USA pression Partners(USAC) - 2021 Q3 - Quarterly Report

GLOSSARY This section defines abbreviations, acronyms, and industry terminology used throughout the Quarterly Report - The glossary provides definitions for abbreviations, acronyms, and industry terminology used in the Quarterly Report, including terms like COVID-19, Credit Agreement, EBITDA, GAAP, Preferred Units, SEC, and Senior Notes[10] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's analysis of financial condition and operations ITEM 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, along with detailed notes on accounting policies and financial line items Unaudited Condensed Consolidated Balance Sheets This section details the company's financial position, including assets, liabilities, and partners' capital Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Total assets | $2,796,551 | $2,948,700 | | Total current assets | $198,939 | $199,555 | | Property and equipment, net | $2,256,930 | $2,380,633 | | Total liabilities | $2,161,717 | $2,133,736 | | Total current liabilities | $167,459 | $170,272 | | Long-term debt, net | $1,961,697 | $1,927,005 | | Preferred Units | $477,309 | $477,309 | | Total partners' capital | $157,525 | $337,655 | - Total assets decreased by approximately $152.1 million from December 31, 2020, to September 30, 2021, primarily driven by a reduction in property and equipment, net, and identifiable intangible assets, net[13] - Long-term debt, net, increased by approximately $34.7 million, while total partners' capital significantly decreased by approximately $180.1 million during the nine-month period[13] Unaudited Condensed Consolidated Statements of Operations This section presents the company's revenues, expenses, and net income or loss over specific periods Condensed Consolidated Statements of Operations Highlights (in thousands, except per unit amounts) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $158,627 | $161,666 | $472,702 | $509,316 | | Total costs and expenses | $121,996 | $122,895 | $368,166 | $1,005,361 | | Operating income (loss) | $36,631 | $38,771 | $104,536 | $(496,045) | | Net income (loss) | $4,115 | $6,519 | $7,174 | $(593,258) | | Net loss attributable to common unitholders' interests | $(8,073) | $(5,669) | $(29,389) | $(629,821) | | Basic and diluted net loss per common unit | $(0.08) | $(0.06) | $(0.30) | $(6.51) | | Distributions declared per common unit | $0.525 | $0.525 | $1.575 | $1.575 | - Total revenues decreased by 1.9% for the three months and 7.2% for the nine months ended September 30, 2021, compared to the same periods in 2020[15] - Net income decreased by 36.9% for the three months ended September 30, 2021, but significantly improved from a net loss of $(593.3) million in the nine months ended September 30, 2020, to a net income of $7.2 million in the same period of 2021, primarily due to the absence of goodwill impairment[15] Unaudited Condensed Consolidated Statements of Changes in Partners' Capital This section details changes in partners' capital, reflecting contributions, distributions, and net income or loss Changes in Partners' Capital (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Partners' capital ending balance, Dec 31 | $337,655 | $1,180,598 | | Vesting of phantom units | $777 | $1,744 | | Distributions and DERs | $(152,881) | $(152,430) | | Issuance of common units under DRIP | $1,303 | $1,412 | | Unit-based compensation | $160 | $166 | | Net loss attributable to common unitholders' interests | $(29,389) | $(629,821) | | Partners' capital ending balance, Sep 30 | $157,525 | $401,669 | - Total partners' capital decreased from $337.7 million at December 31, 2020, to $157.5 million at September 30, 2021, primarily due to distributions and net loss attributable to common unitholders' interests[18] - In the nine months ended September 30, 2020, a significant net loss attributable to common unitholders' interests of $(629.8) million was recorded, largely influenced by a goodwill impairment[18] Unaudited Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $184,368 | $195,651 | | Net cash used in investing activities | $(23,666) | $(94,190) | | Net cash used in financing activities | $(160,454) | $(101,469) | | Increase (decrease) in cash and cash equivalents | $248 | $(8) | | Cash and cash equivalents, end of period | $250 | $2 | - Net cash provided by operating activities decreased by $11.3 million to $184.4 million for the nine months ended September 30, 2021, compared to the same period in 2020[21][171] - Net cash used in investing activities significantly decreased by $70.5 million, primarily due to a $68.5 million decrease in capital expenditures[21][172] - Net cash used in financing activities increased by $59.0 million, mainly due to a decrease in net borrowings under the Credit Agreement and higher cash distributions on common units[21][173] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of the company's organization, accounting policies, and financial line items (1) Organization and Description of Business This note describes the company's business activities and recent organizational changes - USA Compression Partners, LP provides natural gas compression services under fixed-term contracts and natural gas treating services in various U.S. shale plays[23] - The General Partner, USA Compression GP, LLC, became wholly owned by Energy Transfer LP on April 1, 2021, following an internal reorganization[24] (2) Basis of Presentation and Summary of Significant Accounting Policies This note outlines the basis of financial statement preparation and key accounting policies applied - The financial statements are prepared in accordance with GAAP and SEC rules, reflecting normal recurring adjustments, and should be read with the 2020 Annual Report on Form 10-K[26][27] - Key accounting policies cover cash and cash equivalents, trade accounts receivable, allowance for credit losses, inventories, property and equipment, impairment of long-lived assets, identifiable intangible assets, revenue recognition, income taxes, pass-through taxes, and fair value measurements[29][30][31][33][34][37][40][41][42][43][44] Fair Value of Senior Notes (in thousands) | Senior Notes | Sep 30, 2021 (Fair Value) | Dec 31, 2020 (Fair Value) | | :------------- | :------------------------ | :------------------------ | | Senior Notes 2026 | $756,719 | $761,250 | | Senior Notes 2027 | $795,000 | $800,625 | (3) Trade Accounts Receivable This note details the company's trade accounts receivable and the allowance for credit losses Allowance for Credit Losses (in thousands) | Metric | Amount | | :-------------------------------- | :----- | | Balance as of December 31, 2020 | $4,982 | | Current-period provision for expected credit losses | $(2,400) | | Writeoffs charged against the allowance | $(194) | | Balance as of September 30, 2021 | $2,388 | - The allowance for credit losses decreased to $2.4 million as of September 30, 2021, from $5.0 million at December 31, 2020, primarily due to a reversal of $2.4 million in provision for expected credit losses[49][50] - Improved market conditions, including recovery in crude oil and higher natural gas prices, contributed to the decrease in the allowance for credit losses in 2021, contrasting with the $3.7 million provision in 2020 due to low crude oil prices and the COVID-19 pandemic[50][51] (4) Inventories This note provides a breakdown of the company's inventory components Inventories Components (in thousands) | Component | Sep 30, 2021 | Dec 31, 2020 | | :---------------- | :----------- | :----------- | | Serialized parts | $43,227 | $42,233 | | Non-serialized parts | $41,300 | $42,399 | | Total inventories | $84,527 | $84,632 | - Total inventories remained relatively stable at $84.5 million as of September 30, 2021, compared to $84.6 million at December 31, 2020[52] (5) Property and Equipment, Identifiable Intangible Assets and Goodwill This note details property, equipment, intangible assets, and goodwill, including impairment information Property and Equipment, Net (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Total property and equipment, gross | $3,608,637 | $3,582,698 | | Less: accumulated depreciation and amortization | $(1,351,707) | $(1,202,065) | | Total property and equipment, net | $2,256,930 | $2,380,633 | - Net property and equipment decreased by $123.7 million to $2.26 billion as of September 30, 2021, primarily due to increased accumulated depreciation and amortization[53] - Impairment of compression equipment was $5.0 million for the nine months ended September 30, 2021, for 22 retired compressor units, compared to $5.6 million for 27 units in the same period of 2020, due to marketability, excessive maintenance, or inability to meet customer criteria[55][56][57][149][150] - Goodwill impairment of $619.4 million was recognized for the nine months ended September 30, 2020, driven by a decline in common unit market price, global commodity prices, and the COVID-19 pandemic[62][151] (6) Other Current Liabilities This note provides a breakdown of various other current liabilities Components of Other Current Liabilities (in thousands) | Component | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Accrued sales tax contingencies | $44,923 | $44,923 | | Accrued interest expense | $5,601 | $31,125 | | Accrued payroll and benefits | $12,605 | $8,416 | | Accrued unit-based compensation liability | $16,621 | $9,183 | | Accrued property taxes | $8,641 | $4,459 | - Accrued interest expense significantly decreased from $31.1 million to $5.6 million, while accrued payroll and benefits, unit-based compensation liability, and property taxes increased[63] (7) Lease Accounting This note discusses the company's lease accounting practices and related revenue and income - A customer exercised a bargain purchase option on certain compressor packages during Q2 2021, resulting in a $1.1 million gain on disposition of assets[64][65] Maintenance Revenue and Interest Income from Leases (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :----------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Maintenance revenue | $0 | $323 | $323 | $968 | | Interest income | $0 | $87 | $48 | $316 | (8) Long-term Debt This note details the company's long-term debt, including senior notes and revolving credit facility Long-term Debt, Net (in thousands) | Debt Type | Sep 30, 2021 | Dec 31, 2020 | | :-------------------------- | :----------- | :----------- | | Senior Notes 2026, net | $725,000 | $725,000 | | Senior Notes 2027, net | $750,000 | $750,000 | | Revolving credit facility | $505,717 | $473,810 | | Total long-term debt, net | $1,961,697 | $1,927,005 | - Total long-term debt, net, increased by $34.7 million to $1.96 billion as of September 30, 2021, primarily due to increased borrowings under the revolving credit facility[69] - As of September 30, 2021, the company had $505.7 million outstanding under its $1.6 billion revolving credit facility, with $114.3 million available borrowing capacity and a weighted average interest rate of 2.96%[70][71] - The Credit Agreement was amended in August 2020, increasing the maximum funded debt to EBITDA ratio to 5.25 to 1.00 during the 'Covenant Relief Period' (until December 31, 2021) and raising the availability requirement for restricted payments to $250 million[72][73][75] (9) Preferred Units This note describes the terms, distributions, and conversion rights of the company's Preferred Units - There were 500,000 Preferred Units outstanding with a face value of $1,000 per unit, ranking senior to common units for distributions and liquidation rights[83] - Holders are entitled to cumulative quarterly cash distributions of $24.375 per Preferred Unit, with total distributions of $73.125 per unit for the nine months ended September 30, 2021[83][85] - Preferred Units are convertible into common units at the holder's option, with conversion eligibility phased in from April 2021 to April 2023, and the company having a redemption option from April 2023[87] (10) Partners' Capital This note details the composition and changes in partners' capital, including common units and distributions Common Units Outstanding | Metric | Units Outstanding | | :----------------------------------- | :---------------- | | Number of units outstanding as of Dec 31, 2020 | 96,962,323 | | Vesting of phantom units | 44,679 | | Issuance of common units under the DRIP | 89,135 | | Number of units outstanding as of Sep 30, 2021 | 97,096,137 | - Common units outstanding increased to 97,096,137 as of September 30, 2021, from 96,962,323 at December 31, 2020, partly due to DRIP issuances[88] - Cash distributions of $0.525 per common unit were declared quarterly, totaling $1.575 per unit for the nine months ended September 30, 2021[89] - Warrants to purchase 15 million common units (5 million at $17.03, 10 million at $19.59) were outstanding but not included in diluted loss per unit calculations as they were anti-dilutive or not 'in the money'[92][94] (11) Revenue Recognition This note disaggregates revenue by service type and outlines unsatisfied performance obligations Disaggregation of Revenue by Type of Service (in thousands) | Revenue Type | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Contract operations revenue | $154,554 | $159,682 | $464,756 | $501,685 | | Retail parts and services revenue | $4,073 | $1,984 | $7,946 | $7,631 | | Total revenues | $158,627 | $161,666 | $472,702 | $509,316 | - Contract operations revenue decreased by 3.2% for the three months and 7.4% for the nine months ended September 30, 2021, while retail parts and services revenue increased significantly[96] - As of September 30, 2021, unsatisfied performance obligations related to contract operations revenue totaled $440.6 million, with $96.6 million expected to be recognized in the remainder of 2021 and $220.8 million in 2022[99] (12) Transactions with Related Parties This note discloses revenues and receivables from transactions with related parties Related Party Revenues (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Related party revenues | $2,883 | $3,048 | $8,777 | $9,127 | - Related party revenues from ET affiliated entities were consistent period over period, with a slight decrease for both the three and nine months ended September 30, 2021[100] - A $44.9 million related party receivable from ET was recorded as of September 30, 2021, and December 31, 2020, related to indemnification for sales tax contingencies[100][105] (13) Commitments and Contingencies This note outlines the company's commitments and potential liabilities from legal and tax matters - No single customer represented 10% or more of total revenue for the three and nine months ended September 30, 2021 or 2020[101] - The company is protesting sales tax assessments by the Oklahoma Tax Commission, with an estimated range of losses from $0 to approximately $21.8 million, including penalty and interest, though the upper end is considered remote[104] - A $44.9 million accrued liability and related party receivable from ET exist for open audits with the Office of the Texas Comptroller of Public Accounts[105] (14) Recent Accounting Pronouncements This note discusses the impact of recently issued accounting standards on the financial statements - The company intends to adopt ASU 2020-04 (Reference Rate Reform) if modifications to the Credit Agreement meet the criteria for optional expedients and exceptions[106] - ASU 2020-06 (Accounting for Convertible Instruments) will be adopted on January 1, 2022, with no expected material impact on consolidated financial statements[107][108] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial condition, operating results, liquidity, and capital resources, including non-GAAP measures DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This section outlines the nature of forward-looking statements and associated risks in the report - The report contains forward-looking statements regarding plans, strategies, prospects, and expectations, identifiable by words like 'believe,' 'expect,' 'intend,' and 'will'[111] - Key risk factors include changes in crude oil and natural gas supply/demand, the severity and duration of the COVID-19 pandemic, general economic conditions, customer financial health, competition, capital availability, operating hazards, and regulatory changes[112] - All forward-looking statements are based on information available at the report date, and the company undertakes no obligation to update them, except as required by law[113] Operating Highlights This section presents key operational metrics, including fleet horsepower and utilization rates Horsepower and Utilization Metrics | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change (3M) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change (9M) | | :------------------------------------------ | :-------------------------- | :-------------------------- | :------------ | :-------------------------- | :-------------------------- | :------------ | | Fleet horsepower (at period end) | 3,687,601 | 3,725,053 | (1.0)% | 3,687,601 | 3,725,053 | (1.0)% | | Revenue generating horsepower (at period end) | 2,919,362 | 3,009,773 | (3.0)% | 2,919,362 | 3,009,773 | (3.0)% | | Average revenue generating horsepower | 2,914,100 | 3,042,786 | (4.2)% | 2,951,142 | 3,184,952 | (7.3)% | | Average revenue per revenue generating horsepower per month | $16.62 | $16.62 | — % | $16.59 | $16.77 | (1.1)% | | Horsepower utilization (at period end) | 83.0 % | 83.2 % | (0.2)% | 83.0 % | 83.2 % | (0.2)% | | Average horsepower utilization for the period | 82.3 % | 83.9 % | (1.9)% | 82.6 % | 88.1 % | (6.2)% | - Fleet horsepower and revenue generating horsepower decreased by 1.0% and 3.0% respectively, as of September 30, 2021, compared to the prior year, mainly due to a lease purchase option exercise, impaired units, and customer returns[117][118] - Average horsepower utilization decreased by 1.9% for the three months and 6.2% for the nine months ended September 30, 2021, primarily due to increased idle horsepower from customer returns and continued capital discipline[120][121] Financial Results of Operations This section analyzes the company's financial performance, comparing revenues, costs, and net income across periods Three months ended September 30, 2021 compared to the three months ended September 30, 2020 This section compares financial results for the three months ended September 30, 2021, against the prior year Key Financial Results (3 Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | % Change | | :------------------------------------------ | :----- | :----- | :------- | | Total revenues | $158,627 | $161,666 | (1.9)% | | Contract operations revenue | $151,622 | $156,632 | (3.2)% | | Parts and service revenue | $4,122 | $1,986 | * | | Total costs and expenses | $121,996 | $122,895 | (0.7)% | | Operating income | $36,631 | $38,771 | (5.5)% | | Net income | $4,115 | $6,519 | (36.9)% | - Contract operations revenue decreased by $5.0 million (3.2%) due to lower demand and a 4.2% decrease in average revenue generating horsepower, partially offset by units moving to full billing rates[124] - Parts and service revenue increased by $2.1 million due to more maintenance work outside core activities and reimbursable charges[126] - Cost of operations (exclusive of D&A) increased by $2.4 million, driven by higher retail parts/services expenses, property taxes, outside maintenance, and vehicle fleet costs, partially offset by decreases in direct expenses and labor[128] - Selling, general and administrative expense increased by $0.8 million, mainly due to a $2.2 million rise in unit-based compensation expense (mark-to-market change) and higher other taxes, partially offset by a $1.1 million decrease in provision for expected credit losses (improved market conditions) and reduced employee-related expenses[130][131] Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 This section compares financial results for the nine months ended September 30, 2021, against the prior year Key Financial Results (9 Months Ended Sep 30, in thousands) | Metric | 2021 | 2020 | % Change | | :------------------------------------------ | :----- | :----- | :------- | | Total revenues | $472,702 | $509,316 | (7.2)% | | Contract operations revenue | $455,947 | $492,419 | (7.4)% | | Total costs and expenses | $368,166 | $1,005,361 | * | | Operating income (loss) | $104,536 | $(496,045) | * | | Net income (loss) | $7,174 | $(593,258) | * | | Impairment of goodwill | $0 | $619,411 | * | - Contract operations revenue decreased by $36.5 million (7.4%) due to reduced demand, a 7.3% decrease in average revenue generating horsepower, and a 1.1% decrease in average revenue per horsepower per month[138] - Cost of operations (exclusive of D&A) decreased by $12.5 million, driven by lower direct labor, fluids/parts, non-income taxes (sales tax refunds), and training expenses, partially offset by increased outside maintenance and vehicle fleet costs[142][143] - Selling, general and administrative expense decreased by $2.8 million, primarily due to a $6.1 million decrease in provision for expected credit losses (improved market conditions) and reduced employee-related/severance expenses, offset by a $7.9 million increase in unit-based compensation expense[146][147] - A $2.2 million increase in gain on disposition of assets was primarily due to a customer exercising a lease purchase option[148] - Goodwill impairment of $619.4 million was recognized in the prior year (Q1 2020) due to market price decline, commodity price decline, and the COVID-19 pandemic, with no remaining goodwill subsequently[151] - Interest expense, net, increased by $0.6 million due to increased borrowings under the Credit Agreement, partially offset by lower weighted average interest rates[152][153] Other Financial Data This section presents additional financial metrics, including gross margin, Adjusted EBITDA, and Distributable Cash Flow Other Financial Data (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | % Change (3M) | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | % Change (9M) | | :-------------------------- | :-------------------------- | :-------------------------- | :------------ | :-------------------------- | :-------------------------- | :------------ | | Gross margin | $50,203 | $54,879 | (8.5)% | $149,789 | $174,296 | (14.1)% | | Adjusted gross margin | $109,468 | $114,951 | (4.8)% | $329,311 | $353,468 | (6.8)% | | Adjusted gross margin percentage | 69.0 % | 71.1 % | (3.0)% | 69.7 % | 69.4 % | 0.4 % | | Adjusted EBITDA | $99,634 | $103,940 | (4.1)% | $299,175 | $315,605 | (5.2)% | | Adjusted EBITDA percentage | 62.8 % | 64.3 % | (2.3)% | 63.3 % | 62.0 % | 2.1 % | | DCF | $51,973 | $56,911 | (8.7)% | $157,089 | $170,299 | (7.8)% | | DCF Coverage Ratio | 1.02 x | 1.12 x | (8.9)% | 1.03 x | 1.12 x | (8.0)% | | Cash Coverage Ratio | 1.03 x | 1.13 x | (8.8)% | 1.04 x | 1.13 x | (8.0)% | - Gross margin decreased by 8.5% for the three months and 14.1% for the nine months ended September 30, 2021, primarily due to decreased revenues and increased cost of operations[156][157] - Adjusted EBITDA decreased by 4.1% for the three months and 5.2% for the nine months, mainly driven by a decrease in Adjusted gross margin[160][161] - Distributable Cash Flow (DCF) decreased by 8.7% for the three months and 7.8% for the nine months, leading to corresponding decreases in DCF Coverage Ratio and Cash Coverage Ratio[162][163][164] Liquidity and Capital Resources This section discusses the company's liquidity needs, capital expenditure plans, and sources of funding Overview This overview outlines the company's primary liquidity needs and funding sources - Primary liquidity needs include financing compression unit purchases, capital expenditures, debt service, working capital, and distributions[165] - Principal liquidity sources are cash from operations, Credit Agreement borrowings, and debt/equity issuances (including DRIP)[165] - The company may delay discretionary capital spending, amend the Credit Agreement, or reduce distributions if market conditions worsen or covenant violations are predicted[166] Capital Expenditures This section details the company's maintenance and expansion capital expenditure plans - Maintenance capital expenditures for the nine months ended September 30, 2021, were $14.8 million, with a full-year 2021 plan of approximately $20.0 million[169] - Expansion capital expenditures for the nine months ended September 30, 2021, were $25.9 million, significantly down from $84.6 million in 2020, with a full-year 2021 budget of $30.0 million to $40.0 million[170] Cash Flows This section summarizes cash flows from operating, investing, and financing activities Summary of Cash Flows (in thousands) | Cash Flow Type | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $184,368 | $195,651 | | Net cash used in investing activities | $(23,666) | $(94,190) | | Net cash used in financing activities | $(160,454) | $(101,469) | - Net cash provided by operating activities decreased by $11.3 million, while net cash used in investing activities decreased by $70.5 million due to lower capital expenditures[171][172] - Net cash used in financing activities increased by $59.0 million, driven by decreased net borrowings under the Credit Agreement and higher common unit distributions[173] Revolving Credit Facility This section details the company's revolving credit facility, including outstanding borrowings and covenants - As of September 30, 2021, the company had $505.7 million outstanding borrowings under the Credit Agreement, with $114.3 million available borrowing capacity[174] - The Credit Agreement was amended to increase the maximum funded debt to EBITDA ratio to 5.25 to 1.00 during the Covenant Relief Period (ending December 31, 2021) and raise the availability requirement for restricted payments to $250 million[176][177] Senior Notes This section describes the company's outstanding Senior Notes, including principal amounts and interest rates - As of September 30, 2021, $725.0 million aggregate principal amount of Senior Notes 2026 (6.875% interest, due April 1, 2026) and $750.0 million of Senior Notes 2027 (6.875% interest, due September 1, 2027) were outstanding[179][180] DRIP This section explains the distributions reinvested under the Distribution Reinvestment Plan (DRIP) - During the nine months ended September 30, 2021, $1.3 million in distributions were reinvested under the DRIP, resulting in the issuance of 89,135 common units[182] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures used by management to evaluate performance Adjusted Gross Margin This section defines and reconciles Adjusted Gross Margin, a non-GAAP measure of operating profitability - Adjusted gross margin, a non-GAAP measure, is defined as revenue less cost of operations (exclusive of depreciation and amortization) and is used to assess operating profitability[183] Adjusted Gross Margin Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Gross margin | $50,203 | $54,879 | $149,789 | $174,296 | | Depreciation and amortization | $59,265 | $60,072 | $179,522 | $179,172 | | Adjusted gross margin | $109,468 | $114,951 | $329,311 | $353,468 | Adjusted EBITDA This section defines and reconciles Adjusted EBITDA, a key non-GAAP measure for operational performance and cash generation - Adjusted EBITDA is defined as net income (loss) adjusted for interest, taxes, depreciation, amortization, impairment, unit-based compensation, severance, transaction expenses, and disposition gains/losses[185] - It is a primary tool for management and external users to evaluate operational performance, asset financial performance, capital expenditure viability, and cash generation for debt payments and distributions[185][186][189] Adjusted EBITDA Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $4,115 | $6,519 | $7,174 | $(593,258) | | EBITDA | $95,914 | $98,863 | $284,146 | $(316,806) | | Adjusted EBITDA | $99,634 | $103,940 | $299,175 | $315,605 | Distributable Cash Flow This section defines and reconciles Distributable Cash Flow (DCF), a non-GAAP measure for unitholder distributions - DCF is defined as net income (loss) adjusted for non-cash items, depreciation, amortization, unit-based compensation, impairment, transaction expenses, severance, disposition gains/losses, insurance recovery, less Preferred Unit distributions and maintenance capital expenditures[193] - DCF is used to compare basic cash flows (after Preferred Unit distributions) to expected common unitholder distributions and to compute the coverage ratio[194] Distributable Cash Flow Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $4,115 | $6,519 | $7,174 | $(593,258) | | DCF | $51,973 | $56,911 | $157,089 | $170,299 | Coverage Ratios This section defines and presents the DCF Coverage Ratio and Cash Coverage Ratio, measuring distribution capacity - DCF Coverage Ratio (DCF divided by common unitholder distributions) and Cash Coverage Ratio (DCF divided by cash distributions after DRIP impact) measure the ability to pay cash distributions[200] Coverage Ratios | Metric | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2020 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2020 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | DCF Coverage Ratio | 1.02 x | 1.12 x | 1.03 x | 1.12 x | | Cash Coverage Ratio | 1.03 x | 1.13 x | 1.04 x | 1.13 x | - Both DCF Coverage Ratio and Cash Coverage Ratio decreased for the three and nine months ended September 30, 2021, compared to the prior year, primarily due to a decrease in DCF[164][201] Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet financing activities - The company has no off-balance sheet financing activities[203] Recent Accounting Pronouncements This section refers to Note 14 for details on recent accounting pronouncements - For recent accounting pronouncements, refer to Note 14 to the unaudited condensed consolidated financial statements[204] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks, including commodity price, interest rate, and credit risks Commodity Price Risk This section discusses the company's indirect exposure to natural gas and crude oil price fluctuations - The company has no direct exposure to fluctuating commodity prices (natural gas or crude oil) as it does not take title to them, but demand for services is indirectly dependent on these prices[206] - A one percent decrease in average revenue generating horsepower for the nine months ended September 30, 2021, would result in an annual decrease of approximately $5.9 million in revenue and $4.1 million in Adjusted gross margin[206] Interest Rate Risk This section details the company's exposure to variable interest rates on its financing arrangements - The company is exposed to market risk from variable interest rates on its financing arrangements, with $505.7 million of variable-rate indebtedness outstanding at a weighted average interest rate of 2.96% as of September 30, 2021[207] - A one percent increase or decrease in the effective interest rate on variable-rate debt would result in an annual change of approximately $5.1 million in interest expense[207] Credit Risk This section addresses credit exposure related to customer receivables and market volatility - Credit exposure primarily relates to receivables for services provided, and the ability of customers to pay may be adversely affected by the COVID-19 pandemic and crude oil market volatility[209] ITEM 4. Controls and Procedures This section details management's evaluation of disclosure controls and procedures and reports on changes in internal control over financial reporting Management's Evaluation of Disclosure Controls and Procedures This section presents management's conclusion on the effectiveness of disclosure controls and procedures - Management, including the principal executive and financial officers, concluded that disclosure controls and procedures were effective as of September 30, 2021, at the reasonable assurance level[211] Changes in Internal Control over Financial Reporting This section reports on any material changes in internal control over financial reporting - There were no changes in internal control over financial reporting during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[212] PART II. OTHER INFORMATION This part includes information on legal proceedings, risk factors, and exhibits not covered in the financial information section ITEM 1. Legal Proceedings This section addresses the company's involvement in legal proceedings, stating management's opinion on their potential financial impact - Management believes that the resolution of various legal or governmental proceedings and litigation arising in the ordinary course of business is not expected to have a material adverse effect on the consolidated financial position, results of operations, or cash flows[215] ITEM 1A. Risk Factors This section directs readers to the company's annual report for a comprehensive discussion of risk factors that could materially affect its results - Security holders and potential investors are advised to carefully consider the risk factors detailed in Part I, Item 1A. 'Risk Factors' of the 2020 Annual Report on Form 10-K and subsequent SEC filings[216] ITEM 6. Exhibits This section lists all documents filed or incorporated by reference as part of the quarterly report, including certifications and financial statements - The report includes certifications from the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) and financial statements formatted in Inline XBRL (Exhibit 101.1)[217] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers, certifying the report - The report was signed on November 2, 2021, by Matthew C. Liuzzi, Vice President, Chief Financial Officer and Treasurer, and G. Tracy Owens, Vice President of Finance and Chief Accounting Officer, on behalf of USA Compression Partners, LP's General Partner[221]