to pay amounts due and is the same process for both of our financial assets as they have similar risk characteristics. We continuously evaluate the financial strength of our customers and the overall business climate in which our customers operate and make adjustments to the allowance for credit losses as necessary. We evaluate the financial strength of our customers by reviewing the aging of their receivables, our collection experience with the customer, correspondence, financial information and third-party credit ratings. We evaluate the business climate in which our customers operate by reviewing various publicly available materials regarding our customers’ industry, including the solvency of various companies in the industry.
Inventories
Inventories consist of serialized and non-serialized parts used primarily on compression units. All inventories are stated at the lower of cost or net realizable value. Serialized parts inventories are determined using the specific identification cost method, while non-serialized parts inventories are determined using the weighted average cost method. Purchases of inventories are considered operating activities on the unaudited condensed consolidated statements of cash flows.
Property and Equipment
Property and equipment are carried at cost except for (i) certain acquired assets which are recorded at fair value on their respective acquisition dates and (ii) impaired assets which are recorded at fair value on the last impairment evaluation date for which an adjustment was required. Overhauls and major improvements that increase the value or extend the life of compression equipment are capitalized and depreciated over three to five years. Ordinary maintenance and repairs are charged to cost of operations, exclusive of depreciation and amortization.
When property and equipment is retired or sold, its carrying value and the related accumulated depreciation are removed from our accounts and any associated gains or losses are recorded on the unaudited condensed consolidated statements of operations in the period of sale or disposition.
Capitalized interest is calculated by multiplying our monthly effective interest rate on outstanding debt by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was $3,000 and $142,000 for the three months ended March 31, 2021 and 2020, respectively.
Impairment of Long-Lived Assets
Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written-down to estimated fair value. We test long-lived assets for impairment when events or circumstances indicate that the assets’ carrying value may not be recoverable or will no longer be utilized in the operating fleet. The most common circumstance requiring compression units to be evaluated for impairment is when idle units do not meet the desired performance characteristics of our active revenue generating horsepower.
The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value of the long-lived asset exceeds the sum of the undiscounted cash flows associated with the asset, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.
Refer to Note 5 for more detailed information about impairment charges during the three months ended March 31, 2021 and 2020.
Identifiable Intangible Assets
Identifiable intangible assets are recorded at cost and amortized using the straight-line method over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to our future cash flows. The estimated useful lives of our intangible assets range from 15 to 25 years.
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Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of our services or goods. Revenue is measured at the amount of consideration we expect to receive in exchange for providing services or transferring goods. Incidental items, if any, that are immaterial in the context of the contract are recognized as expenses.
Income Taxes
We are organized as a partnership for U.S. federal and state income tax purposes. As a result, our partners are responsible for U.S. federal and state income taxes based upon their distributive share of our items of income, gain, loss or deduction. Texas imposes an entity-level income tax on partnerships that is based on Texas sourced taxable margin (the “Texas Margin Tax”). We have included in the unaudited condensed consolidated financial statements a provision for the Texas Margin Tax.
Pass Through Taxes
Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.
Fair Value Measurements
Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability.
As of March 31, 2021, our financial instruments consisted primarily of cash and cash equivalents, trade accounts receivable, trade accounts payable and long-term debt. The book values of cash and cash equivalents, trade accounts receivable and trade accounts payable are representative of fair value due to their short-term maturities. The carrying amount of our revolving credit facility approximates fair value due to the floating interest rates associated with the debt.
The fair value of our Senior Notes 2026 and Senior Notes 2027 were estimated using quoted prices in inactive markets and are considered Level 2 measurements.
The following table summarizes the aggregate principal amount and fair value of our Senior Notes 2026 and Senior Notes 2027 (in thousands):
March 31,
2021
December 31,
2020
Senior Notes 2026, aggregate principal$725,000 $725,000 
Fair value of Senior Notes 2026743,125 761,250 
Senior Notes 2027, aggregate principal750,000 750,000 
Fair value of Senior Notes 2027776,250 800,625 
Operating Segment
We operate in a single business segment, the compression services business.
(3) Trade Accounts Receivable
The allowance for credit losses, which was $3.5 million and $5.0 million as of March 31, 2021 and December 31, 2020, respectively, is our best estimate of the amount of probable credit losses included in our existing accounts receivable.
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The following summarizes activity within our trade accounts receivable allowance for credit losses balance (in thousands):
Allowance for Credit Losses
Balance as of December 31, 2020$4,982 
Current-period provision for expected credit losses(1,250)
Writeoffs charged against the allowance(191)
Balance as of March 31, 2021$3,541 
For the three months ended March 31, 2021, we recognized a $1.3 million reversal of our provision for expected credit losses. Improved market conditions for customers due to a recovery in crude oil prices was the primary factor contributing to the decrease to the allowance for credit losses for the three months ended March 31, 2021.
For the three months ended March 31, 2020, we recognized a $1.5 million provision for expected credit losses. Low crude oil prices, driven by decreased demand for and global oversupply of crude oil as a result of the COVID-19 pandemic, was the primary factor contributing to the higher allowance for credit losses for the three months ended March 31, 2020.
(4)  Inventories
Components of inventories are as follows (in thousands):
March 31,
2021
December 31,
2020
Serialized parts$42,448 $42,233 
Non-serialized parts42,292 42,399 
Total inventories$84,740 $84,632 

(5)  Property and Equipment, Identifiable Intangible Assets and Goodwill
Property and Equipment
Property and equipment consisted of the following (in thousands):
March 31,
2021
December 31,
2020
Compression and treating equipment$3,482,751 $3,480,660 
Computer equipment53,981 53,887 
Automobiles and vehicles33,276 33,412 
Leasehold improvements8,238 8,218 
Buildings5,334 5,334 
Furniture and fixtures1,111 1,110 
Land77 77 
Total property and equipment, gross3,584,768 3,582,698 
Less: accumulated depreciation and amortization(1,252,556)(1,202,065)
Total property and equipment, net$2,332,212 $2,380,633 
Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:
Compression equipment, acquired new25 years
Compression equipment, acquired used
5 - 25 years
Furniture and fixtures
3 - 10 years
Vehicles and computer equipment
1 - 10 years
Buildings
5 years
Leasehold improvements5 years
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Depreciation expense on property and equipment and gain on disposition of assets were as follows (in thousands):
Three Months Ended March 31,
 20212020
Depreciation expense$53,685 $51,417 
Gain on disposition of assets1,255 1,014 
As of March 31, 2021 and December 31, 2020, there was $2.0 million and $2.8 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.
On a quarterly basis, we evaluate the future deployment of our idle fleet under current market conditions. For 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. As a result, we recorded an impairment of compression equipment of $2.6 million for the three months ended March 31, 2021.
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.
No impairment was recorded for the three months ended March 31, 2020.
Identifiable Intangible Assets
Identifiable intangible assets, net consisted of the following (in thousands):
Customer RelationshipsTrade NamesTotal
Net balance as of December 31, 2020$302,952 $30,839 $333,791 
Amortization expense(6,526)(819)(7,345)
Net balance as of March 31, 2021$296,426 $30,020 $326,446 
Accumulated amortization of intangible assets was $224.2 million and $216.9 million as of March 31, 2021 and December 31, 2020, respectively. The expected amortization of the intangible assets for each of the five succeeding years is $29.4 million.
Goodwill
During the first quarter of 2020 certain potential impairment indicators were identified, specifically (i) the decline in the market price of our common units, (ii) the decline in global commodity prices and (iii) the COVID-19 pandemic; which together indicated the fair value of the reporting unit was less than its carrying amount as of March 31, 2020.
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. Determining fair value of a reporting unit requires judgment and use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, EBITDA margins, weighted average costs of capital and future market conditions, among others. We believe the estimates and assumptions used were reasonable and based on available market information, but variations in any of the assumptions could have resulted in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Under the income approach, we determined fair value based on estimated future cash flows, including estimates for capital expenditures, discounted to present value using the risk-adjusted industry rate, which reflects the overall level of inherent risk of the Partnership. Cash flow projections were derived from four-year operating forecasts plus an estimate of later period cash flows, all of which were developed by management. Subsequent period cash flows were developed using growth rates that management believed were reasonably likely to occur. Under the market approach, we determined fair value by applying valuation multiples of comparable publicly-traded companies to the projected EBITDA of the Partnership and then averaging that estimate with similar historical calculations using a three-year average. In addition, we estimated a reasonable control premium representing the incremental value that would accrue to us if we were to be acquired.
Based on the quantitative goodwill impairment test described above, our carrying amount exceeded fair value and as a result, we recognized a goodwill impairment of $619.4 million for the three months ended March 31, 2020.
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(6)  Other Current Liabilities
Components of other current liabilities included the following (in thousands):
March 31,
2021
December 31,
2020
Accrued sales tax contingencies (1)$44,923 $44,923 
Accrued interest expense5,839 31,125 
Accrued payroll and benefits7,361 8,416 
Accrued unit-based compensation liability11,529 9,183 
______________________
(1)Refer to Note 13 for further information on the accrued sales tax contingencies.
(7)  Lease Accounting
Lessor Accounting
We granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provides the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term in 2021.
We accounted for this option as a sales-type lease resulting in a current installment receivable included in other accounts receivable of $1.9 million and $2.9 million as of March 31, 2021 and December 31, 2020, respectively.
As of March 31, 2021, there is no allowance for credit losses on our net investment in the sales-type lease based on our collections experience with the customer.
Revenue and interest income related to the lease is recognized over the lease term. We recognize maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue and interest income were as follows (in thousands):
Three Months Ended March 31,
 20212020
Maintenance revenue$323 $323 
Interest income48 124 
Lease payments expected to be received subsequent to March 31, 2021 are as follows (in thousands):
Lease Payments
Total installment receivables (1)1,938 
Less: present value discount
(60)
Present value of installment receivables$1,878 
______________________
(1)As discussed above, the installment receivable lease term ends in 2021.
(8)  Long-term Debt
Our long-term debt, of which there is no current portion, consisted of the following (in thousands):
March 31,
2021
December 31,
2020
Senior Notes 2026, aggregate principal$725,000 $725,000 
Senior Notes 2027, aggregate principal750,000 750,000 
Less: deferred financing costs, net of amortization(20,937)(21,805)
Total senior notes, net1,454,063 1,453,195 
Revolving credit facility502,688 473,810 
Total long-term debt, net$1,956,751 $1,927,005 
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Revolving Credit Facility
As of March 31, 2021, we were in compliance with all of our covenants under the Credit Agreement. The Credit Agreement has an aggregate commitment of $1.6 billion (subject to availability under our borrowing base), with a further potential increase of $400 million, and has a maturity date of April 2, 2023, which we expect to maintain for the term.
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. Our weighted average interest rate in effect for all borrowings under the Credit Agreement as of March 31, 2021 was 3.20%, with a weighted average interest rate of 3.06% for the three months ended March 31, 2021. There were no letters of credit issued as of March 31, 2021. We pay a commitment fee of 0.375% on the unused portion of the Credit Agreement.
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”).
The Credit Agreement permits us to make distributions of available cash to unitholders so long as (i) no default under the facility has occurred, is continuing or would result from the distribution, (ii) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants and (iii) immediately prior to and after giving effect to such distribution, we have availability under the Credit Agreement of at least $250 million (reverting to $100 million after the Covenant Relief Period).
The Credit Agreement also contains various financial covenants, including covenants requiring us to maintain:
a minimum EBITDA to interest coverage ratio of 2.5 to 1.0, determined as of the last day of each fiscal quarter, for the annualized trailing three months; and
a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter, for the annualized trailing three months of (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 after the Covenant Relief Period). In addition, the amendment provides that the 0.50 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.
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.
The Credit Agreement is a “revolving credit facility” that includes a lock box arrangement, whereby remittances from customers are forwarded to a bank account controlled by the administrative agent and are applied to reduce borrowings under the facility.
Senior Notes 2026
On March 23, 2018, the Partnership and its wholly owned finance subsidiary, USA Compression Finance Corp. (“Finance Corp”), co-issued the Senior Notes 2026. 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 indenture governing the Senior Notes 2026 (the “2026 Indenture”) contains certain financial ratios that we must comply with in order to make certain restricted payments as described in the 2026 Indenture. As of March 31, 2021, we were in compliance with such financial covenants under the 2026 Indenture.
The Senior Notes 2026 are fully and unconditionally guaranteed (the “2026 Guarantees”), jointly and severally, on a senior unsecured basis by all of our existing subsidiaries (other than Finance Corp), and will be fully and unconditionally guaranteed, jointly and severally, by each of our future restricted subsidiaries that either borrows under, or guarantees, the Credit Agreement or guarantees certain of our other indebtedness (collectively, the “Guarantors”). The Senior Notes 2026 and the 2026 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2026 and the 2026 Guarantees are effectively subordinated in right of
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payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2026.
Senior Notes 2027
On March 7, 2019, the Partnership and Finance Corp co-issued the Senior Notes 2027. 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.
The indenture governing the Senior Notes 2027 (the “2027 Indenture”) contains certain financial ratios that we must comply with in order to make certain restricted payments as described in the 2027 Indenture. As of March 31, 2021, we were in compliance with such financial covenants under the 2027 Indenture.
The Senior Notes 2027 are fully and unconditionally guaranteed (the “2027 Guarantees”), jointly and severally, on a senior unsecured basis by the Guarantors. The Senior Notes 2027 and the 2027 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’, Finance Corp’s, and our existing and future senior indebtedness and senior to the Guarantors’, Finance Corp’s, and our future subordinated indebtedness, if any. The Senior Notes 2027 and the 2027 Guarantees are effectively subordinated in right of payment to all of the Guarantors’, Finance Corp’s, and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2027.
We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100% owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.
(9)  Preferred Units
We had 500,000 Preferred Units outstanding as of March 31, 2021 and December 31, 2020, respectively, with a face value of $1,000 per Preferred Unit.
The Preferred Units rank senior to the common units with respect to distributions and rights upon liquidation. The holders of the Preferred Units are entitled to receive cumulative quarterly cash distributions equal to $24.375 per Preferred Unit.
We have declared and paid quarterly cash distributions to the holders of the Preferred Units of record as follows:
Payment DateDistribution per Preferred Unit
February 7, 2020$24.375 
May 8, 202024.375 
August 10, 202024.375 
November 6, 202024.375 
2020 total distributions
$97.500 
February 5, 2021$24.375 
Announced Quarterly Distribution
On April 14, 2021, we declared a cash distribution of $24.375 per unit on the Preferred Units. The distribution will be paid on May 7, 2021 to the holders of the Preferred Units of record as of close of business on April 26, 2021.
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Changes in the Preferred Units balance are as follows (in thousands):
Preferred Units
Balance as of December 31, 2020$477,309 
Net income allocated to Preferred Units12,187 
Cash distributions on Preferred Units(12,187)
Balance as of March 31, 2021$477,309 
Redemption and Conversion Features
The Preferred Units are convertible, at the option of the holder, into common units in accordance with the terms of our Second Amended and Restated Agreement of Limited Partnership (the “Partnership Agreement”) as follows: one third are convertible on or after April 2, 2021, two thirds are convertible on or after April 2, 2022, and 100% are convertible on or after April 2, 2023. The conversion rate for the Preferred Units is the quotient of (a) the sum of (i) $1,000, plus (ii) any unpaid distributions on the applicable Preferred Unit, divided by (b) $20.0115 for each Preferred Unit. On or after April 2, 2023, we have the option to redeem all or any portion of the Preferred Units then outstanding, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement. On or after April 2, 2028, each Preferred Unitholder will have the right to require us to redeem all or a portion of their Preferred Units, subject to certain minimum redemption threshold amounts, for a redemption price set forth in the Partnership Agreement, which we may elect to pay up to 50% in common units, subject to certain additional limits.
(10) Partners’ Capital
Common Units
The change in common units outstanding was as follows:
Units Outstanding
Number of units outstanding as of December 31, 202096,962,323 
Vesting of phantom units25,986 
Issuance of common units under the DRIP33,981 
Number of units outstanding as of March 31, 202197,022,290 
As of March 31, 2021, ETO held 46,056,228 common units, including 8,000,000 common units held by the General Partner and controlled by ETO.
Cash Distributions
We have declared and paid quarterly distributions per unit to our limited partner unitholders of record, including holders of our common units and phantom units, as follows (dollars in millions, except distribution per unit):
Payment DateDistribution per Limited Partner UnitAmount Paid to Common UnitholdersAmount Paid to Phantom UnitholdersTotal Distribution
February 7, 2020$0.525 $50.7 $0.9 $51.6 
May 8, 20200.525 50.8 0.9 51.7 
August 10, 20200.525 50.9 0.8 51.7 
November 6, 20200.525 50.9 0.7 51.6 
2020 total distributions$2.10 $203.3 $3.3 $206.6 
February 5, 2021$0.525 $50.9 $1.1 $52.0 
Announced Quarterly Distribution
On April 14, 2021, we announced a cash distribution of $0.525 per unit on our common units. The distribution will be paid on May 7, 2021 to common unitholders of record as of the close of business on April 26, 2021.
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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.
Warrants
As of March 31, 2021 and December 31, 2020, we had two tranches of warrants outstanding, which includes warrants to purchase (i) 5,000,000 common units with a strike price of $17.03 per common unit and (ii) 10,000,000 common units with a strike price of $19.59 per common unit (collectively, the “Warrants”). The Warrants may be exercised by the holders at any time before April 2, 2028.
Loss per Unit
The computation of loss per unit is based on the weighted average number of participating securities, which includes our common units and certain equity-based awards, outstanding during the applicable period. Basic loss per unit is determined by dividing net income (loss) allocated to participating securities after deducting the distributions on Preferred Units, by the weighted average number of participating securities outstanding during the period. Loss attributable to unitholders is allocated to participating securities based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income (loss) attributable to unitholders for the period, the excess distributions are allocated to all participating securities outstanding based on their respective ownership percentages.
Diluted loss per unit is computed using the treasury stock method, which considers the potential issuance of limited partner units associated with our long-term incentive plan and Warrants. Unvested phantom units and unexercised Warrants are not included in basic loss per unit, as they are not considered to be participating securities, but are included in the calculation of diluted loss per unit to the extent they are dilutive, and in the case of Warrants to the extent they are considered “in the money.”
For the three months ended March 31, 2021 and 2020, approximately 710,000 and 489,000 incremental unvested phantom units, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive and our outstanding Warrants are not included in the computation as they are not considered “in the money” for either period.
(11) Revenue Recognition
Disaggregation of Revenue
The following table disaggregates our revenue by type of service (in thousands):
Three Months Ended March 31,
20212020
Contract operations revenue$155,469 $175,902 
Retail parts and services revenue2,044 3,097 
Total revenues$157,513 $178,999 
The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands):
Three Months Ended March 31,
20212020
Services provided over time:
Primary term$106,561 $120,362 
Month-to-month48,908 55,540 
Total services provided over time155,469 175,902 
Services provided or goods transferred at a point in time2,044 3,097 
Total revenues$157,513 $178,999 
Contract Assets
We record contract assets when we have completed performance under a contract but our right to consideration is not yet unconditional. We had no contract assets as of March 31, 2021 and December 31, 2020.
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Deferred Revenue
We record deferred revenue when cash payments are received or due in advance of our performance. Components of deferred revenue were as follows (in thousands):
Balance sheet locationMarch 31,
2021
December 31,
2020
Current (1)Deferred revenue$48,792 $47,202 
NoncurrentOther liabilities8,570 8,200 
Total$57,362 $55,402 
______________________
(1)We recognized $39.3 million of revenue during the three months ended March 31, 2021 related to our deferred revenue balance as of December 31, 2020.
Performance Obligations
As of March 31, 2021, we had unsatisfied performance obligations related to our contract operations revenue of $467.4 million. We expect to recognize these remaining performance obligations as follows (in thousands):
2021 (remainder)
202220232024ThereafterTotal
Remaining performance obligations$229,340 $144,444 $61,819 $24,907 $6,894 $467,404 

(12) Transactions with Related Parties
We provide compression services to entities affiliated with ETO, which as of March 31, 2021 owned approximately 47% of our limited partner interests and 100% of the General Partner. Revenue recognized from such affiliated ETO entities on our unaudited condensed consolidated statements of operations were as follows (in thousands):
Three Months Ended March 31,
 20212020
Related party revenues$2,950 $3,157 
We had $0 and $120,000 within related party receivables and $6,000 and $0 within accounts payable on our unaudited condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively, from such affiliated ETO entities. Additionally, the Partnership had a $44.9 million related party receivable from ETO as of March 31, 2021 and December 31, 2020 related to indemnification for sales tax contingencies. See Note 13 for more information related to such sales tax contingencies.
(13) Commitments and Contingencies
(a)Major Customers
We did not have revenue from any single customer representing 10% or more of total revenue for the three months ended March 31, 2021 or 2020.
(b)Litigation
From time to time, we and our subsidiaries may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
(c)Sales Tax Contingencies
Our compliance with state and local sales tax regulations is subject to audit by various taxing authorities. Certain taxing authorities have either claimed or issued an assessment that specific operational processes, which we and others in our industry regularly conduct, result in transactions that are subject to state sales taxes. We and others in our industry have disputed these claims and assessments based on either existing tax statutes or published guidance by the taxing authorities.
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We are currently in discussions with the Oklahoma Tax Commission (“OTC”) regarding its assessment. We believe it is reasonably possible that we could incur losses related to this assessment depending on whether the OTC accepts our position that the transactions are not taxable and we ultimately lose any and all subsequent legal challenges to such determination by the OTC. We estimate that the range of losses we could incur is from $0 to approximately $21.6 million, including penalty and interest. The upper end of this range assumes that all compression services in Oklahoma are taxable, which we believe is remote.
As of March 31, 2021 and December 31, 2020, we have recorded a $44.9 million accrued liability and $44.9 million related party receivable from ETO related to open audits with the Office of the Texas Comptroller of Public Accounts.
For more information, see Note 17 to the consolidated financial statements included in our 2020 Annual Report.
(14) Recent Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendment to Topic 848 provides relief from certain contract modification accounting requirements for the transition away from the London Interbank Offered Rate and certain other reference rates. Adoption of the amendments in this update are optional, effective upon issuance and may be adopted during any interim or annual period through December 31, 2022. Modifications to our Credit Agreement during the effective period of this amendment will be assessed and if the modifications meet the criteria for the optional expedients and exceptions, we intend to adopt Topic 848 and apply the amendments as applicable.
In August 2020, FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 changes how entities account for convertible instruments and contracts in an entity’s own equity, as well as updates guidance on earnings per unit and other related disclosures. The amendments in this update are effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted for fiscal years beginning after December 15, 2020. We plan to adopt this new standard on January 1, 2022. We expect the impact on our disclosures will not be material and there to be no impact to our consolidated financial statements.
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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
Change
20212020
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 end83.1 %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
Change
20212020
Revenues:
Contract operations$152,525 $172,794 (11.7)%
Parts and service2,038 3,048 (33.1)%
Related party2,950 3,157 (6.6)%
Total revenues157,513 178,999 (12.0)%
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization48,628 59,165 (17.8)%
Depreciation and amortization61,030 58,762 3.9 %
Selling, general and administrative13,800 12,385 11.4 %
Gain on disposition of assets(1,255)(1,014)23.8 %
Impairment of compression equipment2,550 —       *
Impairment of goodwill— 619,411       *
Total costs and expenses124,753 748,709       *
Operating income (loss)32,760 (569,710)      *
Other income (expense):
Interest expense, net(32,288)(32,478)(0.6)%
Other25 23 8.7 %
Total other expense(32,263)(32,455)(0.6)%
Net income (loss) before income tax expense497 (602,165)      *
Income tax expense126 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):
Other Financial Data: (1)Three Months Ended March 31,Percent
Change
20212020
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 Ratio1.03 x1.08 x(4.6)%
Cash Coverage Ratio1.04 x1.09 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,
20212020
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,
20212020
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 amortization61,030 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,
20212020
Net income (loss)$371 $(602,461)
Interest expense, net32,288 32,478 
Depreciation and amortization61,030 58,762 
Income tax expense126 296 
EBITDA$93,815 $(510,925)
Interest income on capital lease48 124 
Unit-based compensation expense (benefit) (1)4,182 (1,829)
Severance charges213 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 expense2,281 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,
20212020
Net income (loss)$371 $(602,461)
Non-cash interest expense2,281 1,986 
Depreciation and amortization61,030 58,762 
Non-cash income tax expense (benefit)(99)123 
Unit-based compensation expense (benefit) (1)4,182 (1,829)
Severance charges213 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 expenditures4,506 8,842 
Severance charges(213)(417)
Distributions on Preferred Units12,187 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