(8) Partners’ Capital

At November 6, 2014, USA Compression Holdings held 4,600,086 common units and 14,048,588 subordinated units and controlled USA Compression GP, LLC, which held an approximate 1.7% general partner interest and the incentive distribution rights (“IDRs”). See the Unaudited Condensed Consolidated Statement of Changes in Partners’ Capital.

Subordinated Units

All of the subordinated units are held by USA Compression Holdings. The First Amended and Restated Agreement of Limited Partnership of the Partnership (the “Partnership Agreement”) provides that, during the subordination period, the common units have the right to receive distributions of Available Cash from Operating Surplus (each as defined in the 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 the Partnership has 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 the General Partner’s percentage interest, which is currently approximately 1.7% (the “General Partner’s 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 the General Partner’s 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.

Cash Distributions

The Partnership has declared quarterly distributions per unit to unitholders of record, including holders of common and subordinated units and the General Partner’s Interest and IDRs held by the General Partner as follows (in millions, except distribution per unit):



	Distribution per			Amount Paid to		Amount Paid to		Amount Paid to
	Limited Partner			Common		Subordinated		General		Total
Payment Date	Unit			Unitholders		Unitholder		Partner		Distribution
May 15, 2013	$	0.348	(1)	$	5.2	$	4.9	$	0.2	$	10.3
August 14, 2013		0.44			6.7		6.2		0.3		13.2
November 14, 2013		0.46			10.6		6.5		0.3		17.4
February 14, 2014		0.48			11.3		6.7		0.4		18.4
May 15, 2014		0.49			11.8		6.9		0.4		19.1
August 14, 2014		0.50			15.1		7.0		0.5		22.6

(1)

Prorated to reflect 72 days of quarterly cash distribution rate of $0.435 per unit.

The Partnership Agreement requires that, within 45 days after the end of each quarter, the Partnership distribute all of its Available Cash to the partners of record on the applicable record date. Certain limited partners, including USA Compression Holdings and Argonaut and certain of its related parties, have elected to receive distributions in the form of additional common units in accordance with the DRIP. Distributions to these holders relating to the fourth quarter of 2013, first quarter of 2014 and second quarter of 2014, which were paid during the nine months ended September 30, 2014, were reinvested pursuant to the DRIP. Such distributions totaled $38.5 million and are treated as non-cash transactions in the accompanying Statements of Cash Flows for the nine months ended September 30, 2014.

On October 23, 2014, the Partnership announced a cash distribution of $0.505 per unit on its common and subordinated units. The distribution will be paid on November 14, 2014 to unitholders of record as of the close of business on November 4, 2014. USA Compression Holdings, the owner of 41.7% of the Partnership’s outstanding limited partner interests, and Argonaut and certain of its related parties, the owners of 16.2% of the Partnership’s outstanding limited partner interests, have elected to reinvest all of this distribution with respect to their units pursuant to the DRIP.

Equity Offering

On May 19, 2014, the Partnership closed a public offering of 6,600,000 common units, of which 5,600,000 common units were sold by the Partnership and 1,000,000 common units were sold by certain selling unitholders, including USA Compression Holdings and Argonaut (the “Selling Unitholders”), at a price to the public of $25.59. The Partnership used the net proceeds of $138.0 million (net of underwriting discounts and commission and offering expenses) to reduce the indebtedness outstanding under its revolving credit facility. USA Compression Holdings and Argonaut granted the underwriters an option to purchase up to an additional 990,000 units to cover over-allotments, which was exercised by the underwriters and closed on May 27, 2014. These sales resulted in USA Compression Holdings’ ownership percentage being reduced from 50.1% to 40.6% and Argonaut’s ownership percentage being reduced from 17.9% to 14.7%. The Partnership did not receive any proceeds from the common units sold by the Selling Unitholders.

Earnings Per Common and Subordinated Unit

The computations of earnings per common unit and subordinated unit are based on the weighted average number of common units and subordinated units, respectively, outstanding during the applicable period. The Partnership’s subordinated units and general partner interest (including its IDRs) meet the definition of participating securities as defined by the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 Earnings Per Share; therefore, the Partnership is required to use the two-class method in the computation of earnings per unit. Basic earnings per common unit and subordinated unit are determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to the General Partner (including distributions to the General Partner on its IDRs), by the weighted average number of outstanding common units and subordinated units, respectively, during the period. Net income is allocated to the common units, subordinated units and the general partner based on their respective shares of the distributed and undistributed earnings for the period. To the extent cash distributions exceed net income for the period, the excess distributions are allocated to all participating units outstanding based on their respective ownership percentages. Diluted earnings per unit are computed using the treasury stock method, which considers the potential issuance of limited partner units associated with the Partnership’s 2013 LTIP.

Incentive Distribution Rights

The General Partner holds all of the IDRs. The following table illustrates the percentage allocations of Available Cash from Operating Surplus between the unitholders and the General Partner based on the specified target distribution levels. The amounts set forth under “Marginal percentage interest in distributions” are the percentage interests of the General Partner and the unitholders in any Available Cash from Operating Surplus the Partnership distributes up to and including the corresponding amount in the column “Total quarterly distribution per unit.” The percentage interests shown for our unitholders and the 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 the General Partner include its General Partner’s Interest, and assume (i) the General Partner has contributed any additional capital necessary to maintain its General Partner’s Interest and has not transferred its IDRs and (ii) there are no arrearages.



		Marginal percentage interest
	Total quarterly	in distributions
	distribution per unit	Unit holders		General Partner
Minimum Quarterly Distribution	$0.425	98.3	%	1.7	%
First Target Distribution	up to $0.4888	98.3	%	1.7	%
Second Target Distribution	above $0.4888 up to $0.5313	85.3	%	14.7	%
Third Target Distribution	above $0.5313 up to $0.6375	75.3	%	24.7	%
Thereafter	above $0.6375	50.3	%	49.7	%