(15) Unit-Based Compensation

Long-Term Incentive Plan

In connection with the Partnership’s initial public offering in January 2013, the board of directors of the General Partner (the “Board”) adopted the USA Compression Partners, LP 2013 Long-Term Incentive Plan (“LTIP”) for certain employees, consultants and directors of the General Partner and any of its affiliates who perform services for us. The LTIP provides for awards of unit options, unit appreciation rights, restricted units, phantom units, distribution equivalent rights (“DERs”), unit awards, profits interest units and other unit-based awards. On November 1, 2018 and effective the same day, the Board approved and adopted The First Amendment to the LTIP which, among other things, increased the number of common units of the Partnership available to be awarded under the LTIP by 8,590,000 common units (which brings the total number of common units available to be awarded under the LTIP to 10,000,000 common units) and extends the term of the LTIP until November 1, 2028. Awards that are forfeited, cancelled, paid or otherwise terminate or expire without the actual delivery of common units will be available for delivery pursuant to other awards. The LTIP is administered by the Board or a committee thereof.

The General Partner’s executive officers, certain of its employees and certain of its independent directors were granted these awards to incentivize them to help drive our future success and to share in the economic benefits of that success. All employees with phantom units have a portion of their award settled in cash and a portion settled in common units upon vesting, unless otherwise approved by the Board. The amount that can be settled in cash is in excess of the employee’s minimum statutory tax-withholding rate. ASC Topic 718 Compensation-Stock Compensation, requires the entire amount of an award with such features to be accounted for as a liability. Under the liability method of accounting for unit-based compensation, we re-measure the fair value of the award at each financial statement date until the award vests or is cancelled. The fair value is measured using the market price of the Partnership’s common units. During the requisite service period (the vesting period of the awards), compensation cost is recognized using the proportionate amount of the award’s fair value that has been earned through service to date. Phantom units granted to independent directors do not have a cash settlement option and as such we account for these awards as equity. Each phantom unit is granted in tandem with a corresponding DER, which entitles the recipient to receive an amount in cash on a quarterly basis equal to the product of (a) the number of the recipient’s outstanding, unvested phantom units on the record date for such quarter and (b) the quarterly distribution declared by the Board for such quarter with respect to the Partnership’s common units.

During the period from the Transactions Date to December 31, 2018, an aggregate of 1,136,447 phantom units (including the corresponding DERs) were granted under the LTIP to the General Partner’s executive officers and certain of its employees and independent directors. The phantom units (including the corresponding DERs) awarded are subject to restrictions on transferability, customary forfeiture provisions and time vesting provisions. Phantom unit awards granted after July 30, 2018 vest incrementally, with 60% of the phantom units vesting at the end of the third year following the grant and the remaining 40% vesting at the end of the fifth year following the grant. Phantom unit awards that were granted to employees of USAC Management prior to July 30, 2018 vest evenly over a three-year service period.

Phantom units granted prior to July 30, 2018 vest in full in the event of a change in control followed by a termination of employment, and phantom units granted on or after July 30, 2018 vest in full upon a change in control. 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.

On the Transactions Date and in connection with the closing of the CDM Acquisition, and pursuant to the change in control provisions of our outstanding phantom unit awards, all of the performance-based phantom units granted during 2018, 2017 and 2016 and outstanding as of the Transactions Date, vested immediately upon the change in control event at 100% of the target level. In addition, all outstanding time-based phantom units held by our CEO vested immediately upon the change in control event. As such, 563,544 outstanding phantom units vested resulting in $6.8 million of compensation expense recognized during the year ended December 31, 2018.

ETP had a long-term incentive plan for the USA Compression Predecessor’s employees, officers and directors. ETP had granted restricted unit awards to the USA Compression Predecessor’s employees that vested on a pro-rata basis incrementally over a five-year vesting period, with vesting based on continued employment as of each applicable vesting date. Upon vesting, ETP common units were issued. These restricted unit awards also entitled the recipients of the unit awards to receive, with respect to each ETP common unit subject to such award that had not vested or been forfeited, a corresponding DER entitling the recipient to a cash payment equal to the cash distribution per ETP common unit paid by ETP to its unitholders promptly following each such distribution. All unit-based compensation awards were treated as equity within the USA Compression Predecessor financial statements.

The unit and per-unit amounts disclosed in the remainder of this note for periods prior to the Transactions Date reflect amounts related to ETP. These amounts have been retrospectively adjusted to reflect a 1.5 to one unit-for-unit exchange related to the merger of ETP and Sunoco Logistics Partners L.P. in April 2017 and a 0.4124 to one unit-for unit exchange related to the merger of ETP and Regency Energy Partners LP in April 2015. The unit and per-unit amounts do not reflect the conversion of ETP units to ETE units as a result of the ETE Merger in October 2018.

On the Transactions Date and in connection with the closing of the CDM Acquisition, and pursuant to the change in control provisions of the USA Compression Predecessor’s outstanding phantom unit awards, all of the USA Compression Predecessor’s outstanding phantom unit awards were forfeited.

As of December 31, 2018, our total unit-based compensation liability was $3.6 million. During the years ended December 31, 2018, 2017 and 2016, we recognized $11.7 million, $4.0 million and $3.5 million of compensation expense associated with these awards, respectively, recorded in selling, general and administrative expense. During the years ended December 31, 2018, 2017 and 2016, amounts paid related to the cash settlement of vested awards under the LTIP were $4.4 million, $0.6 million and $0.9 million, respectively.

The total fair value and intrinsic value of the phantom units vested under the LTIP was $9.7 million for the period from the Transactions Date to December 31, 2018, and $1.6 million and $1.0 million during the years ended December 31, 2017 and 2016, respectively.

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


		Weighted-Average
		Grant Date Fair
	Number of Units	Value per Unit (1)
USA Compression Predecessor's phantom units outstanding at December 31, 2015	334,354	$	32.98
Granted	147,384		24.22
Vested	(42,964)		40.28
Forfeited	(9,239)		28.58
USA Compression Predecessor's phantom units outstanding at December 31, 2016	429,535	$	29.34
Granted	2,500		18.75
Vested	(95,499)		36.94
Forfeited	(11,614)		27.41
USA Compression Predecessor's phantom units outstanding at December 31, 2017	324,922	$	27.10
Forfeited upon change in control, April 2, 2018	(324,922)		27.10
Assumed upon change in control, April 2, 2018 (2)	1,010,522		14.24
Granted (2)	1,136,447		15.47
Vested (2)	(571,892)		14.79
Forfeited (2)	(144,013)		17.85
Phantom units outstanding at December 31, 2018	1,431,064	$	14.98

(1)

Determined by dividing the aggregate grant date fair value of awards by the number of units issued.

(2)

Following the Transactions Date, the outstanding unvested phantom units granted by the USA Compression Predecessor were forfeited and the outstanding unvested phantom units granted by the Partnership prior to the Transactions Date were maintained. The number of units assumed upon change in control represent the Partnership’s unvested outstanding phantom units as of March 31, 2018. The subsequent number of units granted, vested and forfeited reflect activity following the Transactions Date through December 31, 2018.

The unrecognized compensation cost associated with phantom unit awards was an aggregate $15.0 million as of December 31, 2018. We expect to recognize the unrecognized compensation cost for these awards on a weighted-average basis over a period of 2.2 years.