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Table of Contents

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 September 30, 2020
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 October 29, 2020, there were 96,903,512 common units outstanding.



Table of Contents
TABLE OF CONTENTS
Page



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

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Table of Contents
PART I.  FINANCIAL INFORMATION
ITEM 1.    Financial Statements
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Balance Sheets
(in thousands)
September 30,
2020
December 31,
2019
Assets
Current assets:
Cash and cash equivalents$2 $10 
Accounts receivable:
Trade, net of allowances for credit losses of $5,204 and $2,479, respectively
71,308 80,276 
Other5,366 11,057 
Related party receivables44,942 45,461 
Inventories89,538 91,923 
Prepaid expenses and other assets2,931 2,196 
Total current assets214,087 230,923 
Property and equipment, net2,419,437 2,482,943 
Lease right-of-use assets23,556 18,317 
Identifiable intangible assets, net341,136 363,171 
Goodwill 619,411 
Other assets13,116 15,642 
Total assets$3,011,332 $3,730,407 
Liabilities, Preferred Units and Partners’ Capital
Current liabilities:
Accounts payable$12,274 $21,703 
Accrued liabilities88,003 119,383 
Deferred revenue45,537 48,289 
Total current liabilities145,814 189,375 
Long-term debt, net1,949,176 1,852,360 
Operating lease liabilities21,980 17,343 
Other liabilities15,384 13,422 
Total liabilities2,132,354 2,072,500 
Commitments and contingencies
Preferred Units477,309 477,309 
Partners’ capital:
Common units, 96,903 and 96,632 units issued and outstanding, respectively
387,690 1,166,619 
Warrants13,979 13,979 
Total partners’ capital401,669 1,180,598 
Total liabilities, Preferred Units and partners’ capital$3,011,332 $3,730,407 
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per unit amounts)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Revenues:
Contract operations$156,632 $166,197 $492,419 $493,110 
Parts and service1,986 4,460 7,770 11,544 
Related party3,048 5,099 9,127 15,523 
Total revenues161,666 175,756 509,316 520,177 
Costs and expenses:
Cost of operations, exclusive of depreciation and amortization46,715 57,423 155,848 170,693 
Depreciation and amortization60,072 57,513 179,172 173,220 
Selling, general and administrative12,716 16,631 45,416 48,836 
Loss (gain) on disposition of assets1,686 (1,975)(115)(389)
Impairment of compression equipment1,706  5,629 3,234 
Impairment of goodwill  619,411  
Total costs and expenses122,895 129,592 1,005,361 395,594 
Operating income (loss)38,771 46,164 (496,045)124,583 
Other income (expense):
Interest expense, net(32,004)(32,626)(96,297)(94,162)
Other20 21 67 53 
Total other expense(31,984)(32,605)(96,230)(94,109)
Net income (loss) before income tax expense6,787 13,559 (592,275)30,474 
Income tax expense268 244 983 623 
Net income (loss)6,519 13,315 (593,258)29,851 
Less: distributions on Preferred Units(12,188)(12,188)(36,563)(36,563)
Net income (loss) attributable to common and Class B unitholders’ interests$(5,669)$1,127 $(629,821)$(6,712)
Net income (loss) attributable to:
Common units$(5,669)$2,084 $(629,821)$1,043 
Class B Units$ $(957)$ $(7,755)
Weighted average common units outstanding – basic96,882 94,625 96,776 91,648 
Weighted average common units outstanding – diluted96,882 94,846 96,776 91,817 
Weighted average Class B Units outstanding – basic and diluted 2,017  4,921 
Basic and diluted net income (loss) per common unit$(0.06)$0.02 $(6.51)$0.01 
Basic and diluted net loss per Class B Unit$ $(0.47)$ $(1.58)
Distributions declared per common unit for respective periods$0.525 $0.525 $1.575 $1.575 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital
(in thousands, except per unit amounts)
For the Nine Months Ended September 30, 2020
Common unitsWarrantsTotal
Partners’ capital ending balance, December 31, 2019$1,166,619 $13,979 $1,180,598 
Vesting of phantom units1,065  1,065 
Distributions and DERs, $0.525 per unit
(50,755) (50,755)
Issuance of common units under the DRIP301  301 
Unit-based compensation for equity classified awards55  55 
Net loss attributable to common unitholders’ interests(614,648) (614,648)
Partners’ capital ending balance, March 31, 2020502,637 13,979 516,616 
Vesting of phantom units659  659 
Distributions and DERs, $0.525 per unit
(50,801) (50,801)
Issuance of common units under the DRIP612  612 
Unit-based compensation for equity classified awards56  56 
Net loss attributable to common unitholders’ interests(9,504) (9,504)
Partners’ capital ending balance, June 30, 2020443,659 13,979 457,638 
Vesting of phantom units20  20 
Distributions and DERs, $0.525 per unit
(50,874) (50,874)
Issuance of common units under the DRIP499  499 
Unit-based compensation for equity classified awards55  55 
Net loss attributable to common unitholders’ interests(5,669) (5,669)
Partners' capital ending balance, September 30, 2020$387,690 $13,979 $401,669 
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital
(continued)
(in thousands, except per unit amounts)
For the Nine Months Ended September 30, 2019
Common unitsClass B UnitsWarrantsTotal
Partners’ capital ending balance, December 31, 2018$1,289,731 $75,146 $13,979 $1,378,856 
Vesting of phantom units2,357   2,357 
Distributions and DERs, $0.525 per unit
(47,259)  (47,259)
Issuance of common units under the DRIP252   252 
Unit-based compensation for equity classified awards36   36 
Net loss attributable to common and Class B unitholders’ interests(2,088)(3,512) (5,600)
Partners’ capital ending balance, March 31, 20191,243,029 71,634 13,979 1,328,642 
Vesting of phantom units539   539 
Distributions and DERs, $0.525 per unit
(47,351)  (47,351)
Issuance of common units under the DRIP227   227 
Unit-based compensation for equity classified awards41   41 
Net income (loss) attributable to common and Class B unitholders’ interests1,047 (3,286) (2,239)
Partners’ capital ending balance, June 30, 20191,197,532 68,348 13,979 1,279,859 
Vesting of phantom units30   30 
Distributions and DERs, $0.525 per unit
(47,373)  (47,373)
Issuance of common units under the DRIP236   236 
Unit-based compensation for equity classified awards41   41 
Net income (loss) attributable to common and Class B unitholders’ interests2,084 (957) 1,127 
Conversion of Class B Units to common units67,391 (67,391)  
Partners' capital ending balance, September 30, 2019$1,219,941 $ $13,979 $1,233,920 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)​
Nine Months Ended September 30,
20202019
Cash flows from operating activities:
Net income (loss)$(593,258)$29,851 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization179,172 173,220 
Provision for expected credit losses3,700 300 
Amortization of debt issuance costs6,113 5,620 
Unit-based compensation expense4,071 7,930 
Deferred income tax expense350 352 
Gain on disposition of assets(115)(389)
Impairment of compression equipment5,629 3,234 
Impairment of goodwill619,411  
Changes in assets and liabilities:
Accounts receivable and related party receivables, net14,403 (7,103)
Inventories(12,106)(21,223)
Prepaid expenses and other current assets(735)(1,768)
Other assets2,445 1,783 
Other liabilities1,829 (8)
Accounts payable(4,097)2,468 
Accrued liabilities and deferred revenue(31,161)14,613 
Net cash provided by operating activities195,651 208,880 
Cash flows from investing activities:
Capital expenditures, net(97,881)(134,146)
Proceeds from disposition of property and equipment2,367 22,165 
Proceeds from insurance recovery1,324 3,754 
Net cash used in investing activities(94,190)(108,227)
Cash flows from financing activities:
Proceeds from revolving credit facility628,804 653,721 
Proceeds from issuance of senior notes 750,000 
Payments on revolving credit facility(534,628)(1,308,731)
Cash paid related to net settlement of unit-based awards(1,125)(1,714)
Cash distributions on common units(153,541)(143,158)
Cash distributions on Preferred Units(36,563)(36,563)
Deferred financing costs(3,780)(13,517)
Other(636)(788)
Net cash used in financing activities(101,469)(100,750)
Decrease in cash and cash equivalents(8)(97)
Cash and cash equivalents, beginning of period10 99 
Cash and cash equivalents, end of period$2 $2 
Supplemental cash flow information:
Cash paid for interest, net of capitalized amounts$115,973 $99,646 
Cash paid for income taxes$633 $173 
Supplemental non-cash transactions:
Non-cash distributions to certain common unitholders (DRIP)$1,412 $715 
Transfers from inventories to property and equipment$13,401 $17,686 
Changes in capital expenditures included in accounts payable and accrued liabilities$(9,536)$3,825 
Financing costs included in accounts payable and accrued liabilities$115 $ 
Conversion of Class B Units to common units$ $67,391 
See accompanying notes to unaudited condensed consolidated financial statements.
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USA COMPRESSION PARTNERS, LP
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Description of Business
Unless otherwise indicated, the terms “our,” “we,” “us,” “the Partnership” and similar language refer to USA Compression Partners, LP, collectively with its consolidated operating subsidiaries.
We are a Delaware limited partnership. Through our operating subsidiaries, we provide compression services under fixed-term contracts with customers in the natural gas and crude oil industries, using natural gas compression packages that we design, engineer, own, operate and maintain. We also own and operate a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling, and dehydration. We primarily provide compression services in a number of shale plays throughout the U.S., including the Utica, Marcellus, Permian Basin, Delaware Basin, Eagle Ford, Mississippi Lime, Granite Wash, Woodford, Barnett, Haynesville, Niobrara and Fayetteville shales.
USA Compression GP, LLC, a Delaware limited liability company, serves as our general partner and is referred to herein as the “General Partner.” The General Partner is wholly-owned by ETO.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Partnership and its operating subsidiaries, all of which are wholly-owned by us.
(2) Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC.
In the opinion of our management, such financial information reflects all normal recurring adjustments necessary for a fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. 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, 2019 filed on February 18, 2020 (our “2019 Annual Report”).
Use of Estimates
Our unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which includes the use of estimates and assumptions by management that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities that existed at the date of the unaudited condensed consolidated financial statements. Although these estimates were based on management’s available knowledge of current and expected future events, actual results could differ from these estimates.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents consist of all cash balances. We consider investments in highly liquid financial instruments purchased with an original maturity of 90 days or less to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest.
Allowance for Credit Losses
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments. On January 1, 2020, we adopted Topic 326 using the modified retrospective approach, which was effective for interim and annual reporting periods beginning on or after December 15, 2019. Topic 326 requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets.
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To adopt Topic 326, we evaluated our allowance for credit losses related to our two financial assets measured at amortized cost: (i) trade accounts receivable and (ii) net investment in lease related to our sales-type lease discussed further in Note 7. Due to the short-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. There was no cumulative effect adjustment to partners’ capital upon adoption.
Our determination of the allowance for credit losses requires us to make estimates and judgments regarding our customers’ ability to pay amounts due and is the same process for both of our financial assets as they have similar risk characteristics. We continuously evaluate the financial strength of our customers based on collection experience, the overall business climate in which our customers operate and specific identification of customer credit losses and make adjustments to the allowance as necessary. Our evaluation of our customers’ financial strength is based on the aging of their respective receivables balance, customer correspondence, financial information and third-party credit ratings. Our evaluation of the business climate in which our customers operate is based on a review of various publicly available materials regarding our customers’ industries, 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 our statements of operations in the period of sale or disposition.
Capitalized interest is calculated by multiplying the Partnership’s monthly effective interest rate on outstanding debt by the amount of qualifying costs, which include upfront payments to acquire certain compression units. Capitalized interest was $6,000 and $0.2 million for the three and nine months ended September 30, 2020, respectively, and $0.1 million and $0.5 million for the three and nine months ended September 30, 2019, respectively.
Impairment of Long-Lived Assets
Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written-down to estimated fair value. We test long-lived assets for impairment when events or circumstances indicate that the assets’ carrying value may not be recoverable or will no longer be utilized in the operating fleet. The most common circumstance requiring compression units to be evaluated for impairment is when idle units do not meet the desired performance characteristics of our active revenue generating horsepower.
The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value of the long-lived asset exceeds the sum of the undiscounted cash flows associated with the asset, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.
Refer to Note 5 for more detailed information about impairment charges during the three and nine months ended September 30, 2020 and 2019.
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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.
Goodwill
Goodwill represents consideration paid in excess of the fair value of the identifiable net assets acquired in a business combination. Goodwill is not amortized, but is reviewed for impairment annually based on the carrying values as of October 1, or more frequently if impairment indicators arise that suggest the carrying value of goodwill may not be recovered.
Refer to Note 5 for more detailed information about goodwill impairment charges during the nine months ended September 30, 2020.
Revenue Recognition
Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of our services or goods. Revenue is measured at the amount of consideration we expect to receive in exchange for providing services or transferring goods. Incidental items, if any, that are immaterial in the context of the contract are recognized as expenses.
Income Taxes
We are organized as a partnership for U.S. federal and state income tax purposes. As a result, our partners are responsible for U.S. federal and state income taxes based upon their distributive share of our items of income, gain, loss or deduction. Texas imposes an entity-level income tax on partnerships that is based on Texas sourced taxable margin (the “Texas Margin Tax”). We have included in the unaudited condensed consolidated financial statements a provision for the Texas Margin Tax.
Pass Through Taxes
Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.
Fair Value Measurements
Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset or liability.
As of September 30, 2020, 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.
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The following table summarizes the aggregate principal amount and fair value of our Senior Notes 2026 and Senior Notes 2027 (in thousands):
September 30,
2020
December 31,
2019
Senior Notes 2026, aggregate principal$725,000 $725,000 
Fair value of Senior Notes 2026725,000 764,875 
Senior Notes 2027, aggregate principal$750,000 $750,000 
Fair value of Senior Notes 2027746,250 785,625 
Operating Segment
We operate in a single business segment, the compression services business.
(3) Trade Accounts Receivable
The allowance for credit losses, which was $5.2 million and $2.5 million as of September 30, 2020 and December 31, 2019, respectively, is our best estimate of the amount of probable credit losses included in our existing accounts receivable.
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, 2019$2,479 
Current-period provision for expected credit losses (1)3,700 
Writeoffs charged against the allowance(975)
Balance as of September 30, 2020$5,204 
______________________
(1)There was no provision for expected credit losses recognized during the three months ended September 30, 2020.
Low crude oil prices, driven by decreased demand for and global oversupply of crude oil as a result of the COVID-19 pandemic, is the primary factor contributing to the increase to the allowance for credit losses for the nine months ended September 30, 2020. We cannot predict the duration of these conditions or the severity of their impact on our customers and the collectability of their accounts receivable.
(4)  Inventories​
Components of inventories are as follows (in thousands):
September 30,
2020
December 31,
2019
Serialized parts$45,357 $43,890 
Non-serialized parts44,181 48,033 
Total inventories$89,538 $91,923 

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(5)  Property and Equipment, Identifiable Intangible Assets and Goodwill
Property and Equipment
Property and equipment consisted of the following (in thousands):
September 30,
2020
December 31,
2019
Compression and treating equipment$3,468,258 $3,384,985 
Computer equipment53,416 54,940 
Automobiles and vehicles34,074 33,544 
Leasehold improvements8,205 7,395 
Buildings5,333 8,639 
Furniture and fixtures1,109 1,543 
Land77 77 
Total property and equipment, gross3,570,472 3,491,123 
Less: accumulated depreciation and amortization(1,151,035)(1,008,180)
Total property and equipment, net$2,419,437 $2,482,943 
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
Depreciation expense on property and equipment and loss (gain) on disposition of assets were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Depreciation expense$52,727 $50,169 $157,137 $151,186 
Loss (gain) on disposition of assets1,686 (1,975)(115)(389)
As of September 30, 2020 and December 31, 2019, there was $1.8 million and $11.4 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.
On a quarterly basis, we evaluate the future deployment of our idle fleet under current market conditions. For the three and nine months ended September 30, 2020, we determined to retire 16 and 27 compressor units, respectively, for a total of approximately 3,900 and 9,000 horsepower, respectively, that were previously used to provide compression services in our business. As a result, we recorded impairments of compression equipment of $1.7 million and $5.6 million for the three and nine months ended September 30, 2020, respectively.
For the nine months ended September 30, 2019, we determined to retire 14 compressor units, for a total of approximately 4,700 horsepower, that were previously used to provide compression services in our business. As a result, we recorded an impairment of compression equipment of $3.2 million for the nine months ended September 30, 2019.
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 September 30, 2019.
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Identifiable Intangible Assets
Identifiable intangible assets, net consisted of the following (in thousands):
Customer RelationshipsTrade NamesTotal
Net balance as of December 31, 2019$329,057 $34,114 $363,171 
Amortization expense(19,578)(2,457)(22,035)
Net balance as of September 30, 2020$309,479 $31,657 $341,136 
Accumulated amortization of intangible assets was $209.5 million and $187.5 million as of September 30, 2020 and December 31, 2019, respectively. The expected amortization of the intangible assets for each of the five succeeding years is $29.4 million.
Goodwill
During the first quarter of 2020 certain potential impairment indicators were identified, specifically (i) the decline in the market price of our common units, (ii) the decline in global commodity prices and (iii) the COVID-19 pandemic; which together indicated the fair value of the reporting unit was less than its carrying amount as of March 31, 2020.
We performed a quantitative goodwill impairment test as of March 31, 2020 and determined fair value using a weighted combination of the income approach and the market approach. Determining fair value of a reporting unit requires judgment and use of significant estimates and assumptions. Such estimates and assumptions include revenue growth rates, EBITDA margins, weighted average costs of capital and future market conditions, among others. We believe the estimates and assumptions used were reasonable and based on available market information, but variations in any of the assumptions could have resulted in materially different calculations of fair value and determinations of whether or not an impairment is indicated. Under the income approach, we determined fair value based on estimated future cash flows, including estimates for capital expenditures, discounted to present value using the risk-adjusted industry rate, which reflects the overall level of inherent risk of the Partnership. Cash flow projections were derived from four-year operating forecasts plus an estimate of later period cash flows, all of which were developed by management. Subsequent period cash flows were developed using growth rates that management believed were reasonably likely to occur. Under the market approach, we determined fair value by applying valuation multiples of comparable publicly-traded companies to the projected EBITDA of the Partnership and then averaging that estimate with similar historical calculations using a three-year average. In addition, we estimated a reasonable control premium representing the incremental value that would accrue to us if we were to be acquired.
Based on the quantitative goodwill impairment test described above, our carrying amount exceeded fair value and as a result, we recognized a goodwill impairment of $619.4 million for the three months ended March 31, 2020.
(6)  Other Current Liabilities
Components of other current liabilities included the following (in thousands):
September 30,
2020
December 31,
2019
Accrued sales tax contingencies (1)$44,923 $48,883 
Accrued interest expense5,736 31,210 
Accrued payroll and benefits11,472 10,687 
Accrued capital expenditures1,821 11,357 
Accrued property taxes8,217 4,116 
______________________
(1)Refer to Note 13 for further information on the accrued sales tax contingencies.
(7)  Lease Accounting
Lessee Accounting
We maintain both finance leases and operating leases, primarily related to office space, warehouse facilities and certain corporate equipment. Our leases have remaining lease terms of up to ten years, some of which include options that permit renewals for additional periods.
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We determine if an arrangement is a lease at inception. Operating leases are included in lease right-of-use assets, accrued liabilities and operating lease liabilities in our unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued liabilities and other liabilities in our unaudited condensed consolidated balance sheets.
Right-of-use (“ROU”) lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date in determining the present value of lease payments. ROU lease assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred.
For short-term leases (leases that have terms of twelve months or less upon commencement), lease payments are recognized on a straight line basis and no ROU assets are recorded. For certain equipment leases, such as office equipment, we account for the lease and non-lease components as a single lease component.
Supplemental balance sheet information related to leases consisted of the following (in thousands):
Assets (liabilities)September 30,
2020
December 31,
2019
Operating leases:
Lease ROU assets$23,556 $18,317 
Accrued liabilities(3,111)(2,451)
Operating lease liabilities(21,980)(17,343)
Finance leases:
Property and equipment, gross$3,978 $7,268 
Accumulated depreciation(2,862)(5,845)
Property and equipment, net1,116 1,423 
Accrued liabilities(556)(774)
Other liabilities(1,130)(1,550)
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Components of lease expense consisted of the following (in thousands):
Three Months Ended September 30,Nine Months Ended
September 30,
Income Statement Line Item
2020201920202019
Operating lease costs:
Operating lease costCost of operations, exclusive of depreciation and amortization$758 $563 $2,123 $1,218 
Operating lease costSelling, general and administrative386 312 1,159 787 
Total operating lease costs1,144 875 3,282 2,005 
Finance lease costs:
Amortization of lease assetsDepreciation and amortization102 116 307 1,526 
Short-term lease costs:
Short-term lease costCost of operations, exclusive of depreciation and amortization104 89 266 233 
Short-term lease costSelling, general and administrative8 11 36 21 
Total short-term lease costs112 100 302 254 
Variable lease costs:
Variable lease costCost of operations, exclusive of depreciation and amortization46 8 208 155 
Variable lease costSelling, general and administrative249 293 946 1,008 
Total variable lease costs295 301 1,154 1,163 
Total lease costs$1,653 $1,392 $5,045 $4,948 
The weighted average remaining lease terms and weighted average discount rates were as follows:
September 30,
2020
December 31,
2019
Weighted average remaining lease term:
Operating leases8 years8 years
Finance leases4 years4 years
Weighted average discount rate:
Operating leases5.0 %4.9 %
Finance leases2.6 %2.6 %
Supplemental cash flow information related to leases consisted of the following (in thousands):
Nine Months Ended September 30,
20202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$(3,204)$(2,117)
Operating cash flows from finance leases(477)(673)
Financing cash flows from finance leases(636)(788)
ROU assets obtained in exchange for lease obligations:
Operating leases$7,663 $11,784 
Finance leases 259 
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Maturities of lease liabilities as of September 30, 2020 consisted of the following (in thousands):
Operating LeasesFinance LeasesTotal
2020 (remainder)$1,104 $146 $1,250 
20214,207 567 4,774 
20223,924 398 4,322 
20233,562 369 3,931 
20243,345 284 3,629 
Thereafter14,545  14,545 
Total lease payments30,687 1,764 32,451 
Less: present value discount(5,596)(78)(5,674)
Present value of lease liabilities$25,091 $1,686 $26,777 
As of September 30, 2020, we have not entered into any additional leases that have not yet commenced.
Lessor Accounting​
We granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provides the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term in 2021.
We accounted for this option as a sales-type lease resulting in a current installment receivable included in other accounts receivable of $4.0 million and $4.0 million, and a long-term installment receivable included in other assets of $0 and $2.9 million as of September 30, 2020 and December 31, 2019, respectively.
As of September 30, 2020, there is no allowance for credit losses on our net investment in the sales-type lease based on our collections experience with the customer.
Revenue and interest income related to the lease is recognized over the lease term. We recognize maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue and interest income were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Maintenance revenue$323 $323 $968 $968 
Interest income87 159 316 530 
Lease payments expected to be received subsequent to September 30, 2020 are as follows (in thousands):
Lease Payments
2020 (remainder)$1,418 
20213,356 
Total installment receivables4,774 
Less: present value discount(821)
Present value of installment receivables$3,953 
FASB Accounting Standards Codification (“ASC”) Topic 842 provides lessors with a practical expedient to not separate non-lease components from the associated lease components and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC Topic 606 Revenue from Contracts with Customers (“ASC Topic 606”) and certain conditions are met. Our contract operations services agreements meet these conditions and we consider the predominant component to be the non-lease components, resulting in the ongoing recognition of revenue following ASC Topic 606 guidance.
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(8)  Long-term Debt
Our long-term debt, of which there is no current portion, consisted of the following (in thousands):
September 30,
2020
December 31,
2019
Revolving credit facility$496,898 $402,722 
Senior Notes 2026, aggregate principal725,000 725,000 
Senior Notes 2027, aggregate principal750,000 750,000 
Less: deferred financing costs, net of amortization(22,722)(25,362)
Total senior notes, net1,452,278 1,449,638 
Total long-term debt, net$1,949,176 $1,852,360 
Revolving Credit Facility
As of September 30, 2020, we were in compliance with all of our covenants under the Credit Agreement. The Credit Agreement has an aggregate commitment of $1.6 billion (subject to availability under our borrowing base), with a further potential increase of $400 million, and has a maturity date of April 2, 2023, which we expect to maintain for the term.
As of September 30, 2020, we had outstanding borrowings under the Credit Agreement of $496.9 million, $1.1 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $411.8 million. Our weighted average interest rate in effect for all borrowings under the Credit Agreement as of September 30, 2020 was 3.03%, with a weighted average interest rate of 3.36% for the nine months ended September 30, 2020. There were no letters of credit issued as of September 30, 2020. We pay a commitment fee of 0.375% on the unused portion of the Credit Agreement.
The Credit Agreement was amended on August 3, 2020 (the “Amendment Effective Date”) and amends, among other things, the requirements of certain covenants and the date on which certain covenants in the Credit Agreement must be met from the Amendment Effective Date until the last day of the fiscal quarter ending December 31, 2021 (the “Covenant Relief Period”).
The Credit Agreement permits us to make distributions of available cash to unitholders so long as (i) no default under the facility has occurred, is continuing or would result from the distribution, (ii) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants and (iii) immediately after giving effect to such distribution, we have availability under the Credit Agreement of at least $250 million (reverting back to $100 million after the Covenant Relief Period).
The Credit Agreement also contains various financial covenants, including covenants requiring us to maintain:
a minimum EBITDA to interest coverage ratio of 2.5 to 1.0, determined as of the last day of each fiscal quarter, for the annualized trailing three months; and
a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter, for the annualized trailing three months of (i) 5.75 to 1.00 for the fiscal quarters ending September 30, 2020 and December 31, 2020, (ii) 5.50 to 1.00 for the fiscal quarters ending March 31, 2021 and June 30, 2021 and (iii) 5.25 to 1.00 for the fiscal quarters ending September 30, 2021 and December 31, 2021 (reverting back to 5.00 to 1.00 after the Covenant Relief Period). In addition, the amendment provides that the 0.5 increase in maximum funded debt to EBITDA ratio applicable to certain future acquisitions (for the six consecutive month period in which any such acquisition occurs) is only available beginning with the fiscal quarter ending September 30, 2021, and in any case shall not increase the maximum funded debt to EBITDA ratio above 5.50 to 1.00.
In addition, during the Covenant Relief Period, the applicable margin for Eurodollar borrowings is increased from a range of 2.00% – 2.75% to a range of 2.25% – 3.00%. The amendment further provides that the Partnership becomes guarantor of the obligations of all other guarantors under the Credit Agreement.
In connection with the Credit Agreement amendment, we incurred arrangement fees, consent fees and other fees in the amount of $3.4 million, which were capitalized to loan costs and are amortized over the remaining term of 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, the Partnership and its wholly owned finance subsidiary, USA Compression Finance Corp. (“Finance Corp”), co-issued the Senior Notes 2026. The Senior Notes 2026 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 September 30, 2020, we were in compliance with such financial covenants under the 2026 Indenture.
The Senior Notes 2026 are fully and unconditionally guaranteed (the “2026 Guarantees”), jointly and severally, on a senior unsecured basis by all of our existing subsidiaries (other than Finance Corp), and will be fully and unconditionally guaranteed, jointly and severally, by each of our future restricted subsidiaries that either borrows under, or guarantees, the Credit Agreement or guarantees certain of our other indebtedness (collectively, the “Guarantors”). The Senior Notes 2026 and the 2026 Guarantees are general unsecured obligations and rank equally in right of payment with all of the Guarantors’ and our existing and future senior indebtedness and senior to the Guarantors’ and our future subordinated indebtedness, if any. The Senior Notes 2026 and