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Table of Contents 

c

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, 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)

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

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 

As of November 1, 2019, there were 96,615,998 common 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

5

Notes to Unaudited Condensed Consolidated Financial Statements

6

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

23

ITEM 3.         Quantitative and Qualitative Disclosures About Market Risk

39

ITEM 4.         Controls and Procedures

40

PART II. OTHER INFORMATION

41

ITEM 1.         Legal Proceedings

41

ITEM 1A.      Risk Factors

41

ITEM 6.         Exhibits

41

SIGNATURES

42

i

Table of Contents 

PART I.  FINANCIAL INFORMATION

ITEM 1.Financial Statements

USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Balance Sheets

(in thousands)

  

September 30,

  

December 31,

2019

2018

Assets

Current assets:

Cash and cash equivalents

$

2

$

99

Accounts receivable, net:

Trade

 

80,926

 

75,572

Other

 

7,333

 

3,809

Related party receivables

48,557

47,661

Inventories

 

92,520

 

89,007

Prepaid expenses and other assets

 

3,360

 

1,592

Total current assets

 

232,698

 

217,740

Installment receivable

3,953

6,924

Property and equipment, net

 

2,497,456

 

2,521,488

Identifiable intangible assets, net

370,515

392,550

Goodwill

 

619,411

 

619,411

Other assets

 

27,197

 

16,536

Total assets

$

3,751,230

$

3,774,649

Liabilities, Preferred Units and Partners’ Capital

Current liabilities:

Accounts payable

$

26,272

$

23,804

Related party payables

2

395

Accrued liabilities

 

99,307

 

94,028

Deferred revenue

 

47,161

 

31,372

Total current liabilities

 

172,742

 

149,599

Long-term debt, net

 

1,843,309

 

1,759,058

Other liabilities

 

23,950

 

9,827

Total liabilities

2,040,001

1,918,484

Commitments and contingencies

Preferred Units

477,309

477,309

Partners’ capital:

Limited partner interests:

Common units, 96,616 and 89,984 units issued and outstanding, respectively

 

1,219,941

 

1,289,731

Class B Units, 6,398 units issued and outstanding as of December 31, 2018

75,146

Warrants

 

13,979

 

13,979

Total partners’ capital

 

1,233,920

 

1,378,856

Total liabilities, preferred units and partners’ capital

$

3,751,230

$

3,774,649

See accompanying notes to unaudited condensed consolidated financial statements.

1

Table of Contents 

USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per unit amounts)

Three Months Ended 

Nine Months Ended 

September 30,

September 30,

  

2019

  

2018

  

2019

  

2018

Revenues:

Contract operations

$

166,197

$

158,664

$

493,110

$

383,732

Parts and service

 

4,460

 

6,012

 

11,544

 

15,836

Related party

5,099

4,271

15,523

12,807

Total revenues

 

175,756

 

168,947

 

520,177

 

412,375

Costs and expenses:

Cost of operations, exclusive of depreciation and amortization

 

57,423

 

64,309

 

170,693

 

159,177

Selling, general and administrative

 

16,631

 

17,753

 

48,836

 

52,891

Depreciation and amortization

 

57,513

 

59,403

 

173,220

 

156,943

Loss (gain) on disposition of assets

 

(1,975)

 

1,250

 

(389)

 

12,328

Impairment of compression equipment

2,292

3,234

2,292

Total costs and expenses

 

129,592

 

145,007

 

395,594

 

383,631

Operating income

 

46,164

 

23,940

 

124,583

 

28,744

Other income (expense):

Interest expense, net

 

(32,626)

 

(25,443)

 

(94,162)

 

(51,125)

Other

 

21

 

22

 

53

 

21

Total other expense

 

(32,605)

 

(25,421)

 

(94,109)

 

(51,104)

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

 

13,559

 

(1,481)

 

30,474

 

(22,360)

Income tax expense (benefit)

 

244

 

(918)

 

623

 

(1,624)

Net income (loss)

13,315

(563)

29,851

(20,736)

Less: distributions on Preferred Units

(12,188)

(12,188)

(36,563)

(24,242)

Net income (loss) attributable to common and Class B unitholders’ interests

$

1,127

$

(12,751)

$

(6,712)

$

(44,978)

Net income (loss) attributable to:

Common units

$

2,084

$

(8,768)

$

1,043

$

(33,185)

Class B Units

$

(957)

$

(3,983)

$

(7,755)

$

(11,793)

Weighted average common units outstanding - basic

 

94,625

 

89,973

 

91,648

 

69,253

Weighted average common units outstanding - diluted

 

94,846

 

89,973

 

91,817

 

69,253

Weighted average Class B Units outstanding - basic and diluted

 

2,017

 

6,398

 

4,921

 

6,398

Basic and diluted net income (loss) per common unit

$

0.02

$

(0.10)

$

0.01

$

(0.48)

Basic and diluted net loss per Class B Unit

$

(0.47)

$

(0.62)

$

(1.58)

$

(1.84)

Distributions declared per common unit for respective periods

$

0.525

$

0.525

$

1.575

$

1.05

See accompanying notes to unaudited condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital

And Predecessor Parent Company Net Investment

(in thousands, except per unit amounts)

For the Nine Months Ended September 30, 2019

  

Common Units

  

Class B Units

  

Warrants

  

Total

Partners’ capital ending 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 attributable to common and Class B unitholders’ interests

 

 

(2,088)

 

(3,512)

 

 

(5,600)

Partners’ capital ending balance, March 31, 2019

$

1,243,029

$

71,634

$

13,979

$

1,328,642

Vesting of phantom units

580

580

Distributions and distribution equivalent rights, $0.525 per unit

(47,351)

(47,351)

Issuance of common units under the DRIP

227

227

Net income (loss) attributable to common and Class B unitholders’ interests

1,047

(3,286)

(2,239)

Partners’ capital ending balance, June 30, 2019

$

1,197,532

$

68,348

$

13,979

$

1,279,859

Vesting of phantom units

71

71

Distributions and distribution equivalent rights, $0.525 per unit

(47,373)

(47,373)

Issuance of common units under the DRIP

236

236

Net income (loss) attributable to common and Class B unitholders’ interests

2,084

(957)

1,127

Conversion of Class B Units to common units

67,391

(67,391)

Partners’ capital ending balance, September 30, 2019

 

$

1,219,941

 

$

$

13,979

$

1,233,920

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USA COMPRESSION PARTNERS, LP

Unaudited Condensed Consolidated Statements of Changes in Partners’ Capital

And Predecessor Parent Company Net Investment

(continued)

(in thousands, except per unit amounts)

For the Nine Months Ended September 30, 2018

Predecessor Parent

Company Net

  

Common Units

  

Class B Units

  

Warrants

  

Investment

  

Total

Ending 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

Ending balance, March 31, 2018

$

$

$

$

1,668,230

$

1,668,230

Allocation of Predecessor parent company net investment

1,668,230

(1,668,230)

Deemed distribution for additional interest in USA Compression Predecessor

(37,178)

(37,178)

Purchase Price Adjustment for USA Compression Partners, LP

(654,340)

(654,340)

Issuance of common units for the Equity Restructuring

135,440

135,440

Issuance of common units for the CDM Acquisition

324,910

324,910

Issuance of Class B units for the CDM Acquisition

86,125

86,125

Issuance of Warrants

13,979

13,979

Vesting of phantom units

5,193

5,193

Distributions and distribution equivalent rights

(47,217)

(47,217)

Issuance of common units under the DRIP

212

212

Net loss attributable to common and Class B unitholders’ interests for the period April 2, 2018 to June 30, 2018

(5,131)

(3,726)

(8,857)

Partners’ capital ending balance, June 30, 2018

$

1,390,119

 

$

82,399

$

13,979

$

$

1,486,497

Vesting of phantom units

37

37

Distributions and distribution equivalent rights

(47,235)

(47,235)

Issuance of common units under the DRIP

212

212

Net loss attributable to common and Class B unitholders’ interests

(8,768)

(3,983)

(12,751)

Partners’ capital ending balance, September 30, 2018

 

$

1,334,365

 

$

78,416

$

13,979

$

$

1,426,760

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,

    

2019

    

2018

Cash flows from operating activities:

Net income (loss)

$

29,851

$

(20,736)

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

Depreciation and amortization

 

173,220

 

156,943

Bad debt expense

300

633

Amortization of debt issuance costs

 

5,620

 

3,555

Unit-based compensation expense

 

7,930

 

10,891

Deferred income tax expense (benefit)

352

(1,863)

Loss (gain) on disposition of assets

 

(389)

 

12,328

Impairment of compression equipment

3,234

2,292

Changes in assets and liabilities:

Accounts receivable and related party receivables, net

 

(7,103)

 

(63,576)

Inventories

 

(21,223)

 

(764)

Prepaid expenses and other current assets

 

(1,768)

 

6,520

Other noncurrent assets

 

1,783

 

(58)

Other noncurrent liabilities

(8)

Accounts payable and related party payables

 

2,468

 

(4,751)

Accrued liabilities and deferred revenue

 

14,613

 

31,786

Net cash provided by operating activities

 

208,880

 

133,200

Cash flows from investing activities:

Capital expenditures, net

 

(134,146)

 

(200,932)

Proceeds from disposition of property and equipment

22,165

6,870

Proceeds from insurance recovery

3,754

253

Acquisitions of USA Compression Predecessor

(1,232,546)

Assumed cash acquired in business combination of USA Compression Partners, LP

710,506

Net cash used in investing activities

 

(108,227)

 

(715,849)

Cash flows from financing activities:

Proceeds from revolving credit facility

 

653,721

 

482,414

Proceeds from issuance of senior notes

750,000

Payments on revolving credit facility

 

(1,308,731)

 

(279,651)

Proceeds from issuance of Preferred Units and Warrants, net

479,100

Cash paid related to net settlement of unit-based awards

(1,714)

(4,447)

Cash distributions on common units

 

(143,158)

 

(94,801)

Cash distributions on Preferred Units

(36,563)

(12,054)

Financing costs

 

(13,517)

 

(17,615)

Contributions from Parent, net

28,520

Other

(788)

Net cash provided by (used in) financing activities

 

(100,750)

 

581,466

Decrease in cash and cash equivalents

 

(97)

 

(1,183)

Cash and cash equivalents, beginning of period

 

99

 

4,013

Cash and cash equivalents, end of period

$

2

$

2,830

Supplemental cash flow information:

Cash paid for interest, net of capitalized amounts

$

99,646

$

47,972

Cash paid for taxes

$

173

$

183

Supplemental non-cash transactions:

Non-cash distributions to certain common unitholders (DRIP)

$

715

$

424

Transfers from inventories to property and equipment

$

17,686

$

9,533

Changes in capital expenditures included in accounts payable and accrued liabilities

$

3,825

$

(5,885)

Conversion of Class B Units to common units

$

67,391

$

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

$

$

(1,790)

Issuance of common units for the CDM Acquisition

$

$

324,910

Issuance of Class B Units for the CDM Acquisition

$

$

86,125

Issuance of common units for the Equity Restructuring

$

$

135,440

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 and nine months ended September 30, 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”).

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

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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.  

Inventories

Inventories consist of serialized and non-serialized parts used primarily in the repair of compression units. All inventories are stated at the lower of cost or net realizable value. Serialized parts inventories are determined using the specific identification 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 $0.1 million and $0.5 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.3 million for the three and nine months ended September 30, 2018, respectively.

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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 and nine months ended September 30, 2019 and 2018. 

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. We did not record any impairment of identifiable intangible assets during the three and nine months ended September 30, 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.

We did not record any impairment of goodwill during the three and nine months ended September 30, 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.

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.

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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, 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 our Senior Notes 2026 and Senior Notes 2027 (in thousands):

September 30, 2019

December 31, 2018

Level 2

Level 2

Senior Notes 2026, aggregate principal

$

725,000

$

725,000

Fair value of Senior Notes 2026

750,375

696,000

Senior Notes 2027, aggregate principal

$

750,000

$

Fair value of Senior Notes 2027

774,375

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.

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.

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

Balance at

Adjustments Due to

Balance Sheet

December 31, 2018, as

ASC Topic 842

Balance at

Assets (liabilities)

Line Item

Previously Reported

(Leases)

January 1, 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 $1.8 million and $1.7 million at September 30, 2019 and December 31, 2018, respectively, is our best estimate of the amount of probable credit losses included in our existing accounts receivable.

During the nine months ended September 30, 2019, we recognized bad debt expense of $0.3 million and wrote-off $0.2 million of receivables on accounts previously reserved, resulting in a $0.1 million increase in our allowance for doubtful accounts.

During the three and nine months ended September 30, 2018, we increased our allowance for doubtful accounts by $0.5 million and $0.9 million, respectively, due primarily to estimated uncollectible amounts from customers of the USA Compression Predecessor.

(4) Inventories

Components of inventories are as follows (in thousands):

    

September 30, 2019

    

December 31, 2018

Serialized parts

$

43,629

$

45,568

Non-serialized parts

 

48,891

 

43,439

Total inventories

$

92,520

$

89,007

(5)  Property and Equipment and Identifiable Intangible Assets

Property and Equipment

Property and equipment consisted of the following (in thousands):

  

September 30, 2019

    

December 31, 2018

Compression and treating equipment

$

3,355,314

$

3,239,831

Furniture and fixtures

 

1,325

 

1,129

Automobiles and vehicles

 

31,869

 

32,490

Computer equipment

 

57,133

 

54,806

Buildings

8,639

9,314

Land

77

77

Leasehold improvements

 

5,579

 

5,377

Total property and equipment, gross

 

3,459,936

 

3,343,024

Less: accumulated depreciation and amortization

 

(962,480)

 

(821,536)

Total property and equipment, net

$

2,497,456

$

2,521,488

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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 $50.2 million and $151.2 million for the three and nine months ended September 30, 2019, respectively, and $51.5 million and $136.0 million for the three and nine months ended September 30, 2018, respectively.

As of September 30, 2019 and December 31, 2018, there was $11.7 million and $7.9 million, respectively, of property and equipment purchases in accounts payable and accrued liabilities.

During the three and nine months ended September 30, 2019, we recognized $2.0 million and $0.4 million of net gains on disposition of assets, respectively.

During the three and nine months ended September 30, 2018, we recognized $1.3 million and $12.3 million of net losses on disposition of assets, respectively. The net loss for the nine months ended September 30, 2018 was primarily attributable to disposals of various property and equipment by the USA Compression Predecessor.

On a quarterly basis, we evaluate the future deployment of our idle fleet under then-current market conditions. For the nine months ended September 30, 2019 and for the three and nine months ended September 30, 2018, we determined to retire or re-utilize key components of 14 compressor units and 18 compressor units, respectively, or approximately 4,700 horsepower and 5,800 horsepower, respectively, 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 nine months ended September 30, 2019 and $2.3 million for the three and nine months ended September 30, 2018.

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 then-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.

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

 

(19,579)

 

(2,456)

 

(22,035)

Net balance at September 30, 2019

$

335,582

$

34,933

$

370,515

Accumulated amortization of intangible assets was $180.1 million and $158.1 million as of September 30, 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 September 30, 2019, accrued liabilities included $44.9 million of accrued sales tax contingency (Note 13), $13.7 million of accrued payroll and benefits, $11.7 million of accrued capital expenditures, $9.3 million of accrued property taxes and $5.8 million of accrued interest expense.

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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 up to ten years, some of which include options that permit renewals for additional periods.

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 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.

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

Three Months Ended 

Nine Months Ended 

   

Income Statement Line Item

   

September 30, 2019

   

September 30, 2019

Operating lease costs:

Operating lease cost

Cost of operations, exclusive of depreciation and amortization

$

563

$

1,218

Operating lease cost

Selling, general and administrative

312

787

Total operating lease costs

875

2,005

Finance lease costs:

Amortization of lease assets

Depreciation and amortization

116

1,526

Short-term lease costs:

Short-term lease cost

Cost of operations, exclusive of depreciation and amortization

89

233

Short-term lease cost

Selling, general and administrative

11

21

Total short-term lease costs

100

254

Variable lease costs:

Variable lease cost

Cost of operations, exclusive of depreciation and amortization

8

155

Variable lease cost

Selling, general and administrative

293

1,008

Total variable lease costs

301

1,163

Total lease costs

$

1,392

$

4,948

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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

September 30, 2019

December 31, 2018

Operating lease ROU assets

Other assets

$

13,531

$

Operating lease liabilities, current

Accrued liabilities

(2,259)

Operating lease liabilities, long-term

Other liabilities

(11,529)

Finance Leases

Assets (liabilities)

September 30, 2019

December 31, 2018

Property and equipment, gross

$

7,268

$

7,683

Accumulated depreciation

(5,733)

(4,882)

Property and equipment, net

1,535

2,801

Accrued liabilities

(883)

(1,085)

Other liabilities

(1,687)

(2,114)

Other supplemental information related to leases was as follows: