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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 June 30, 2022
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 July 28, 2022, there were 97,940,715 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 AgreementSeventh Amended and Restated Credit Agreement, dated as of December 8, 2021, by and among USA Compression Partners, LP, as borrower, the guarantors party thereto from time to time, the lenders party thereto from time to time, as may be amended from time to time, and any predecessor thereto if the context so dictates
DERsdistribution equivalent rights
DRIPdistribution reinvestment plan
EBITDAearnings before interest, taxes, depreciation and amortization
Energy TransferEnergy Transfer LP, for periods following its merger with Energy Transfer Operating, L.P., and Energy Transfer Operating, L.P. for periods prior to 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
SOFRSecured Overnight Financing Rate
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)
June 30,
2022
December 31,
2021
Assets
Current assets:
Cash and cash equivalents$ $ 
Accounts receivable:
Trade, net of allowances for credit losses of $1,254 and $2,057, respectively
72,465 68,175 
Other69 39 
Related party receivables45,920 44,941 
Inventories90,204 85,816 
Prepaid expenses and other assets9,025 6,016 
Total current assets217,683 204,987 
Property and equipment, net2,178,383 2,222,336 
Lease right-of-use assets19,393 20,173 
Identifiable intangible assets, net289,722 304,411 
Other assets14,711 16,072 
Total assets$2,719,892 $2,767,979 
Liabilities, Preferred Units and Partners’ Capital (Deficit)
Current liabilities:
Accounts payable$26,246 $22,538 
Accrued liabilities129,360 113,891 
Deferred revenue54,545 51,216 
Total current liabilities210,151 187,645 
Long-term debt, net2,017,326 1,973,234 
Operating lease liabilities17,446 18,551 
Other liabilities9,725 10,132 
Total liabilities2,254,648 2,189,562 
Commitments and contingencies
Preferred Units477,309 477,309 
Partners’ capital (deficit):
Common units, 97,941 and 97,345 units issued and outstanding, respectively
(20,877)87,129 
Warrants8,812 13,979 
Total partners’ capital (deficit)(12,065)101,108 
Total liabilities, Preferred Units and partners’ capital (deficit)$2,719,892 $2,767,979 
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 June 30,Six Months Ended June 30,
2022202120222021
Revenues:
Contract operations$163,969 $151,800 $321,637 $304,325 
Parts and service3,605 1,818 5,531 3,856 
Related party3,887 2,944 7,705 5,894 
Total revenues171,461 156,562 334,873 314,075 
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization55,158 45,604 108,890 94,232 
Depreciation and amortization58,959 59,227 118,023 120,257 
Selling, general and administrative13,914 15,288 29,179 29,088 
Loss (gain) on disposition of assets1,031 (1,105)852 (2,360)
Impairment of compression equipment 2,403 432 4,953 
Total costs and expenses129,062 121,417 257,376 246,170 
Operating income42,399 35,145 77,497 67,905 
Other income (expense):
Interest expense, net(33,079)(32,350)(64,917)(64,638)
Other21 45 41 70 
Total other expense(33,058)(32,305)(64,876)(64,568)
Net income before income tax expense9,341 2,840 12,621 3,337 
Income tax expense255 152 281 278 
Net income9,086 2,688 12,340 3,059 
Less: distributions on Preferred Units(12,188)(12,188)(24,375)(24,375)
Net loss attributable to common unitholders’ interests$(3,102)$(9,500)$(12,035)$(21,316)
Weighted average common units outstanding – basic and diluted97,728 97,044 97,547 97,017 
Basic and diluted net loss per common unit$(0.03)$(0.10)$(0.12)$(0.22)
Distributions declared per common unit for respective periods$0.525 $0.525 $1.05 $1.05 
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 (Deficit)
(in thousands, except per unit amounts)
For the Six Months Ended June 30, 2022
Common unitsWarrantsTotal
Partners’ capital ending balance, December 31, 2021
$87,129 $13,979 $101,108 
Distributions and DERs, $0.525 per unit
(51,137) (51,137)
Issuance of common units under the DRIP516  516 
Unit-based compensation for equity classified awards64  64 
Net loss attributable to common unitholders’ interests(8,933) (8,933)
Partners’ capital ending balance, March 31, 202227,639 13,979 41,618 
Distributions and DERs, $0.525 per unit
(51,154) (51,154)
Issuance of common units under the DRIP508  508 
Unit-based compensation for equity classified awards65  65 
Exercise and conversion of warrants into common units5,167 (5,167) 
Net loss attributable to common unitholders’ interests(3,102) (3,102)
Partners’ capital (deficit) ending balance, June 30, 2022$(20,877)$8,812 $(12,065)
For the Six Months Ended June 30, 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, 2021261,835 13,979 275,814 
Vesting of phantom units277  277 
Distributions and DERs, $0.525 per unit
(50,963) (50,963)
Issuance of common units under the DRIP402  402 
Unit-based compensation for equity classified awards54  54 
Net loss attributable to common unitholders’ interests(9,500) (9,500)
Partners’ capital ending balance, June 30, 2021$202,105 $13,979 $216,084 
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)
Six Months Ended June 30,
20222021
Cash flows from operating activities:
Net income$12,340 $3,059 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization118,023 120,257 
Provision for expected credit losses(700)(1,250)
Amortization of debt issuance costs3,637 4,578 
Unit-based compensation expense6,708 8,442 
Deferred income tax benefit(183)(133)
Loss (gain) on disposition of assets852 (2,360)
Impairment of compression equipment432 4,953 
Changes in assets and liabilities:
Accounts receivable and related party receivables, net(4,598)1,646 
Inventories(11,159)(6,490)
Prepaid expenses and other current assets(3,009)(1,645)
Other assets1,562 1,764 
Accounts payable(1,452)2,494 
Accrued liabilities and deferred revenue6,829 3,756 
Net cash provided by operating activities129,282 139,071 
Cash flows from investing activities:
Capital expenditures, net(43,818)(15,435)
Proceeds from disposition of property and equipment764 3,607 
Proceeds from insurance recovery184 1,559 
Net cash used in investing activities(42,870)(10,269)
Cash flows from financing activities:
Proceeds from revolving credit facility382,884 330,687 
Payments on revolving credit facility(340,562)(331,050)
Cash paid related to net settlement of unit-based awards (461)
Cash distributions on common units(103,536)(103,185)
Cash distributions on Preferred Units(24,375)(24,375)
Deferred financing costs(549)(138)
Other(274)(280)
Net cash used in financing activities(86,412)(128,802)
Change in cash and cash equivalents  
Cash and cash equivalents, beginning of period 2 
Cash and cash equivalents, end of period$ $2 
Supplemental cash flow information:
Cash paid for interest, net of capitalized amounts$60,239 $60,416 
Cash paid for income taxes$798 $647 
Supplemental non-cash transactions:
Non-cash distributions to certain common unitholders (DRIP)$1,024 $865 
Transfers from inventories to property and equipment$6,692 $6,661 
Changes in capital expenditures included in accounts payable and accrued liabilities$11,023 $(510)
Changes in financing costs included in accounts payable and accrued liabilities$(265)$120 
Exercise and conversion of warrants into common units$5,167 $ 
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 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.” The General Partner is wholly owned by Energy Transfer.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Partnership and its 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 and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. 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, 2021 filed on February 15, 2022 (our “2021 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.
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 trade accounts receivable measured at amortized cost. Due to the short-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.
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Our determination of the allowance for credit losses requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. 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 variable-rate indebtedness by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was approximately $208,000 and $346,000 for the three and six months ended June 30, 2022, respectively, and approximately $98,000 and $101,000 for the three and six months ended June 30, 2021, 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 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 and six months ended June 30, 2022 and 2021.
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.
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
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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
USA Compression Partners, LP is 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 also imposes on partnerships an entity-level income tax that is based on Texas sourced taxable margin (the “Texas Margin Tax”) and such tax impacts are included in the unaudited condensed consolidated financial statements. Our wholly owned finance subsidiary, USA Compression Finance Corp. (“Finance Corp”), is a corporation for U.S. federal and state income tax purposes and such tax impacts, if any, are also included in the unaudited condensed consolidated financial statements.
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 June 30, 2022, 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):
June 30,
2022
December 31,
2021
Senior Notes 2026, aggregate principal$725,000 $725,000 
Fair value of Senior Notes 2026659,750 755,813 
Senior Notes 2027, aggregate principal750,000 750,000 
Fair value of Senior Notes 2027675,000 787,500 
Operating Segment
We operate in a single business segment, the compression services business.
(3) Trade Accounts Receivable
The allowance for credit losses, which was $1.3 million and $2.1 million as of June 30, 2022 and December 31, 2021, 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, 2021$2,057 
Current-period provision for expected credit losses(700)
Writeoffs charged against the allowance(103)
Balance as of June 30, 2022$1,254 
For the three and six months ended June 30, 2022, we recognized reversals of $0.2 million and $0.7 million, respectively, of our provision for expected credit losses. Favorable market conditions for customers due to higher commodity prices was the primary factor contributing to the decrease to the allowance for credit losses for the three and six months ended June 30, 2022.
For the six months ended June 30, 2021, we recognized a reversal of $1.3 million of our provision for expected credit losses. Improved market conditions for customers due to a recovery in commodity prices was the primary factor contributing to the decrease to the allowance for credit losses for the six months ended June 30, 2021.
(4)  Inventories
Components of inventories are as follows (in thousands):
June 30,
2022
December 31,
2021
Serialized parts$46,619 $44,642 
Non-serialized parts43,585 41,174 
Total inventories$90,204 $85,816 
(5)  Property and Equipment and Identifiable Intangible Assets
Property and Equipment
Property and equipment consisted of the following (in thousands):
June 30,
2022
December 31,
2021
Compression and treating equipment$3,572,197 $3,522,083 
Computer equipment56,104 54,013 
Automobiles and vehicles33,579 31,919 
Leasehold improvements8,849 8,847 
Buildings5,334 5,334 
Furniture and fixtures1,106 1,105 
Land77 77 
Total property and equipment, gross3,677,246 3,623,378 
Less: accumulated depreciation and amortization(1,498,863)(1,401,042)
Total property and equipment, net$2,178,383 $2,222,336 
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 loss (gain) on disposition of assets were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Depreciation expense$51,614 $51,882 $103,334 $105,567 
Loss (gain) on disposition of assets1,031 (1,105)852 (2,360)
On a quarterly basis, we evaluate the future deployment of our idle fleet under current market conditions. For the six months ended June 30, 2022, we determined to retire 10 compressor units for a total of approximately 1,400 horsepower that were previously used to provide compression services in our business. As a result, we recorded an impairment of compression equipment of $0.4 million for the six months ended June 30, 2022.
For the three and six months ended June 30, 2021, we determined to retire 10 and 22 compressor units, respectively, for a total of approximately 4,000 and 9,600 horsepower, respectively, that were previously used to provide compression services in our business. As a result, we recorded impairments of compression equipment of $2.4 million and $5.0 million for the three and six months ended June 30, 2021, respectively.
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 June 30, 2022.
Identifiable Intangible Assets
Identifiable intangible assets, net consisted of the following (in thousands):
Customer RelationshipsTrade NamesTotal
Net balance as of December 31, 2021$276,848 $27,563 $304,411 
Amortization expense(13,052)(1,637)(14,689)
Net balance as of June 30, 2022$263,796 $25,926 $289,722 
Accumulated amortization of intangible assets was $260.9 million and $246.3 million as of June 30, 2022 and December 31, 2021, respectively.
(6)  Other Current Liabilities
Components of other current liabilities included the following (in thousands):
June 30,
2022
December 31,
2021
Accrued sales tax contingencies (1)$44,923 $44,923 
Accrued interest expense31,951 30,850 
Accrued payroll and benefits10,518 8,054 
Accrued unit-based compensation liability17,591 13,280 
Accrued capital expenditures14,544 3,521 
________________________________
(1)Refer to Note 13 for further information on the accrued sales tax contingencies.
(7)  Lease Accounting
Lessor Accounting
In 2014, we granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provided 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.
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During the second quarter of 2021, the customer exercised its bargain purchase option resulting in a gain of $1.1 million recognized within gain on disposition of assets for the three and six months ended June 30, 2021.
Prior to the customer exercising its bargain purchase option, revenue and interest income related to the lease was recognized over the lease term. We recognized maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue and interest income for the six months ended June 30, 2021 were $0.3 million and $0.1 million, respectively.
(8)  Long-term Debt
Our long-term debt, of which there is no current portion, consisted of the following (in thousands):
June 30,
2022
December 31,
2021
Senior Notes 2026, aggregate principal$725,000 $725,000 
Senior Notes 2027, aggregate principal750,000 750,000 
Less: deferred financing costs, net of amortization(16,338)(18,108)
Total senior notes, net1,458,662 1,456,892 
Revolving credit facility558,664 516,342 
Total long-term debt, net$2,017,326 $1,973,234 
Revolving Credit Facility
The Credit Agreement has an aggregate commitment of $1.6 billion (subject to availability under our borrowing base), with a further potential increase of up to $200 million. The Partnership's obligations under the Credit Agreement are guaranteed by the guarantors party to the Credit Agreement, which currently consists of all of the Partnership's subsidiaries. In addition, the Partnership’s obligations under the Credit Agreement are secured by: (i) substantially all of the Partnership’s assets and substantially all of the assets of the guarantors party to the Credit Agreement, excluding real property and other customary exclusions; and (ii) all of the equity interests of the Partnership’s U.S. restricted subsidiaries (subject to customary exceptions). The Credit Agreement matures on December 8, 2026, except that if any portion of the Senior Notes 2026 are outstanding on December 31, 2025, the Credit Agreement will mature on December 31, 2025.
As of June 30, 2022, we had outstanding borrowings under the Credit Agreement of $558.7 million, $1.0 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $360.9 million. Our weighted-average interest rate in effect for all borrowings under the Credit Agreement as of June 30, 2022 was 4.13%, with a weighted-average interest rate of 3.21% for the six months ended June 30, 2022. There were no letters of credit issued as of June 30, 2022. We pay a commitment fee of 0.375% on the unused portion of the Credit Agreement.
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, (a) on or before September 30, 2023, we have availability under the Credit Agreement of at least $250 million and (b) after September 30, 2023, we have availability under the Credit Agreement of at least $100 million.
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, with EBITDA and interest expense annualized for the fiscal quarter most recently ended;
a ratio of total secured indebtedness to EBITDA not greater than 3.0 to 1.0 or less than 0.0 to 1.0, determined as of the last day of each fiscal quarter, with EBITDA annualized for the fiscal quarter most recently ended; and
a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter with EBITDA annualized for the fiscal quarter most recently ended, (i) 5.75 to 1.00 through the second fiscal quarter of 2022, (ii) 5.50 to 1.00 from the third quarter of 2022 through the third quarter of 2023 and (iii) 5.25 to 1.00 thereafter. In addition, the Partnership may increase the applicable ratio by 0.25 for any fiscal quarter during which a Specified Acquisition (as defined in the Credit Agreement) occurs and the following two fiscal quarters, but in no event shall the maximum ratio exceed 5.50 to 1.00 for any fiscal quarter as a result of such increase.
As of June 30, 2022, we were in compliance with all of our covenants under the Credit Agreement.
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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, USA Compression Partners, LP and 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 June 30, 2022, 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 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 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, USA Compression Partners, LP 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 June 30, 2022, 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 and Finance Corp 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 June 30, 2022 and December 31, 2021, 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.
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We have declared and paid quarterly cash distributions per unit to the holders of the Preferred Units of record as follows:
Payment DateDistribution per Preferred Unit
February 5, 2021$24.375 
May 7, 202124.375 
August 6, 202124.375 
November 5, 202124.375 
2021 total distributions
$97.500 
February 4, 2022$24.375 
May 6, 202224.375 
2022 total distributions
$48.750 
Announced Quarterly Distribution
On July 14, 2022, we declared a cash distribution of $24.375 per unit on our Preferred Units. The distribution will be paid on August 5, 2022 to the holders of the Preferred Units of record as of the close of business on July 25, 2022.
Changes in the Preferred Units balance are as follows (in thousands):
Preferred Units
Balance as of December 31, 2021$477,309 
Net income allocated to Preferred Units24,375 
Cash distributions on Preferred Units(24,375)
Balance as of June 30, 2022$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 on or after April 2, 2021, two thirds on or after April 2, 2022, and 100% 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 cash 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 holder of the Preferred Units 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 (Deficit)
Common Units
The change in common units outstanding was as follows:
Units Outstanding
Number of units outstanding as of December 31, 202197,344,707 
Issuance of common units under the DRIP61,700 
Exercise and conversion of warrants into common units534,308 
Number of units outstanding as of June 30, 202297,940,715 
As of June 30, 2022, Energy Transfer held 46,056,228 common units, including 8,000,000 common units held by the General Partner and controlled by Energy Transfer.
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Cash Distributions
We have declared and paid quarterly distributions per unit to our limited partner unitholders of record, including holders of our common 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 5, 2021$0.525 $50.9 $1.1 $52.0 
May 7, 20210.525 50.9 1.1 52.0 
August 6, 20210.525 51.0 1.1 52.1 
November 5, 20210.525 51.0 1.0 52.0 
2021 total distributions
$2.10 $203.8 $4.3 $208.1 
February 4, 2022$0.525 $51.1 $1.2 $52.3 
May 6, 20220.525 51.1 1.2 52.3 
2022 total distributions
$1.05 $102.2 $2.4 $104.6 
Announced Quarterly Distribution
On July 14, 2022, we announced a cash distribution of $0.525 per unit on our common units. The distribution will be paid on August 5, 2022 to common unitholders of record as of the close of business on July 25, 2022.
DRIP
During the six months ended June 30, 2022, distributions of $1.0 million were reinvested under the DRIP resulting in the issuance of 61,700 common units.
Warrants
As of December 31, 2021, we had two tranches of warrants outstanding, which included 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”).
On April 27, 2022, the tranche of Warrants with the right to purchase 5,000,000 common units with a strike price of $17.03 per common unit was exercised in full by the holders. The exercise of the warrants was net settled by the Partnership for 534,308 common units.
As of June 30, 2022, the tranche of Warrants with the right to purchase 10,000,000 common units with a strike price of $19.59 per common unit was outstanding and 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 amount distributed 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 and six months ended June 30, 2022, approximately 1,051,000 and 928,000 incremental unvested phantom units, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive. For the three and six months ended June 30, 2022, approximately 157,000 and 85,000 incremental “in the money” outstanding Warrants, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive.
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For the three and six months ended June 30, 2021, approximately 803,000 and 757,000 incremental unvested phantom units, respectively, were excluded from the calculation of diluted loss per unit because the impact was anti-dilutive, and our then-outstanding Warrants were not included in the computation as they were 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 June 30,Six Months Ended June 30,
2022202120222021
Contract operations revenue$167,853 $154,733 $329,339 $310,202 
Retail parts and services revenue3,608 1,829 5,534 3,873 
Total revenues$171,461 $156,562 $334,873 $314,075 
The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Services provided over time:
Primary term$118,248 $105,213 $226,545 $211,774 
Month-to-month49,605 49,520 102,794 98,428 
Total services provided over time167,853 154,733 329,339 310,202 
Services provided or goods transferred at a point in time3,608 1,829 5,534 3,873 
Total revenues$171,461 $156,562 $334,873 $314,075 
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 June 30, 2022 and December 31, 2021.
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 locationJune 30,
2022
December 31,
2021
Current (1)Deferred revenue$54,545 $51,216 
NoncurrentOther liabilities4,848 4,823 
Total$59,393 $56,039 
________________________________
(1)We recognized $2.9 million and $45.0 million of revenue during the three and six months ended June 30, 2022, respectively, related to our deferred revenue balance as of December 31, 2021.
Performance Obligations
As of June 30, 2022, the aggregate amount of transaction price allocated to unsatisfied performance obligations related to our contract operations revenue was $505.6 million. We expect to recognize these remaining performance obligations as follows (in thousands):
2022 (remainder)
202320242025ThereafterTotal
Remaining performance obligations$209,490 $199,479 $61,640 $21,251 $13,741 $505,601 
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(12) Transactions with Related Parties
We provide compression services to entities affiliated with Energy Transfer, which as of June 30, 2022 owned approximately 47% of our limited partner interests and 100% of the General Partner. Revenue recognized from such affiliated Energy Transfer entities on our unaudited condensed consolidated statements of operations were as follows (in thousands):
Three Months Ended June 30,Six Months Ended June 30,
 2022202120222021
Related party revenues$3,887 $2,944 $7,705 $5,894 
We had approximately $997,000 and $18,000 within related party receivables on our unaudited condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021, respectively, from such affiliated Energy Transfer entities. Additionally, the Partnership had a $44.9 million related party receivable from Energy Transfer as of June 30, 2022 and December 31, 2021 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 and six months ended June 30, 2022 or 2021.
(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)Equipment Purchase Commitments
Our future capital commitments are comprised of binding commitments under purchase orders for new compression units ordered but not received. The commitments as of June 30, 2022 were $53.2 million, all of which is expected to be settled within the next twelve months and $24.2 million of which is expected to be settled in the remainder of 2022.
(d)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.
We are currently protesting certain assessments made by the Oklahoma Tax Commission (“OTC”). We believe it is reasonably possible that we could incur losses related to this assessment depending on whether the administrative law judge assigned by the OTC accepts our position that the transactions are not taxable and we ultimately lose any and all subsequent legal challenges to such determination. We estimate that the range of losses we could incur is from $0 to approximately $19.5 million, including penalty and interest.
As of June 30, 2022 and December 31, 2021, we have recorded a $44.9 million accrued liability and $44.9 million related party receivable from Energy Transfer related to open audits with the Office of the Texas Comptroller of Public Accounts (the “Comptroller”), wherein the Comptroller has challenged the applicability of the manufacturing exemption.
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ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
USA Compression Partners, LP (the “Partnership”) is a growth-oriented Delaware limited partnership. We are managed by our general partner, USA Compression GP, LLC (the “General Partner”), which is wholly owned by Energy Transfer. All references in this section to the Partnership, as well as the terms “our,” “we,” “us” and “its” refer to USA Compression Partners, LP, together with its consolidated subsidiaries, unless the context otherwise requires or where otherwise indicated.
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 annual report on Form 10-K for the year ended December 31, 2021 filed on February 15, 2022 (our “2021 Annual Report”), 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 the severity and duration of world health events, including the COVID-19 pandemic, related economic repercussions, actions taken by governmental authorities and other third parties in response to such events and the resulting disruption in the oil and gas industry and impact on demand for oil and gas;
changes in general economic conditions, including inflation or supply chain disruptions, and changes in economic conditions of the crude oil and natural gas industries, including any impact from the military conflict involving Russia and Ukraine;
competitive conditions in our industry, including competition for employees in a tight labor market;
renegotiation of material terms of customer contracts;
actions taken by our customers, competitors and third-party operators;
changes in the availability and cost of capital, including changes to interest rates;
operating hazards, natural disasters, epidemics, pandemics (such as COVID-19), weather-related impacts, casualty losses and other matters beyond our control;
operational challenges relating to COVID-19 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 deterioration of the financial condition of our customers, which may result in the initiation of bankruptcy proceedings with respect to customers;
the restrictions on our business that are imposed under our long-term debt agreements;
information technology risks including the risk from cyberattacks;
the effects of existing and future laws and governmental regulations;
the effects of future litigation; and
our ability to realize the anticipated benefits of acquisitions.
Many of the foregoing risks and uncertainties are, and will be, exacerbated by the COVID-19 pandemic and any consequent impact on the global business and economic environment. New factors emerge from time to time, and it is not possible for us to predict all such factors. Should one or more of the risks or uncertainties described in this Quarterly Report occur, or should underlying assumptions prove incorrect, actual results and plans could differ materially from those expressed in any forward-looking statements.
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
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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 June 30,Percent
Change
Six Months Ended June 30,Percent
Change
2022202120222021
Fleet horsepower (at period end) (1)3,695,955 3,686,584 0.3 %3,695,955 3,686,584 0.3 %
Total available horsepower (at period end) (2)3,749,145 3,690,724 1.6 %3,749,145 3,690,724 1.6 %
Revenue generating horsepower (at period end) (3)3,048,498 2,912,628 4.7 %3,048,498 2,912,628 4.7 %
Average revenue generating horsepower (4)3,027,886 2,944,909 2.8 %3,003,154 2,969,664 1.1 %
Average revenue per revenue generating horsepower per month (5)$17.20 $16.55 3.9 %$17.03 $16.58 2.7 %
Revenue generating compression units (at period end)4,014 3,934 2.0 %4,014 3,934 2.0 %
Average horsepower per revenue generating compression unit (6)759 748 1.5 %757 753 0.5 %
Horsepower utilization (7):
At period end88.4 %81.9 %7.9 %88.4 %81.9 %7.9 %
Average for the period (8)87.9 %82.4 %6.7 %86.4 %82.7 %4.5 %
________________________________
(1)Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order). As of June 30, 2022, we had 65,000 large horsepower on order for delivery, all of which is expected to be delivered within the next twelve months and 30,000 horsepower of which is expected to be delivered in the remainder of 2022.
(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 June 30, 2022 and 2021 was 82.5% and 79.0%, 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 June 30, 2022 and 2021 was 82.1% and 79.6%, respectively. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for the six months ended June 30, 2022 and 2021 was 81.4% and 80.0%, respectively.
The 1.6% increase in total available horsepower as of June 30, 2022 compared to June 30, 2021 was primarily due to compression units added to our fleet to meet incremental demand from customers for our compression services.
The 4.7% increase in revenue generating horsepower and 2.0% increase in revenue generating compression units as of June 30, 2022 compared to June 30, 2021 were primarily driven by the redeployment of existing compression units due to increased demand for our services commensurate with increased operating activity in the oil and gas industry.
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The 3.9% and 2.7% increases in average revenue per revenue generating horsepower per month during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021, respectively, were primarily due to select price increases on our existing fleet.
The 1.5% and 0.5% increases in average horsepower per revenue generating compression unit during the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021, respectively, were primarily due to the composition of existing compression units redeployed.
Horsepower utilization increased to 88.4% as of June 30, 2022 compared to 81.9% as of June 30, 2021. The increase in horsepower utilization was primarily due to an increase in revenue generating horsepower and an increase in horsepower that is under contract but not yet generating revenue, which was driven by a combination of the redeployment of certain previously idle units as well as new units added to the fleet. We believe the increase in horsepower utilization is the result of increased demand for our services commensurate with increased operating activity in the oil and gas industry. These factors also drove the change in average horsepower utilization for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.
Horsepower utilization based on revenue generating horsepower and fleet horsepower increased to 82.5% as of June 30, 2022 compared to 79.0% as of June 30, 2021. The increase in horsepower utilization based on revenue generating horsepower and fleet horsepower was driven by the redeployment of certain previously idle units due to increased demand for our services commensurate with increased operating activity in the oil and gas industry. This factor also drove the change in average horsepower utilization based on revenue generating horsepower and fleet horsepower for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.

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Financial Results of Operations
Three months ended June 30, 2022 compared to the three months ended June 30, 2021
The following table summarizes our results of operations for the periods presented (dollars in thousands):
Three Months Ended June 30,Percent
Change
20222021
Revenues:
Contract operations$163,969 $151,800 8.0 %
Parts and service3,605 1,818 98.3 %
Related party3,887 2,944 32.0 %
Total revenues171,461 156,562 9.5 %
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization55,158 45,604 20.9 %
Depreciation and amortization58,959 59,227 (0.5)%
Selling, general and administrative13,914 15,288 (9.0)%
Loss (gain) on disposition of assets1,031 (1,105)          *
Impairment of compression equipment— 2,403           *
Total costs and expenses129,062 121,417 6.3 %
Operating income42,399 35,145 20.6 %
Other income (expense):
Interest expense, net(33,079)(32,350)2.3 %
Other21 45 (53.3)%
Total other expense(33,058)(32,305)2.3 %
Net income before income tax expense9,341 2,840 228.9 %
Income tax expense255 152 67.8 %
Net income$9,086 $2,688 238.0 %
________________________________
*Not meaningful
Contract operations revenue. The $12.2 million increase in contract operations revenue for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to (i) select price increases on our existing fleet resulting in a 3.9% increase in average revenue per revenue generating horsepower per month, (ii) a 2.8% increase in average revenue generating horsepower as a result of increased demand for our services commensurate with increased operating activity in the oil and gas industry and (iii) an increase in our natural gas treating services.
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 $1.8 million increase in parts and service revenue for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to an increase in maintenance work performed on units at our customers’ locations that are outside the scope of our core maintenance activities and offered as a convenience 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 Energy Transfer. The $0.9 million increase in related party revenue for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to revenue recognized from entities acquired by Energy Transfer since the previous period.
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Cost of operations, exclusive of depreciation and amortization. The $9.6 million increase in cost of operations, exclusive of depreciation and amortization, for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to (i) a $3.0 million increase in direct expenses, primarily driven by fluids and parts, (ii) a $2.7 million increase in non-income taxes, primarily due to sales tax refunds received in the prior period, (iii) a $1.2 million increase in retail parts and services expenses, which had a corresponding increase in parts and service revenue, (iv) a $0.9 million increase in expenses related to our vehicle fleet, primarily due to increased fuel costs, (v) a $0.9 million increase in direct labor costs due to higher employee costs and (vi) a $0.6 million increase in outside maintenance costs due to greater use and higher costs of third-party labor during the current period. The increases in fluids and fuel costs were primarily related to higher commodity prices and higher usage associated with our increased revenue generating horsepower.
Depreciation and amortization expense. The $0.3 million decrease in depreciation and amortization expense for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to assets reaching the end of their depreciable lives.
Selling, general and administrative expense. The $1.4 million decrease in selling, general and administrative expense for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to a $1.3 million decrease in unit-based compensation expense driven by the overall change in our unit price as of June 30, 2022, and the related mark-to-market change to our unit-based compensation liability.
Loss (gain) on disposition of assets. The $2.1 million decrease in loss (gain) on disposition of assets for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to the exercise of a lease purchase option on certain compression units by a customer during the prior period. The remaining change is primarily related to various disposals in the ordinary course of business.
Impairment of compression equipment. The $2.4 million impairment of compression equipment for the three months ended June 30, 2021 was primarily the result of our evaluations of the future deployment of our idle fleet under the current market conditions at the time. The primary causes for these impairments were: (i) units were not considered marketable in the foreseeable future, (ii) units were subject to excessive maintenance costs or (iii) units were unlikely to be accepted by customers due to certain performance characteristics of the unit, such as the inability to meet current quoting criteria without excessive retrofitting costs. These compression units were written down to their respective estimated salvage values, if any.
As a result of our evaluation during the three months ended June 30, 2021, we determined to retire 10 compressor units for a total of approximately 4,000 horsepower that were previously used to provide compression services in our business.
No impairment was recorded for the three months ended June 30, 2022.
Interest expense, net. The $0.7 million increase in interest expense, net for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily due to higher weighted-average interest rates and increased borrowings under the Credit Agreement, partially offset by a decrease in amortization of debt issuance costs related to the amendment and restatement of the Credit Agreement since the prior period.