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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(MARK ONE)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED March 31, 2019

 

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

 

75-2771546

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

100 Congress Avenue, Suite 450

 

 

Austin, Texas

 

78701

(Address of principal executive offices)

 

(Zip Code)

 

 (512) 473-2662

(Registrant’s telephone number, including area code)

 

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 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 ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

Title of each class

Trading Symbol(s)

Name of exchange on which registered

Common units representing limited partner interests

USAC

New York Stock Exchange

 

As of May 3, 2019, there were 90,158,987 common units and 6,397,965 Class B Units outstanding.

 

 

 


 

Table of Contents 

TABLE OF CONTENTS

 

 

 

 

 

 

    

Page

PART I. FINANCIAL INFORMATION 

 

1

ITEM 1.         Financial Statements 

 

1

Unaudited Condensed Consolidated Balance Sheets 

 

1

Unaudited Condensed Consolidated Statements of Operations 

 

2

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital and Predecessor Parent Company Net Investment 

 

3

Unaudited Condensed Consolidated Statements of Cash Flows 

 

4

Notes to Unaudited Condensed Consolidated Financial Statements 

 

5

ITEM 2.         Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

22

ITEM 3.         Quantitative and Qualitative Disclosures About Market Risk 

 

33

ITEM 4.         Controls and Procedures 

 

34

PART II. OTHER INFORMATION 

 

35

ITEM 1.         Legal Proceedings 

 

35

ITEM 1A.      Risk Factors 

 

35

ITEM 6.         Exhibits 

 

35

SIGNATURES 

 

36

 

 

 

 

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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)

 

 

 

 

 

 

 

 

 

 

 

  

March 31,

  

December 31,

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

227

 

$

99

Accounts receivable, net:

 

 

 

 

 

 

Trade, net

 

 

78,990

 

 

75,572

Other

 

 

4,816

 

 

3,809

Related party receivables

 

 

45,589

 

 

47,661

Inventory, net

 

 

93,780

 

 

89,007

Prepaid expenses and other assets

 

 

2,842

 

 

1,592

Total current assets

 

 

226,244

 

 

217,740

Installment receivable

 

 

5,952

 

 

6,924

Property and equipment, net

 

 

2,502,392

 

 

2,521,488

Identifiable intangible assets, net

 

 

385,205

 

 

392,550

Goodwill

 

 

619,411

 

 

619,411

Other assets

 

 

18,643

 

 

16,536

Total assets

 

$

3,757,847

 

$

3,774,649

Liabilities and Partners’ Capital

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

19,593

 

$

23,804

Related party payables

 

 

 —

 

 

395

Accrued liabilities

 

 

79,150

 

 

94,028

Deferred revenue

 

 

34,540

 

 

31,372

Total current liabilities

 

 

133,283

 

 

149,599

Long-term debt, net

 

 

1,808,309

 

 

1,759,058

Other liabilities

 

 

10,304

 

 

9,827

Total liabilities

 

 

1,951,896

 

 

1,918,484

Preferred Units

 

 

477,309

 

 

477,309

Commitments and contingencies

 

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

 

Limited partner interest:

 

 

 

 

 

 

Common units, 90,158 and 89,984 units issued and outstanding, respectively

 

 

1,243,029

 

 

1,289,731

Class B Units, 6,398 units issued and outstanding as of each period

 

 

71,634

 

 

75,146

Warrants

 

 

13,979

 

 

13,979

Total partners’ capital

 

 

1,328,642

 

 

1,378,856

Total liabilities and partners’ capital

 

$

3,757,847

 

$

3,774,649

 

See accompanying notes to unaudited condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per unit amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

  

2019

  

2018

Revenues:

 

 

 

 

 

 

Contract operations

 

$

163,976

 

$

69,807

Parts and service

 

 

2,684

 

 

2,750

Related party

 

 

4,086

 

 

3,973

Total revenues

 

 

170,746

 

 

76,530

Costs and expenses:

 

 

 

 

 

 

Cost of operations, exclusive of depreciation and amortization

 

 

57,025

 

 

37,335

Selling, general and administrative

 

 

15,995

 

 

7,961

Depreciation and amortization

 

 

58,924

 

 

44,672

Loss on disposition of assets

 

 

40

 

 

10,347

Impairment of compression equipment

 

 

3,234

 

 

 —

Total costs and expenses

 

 

135,218

 

 

100,315

Operating income (loss)

 

 

35,528

 

 

(23,785)

Other income (expense):

 

 

 

 

 

 

Interest expense, net

 

 

(28,857)

 

 

 —

Other

 

 

20

 

 

(20)

Total other expense

 

 

(28,837)

 

 

(20)

Net income (loss) before income tax expense (benefit)

 

 

6,691

 

 

(23,805)

Income tax expense (benefit)

 

 

104

 

 

(435)

Net income (loss)

 

 

6,587

 

 

(23,370)

Less: distributions on Preferred Units

 

 

(12,187)

 

 

 —

Net loss attributable to common and Class B unitholders’ interests

 

$

(5,600)

 

$

(23,370)

 

 

 

 

 

 

 

Net loss attributable to:

 

 

 

 

 

 

Common units

 

$

(2,088)

 

 

 

Class B Units

 

$

(3,512)

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding - basic and diluted

 

 

90,060

 

 

 

 

 

 

 

 

 

 

Weighted average Class B Units outstanding - basic and diluted

 

 

6,398

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per common unit

 

$

(0.02)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per Class B Unit

 

$

(0.55)

 

 

 

 

 

 

 

 

 

 

Distributions declared per common unit for respective periods

 

$

0.525

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital

And Predecessor Parent Company Net Investment

 (in thousands, except per unit amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Predecessor Parent

 

 

 

 

 

 

 

 

 

 

 

 

Company Net

 

 

 

  

Common Units

  

Class B Units

  

Warrants

  

Investment

  

Total

Balance, December 31, 2018

 

$

1,289,731

 

$

75,146

 

$

13,979

 

$

 —

 

$

1,378,856

Vesting of phantom units

 

 

2,393

 

 

 —

 

 

 —

 

 

 —

 

 

2,393

Distributions and distribution equivalent rights, $0.525 per unit

 

 

(47,259)

 

 

 —

 

 

 —

 

 

 —

 

 

(47,259)

Issuance of common units under the DRIP

 

 

252

 

 

 —

 

 

 —

 

 

 —

 

 

252

Net loss

 

 

(2,088)

 

 

(3,512)

 

 

 —

 

 

 —

 

 

(5,600)

Balance, March 31, 2019

 

$

1,243,029

 

$

71,634

 

$

13,979

 

$

 —

 

$

1,328,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

Predecessor Parent

 

 

 

 

 

 

 

 

 

 

 

 

Company Net

 

 

 

  

Common Units

  

Class B Units

  

Warrants

  

Investment

  

Total

Balance, December 31, 2017

 

$

 —

 

$

 —

 

$

 —

 

$

1,664,870

 

$

1,664,870

Predecessor net loss

 

 

 —

 

 

 —

 

 

 —

 

 

(23,370)

 

 

(23,370)

Predecessor parent company net contribution

 

 

 —

 

 

 —

 

 

 —

 

 

26,730

 

 

26,730

Balance, March 31, 2018

 

$

 —

 

$

 —

 

$

 —

 

$

1,668,230

 

$

1,668,230

 

See accompanying notes to unaudited condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

    

2019

    

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

6,587

 

$

(23,370)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

58,924

 

 

44,672

Bad debt recovery

 

 

 —

 

 

(192)

Amortization of debt issue costs

 

 

1,680

 

 

 —

Unit-based compensation expense

 

 

3,134

 

 

435

Deferred income tax expense (benefit)

 

 

14

 

 

(435)

Loss on disposition of assets

 

 

40

 

 

10,347

Impairment of compression equipment

 

 

3,234

 

 

 —

Changes in assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

(1,381)

 

 

(8,637)

Inventory, net

 

 

(6,659)

 

 

(660)

Prepaid expenses and other current assets

 

 

(1,250)

 

 

3,162

Other noncurrent assets

 

 

449

 

 

(3)

Accounts payable and related party payables

 

 

(4,013)

 

 

(1,586)

Accrued liabilities and deferred revenue

 

 

(12,990)

 

 

(4,866)

Net cash provided by operating activities

 

 

47,769

 

 

18,867

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures, net

 

 

(36,339)

 

 

(51,669)

Proceeds from disposition of property and equipment

 

 

321

 

 

5,845

Proceeds from insurance recovery

 

 

1,365

 

 

 —

Net cash used in investing activities

 

 

(34,653)

 

 

(45,824)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

221,792

 

 

 —

Proceeds from senior notes

 

 

750,000

 

 

 —

Payments on revolving credit facility

 

 

(909,914)

 

 

 —

Cash paid related to net settlement of unit-based awards

 

 

(1,433)

 

 

 —

Cash distributions on common units

 

 

(47,739)

 

 

 —

Cash distributions on Preferred Units

 

 

(12,187)

 

 

 —

Financing costs

 

 

(13,220)

 

 

 —

Other

 

 

(287)

 

 

 —

Contributions from Parent, net

 

 

 —

 

 

28,520

Net cash provided by (used in) financing activities

 

 

(12,988)

 

 

28,520

Increase in cash and cash equivalents

 

 

128

 

 

1,563

Cash and cash equivalents, beginning of period

 

 

99

 

 

4,013

Cash and cash equivalents, end of period

 

$

227

 

$

5,576

Supplemental cash flow information:

 

 

 

 

 

 

Cash paid for interest, net of capitalized amounts

 

$

38,737

 

$

 —

Cash paid for taxes

 

$

 —

 

$

 —

Supplemental non-cash transactions:

 

 

 

 

 

 

Non-cash distributions to certain common unitholders (DRIP)

 

$

252

 

$

 —

Transfers from inventory to property and equipment

 

$

1,951

 

$

 —

Change in capital expenditures included in accounts payable and accrued liabilities

 

$

(782)

 

$

(5,322)

Financing costs included in accounts payable and accrued liabilities

 

$

139

 

$

 —

Predecessor’s non-cash contribution to Predecessor’s Parent

 

$

 —

 

$

(1,790)

 

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 the context otherwise requires or where otherwise indicated, the terms “our,” “we,” “us,” “the Partnership” and similar language when used in the present or future tense and for periods on and subsequent to April 2, 2018 (the “Transactions Date”) refer to USA Compression Partners, LP, collectively with its consolidated operating subsidiaries, including the USA Compression Predecessor. Unless the context otherwise requires or where otherwise indicated, the term “USA Compression Predecessor,” as well as the terms “our,” “we,” “us” and “its” when used in a historical context or in reference to periods prior to the Transactions Date, refer to CDM Resource Management LLC and CDM Environmental & Technical Services LLC collectively, which has been deemed to be the predecessor of the Partnership for financial reporting purposes.

 

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 primarily provide compression services in a number of shale plays throughout the United States, 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 has been wholly owned by Energy Transfer Operating, L.P. (“ETO”) since October 2018, when Energy Transfer Equity, L.P. (“ETE”) and Energy Transfer Partners, L.P. (“ETP”) completed the merger of ETP with a wholly owned subsidiary of ETE in a unit-for-unit exchange (the “ETE Merger”).  Following the closing of the ETE Merger, ETE changed its name to “Energy Transfer LP” (“ET LP”) and ETP changed its name to “Energy Transfer Operating, L.P.” Upon the closing of the ETE Merger, ETE contributed to ETO 100% of the limited liability company interests in the General Partner. References herein to “ETO” refer to ETP for periods prior to the ETE Merger and ETO following the ETE Merger, and references to “ET LP” refer to ETE for periods prior to the ETE Merger and ET LP following the ETE Merger.   

 

The USA Compression Predecessor owned and operated a fleet of compressors used to provide natural gas compression services for customer specific systems. The USA Compression Predecessor also owned and operated a fleet of equipment used to provide natural gas treating services, such as carbon dioxide and hydrogen sulfide removal, cooling, and dehydration. The USA Compression Predecessor had operations located in Texas, Oklahoma, Louisiana, Arkansas, Pennsylvania, New Mexico, Colorado, Ohio, and West Virginia.

 

CDM Acquisition

 

On the Transactions Date, we consummated the transactions contemplated by the Contribution Agreement dated January 15, 2018, pursuant to which, among other things, we acquired all of the issued and outstanding membership interests of the USA Compression Predecessor from ETO (the “CDM Acquisition”) in exchange for aggregate consideration of approximately $1.7 billion, consisting of (i) 19,191,351 common units representing limited partner interests in us, (ii) 6,397,965 Class B units representing limited partner interests in us (“Class B Units”) and (iii) $1.2 billion in cash (including customary closing adjustments).

 

General Partner Purchase Agreement

 

On the Transactions Date, and in connection with the closing of the CDM Acquisition, we consummated the transactions contemplated by the Purchase Agreement dated January 15, 2018, by and among ET LP,  Energy Transfer Partners, L.L.C., USA Compression Holdings, LLC (“USA Compression Holdings”) and, solely for certain purposes therein, R/C IV USACP Holdings, L.P. and ETO, pursuant to which, among other things, ET LP acquired from USA Compression Holdings (i) all of the outstanding limited liability company interests in the General Partner and (ii) 12,466,912 common units for cash consideration paid by ET LP to USA Compression Holdings equal to $250.0 million (the “GP Purchase”). Upon the closing of the ETE Merger, ET LP contributed all of the interests in the General Partner and the 12,466,912 common units to ETO.

 

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Equity Restructuring Agreement

 

On the Transactions Date, and in connection with the closing of the CDM Acquisition, we consummated the transactions contemplated by the Equity Restructuring Agreement dated January 15, 2018, pursuant to which, among other things, the Partnership, the General Partner and ET LP agreed to cancel the Partnership’s Incentive Distribution Rights and convert the General Partner Interest (as defined in the Equity Restructuring Agreement) into a non-economic general partner interest, in exchange for the Partnership’s issuance of 8,000,000 common units to the General Partner (the “Equity Restructuring”).

 

The CDM Acquisition, GP Purchase and Equity Restructuring are collectively referred to as the “Transactions.”

 

(2)    Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Partnership

 

The unaudited condensed consolidated financial statements give effect to the business combination and the Transactions discussed above under the acquisition method of accounting, and the business combination has been accounted for in accordance with the applicable reverse merger accounting guidance. ET LP acquired a controlling financial interest in us through the acquisition of the General Partner. As a result, the USA Compression Predecessor is deemed to be the accounting acquirer of the Partnership because its ultimate parent company obtained control of the Partnership through its control of the General Partner. Consequently, the USA Compression Predecessor is deemed to be the predecessor of the Partnership for financial reporting purposes, and the historical financial statements of the Partnership reflect the USA Compression Predecessor for all periods prior to the closing of the Transactions, which occurred on the Transactions Date.

 

The USA Compression Predecessor’s assets and liabilities retained their historical carrying values.  Additionally, the Partnership’s assets acquired and liabilities assumed by the USA Compression Predecessor in the business combination were recorded at their fair values measured as of the Transactions Date. The excess of the assumed purchase price of the Partnership over the estimated fair values of the Partnership’s net assets acquired was recorded as goodwill. The assumed purchase price and fair value of the Partnership was determined using acceptable fair value methods. Additionally, the USA Compression Predecessor was reflected at ET LP’s historical cost, and the difference between the consideration paid by the Partnership and ET LP’s historical carrying values (net book value) at the Transactions Date was recorded to partners’ capital.

 

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). As noted above, the historical condensed consolidated financial statements of the Partnership reflect the historical condensed consolidated financial statements of the USA Compression Predecessor in accordance with the applicable accounting and financial reporting guidance. Therefore, the historical condensed consolidated financial statements are comprised of the USA Compression Predecessor for periods prior to the Transactions Date. The historical condensed consolidated financial statements are also comprised of the condensed consolidated balance sheet and statement of operations of the Partnership, which includes the USA Compression Predecessor, as of and for all periods subsequent to the Transactions Date. 

 

In the opinion of our management, such financial information reflects all normal recurring adjustments necessary for a fair presentation of these interim unaudited condensed consolidated financial statements in accordance with GAAP. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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, 2018 filed on February 19, 2019 (our “2018 Annual Report”).

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USA Compression Predecessor

 

ETO allocated various corporate overhead expenses to the USA Compression Predecessor based on a percentage of assets, net income (loss), or adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). These allocations are not necessarily indicative of the cost that the USA Compression Predecessor would have incurred had it operated as an independent standalone entity. The USA Compression Predecessor also historically relied upon ETO for funding operating and capital expenditures as necessary. As a result, the historical financial statements of the USA Compression Predecessor may not fully reflect or be indicative of what the USA Compression Predecessor’s balance sheet, results of operations and cash flows would have been or will be in the future.

 

Certain expenses incurred by ETO are only indirectly attributable to the USA Compression Predecessor. As a result, certain assumptions and estimates are made in order to allocate a reasonable share of such expenses to the USA Compression Predecessor, so that the accompanying financial statements reflect substantially all costs of doing business. The allocations and related estimates and assumptions are described more fully in Note 12.

 

Certain amounts of the USA Compression Predecessor’s revenues are derived from related party transactions, as described more fully in Note 12. 

 

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 and Allowance for Doubtful Accounts

 

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Our determination of the allowance for doubtful accounts requires us to make estimates and judgments regarding our customers’ ability to pay amounts due. We continuously evaluate the financial strength of our customers based on payment history, the overall business climate in which our customers operate and specific identification of customer bad debt 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.

 

The USA Compression Predecessor determined its allowance for doubtful accounts based upon historical write-off experience and specific identification of unrecoverable amounts.  

 

Inventory

 

Inventory consists of serialized and non-serialized parts used primarily in the repair of compression units.  All inventory is stated at the lower of cost or net realizable value. Serialized parts inventory is determined using the specific identification method, while non-serialized parts inventory is determined using the weighted average cost method. Purchases of inventory 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.

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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 $0.2 million for the three months ended March 31, 2019.  The USA Compression Predecessor had no capitalized interest for the three months ended March 31, 2018.

 

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 exceeds the sum of the undiscounted cash flows associated with the operating fleet, an impairment loss equal to the amount of the carrying value exceeding the fair value of the asset is recognized. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, based on an estimate of discounted cash flows, the expected net sale proceeds compared to the other similarly configured fleet units we recently sold or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.

 

Refer to Note 5 for more detailed information about impairment charges during the three months ended March 31, 2019.

 

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.

 

We assess identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Neither we nor the USA Compression Predecessor recorded any impairment of identifiable intangible assets during the three months ended March 31, 2019 and 2018.

 

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. 

 

Neither we nor the USA Compression Predecessor recorded any impairment of goodwill during the three months ended March 31, 2019 and 2018.

 

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.

 

Pass Through Taxes

 

Sales taxes incurred on behalf of, and passed through to, customers are accounted for on a net basis.

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Fair Value Measurements

 

Accounting standards on fair value measurements establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and non-recurring financial and non-financial assets and liabilities that require or permit fair value measurements. Among the required disclosures is the fair value hierarchy of inputs we use to value an asset or a liability. The three levels of the fair value hierarchy are described as follows:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

 

Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

As of March 31, 2019, 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, both defined in Note 8, 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 these assets and liabilities (in thousands): 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

 

 

Level 2

 

Level 2

Senior Notes 2026, aggregate principal

 

$

725,000

 

$

725,000

Fair value of Senior Notes 2026

 

 

744,938

 

 

696,000

Senior Notes 2027, aggregate principal

 

$

750,000

 

$

 —

Fair value of Senior Notes 2027

 

 

767,813

 

 

 —

 

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.

 

Operating Segment

 

We operate in a single business segment, the compression services business. 

 

Adoption of Lease Accounting Standard

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which has amended the FASB Accounting Standards Codification (“ASC”) and introduced ASC Topic 842, Leases (“ASC Topic 842”).  On January 1, 2019, we adopted ASC Topic 842, which is effective for interim and annual reporting periods beginning on or after December 15, 2018.  ASC Topic 842 requires entities to recognize lease assets and liabilities on the balance sheet for all leases with a term of more than one year, including operating leases, which historically were not recorded on the balance sheet in accordance with the prior standard.

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To adopt ASC Topic 842, we recognized a cumulative catch-up adjustment to the opening balance sheet presented January 1, 2019 related to certain leases that existed as of that date.  As permitted, we have not retrospectively modified our consolidated financial statements for comparative purposes.  The adoption of the standard had an impact on our consolidated balance sheet, but did not have an impact on our consolidated statements of operations or cash flows.  As a result of adoption, we have recorded additional net right-of-use (“ROU”) lease assets and lease liabilities of approximately $3.5 million and $3.7 million, respectively, as of January 1, 2019.  In addition, we have updated our business processes, systems and internal controls to support the on-going reporting requirements under the new standard.

 

To adopt ASC Topic 842, we elected the package of practical expedients permitted under the transition guidance within the standard.  The expedient package allowed us not to reassess whether existing contracts contained a lease, the lease classification of existing leases and initial direct cost for existing leases.  In addition to the package of practical expedients, we have elected not to capitalize amounts pertaining to leases with terms less than twelve months, to use the portfolio approach to determine discount rates, not to separate non-lease components from lease components and not to apply the use of hindsight to the active lease population.

 

Cumulative-effect adjustments made to the opening balance sheet at January 1, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

December 31,

 

Adjustments

 

 

 

 

 

 

 

2018, as

 

Due to

 

Balance at

 

 

Balance Sheet

 

Previously

 

ASC Topic 842

 

January 1,

Assets (liabilities)

 

Line Item

 

Reported

 

(Leases)

 

2019

Operating lease right-of use assets

 

Other assets

 

$

 -

 

$

3,502

 

$

3,502

Operating lease liabilities, current

 

Accrued liabilities

 

 

 -

 

 

(2,015)

 

 

(2,015)

Operating lease liabilities, long term

 

Other liabilities

 

 

 -

 

 

(1,706)

 

 

(1,706)

 

Additional disclosures related to lease accounting are included in Note 7. 

 

(3)  Trade Accounts Receivable

 

The allowance for doubtful accounts, which was $1.7 million at March 31, 2019 and December 31, 2018, is our best estimate of the amount of probable credit losses included in our existing accounts receivable.

 

The USA Compression Predecessor reduced its allowance for doubtful accounts by $0.4 million during the three months ended March 31, 2018,  due to write-offs of receivables and collections on accounts previously reserved.

 

(4)  Inventory

 

Components of inventory are as follows (in thousands):

 

 

 

 

 

 

 

 

 

    

March 31, 2019

    

 

December 31, 2018

Serialized parts

 

$

47,018

 

 

$

45,568

Non-serialized parts

 

 

46,762

 

 

 

43,439

Total Inventory, gross

 

 

93,780

 

 

 

89,007

Less: obsolete and slow moving reserve

 

 

 —

 

 

 

 —

Total Inventory, net

 

$

93,780

 

 

$

89,007

 

 

 

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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):

 

 

 

 

 

 

 

 

 

  

March 31, 2019

    

December 31, 2018

Compression and treating equipment

 

$

3,270,065

 

$

3,239,831

Furniture and fixtures

 

 

1,129

 

 

1,129

Automobiles and vehicles

 

 

31,863

 

 

32,490

Computer equipment

 

 

55,810

 

 

54,806

Buildings

 

 

9,146

 

 

9,314

Land

 

 

77

 

 

77

Leasehold improvements

 

 

5,511

 

 

5,377

Total Property and equipment, gross

 

 

3,373,601

 

 

3,343,024

Less: accumulated depreciation and amortization

 

 

(871,209)

 

 

(821,536)

Total Property and equipment, net

 

$

2,502,392

 

$

2,521,488

 

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as follows:

 

 

 

 

 

Compression equipment, acquired new

 

25 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 improvements

 

5 years

 

 

Depreciation expense on property and equipment was $51.6 million for the three months ended March 31, 2019. The USA Compression Predecessor recognized $39.5 million of depreciation expense on property and equipment for the three months ended March 31, 2018. 

 

As of March 31, 2019 and December 31, 2018, there was $7.2 million and $7.9 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.

 

During the three months ended March 31, 2018, the USA Compression Predecessor recognized a $10.3 million net loss on disposition of assets.

 

During the three months ended March 31, 2019, we evaluated the future deployment of our idle fleet under then-current market conditions and determined to retire, sell or re-utilize key components of 14 compressor units, or approximately 4,700 horsepower, that were previously used to provide services in our business.  As a result, we recorded $3.2 million in impairment of compression equipment for the three months ended March 31, 2019. The primary causes for this impairment 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 then-current quoting criteria without excessive retrofitting costs. These compression units were written down to their respective estimated salvage values, if any.

 

The USA Compression Predecessor did not record any impairment of long-lived assets during the three months ended March 31, 2018.

 

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Identifiable Intangible Assets

 

Identifiable intangible assets, net consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

    

Customer

    

 

 

    

 

 

 

 

Relationships

 

Trade Names

 

Total

Net Balance at December 31, 2018

 

$

355,161

 

$

37,389

 

$

392,550

Amortization expense

 

 

(6,526)

 

 

(819)

 

 

(7,345)

Net Balance at March 31, 2019

 

$

348,635

 

$

36,570

 

$

385,205

 

Accumulated amortization of intangible assets was $165.5 million and $158.1 million as of March 31, 2019 and December 31, 2018, respectively. The expected amortization of the intangible assets for each of the five succeeding years is $29.4 million.

 

(6)   Other Current Liabilities 

 

As of March  31, 2019,  accrued liabilities included $44.9 million of accrued sales tax contingency (Note 13),  $5.0 million of accrued interest expense, $6.1 million of accrued payroll and benefits and $7.2 million of accrued capital expenditures.

 

As of December 31, 2018, accrued liabilities included $44.9 million of accrued sales tax contingency (Note 13), $16.4 million of accrued interest expense, $10.7 million of accrued payroll and benefits and $7.9 million of accrued capital expenditures.

 

(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 one to seven years, some of which include options to extend the leases for up to two years, and some of which include options to terminate the leases within one year.

 

We determine if an arrangement is a lease at inception. Operating leases are included in other assets, accrued liabilities and other 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.  

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 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. We use the implicit rate when readily determinable. 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.

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.

 

Components of lease expense consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

Income Statement Line Item

 

Three months ended March 31, 2019

Operating lease cost

 

Cost of operations & Selling, general and administrative

 

$

610

Amortization of finance lease right-of-use assets

 

Depreciation and amortization

 

 

819

 

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Supplemental balance sheet information related to leases consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets (liabilities)

 

Balance Sheet Line Item

 

March 31, 2019

 

December 31, 2018

Operating lease right-of-use assets

 

Other assets

 

$

2,943

 

$

 -

Operating lease liabilities, current

 

Accrued liabilities

 

 

(1,485)

 

 

 -

Operating lease liabilities, long-term

 

Other liabilities

 

 

(1,626)

 

 

 -

 

 

 

 

 

 

 

 

 

 

Finance Leases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets (liabilities)

 

 

 

March 31, 2019

 

December 31, 2018

Property and equipment, gross

 

 

 

$

7,516

 

$

7,683

Accumulated depreciation

 

 

 

 

(5,533)

 

 

(4,882)

Property and equipment, net

 

 

 

$

1,983

 

$

2,801

Accrued liabilities

 

 

 

 

(1,050)

 

 

(1,085)

Other liabilities

 

 

 

 

(1,852)

 

 

(2,114)

 

 

 

 

 

 

 

 

 

 

Weighted Average Remaining Lease Term

 

 

 

 

 

 

March 31, 2019

Operating leases

 

 

 

 

 

 

 

3.66 years

Finance Leases

 

 

 

 

 

 

 

3.85 years

 

 

 

 

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

 

 

March 31, 2019

Operating leases

 

 

 

 

 

 

 

2.92%

Finance Leases

 

 

 

 

 

 

 

2.17%

 

Supplemental cash flow information related to leases consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

$

(662)

Operating cash flows from finance leases

 

 

 

 

(194)

Financing cash flows from finance leases

 

 

 

 

(287)

Right-of-use assets obtained in exchange for lease obligations

 

 

 

 

 

Operating leases

 

 

 

$

 -

Finance leases

 

 

 

 

 -

 

Maturities of lease liabilities consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

Finance Leases

 

Total

2019 (remainder)

$

1,396

 

$

1,147

 

$

2,543

2020

 

595

 

 

1,026

 

 

1,621

2021

 

390

 

 

509

 

 

899

2022

 

276

 

 

342

 

 

618

2023

 

241

 

 

312

 

 

553

Thereafter

 

405

 

 

237

 

 

642

Total lease payments

 

3,303

 

 

3,573

 

 

6,876

Less: present value discount

 

(192)

 

 

(671)

 

 

(863)

Present value of lease liabilities

$

3,111

 

$

2,902

 

$

6,013

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As of March 31, 2019, we have an additional operating lease that has not yet commenced of $6.7 million. This operating lease will commence in 2020 with a lease term of 10 years.

 

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 $3.8 million and $3.7 million and a long-term installment receivable of $6.0 million and $6.9 million as of March 31, 2019 and December 31, 2018, respectively.

 

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 was $0.3 million for the three months ended March 31, 2019. Interest income was $0.2 million for the three months ended March 31, 2019.

 

Lease payments expected to be received subsequent to March 31, 2019 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease payments

2019 (remainder)

 

 

 

 

 

 

$

4,254

2020

 

 

 

 

 

 

 

5,673

2021

 

 

 

 

 

 

 

3,356

Total installment receivables

 

 

 

 

 

 

 

13,283

Less: present value discount

 

 

 

 

 

 

 

(3,550)

Present value of installment receivables

 

 

 

 

 

 

$

9,733

 

The USA Compression Predecessor had no capital lease revenue or maintenance revenue related to capital leases for the three months ended March 31, 2018.

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.

 

(8)  Long-Term Debt

 

Our long-term debt, of which there is no current portion, consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

Revolving credit facility

 

$

361,425

 

$

1,049,547

Senior Notes 2026, aggregate principal

 

 

725,000

 

 

725,000

Senior Notes 2027, aggregate principal

 

 

750,000

 

 

 —

Less: deferred financing costs, net of amortization

 

 

(28,116)

 

 

(15,489)

Total Senior Notes, net

 

 

1,446,884

 

 

709,511

Total long-term debt, net

 

$

1,808,309

 

$

1,759,058

 

Revolving Credit Facility 

 

As of March 31, 2019, we were in compliance with all of our covenants under the Sixth Amended and Restated Credit Agreement (the “Credit Agreement”).

 

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As of March 31, 2019, we had outstanding borrowings under the Credit Agreement of $361.4 million, $1.2 billion of borrowing base availability and, subject to compliance with the applicable financial covenants, available borrowing capacity of $492.7 million. Our interest rate in effect for all borrowings under the Credit Agreement as of March 31, 2019 was 5.17%, with a weighted average interest rate of 5.07%  for the three months ended March 31, 2019. There were no letters of credit issued as of March 31, 2019.

 

The Credit Agreement permits us to make distributions of available cash to unitholders so long as (a) no default under the facility has occurred, is continuing or would result from the distribution, (b) immediately prior to and after giving effect to such distribution, we are in compliance with the facility’s financial covenants and (c) immediately after giving effect to such distribution, 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; 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 (a) 5.75 to 1.0 through the end of the fiscal quarter ending March 31, 2019, (b) 5.5 to 1.0 through the end of the fiscal quarter ending December 31, 2019 and (c) 5.00 to 1.0 thereafter, in each case subject to a provision for increases to such thresholds by 0.5 in connection with certain future acquisitions for the six consecutive month period following the period in which any such acquisition occurs.

 

The Credit Agreement matures in April 2023 and we expect to maintain it for the term. 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 $725.0 million aggregate principal amount of senior notes due on April 1, 2026 (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 a Fixed Charge Coverage Ratio (as defined in the 2026 Indenture) that we must comply with in order to make certain Restricted Payments (as defined in 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, our revolving credit facility 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 the 2026 Guarantees are effectively subordinated in right of payment to all of the Guarantors’ 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.

 

We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100% owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.

 

On January 14, 2019, the Partnership closed an exchange offer whereby holders of the Senior Notes 2026 exchanged all of the Senior Notes 2026 for an equivalent amount of senior notes (“Exchange Notes”) registered under the Securities Act of 1933, as amended (the “Securities Act”).  The Exchange Notes are substantially identical to the Senior Notes 2026,  

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except that the Exchange Notes have been registered with the SEC and do not contain the transfer restrictions, restrictive legends, registration rights or additional interest provisions of the Senior Notes 2026.

 

Senior Notes 2027

 

On March 7, 2019, the Partnership and Finance Corp co-issued $750.0 million aggregate principal amount of senior notes due on September 1, 2027 (the “Senior Notes 2027”). The Senior Notes 2027 accrue interest from March 7, 2019 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, commencing on September 1, 2019.

 

At any time prior to September 1, 2022, we may redeem up to 35% of the aggregate principal amount of the Senior Notes 2027 at a redemption price equal to 106.875% of the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in an amount not greater than the net proceeds from one or more equity offerings, provided that at least 65% of the aggregate principal amount of the Senior Notes 2027 remains outstanding immediately after the occurrence of such redemption (excluding Senior Notes 2027 held by us and our subsidiaries) and redemption occurs within 180 days of the date of the closing of such equity offering.

 

Prior to September 1, 2022, we may redeem all or a part of the Senior Notes 2027 at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date.

 

On or after September 1, 2022, we may redeem all or a part of the Senior Notes 2027 at redemption prices (expressed as percentages of the principal amount) set forth below, plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on September 1 of the years indicated below: 

 

 

 

 

 

 

Year

 

 

Percentages

 

2022

 

 

105.156

%

2023

 

 

103.438

%

2024

 

 

101.719

%

2025 and thereafter

 

 

100.000

%

 

If we experience a change of control followed by a ratings decline, unless we have previously exercised or concurrently exercise our right to redeem the Senior Notes 2027 (as described above), we may be required to offer to repurchase the Senior Notes 2027 at a purchase price equal to 101% of the principal amount repurchased, plus accrued and unpaid interest, if any, to the repurchase date.

 

The indenture governing the Senior Notes 2027 (the “2027 Indenture”) contains a Fixed Charge Coverage Ratio (as defined in the 2027 Indenture) that we must comply with in order to make certain Restricted Payments (as defined in the 2027 Indenture).

 

In connection with issuing the Senior Notes 2027, we incurred certain issuance costs in the amount of $13.1 million, which is amortized over the term of the Senior Notes 2027.

 

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’ and our existing and future senior indebtedness, including the Exchange Notes, and senior to the Guarantors’ 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’ and our existing and future secured debt, including debt under the Credit Agreement and guarantees thereof, to the extent of the value of the assets securing such debt, and are structurally subordinated to all indebtedness of any of our subsidiaries that do not guarantee the Senior Notes 2027.

 

We have no assets or operations independent of our subsidiaries, and there are no significant restrictions upon our ability to obtain funds from our subsidiaries by dividend or loan. Each of the Guarantors is 100% owned by us. None of the assets of our subsidiaries represent restricted net assets pursuant to Rule 4-08(e)(3) of Regulation S-X under the Securities Act.

 

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(9) Preferred Units and Warrants

 

Series A Preferred Unit and Warrant Private Placement

 

On the Transactions Date, we completed a private placement of $500 million in the aggregate of (i) newly authorized and established Series A Preferred Units (the “Preferred Units”) and (ii) warrants to purchase common units (the “Warrants”) pursuant to a Series A Preferred Unit and Warrant Purchase Agreement dated January 15, 2018, with certain investment funds managed or advised by EIG Global Energy Partners (collectively, the “Preferred Unitholders”).  We issued 500,000 Preferred Units with a face value of $1,000 per Preferred Unit and issued two tranches of Warrants to the Preferred Unitholders, which included Warrants to purchase 5,000,000 common units with a strike price of $17.03 per unit and 10,000,000 common units with a strike price of $19.59 per unit. The Warrants may be exercised by the holders thereof at any time beginning April 2, 2019 and before April 2, 2028.

 

The Preferred Units rank senior to the common units with respect to distributions and rights upon liquidation. The Preferred Unitholders are entitled to receive cumulative quarterly distributions equal to $24.375 per Preferred Unit, which may be paid in cash or, subject to certain limits, a combination of cash and additional Preferred Units as determined by the General Partner, with respect to any quarter ending on or prior to June 30, 2019. The distribution attributable to the quarter ended March 31, 2019 will be paid on May 10, 2019 to Preferred Unitholders of record as of the close of business on April 29, 2019.

The Preferred Units are presented as temporary equity in the mezzanine section of the unaudited condensed consolidated balance sheets because the redemption provisions exercisable on or after April 2, 2028 are outside the Partnership’s control. The Preferred Units have been recorded at their issuance date fair value, net of issuance cost.  Net income allocations increase the carrying value and declared distributions decrease the carrying value of the Preferred Units. As the Preferred Units are not currently redeemable and it is not probable that they will become redeemable by us, adjustment to the initial carrying amount is not necessary and would only be required if it becomes probable that the Preferred Units would become redeemable by us.

Changes in the Preferred Units balance from December 31, 2018 through March 31, 2019 are summarized below (in thousands):

 

 

 

 

 

 

 

Preferred Units

Balance at December 31, 2018

 

$

477,309

Net income allocated to Preferred Units

 

 

12,187

Cash distributions on Preferred Units

 

 

(12,187)

Balance at March 31, 2019

 

$

477,309

The Warrants are presented within the equity section of the unaudited condensed consolidated balance sheets in accordance with GAAP as they are indexed to the Partnership’s common units and require physical settlement or net common unit settlement.

Refer to Note 12  for information about the rights EIG Veteran Equity Aggregator, L.P. (along with its affiliated funds, “EIG”) has to designate one of the members of the Board of Directors of USA Compression GP, LLC (the “Board”).  

 

(10)  Partners’ Capital

 

Common Units

 

As of March 31, 2019, we had 90,157,764 common units outstanding. As of March 31, 2019, ETO held 39,658,263 common units, including 8,000,000 common units held by the General Partner and controlled by ETO.  

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Class B Units

 

As of March 31, 2019, we had 6,397,965 Class B Units outstanding which represent limited partner interests in the Partnership, all of which were held by ETO. Each Class B Unit will automatically convert into one common unit following the record date attributable to the quarter ending June 30, 2019. Each Class B Unit has all of the rights and obligations of a common unit except the right to participate in distributions made prior to conversion into a common unit.  

 

Cash Distributions

As the USA Compression Predecessor is deemed to be the predecessor of the Partnership for financial reporting purposes, cash distributions made by the Partnership in periods prior to the Transactions Date are not included within the results of operations presented within the unaudited condensed consolidated financial statements for the three months ended March 31, 2018.

We have declared quarterly distributions per unit to our limited partner unitholders of record, including holders of our common units and phantom units, as follows (dollars in millions, except distribution per unit):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution per

 

Amount Paid to

 

Amount Paid to

 

 

 

 

 

Limited Partner

 

Common

 

Phantom

 

Total

 

Payment Date

  

Unit

  

Unitholders

  

Unitholders

  

Distribution

 

February 8, 2019

 

$

0.525

 

$

47.2

 

$

0.7

 

$

47.9

 

 

Announced Quarterly Distribution

 

On April 18, 2019, we announced a cash distribution of $0.525 per unit on our common units. The distribution will be paid on May 10, 2019 to common unitholders of record as of the close of business on April 29, 2019.  

 

Distribution Reinvestment Plan

 

During the three months ended March 31, 2019, distributions of $0.3 million were reinvested under the Distribution Reinvestment Plan (“DRIP”) resulting in the issuance of 16,714 common units.

 

Earnings Per Unit

 

The computation of earnings per unit is based on the weighted average number of participating securities outstanding during the applicable period. Basic earnings 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. Net income (loss) 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) for the period, the excess distributions are allocated to all participating securities outstanding based on their respective ownership percentages. Diluted earnings per unit are computed using the treasury stock method, which considers the potential issuance of limited partner units associated with our long-term incentive plan and Warrants. The classes of participating securities include common units, Class B Units, and certain equity-based compensation awards. Unvested phantom units and unexercised Warrants are not included in basic earnings per unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per unit to the extent that they are dilutive, and in the case of Warrants to the extent they are considered “in the money.”  For the three months ended March  31, 2019, approximately 114,000 incremental unvested phantom units were excluded from the calculation of diluted earnings per unit because the impact was anti-dilutive. Our outstanding Warrants are not included in the computation as of March 31, 2019 as they are not considered “in the money” for the period. Earnings per unit is not applicable to the USA Compression Predecessor as the USA Compression Predecessor had no outstanding common units prior to the Transactions.

 

(11)  Revenue Recognition

 

On January 1, 2018, we adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018.

 

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We identified no material impact on our historical revenues upon initial application of ASC Topic 606, and as such did not recognize any cumulative catch-up effect to the opening balance of our partners’ capital as of January 1, 2018. Additionally, the application of ASC Topic 606 had no material impact on any financial statement line items.

 

The following table disaggregates our revenue by type of service (in thousands): 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

  

2019

  

2018

Contract operations revenue

 

$

168,010

 

$

73,665

Retail parts and services revenue

 

 

2,736

 

 

2,865

Total revenues

 

$

170,746

 

$

76,530

 

The following table disaggregates our revenue by timing of provision of services or transfer of goods (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

  

2019

  

2018

Services provided or goods transferred at a point in time

 

$

2,736

 

$

2,865

Services provided over time: