Item 1. Financial Statements.
Compressco Partners, L.P.
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Amounts)
(Unaudited)
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Three Months Ended
March 31,
|
|
2014
|
|
2013
|
Revenues:
|
|
|
|
Compression and other services
|
$
|
27,927
|
|
|
$
|
29,679
|
|
Sales of compressors and parts
|
1,883
|
|
|
1,088
|
|
Total revenues
|
29,810
|
|
|
30,767
|
|
Cost of revenues (excluding depreciation and amortization expense):
|
|
|
|
|
|
Cost of compression and other services
|
15,154
|
|
|
17,096
|
|
Cost of compressors and parts sales
|
929
|
|
|
617
|
|
Total cost of revenues
|
16,083
|
|
|
17,713
|
|
Selling, general, and administrative
expense
|
4,094
|
|
|
4,279
|
|
Depreciation and amortization
|
3,682
|
|
|
3,473
|
|
Interest expense, net
|
159
|
|
|
58
|
|
Other (income) expense, net
|
539
|
|
|
(17
|
)
|
Income before income tax provision
|
5,253
|
|
|
5,261
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|
Provision for income taxes
|
634
|
|
|
722
|
|
Net income
|
$
|
4,619
|
|
|
$
|
4,539
|
|
General partner interest in net income
|
$
|
92
|
|
|
$
|
91
|
|
Common units interest in net income
|
$
|
2,700
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|
|
$
|
2,646
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|
Subordinated units interest in net income
|
$
|
1,827
|
|
|
$
|
1,802
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|
Net income per common unit:
|
|
|
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Basic
|
$
|
0.29
|
|
|
$
|
0.29
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|
Diluted
|
$
|
0.29
|
|
|
$
|
0.29
|
|
Weighted average common units outstanding:
|
|
|
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|
Basic
|
9,275,936
|
|
|
9,216,331
|
|
Diluted
|
9,313,078
|
|
|
9,275,480
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|
Net income per subordinated
unit:
|
|
|
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Basic and diluted
|
$
|
0.29
|
|
|
$
|
0.29
|
|
Weighted average subordinated units outstanding:
|
|
|
|
|
Basic and diluted
|
6,273,970
|
|
|
6,273,970
|
|
See Notes to Consolidated Financial
Statements
Compressco Partners, L.P.
Consolidated Statements of Comprehensive Income
(In Thousands)
(Unaudited)
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|
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Three Months Ended
March 31,
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|
2014
|
|
2013
|
Net income
|
$
|
4,619
|
|
|
$
|
4,539
|
|
Foreign currency translation adjustment
|
(2,968
|
)
|
|
(27
|
)
|
Comprehensive income
|
$
|
1,651
|
|
|
$
|
4,512
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|
See Notes to Consolidated Financial Statements
Compressco Partners, L.P.
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
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March 31,
2014
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|
December 31,
2013
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(Unaudited)
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ASSETS
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Current assets:
|
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Cash and cash equivalents
|
$
|
12,633
|
|
|
$
|
9,477
|
|
Trade accounts receivable, net of allowances for doubtful accounts of $777 in 2014 and $600 in 2013
|
18,726
|
|
|
23,819
|
|
Inventories
|
13,545
|
|
|
14,029
|
|
Deferred tax asset
|
57
|
|
|
57
|
|
Prepaid expenses and other current assets
|
1,502
|
|
|
1,597
|
|
Total current assets
|
46,463
|
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|
48,979
|
|
Property, plant, and equipment:
|
|
|
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Land and building
|
2,178
|
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|
2,178
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|
Compressors and equipment
|
177,782
|
|
|
176,592
|
|
Vehicles
|
12,656
|
|
|
12,892
|
|
Construction in progress
|
—
|
|
|
—
|
|
Total property, plant, and equipment
|
192,616
|
|
|
191,662
|
|
Less accumulated depreciation
|
(92,162
|
)
|
|
(89,648
|
)
|
Net property, plant, and equipment
|
100,454
|
|
|
102,014
|
|
Other assets:
|
|
|
|
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|
Goodwill
|
72,161
|
|
|
72,161
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|
Deferred tax asset
|
1,750
|
|
|
937
|
|
Other assets
|
2,803
|
|
|
1,018
|
|
Total other assets
|
76,714
|
|
|
74,116
|
|
Total assets
|
$
|
223,631
|
|
|
$
|
225,109
|
|
LIABILITIES AND
PARTNERS' CAPITAL
|
|
|
|
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|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
$
|
6,524
|
|
|
$
|
4,854
|
|
Accrued liabilities and other
|
4,154
|
|
|
4,881
|
|
Accrued payroll and benefits
|
634
|
|
|
826
|
|
Amounts payable to affiliates
|
4,698
|
|
|
4,210
|
|
Deferred tax liabilities
|
2,021
|
|
|
2,134
|
|
Total current liabilities
|
18,031
|
|
|
16,905
|
|
Other liabilities:
|
|
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|
Long-term debt, net
|
32,220
|
|
|
29,959
|
|
Deferred tax liabilities
|
4,725
|
|
|
4,477
|
|
Other long-term liabilities
|
50
|
|
|
52
|
|
Total other liabilities
|
36,995
|
|
|
34,488
|
|
Commitments and contingencies
|
|
|
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|
Partners' capital:
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General partner interest
|
3,112
|
|
|
3,158
|
|
Common units (9,279,293 units issued and outstanding at March 31, 2014 and 9,279,293 units issued and outstanding at December 31, 2013)
|
103,709
|
|
|
104,887
|
|
Subordinated units (6,273,970 units issued and outstanding)
|
64,339
|
|
|
65,258
|
|
Accumulated other comprehensive income (loss)
|
(2,555
|
)
|
|
413
|
|
Total partners' capital
|
168,605
|
|
|
173,716
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Total liabilities and partners' capital
|
$
|
223,631
|
|
|
$
|
225,109
|
|
See Notes to Consolidated Financial Statements
Compressco Partners, L.P.
Consolidated Statement of Partners’ Capital
(In Thousands)
(Unaudited)
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Partners' Capital
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Accumulated Other Comprehensive Income (Loss)
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Total Partners' Capital
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Limited Partners
|
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General
Partner
|
|
Common
Unitholders
|
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Subordinated
Unitholder
|
|
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Balance at December 31, 2013
|
$
|
3,158
|
|
|
$
|
104,887
|
|
|
$
|
65,258
|
|
|
$
|
413
|
|
|
$
|
173,716
|
|
Net income
|
92
|
|
|
2,700
|
|
|
1,827
|
|
|
—
|
|
|
4,619
|
|
Distributions ($0.4375 per unit)
|
(138
|
)
|
|
(4,080
|
)
|
|
(2,746
|
)
|
|
—
|
|
|
(6,964
|
)
|
Equity compensation
|
—
|
|
|
202
|
|
|
—
|
|
|
—
|
|
|
202
|
|
Other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,968
|
)
|
|
(2,968
|
)
|
Balance at March 31, 2014
|
$
|
3,112
|
|
|
$
|
103,709
|
|
|
$
|
64,339
|
|
|
$
|
(2,555
|
)
|
|
$
|
168,605
|
|
See Notes to Consolidated Financial Statements
Compressco
Partners, L.P.
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
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Three Months Ended March 31,
|
|
2014
|
|
2013
|
Operating activities:
|
|
|
|
|
|
Net income
|
$
|
4,619
|
|
|
$
|
4,539
|
|
Reconciliation of net income to cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
3,682
|
|
|
3,473
|
|
Provision for deferred income taxes
|
67
|
|
|
(172
|
)
|
Equity compensation expense
|
202
|
|
|
322
|
|
Provision for doubtful accounts
|
177
|
|
|
(19
|
)
|
Other non-cash charges and credits
|
67
|
|
|
—
|
|
Loss on sale of property, plant, and
equipment
|
230
|
|
|
97
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
4,640
|
|
|
(8,226
|
)
|
Inventories
|
526
|
|
|
(172
|
)
|
Prepaid expenses and other current assets
|
—
|
|
|
291
|
|
Accounts payable and accrued expenses
|
2,024
|
|
|
6,623
|
|
Other
|
—
|
|
|
8
|
|
Net cash provided by operating activities
|
16,234
|
|
|
6,764
|
|
Investing activities:
|
|
|
|
|
|
Purchases of property, plant, and equipment, net
|
(6,004
|
)
|
|
(7,889
|
)
|
Other investing activities
|
(1,853
|
)
|
|
1
|
|
Net cash used in
investing activities
|
(7,857
|
)
|
|
(7,888
|
)
|
Financing activities:
|
|
|
|
|
|
Proceeds from long-term debt
|
2,000
|
|
|
4,250
|
|
Distributions
|
(6,964
|
)
|
|
(6,660
|
)
|
Net cash used in financing activities
|
(4,964
|
)
|
|
(2,410
|
)
|
Effect of exchange rate
changes on cash
|
(257
|
)
|
|
(20
|
)
|
Increase (decrease) in cash and cash equivalents
|
3,156
|
|
|
(3,554
|
)
|
Cash and cash equivalents at beginning of period
|
9,477
|
|
|
12,966
|
|
Cash and cash equivalents at end of period
|
$
|
12,633
|
|
|
$
|
9,412
|
|
Supplemental cash flow information:
|
|
|
|
|
|
Income taxes paid
|
$
|
410
|
|
|
$
|
977
|
|
See Notes to Consolidated Financial Statements
Compressco Partners, L.P.
Notes to Consolidated Financial
Statements
(Unaudited)
NOTE
A
–
BASIS OF PRESENTATION
AND
SIGNIFICANT ACCOUNTING POLICIES
We are a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional
compression applications and, in certain circumstances, well monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region.
Presentation
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of
March 31, 2014
, and for the three month periods ended
March 31, 2014
and 2013, include all normal recurring adjustments that are, in the opinion of management, necessary to provide a fair statement of our results for the interim periods. Operating results for the period ended
March 31, 2014
are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2014.
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the SEC and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements for the year ended
December 31, 2013
, and notes thereto included in our Annual Report on Form 10-K, which
we filed with the SEC on March 14, 2014.
Beginning with the three month period ended September 30, 2013, certain ad valorem tax expenses for operating equipment have been classified as cost of compression and other services instead of being included in general and administrative expense as reported in prior periods. Prior period amounts have been reclassified to conform to the current year period presentation. The amount of such reclassification is $
0.3 million
for the three month period ended March 31, 2013. This reclassification had no effect on net income for any of the periods presented. This revised presentation results in a presentation that is consistent with other reporting entities in our industry.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be
material.
Cash Equivalents
We consider all highly
liquid cash investments with
maturities
of three months or less when purchased
to be cash equivalents.
Financial Instruments
The fair values of our financial instruments, which may include cash, accounts receivable, accounts payable, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts.
Foreign Currencies
We have designated the Canadian dollar as the functional currency for our operations in Canada.
Effective January 1, 2014, we changed the functional currency in Argentina from the U.S. dollar to the Argentina peso. We are exposed to fluctuations between the U.S. dollar and certain foreign currencies, including the Canadian dollar, the Mexican peso, and the Argentine peso, as a result of our international operations.
Inventories
Inventories
consist primarily of compressor unit components and parts and
are stated at the lower of cost or
market value. Cost is determined using the weighted average
cost
method.
Net Income
Per Common and Subordinated Unit
The computations of
net income
per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units meet the definition of a participating security, and, therefore, we are required to use the two-class method in the computation of net income per unit. Basic
net income
per common and subordinated unit
is
determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to our
General Partner
(including any distributions to our
General Partner
on its
incentive distribution rights) by the weighted average number of
outstanding common and subordinated units, respectively, during the period.
We determine cash distributions based on available cash and determine the actual incentive distributions allocable to our
General Partner, if any,
based on actual distributions. When computing
net income
per common and subordinated unit under the two-class method, the amount of the actual incentive distribution rights, if any, is deducted from net income and allocated to our
General Partner
for the period
to which the calculation relates. The remaining amount of net income, after deducting the incentive distribution rights, is allocated among
our
General Partner, common, and subordinated units based on how our partnership agreement allocates net income.
The following is a reconciliation of the weighted average number of common and subordinated units outstanding to the number of common and subordinated units used in the computations of net income per common and subordinated unit.
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|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2014
|
|
Three Months Ended
March 31, 2013
|
|
Common
Units
|
|
Subordinated
Units
|
|
Common
Units
|
|
Subordinated
Units
|
Number of weighted average units outstanding
|
9,275,936
|
|
|
6,273,970
|
|
|
9,216,331
|
|
|
6,273,970
|
|
Restricted units outstanding
|
37,142
|
|
|
—
|
|
|
59,149
|
|
|
—
|
|
Average diluted units outstanding
|
9,313,078
|
|
|
6,273,970
|
|
|
9,275,480
|
|
|
6,273,970
|
|
Environmental Liabilities
Costs to remediate and monitor environmental matters are accrued when such
liabilities are considered probable and a reasonable estimate of such costs is determinable.
Accumulated Other Comprehensive Income (Loss)
Certain of
our foreign operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of the foreign currency translation adjustment reflected as a component of accumulated other comprehensive income. Accumulated other comprehensive income is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income (loss) during the three month periods ended
March 31, 2014
and
2013
,
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
|
(In Thousands)
|
Balance, beginning of period
|
$
|
413
|
|
|
$
|
1,004
|
|
Foreign currency translation adjustment
|
(2,968
|
)
|
|
(27
|
)
|
Balance, end of period
|
$
|
(2,555
|
)
|
|
$
|
977
|
|
Activity within accumulated other comprehensive income (loss) includes no
reclassifications to net income.
Allocation of Net Income
Our net income is allocated to partners’ capital accounts in accordance with the provisions of our partnership agreement.
Distributions
On
January 17, 2014
, we declared a cash distribution attributable to the quarter ended
December 31, 2013
of
$0.4375
per unit. This distribution equates to a distribution of
$1.75
per outstanding unit on an annualized basis. This cash distribution was paid on
February 14, 2014
,
to all unitholders of record as of the close of business
January 31, 2014
.
Subsequent to
March 31, 2014
, on
April 21, 2014
, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended
March 31, 2014
of
$0.4450
per unit. This distribution equates to a distribution of
$1.78
per outstanding unit, or approximately
$28.2 million
, on an annualized basis. This cash distribution is to be paid on
May 15, 2014
to all unitholders of record as of the close of business on
May 1, 2014
.
Fair Value Measurements
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.
Under generally accepted accounting principles, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets, including goodwill. The fair value of our financial instruments, which may include cash, temporary investments, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts.
We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward purchase derivative contracts. For these fair value measurements, we utilize the quoted value as determined by our counterparty financial institution (a Level 2 measurement). A summary of these fair value measurements as of
March 31, 2014
, is as follows:
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|
|
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|
|
|
|
|
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|
Fair Value Measurements Using
|
Description
|
|
Total as of
March 31, 2014
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
(In Thousands)
|
Asset for foreign currency derivative contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liability for foreign currency derivative contracts
|
|
(60
|
)
|
|
—
|
|
|
(60
|
)
|
|
—
|
|
|
|
$
|
(60
|
)
|
|
|
|
|
|
|
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (FASB) published ASU No. 2013-11,
"Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" (ASU 2013-11). The amendments in this ASU provide guidance on presentation of unrecognized tax benefits and are expected to reduce diversity in practice and better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this ASU are effective prospectively for interim and annual periods beginning after December 15, 2013, with early adoption and retrospective application permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity", which modifies the criteria for disposals to quality as discontinued operations and expands related disclosures. The guidance is effective for annual and interim reporting periods beginning after December 15, 2014. Adoption of this amendment will not have a material impact on the Company's financial statements.
NOTE
B
–
LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
(In Thousands)
|
|
|
Scheduled Maturity
|
|
|
|
|
Previous Credit Agreement
|
|
June 24, 2015
|
|
$
|
—
|
|
|
$
|
29,959
|
|
Credit Agreement
|
|
October 15, 2017
|
|
32,220
|
|
|
—
|
|
Total debt
|
|
|
|
32,220
|
|
|
29,959
|
|
Less current portion
|
|
|
|
—
|
|
|
—
|
|
Total long-term debt
|
|
|
|
$
|
32,220
|
|
|
$
|
29,959
|
|
NOTE C – MARKET RISKS AND DERIVATIVE CONTRACTS
We are exposed to financial and market risks that affect our businesses. We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facility, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our financial risk management activities may at times involve, among other measures, the use of derivative financial instruments, such as swap and collar
agreements, to hedge the impact of market price risk exposures.
Foreign Currency Derivative Contracts
In October 2013, we began entering into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of
March 31, 2014
, we had the following foreign currency derivative contracts outstanding relating to a portion of our foreign operations:
|
|
|
|
|
|
|
|
|
|
Derivative Contracts
|
|
US Dollar Notional Amount
|
|
Traded Exchange Rate
|
|
Settlement Date
|
|
|
(In Thousands)
|
|
|
|
|
Forward purchase Mexican peso
|
|
$
|
2,374
|
|
|
13.07
|
|
4/15/2014
|
Forward purchase Canadian dollar
|
|
$
|
2,238
|
|
|
1.10
|
|
4/15/2014
|
Forward purchase Argentina peso
|
|
$
|
3,173
|
|
|
8.06
|
|
4/15/2014
|
Under this program, we may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of our currency exchange risk exposure, they will not be formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.
The fair value of foreign currency derivative instruments are based on quoted market values as reported to us by our counterparty (a Level 2 measurement). The fair value of our foreign currency derivative instruments as of
March 31, 2014
, is as follows:
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
Fair Value at
|
Foreign currency derivative instruments
|
|
Location
|
|
March 31, 2014
|
|
|
|
|
(In Thousands)
|
Forward purchase contracts
|
|
Current assets
|
|
$
|
—
|
|
|
|
Current liabilities
|
|
(60
|
)
|
Total
|
|
|
|
$
|
(60
|
)
|
None of the foreign currency derivative contracts contain credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three month period ended March 31, 2014, we recognized approximately $
0.5 million
of net gains associated with our foreign currency derivative program, and such amount is included in Other Income in the accompanying consolidated statement of operations.
NOTE D – RELATED
PARTY TRANSACTIONS
Set forth below is a description of one of the agreements we entered into with related parties in connection with the
completion of our initial public offering
(the Offering) on June 20, 2011. This description is not a complete discussion of this agreement and is qualified in its entirety by reference to the full text of the complete agreement, which is filed, along with other agreements, as exhibits to our filings with the SEC.
Omnibus Agreement
On June 20, 2011, in connection with the
completion
of the
Offering,
we
entered into an omnibus agreement (the Omnibus Agreement) with
TETRA and
our
General
Partner.
Under the terms of the Omnibus Agreement,
our
General
Partner
provides
all personnel and services reasonably necessary to manage
our
operations and conduct
our
business
(other than in Mexico and Argentina),
and
certain of
TETRA’s
Latin American-based subsidiaries provide personnel and services necessary
for the
conduct
of certain of
our
Latin American-based businesses. In addition, under the Omnibus Agreement,
TETRA
provides
certain corporate and general and administrative services
as requested by our
General
Partner,
including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental,
information technology, human resources, credit, payroll, internal audit,
and tax services. Pursuant to the Omnibus Agreement,
we
reimburse
our
General
Partner
and
TETRA
for services they provide to
us.
Under the terms of the Omnibus Agreement, TETRA has agreed to indemnify us for
three
years after the completion of the Offering against certain potential environmental claims, losses, and expenses associated with the operation of the business prior to the completion of the Offering. TETRA’s maximum liability for this indemnification obligation is
$5.0 million
, and TETRA will not have any obligation under this indemnification until our aggregate losses exceed
$250,000
. TETRA will have no indemnification obligations with respect to environmental claims made as a result of
new
or
modified
environmental laws promulgated after the
completion
of the Offering.
We
have agreed to
indemnify
TETRA
for environmental claims arising following the completion of the Offering regarding the business contributed to
us.
Under
the terms of the Omnibus Agreement,
we
or
TETRA
may, but neither
are under any
obligation to, perform for the other such production enhancement or other oilfield services on a subcontract basis as are needed or desired by the
other, for such periods of time and in such amounts as may be mutually agreed upon by
TETRA
and
our
General Partner. Any such services are required to be performed on terms that are (i) approved by the conflicts committee of
our
General Partner’s board of directors, (ii) no less favorable to
us
than those generally being provided to or available from non-affiliated third parties, as determined by
our
General Partner, or (iii) fair and reasonable to
us, taking into account the totality of the relationships between
TETRA
and
us
(including other transactions that may be particularly favorable or advantageous to
us), as determined by
our
General Partner.
Under the terms of the Omnibus Agreement,
we
or
TETRA
may, but
are under no obligation
to, sell, lease or exchange on a like-kind basis to
the other such production enhancement or other oilfield services equipment as is needed or desired
to meet either of our
production enhancement or other oilfield services obligations, in such amounts, upon
such conditions and for such periods of time, if
applicable, as may be mutually agreed upon by
TETRA
and
our
General Partner. Any such sales, leases,
or like-kind exchanges are required to be on terms that are (i) approved by the conflicts committee of
our
General Partner’s board of directors, (ii) no less favorable to
us
than those generally being provided to or available from non-affiliated third parties, as determined by
our
General Partner, or (iii) fair and reasonable to
us, taking into account the totality of the relationships between
TETRA
and
us
(including other transactions that may be particularly favorable or advantageous to
us), as determined by
our
General Partner. In addition, unless otherwise approved by the conflicts committee of
our
General Partner’s
board of directors,
TETRA
may purchase
newly fabricated equipment from
us at a negotiated price, provided that such price may not be
less than the sum of the total costs (other than any allocations of general and administrative expenses) incurred by
us
in fabricating such equipment plus a fixed
margin percentage thereof, and
TETRA
may purchase from
us
previously fabricated equipment for a price that is not less than the sum of the net book value of such equipment plus a fixed margin percentage thereof.
TETRA has also agreed to indemnify
us
for liabilities related to: (1) certain defects in title to
our
assets as of the completion of the Offering and any failure to obtain, prior to the completion of the Offering, certain consents and permits necessary to own and operate such assets, to the extent
we
notify
TETRA
within three years after the completion of the Offering; and (2) tax liabilities attributable to the operation of
our
assets prior to the completion of the Offering.
The Omnibus Agreement (other than the indemnification obligations described above) will terminate upon the earlier to occur of (i) a change of control of
our
General
Partner or
TETRA,
or (ii) the third anniversary of the
completion
of the
Offering, unless
we, our
General
Partner,
and
TETRA
decide to extend the term of the Omnibus Agreement.
NOTE E – INCOME TAXES
Our U.S. operations are not subject to U.S. federal income tax other than the operations that are conducted through our taxable
subsidiaries. We will incur state and local income taxes in certain states of the United States in which we conduct business. We incur income taxes and will be subject to withholding requirements related to certain of our operations in Mexico, Argentina, Canada, and other foreign countries in which we operate. Furthermore, we will also incur Texas Margin Tax, which, in accordance with FASB ASC 740, is classified as an income tax for reporting purposes.
NOTE F – COMMITMENTS
AND CONTINGENCIES
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of any lawsuits
or other proceedings
against us cannot be predicted with certainty, management does not
consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is
expected
to
have a material adverse effect on our financial
condition, results of operations,
or cash flows.
NOTE G – SUBSEQUENT EVENTS
On
April 21, 2014
, the
board of directors of
our
General Partner
declared a cash distribution attributable to the quarter ended
March 31, 2014
of
$0.445
0 per
unit. This cash distribution
is to
be paid on
May 15, 2014
, to all unitholders of record as of the close of business on
May 1, 2014
.
Item
2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report.
In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC
on March
14, 2014. This
discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview
We are a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications, and, in certain circumstances, well
monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Outside of the United States, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region.
Over time, oil and natural gas wells exhibit declining pressure and production. Production enhancement technologies are designed to increase daily production and total recoverable reserves. Our conventional compression-based production enhancement services are utilized to increase production by deliquifying wells, lowering wellhead pressure, and increasing gas velocity.
Our conventional applications include production enhancement for dry gas wells and liquid-loaded gas wells, and backside auto injection systems (“BAIS”) for liquid-loaded gas wells. Our unconventional compression-based services applications are utilized primarily in horizontal resource plays and include vapor recovery, gas lift, and casing gas system applications. During late 2013, we purchased three-stage compressor packages with higher discharge pressure for use in gas lift services applications. Gas lift involves the use of compression equipment to inject natural gas downhole in order to increase oil and liquids production, primarily in horizontal wells. In
certain circumstances, in connection with our primary production enhancement services, we also provide well monitoring and automated
sand separation services.
While our conventional applications are primarily utilized with mature gas wells with low formation pressures, they are also effectively utilized on newer gas wells that have experienced significant production declines. Our field services are performed by our highly trained staff of regional service supervisors, optimization specialists, and field mechanics. In addition, we design and manufacture most of the compressor packages that we use to provide our services, and, in certain markets, we sell our compressor packages to oil and gas operators.
We seek to strategically grow our business through the expansion of our existing fleet and by offering additional services to our customers. In addition, as part of our strategic growth plans, we evaluate opportunities to acquire businesses and assets and intend to consider acquisition opportunities that may involve the payment of cash or the issuance of debt securities or equity, including our common units.
Increased demand for unconventional compression services applications, particularly vapor recovery, contributed to increased U.S. service revenues during the first three months of 2014 compared to the prior year period. This growth in U.S. service revenues was more than offset, however, by decreased activity levels in Mexico. In addition to the increased demand for unconventional compression services, U.S. and Canadian natural gas prices were higher compared to the prior year period, which has had a positive impact on demand and pricing for conventional compression services in these markets. As a result of this increased U.S. and Canadian services activity, the average utilization rate for our compressor fleet increased to 84.8% during the current year period compared to 83.7% during the prior year period. The growth of our U.S. unconventional compression services applications has helped reduce our overall dependence on natural gas prices, however, the level of our conventional
production enhancement services operations
remains generally
dependent upon the demand for and prices
of natural gas in
the locations
in which we operate. Demand for our unconventional compression services remains strong and we expect continued growth in demand for those applications. In addition, foreign compression service revenues increased compared to the prior year period, particularly in Argentina and Canada.
Decreased activity levels by our primary customer in Mexico, Petróleos Mexicanos (PEMEX), resulted in decreased compression services revenues during the three months ended March 31, 2014, compared to the prior year period. During late March 2013, we began to experience
a decline in the level of activity and revenues in Mexico. We believe this decline in demand is temporary. However, any long-term increase in the levels of Mexico revenues is dependent upon the resumption of activity by PEMEX in the regions in which we operate as well as the renewal or extension of certain of our contracts, or the awarding of new contracts,
with
PEMEX. Recently the Mexican government implemented an energy industry reform that is designed to allow the government to grant non-Mexican companies the opportunity to enter into contracts and licenses to explore and drill for oil and natural gas in Mexico. Although this reform could result in additional customers for us in Mexico, and a reduction in our dependency on PEMEX, the timing of any impact from this reform is uncertain. Regardless of the impact of this reform, we anticipate that we will continue to be dependent on PEMEX as a significant customer.
Overall, our total revenues and cost of revenues
decreased during the three
month period ended
March 31, 2014
,
compared to the
corresponding
prior year period.
These decreases reflect:
•
lower activity in Mexico;
|
|
•
|
improved
overall
utilization
of the existing fleet, particularly in the U.S.;
|
•
increased
compression services activity in Argentina and Canada;
|
|
•
|
growth of our unconventional compression services applications in the U.S;
|
•
growth of the fleet within our
other
international operations; and
|
|
•
|
decreased operating expenses driven by cost reductions in Mexico as well as overall labor and equipment cost reductions.
|
Despite the decreased activity levels in Mexico, our operations in Latin America remain significant, and require a significant investment in working capital, equipment, and the levels of personnel and related administrative services provided under the Omnibus Agreement and our other agreements with TETRA and its subsidiaries. In addition, our operations in Latin America are subject to potential volatility relating to our Mexico and Argentina operations as addressed in more detail under “Liquidity and Capital Resources - Cash Flows.”
How We Evaluate Our Operations
Operating Expenses.
We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, year-to-date, and year-to-year comparisons, and as compared to budget. This analysis is useful in identifying adverse cost trends and
allows us to investigate the cause of these trends and implement remedial measures, if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and the fuel and other supplies consumed while providing our services. Other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with the level of activities performed.
Our labor costs consist primarily of wages
and benefits
for our field personnel, as well as expenses related to their training and safety.
Additional
information regarding our operating expenses for the three month period
ended
March 31, 2014
, is provided within the results of operations sections
below.
EBITDA.
We view EBITDA as one of our primary management tools, and we track
it
on a monthly basis, both in dollars and as a percentage of revenues
(compared to the prior month,
prior year
period,
and to budget). We define EBITDA as earnings before
interest, taxes, depreciation,
and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:
|
|
•
|
assess our ability to generate available cash sufficient to make distributions to our unitholders and
General
Partner;
|
|
|
•
|
evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
|
|
|
•
|
measure operating performance and return on capital as compared to our competitors; and
|
|
|
•
|
determine our ability to incur and service debt and fund capital expenditures.
|
EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities,
or any other measure of financial performance presented in accordance with generally accepted accounting principles (GAAP). Our EBITDA may not be comparable to EBITDA or similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as
we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures,
and incorporating this knowledge into management’s decision-making processes.
EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.
The following table
reconciles net income to EBITDA for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
|
(In Thousands)
|
Net income
|
$
|
4,619
|
|
|
$
|
4,539
|
|
Provision for income taxes
|
634
|
|
|
722
|
|
Depreciation and amortization
|
3,682
|
|
|
3,473
|
|
Interest expense, net
|
159
|
|
|
58
|
|
EBITDA
|
$
|
9,094
|
|
|
$
|
8,792
|
|
The following table reconciles cash flow from operating activities to EBITDA:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
|
(In Thousands)
|
Cash flow from operating activities
|
$
|
16,234
|
|
|
$
|
6,764
|
|
Changes in current assets and current liabilities
|
(7,190
|
)
|
|
1,476
|
|
Deferred income taxes
|
(67
|
)
|
|
172
|
|
Other non-cash charges
|
(676
|
)
|
|
(400
|
)
|
Interest expense, net
|
159
|
|
|
58
|
|
Provision for income taxes
|
634
|
|
|
722
|
|
EBITDA
|
$
|
9,094
|
|
|
$
|
8,792
|
|
Average Utilization Rate of our Compressor Packages.
We measure the average compressor package utilization rate of our fleet of compressor packages as the
average
number of compressor packages used to provide services during a particular period, divided by
the
average
number of compressor packages in our fleet
during
such
period.
Our management primarily uses this metric
to
determine our future need for additional compressor packages.
The
following table sets forth our
historical fleet size and average number of compressor packages being utilized to provide our production enhancement services during the periods shown and our
average utilization rates during those periods.
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
Total compressor packages in fleet (at period end)
|
4,054
|
|
|
3,843
|
|
Total compressor packages in service (at period end)
|
3,398
|
|
|
3,149
|
|
Average number of compressor packages in service (during period)
(1)
|
3,412
|
|
|
3,174
|
|
Average compressor package utilization (during period)
(2)
|
84.8
|
%
|
|
83.7
|
%
|
|
|
(1)
|
“Average number of compressor packages in service” for each period shown is determined by calculating an average of two numbers, the first of which is the number of compressor packages being used to provide services at the beginning of the period and the second
of which is the number of compressor packages being used to provide services at the end of the period.
|
|
|
(2)
|
“Average compressor package utilization” for each period shown is determined by dividing the average number of compressor packages in service during such period by the average of two numbers, the first of which is the total number of compressor packages in our fleet at the beginning of such period and the second of which is the total number of compressor packages in our fleet at the end of such period.
|
Net Increase in Compressor Fleet Size.
We define the net increase in our compressor fleet size during a given period of time as the difference between the number of compressor packages we placed into service, less the number of compressor packages we removed from service.
Management uses this metric to evaluate our operating performance and specifically the effectiveness of our marketing efforts.
Additional information regarding changes in the size of our compressor fleet for the three month period
ended
March 31, 2014
is provided within the results of operations sections below.
Critical Accounting Policies
There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended
December 31, 2013
. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the useful life of long-lived assets, and the collectability of accounts receivable. Our estimates are based on historical experience and on future expectations that we believe are reasonable.
The fair values of a large portion of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not
readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates,
and those differences may be material.
Results of Operations
The following data should be read
in conjunction with the Consolidated
Financial Statements and the associated Notes contained elsewhere in this
document.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Period-to-Period Change
|
|
Percentage of Total Revenues
|
|
Period-to-Period Change
|
Combined Results of Operations
|
2014
|
|
2013
|
|
2014 vs. 2013
|
|
2014
|
|
2013
|
|
2014 vs. 2013
|
|
(In Thousands)
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
$
|
27,927
|
|
|
$
|
29,679
|
|
|
$
|
(1,752
|
)
|
|
93.7
|
%
|
|
96.5
|
%
|
|
(5.9
|
)%
|
Sales of compressors and parts
|
1,883
|
|
|
1,088
|
|
|
795
|
|
|
6.3
|
%
|
|
3.5
|
%
|
|
73.1
|
%
|
Total revenues
|
$
|
29,810
|
|
|
$
|
30,767
|
|
|
$
|
(957
|
)
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(3.1
|
)%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
$
|
15,154
|
|
|
$
|
17,096
|
|
|
(1,942
|
)
|
|
50.8
|
%
|
|
55.6
|
%
|
|
(11.4
|
)%
|
Cost of compressors and parts sales
|
929
|
|
|
617
|
|
|
312
|
|
|
3.1
|
%
|
|
2.0
|
%
|
|
50.6
|
%
|
Total cost of revenues
|
$
|
16,083
|
|
|
$
|
17,713
|
|
|
$
|
(1,630
|
)
|
|
54.0
|
%
|
|
57.6
|
%
|
|
(9.2
|
)%
|
Selling, general and administrative expense
|
4,094
|
|
|
4,279
|
|
|
(185
|
)
|
|
13.7
|
%
|
|
13.9
|
%
|
|
(4.3
|
)%
|
Depreciation and amortization
|
3,682
|
|
|
3,473
|
|
|
209
|
|
|
12.4
|
%
|
|
11.3
|
%
|
|
6.0
|
%
|
Interest (income) expense, net
|
159
|
|
|
58
|
|
|
101
|
|
|
0.5
|
%
|
|
0.2
|
%
|
|
174.1
|
%
|
Other (income) expense, net
|
539
|
|
|
(17
|
)
|
|
556
|
|
|
1.8
|
%
|
|
(0.1
|
)%
|
|
(3,270.6
|
)%
|
Income before income taxes
|
$
|
5,253
|
|
|
$
|
5,261
|
|
|
$
|
(8
|
)
|
|
17.6
|
%
|
|
17.1
|
%
|
|
(0.2
|
)%
|
Provision for income taxes
|
634
|
|
|
722
|
|
|
(88
|
)
|
|
2.1
|
%
|
|
2.3
|
%
|
|
(12.2
|
)%
|
Net income
|
$
|
4,619
|
|
|
$
|
4,539
|
|
|
$
|
80
|
|
|
15.5
|
%
|
|
14.8
|
%
|
|
1.8
|
%
|
Three months ended
March 31, 2014
compared to three months ended
March 31, 2013
Revenues
Revenues during the first quarter of 2014 decreased compared to the prior year period due to decreased service revenues. This decrease in service revenues was due to a significant decrease in revenues in Mexico, which was caused by decreased activity by PEMEX, our primary customer in Mexico. In late March 2013,
we began to experience a
decline in demand in the northern region of Mexico for oil and gas services from this customer, and this decline has continued through the current year period. We believe this decline in demand is temporary, however, and we have seen a subsequent modest increase in activity in certain gas producing regions of Mexico that began during late 2013. However, any long-term increase in the levels of Mexico revenues is dependent upon the resumption of activity by PEMEX in the regions in which we operate as well the renewal or extension of certain contracts, or the awarding of new contracts,
with
PEMEX.
Recently the Mexican government implemented an energy industry reform that is designed to allow the government to grant non-Mexican companies the opportunity to enter into contracts and licenses to explore and drill for oil and natural gas in Mexico. Although this reform could result in additional customers for us in Mexico, and a reduction in our dependency on PEMEX, the timing of any impact from this reform is uncertain.
Decreased service revenues in Mexico were partially offset by increased revenues in the U.S., Argentina, and Canada. The increase in U.S. service revenues was primarily due to increased unconventional compression services applications activity, primarily in horizontal resource play reservoirs. This increase in higher priced unconventional services activity have resulted in increased revenues per domestic compressor unit, and we expect the growth in demand for
these higher priced unconventional services to continue. In addition, increased natural gas prices in the U.S. and Canada have had a positive impact on demand and pricing for conventional compression services in these markets. We have continued to increase our compressor fleet, both in the U.S. and certain foreign markets, to serve increasing demand for services.
In addition to the increase in consolidated compression and other service revenues, there was an increase of approximately $0.8 million in revenues from sales of compressor packages and parts during the three month
ended
March 31, 2014
, compared to the prior year period. Although sales of compressor packages are a part of our operations, the level of revenues from sales of compressors is volatile and more difficult to forecast than are our revenues from compression and other services.
Cost of revenues
The decrease in cost of compression and other services during the quarter ended
March 31, 2014
,
compared to the prior year period was due to the decreased service activity
in Mexico, where we have reduced headcount, relocated assets, and taken other measures to reduce operating expenses. Consolidated cost
of compression and other services as a percentage of consolidated compression and other services revenues
decreased
to 54.3%
during the
current
year period
from
57.6% during the
prior
year period, despite the decrease in the higher margin Mexico activity. This improvement was due to overall efforts to decrease U.S. and Canada operating costs despite the increase in activity in these regions, and despite the increase in unconventional compression services applications, which have higher operating cost levels.
Cost of compressors and parts sales increased compared to the prior year due to the increased sales discussed above.
Selling, general and administrative expense
Selling,
general and administrative
expense decreased slightly for the three months ended
March 31, 2014
, compared to the three months
ended
March 31, 2014
, primarily due to decreased administrative salary and personnel related expenses, including decreased equity compensation expense. These decreases were offset by approximately $0.2 million of increased provision for bad debt.
Depreciation and amortization
Depreciation and amortization expense primarily consists of the depreciation of compressor packages. In addition,
it
includes the depreciation of other operating equipment and facilities. Depreciation and amortization expense increased primarily as a result of additional compressor packages placed into service as compared to the prior year period.
Interest expense
As of
March 31, 2014
, our total outstanding borrowing under the Credit Agreement was $32.2 million. We
incurred approximately $0.1 million of
interest expense in the current year period associated with these borrowings under the Credit Agreement.
Other expense, net
Other expense, net, was $0.5 million during the first quarter of 2014 compared to $0.02 million of income during the prior year
period,
primarily due to increased charges associated with foreign currency exchange losses.
Provision for income
taxes
Our U.S. operations are not subject to U.S. federal income tax other than with respect to the operations that are conducted through our taxable U.S. corporate
subsidiary. We also incur state and local income taxes in certain states, and we incur income taxes related to our foreign operations in the foreign countries in which we operate.
Liquidity and Capital Resources
Our primary cash requirements are for distributions, working capital requirements, normal operating expenses, and capital expenditures. Our
sources
of funds are
our existing cash balances, cash generated from our operations, long-term and short-term borrowings, operating leases, and future issuances of equity, which we believe will be sufficient to meet our working capital requirements. We believe that we have sufficient liquid assets, cash flow from operations,
and borrowing capacity to meet our financial commitments, debt service obligations, and anticipated capital expenditures. We expect to fund future acquisitions and capital expenditures with cash flow generated from operations, funds borrowed under our Credit Agreement, funds received from the issuance of long-
term debt, and the issuance of additional equity. However, we are subject to business and operational risks that could materially adversely affect our cash flows.
Please
read Part II, Item 1A
“Risk Factors”
in our Annual Report on Form 10-K for the year ended
December 31, 2013
.
The continued growth in our operations, both internationally and in the U.S, requires
ongoing
significant capital expenditure
investment. In addition to this
capital expenditure investment,
reduced activity levels and related increased receivable collection time from our primary customer in Mexico have
resulted in
increased working capital requirements.
Continued growth
of
our operations
or increased working capital requirements
could result in the need for additional borrowings.
On April 23, 2014, we filed a universal shelf registration statement on Form S-3 that permits us, or our financing subsidiary, to issue up to $500 million of common units, debt securities, or other securities in one or more public offerings that we may undertake from time to time. As part of our strategic growth plans, we evaluate opportunities to acquire businesses and assets that may involve the payment of cash. Such acquisitions may be funded with existing cash balances, funds under credit facilities (including pursuant to our Credit Agreement) or cash generated from the issuance of securities issued under our shelf registration statement.
On April 21, 2014, the
board of directors of
our
General Partner
declared a cash distribution attributable to the quarter ended
March 31, 2014
of
$0.445
0 per
unit. This cash distribution
is to
be paid on May 15, 2014, to all unitholders of record as of the close of business on
May 1, 2014
.
Cash Flows
The following table summarizes our primary sources and uses of cash
for
the three month periods ended
March 31, 2014
and
2013
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2014
|
|
2013
|
|
(In Thousands)
|
Net cash provided by operating activities
|
$
|
16,234
|
|
|
$
|
6,764
|
|
Net cash used in investing activities
|
(7,857
|
)
|
|
(7,888
|
)
|
Net cash used in financing activities
|
(4,964
|
)
|
|
(2,410
|
)
|
Operating Activities
Net cash from operating activities increased by $9.5 million during the
three month period ended
March 31, 2014
to $16.2 million compared to $6.8
million for
the
2013
period. Improvements in the collection of accounts receivable, particularly in Mexico, were partially offset by changes in accounts payable and accrued expenses.
Cash provided from our Latin America operations is subject to various uncertainties including the volatility associated with interruptions caused by PEMEX
budgetary decisions, uncertainties regarding the renewal of our existing customer contracts with PEMEX under their current terms and the possibility that new contracts for such
projects could be awarded to our competitors, and other changes in contract arrangements,
security concerns,
the timing of collection of our receivables from PEMEX, and the repatriation of cash generated by our Argentina operations. During the first quarter of 2014, PEMEX represented 17.5% of our total revenues and during the first quarter of 2013, PEMEX represented 31.6% of total revenues. During 2013, we were notified by PEMEX of their intention to further extend, until June 2014, a contract that represents a majority of our Mexico revenues and that expired in June 2013. At the request of PEMEX, we are currently operating under this understanding and anticipate that we will bid on new contracts covering these activities during the first half of 2014. Based on our prior course of business with PEMEX, we anticipate that we will be awarded new contracts or be able to extend some or
a majority
of our activities under the extended contracts on the same or similar terms or to provide similar services under other of our contracts with PEMEX.
However, there are no assurances that our future activity levels with PEMEX will approach first quarter 2013 levels or that we will retain all of our current business with PEMEX. Recently the Mexican government implemented an energy industry reform that is designed to allow the government to grant non-Mexican companies the opportunity to enter into contracts and licenses to explore and drill for oil and natural gas in Mexico. Although this reform could result in additional customers for us in Mexico, and a reduction in our dependency on PEMEX, the timing of any impact from this reform is uncertain.
Investing Activities
Capital expenditures during
the
three
month period ended
March 31, 2014
, slightly decreased compared to the
2013 period, primarily due to a decrease in the number of compressor packages fabricated or upgraded during the period. During the fourth quarter of 2013, we purchased eighteen SuperJack
TM
compressor packages for approximately $3.6 million and subsequently deployed them in gas lift application markets. During the three months ended March 31, 2014, we also paid in advance approximately $1.9 million toward the purchase of additional SuperJack
TM
packages being fabricated for us by a third party. This amount is included in Other Investing Activities in our consolidated statement of cash flows for the period. Included within current year period capital expenditures
were maintenance capital expenditures of $0.2 million. Our capital programs in 2014 are focused on increasing and upgrading our fleet to meet market demand. We currently plan to spend up to approximately $34 million on capital expenditures during 2014 including approximately $0.6 million of estimated maintenance capital expenditures. This level of maintenance capital expenditures reflects our decision to enter into operating leases for field vehicles in many of our operating locations rather than purchasing such field vehicles.
Financing Activities
Our
partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our
available
cash to our unitholders of record on the applicable record date and to our General Partner. During the
three
month period ended
March 31, 2014
, we distributed approximately $7.0
million to our unitholders and General Partner. On April 21, 2014, the
board of directors of
our
General Partner
declared a cash distribution attributable to the quarter ended
March 31, 2014
of
$0.4450
per
unit. This cash distribution
is to
be paid on May 15, 2014, to all unitholders of record as of the close of business on
May 1, 2014
.
Our sources of funds for liquidity needs are existing cash balances, cash generated from our operations, long-term and short-term borrowings, and future issuances of equity.
Bank Credit Facilities
On October 15, 2013, we entered into a new asset-based revolving credit agreement with a syndicate of lenders including JPMorgan Chase Bank, N.A. as administrative agent (the Partnership Credit Agreement) which replaced the previous credit agreement. Under the Partnership Credit Agreement, we, along with certain of our subsidiaries, are named as borrowers, and all obligations under the New Credit Agreement are guaranteed by all of our existing and future, direct and indirect, domestic subsidiaries. The Partnership Credit Agreement includes a maximum credit commitment of $100.0 million that is available for letters of credit (with a sublimit of $20.0 million) and includes an uncommitted $30.0 million expansion feature. The actual maximum credit availability under the Credit Agreement varies from time to time and is determined by calculating the applicable borrowing base, which is based upon applicable percentages of the values of eligible accounts receivable, inventory, and equipment, minus reserves as determined necessary by the Administrative Agent. As of
March 31, 2014
, we had a balance outstanding under the Partnership Credit Agreement of $32.2 million and had availability under the Partnership Credit Agreement of $38.4 million, based upon a $71.0 million borrowing base and the $32.2 million outstanding balance.
The Partnership Credit Agreement may be used to fund our working capital needs, letters of credit, and for general partnership purposes, including capital expenditures and potential acquisitions. So long as we are not in default, the Partnership Credit Agreement can also be used to fund our quarterly distributions at the option of the board of directors of our general partner (provided, that after giving effect to such distributions, we will be in compliance with the financial covenants). The initial borrowings under the Credit Agreement of $24.5 million were used to repay in full all amounts outstanding under the previous credit agreement dated June 24, 2011. Borrowings under the Partnership Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default. The maturity date of the Partnership Credit Agreement is October 15, 2017. Borrowings under the Partnership Credit Agreement bear interest at a rate per annum equal to, at our option, either (a) LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two, three or six months (as selected by us) plus a margin of 2.25% per annum or (b) a base rate determined by reference to the highest of (1) the prime rate of interest announced from time to time by JPMorgan Chase Bank, N.A. or (2) LIBOR (adjusted to reflect any required bank reserves) for a one-month interest period on such day plus 2.50% per annum. In addition to paying interest on outstanding principal under the Partnership Credit Agreement, we are required to pay a commitment fee in respect of the unutilized commitments thereunder of 0.375% per annum, paid quarterly in
arrears. We are also required to pay a customary letter of credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.
The Partnership Credit Agreement requires us to maintain a minimum interest coverage ratio (ratio of earnings before interest and taxes to interest) of 4.0 to 1.0 as of the last day of any fiscal quarter, calculated on a trailing four quarters basis. In addition, the Credit Agreement includes customary negative covenants, which, among other things, limits our ability to incur additional debt, incur, or permit certain liens to exist, or make certain loans, investments, acquisitions, or other restricted payments. The Credit Agreement provides that we can make distributions to holders of its common and subordinated units, but only if there is no default or event of default under the facility.
All obligations under the Partnership Credit Agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first lien security interest in substantially all of our assets (excluding real property) and its existing and future, direct and indirect domestic subsidiaries, and all of the capital stock of our existing and future, direct and indirect subsidiaries (limited, in the case of foreign subsidiaries, to 65% of the capital stock of first tier foreign subsidiaries).
Off Balance Sheet Arrangements
As of
March 31, 2014
, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.
Commitments and Contingencies
From time to time, we are
involved in litigation relating to claims arising out of our operations in the normal course of business.
While the outcome of
these
lawsuits
or other proceedings
against
us
cannot be predicted with certainty, management does not
consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is
expected to
have a material adverse effect on our financial
condition, results of operations, or cash flows.
Contractual Obligations
Our contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and obligations under operating leases. During the first three months of 2014, there were no material changes outside the ordinary course of business in the specified contractual obligations.
During the
three
month period ended
March 31, 2014
, we borrowed $2.0 million pursuant to our bank credit agreement, resulting in an aggregate of $32.2
million outstanding. The maturity date for the bank credit agreement is October 15, 2017.
For additional information about our contractual obligations as of
December 31, 2013
, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual Report on Form 10-K for the year ended
December 31, 2013
.
Cautionary Statement for Purposes of Forward-Looking Statements
Certain statements contained herein and elsewhere may be deemed to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the “safe harbor” provisions of that act. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “would,” “could,” “estimates,” and similar terms. These forward-looking statements include, without limitation, statements concerning our business outlook, future or expected sales, earnings, costs, expenses, acquisitions, asset recoveries, working capital, capital expenditures, financial condition, other results of operations, anticipated activities by our customers, our ability to extend or obtain contracts with our customers, the expected impact of current economic and capital market conditions on the oil and gas industry and our operations, other statements regarding our beliefs, plans, goals, future events and performance, and other statements that are not purely historical. Such statements reflect our current views with respect to future events and financial performance and involve risks and uncertainties, many of which are beyond our control. Actual results could differ materially from the expectations expressed in such forward-looking statements. Some of the risk factors that could affect our actual results and cause actual results to differ materially from any such results that might be projected, forecast,
estimated, or budgeted by us in such forward-looking statements are set forth in Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended
December 31, 2013
, filed with the SEC on March 14, 2014, and others that may be set forth from time to time in our filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement, except as may be required by law.