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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(MARK ONE)

FOR THE QUARTERLY PERIOD ENDED September 30, 2013

FOR THE TRANSITION PERIOD FROM              TO              

Commission File No. 001-35779

USA Compression Partners, LP

(Exact name of registrant as specified in its charter)

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 x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

As of November 4, 2013, there were 23,078,673 common units and 14,048,588 subordinated units outstanding.

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PART I. FINANCIAL INFORMATION

ITEM 1.                        Financial Statements

USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except for unit information)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per unit amounts)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Partners’ Capital

(In thousands, except for unit amounts)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

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USA COMPRESSION PARTNERS, LP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1)         Organization and Summary of Significant Accounting Policies

(a)         Organization

USA Compression Partners, LP (the “Partnership”) is a publicly traded Delaware limited partnership formed to own and operate the business conducted by its subsidiaries. The common units representing limited partner interests in the Partnership (“Common Units”) are listed on the New York Stock Exchange (“NYSE”) under the symbol “USAC.” USA Compression GP, LLC, the general partner of the Partnership (“General Partner”), is owned by USA Compression Holdings, LLC (“USA Compression Holdings”). Unless the context requires otherwise, references to “we,” “us,” “our,” or “the Partnership” are intended to mean the business and operations of USA Compression Partners, LP and its consolidated subsidiaries and references to the “General Partner” refer to the General Partner and its consolidated subsidiaries. On January 18, 2013, the Partnership completed its initial public offering (“IPO”) pursuant to a Registration Statement on Form S-1, as amended (Reg. No. 333-174803), that was declared effective on January 14, 2013 (the “Registration Statement”). Under the Registration Statement, the Partnership sold 11,000,000 Common Units at a price to the public of $18.00 per Common Unit, which generated net proceeds to the Partnership of $180,555,381 after deducting underwriting discounts and commissions of $12,127,500, structuring fees of $742,500 and offering expenses of $4,574,619, including $139,180 of expenses related to the effective registration statement with the Securities and Exchange Commission (“SEC”) that registered the issuance of up to 4,150,000 of the Partnership’s Common Units in connection with a distribution reinvestment plan (“DRIP”) . Upon closing of the IPO, USA Compression Holdings received consideration of a 2% general partner interest, 14,048,588 subordinated units representing limited partner interests in the Partnership (“Subordinated Units”), 4,048,588 Common Units of the Partnership, and all of the Incentive Distribution Rights (“IDRs”) for its prior equity interest.

On August 30, 2013, the Partnership completed the acquisition of assets and certain liabilities related to the business of providing compression services to third parties engaged in the exploration, production, gathering, processing, transportation or distribution of oil and gas (the “S&R Acquisition”) in exchange for 7,425,261 Common Units, which were valued at $181.9 million at the time of issuance. The S&R Acquisition was consummated pursuant to the Contribution Agreement dated August 12, 2013 (the “Contribution Agreement”) with S&R Compression, LLC, (“S&R”) and Argonaut Private Equity, L.L.C. (“Argonaut”). The S&R Acquisition had an effective date of June 30, 2013. The issuance of Common Units in the S&R Acquisition was not registered pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or any applicable state securities laws, and, at the time of issuance, were restricted securities under the federal securities laws.

The Partnership, together with its wholly-owned subsidiaries USA Compression Partners, LLC (“Operating Subsidiary”) and Operating Subsidiary’s wholly-owned subsidiary USAC Leasing LLC (“Leasing Subsidiary”) and USAC OpCo 2, LLC (“OPCO 2”) and OPCO 2’s wholly-owned subsidiary USAC Leasing 2, LLC (“Leasing 2” and together with Operating Subsidiary, Leasing Subsidiary and OPCO 2, the “Operating Subsidiaries”), primarily provides natural gas compression services under term contracts with customers in the oil and gas industry, using natural gas compressor packages that it designs, engineers, owns, operates and maintains. The consolidated financial statements as of September 30, 2013 and 2012 include the accounts of the Partnership and the Operating Subsidiaries and all intercompany balances and transactions have been eliminated in consolidation.

Our ownership is as follows:

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Partnership net income (loss) is allocated to the partners in proportion to their respective interest in the Partnership.

(b)         Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Partnership have been prepared on the same basis as the audited consolidated financial statements included in the Partnership’s annual report on Form 10-K for the year ended December 31, 2012. In the opinion of the Partnership’s management, such financial information reflects all adjustments necessary for a fair presentation of the financial position as of September 30, 2013 and December 31, 2012, and the results of operations, changes in partners’ capital and changes in cash flows for the three months and nine months ended September 30, 2013 and 2012, in accordance with accounting principles generally accepted in the United States (“GAAP”). All intercompany items and transactions have been eliminated in consolidation. 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 consolidated financial statements should be read in conjunction with the Partnership’s audited consolidated financial statements for the year ended December 31, 2012 contained in our Annual Report on Form 10-K filed on March 28, 2013. As the closing of the Partnership’s IPO occurred on January 18, 2013, the earnings and earnings per unit for the nine months ended September 30, 2013 have been pro-rated to reflect earnings on a pre-IPO and post-IPO basis.

(c)          Use of Estimates

The 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 exist at the date of the unaudited condensed consolidated financial statements. Although these estimates are based on management’s available knowledge of current and expected future events, actual results could be different from those estimates.

(d)         Intangible Assets

As of September 30, 2013, intangible assets, net consisted of the following (in thousands):

Intangible assets are amortized on a straight line basis over their estimated useful lives, which is the period over which the assets are expected to contribute directly or indirectly to the Partnership’s future cash flows. As of September 30, 2013, the amortization periods of identifiable intangible asset - customer relationships and identifiable intangible asset - trade names vary between 20 and 30 years and the amortization period of identifiable intangible asset - non-compete is 4 years.

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The expected amortization of the intangible assets for each of the five succeeding years is as follows (in thousands):

The Partnership assesses long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is assessed by comparing the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amounts exceed the fair value of the assets. The Partnership did not record any impairment of intangible assets in the nine months ended September 30, 2013 or year ended December 31, 2012.

(e)          Fair Value of Financial Instruments

Accounting standards on fair value measurement establish a framework for measuring fair value and stipulate disclosures about fair value measurements. The standards apply to recurring and nonrecurring 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 the Partnership uses 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 the Partnership has the ability to access at the measurement date.

Level 2 inputs are inputs 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.

The Partnership’s financial instruments consist 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 maturity. The carrying amounts of long-term debt approximates fair value based on the interest rates charged on instruments with similar terms and risks.

(2)         Acquisitions

On August 30, 2013, the Partnership completed the acquisition of assets and certain liabilities related to the business of providing gas lift compression services to third parties engaged in the exploration, production, gathering, processing, transportation or distribution of oil and gas in exchange for 7,425,261 Common Units, which were valued at $181.9 million at the time of issuance. The S&R Acquisition was consummated pursuant to the Contribution Agreement with S&R and Argonaut. The S&R Acquisition had an effective date of June 30, 2013. The issuance of Common Units in the S&R Acquisition was not registered pursuant to the Securities Act, or any applicable state securities laws, and, at the time of issuance, were restricted securities under the federal securities laws. The effective purchase price of $178.3 million, reflects customary effective-date adjustments such as a $3.7 million purchase price adjustment due to working capital changes from the effective date to the closing date.

The transaction was accounted for in accordance with Accounting Standards Codification 805, Business Combinations, (“ASC 805”). The purchase price allocation as of August 30, 2013 is comprised of the following components (in thousands):

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Expenses associated with acquisition activities and transaction activities related to the S&R Acquisition for the nine months ended September 30, 2013 were $1.5 million and are included in selling, general and administrative expenses (“SG&A”). The acquisition was recorded at fair value, which was determined using the cost and market approaches for the fixed assets, the multi-period excess earnings method was used to determine fair value of the customer relationships asset and the with-and-without method was used to determine fair value of the non-compete agreement. In applying these accounting principles, we estimated the fair value of the S&R assets acquired to be $127.6 million. This measurement resulted in the recognition of goodwill totaling approximately $50.7 million. Goodwill was calculated as the excess of the consideration transferred to acquire S&R over the acquisition date estimated fair value of the assets acquired. Goodwill recorded in the S&R Acquisition primarily represents the value of the opportunity to expand into gas lift operations with a high quality fleet, the experience and technical expertise of former S&R employees who have joined USA Compression, and the addition of strategic areas of operations in which the Partnership did not previously have a significant presence. The intangible asset customer relationships will be amortized over a life of 20 years and the intangible asset non-compete will be amortized over a life of 4 years.

Revenue, Net Income and Pro Forma Financial Information — Unaudited

The S&R Acquisition was not included in the Partnership’s consolidated results until the closing date of August 30, 2013. For the period of August 30, 2013 to September 30, 2013, the S&R Acquisition accounted for $3.5 million of revenue, $1.2 million of direct operating expenses and $0.9 million of depreciation and amortization, resulting in $1.4 million of net income. The net income attributable to these assets does not reflect certain expenses, such as SG&A and interest expense; therefore, this information is not intended to report results as if these operations were managed on a stand-alone basis.

The unaudited pro forma financial information was prepared assuming the S&R Acquisition occurred on January 1, 2012. The financial information was derived from the Partnership’s and S&R’s unaudited historical consolidated financial statements for the 2012 and 2013 interim periods.

The pro forma adjustments were based on currently available information and certain estimates and assumptions by management. If the S&R Acquisition had been in effect on the dates or for the periods indicated, the results may have been substantially different. For example, we may have operated the assets differently than S&R, realized service revenue may have been different and costs of operation of the compression assets may have been different. This pro forma financial information is provided for illustrative purposes only and may not provide an indication of results in the future.  The following table presents a summary of our pro forma financial information (in thousands except earnings per share):

(1)         The Partnership did not complete its initial public offering until January 18, 2013.  Therefore, earnings per unit information is not applicable for the 2012 period.

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For the pro forma financial information, certain information was derived from financial records and certain information was estimated. The sources of information and significant assumptions are described below:

 (a)      Revenues and direct operating expenses for S&R were derived from the historical financial records of S&R. Incremental revenue adjustments related to the S&R Acquisition were $10.3 million and $6.2 million for the three months ended September 30, 2013 and 2012, respectively. Incremental operating costs related to the S&R Acquisition were $4.1 million and $3.2 million for the three months ended September 30, 2013 and 2012, respectively. Incremental revenue adjustments related to the S&R Acquisition were $27.1 million and $17.3 million for the nine months ended September 30, 2013 and 2012, respectively. Incremental operating costs related to the S&R Acquisition were $12.2 million and $8.7 million for the nine months ended September 30, 2013 and 2012, respectively.

 (b)      Depreciation and amortization was estimated using the straight-line method and reflects the incremental depreciation and amortization expense incurred due to adding the compression assets and intangible fair value assets acquired from S&R. Incremental depreciation and amortization was estimated at $2.4 million for the three months ended September 30, 2013 and 2012, and $7.3 million for the nine months ended September 30, 2013 and 2012.

 (c)       Incremental transaction expenses related to the S&R Acquisition were $1.5 million and were assumed to be funded from cash on hand.

 (d)      The S&R Acquisition was financed solely with Common Units issued in consideration for the assets and liabilities acquired as part of the S&R Acquisition.

 (e)       The capital contribution made by the General Partner to maintain its 2% general partner interest in the Partnership in connection with the issuance of Common Units in the S&R Acquisition was used to pay down the Partnership’s revolving credit facility resulting in a reduction of interest expense. Incremental interest expense reductions were estimated at $0.02 million and $0.03 million for the three months ended September 30, 2013 and 2012, respectively, and $0.09 million and $0.08 million for the nine months ended September 30, 2013 and 2012, respectively.

(3)         Trade Accounts Receivable

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts of $208,983 and $259,638 at September 30, 2013 and December 31, 2012, respectively, is the Partnership’s best estimate of the amount of probable credit losses in the Partnership’s existing accounts receivable. The Partnership determines the allowance based upon historical write-off experience and specific identification. The Partnership does not have any off-balance-sheet credit exposure related to its customers.

(4)         Property and Equipment

Property and equipment consisted of the following at September 30, 2013 and December 31, 2012 (in thousands):

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We recognized $12,573,943 and $10,173,044 of depreciation expense on property, plant and equipment for the three months ended September 30, 2013 and 2012, respectively.  We recognized $34,912,456 and $28,322,251 of depreciation expense on property, plant and equipment for the nine months ended September 30, 2013 and 2012, respectively.

As of September 30, 2013 and December 31, 2012, there was $11,237,243 and $5,940,149, respectively, of property and equipment purchases in accounts payable and accrued liabilities.

(5)         Long-Term Debt

The long-term debt of the Partnership, of which there is no current portion, consisted of the following at September 30, 2013 and December 31, 2012 (in thousands):

On June 1, 2012, the Partnership made a third amendment to the credit agreement whereby the aggregate commitment under the facility increased from $500,000,000 to $600,000,000. In addition, on June 1, 2012, the Partnership entered into the Fourth Amended and Restated Credit Agreement in order to provide a structure that the Partnership believes is more appropriate for a public company than was in the prior credit agreement, including a reduction of the applicable margin for LIBOR loans to a range of 175 to 250 basis points above LIBOR, depending on the Partnership’s leverage ratio. The Fourth Amended and Restated Credit Agreement became effective on January 18, 2013, the closing date of the Partnership’s initial public offering. On January 18, 2013, the Partnership completed its IPO pursuant to the Registration Statement and used the net proceeds from the offering to repay $180,646,751 of indebtedness outstanding under its revolving credit facility.

On December 10, 2012, the Partnership amended the Fourth Amended and Restated Credit Agreement to extend the periods during which the maximum funded debt to EBITDA ratio thresholds will apply. In addition, borrowing availability under the revolving credit facility was linked to the Partnership’s asset base, with the increased maximum capacity of $600,000,000 (subject to a further potential increase of $50,000,000). The revolving credit facility is secured by a first priority lien against the Partnership’s assets and matures on October 5, 2015, at which point all amounts outstanding will become due.

As of September 30, 2013 we had approximately $390.3 million of variable-rate outstanding indebtedness at a weighted-average interest rate of 2.43%.  At September 30, 2013, subject to financial covenants, borrowing availability was $209,694,474. The borrowing base consists of eligible accounts receivable, inventory and compression units. The largest component, representing 96% and 95% of the borrowing base at September 30, 2013 and December 31, 2012, respectively, is eligible compression units — compressor packages that are leased, rented or under service contracts to customers and carried in the financial statements as fixed assets.

The revolving credit facility expires in 2015 and the Partnership expects to maintain its facility for the term. The facility is a “revolving credit facility” that includes a “springing” lock box arrangement, whereby remittances from customers are forwarded to a bank account controlled by the Partnership, and the Partnership is not required to use such remittances to reduce borrowings under the facility, unless there is a default or excess availability under the facility is reduced below $20,000,000. The facility qualifies as a refinancing, and, as such, the debt has been classified as long term at September 30, 2013 and December 31, 2012.

The Fourth Amended and Restated Credit Agreement permits us to make distributions of available cash to unitholders so long as (a) no default or event of default under the facility occurs or would result from the distribution, (b) immediately prior to and after giving effect to such distribution, the Partnership is in compliance with the facility’s financial covenants and (c) immediately after giving effect to such distribution, the Partnership has availability under the revolving credit facility of at least $20,000,000. In addition, the amended and restated credit agreement contains various covenants that may limit, among other things, the Partnership’s ability to:

·                  grant liens;

·                  make certain loans or investments;

·                  incur additional indebtedness or guarantee other indebtedness;

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·                  subject to exceptions, enter into transactions with affiliates;

·                  sell the Partnership’s assets; or

·                  acquire additional assets.

The Fourth Amended and Restated Credit Agreement also contains financial covenants requiring the Partnership to maintain:

·                  a minimum EBITDA to interest coverage ratio of 2.5 to 1.0; and

·                  a maximum funded debt to EBITDA ratio, determined as of the last day of each fiscal quarter, for the twelve month period then ending of (a) 5.50 to 1.0, with respect to any fiscal quarter ending on or after January 18, 2013, the closing date of the Partnership’s initial public offering, through March 31, 2014 or (b) 5.00 to 1.0, with respect to the fiscal quarter ending June 30, 2014 and each fiscal quarter 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.

If an event of default exists under the revolving credit facility, the lenders will be able to accelerate the maturity of the revolving credit facility and exercise other rights and remedies. As of September 30, 2013, the Partnership was in compliance with these financial covenants.

(6)         Partner’s Capital

In connection with the closing of the Partnership’s IPO, USA Compression Holdings converted its interests in the Partnership into 4,048,588 Common Units and 14,048,588 Subordinated Units and USA Compression GP, LLC converted its general partner interest in the Partnership into a 2.0% general partner interest and the IDRs. See the condensed consolidated statement of changes in Partners’ Capital.

Subordinated Units

All of the Subordinated Units are held by USA Compression Holdings. The partnership agreement provides that, during the subordination period, the Common Units have the right to receive distributions of Available Cash from Operating Surplus (as defined in our partnership agreement) each quarter in an amount equal to $0.425 per Common Unit (the “Minimum Quarterly Distribution”), plus any arrearages in the payment of the Minimum Quarterly Distribution from Operating Surplus on the Common Units from prior quarters, before any distributions of Available Cash from Operating Surplus may be made on the Subordinated Units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the Subordinated Units will not be entitled to receive any distributions from Operating Surplus until the Common Units have received the Minimum Quarterly Distribution plus any arrearages from prior quarters. The practical effect of the Subordinated Units is to increase the likelihood that during the subordination period there will be Available Cash from Operating Surplus to be distributed on the Common Units. The subordination period will end on the first business day after we have earned and paid at least (i) $1.70 (the Minimum Quarterly Distribution on an annualized basis) on each outstanding unit and the corresponding distribution on our general partner’s 2.0% interest for each of three consecutive, non-overlapping four-quarter periods ending on or after December 31, 2015 or (ii) $2.55 (150.0% of the annualized Minimum Quarterly Distribution) on each outstanding unit and the corresponding distributions on our general partner’s 2.0% interest and the related distribution on the incentive distribution rights for the four-quarter period immediately preceding that date. When the subordination period ends, all Subordinated Units will convert into Common Units on a one-for-one basis, and all Common Units thereafter will no longer be entitled to arrearages.

Incentive Distribution Rights

Our general partner holds the incentive distribution rights (“IDRs”). The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total quarterly

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distribution per unit.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2.0% general partner interest, assume our general partner has contributed any additional capital necessary to maintain its 2.0% general partner interest and has not transferred its incentive distribution rights and there are no arrearages on Common Units.

Within 45 days after the end of each quarter, the Partnership intends to make cash distributions to the partners of record on the applicable record date. On August 14, 2013, the Partnership paid a cash distribution for the second quarter of 2013 of approximately $13.2 million to its unitholders of record as of the close of business on August 2, 2013 at the rate of $0.44 per unit on its Common and Subordinated Units. Certain limited partners, including USA Compression Holdings, LLC, have elected to receive distributions in the form of additional Common Units in accordance with the Partnership’s DRIP. Such distributions, which are treated as non-cash transactions in the accompanying statements of cash flows, totaled $8.1 million for the second quarter of 2013.

On October 24, 2013, the Partnership announced a cash distribution of $0.46 per unit on its Common and Subordinated Units. The distribution will be paid on November 14, 2013 to unitholders of record as of the close of business on November 4, 2013. USA Compression Holdings, LLC, the owner of 50.4% of the Partnership’s outstanding limited partner interests, and Argonaut Private Equity and certain of its affiliates, the owners of 19.2% of the Partnership’s outstanding limited partner interests, have elected to reinvest all of this distribution with respect to their units pursuant to the Partnership’s DRIP.

Earnings Per Common and Subordinated Unit

The computations of earnings per Common and Subordinated Unit are based on the weighted average number of Common and Subordinated Units, respectively, outstanding during the applicable period. The Partnership’s Subordinated Units meet the definition of a participating security and therefore it is required to use the two-class method in the computation of earnings per unit. Basic earnings per Common and Subordinated Unit are determined by dividing net income allocated to the Common and Subordinated Units, respectively, after deducting the amount allocated to the Partnership’s general partner (including distributions to the general partner on its incentive distribution rights), by the weighted average number of outstanding Common and Subordinated Units, respectively, during the period.

Pursuant to the partnership agreement, to the extent that the quarterly distributions exceed certain targets, the general partner is entitled to receive certain incentive distributions that will result in more earnings proportionately being allocated to the general partner than to the holders of Common and Subordinated Units. Our earnings per unit calculations, which allocate 2% of earnings to the general partner, assume that, while such distribution to the general partner with respect to its 2% general partner interest was made, no incentive distributions were permitted to be, or were, made to the general partner because quarterly distributions declared by the board of directors for the third quarter of 2013 did not exceed the specified targets.

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(7)         Equity-based Awards

Long-Term Incentive Plan

In connection with the Partnership’s IPO, the Board adopted the USA Compression Partners, LP 2013 Long-Term Incentive Plan (“LTIP”) for employees, consultants and directors of the general partner and any of its affiliates who perform services for the Partnership. The LTIP consists of unit options, unit appreciation rights, restricted units, phantom units, distribution equivalent rights, unit awards, profits interest units and other unit-based awards. The LTIP initially limits the number of Common Units that may be delivered pursuant to awards under the plan to 1,410,000 Common Units. Common Units that are forfeited, cancelled, exercised, paid, or otherwise terminate or expire without the actual delivery of units will be available for delivery pursuant to other awards. The LTIP will be administered by the Board or a committee thereof.

In March 2013, an aggregate of 237,490 phantom units (including the corresponding distribution equivalent rights) were granted under the LTIP to our general partner’s executive officers and employees and independent directors of our general partner. In the three months ending June 30, 2013, an aggregate of 14,947 phantom units (including the corresponding distribution equivalent rights) were granted under the LTIP to employees of the general partner who perform services on behalf of the Partnership, no phantom units were issued during the three months ended September 30, 2013. The phantom units (including the corresponding distribution equivalent rights) awarded are subject to restrictions on transferability, customary forfeiture provisions and time vesting provisions generally in which one-third of each award vests on the first, second, and third anniversaries of the date of grant. Award recipients do not have all the rights of a unitholder in the partnership with respect to the phantom units until the units have vested.

The fair value of the phantom units awarded to our general partner’s executive officers, employees and independent directors, was $4,955,000 based on the market price per unit on the date of grant. This amount will be recognized as compensation cost on a straight-line basis over the requisite service period. Our general partner’s executive officers, employees and independent directors were granted these awards to incentivize them to help drive the Partnership’s future success and to share in the economic benefits of that success. The compensation costs associated with these awards are recorded as direct general and administrative expenses. During the three and nine months ended September 30, 2013, we recognized $337,388 and $904,839, respectively, of compensation expense associated with these awards.

The following table summarizes information regarding phantom unit awards for the periods presented:

(1)         Determined by dividing the aggregate grant date fair value of awards by the number of awards issued.

The unrecognized compensation cost associated with phantom unit awards was an aggregate $3,350,162 at September 30, 2013. We expect to recognize the unrecognized compensation cost for these awards over a weighted-average period of 2.3 years.

Each phantom unit granted is granted in tandem with a corresponding distribution equivalent right (“DER”), which shall remain outstanding and unpaid from the grant date until the earlier of the payment or forfeiture of the related phantom units. Each vested DER shall entitle the participant to receive payments in the amount equal to any distributions made by the Partnership following the grant date in respect of the Common Unit underlying the phantom unit to which such DER relates.

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(8)         Transactions with Related Parties

For the nine months ended September 30, 2013, the Partnership incurred $49,315 of expenses related to a management fee under an agreement between USA Compression Holdings and certain of its affiliates, for services provided to the Partnership for the period from January 1, 2013 through January 17, 2013. For the nine months ended September 30, 2012, the Partnership incurred $750,000 of management fees under such agreement.

William Shea, who has served as a director of USA Compression GP, LLC since June 2011, is currently a director and the chief executive officer of the general partner of PVR Partners, L.P. (“PVR”). For the three months ended September 30, 2013 and 2012, subsidiaries of PVR made compression services payments to us of approximately $0.8 million and $0.6 million, respectively. For the nine months ended September 30, 2013 and 2012, subsidiaries of PVR made compression services payments to us of approximately $2.2 million and $1.7 million, respectively.

The Partnership provides compression services to affiliated entities controlled by Riverstone, who owns a majority of the membership interest in USA Compression Holdings, which owns and controls the Partnership’s general partner and owns 50.4% of our limited partner interests. For the three months ended September 30, 2013 and 2012, affiliated entities made compression services payments to the Partnership of approximately $0.1 million. For the nine months ended September 30, 2013 and 2012, affiliated entities made compression services payments to the Partnership of approximately $0.4 million. The Partnership may provide compression services to additional entities controlled by Riverstone in the future and any significant transactions will be disclosed.

(9)         Commitments and Contingencies

(a)         Operating Leases

Rent expense for office space, warehouse facilities and certain corporate equipment for the three months ended September 30, 2013 and 2012, was $415,629 and $303,347, respectively, and for the nine months ended September 30, 2013 and 2012, was $1,153,361 and $861,245, respectively.

Commitments for future minimum lease payments for noncancelable leases as of the year ending September 30 are as follows (in thousands):

(b)         Major Customers

The Partnership had revenue from two customers representing 14.7% and 7.1% of total revenue for the three months ended September 30, 2013 and revenue from two customers representing 15.1% and 9.4% of total revenue for the three months ended September 30, 2012. The Partnership had revenue from two customers representing 15.0% and 7.9% of total revenue for the nine months ended September 30, 2013 and revenue from two customers representing 14.3% and 9.9% of total revenue for the nine months ended September 30, 2012.

(c)          Litigation

The Partnership may be involved in various claims and litigation arising in the ordinary course of business. In management’s opinion, the resolution of such matters is not expected to have a material adverse effect on the Partnership’s consolidated financial position, results of operations or cash flows.

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

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements.” All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our plans, strategies, prospects and expectations concerning our business, results of operations and financial condition. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “continue” or similar words or the negative thereof.

Known material factors that could cause our actual results to differ from those in these forward-looking statements are described below, in Part II, Item 1A (“Risk Factors”) of this report. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:

·                  changes in general economic conditions;

·                  competitive conditions in our industry;

·                  changes in the long-term supply of and demand for natural gas and crude oil;

·                  our ability to realize the anticipated benefits of the S&R Acquisition and to integrate the acquired assets with our existing fleet;

·                  actions taken by our customers, competitors and third party operators;

·                  changes in the availability and cost of capital;

·                  operating hazards, natural disasters, weather related delays, casualty losses and other matters beyond our control;

·                  the effects of existing and future laws and governmental regulations; and

·                  the effects of future litigation.

All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.

Overview

We are a growth-oriented Delaware limited partnership and, based on management’s significant experience in the industry, we believe that we are one of the nation’s largest independent providers of compression services in terms of total compression unit horsepower. We partner with a broad customer base composed of producers, processors, gatherers and transporters of natural gas and oil producers. Our focus is to provide compression services to infrastructure applications primarily in high volume gathering systems, processing facilities and transportation applications.

On August 30, 2013, we completed the acquisition of assets and certain liabilities related to the business of providing compression services to third parties engaged in the exploration, production, gathering, processing, transportation or distribution of oil and gas (the “S&R Acquisition”) in exchange for 7,425,261 Common Units, which were valued at approximately $181.9 million at the time of issuance. The S&R Acquisition was consummated pursuant to the Contribution Agreement dated August 12, 2013 (the “Contribution Agreement”) with S&R Compression, LLC, (“S&R”) and Argonaut Private Equity, L.L.C. (“Argonaut”). The S&R Acquisition had an effective date of June 30, 2013. In connection with the S&R Acquisition, the Partnership acquired 982 gas lift compression units with a total horsepower of approximately 138,000.  The issuance of Common Units in the S&R

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Acquisition was not registered pursuant to the Securities Act of 1933, as amended (the “Securities Act”), or any applicable state securities laws, and, at the time of issuance, were restricted securities under the federal securities laws.

General Trends and Outlook

Following a period of decreasing market rates in 2009 and 2010, when we elected to sign shorter-term contracts to limit our long-term exposure to lower market rates, rates have improved and generally stabilized starting in 2011 and continuing into this year.  We have experienced some pricing pressure on certain of our midstream compression units, and expect that to continue through the remainder of 2013. However, over the long term, we expect that continued improved pricing will ultimately improve our average monthly revenue per revenue generating horsepower as contracts that we entered into in 2009 and early 2010 expire and we enter into new contracts at higher rates. In our gas lift fleet, we have continued to experience strong market demand and, as a result, attractive pricing. We intend to grow the number of midstream and gas lift horsepower units in our fleet. While midstream horsepower units in general allow us to generate higher gross operating margins than gas lift units, they also generate lower average monthly revenue per revenue generating horsepower.

Our ability to increase our revenues is dependent in large part on our ability to add new revenue generating compression units to our fleet and increase the utilization of idle compression units. During 2010, we began to see an increase in overall natural gas activity in the U.S. and experienced an increase in demand for our compression services that has continued through 2012 and 2013. The generally strong activity in crude oil production in our core gas lift regions has also contributed to increased demand for our services. Revenue generating horsepower increased by 31.6% from September 30, 2012 to September 30, 2013, in part due to the S&R Acquisition. The average revenue generating horsepower increased by 16.6%, primarily due to growth in our core midstream compression business along with the S&R Acquisition, from the three months ended September 30, 2012 to the three months ended September 30, 2013. We believe the natural gas activity levels in the U.S. will continue to increase, particularly in shale plays as well as crude oil production, especially in unconventional resource plays. We anticipate this activity will result in higher demand for our compression services, which we believe should result in increasing revenues. However, the expected increase in overall natural gas and crude oil activity and demand for our compression services may not occur for a variety of reasons. Please read “Disclosure Regarding Forward-Looking Statements”.

Operating Highlights

The following table summarizes certain horsepower and horsepower utilization percentages for the periods presented.

(1)         Fleet horsepower is horsepower for compression units that have been delivered to us (and excludes units on order).

(2)         Revenue generating horsepower is horsepower under contract for which we are billing a customer.

(3)         Calculated as the average of the month-end horsepower per revenue generating horsepower for each of the months in the period.

(4)   Includes 1,014 of revenue generating gas lift compression units purchased in connection with the S&R Acquisition.

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(5)         Horsepower utilization is calculated as (i)(a) revenue generating horsepower plus (b) horsepower in our fleet that is under contract, but is not yet generating revenue plus (c) horsepower not yet in our fleet that is under contract not yet generating revenue and that is subject to a purchase order, divided by (ii) total available horsepower less idle horsepower that is under repair. Horsepower utilization based on revenue generating horsepower and fleet horsepower at each applicable period end was 89.1% and 88.5% for the quarters ended September 30, 2013 and 2012, respectively.

(6)         Calculated as the average utilization for the months in the period based on utilization at the end of each month in the period. Average horsepower utilization based on revenue generating horsepower and fleet horsepower for each applicable period was 87.8% and 89.4% for the quarters ended September 30, 2013 and 2012, respectively.

(1)         Gross operating margin is a non-GAAP financial measure. We calculate gross operating margin as revenue less cost of operations, exclusive of depreciation and amortization expense. We believe that gross operating margin is useful as a supplemental measure of our operating profitability. Gross operating margin should not be considered an alternative to, or more meaningful than, operating income or any other measure of financial performance presented in accordance with GAAP. Moreover, gross operating margin as presented may not be comparable to similarly titled measures of other companies. Because we capitalize assets, depreciation and amortization of equipment is a necessary element of our costs. To compensate for the limitations of gross operating margin as a measure of our performance, we believe that it is important to consider operating income determined under GAAP, as well as gross operating margin, to evaluate our operating profitability.

The following table reconciles gross operating margin to operating income, its most directly comparable GAAP financial measure, for each of the periods presented: