What changed in this filing

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Item 9A. Controls and Procedures

2021-02-23 compared with 2020-02-21 · 484 added, 473 removed, 1067 unchanged (47% of the section changed)

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We have audited the internal control over financial reporting of Archrock, Inc.

and subsidiaries (the “Company”) as of December 31, 2019, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2019, of the Company and our report dated February 21, 2020, expressed an unqualified opinion on those financial statements and financial statement schedule.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the financial statement schedule as of and for the year ended December 31, 2020, of the Company and our report dated February 22, 2021, expressed an unqualified opinion on those financial statements and financial statement schedule.

Basis for Opinion

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Directors, Executive Officers and Corporate Governance

The information required in Part III, Item 10 of this 2019 Form 10-K is incorporated by reference to the sections entitled “Election of Directors,” “Corporate Governance,” “Executive Officers” and “Beneficial Ownership of Common Stock” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

The information required in Part III Item 10 of this 2020 Form 10-K is incorporated by reference to the sections entitled “Election of Directors,” “Governance” and “Stock Ownership” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

Executive Compensation

The information required in Part III, Item 11 of this 2019 Form 10-K is incorporated by reference to the sections entitled “Compensation Discussion and Analysis” and “Information Regarding Executive Compensation” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

The information required in Part III Item 11 of this 2020 Form 10-K is incorporated by reference to the sections entitled “Governance” and “Compensation Discussion and Analysis” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required in Part III, Item 12 of this 2019 Form 10-K is incorporated by reference to the section entitled “Stock Ownership - Equity Plan Information” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.

Portions of the information required in Part III Item 12 of this 2020 Form 10-K are incorporated by reference to the section entitled “Stock Ownership” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information as of December 31, 2020, with respect to the Archrock compensation plans under which our common stock is authorized for issuance, aggregated as follows:

Number of Securities

to be Issued Upon

Weighted Average

Number of Securities

Exercise Price of

Remaining Available for

Outstanding Options,

Future Issuance Under

Warrants and Rights

Equity Compensation Plans

Equity compensation plans approved by security holders (1)

Equity compensation plans not approved by security holders (5)

(1) Comprised of the 2007 Plan, 2013 Plan, 2020 Plan and ESPP.

No additional grants may be made under the 2007 Plan and 2013 Plan.

(2) Includes 63,891 outstanding stock options and 261,837 unvested performance-based restricted stock units payable in common stock upon vesting at target performance.

(3) Includes the weighted average exercise price for outstanding options only:

performance-based restricted stock units do not have an exercise price.

(4) Includes 8,444,921 shares of common stock under the 2020 Plan and 611,707 shares of common stock under the ESPP.

In addition, as of December 31, 2020, 1,730,599 restricted shares were outstanding, which are not included in column (c).

(5) Comprised of our DSDP.

As of December 31, 2020, 10,251 restricted stock units are outstanding, which have been deducted in column (c).

See Note 24 (“Stock-Based Compensation”) to our Financial Statements for further details of our DSDP.

Certain Relationships and Related Transactions and Director Independence

The information required in Part III, Item 13 of this 2019 Form 10-K is incorporated by reference to the sections entitled “Certain Relationships and Related Transactions” and “Corporate Governance” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

The information required in Part III Item 13 of this 2020 Form 10-K is incorporated by reference to the section entitled “Governance” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

Principal Accountant Fees and Services

The information required in Part III, Item 14 of this 2019 Form 10-K is incorporated by reference to the section entitled “Ratification of the Appointment of Independent Registered Public Accounting Firm” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

The information required in Part III Item 14 of this 2020 Form 10-K is incorporated by reference to the section entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in our definitive proxy statement to be filed with the SEC within 120 days of the end of our fiscal year.

Exhibits and Financial Statement Schedules

Documents filed as a part of this 2019 Form 10-K

(a) Documents filed as a part of this 2020 Form 10-K

Financial Statements.

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(now Archrock, Inc.), incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013

Amendment No.

1 to Third Amended and Restated Bylaws of Archrock, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on May 5, 2020

Indenture, dated as of March 21, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., the guarantors party thereto and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on March 21, 2019

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Purchase Agreement, dated as of December 16, 2019, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 17, 2019

Separation Agreement, dated effective as of January 31, 2020 between Archrock, Inc.

Clawges, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on February 11, 2020

Form of Compensation Letter applicable to Messrs.

Childers, Aron, Ingersoll and Thode and Mme.

Hildebrandt, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on April 30, 2020

Purchase Agreement, dated as of December 14, 2020, by and among Archrock Partners, L.P., Archrock Partners Finance Corp., Archrock, Inc., the other guarantors party thereto and RBC Capital Markets, LLC, as representative of the initial purchasers named therein, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on December 15, 2020

Amendment No.

3 to Credit Agreement, dated as of February 22, 2021, by and among Archrock Inc., Archrock Partners Operating LLC, Archrock Services, L.P., the other Loan Parties thereto, the Lenders thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on February 23, 2021

Form of Letter Agreement

Form of Archrock, Inc.

Award Notice and Agreement for Restricted Stock

Form of Archrock, Inc.

Award Notice and Agreement for Restricted Stock for Non-Employee Directors

Form of Archrock, Inc.

Award Notice and Agreement for Restricted Stock Units for Non-Employee Directors

Form of Archrock, Inc.

Award Notice and Agreement for Performance Units (Cash-Settled)

Form of Archrock, Inc.

Award Notice and Agreement for Performance Units (Stock-Settled)

List of Subsidiaries of Archrock, Inc.

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Anne-Marie N.

/s/ WENDELL R.

/s/ GORDON T.

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Frances Powell Hawes

/s/ JEFFERY D.

/s/ LEONARD W.

/s/ EDMUND P.

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We have audited the accompanying consolidated balance sheets of Archrock, Inc.

and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounting for Elite Acquisition - Refer to Note 4 to the financial statements

Critical Audit Matter Description

The Company completed the Elite Acquisition for consideration of $439.9 million consisting of cash and common stock on August 1, 2019.

The Company accounted for this transaction under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including $286.2 million in property, plant and equipment and customer relationships of $40.2 million, resulting in goodwill of $100.6 million.

Of the identified fixed assets acquired, the most significant was compressor units.

The method for determining the fair value of the compressor units was the cost method and involved management making estimates of the replacement cost.

The method for determining the fair value of the customer relationships was the multi-period excess earnings method and involved management making estimates of the attrition rate, discount rate, and contributory asset charges.

Changes in these assumptions could have a significant impact on the fair values allocated to the compressor units, customer relationships, or the resulting goodwill.

We identified the valuation of compressor units and identified intangible assets arising out of the acquisition as a critical audit matter because of the significant estimates and assumptions management makes related to the replacement cost, attrition rate, discount rate, and contributory asset charges.

These assumptions required a high degree of auditor judgment and an increased extent of effort, including involving specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the replacement cost, attrition rate, discount rate, and contributory asset charges used by management to estimate the fair values of the compressor units and customer relationships included the following, among others:

We tested the operating effectiveness of internal controls over the valuation of the compressor units and intangible assets, including management’s controls over the valuation methodology, determination of replacement cost, attrition rate, discount rate, and contributory asset charges.

With the assistance of our fair value specialists, we evaluated the reasonableness of (1) the valuation methodology;

(2) the source information underlying the determination of the discount rates, replacement cost, attrition rate, and contributory asset charges and tested the mathematical accuracy of the calculations;

and (3) developing a range of independent estimates of the discount rates and comparing the discount rates selected by management to the range of independent estimates of the discount rates.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relate.

Long-Lived Asset Impairment - Refer to Note 18 to the financial statements .

Critical Audit Matter Description

The Company’s evaluation of whether to retire compressor units from its active fleet takes into consideration the future deployment of the units that were not of the type, configuration, condition, make, or model that are cost efficient to maintain or operate.

Management’s evaluation of whether to retire compressor units from its active fleet takes into consideration the future deployment of the units that were not of the type, configuration, condition, make, or model that are cost efficient to maintain or operate.

Once a compressor unit is retired from the active fleet, it is tested for impairment.

As such, the timing of the identification of compressor units for removal could have a significant impact on the amount of any impairment charge.

During the year ended December 31, 2019, the Company retired 975 units from the active fleet resulting in an asset impairment charge of $44.7 million.

During the year ended December 31, 2020, the Company retired 730 units from the active fleet resulting in an

asset impairment charge of $77.6 million.

The determination of impairment requires management to make significant estimates and assumptions related to the timing of the identification of compressor units for removal.

Changes in these assumptions could have a significant impact on the amount of impairment charged.

Auditing the decisions on when compressor units are retired from the active fleet required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions.

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Accounts receivable, trade, net of allowance of $ 3,370 and $ 2,210 , respectively

Tax refund receivable

Other current assets

Current assets associated with discontinued operations

Total current assets

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Deferred revenue

Current liabilities associated with discontinued operations

Total current liabilities

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive loss

Accumulated deficit

( 2,401,988 )

( 2,244,877 )

Treasury stock:

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Depreciation and amortization

Long-lived asset impairment

Long-lived and other asset impairment

Goodwill impairment

Restatement and other charges

Restructuring and other charges

Restructuring charges

Interest expense

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Provision for (benefit from) income taxes

Income from continuing operations

Income (loss) from continuing operations

Loss from discontinued operations, net of tax

Net (income) loss attributable to the noncontrolling interest

Net income attributable to Archrock stockholders

Basic and diluted net income per common share attributable to Archrock common stockholders

Net income (loss)

Net income attributable to noncontrolling interest

Net income (loss) attributable to Archrock stockholders

Basic and diluted net income (loss) per common share attributable to Archrock common stockholders

Weighted average common shares outstanding:

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Year Ended December 31,

Net income (loss)

Other comprehensive income (loss), net of tax:

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Merger-related adjustments

Adjustments from other changes in ownership of Partnership

Total other comprehensive income (loss), net of tax

Comprehensive income

Comprehensive income attributable to the noncontrolling interest

Comprehensive income attributable to Archrock stockholders

Comprehensive income (loss)

Comprehensive income attributable to noncontrolling interest

Comprehensive income (loss) attributable to Archrock stockholders

The accompanying notes are an integral part of these consolidated financial statements.

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Archrock Stockholders

Comprehensive Income (Loss)

Comprehensive

Noncontrolling

Treasury Stock

Balance at January 1, 2017

Treasury stock purchased

Cash dividends ($0.4800 per common share)

Shares issued in employee stock purchase plan

Stock-based compensation, net of forfeitures

Stock options exercised

Contribution from Exterran Corporation

Net proceeds from the sale of Partnership units, net of tax

Cash distribution to noncontrolling unitholders of the Partnership

Impact of adoption of ASU 2016-09

Comprehensive income

Net income (loss)

Interest rate swap gain, net of reclassifications to earnings

Amortization of terminated interest rate swaps

Adjustment for changes in ownership of the Partnership

Income (Loss)

Balance at December 31, 2017

( 2,241,243 )

( 5,930,380 )

Treasury stock purchased

Cash dividends ($ 0.504 per common share)

Shares issued in employee stock purchase plan

Shares issued in ESPP

Stock-based compensation, net of forfeitures

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Balance at December 31, 2018

( 2,263,677 )

( 6,381,605 )

Treasury stock purchased

Cash dividends ($ 0.554 per common share)

Shares issued in employee stock purchase plan

Shares issued in ESPP

Stock-based compensation, net of forfeitures

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Balance at December 31, 2019

( 2,244,877 )

( 6,702,602 )

Treasury stock purchased

Cash dividends ($ 0.580 per common share)

Shares issued in ESPP

Stock-based compensation, net of forfeitures

Contribution from Exterran Corporation

Impact of ASU 2016-13 adoption

Comprehensive loss

Interest rate swap loss, net of reclassifications to earnings

Balance at December 31, 2020

( 2,401,988 )

( 7,052,769 )

The accompanying notes are an integral part of these consolidated financial statements.

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Cash flows from operating activities:

Adjustments to reconcile net income to cash provided by operating activities:

Net income (loss)

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

Loss from discontinued operations, net of tax

Depreciation and amortization

Long-lived asset impairment

Long-lived and other asset impairment

Goodwill impairment

Inventory write-downs

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Amortization of debt discount

Amortization of debt premium

Amortization of terminated interest rate swaps

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Non-cash restructuring charges

Provision for doubtful accounts

Gain on sale of assets, net

Provision for credit losses

(Gain) loss on sale of assets, net

Gain on sale of business

Deferred income tax provision (benefit)

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Deferred revenue recognized in earnings

Changes in assets and liabilities, net of acquisitions:

Change in assets and liabilities, net of acquisition:

Accounts receivable, trade

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Capital expenditures

Proceeds from sale of business

Proceeds from sale of property, plant and equipment and other assets

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Repayments of long-term debt

( 1,204,375 )

( 2,071,750 )

Payments for debt issuance costs

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Distributions paid to noncontrolling partners in the Partnership

Net proceeds from sale of Partnership units

Proceeds from stock options exercised

Proceeds from stock issued under employee stock purchase plan

Proceeds from stock issued under ESPP

Purchases of treasury stock

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Net cash provided by (used in) financing activities

Net increase (decrease) in cash and cash equivalents

Net decrease in cash and cash equivalents

Cash and cash equivalents, beginning of period

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Interest paid

Income taxes refunded, net

Supplemental disclosure of non-cash transactions:

Income taxes refunded (paid), net

Supplemental disclosure of non-cash investing and financing transactions:

Accrued capital expenditures

Issuance of Archrock common stock pursuant to Merger, net of tax

Non-cash consideration received in July 2020 Disposition

Issuance of Archrock common stock pursuant to Elite Acquisition, net of tax

Issuance of Archrock common stock pursuant to Merger, net of tax

The accompanying notes are an integral part of these consolidated financial statements.

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Certain prior year amounts have been reclassified to conform to the current year presentation.

We consolidate the financial statements of the Partnership and reflect its operations in our contract operations segment.

We control the Partnership through our ownership of its General Partner.

Public ownership of the Partnership’s net assets and earnings prior to the Merger is reflected within noncontrolling interest in our Financial Statements.

Our Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC.

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Revenue Recognition

As a result of our adoption of ASC 606 Revenue on January 1, 2018, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services.

We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services.

Sales and usage-based taxes that are collected from the customer are excluded from revenue.

In our contract operations business, natural gas compression service revenue is recognized over time and revenue associated with billable maintenance on our natural gas compression equipment is recognized at a point in time.

The timing of revenue recognition is impacted by contractual provisions for service availability guarantees of our compression assets and re-billable costs associated with moving our compression assets to a customer site.

Under previous guidance, contract operations revenue was recognized when earned, which generally occurs monthly when the service is provided under our customer contracts.

In our aftermarket services business, maintenance, overhaul and reconfiguration services revenue is recognized over time using output or input methods to measure the progress toward complete satisfaction of the performance obligation and revenue from the sale of OTC parts is recognized at a point in time.

Under previous guidance, revenue was recognized on a completed contract basis as products were delivered and title was transferred or services were performed for the customer.

Contract Operations

Natural gas compression services.

Natural gas compression services are generally satisfied over time, as the customer simultaneously receives and consumes the benefits provided by these services.

Our performance obligation is a series in which the unit of service is one month, as the customer receives substantially the same benefit each month from the services regardless of the type of service activity performed, which may vary.

If the transaction price is based on a fixed fee, revenue is recognized monthly on a straight-line basis over the period that we are providing services to the customer.

Amounts invoiced to customers for costs associated with moving our compression assets to a customer site are also included in the transaction price and are amortized over the initial contract term.

We do not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year.

Variable consideration exists if customers are billed at a lesser standby rate when a unit is not running.

We recognize revenue for such variable consideration monthly, as the invoice corresponds directly to the value transferred to the customer based on our performance completed to date.

The rate for standby service is lower to reflect the decrease in costs and effort required to provide standby service when a unit is not running.

Billable Maintenance Service .

We also perform billable maintenance service on our natural gas compression equipment at the customer’s request on an as-needed basis.

The performance obligation is satisfied and revenue is recognized at the agreed-upon transaction price at the point in time when service is complete and the customer has accepted the work performed and can obtain the remaining benefits of the service that the unit will provide.

Aftermarket Services

OTC Parts and Components Sales .

For sales of OTC parts and components, the performance obligation is generally satisfied at the point in time when delivery takes place and the customer obtains control of the part or component.

The transaction price is the fixed sales price for the part stated in the contract.

Revenue is recognized upon delivery, as we have a present right to payment and the customer has legal title.

Maintenance, Overhaul and Reconfiguration Services .

For our service activities, the performance obligation is satisfied over time, as the work performed enhances the customer-controlled asset and another entity would not have to substantially re-perform the work we completed if they were to fulfill the remaining performance obligation.

The transaction price may be a fixed monthly service fee, a fixed quoted fee or entirely variable, calculated on a time and materials basis.

For service provided based on a fixed monthly fee, the performance obligation is a series in which the unit of service is one month.

The customer receives substantially the same benefit each month from the service, regardless of the type of service activity performed, which may vary.

As the progress towards satisfaction of the performance obligation is measured based on the passage of time, revenue is recognized monthly based on the fixed fee provided for in the contract.

For service provided based on a quoted fixed fee, progress towards satisfaction of the performance obligation is measured using an input method based on the actual amount of labor and material costs incurred.

The amount of the transaction price recognized as revenue each reporting period is determined by multiplying the transaction price by the ratio of actual costs incurred to date to total estimated costs expected for the service.

Significant judgment is involved in the estimation of the progress to completion.

Any adjustments to the measure of the progress to completion is accounted for on a prospective basis.

Changes to the scope of service is recognized as an adjustment to the transaction price in the period in which the change occurs.

Service provided based on time and materials are generally short-term in nature and labor rates and parts pricing is agreed upon prior to commencing the service.

We apply an estimated gross margin percentage, which is fixed based on historical time and materials-based service, to actual costs incurred.

We evaluate the estimated gross margin percentage at the end of each reporting period and adjust the transaction price as appropriate.

Contract Assets and Liabilities

We recognize a contract asset when we have the right to consideration in exchange for goods or services transferred to a customer when the right is conditioned on something other than the passage of time.

We recognize a contract liability when we have an obligation to transfer goods or services to a customer for which we have already received consideration.

Concentrations of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist of cash and cash equivalents and trade accounts receivable.

We believe that the credit risk of our temporary cash investments is minimal because we maintain minimal balances in our cash investment accounts.

Our temporary cash investments have a zero loss expectation because we maintain minimal balances in our cash investment accounts and have no history of loss.

Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S.

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Payment terms are on a short-term basis and in accordance with industry practice.

We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our contract operations customer service agreements.

We consider this credit risk to be limited due to these companies’ financial resources, the nature of the products and services we provide and the terms of our customer agreements.

Due to the short-term nature of our trade receivables, we consider the amortized cost to be the same as the carrying amount of the receivable, excluding the allowance for credit losses.

We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote.

We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a collective (pool) basis when similar risk characteristics exist.

We rely primarily on ratings assigned by external rating agencies and credit monitoring services to assess credit risk and aggregate customers first by low, medium or high risk asset pools, and then by delinquency status.

We also consider the internal risk associated with geographic location and the services we provide to the customer when determining asset pools.

If a customer does not share similar risk characteristics with other customers, we evaluate the customer’s outstanding trade receivables for expected credit losses on an individual basis.

Trade receivables evaluated individually are not included in our collective assessment.

Each reporting period, we reassess our customers’ risk profiles and determine the appropriate asset pool classification, or perform individual assessments of expected credit losses, based on the customers’ risk characteristics at the reporting date.

The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract.

Contract operations services are generally billed monthly at the beginning of the month in which service is being provided.

Aftermarket services billings typically occur when parts are delivered or service is completed.

Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding.

We analyze two years of internal historical loss data, including the effects of prepayments, write-offs and subsequent recoveries, to determine our historical loss experience.

Our historical loss information is a relevant data point for estimating credit losses, as the data closely aligns with trade receivables due from our customers.

Ratings assigned by external rating agencies and credit monitoring services consider past performance and forecasts of future economic conditions in assessing credit risk.

We routinely update our historical loss data to reflect our customers’ current risk profile, to ensure the historical data and loss rates are relevant to the pool of assets for which we are estimating expected credit losses.

At December 31, 2020, Chevron U.S.A.

and Williams Partners accounted for 14 % and 10 % of our trade accounts receivable balance, respectively.

No customer accounted for more than 10% of our trade accounts receivable balance at December 31, 2019.

At December 31, 2018 , Anadarko and Williams Partners accounted for 13 % and 11 % , respectively, of our trade accounts receivable balance.

Outstanding accounts receivable are reviewed regularly for non-payment indicators and allowances for doubtful accounts are recorded based upon management’s estimate of collectibility at each balance sheet date.

During the years ended December 31, 2020, 2019 and 2018, we recorded bad debt expense of $ 3.5 million, $ 2.6 million and $ 1.7 million, respectively.

The following table summarizes the changes in our allowance for credit losses balance during the year ended December 31, 2020 (in thousands):

Balance at December 31, 2019

Impact of adoption of ASU 2016-13 on January 1, 2020

Provision for credit losses

Write-offs charged against allowance

Balance at December 31, 2020

Inventory consists of parts used for maintenance of natural gas compression equipment.

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Operating lease expense for lease payments is recognized on a straight-line basis over the term of the lease.

Our facility leases, of which we are the lessee, contain lease and nonlease components for which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification.

Our facility leases, of which we are the lessee, contain lease and nonlease components, which we have elected to account for as a single lease component, as the nonlease components are not significant to the total consideration of the contract and separating the nonlease component would have no effect on lease classification.

As it relates to our contract operations service agreements in which we are a lessor, the services nonlease component is predominant over the compression package lease component and therefore recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

Under previous guidance, no separation of lease and nonlease component is required, for either lessee or lessor.

The goodwill acquired in connection with the Elite Acquisition represents the excess of consideration transferred over the fair value of the assets and liabilities acquired.

Under previous guidance, no separation of lease and nonlease components is required, for either lessee or lessor.

The goodwill acquired in connection with the Elite Acquisition represented the excess of consideration transferred over the fair value of the assets and liabilities acquired.

We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of a reporting unit exceeds its fair value, including the applicable goodwill.

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Significant estimates are made to determine future cash flows including future revenues, costs and capital requirements and the appropriate risk-adjusted discount rate by which to discount the estimated future cash flows.

Our fourth quarter qualitative assessment determined that it was not more likely than not that the fair value of the contract operations reporting unit was less than its carrying amount as of December 31, 2019, and as such, no quantitative impairment test of our goodwill was warranted.

In the first quarter of 2020, the global response to the COVID-19 pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020.

The quantitative test determined that the carrying amount of our contract operations reporting unit exceeded its fair value and we recorded a full impairment loss on goodwill in the first quarter as a result.

Internal-Use Software

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Certain costs incurred for the implementation of a hosting arrangement that is a service contract are capitalized and amortized on a straight-line basis over the term of the respective contract.

Amortization begins for each component of the hosting arrangement when the component becomes ready for its intended use.

Capitalized implementation costs are presented in other assets, the same line item in our consolidated balance sheets that a prepayment of the fees for the associated hosting arrangement would be presented.

Amortization expense of the capitalized implementation costs is presented in SG&A, the same line item in our consolidated statements of operations as the expense for fees for the associated hosting arrangement.

Amortization begins for each component of the hosting arrangement when the component becomes ready for its intended use.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements.

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Hedging and Use of Derivative Instruments

We use derivative instruments to manage our exposure to fluctuations in the variable interest rate of the Credit Facility and thereby minimize the risks and costs associated with financial activities.

We use derivative instruments to manage our exposure to fluctuations in the variable interest rate of our Credit Facility and thereby minimize the risks and costs associated with financial activities.

We do not use derivative instruments for trading or other speculative purposes.

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At that time, amounts are reclassified into earnings to interest expense, the same statement of operations line item to which the earnings effect of the hedged item is recorded.

Cash flows from derivatives designated as hedges are classified in our consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions unless the derivative contract contains a significant financing element, in which case, the cash settlements for these derivatives are classified as cash flows from financing activities.

To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness of the transactions.

We perform quarterly qualitative prospective and retrospective hedge effectiveness assessments unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective.

If the necessary correlation ceases to exist or if the anticipated transaction is no longer probable, we would discontinue hedge accounting and apply mark-to-market accounting.

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Accounting Standards Updates Implemented

On October 1, 2019, we prospectively adopted ASU 2017-04, which simplifies the test for goodwill impairment by eliminating Step 2 in the test for goodwill impairment, which required an entity to calculate the implied fair value of goodwill.

Under this amendment, an entity should perform its goodwill impairment test on at least an annual basis by comparing the fair value of a reporting unit, including any income tax effects from any tax deductible goodwill, with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.

An entity still has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet.

Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

Under the new guidance, lessor accounting is largely unchanged.

We adopted ASC 842 Leases on January 1, 2019 using the modified retrospective transition method and elected the practical expedient package to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) lease classification of any expired or existing leases and (iii) initial direct costs for any existing leases.

We did not elect the practical expedient to use hindsight in determining the lease term.

Adoption of ASC 842 Leases resulted in recognition of an operating lease ROU asset of $ 18.6 million and an operating lease liability of $ 20.0 million in our consolidated balance sheet at January 1, 2019.

The difference of $ 1.4 million related to accrued rent and prepaid lease payments recorded to our consolidated balance sheet as of December 31, 2018.

We did not recognize any finance lease ROU assets or liabilities upon adoption of ASC 842 Leases.

There was no impact to our consolidated statements of operations, equity or cash flows upon adoption.

Comparative information has not been recast and continues to be reported under the accounting standards in effect for those periods.

ASC 842 Leases also provides a practical expedient, elected by class of underlying asset, to not separate lease and nonlease components and instead account for those components as a single component if certain conditions are met.

ASC 842 Leases also provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based on determination of the predominant component.

We have concluded that for our contract operations services agreements, in which we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing recognition of these agreements will continue to follow the ASC 606 Revenue guidance.

We have also elected, as a lessee, to not separate lease and nonlease components as it relates to our facility leases.

In addition, we have made an accounting policy election, as permitted by ASC 842 Leases, to not apply the recognition requirements of ASC 842 Leases to leases with an initial term of 12 months or less.

Accounting Standards Updates Not Yet Implemented

In December 2019, the FASB issued ASU 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to various tax accounting principles and clarifies other existing guidance in order to improve consistency of application.

These amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted and requires that an entity early adopt all of the amendments within this update in the same period.

We are currently evaluating the impact of ASU 2019-12 on our consolidated financial statements and footnote disclosures.

Fair Value Measurements

In August 2018, the FASB issued ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied.

These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.

All other amendments are to be applied retrospectively to all periods presented upon their effective date.

We will adopt ASU 2018-13 effective January 1, 2020.

These amendments will impact our disclosures related to our fair value measurements of our idle and previously-culled compressors and borrowings outstanding under our Credit Facility.

We currently anticipate that the adoption will have no impact on our consolidated financial statements and are developing the new disclosures required by the new standard for inclusion in our first quarterly filing of 2020.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new current expected credit loss model that will result in earlier recognition of allowance for losses.

For public entities that meet the definition of an SEC filer, ASU 2016-13 is effective for fiscal years beginning after December 15, 2019.

Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

We will adopt ASU 2016-13 effective January 1, 2020 and do not currently anticipate that the adoption will have a material impact on our consolidated financial statements.

Our financial assets measured at amortized cost consist primarily of receivables from revenue transactions within the scope of ASC 606 Revenue.

We are currently updating our accounting policies, documenting operational procedures and finalizing changes to our systems and internal control structure as necessary to implement the new standard and address the risks associated with estimating current expected credit losses.

In June 2016, the FASB issued ASU 2016-13, which changes the impairment model for financial assets measured at amortized cost and certain other instruments, and requires entities to use a new current expected credit loss model that results in recognition of expected losses over the contractual life of an asset.

We adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach.

The adoption resulted in a $ 0.2 million decrease in our allowance for credit losses and a corresponding pre-tax cumulative effect adjustment to retained earnings in our consolidated balance sheet at January 1, 2020.

Comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Fair Value Measurements

On January 1, 2020, we adopted ASU 2018-13, which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied.

These amendments resulted in new, prospective disclosures of the range and weighted average of the significant unobservable inputs used to develop our Level 3 fair value measurements related to our idle and previously-culled compressors.

The adoption of ASU 2018-13 had no impact on our consolidated financial statements.

On January 1, 2020, we adopted ASU 2019-12, which simplifies the accounting for income taxes by, among other things, removing certain exceptions related to the incremental approach for intraperiod tax allocation, the year-to-date loss methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities on outside basis differences.

ASU 2019-12 also clarifies other aspects of the accounting for income taxes in order to improve consistency of application.

The adoption of ASU 2019-12 had no impact on our consolidated financial statements.

Accounting Standards Updates Not Yet Implemented

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued as a result of reference rate reform.

ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022.

Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020.

Modifications to our interest rate swap and Credit Facility agreements during the effective period of this amendment will be assessed and if the modifications meet the criteria for the optional expedients and exceptions, we intend to adopt ASU 2020-04 and apply the amendments as applicable.

Business Transactions

July 2020 Disposition

On July 9, 2020, we completed the sale of the turbocharger business included within our aftermarket services segment .

In connection with the sale, we entered into a supply agreement to purchase a minimum amount of turbocharger goods and services over a two-year term.

In addition to cash of $ 9.5 million received upon closing, an additional $ 3.0 million is due on the first anniversary of the closing date and $ 3.5 million will be received through the purchase of turbocharger goods and services under the supply agreement.

During the year ended December 31, 2020, we received cash of $ 0.7 million under the supply agreement and recognized a gain on the sale of $ 9.3 million in gain on sale of assets, net in our consolidated statements of operations.

March 2020 Disposition

On March 1, 2020, we completed the sale of certain contract operations customer service agreements and approximately 200 compressors, comprising approximately 35,000 horsepower, used to provide compression services under those agreements as well as other assets used to support the operations.

We allocated customer-related and contract-based intangible assets and goodwill based on a ratio of the horsepower sold relative to the total horsepower of the asset group.

We recognized a gain on the sale of $ 3.2 million in gain on sale of assets, net in our consolidated statements of operations during the year ended December 31, 2020.

Elite Acquisition

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The fair value measurements for property, plant and equipment and intangible assets are based on significant inputs that are not observable in the market and therefore represent Level 3 measurements.

The goodwill resulting from the acquisition is attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment.

The goodwill is considered to have an indefinite life and will be reviewed annually for impairment or more frequently if indicators of potential impairment exist.

The goodwill resulting from the acquisition was attributable to the expansion of our services in various regions in which we currently operate and was allocated to our contract operations segment.

The goodwill had an indefinite life that was to be reviewed annually for impairment or more frequently if indicators of potential impairment existed.

All of the goodwill recorded for this acquisition is expected to be deductible for U.S.

federal income tax purposes.

See Note 9 (“Goodwill”) for details on the 2020 impairment of our goodwill.

Property, Plant and Equipment

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To discount the estimated future cash flows, we utilized a discount rate that was at a premium to our weighted average cost of capital to reflect the less liquid nature of the customer relationships relative to the tangible assets acquired.

Elite Compression Revenue and Earnings

The results of operations attributable to the assets and liabilities acquired in the Elite Acquisition have been included in our consolidated financial statements as part of our contract operations segment since the date of acquisition.

Revenue attributable to the assets acquired from the date of acquisition, August 1, 2019, through December 31, 2019 was $ 33.2 million .

We are unable to provide earnings attributable to the assets and liabilities acquired since the date of acquisition as we do not prepare full stand-alone earnings reports for those assets and liabilities.

Unaudited Pro Forma Financial Information

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Net income attributable to Archrock stockholders

Revenue attributable to the assets acquired from the date of acquisition, August 1, 2019, through December 31, 2019 was $ 33.2 million.

On August 1, 2019, we completed an asset sale in which Harvest acquired from us approximately 80,000 active and idle compression horsepower, vehicles and parts inventory for cash consideration of $ 30.0 million.

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In 2015 we completed the Spin-off.

In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation, which include, but are not limited to, the separation and distribution agreement, the tax matters agreement and the supply agreement.

Certain terms of these agreements follow:

The separation and distribution agreement specifies our right to promptly receive payments from Exterran Corporation based on a notional amount corresponding to payments received by Exterran Corporation from PDVSA Gas, S.A., a subsidiary of Petroleos de Venezuela, S.A., in respect of the sale of Exterran Corporation’s and joint ventures’ previously nationalized assets after such amounts are collected by Exterran Corporation.

The separation and distribution agreement specifies, among other things, our right to promptly receive payments from Exterran Corporation based on a notional amount corresponding to payments received by Exterran Corporation from PDVSA in respect of the sale of Exterran Corporation’s previously nationalized assets after such amounts are collected by Exterran Corporation.

During the years ended December 31, 2020 and 2018, we received $ 0.7 million and $ 18.7 million, respectively, from Exterran Corporation pursuant to this term of the separation and distribution agreement.

The separation and distribution agreement also specifies our right to receive a $ 25.0 million cash payment from Exterran Corporation promptly following the occurrence of a qualified capital raise as defined in the Exterran Corporation credit agreement.

Such a qualified capital raise occurred in April 2017 and we received a cash payment of $ 25.0 million later that month.

Generally, the separation and distribution agreement provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of Exterran Corporation’s business with Exterran Corporation.

Pursuant to the separation and distribution agreement, we and Exterran Corporation generally release the other party from all claims arising prior to the Spin-off that relate to the other party’s business.

The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and certain other matters regarding taxes.

Subject to the provisions of this agreement Exterran Corporation and we agreed to indemnify the primary obligor of any return for tax periods beginning before and ending before or after the Spin-off (including any ongoing or future amendments and audits for these returns) for the portion of the tax liability (including interest and penalties) that relates to their respective operations reported in the filing.

As of December 31, 2019 , we classified $ 8.5 million of unrecognized tax benefits (including interest and penalties) as noncurrent liabilities associated with discontinued operations since it relates to operations of Exterran Corporation prior to the Spin-off.

We have also recorded an offsetting $ 8.5 million indemnification asset related to this reserve as noncurrent assets associated with discontinued operations.

The supply agreement, which expired November 2017, set forth the terms under which Exterran Corporation provided manufactured equipment, including the design, engineering, manufacturing and sale of natural gas compression equipment, on an exclusive basis to us and the Partnership, subject to certain exceptions.

During the year ended December 31, 2017 , we purchased $ 150.2 million of newly-manufactured compression equipment from Exterran Corporation.

The following table summarizes the balance sheet for discontinued operations (in thousands):

Other current assets

We entered into an assignment from Exterran Corporation in 2020 such that any future payments by PDVSA would be received directly by us.

The tax matters agreement governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain tax matters.

As of December 31, 2020 and 2019, we had $ 7.9 million and $ 8.5 million, respectively, of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to noncurrent liabilities associated with discontinued operations in our consolidated balance sheets.

We had an offsetting indemnification asset of $ 7.9 million and $ 8.5 million related to these unrecognized tax benefits recorded to noncurrent assets associated with discontinued operations as of December 31, 2020 and 2019, respectively.

The following table presents the balance sheet for our discontinued operations (in thousands):

Deferred tax assets

Total assets associated with discontinued operations

Other current liabilities

Deferred tax liabilities

Total liabilities associated with discontinued operations

As of December 31, 2018 , the $ 5.6 million net deferred tax asset was fully offset by a valuation allowance.

As of December 31, 2019 , the $ 5.6 million valuation allowance was released and the net deferred tax asset decreased by $ 1.2 million due to current period tax amortization.

See Note 20 (“Income Taxes”) for further details.

The following table summarizes the statements of operations for discontinued operations (in thousands):

The following table presents the statements of operations for our discontinued operations (in thousands):

Year Ended December 31,

Other (income) loss, net

Other (income) expense, net

Provision for (benefit from) income taxes

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Accumulated depreciation

( 1,300,930 )

( 1,370,335 )

Property, plant and equipment, net

Depreciation expense was $ 177.5 million, $ 172.8 million and $ 158.4 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Assets under construction of $ 51.0 million and $ 55.4 million at December 31, 2019 and 2018 , respectively, were primarily included in compression equipment.

Assets under construction of $ 17.6 million and $ 51.0 million at December 31, 2020 and 2019, respectively, were primarily included in compression equipment, facilities and other fleet assets .

We have operating leases and subleases for office space, temporary housing, storage and shops.

Our leases have remaining lease terms of less than 1 year to 11 years and most include options to extend the lease term, at our discretion, for an additional three to five years .

Our leases have remaining lease terms of less than one year to approximately 10 years and most include options to extend the lease term, at our discretion, for an additional one to five years .

We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms.

Balance sheet information related to our operating leases was as follows (in thousands):

Balance sheet information related to our operating leases follows (in thousands):

Classification

December 31, 2019

Operating lease ROU assets

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Total lease liabilities

The components of lease cost were as follows (in thousands):

December 31, 2019

The components of lease cost follow (in thousands):

Year Ended December 31,

Operating lease cost

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Total lease cost

Cash flow and noncash information related to our operating leases were as follows (in thousands):

December 31, 2019

Cash flow and noncash information related to our operating leases follow (in thousands):

Year Ended December 31,

Operating cash flows - cash paid for amounts included in the measurement of operating lease liabilities

Operating lease ROU assets obtained in exchange for new lease liabilities

Other supplemental information related to our operating leases was as follows:

December 31, 2019

Other supplemental information related to our operating leases follows:

Weighted average remaining lease term (in years)

Weighted average discount rate

Remaining maturities of lease liabilities governed under ASC 842 Leases as of December 31, 2019 were as follows (in thousands):

Remaining maturities of lease liabilities as of December 31, 2020 were as follows (in thousands):

Total lease payments

Total lease liabilities under ASC 842 Leases

Maturities of lease liabilities governed under ASC 840 Leases as of December 31, 2018 were as follows (in thousands):

Total lease liabilities under ASC 840 Leases

Total lease liabilities

Our goodwill was recognized in connection with the Elite Acquisition and represents the excess of consideration transferred over the fair value of the assets and liabilities acquired.

All of the goodwill was allocated to our contract operations reporting unit.

We review the carrying amount of our goodwill in the fourth quarter of every year, or whenever indicators of potential impairment exist, to determine if the carrying amount of our contract operations reporting unit exceeds its fair value, including the goodwill.

Beginning in the first quarter of 2020, the COVID-19 pandemic caused a significant deterioration in global macroeconomic conditions, including a collapse in the demand for oil coupled with an oversupply of oil, which commenced substantial spending cuts by our customers and a decline in production.

This global response to the pandemic significantly impacted our market capitalization and estimates of future revenues and cash flows, which triggered the need to perform a quantitative test of the fair value of our contract operations reporting unit as of March 31, 2020.

Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined.

We determine the fair value of our reporting unit using an equal weighting of both the expected present value of future cash flows and a market approach.

The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital.

The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization expense of comparable peer companies.

Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.

The following table presents the change in the carrying amount of goodwill during the year ended December 31, 2020 (in thousands):

Balance at December 31, 2019

Impairment loss

Balance at December 31, 2020

Intangible Assets, net

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Amortization expense of these intangible assets totaled $ 15.6 million, $ 15.3 million and $ 16.5 million during the years ended December 31, 2020, 2019 and 2018, respectively.

Estimated future intangible assets amortization expense is as follows (in thousands):

Estimated future intangible assets amortization expense as of December 31, 2020 was as follows (in thousands):

Contract Costs

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Capitalized costs incurred to fulfill our customer contracts include freight charges to transport compression assets before transferring services to the customer and mobilization activities associated with our contract operations services.

Aftermarket services fulfillment costs are recognized based on the percentage-of-completion method applicable to the customer contract and do not typically result in the recognition of contract costs.

We had contract costs of $ 26.0 million and $ 38.1 million associated with freight and mobilization recorded in our consolidated balance sheets at December 31, 2020 and 2019, respectively.

Contract operations costs are amortized based on the transfer of service to which the assets relate, which is estimated to be 38 months based on average contract term, including anticipated renewals.

Contract operations obtainment and fulfillment costs are amortized based on the transfer of service to which the assets relate, which is estimated to be 38 months based on average contract term, including anticipated renewals.

We assess periodically whether the 38 -month estimate fairly represents the average contract term and adjust as appropriate.

Aftermarket services fulfillment costs are recognized based on the percentage-of-completion method applicable to the customer contract.

Contract costs associated with commissions are amortized to SG&A.

Contract costs associated with freight and mobilization are amortized to cost of sales (excluding depreciation and amortization).

During the years ended December 31, 2019 and 2018 , we amortized $ 2.6 million and $ 1.5 million , respectively, related to sales commissions and $ 20.7 million and $ 13.4 million , respectively, related to freight and mobilization.

No impairment losses were recorded related to our capitalized contract costs during the years ended December 31, 2019 and 2018 .

During the years ended December 31, 2020, 2019 and 2018, we amortized $ 3.0 million, $ 2.6 million and $ 1.5 million, respectively, related to sales commissions and $ 23.6 million, $ 20.7 million and $ 13.4 million, respectively, related to freight and mobilization.

Hosting Arrangements

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Included in this project are hosting arrangements that are service contracts related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools.

Certain costs incurred for the implementation of our hosting arrangements that are service contracts are being capitalized and will be amortized on a straight-line basis over the term of the respective contract.

As of December 31, 2019 and 2018 , we had $ 5.5 million and $ 0.4 million , respectively, of implementation costs related to our hosting arrangements that are service contracts capitalized to other assets in our consolidated balance sheets.

Amortization of the capitalized implementation costs will be recorded to SG&A in our consolidated statements of operations and is expected to begin in future periods as the individual components become ready for their intended use.

As of December 31, 2020 and 2019, we had $ 7.7 million and $ 5.5 million, respectively, of capitalized implementation costs related to our hosting arrangements that are service contracts included in other assets in our consolidated balance sheets.

Accumulated amortization was $ 0.3 million at December 31, 2020.

We recorded $ 0.3 million of amortization expense to SG&A in our consolidated statements of operations during the year ended December 31, 2020.

During the year ended December 31, 2020, we impaired $ 1.6 million of capitalized implementation costs related to the hosting arrangements of the mobile workforce component of our project due to the termination of the agreement, which was included in long-lived and other asset impairment in our consolidated statements of operations.

Accrued Liabilities

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Credit Facility

Deferred financing costs, net of amortization

Debt premium, net of amortization

Deferred financing costs, net of amortization

Debt discount, net of amortization

Deferred financing costs, net of amortization

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Credit Facility

The Credit Facility is a $ 1.25 billion asset-based revolving credit facility that will mature on November 8, 2024 , except that if any portion of the 2022 Notes are outstanding as of June 3, 2022 , it will instead mature on June 3, 2022 .

As of December 31, 2019 , there were $ 13.7 million outstanding letters of credit under the Credit Facility and the applicable margin on borrowings outstanding was 2.5 % .

As of December 31, 2020, there were $ 12.4 million letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was 2.4 %.

The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.7 % and 4.3 % at December 31, 2020 and 2019, respectively.

As a result of the facility’s ratio requirements (see below), $ 444.1 million of the $ 844.6 million of undrawn capacity was available for additional borrowings as of December 31, 2020.

As of December 31, 2020, we were in compliance with all covenants under the Credit Facility agreement.

Amendment No.

On November 8, 2019, we amended the Credit Facility to, among other things:

extend the maturity date of the Credit Facility from March 30, 2022 to November 8, 2024 (or June 3, 2022 , if any portion of the 2022 Notes remains outstanding at such date), effective as of the execution of Amendment No.

● extend the maturity date of the Credit Facility from March 30, 2022 to November 8, 2024, effective as of the execution of Amendment No.

● change the applicable margin for borrowings under the Credit Facility to those discussed in “Other Facility Terms” below.

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increase the basket sizes under certain covenants including covenants limiting our ability to make investments, incur debt, make restricted payments, incur liens and make asset dispositions.

name Archrock Services, L.P., one of our subsidiaries, as a borrower under the Credit Facility and certain of our other subsidiaries as loan guarantors;

amend the definition of “Borrowing Base” to include certain assets of ours and our subsidiaries.

We incurred $ 3.3 million in transaction costs related to Amendment No.

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Subject to certain conditions, including the approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional $ 250.0 million.

Portions of the Credit Facility up to $ 50.0 million will be available for the issuance of swing line loans.

Portions of the Credit Facility up to $ 50.0 million are available for the issuance of swing line loans.

The Credit Facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin.

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The Credit Facility agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers.

In addition, if as of any date we have cash and cash equivalents (other than proceeds from a debt or equity issuance received in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Credit Facility agreement) in excess of $ 50.0 million , then such excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility.

We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:

As of December 31, 2020, the following consolidated financial ratios, as defined in our Credit Facility agreement, were required:

EBITDA to Interest Expense

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Total Debt to EBITDA

Through fiscal year 2019

Through second quarter of 2020

January 1 through June 30, 2020

Thereafter (1)

(1) Subject to a temporary increase to 5.50 to 1.0 for any quarter during which an acquisition satisfying certain thresholds is completed and for the two quarters immediately following such quarter.

A material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform our obligations under the Credit Facility agreement, could lead to a default under that agreement.

A default under one of our debt agreements would trigger cross-default provisions under our other debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements.

As of December 31, 2019 , we were in compliance with all covenants under the Credit Facility agreement.

Formation of the Credit Facility

In March 2017, we incurred $ 14.9 million in transaction costs related to the formation of the Credit Facility, which were included in other assets in our consolidated balance sheets and are being amortized over the term of the Credit Facility.

Concurrent with entering into the Credit Facility, we terminated our Former Credit Facility, and all commitments under the facility, and repaid $ 648.4 million in borrowings and accrued and unpaid interest and fees outstanding.

As a result of the termination, we expensed $ 0.6 million of unamortized deferred financing costs, which were included in interest expense in our consolidated statements of operations, and recorded a debt extinguishment loss of $ 0.3 million .

Archrock Credit Facility

In April 2018, in connection with the Merger, the Archrock Credit Facility was terminated.

Former Credit Facility

In April 2018, in connection with the Merger, the Former Credit Facility was terminated.

Upon termination, we repaid $ 63.2 million in borrowings and accrued and unpaid interest and fees outstanding.

All commitments under the Archrock Credit Facility were terminated and the $ 15.4 million of letters of credit outstanding under the Archrock Credit Facility were converted to letters of credit under the Credit Facility.

All commitments under the Former Credit Facility were terminated and the $ 15.4 million of letters of credit outstanding under the Former Credit Facility were converted to letters of credit under the Credit Facility.

As a result of the termination, we recorded a debt extinguishment loss of $ 2.5 million.

We incurred commitment fees on the daily unused amount of the Archrock Credit Facility of $ 0.2 million in 2018 prior to the facility’s termination and $ 0.7 million during the year ended December 31, 2017.

We were in compliance with all covenants under the Archrock Credit Facility through its closing.

We were in compliance with all covenants under the Former Credit Facility through its closing.

2028 Notes and 2027 Notes

On December 20, 2019, we completed a private offering of $ 500.0 million aggregate principal amount of 6.25 % senior notes due April 2028 and received net proceeds of $ 491.8 million after deducting issuance costs.

The net proceeds were used to repay borrowings outstanding under our Credit Facility.

On March 21, 2019, we completed a private offering of $ 500.0 million aggregate principal amount of 6.875 % senior notes due April 2027 and received net proceeds of $ 491.2 million after deducting issuance costs.

The net proceeds were used to repay borrowings outstanding under our Credit Facility.

Issuance costs of $ 8.2 million and $ 8.8 million related to the 2028 Notes and 2027 Notes, respectively, were recorded as deferred financing costs within long-term debt in our consolidated balance sheets and are being amortized to interest expense in our consolidated statements of operations over the terms of the notes.

On December 17, 2020, we completed a private offering of $ 300.0 million aggregate principal amount of 6.25 % senior notes due April 2028, which were issued pursuant to the indenture under which we completed a private offering of $ 500.0 million aggregate principal amount of 6.25 % senior notes in December 2019.

The notes of the two offerings have identical terms and are treated as a single class of securities.

The $ 300.0 million of notes were issued at 104.875 % of their face value and have an effective interest rate of 5.6 %.

We received net proceeds of $ 309.9 million, after deducting issuance costs of $ 4.7 million, from our December 2020 offering and net proceeds of $ 491.8 million, after deducting issuance costs of $ 8.2 million, from our December 2019 offering.

In March 2019, we completed a private offering of $ 500.0 million aggregate principal amount of 6.875 % senior notes due April 2027 and received net proceeds of $ 491.2 million after deducting issuance costs of $ 8.8 million.

The net proceeds from the 2027 Notes and 2028 Notes were used to repay borrowings outstanding under our Credit Facility.

Issuance costs related to the 2027 Notes and 2028 Notes are considered deferred financing costs, and together with the issue premium of the December 2020 offering of 2028 Notes, are recorded within long-term debt in our consolidated balance sheets and are being amortized to interest expense in our consolidated statements of operations over the terms of the notes.

The 2027 Notes and 2028 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by us and all of our existing subsidiaries, other than Archrock Partners, L.P.

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The 2027 Notes and 2028 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole premiums, plus any accrued and unpaid interest.

In April 2014, we issued $ 350.0 million aggregate principal amount of 6 % senior notes due October 2022.

These notes were issued at an original issuance discount of $ 5.7 million , which is being amortized at an effective interest rate of 6.25 % over their term.

In February 2015, holders of these notes exchanged their notes for registered notes with the same terms.

We may redeem all or a portion of these notes at redemption prices (expressed as percentages of principal amount) equal to 101.5 % for the 12-month period beginning on April 1, 2019 and 100.0 % for the 12-month period beginning on April 1, 2020 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date.

The 2022 Notes are guaranteed on a senior unsecured basis by all of the Partnership’s existing subsidiaries (other than Archrock Partners Finance Corp., which is a co-issuer of the 2022 Notes) and certain of the Partnership’s future subsidiaries.

The 2022 Notes and the guarantees, respectively, are the Partnership’s and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of the Partnership’s and the guarantors’ other senior obligations and are effectively subordinated to all of the Partnership’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness.

In addition, the 2022 Notes and guarantees are effectively subordinated to all existing and future indebtedness and other liabilities of any future non-guarantor subsidiaries.

Guarantees by the Partnership’s subsidiaries are full and unconditional, subject to customary release provisions, and constitute joint and several obligations.

The Partnership has no assets or operations independent of its subsidiaries and there are no significant restrictions upon its subsidiaries’ ability to distribute funds to the Partnership.

On April 5, 2019, the 2021 Notes were redeemed at 100 % of their $ 350.0 million aggregate principal amount plus accrued and unpaid interest of $ 0.2 million with borrowings from the Credit Facility.

On April 1, 2020, the 2022 Notes were redeemed at 100 % of their $ 350.0 million aggregate principal amount plus accrued and unpaid interest of $ 10.5 million with borrowings under the Credit Facility.

A debt extinguishment loss of $ 4.0 million related to the redemption was recognized during the year ended December 31, 2020.

In April 2019, the 2021 Notes were redeemed at 100 % of their $ 350.0 million aggregate principal amount plus accrued and unpaid interest of $ 0.2 million with borrowings under the Credit Facility.

We recorded a debt extinguishment loss of $ 3.7 million related to the redemption during the year ended December 31, 2019.

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Long-term debt maturities through 2025

Includes the full face value of the 2022 Notes and has not been reduced by the aggregate unamortized discount of $ 2.0 million and the aggregate unamortized deferred financing costs of $ 2.3 million as of December 31, 2019 .

Accumulated Other Comprehensive Income (Loss)

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners.

Our accumulated other comprehensive income (loss) consists of changes in the fair value of our interest rate swap derivative instruments, net of tax, which are designated as cash flow hedges, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of the Partnership.

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest, during the years ended December 31, 2019 , 2018 and 2017 (in thousands):

The following table presents the changes in accumulated other comprehensive income (loss) of our derivative cash flow hedges, net of tax and excluding noncontrolling interest (in thousands):

Year Ended December 31,

Beginning accumulated other comprehensive income (loss)

Gain (loss) recognized in other comprehensive income (loss), net of tax provision (benefit) of $(1,425), $169 and $793, respectively

Loss recognized in other comprehensive income (loss), net of tax provision (benefit) of $( 1,776 ), $( 1,425 ) and $ 169 , respectively

(Gain) loss reclassified from accumulated other comprehensive income (loss) to interest expense, net of tax provision (benefit) of $( 814 ), $ 478 and $ 185 , respectively (1)

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Ending accumulated other comprehensive income (loss)

Included stranded tax effects resulting from the TCJA of $ 0.3 million reclassified to accumulated deficit during the year ended December 31, 2018.

(1) Included stranded tax effects resulting from the Tax Cuts and Jobs Act of $ 0.3 million reclassified to accumulated deficit during the year ended December 31, 2018.

(2) Pursuant to the Merger, we reclassified a gain of $ 5.7 million from noncontrolling interest to accumulated other comprehensive income (loss) related to the fair value of our derivative instruments that was previously attributed to public ownership of the Partnership .

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Elite Acquisition

On August 1, 2019, we completed the Elite Acquisition.

In August 2019, we completed the Elite Acquisition.

A portion of the acquisition’s purchase price was funded through the issuance of 21.7 million shares of common stock with an acquisition date fair value of $ 225.9 million, which was recorded to common stock and additional paid-in capital in our consolidated statements of equity.

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The equity interests in the Partnership that were owned by the public prior to the Merger are reflected in noncontrolling interest in our consolidated statements of equity.

The earnings of the Partnership that were attributed to its common units held by the public prior to the Merger are reflected in net income (loss) attributable to the noncontrolling interest in our consolidated statements of operations.

The earnings of the Partnership that were attributed to its common units held by the public prior to the Merger are reflected in net income attributable to noncontrolling interest in our consolidated statements of operations.

The tax effects of the Merger were reported as adjustments to other assets, noncurrent assets associated with discontinued operations, deferred tax liabilities, additional paid-in capital and other comprehensive income.

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The $ 105.2 million net tax impact of the change in deferred tax assets and the valuation allowance was recorded as an offsetting increase to additional paid-in capital.

We incurred $ 0.5 million , $ 10.2 million and $ 0.3 million of transaction costs directly attributable to the Merger during the years ended December 31, 2019 , 2018 and 2017 respectively, including financial advisory, legal service and other professional fees, which were recorded to transaction-related costs on our consolidated statements of operations.

Other Transactions Related to the Partnership

In August 2017, the Partnership sold, pursuant to a public underwritten offering, 4.6 million common units, including 0.6 million common units pursuant to an over-allotment option.

The Partnership received net proceeds of $ 60.3 million after deducting underwriting discounts, commissions and offering expenses, which it used to repay borrowings outstanding under the Credit Facility.

In connection with this sale and as permitted under its partnership agreement, the Partnership sold 93,163 general partner units to its General Partner for a contribution of $ 1.3 million to maintain the General Partner’s approximate 2 % general partner interest in the Partnership.

As a result of this transaction, adjustments were made to noncontrolling interest, accumulated other comprehensive income (loss), deferred tax liabilities and additional paid-in capital to reflect our new ownership percentage in the Partnership.

The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders during the years ended December 31, 2018 and 2017 (in thousands):

Year Ended December 31,

We incurred $ 0.5 million and $ 10.2 million of transaction costs directly attributable to the Merger during the years ended December 31, 2019 and 2018, respectively, including financial advisory, legal service and other professional fees, which were recorded to transaction-related costs in our consolidated statements of operations.

The following table presents the effects of changes in our ownership interest in the Partnership on the equity attributable to Archrock stockholders during the year ended December 31, 2018 (in thousands):

December 31, 2018

Net income attributable to Archrock stockholders

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Declared Dividends

per Common Share

Dividends Paid

per Common Share

(in thousands)

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Revenue from Contracts with Customers

Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services.

Sales and usage-based taxes that are collected from the customer are excluded from revenue.

The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):

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(2) Primarily relates to fees associated with owned non-compression equipment.

Includes $ 7.9 million and $ 6.6 million for the years ended December 31, 2019 and 2018 , respectively, related to billable maintenance on owned compressors that was recognized at a point in time.

(3) Includes $ 5.6 million, $ 7.9 million and $ 6.6 million for the years ended December 31, 2020, 2019 and 2018, respectively, related to billable maintenance on owned compressors that was recognized at a point in time.

All other contract operations revenue is recognized over time.

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All OTC parts and components sales revenue is recognized at a point in time.

Contract Operations

We provide comprehensive contract operations services, including the personnel, equipment, tools, materials and supplies to meet our customers’ natural gas compression needs.