CSI Compressco LP
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
December 31,
2018
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,870
|
|
|
$
|
15,858
|
|
Trade accounts receivable, net of allowances for doubtful accounts of $1,214 as of March 31, 2019 and $1,229 as of December 31, 2018
|
58,951
|
|
|
65,067
|
|
Inventories
|
74,528
|
|
|
65,222
|
|
Prepaid expenses and other current assets
|
6,172
|
|
|
5,600
|
|
Total current assets
|
156,521
|
|
|
151,747
|
|
Property, plant, and equipment:
|
|
|
|
|
|
Land and building
|
35,026
|
|
|
35,024
|
|
Compressors and equipment
|
932,150
|
|
|
913,488
|
|
Vehicles
|
10,336
|
|
|
10,354
|
|
Construction in progress
|
46,055
|
|
|
41,086
|
|
Total property, plant, and equipment
|
1,023,567
|
|
|
999,952
|
|
Less accumulated depreciation
|
(373,516
|
)
|
|
(358,633
|
)
|
Net property, plant, and equipment
|
650,051
|
|
|
641,319
|
|
Other assets:
|
|
|
|
|
|
Deferred tax asset
|
13
|
|
|
13
|
|
Intangible assets, net of accumulated amortization of $25,530 as of March 31, 2019 and $24,790 as of December 31, 2018
|
30,238
|
|
|
30,978
|
|
Operating lease right-of-use assets
|
9,721
|
|
|
—
|
|
Other assets
|
3,325
|
|
|
2,687
|
|
Total other assets
|
43,297
|
|
|
33,678
|
|
Total assets
|
$
|
849,869
|
|
|
$
|
826,744
|
|
LIABILITIES AND
PARTNERS' CAPITAL
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
45,830
|
|
|
$
|
33,408
|
|
Unearned income
|
49,296
|
|
|
24,898
|
|
Accrued liabilities and other
|
21,469
|
|
|
32,530
|
|
Amounts payable to affiliates
|
9,856
|
|
|
3,517
|
|
Total current liabilities
|
126,451
|
|
|
94,353
|
|
Other liabilities:
|
|
|
|
|
|
Long-term debt, net
|
633,692
|
|
|
633,013
|
|
Series A Preferred Units
|
20,890
|
|
|
30,900
|
|
Deferred tax liabilities
|
2,494
|
|
|
1,012
|
|
Long-term affiliate payable
|
2,402
|
|
|
—
|
|
Operating lease liabilities
|
5,845
|
|
|
—
|
|
Other long-term liabilities
|
61
|
|
|
63
|
|
Total other liabilities
|
665,384
|
|
|
664,988
|
|
Commitments and contingencies
|
|
|
|
|
|
Partners' capital:
|
|
|
|
|
|
General partner interest
|
322
|
|
|
505
|
|
Common units (46,998,713 units issued and outstanding at March 31, 2019 and 45,769,019 units issued and outstanding at December 31, 2018)
|
72,526
|
|
|
81,984
|
|
Accumulated other comprehensive income (loss)
|
(14,814
|
)
|
|
(15,086
|
)
|
Total partners' capital
|
58,034
|
|
|
67,403
|
|
Total liabilities and partners' capital
|
$
|
849,869
|
|
|
$
|
826,744
|
|
See Notes to Consolidated Financial Statements
CSI Compressco LP
Consolidated Statements of Partners’ Capital
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total Partners' Capital
|
|
|
|
|
General
Partner
|
|
Common
Unitholders
|
|
|
|
Amount
|
|
Units
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
505
|
|
|
45,769
|
|
|
$
|
81,984
|
|
|
$
|
(15,086
|
)
|
|
$
|
67,403
|
|
Net loss
|
(177
|
)
|
|
—
|
|
|
(12,279
|
)
|
|
—
|
|
|
(12,456
|
)
|
Distributions ($0.01 per unit)
|
(6
|
)
|
|
—
|
|
|
(470
|
)
|
|
—
|
|
|
(476
|
)
|
Equity compensation
|
—
|
|
|
—
|
|
|
312
|
|
|
—
|
|
|
312
|
|
Vesting of Phantom Units
|
—
|
|
|
117
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversions of Series A Preferred
|
—
|
|
|
1,113
|
|
|
3,048
|
|
|
—
|
|
|
3,048
|
|
Translation adjustment, net of taxes of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
272
|
|
|
272
|
|
Other
|
—
|
|
|
—
|
|
|
(69
|
)
|
|
—
|
|
|
(69
|
)
|
Balance at March 31, 2019
|
$
|
322
|
|
|
46,999
|
|
|
$
|
72,526
|
|
|
$
|
(14,814
|
)
|
|
$
|
58,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partners' Capital
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
Total Partners' Capital
|
|
|
|
|
General
Partner
|
|
Common
Unitholders
|
|
|
|
Amount
|
|
Units
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
1,618
|
|
|
37,618
|
|
|
$
|
104,898
|
|
|
$
|
(11,489
|
)
|
|
$
|
95,027
|
|
Net loss
|
(264
|
)
|
|
—
|
|
|
(15,473
|
)
|
|
—
|
|
|
(15,737
|
)
|
Distributions ($0.1875 per unit)
|
(126
|
)
|
|
—
|
|
|
(7,186
|
)
|
|
—
|
|
|
(7,312
|
)
|
Equity compensation, net
|
—
|
|
|
—
|
|
|
(655
|
)
|
|
—
|
|
|
(655
|
)
|
Vesting of Phantom Units
|
—
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversions of Series A Preferred
|
—
|
|
|
1,778
|
|
|
11,555
|
|
|
—
|
|
|
11,555
|
|
Translation adjustment, net of taxes of $0
|
—
|
|
|
—
|
|
|
—
|
|
|
(649
|
)
|
|
(649
|
)
|
Balance at March 31, 2018
|
$
|
1,228
|
|
|
39,428
|
|
|
$
|
93,139
|
|
|
$
|
(12,138
|
)
|
|
$
|
82,229
|
|
See Notes to Consolidated Financial Statements
CSI Compressco LP
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
Operating activities:
|
|
|
|
|
|
Net income (loss)
|
$
|
(12,456
|
)
|
|
$
|
(15,737
|
)
|
Reconciliation of net income (loss) to cash provided by (used in) operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
18,532
|
|
|
17,367
|
|
Provision for deferred income taxes
|
1,466
|
|
|
96
|
|
Series A Preferred redemption premium
|
448
|
|
|
—
|
|
Series A Preferred paid in kind distributions in interest expense
|
685
|
|
|
1,742
|
|
Series A Preferred fair value adjustments
|
1,304
|
|
|
1,553
|
|
Equity compensation expense
|
365
|
|
|
(604
|
)
|
Provision for doubtful accounts
|
56
|
|
|
139
|
|
Amortization of deferred financing costs
|
600
|
|
|
830
|
|
Expense for unamortized finance costs
|
—
|
|
|
3,539
|
|
Other non-cash charges and credits
|
54
|
|
|
328
|
|
(Gain) loss on sale of property, plant, and
equipment
|
(26
|
)
|
|
85
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable
|
5,992
|
|
|
(5,404
|
)
|
Inventories
|
(11,990
|
)
|
|
(13,009
|
)
|
Prepaid expenses and other current assets
|
(567
|
)
|
|
(1,703
|
)
|
Accounts payable and accrued expenses
|
27,442
|
|
|
10,399
|
|
Other
|
(273
|
)
|
|
14
|
|
Net cash provided by (used in) operating activities
|
31,632
|
|
|
(365
|
)
|
Investing activities:
|
|
|
|
|
Purchases of property, plant, and equipment, net
|
(23,152
|
)
|
|
(17,039
|
)
|
Advances and other investing activities
|
—
|
|
|
(59
|
)
|
Net cash used in
investing activities
|
(23,152
|
)
|
|
(17,098
|
)
|
Financing activities:
|
|
|
|
|
Proceeds from long-term debt
|
—
|
|
|
380,000
|
|
Payments of long-term debt
|
(2
|
)
|
|
(258,000
|
)
|
Cash redemptions of Preferred Units
|
(9,399
|
)
|
|
—
|
|
Distributions
|
(476
|
)
|
|
(7,312
|
)
|
Debt issuance costs
|
—
|
|
|
(5,971
|
)
|
Advances from affiliate
|
2,402
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
(7,475
|
)
|
|
108,717
|
|
Effect of exchange rate
changes on cash
|
7
|
|
|
(48
|
)
|
Increase (decrease) in cash and cash equivalents
|
1,012
|
|
|
91,206
|
|
Cash and cash equivalents at beginning of period
|
15,858
|
|
|
7,601
|
|
Cash and cash equivalents at end of period
|
$
|
16,870
|
|
|
$
|
98,807
|
|
Supplemental cash flow information:
|
|
|
|
|
Interest paid
|
$
|
10,727
|
|
|
$
|
14,042
|
|
Income taxes paid
|
$
|
648
|
|
|
$
|
763
|
|
See Notes to Consolidated Financial Statements
CSI Compressco LP
Notes to Consolidated Financial
Statements
(Unaudited)
NOTE A
–
ORGANIZATION, BASIS OF PRESENTATION,
AND
SIGNIFICANT ACCOUNTING POLICIES
Organization
CSI Compressco LP, a Delaware limited partnership, is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing, and storage. We sell standard and custom-designed compressor packages and provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide these compression services and equipment to a broad base of natural gas and oil exploration and production, midstream, and transmission companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign countries, including Mexico, Canada, and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services or that we sell to customers.
Presentation
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of
March 31, 2019
, and for the
three
month periods ended
March 31, 2019
and
2018
, include all normal recurring adjustments that are necessary to provide a fair statement of our results for these interim periods. Operating results for the
three
month periods ended
March 31, 2019
are not necessarily indicative of results that may be expected for the twelve months ended
December 31, 2019
.
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 U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2018 and notes thereto included in our
Annual Report
on Form 10-K, which we filed with the SEC on March 4, 2019.
Segments
Our General Partner has concluded that we operate in one business segment.
Significant Accounting Policies
We have added policies for the recording of leases in conjunction with the adoption of the new lease standard discussed in our "Leases" and "New Accounting Pronouncements" sections below. Other than the additional lease policies described herein, there have been no significant changes in our accounting policies or the application of these policies.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could be
material.
Foreign Currencies
Accumulated other comprehensive income (loss) is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with our international operations. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled
$(1.0) million
and
$(1.1) million
during the
three
month periods ended
March 31, 2019
and
March 31, 2018
,
respectively.
Leases
As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election, described below, we initially recognize a lease liability and related right-of-use asset on the commencement date. The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.
All of our long-term leases are operating leases and are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of
March 31, 2019
. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term, if it is reasonably certain that we would exercise the option.
As an accounting policy election, we do not include short-term leases on our balance sheet. Short-term leases include leases with a term of 12 months or less, inclusive of renewal options we are reasonably certain to exercise. The lease payments for short-term leases are included as operating lease costs on a straight-line basis over the lease term in cost of revenues or selling, general, and administrative expense based on the use of the underlying asset. We recognize lease costs for variable lease payments not included in the determination of a lease liability in the period in which an obligation is incurred.
As allowed by U.S. GAAP, we do not separate nonlease components from the associated lease component for our compression services contracts and instead account for those components as a single component based on the accounting treatment of the predominant component. In our evaluation of whether Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842 "Leases" or ASC 606 "Revenue from Contracts with Customers" is applicable to the combined component based on the predominant component, we determined the services nonlease component is predominant, resulting in the ongoing recognition of our compression services contracts following ASC 606.
Our operating leases are recognized at the present value of lease payments over the lease term. When the implicit discount rate is not readily determinable, we use our incremental borrowing rate to calculate the discount rate used to determine the present value of lease payments. Consistent with other long-lived assets or asset groups that are held and used, we test for impairment of our right-of-use assets when impairment indicators are present.
Earnings
Per Common Unit
Our computations of
earnings
per common unit are based on the weighted average number of common units outstanding during the applicable period. Basic
earnings
per common unit
are
determined by dividing net income (loss) allocated to the common units 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 units during the period.
When computing
earnings
per common unit under the two class method in periods when distributions are greater than earnings, the amount of the distribution is deducted from net income (loss) and the excess of distributions over earnings is allocated between the
General Partner and common units based on how our Partnership Agreement allocates net losses.
Diluted earnings per common unit are computed using the treasury stock method, which considers the potential future issuance of limited partner common units. Unvested phantom units are not included in basic earnings per common unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per common unit. For the
three
month periods ended
March 31, 2019
and
March 31, 2018
, all unvested phantom units were excluded from the calculation of diluted common units because the impact was anti-dilutive. Diluted earnings per common unit are computed using the "if converted" method, whereby the amount of net income (loss) and the number of common units issuable are each adjusted as if the Preferred Units, discussed in Note D - "Series A Convertible Preferred Units", had been converted as of the beginning of the period presented. The number of common units that may be issued upon future conversion of the Preferred Units is excluded from the calculation of diluted common units for the
three
month periods ended
March 31, 2019
and
2018
as the impact would be anti-dilutive.
Distributions
On
January 22, 2019
, our General Partner declared a cash distribution attributable to the quarter ended December 31, 2018 of
$0.01
per common unit. This distribution equates to a distribution of
$0.04
per outstanding common unit on an annualized basis. Also on
January 22, 2019
, our General Partner approved the paid in kind distribution of
85,565
Preferred Units attributable to the quarter ended December 31, 2018 in accordance with the provisions of our partnership agreement, as amended. These distributions were paid on
February 14, 2019
, to each of the holders of common units and the holders of the Preferred Units in the aggregate, respectively, of record as of the close of business on
February 1, 2019
.
New Accounting Pronouncements
Standards adopted in 2019
In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize right-of-use lease assets and lease liabilities in the balance sheet related to the right to use the underlying asset for the lease term. In addition, through improved disclosure requirements, ASC 842 will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard effective January 1, 2019. The standard had a material impact on our consolidated balance sheet, specifically, the reporting of our operating leases.
We chose to transition using a modified retrospective approach which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. Comparative information is reported under the accounting standards that were in effect for those periods. In addition, upon transition, we elected the package of practical expedients, which allows us to continue to apply historical lease classifications to existing contracts. Upon adoption, we recognized
$8.3 million
in operating right-of-use assets,
$3.5 million
in accrued liabilities, and
$4.8 million
in operating lease liabilities. Refer to Note J - “Leases” for further information on our leases.
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)" that gives entities the option to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This is effective for us on January 1, 2019, however, as we do not have associated tax effects in accumulated other comprehensive income, there was no impact.
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” to align the measurement and classification guidance for share-based payments to nonemployees with the guidance currently applied to employees, with certain exceptions. We adopted this ASU during the three months ended March 31, 2019, with no material impact to our consolidated financial statements.
Standards not yet adopted
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 has an effective date of the first quarter of fiscal 2020. We are currently assessing the potential effects of these changes to our consolidated financial statements.
NOTE B
–
INVENTORIES
Components of inventories as of
March 31, 2019
and
December 31, 2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
(In Thousands)
|
Parts and supplies
|
$
|
40,234
|
|
|
$
|
43,538
|
|
Work in progress
|
34,294
|
|
|
21,684
|
|
Total inventories
|
$
|
74,528
|
|
|
$
|
65,222
|
|
Inventories
consist primarily of compressor package parts and supplies. Work in progress inventories consist primarily of new compressor packages located at our fabrication facility in Midland, Texas.
NOTE C
–
LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
Scheduled Maturity
|
|
(In Thousands)
|
Credit Agreement
|
|
June 29, 2023
|
|
—
|
|
|
—
|
|
7.25% Senior Notes (presented net of the unamortized discount of $2.1 million as of March 31, 2019 and $2.2 million as of December 31, 2018 and unamortized deferred financing costs of $3.6 million as of March 31, 2019 and $3.9 million as of December 31, 2018)
|
|
August 15, 2022
|
|
290,204
|
|
|
289,797
|
|
7.50% Senior Secured Notes (presented net of the unamortized deferred financing costs of $6.5 million as of March 31, 2019 and $6.8 million as of December 31, 2018)
|
|
April 1, 2025
|
|
343,488
|
|
|
343,216
|
|
|
|
|
|
633,692
|
|
|
633,013
|
|
Less current portion
|
|
|
|
—
|
|
|
—
|
|
Total long-term debt
|
|
|
|
$
|
633,692
|
|
|
$
|
633,013
|
|
There was
no
balance outstanding under the Credit Agreement as of
March 31, 2019
. As of
March 31, 2019
, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of
$18.4 million
.
Our credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. We are in compliance with all covenants of our respective credit and senior note agreements as of
March 31, 2019
.
NOTE D
– SERIES A CONVERTIBLE PREFERRED UNITS
During 2016, we issued an aggregate of
6,999,126
Preferred Units for a cash purchase price of
$11.43
per Preferred Unit (the “Issue Price”). One of the purchasers was TETRA, which purchased
874,891
of the Preferred Units at the aggregate Issue Price of
$10.0 million
.
Unless otherwise redeemed for cash, a ratable portion of the Preferred Units has been, and may be, converted into common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Based on the number of Preferred Units outstanding as of
March 31, 2019
, the maximum aggregate number of common units that could be required to be issued pursuant to the conversion provisions of the Preferred Units is approximately
10.2 million
common units; however, the Partnership may, at its option, pay cash, or a combination of cash and common units, to the holders of Preferred Units instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Second Amended and Restated Partnership Agreement and the Credit Agreement. Beginning with the January 2019 Conversion Date, we have elected to redeem the remaining Preferred Units for cash, resulting in
783,046
Preferred Units being redeemed during the three months ended
March 31, 2019
for
$9.4 million
, which includes
approximately
$0.4 million
of redemption premium that was paid and charged to other (income) expense, net in the accompanying consolidated statements of operations. The total number of Preferred Units outstanding as of
March 31, 2019
was
1,779,417
.
The fair value of the Preferred Units is classified as a long-term liability on our consolidated balance sheets. The fair value of the Preferred Units as of
March 31, 2019
was
$20.9 million
. During the
three
month periods ended
March 31, 2019
and
March 31, 2018
, changes in the fair value resulted in
$1.3 million
and
$1.6 million
being
charged
to earnings, respectively, in the accompanying consolidated statements of operations.
Based on the conversion provisions of the Preferred Units, and using the Conversion Price calculated as of
March 31, 2019
, the theoretical number of common units that would be issued if all of the outstanding Preferred Units were converted on
March 31, 2019
on the same basis as the monthly conversions would be approximately
7.4 million
common units, with an aggregate market value of
$21.0 million
. A $1 decrease in the Conversion Price would result in the issuance of approximately
2.8 million
additional common units pursuant to these conversion provisions.
NOTE E
– FAIR VALUE MEASUREMENTS
Financial Instruments
Preferred Units
The Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (a Level 3 fair value measurement). These unobservable items include (i) the volatility of the trading price of our common units compared to a volatility analysis of equity prices of comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis. During the
three
month periods ended
March 31, 2019
and
March 31, 2018
, the changes in the fair value of the Preferred Units resulted in
$1.3 million
and
$1.6 million
being
charged
to earnings, respectively, in the consolidated statements of operations.
Derivative Contracts
As of
March 31, 2019
, we had the following foreign currency derivative contract outstanding relating to a portion of our foreign operations:
|
|
|
|
|
|
|
|
|
|
Derivative Contracts
|
|
US Dollar Notional Amount
|
|
Traded Exchange Rate
|
|
Settlement Date
|
|
|
(In Thousands)
|
|
|
|
|
Forward sale Mexican peso
|
|
$
|
6,301
|
|
|
19.52
|
|
4/17/2019
|
Under a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries, we may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as economic hedges 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 values of our foreign currency derivative instruments are based on quoted market values (a Level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of
March 31, 2019
and
December 31, 2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative instruments
|
|
Balance Sheet
|
|
Fair Value at
|
|
Location
|
|
March 31, 2019
|
|
December 31, 2018
|
|
|
|
|
(In Thousands)
|
Forward sale contracts
|
|
Current liabilities
|
|
(19
|
)
|
|
(98
|
)
|
Net asset
|
|
|
|
$
|
(19
|
)
|
|
$
|
(98
|
)
|
None of the foreign currency derivative contracts contains 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 periods ended
March 31, 2019
and
March 31, 2018
, we recognized
$0.1 million
and
$0.5 million
, respectively, of net (gains) losses associated with our foreign currency derivative program, and such amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations.
A summary of these recurring fair value measurements by valuation hierarchy as of
March 31, 2019
and
December 31, 2018
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
Description
|
|
Total as of
March 31, 2019
|
|
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)
|
Series A Preferred Units
|
|
$
|
(20,890
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(20,890
|
)
|
Liability for foreign currency derivative contracts
|
|
(19
|
)
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
|
$
|
(20,909
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Description
|
|
Total as of
December 31, 2018
|
|
|
|
|
|
(In Thousands)
|
Series A Preferred Units
|
|
$
|
(30,900
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(30,900
|
)
|
Liability for foreign currency derivative contracts
|
|
(98
|
)
|
|
—
|
|
|
(98
|
)
|
|
—
|
|
|
|
$
|
(30,998
|
)
|
|
|
|
|
|
|
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings, and variable-rate long-term debt pursuant to our Credit Agreement approximate their carrying amounts. The fair values of our publicly traded long-term 7.25% Senior Notes at
March 31, 2019
and
December 31, 2018
were approximately
$264.9 million
and
$266.3 million
, respectively. Those fair values compare to aggregate principal amounts of such notes at
March 31, 2019
and
December 31, 2018
of
$295.9 million
. The fair value of our publicly traded long-term
7.50%
Senior Secured Notes at
March 31, 2019
and
December 31, 2018
were approximately
$336.0 million
and
$332.5 million
, respectively. This fair value compares to an aggregate principal amount of such notes at
March 31, 2019
of
$350.0 million
. We based the fair values of our
7.25%
Senior Notes and our
7.50%
Senior Secured Notes as of
March 31, 2019
on recent trades for these notes.
NOTE F
– RELATED
PARTY TRANSACTIONS
Omnibus Agreement
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, Canada, 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.
TETRA and General Partner Ownership
As of
March 31, 2019
, TETRA's ownership interest in us was approximately
34%
of the outstanding common units,
12.6%
of the outstanding Preferred Units, and an approximately
1%
general partner interest, through which it holds incentive distribution rights. As Preferred Units are converted to common units, TETRA's percentage ownership of the common units will decrease.
Other Sources of Financing
In February 2019, we entered into a transaction with TETRA whereby TETRA has agreed to purchase up to
$15.0 million
of new compression services equipment and lease it to us in exchange for a monthly rental fee. As of
March 31, 2019
, pursuant to this arrangement,
$2.4 million
has been advanced to us by TETRA for the construction of new compression equipment, and is included in long-term affiliate payable in our consolidated balance sheet.
NOTE G
– INCOME TAXES
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S., and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.
Our effective tax rate for the three month period ended
March 31, 2019
, was negative
54.1%
primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. In addition, the application of ASC 740-270 "Income Taxes - Interim Reporting," resulted in an accrual of current income taxes for the three month period ended March 31, 2019 equal to approximately the full year estimate. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.
NOTE H
– 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 I
– REVENUE RECOGNITION
Performance Obligations.
Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers.
Compression and related services.
For compression services revenues recognized over time, our customer contracts typically provide agreed upon monthly service rates and we recognize service revenue based upon the number of days that services have been performed. We receive cash equal to the invoice price for most product sales and services and payment terms typically range from 30 to 60 days from the date we invoice our customer.
With the exception of the initial terms of our compression services contracts of our medium- and high-horsepower compressor packages, our customer contracts are generally for terms of one year or less. Since the period between when we deliver products or services and when the customer pays for products or services are not expected to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.
Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer. For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period. As of
March 31, 2019
, we had
$24.6 million
of remaining performance obligations related to our compression service contracts. As a practical expedient, thi
s amount does not reflect revenue for compression service contracts whose original expected duration is less than 12 months an
d does not consider the effects of the time value of money
. The remaining performance obligations, and associated revenues, will be recognized through 2023 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Total
|
|
(In Thousands)
|
Compression service contracts remaining performance obligations
|
$
|
10,444
|
|
|
$
|
9,851
|
|
|
$
|
4,240
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
24,567
|
|
Sales taxes, value added taxes, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We recognize the cost for freight and shipping costs when control over our products (i.e. delivery) has transferred to the customer as part of cost of product sales.
Equipment Sales & Aftermarket Services.
Equipment sales and most aftermarket service revenues are recognized at a point in time when we transfer control of our products and complete the delivery of services to our customers.
Use of Estimates.
Our revenues do not include material amounts of variable consideration, as our revenues typically do not require significant estimates or judgments. The transaction price on a majority of our arrangements are fixed and product returns are immaterial. Additionally, our arrangements typically do not include multiple performance obligations that require estimates of the stand-alone purchase price for each performance obligation. Revenue on certain aftermarket service arrangements that include time as a component of the transaction price is not recognized until the performance obligation is complete.
Contract Assets and Liabilities.
Any contract assets, along with billed and unbilled accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.
We classify contract liabilities as Unearned Income in our consolidated balance sheets. Such unearned income typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract.
There were
no
contract assets as of
December 31, 2018
and
March 31, 2019
. The following table reflects the changes in our contract liabilities during the
three
month period ended
March 31, 2019
:
|
|
|
|
|
|
March 31, 2019
|
|
(In Thousands)
|
Unearned income, beginning of period
|
$
|
24,898
|
|
Additional unearned income
|
48,955
|
|
Revenue recognized
|
(24,557
|
)
|
Unearned income, end of period
|
$
|
49,296
|
|
During the
three
months ended
March 31, 2019
, contract liabilities increased due to unearned income for consideration received on new compressor equipment being fabricated. During the
three
months ended
March 31, 2019
,
$24.6 million
of unearned income was recognized as product sales revenue, primarily associated with deliveries of new compression equipment.
Contract Costs.
As of
March 31, 2019
and March 31, 2018, contract costs are immaterial.
Disaggregation of Revenue.
We disaggregate revenue from contracts with customers by geography based on the following table.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(In Thousands)
|
Compression and related services
|
|
|
|
U.S.
|
$
|
54,017
|
|
|
$
|
46,404
|
|
International
|
9,015
|
|
|
7,331
|
|
|
63,032
|
|
|
53,735
|
|
Aftermarket services
|
|
|
|
U.S.
|
13,319
|
|
|
13,353
|
|
International
|
282
|
|
|
663
|
|
|
13,601
|
|
|
14,016
|
|
Equipment sales
|
|
|
|
U.S.
|
26,180
|
|
|
17,222
|
|
International
|
623
|
|
|
444
|
|
|
26,803
|
|
|
17,666
|
|
Total Revenue
|
|
|
|
U.S.
|
93,516
|
|
|
76,979
|
|
International
|
9,920
|
|
|
8,438
|
|
|
$
|
103,436
|
|
|
$
|
85,417
|
|
NOTE J
– LEASES
We have operating leases for some of our office space, warehouse space, operating locations, and machinery and equipment. Our leases have remaining lease terms ranging from
1
to
10 years
. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. Our leases generally require us to pay all maintenance and insurance costs. We do not have leases that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease costs are included in either cost of revenues or selling, general, and administrative expense depending on the use of the underlying asset. Components of lease expense (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less), were
$1.8 million
for the three months ended March 31, 2019, of which,
$0.4 million
was related to short-term leases. Variable rent expense was not material.
Operating lease supplemental cash flow information:
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
(In Thousands)
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows - operating leases
|
$
|
1,174
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
Operating leases
|
$
|
2,487
|
|
Supplemental balance sheet information:
|
|
|
|
|
|
March 31, 2019
|
|
(In Thousands)
|
Operating leases:
|
|
Operating right-of-use asset
|
$
|
9,721
|
|
|
|
Accrued liabilities and other
|
$
|
3,876
|
|
Operating lease liabilities
|
5,845
|
|
Total operating lease liabilities
|
$
|
9,721
|
|
|
|
Additional operating lease information:
|
|
|
|
|
March 31, 2019
|
Weighted average remaining lease term:
|
|
Operating leases
|
4 years
|
|
|
|
Weighted average discount rate:
|
|
Operating leases
|
6.60
|
%
|
Future minimum lease payments by year and in the aggregate, under non-cancelable operating leases with terms in excess of one year, consist of the following at
March 31, 2019
:
|
|
|
|
|
|
Operating Leases
|
|
(In Thousands)
|
|
|
2019
|
$
|
3,240
|
|
2020
|
3,868
|
|
2021
|
1,853
|
|
2022
|
462
|
|
2023
|
286
|
|
Thereafter
|
1,342
|
|
Total lease payments
|
11,051
|
|
Less imputed interest
|
(1,330
|
)
|
Total lease liabilities
|
$
|
9,721
|
|
NOTE K
— SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The
$295.9 million
and
$350.0 million
in aggregate principal amounts outstanding of the
7.25%
Senior Notes and 7.50% Senior Secured Notes, respectively, as of
March 31, 2019
are fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several senior unsecured and secured basis, respectively, by certain of our domestic restricted subsidiaries.
Condensed Consolidating Balance Sheet
March 31, 2019
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
—
|
|
|
$
|
130,248
|
|
|
$
|
26,273
|
|
|
$
|
—
|
|
|
$
|
156,521
|
|
Property, plant, and equipment, net
|
|
|
622,738
|
|
|
27,313
|
|
|
|
|
650,051
|
|
Investments in subsidiaries
|
149,600
|
|
|
23,466
|
|
|
—
|
|
|
(173,066
|
)
|
|
—
|
|
Operating lease right-of-use assets
|
—
|
|
|
9,196
|
|
|
525
|
|
|
—
|
|
|
9,721
|
|
Intangible and other assets, net
|
—
|
|
|
31,531
|
|
|
2,045
|
|
|
—
|
|
|
33,576
|
|
Intercompany receivables
|
569,667
|
|
|
|
|
—
|
|
|
(569,667
|
)
|
|
—
|
|
Total non-current assets
|
719,267
|
|
|
686,931
|
|
|
29,883
|
|
|
(742,733
|
)
|
|
693,348
|
|
Total assets
|
$
|
719,267
|
|
|
$
|
817,179
|
|
|
$
|
56,156
|
|
|
$
|
(742,733
|
)
|
|
$
|
849,869
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS' CAPITAL
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
5,254
|
|
|
$
|
108,678
|
|
|
$
|
2,663
|
|
|
$
|
—
|
|
|
$
|
116,595
|
|
Amounts payable to affiliates
|
—
|
|
|
5,872
|
|
|
3,984
|
|
|
—
|
|
|
9,856
|
|
Long-term debt, net
|
633,692
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
633,692
|
|
Series A Preferred Units
|
20,890
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,890
|
|
Operating lease liabilities
|
—
|
|
|
5,370
|
|
|
475
|
|
|
—
|
|
|
5,845
|
|
Intercompany payables
|
—
|
|
|
545,068
|
|
|
24,599
|
|
|
(569,667
|
)
|
|
—
|
|
Other long-term liabilities
|
1,397
|
|
|
2,591
|
|
|
969
|
|
|
—
|
|
|
4,957
|
|
Total liabilities
|
661,233
|
|
|
667,579
|
|
|
32,690
|
|
|
(569,667
|
)
|
|
791,835
|
|
Total partners' capital
|
58,034
|
|
|
149,600
|
|
|
23,466
|
|
|
(173,066
|
)
|
|
58,034
|
|
Total liabilities and partners' capital
|
$
|
719,267
|
|
|
$
|
817,179
|
|
|
$
|
56,156
|
|
|
$
|
(742,733
|
)
|
|
$
|
849,869
|
|
Condensed Consolidating Balance Sheet
December 31, 2018
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets
|
$
|
—
|
|
|
$
|
128,084
|
|
|
$
|
23,663
|
|
|
$
|
—
|
|
|
$
|
151,747
|
|
Property, plant, and equipment, net
|
—
|
|
|
614,982
|
|
|
26,337
|
|
|
—
|
|
|
641,319
|
|
Investments in subsidiaries
|
146,852
|
|
|
21,330
|
|
|
—
|
|
|
(168,182
|
)
|
|
—
|
|
Intangible and other assets, net
|
—
|
|
|
31,874
|
|
|
1,804
|
|
|
—
|
|
|
33,678
|
|
Intercompany receivables
|
599,145
|
|
|
—
|
|
|
—
|
|
|
(599,145
|
)
|
|
—
|
|
Total non-current assets
|
745,997
|
|
|
668,186
|
|
|
28,141
|
|
|
(767,327
|
)
|
|
674,997
|
|
Total assets
|
$
|
745,997
|
|
|
$
|
796,270
|
|
|
$
|
51,804
|
|
|
$
|
(767,327
|
)
|
|
$
|
826,744
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS\' CAPITAL
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
14,681
|
|
|
$
|
72,985
|
|
|
$
|
3,170
|
|
|
$
|
—
|
|
|
$
|
90,836
|
|
Amounts payable to affiliates
|
—
|
|
|
—
|
|
|
3,517
|
|
|
—
|
|
|
3,517
|
|
Long-term debt, net
|
633,013
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
633,013
|
|
Series A Preferred Units
|
30,900
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,900
|
|
Intercompany payables
|
—
|
|
|
576,242
|
|
|
22,903
|
|
|
(599,145
|
)
|
|
—
|
|
Other long-term liabilities
|
—
|
|
|
191
|
|
|
884
|
|
|
—
|
|
|
1,075
|
|
Total liabilities
|
678,594
|
|
|
649,418
|
|
|
30,474
|
|
|
(599,145
|
)
|
|
759,341
|
|
Total partners' capital
|
67,403
|
|
|
146,852
|
|
|
21,330
|
|
|
(168,182
|
)
|
|
67,403
|
|
Total liabilities and partners' capital
|
$
|
745,997
|
|
|
$
|
796,270
|
|
|
$
|
51,804
|
|
|
$
|
(767,327
|
)
|
|
$
|
826,744
|
|
Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended March 31, 2019
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenues
|
$
|
—
|
|
|
$
|
98,062
|
|
|
$
|
9,033
|
|
|
$
|
(3,659
|
)
|
|
$
|
103,436
|
|
Cost of revenues (excluding depreciation and amortization expense)
|
—
|
|
|
65,739
|
|
|
6,020
|
|
|
(3,659
|
)
|
|
68,100
|
|
Selling, general and administrative expense
|
365
|
|
|
9,825
|
|
|
475
|
|
|
—
|
|
|
10,665
|
|
Depreciation and amortization
|
—
|
|
|
17,553
|
|
|
979
|
|
|
—
|
|
|
18,532
|
|
Interest expense, net
|
13,291
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
13,299
|
|
Series A Preferred FV Adjustment
|
1,304
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,304
|
|
Other expense, net
|
448
|
|
|
143
|
|
|
(972
|
)
|
|
|
|
(381
|
)
|
Equity in net income (loss) of subsidiaries
|
(2,952
|
)
|
|
(2,135
|
)
|
|
|
|
5,087
|
|
|
—
|
|
Income before income tax provision
|
(12,456
|
)
|
|
6,929
|
|
|
2,531
|
|
|
(5,087
|
)
|
|
(8,083
|
)
|
Provision (benefit) for income taxes
|
—
|
|
|
3,977
|
|
|
396
|
|
|
—
|
|
|
4,373
|
|
Net income
|
(12,456
|
)
|
|
2,952
|
|
|
2,135
|
|
|
(5,087
|
)
|
|
(12,456
|
)
|
Other comprehensive income (loss)
|
272
|
|
|
272
|
|
|
—
|
|
|
(272
|
)
|
|
272
|
|
Comprehensive income (loss)
|
$
|
(12,184
|
)
|
|
$
|
3,224
|
|
|
$
|
2,135
|
|
|
$
|
(5,359
|
)
|
|
$
|
(12,184
|
)
|
Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended March 31, 2018
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Revenues
|
$
|
—
|
|
|
$
|
79,390
|
|
|
$
|
7,386
|
|
|
$
|
(1,359
|
)
|
|
$
|
85,417
|
|
Cost of revenues (excluding depreciation and amortization expense)
|
—
|
|
|
54,290
|
|
|
5,055
|
|
|
(1,359
|
)
|
|
57,986
|
|
Selling, general and administrative expense
|
(604
|
)
|
|
8,438
|
|
|
463
|
|
|
|
|
8,297
|
|
Depreciation and amortization
|
|
|
16,644
|
|
|
723
|
|
|
|
|
17,367
|
|
Interest expense, net
|
8,099
|
|
|
3,334
|
|
|
—
|
|
|
—
|
|
|
11,433
|
|
Series A Preferred FV Adjustment
|
1,553
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,553
|
|
Other expense, net
|
—
|
|
|
4,335
|
|
|
(1,131
|
)
|
|
—
|
|
|
3,204
|
|
Equity in net income (loss) of subsidiaries
|
6,689
|
|
|
(1,499
|
)
|
|
—
|
|
|
(5,190
|
)
|
|
—
|
|
Income before income tax provision
|
(15,737
|
)
|
|
(6,152
|
)
|
|
2,276
|
|
|
5,190
|
|
|
(14,423
|
)
|
Provision (benefit) for income taxes
|
—
|
|
|
537
|
|
|
777
|
|
|
—
|
|
|
1,314
|
|
Net income
|
(15,737
|
)
|
|
(6,689
|
)
|
|
1,499
|
|
|
5,190
|
|
|
(15,737
|
)
|
Other comprehensive income (loss)
|
(649
|
)
|
|
(649
|
)
|
|
—
|
|
|
649
|
|
|
(649
|
)
|
Comprehensive income (loss)
|
$
|
(16,386
|
)
|
|
$
|
(7,338
|
)
|
|
$
|
1,499
|
|
|
$
|
5,839
|
|
|
$
|
(16,386
|
)
|
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2019
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net cash provided by (used in) operating activities
|
$
|
—
|
|
|
$
|
32,320
|
|
|
$
|
(688
|
)
|
|
$
|
—
|
|
|
$
|
31,632
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment, net
|
—
|
|
|
(22,749
|
)
|
|
(403
|
)
|
|
—
|
|
|
(23,152
|
)
|
Advances and other investing activities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
—
|
|
|
(22,749
|
)
|
|
(403
|
)
|
|
—
|
|
|
(23,152
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments of long-term debt
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Cash redemptions of Preferred Units
|
(9,399
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,399
|
)
|
Distributions
|
(476
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(476
|
)
|
Intercompany contribution (distribution)
|
9,875
|
|
|
(9,875
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Advances from affiliate
|
—
|
|
|
2,402
|
|
|
—
|
|
|
—
|
|
|
2,402
|
|
Net cash provided by (used in) financing activities
|
—
|
|
|
(7,475
|
)
|
|
—
|
|
|
—
|
|
|
(7,475
|
)
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Increase (decrease) in cash and cash equivalents
|
—
|
|
|
2,096
|
|
|
(1,084
|
)
|
|
—
|
|
|
1,012
|
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
14,148
|
|
|
1,710
|
|
|
—
|
|
|
15,858
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
16,244
|
|
|
$
|
626
|
|
|
$
|
—
|
|
|
$
|
16,870
|
|
Condensed Consolidating Statement of Cash Flows
Three Months Ended March 31, 2018
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuers
|
|
Guarantor
Subsidiaries
|
|
Non-Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
Net cash provided by (used in) operating activities
|
$
|
—
|
|
|
$
|
(5,095
|
)
|
|
$
|
4,730
|
|
|
$
|
—
|
|
|
$
|
(365
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment, net
|
—
|
|
|
(14,869
|
)
|
|
(2,170
|
)
|
|
—
|
|
|
(17,039
|
)
|
Advances and other investing activities
|
—
|
|
|
(59
|
)
|
|
|
|
—
|
|
|
(59
|
)
|
Net cash provided by (used in) investing activities
|
—
|
|
|
(14,928
|
)
|
|
(2,170
|
)
|
|
—
|
|
|
(17,098
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
344,100
|
|
|
35,900
|
|
|
—
|
|
|
—
|
|
|
380,000
|
|
Payments of long-term debt
|
—
|
|
|
(258,000
|
)
|
|
—
|
|
|
—
|
|
|
(258,000
|
)
|
Distributions
|
(7,312
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,312
|
)
|
Other financing activities
|
(5,971
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,971
|
)
|
Intercompany contribution (distribution)
|
(330,817
|
)
|
|
330,817
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
—
|
|
|
108,717
|
|
|
—
|
|
|
—
|
|
|
108,717
|
|
Effect of exchange rate changes on cash
|
—
|
|
|
—
|
|
|
(48
|
)
|
|
—
|
|
|
(48
|
)
|
Increase (decrease) in cash and cash equivalents
|
—
|
|
|
88,694
|
|
|
2,512
|
|
|
—
|
|
|
91,206
|
|
Cash and cash equivalents at beginning of period
|
—
|
|
|
4,197
|
|
|
3,404
|
|
|
—
|
|
|
7,601
|
|
Cash and cash equivalents at end of period
|
$
|
—
|
|
|
$
|
92,891
|
|
|
$
|
5,916
|
|
|
$
|
—
|
|
|
$
|
98,807
|
|
NOTE L
– SUBSEQUENT EVENTS
On
April 18, 2019
, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended
March 31, 2019
of
$0.01
per common unit. This distribution equates to a distribution of
$0.04
per outstanding common unit, on an annualized basis. Also on
April 18, 2019
, the board of directors of our General Partner approved the paid-in-kind distribution of
59,953
Preferred Units attributable to the quarter ended
March 31, 2019
, in accordance with the provisions of our partnership agreement, as amended. These distributions will be paid on
May 15, 2019
to each of the holders of common units, and to the holders of the Preferred Units in the aggregate, respectively, of record as of the close of business on
May 1, 2019
.
On April 8, 2019,
355,883
Preferred Units were redeemed for
$4.3 million
. On May 8, 2019,
355,883
Preferred Units were redeemed for
$4.3 million
.
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 for the year ended
December 31, 2018
filed with the SEC
on
March 4, 2019
("
2018 Annual Report
"). This
discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview
Growth in demand for our compression services and equipment continues to drive increases in our revenues and gross margin. Compression and related services revenues increased
$9.3 million
during the current quarter compared to the prior year quarter. Our first quarter utilization rates in our overall compression service fleet increased to
87.2%
as of
March 31, 2019
from
86.6%
as of
December 31, 2018
and
84.2%
as of March 31, 2018. For our high-horsepower class, the utilization rate increased to
95.6%
at
March 31, 2019
from
95.0%
as of
December 31, 2018
and
92.9%
as of March 31, 2018. In addition to increasing our utilization rates, the increase in demand has provided us the ability to benefit from improved contract pricing on our compression services and the opportunity to gain efficiencies on repeat orders of new equipment sales. Demand was consistent for our aftermarket services when compared to the prior year quarter, as customers spent maintenance capital to deploy compression units that were previously idle.
New equipment sales revenues increased
$9.1 million
during the current quarter compared to the prior year quarter. The construction of infrastructure to alleviate current takeaway capacity constraints that is limiting production and new drilling in the Permian Basis has resulted in increased demand for equipment. Our new equipment sales backlog was
$93.9 million
as of
March 31, 2019
. The decrease in our backlog from December 31, 2018 of
$105.2 million
is the result of converting backlog into revenue for completed orders during the current year quarter. New equipment sales orders generally take less than twelve months to build and deliver. We expect all of our current backlog to be recognized in revenue during fiscal year 2019. Our results of operations for the three month period ending March 31, 2019 reflect margins on equipment sales contracts entered into in prior periods. Our equipment sales orders are largely prepaid by the customer through progressive billings, which allows us to fabricate new compression units using our customers' funding.
Our focus remains on our ability to appropriately expand and maintain our compression equipment fleet in order to serve our customers. During the first three months of 2019, we spent
$17.6 million
(inclusive of
$2.4 million
paid by TETRA as discussed below), to expand primarily our high-horsepower class of compression equipment, and
$5.7 million
to maintain our compression fleet. In order to meet current and future demand, we continue to evaluate options to fund the expansion of our compression and related services. Through currently available cash and operating cash flows, we have sufficient liquidity to allow us to fund additional capital expenditures during the remainder of 2019 without having to access available borrowings under our Credit Agreement and without having to access the debt and equity markets, as current conditions in the debt and equity markets have increased the difficulty of obtaining attractive financing. Pursuant to agreements executed in February 2019, TETRA has agreed to purchase up to
$15.0 million
of new compression services equipment and lease it to us in exchange for a monthly rental fee. In addition to these anticipated additional growth capital expenditures, we also seek to grow through targeted acquisition opportunities, with expected funding through the issuance of additional debt and equity securities, to the extent possible and financially prudent. Our Credit Agreement provides up to $50.0 million of working capital, subject to borrowing base limitations, to fund the working capital needs of our business. As a result of increased borrowings at a higher rate to finance the growth of our medium- and high- horsepower compression fleet, interest expense increased during the current quarter compared to the prior year quarter.
Beginning with the distribution made during the first quarter of 2019, and consistent with our December 20, 2018 announcement, given the decline in our common unit price, we reduced our common unit distributions from $0.75 per unit per year (or $0.1875 per quarter) to $0.04 per unit per year (or $0.01 per quarter). During the first quarter of 2019, we began to redeem the remaining Series A Convertible Preferred Units (the "Preferred Units") for cash and avoid the further dilution to our common unitholders that would occur if the Preferred Units were converted into common units.
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, quarter-to-quarter, 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 for 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 our level of activity.
Our labor costs consist primarily of wages
and benefits
for our field and fabrication 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, 2019
, is provided within the Results of Operations sections
below.
Adjusted EBITDA
.
We view Adjusted 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
(typically compared to the prior month,
prior year
period,
and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and before certain non-cash charges, consisting of impairments, bad debt expense attributable to bankruptcy of customer, equity compensation, non-cash costs of compressors sold, fair value adjustments of our Preferred Units, gain on extinguishment of debt, administrative expenses under the Omnibus Agreement paid in equity using common units, write-off of unamortized financing costs, and excluding acquisition and transaction costs, Series A Preferred redemption premiums, and severance. Adjusted 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 common 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.
|
The following table
reconciles net income (loss) to Adjusted EBITDA for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(In Thousands)
|
Net loss
|
$
|
(12,456
|
)
|
|
$
|
(15,737
|
)
|
Provision for income taxes
|
4,373
|
|
|
1,314
|
|
Depreciation and amortization
|
18,532
|
|
|
17,367
|
|
Interest expense, net
|
13,299
|
|
|
11,433
|
|
Equity compensation
|
365
|
|
|
(604
|
)
|
Expense for unamortized finance costs
|
—
|
|
|
3,541
|
|
Series A Preferred redemption premium
|
448
|
|
|
—
|
|
Series A Preferred fair value adjustments
|
1,304
|
|
|
1,553
|
|
Non-cash cost of compressors sold
|
940
|
|
|
324
|
|
Adjusted EBITDA
|
$
|
26,805
|
|
|
$
|
19,191
|
|
The following table reconciles cash flow from operating activities to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(In Thousands)
|
Cash flow from operating activities
|
$
|
31,632
|
|
|
$
|
(365
|
)
|
Changes in current assets and current liabilities
|
(20,604
|
)
|
|
9,705
|
|
Deferred income taxes
|
(1,466
|
)
|
|
(96
|
)
|
Other non-cash charges
|
(684
|
)
|
|
(1,382
|
)
|
Interest expense, net
|
13,299
|
|
|
11,433
|
|
Series A Preferred accrued paid in kind distributions
|
(685
|
)
|
|
(1,742
|
)
|
Provision for income taxes
|
4,373
|
|
|
1,314
|
|
Non-cash cost of compressors sold
|
940
|
|
|
324
|
|
Adjusted EBITDA
|
$
|
26,805
|
|
|
$
|
19,191
|
|
Free Cash Flow
.
We define Free Cash Flow as cash from operations less capital expenditures, net of sales proceeds. Management primarily uses this metric to assess our ability to retire debt, evaluate our capacity to further invest and grow, and measure our performance as compared to our peers. The following table reconciles cash provided by operations, net, to Free Cash Flow for the periods indicated:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2019
|
|
2018
|
|
(In Thousands)
|
Cash from operations
|
$
|
31,632
|
|
|
$
|
(365
|
)
|
Capital expenditures, net of sales proceeds
|
(23,152
|
)
|
|
(17,039
|
)
|
Free cash flow
|
$
|
8,480
|
|
|
$
|
(17,404
|
)
|
Adjusted EBITDA and Free Cash Flow are financial measures that are not in accordance with U.S. GAAP and 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 U.S. GAAP. These measures may not be comparable to similarly titled financial metrics of other entities, as other entities may not calculate Adjusted EBITDA or Free Cash Flow in the same manner as
we do. Management compensates for the limitations of Adjusted EBITDA and Free Cash Flow as an analytical tool by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures,
and incorporating this knowledge into management’s decision-making processes.
Adjusted EBITDA and Free Cash Flow 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.
Horsepower Utilization Rate of our Compressor Packages
.
We measure the horsepower utilization rate of our fleet of compressor packages as the
amount of horsepower of compressor packages used to provide services as of a particular date, divided by
the
amount of horsepower of compressor packages in our services fleet
as of
such
date.
Management primarily uses this metric
to
determine our future need for additional compressor packages for our service fleet and to measure marketing effectiveness.
The
following table sets forth the total horsepower in our compressor fleet, our total horsepower in service, and our horsepower utilization rate as of the dates shown.
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Horsepower
|
|
|
|
Total horsepower in fleet
|
1,167,164
|
|
|
1,085,088
|
|
Total horsepower in service
|
1,017,452
|
|
|
913,962
|
|
Total horsepower utilization rate
|
87.2
|
%
|
|
84.2
|
%
|
The following table sets forth our horsepower utilization rates by each horsepower class of our compression fleet as of the dates shown.
|
|
|
|
|
|
|
|
March 31,
|
|
2019
|
|
2018
|
Horsepower utilization rate by class
|
|
|
|
Low-horsepower (0-100)
|
65.7
|
%
|
|
65.8
|
%
|
Mid-horsepower (101-1,000)
|
85.4
|
%
|
|
82.7
|
%
|
High-horsepower (1,001 and over)
|
95.6
|
%
|
|
92.9
|
%
|
Net Increases/Decreases in Compression Fleet Horsepower
.
We measure the net increase (or decrease) in our compression fleet horsepower during a given period by taking the difference between the aggregate horsepower of compressor packages added to the fleet during the period, less the aggregate horsepower of compressor packages removed from the fleet during the period. We measure the net increase (or decrease) in our compression fleet horsepower in service during a given period by taking the difference between the aggregate horsepower of compressor packages placed into service during the period, less the aggregate horsepower of compressor packages removed from service during the period.
New Equipment Sales Backlog
.
Our new equipment sales business includes the fabrication and sale of standard compressor packages and custom-designed compressor packages designed and fabricated primarily at our facility in Midland, Texas. The equipment is fabricated to customer and standard specifications, as applicable. Our custom fabrication projects are typically greater in size and scope than standard fabrication projects, requiring more labor, materials, and overhead resources. Our fabrication business requires diligent planning of those resources and project and backlog management in order to meet the customer delivery dates and performance criteria. During the three months ended
March 31, 2019
, we received cumulative orders of
$11.2 million
for new compressor equipment. As of
March 31, 2019
, our new equipment sales backlog was
$93.9 million
, all of which is expected to be recognized during 2019. Our new equipment sales backlog consists of firm customer orders for which a purchase or work order has been received, satisfactory credit or financing arrangements exist, and delivery has been scheduled. Our new equipment sales backlog is a measure of marketing effectiveness that allows us to plan future labor and raw material needs and measure our success in winning bids from our customers.
Critical Accounting Policies and Estimates
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
2018 Annual Report
. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. 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
Three months ended
March 31, 2019
compared to
three
months ended
March 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
Period-to-Period Change
|
|
Percentage of Total Revenues
|
Period-to-Period Change
|
Consolidated Results of Operations
|
2019
|
|
2018
|
|
2019 vs. 2018
|
|
2019
|
|
2018
|
|
2019 vs. 2018
|
|
(In Thousands)
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and related services
|
$
|
63,032
|
|
|
$
|
53,735
|
|
|
$
|
9,297
|
|
|
60.9
|
%
|
|
62.9
|
%
|
|
17.3
|
%
|
Aftermarket services
|
13,601
|
|
|
14,016
|
|
|
(415
|
)
|
|
13.1
|
%
|
|
16.4
|
%
|
|
(3.0
|
)%
|
Equipment sales
|
26,803
|
|
|
17,666
|
|
|
9,137
|
|
|
25.9
|
%
|
|
20.7
|
%
|
|
51.7
|
%
|
Total revenues
|
103,436
|
|
|
85,417
|
|
|
18,019
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
21.1
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and related services
|
32,621
|
|
|
31,380
|
|
|
1,241
|
|
|
31.5
|
%
|
|
36.7
|
%
|
|
4.0
|
%
|
Cost of aftermarket services
|
11,250
|
|
|
11,157
|
|
|
93
|
|
|
10.9
|
%
|
|
13.1
|
%
|
|
0.8
|
%
|
Cost of equipment sales
|
24,229
|
|
|
15,449
|
|
|
8,780
|
|
|
23.4
|
%
|
|
18.1
|
%
|
|
56.8
|
%
|
Total cost of revenues
|
68,100
|
|
|
57,986
|
|
|
10,114
|
|
|
65.8
|
%
|
|
67.9
|
%
|
|
17.4
|
%
|
Depreciation and amortization
|
18,532
|
|
|
17,367
|
|
|
1,165
|
|
|
17.9
|
%
|
|
20.3
|
%
|
|
6.7
|
%
|
Selling, general and administrative expense
|
10,665
|
|
|
8,297
|
|
|
2,368
|
|
|
10.3
|
%
|
|
9.7
|
%
|
|
28.5
|
%
|
Interest expense, net
|
13,299
|
|
|
11,433
|
|
|
1,866
|
|
|
12.9
|
%
|
|
13.4
|
%
|
|
16.3
|
%
|
Series A Preferred fair value adjustment (income) expense
|
1,304
|
|
|
1,553
|
|
|
(249
|
)
|
|
1.3
|
%
|
|
1.8
|
%
|
|
(16.0
|
)%
|
Other (income) expense, net
|
(381
|
)
|
|
3,204
|
|
|
(3,585
|
)
|
|
(0.4
|
)%
|
|
3.8
|
%
|
|
|
|
Income (loss) before income taxes
|
(8,083
|
)
|
|
(14,423
|
)
|
|
6,340
|
|
|
(7.8
|
)%
|
|
(16.9
|
)%
|
|
(44.0
|
)%
|
Provision (benefit) for income taxes
|
4,373
|
|
|
1,314
|
|
|
3,059
|
|
|
4.2
|
%
|
|
1.5
|
%
|
|
232.8
|
%
|
Net income (loss)
|
$
|
(12,456
|
)
|
|
$
|
(15,737
|
)
|
|
$
|
3,281
|
|
|
(12.0
|
)%
|
|
(18.4
|
)%
|
|
(20.8
|
)%
|
Revenues
Compression and related services revenues
increased
by
$9.3 million
, or
17.3%
, in the current year quarter compared to the prior year quarter. Growth in demand for compression services positively impacted our compression fleet utilization rates. Utilization of our medium-horsepower (101-1,000 HP) and high-horsepower (over 1,000 HP) compression fleets, which are used to provide services in natural gas gathering and transmission applications, have increased compared to the prior year quarter. As a result, the overall compression fleet horsepower utilization rate as of
March 31, 2019
increased
to
87.2%
compared to
84.2%
as of
March 31, 2018
. Our low horsepower compression fleet, which is primarily used to provide services for wellhead natural gas production enhancement, continues to experience lower utilization compared to the higher horsepower classes of our compression fleet. Primarily as a result of our medium-horsepower and high-horsepower compression fleets, we have seen our overall compression fleet horsepower utilization rate increase sequentially over the past two years. Increased demand has also led to improved customer contract pricing for compression services. In response to the overall improving demand for compression services, we continue to invest in growth capital projects to increase certain horsepower categories of our compression fleet.
Aftermarket services revenues
decreased
$0.4 million
, or
3.0%
, during the current year quarter compared to the prior year quarter. In the prior year quarter, we experienced increased sales backlog for aftermarket projects as well as an increase in requests for quotes for aftermarket services as our customers increased their maintenance capital expenditure activities and deployed compression units that were previously idle.
Equipment sales revenues
increased
$9.1 million
, or
51.7%
, during the current year quarter compared to the prior year quarter, as we continue to see improving demand. This
increase
is primarily due to the increased number of customer projects compared to the prior year quarter requiring fabrication, particularly projects requiring high-horsepower compressor packages. New equipment sales backlog was
$93.9 million
as of
March 31, 2019
compared to
$105.2 million
and
$102.5 million
as of
December 31, 2018
and
March 31, 2018
, respectively. Changes in our new equipment sales backlog are a function of additional customer orders less completed orders that result in equipment sales revenues. Our backlog associated with new equipment sales decreased from the prior year quarter as completed customer orders, recorded as revenue during the current quarter, exceeded new orders received during the current quarter. During the year ended December 31, 2018, we reached our highest backlog since 2014, some of which was recognized as revenues during the three months ended
March 31, 2019
. All of our new equipment sales backlog as of
March 31, 2019
is expected to be recognized as revenues in 2019. The level of revenues from equipment sales is typically volatile and difficult to forecast, as these revenues are tied to specific customer projects that vary in scope, design, complexity, and customer needs. In comparison, our revenues from compression and related services and aftermarket services are typically more consistent and predictable.
Cost of revenues
The
increase
in the cost of compression and related services revenue, compared to the prior year quarter, was primarily due to the increased overall utilization of compressor packages. The costs of compression and related services as a percentage of compression and related services revenues were
51.8%
and
58.4%
during the current and prior year quarters, respectively. Costs of compression and related services as a percent of associated revenues
decreased
compared to the prior year quarter primarily due to improved customer contract pricing and internal efficiencies gained on repeat orders. Costs of aftermarket services
increased
slightly compared to the prior year quarter, despite a slight decrease in activity and parts sales due to the mix between parts and services during the periods.
Cost of equipment sales revenues
increased
in accordance with the
increase
in associated revenues. Costs of equipment sales as a percentage of equipment sales revenues
increased
primarily due to pricing on equipment orders placed in early 2018. We expect to capture greater margin on equipment sales included in our current backlog in future periods as the orders are completed.
Depreciation and amortization
Depreciation and amortization expense primarily consists of the depreciation of compressor packages in our service fleet. In addition,
it
includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased slightly compared to the prior year quarter due to increases in the compression services fleet.
Selling, general and administrative expense
Selling,
general and administrative
expenses
increased
during the current year quarter compared to the prior year quarter, largely due to increased employee expenses, including wages, incentives, benefits, and other employee related expenses of
$2.1 million
, and increased other general expenses of
$0.3 million
. As a result of these increases, selling, general and administrative expense as a percentage of revenues
increased
.
Interest expense, net
Interest expense, net,
increased
compared to the prior year quarter due to higher outstanding debt balances and higher interest rates associated with the issuance of our
7.50%
Senior Secured Notes in March 2018. Interest expense, net, during the current and prior year quarter includes
$0.7 million
and
$1.0 million
, respectively, of finance cost amortization and other non-cash charges.
Series A Preferred fair value adjustment
The Series A Preferred fair value adjustment was
$1.3 million
charged
to earnings during the current year quarter compared to
$1.6 million
charged
to earnings during the prior year quarter. As of
March 31, 2019
, the fair value of the Preferred Units was
$20.9 million
. Changes in the fair value of the Preferred Units may generate additional volatility to our earnings going forward.
Other (income) expense, net
Other (income) expense, net, was
$0.4 million
of
income
during the current year quarter, compared to
$3.2 million
of
expense
during the prior year quarter. This decrease in expense is primarily due to
$3.5 million
of
unamortized deferred financing costs charged to other expense as a result of the termination of the previous credit agreement in the prior year quarter. The current year period includes approximately
$0.4 million
of redemption premium incurred in connection with the redemption of Preferred Units for cash.
Provision for income taxes
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S. and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.
Our effective tax rate for the
three
month period ended
March 31, 2019
, was negative
54.1%
primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. In addition, the application of ASC 740-270 "Income Taxes - Interim Reporting," resulted in an accrual of current income taxes for the three month period ended March 31, 2019 equal to approximately the full year estimate. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.
Liquidity and Capital Resources
Our primary cash requirements are for distributions, working capital requirements, debt service, normal operating expenses, and capital expenditures. Our potential sources
of funds are
our existing cash balances, cash generated from our operations, long-term and short-term borrowings, financing transactions with TETRA, issuances of debt and equity securities, and leases, which we believe will be sufficient to meet our working capital and planned growth requirements during 2019. Continued competitive market environments have resulted in ongoing challenges in each of our domestic and international business regions. We are monitoring the 2019 spending plans of our customers due to oil price volatility and its impact on our customer's demand for our products and services. If oil prices decrease during 2019, our businesses could be negatively impacted. In addition, current conditions in the market for debt and equity securities in the energy sector have increased the difficulty of obtaining equity and debt financing to grow our business. Despite these challenges, we remain committed to a long-term growth strategy. Our near-term focus is to selectively expand our compression fleet to serve the growing demand for compression services, while continuing to preserve and enhance liquidity through strategic operating and financial measures.
On December 20, 2018, we announced that, given the decline in our common unit price, we were reducing our common unit distributions from $0.75 per unit per year (or $0.1875 per quarter) to $0.04 per unit per year (or $0.01 per quarter) for a period of up to four quarters, beginning with the February 2019 distribution. We intend to use the approximately $34 million of savings from the reduced distribution to redeem the remaining Preferred Units for cash and avoid the dilution to our common unitholders that would occur if the Preferred Units were converted into common units. The stated value of the Preferred Units as of
May 8, 2019
was approximately
$13.3 million
.
We expect to fund any future capital expenditures, along with potential acquisitions, if any, with existing cash balances, cash flow generated from our operations, financing transactions with TETRA and funds received from the issuance of additional debt and equity securities. However, we are subject to business and operational risks that could materially adversely affect our cash flows and together with risks associated with current debt and equity market conditions, our ability or desire to issue such securities.
Please
read Part I, Item 1A "Risk Factors" included in our
2018 Annual Report
.
Meeting increased demand for our compression services, both internationally and in the U.S., will require
ongoing
capital expenditure
investment, which could be significant. The level of future growth capital expenditures depends on demand for compression services, the level of cash available to fund these expenditures, and our decisions whether to utilize available cash to fund distribution increases, retire debt or make capital expenditures. We anticipate capital expenditures in 2019 to range from
$60.0 million
to
$65.0 million
. These capital expenditures include approximately
$18.0 million
to
$20.0 million
of maintenance capital expenditures and approximately
$42 million
to
$45 million
of capital expenditures primarily associated with the expansion of our compression services fleet. We expect that the combination of
$16.9 million
of cash on hand at
March 31, 2019
and operating cash flows expected to be generated during the remainder of the year will be sufficient to fund these capital expenditures
without having to incur additional long-term debt and without having to access the equity markets. In addition to these capital expenditures, pursuant to agreements executed in February 2019, TETRA has agreed to purchase up to
$15.0 million
of new compression services equipment and lease it to us in exchange for a monthly rental fee. During the three months ended
March 31, 2019
,
$2.4 million
of the
$15.0 million
was paid to us from TETRA. As a result of this agreement, approximately 20,700 horsepower of additional compression equipment will be deployed, and we will have the right to purchase the equipment from TETRA at any time over the five year lease term. These anticipated 2019 growth plans are to expand our high-horsepower compression fleet by approximately 98,000 horsepower, focused on key customers as they look to their 2020 compression needs. However, if additional desired capital expenditures exceed available sources, and other financing sources are not available, we will not have the ability to expand our compression services fleet to meet the increased demand. We are reviewing all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.
On
April 18, 2019
, our General Partner declared a cash distribution attributable to the quarter ended
March 31, 2019
of
$0.01
per common unit. This distribution equates to a distribution of
$0.04
per outstanding common unit, on an annualized basis. Also on
April 18, 2019
, our General Partner approved the paid-in-kind distribution of
59,953
Preferred Units attributable to the quarter ended
March 31, 2019
, in accordance with the provisions of our partnership agreement, as amended. These quarterly distributions will be paid on
May 15, 2019
to each of the holders of common units and to the holders of the Preferred Units in the aggregate, respectively, of record as of the close of business on
May 1, 2019
.
Cash Flows
A summary of our sources and uses of cash during the
three
months ended
March 31, 2019
and
2018
is as follows:
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Three Months Ended March 31,
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(In Thousands)
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2019
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|
2018
|
Operating activities
|
$
|
31,632
|
|
|
$
|
(365
|
)
|
Investing activities
|
(23,152
|
)
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|
(17,098
|
)
|
Financing activities
|
(7,475
|
)
|
|
108,717
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|
Operating Activities
Net cash
provided by
operating activities increased by
$32.0 million
. Our cash provided from operating activities is primarily generated from the provision of compression and related services and the sale of new compressor packages. The decrease in our backlog from
December 31, 2018
is the result of converting backlog into revenue for completed orders during the current year quarter. New equipment sales orders generally take less than twelve months to build and deliver.
Cash provided from our foreign operations is subject to various uncertainties, including the volatility associated with interruptions caused by customer
budgetary decisions, uncertainties regarding the renewal of our existing customer contracts, and other changes in contract arrangements,
security concerns,
the timing of collection of our receivables, and the repatriation of cash generated by our international operations.
Investing Activities
Capital expenditures during
the
three
months ended
March 31, 2019
,
increased
by
$6.1 million
compared to the same period in
2018
primarily to grow and maintain the capacity of our compression fleet. As a result of overall improving demand for compression services, beginning in late 2017 we began growth capital expenditure projects to increase certain horsepower categories of our compression fleet. Maintenance capital expenditures also increased during the
three
months ended
March 31, 2019
compared to the prior year period. Total capital expenditures, net of disposals and proceeds, during the current year period of
$23.2 million
include
$5.7 million
of maintenance capital expenditures and are net of
$0.9 million
of non-cash cost of fleet compression units sold. The level of growth capital expenditures depends on forecasted demand for compression services. If the forecasted demand for compression services during 2019 increases or decreases, the amount of planned expenditures on
growth and expansion will be adjusted, subject to the availability of funds. We continue to review all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.
Financing Activities
Beginning with the distribution to common unitholders during February 2019, we reduced our common unit distributions from
$0.75
per unit per year (or $0.1875 per quarter) to
$0.04
per unit per year (or
$0.01
per quarter). We intend to use the approximately
$34 million
of savings from the reduced distribution to redeem the remaining Preferred Units for cash and avoid the further dilution to our common unitholders that would occur if the Preferred Units were converted into common units. Accordingly, during the
three
months ended
March 31, 2019
, we distributed
$0.5 million
of cash distributions to our common unitholders and General Partner.
Our sources of funds for liquidity needs are existing cash balances, cash generated from our operations, and long-term and short-term borrowings. In addition to redeeming the remaining Preferred Units, we anticipate that we will utilize available cash to fund our anticipated growth capital expenditures. In February 2019, we entered into a transaction with TETRA whereby TETRA agreed to purchase up to
$15 million
of new compression services equipment and agreed to lease it to us in exchange for a monthly rental fee. As of
March 31, 2019
, pursuant to this arrangement,
$2.4 million
has been paid to us from TETRA for the construction of new compression equipment.
Series A Convertible Preferred Units
.
The Preferred Units rank senior to all classes or series of equity securities of the Partnership with respect to distribution rights and rights upon liquidation. The holders of Preferred Units receive quarterly distributions, which are paid in kind in additional Preferred Units, equal to an annual rate of 11.00% of the Issue Price (or
$1.2573
per Preferred Unit annualized) of their outstanding Preferred Units, subject to certain adjustments.
Unless otherwise redeemed for cash, a ratable portion of the Preferred Units has been, and will be, converted into common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Beginning with the January 2019 Conversion Date, we have elected to redeem the remaining Preferred Units for cash, resulting in
783,046
Preferred Units being redeemed during the three months ended
March 31, 2019
for
$9.4 million
, which includes approximately
$0.4 million
of redemption premium that was paid. Including the impact of paid in kind distributions of Preferred Units and the conversions of Preferred Units into common units, and the redemptions of Preferred Units for cash, the total number of Preferred Units outstanding as of
March 31, 2019
was
1,779,417
. As of
May 8, 2019
, the total number of Preferred Units outstanding was 1,165,756, having an aggregate stated value of approximately
$13.3 million
.
The fair value of the Preferred Units as of
March 31, 2019
was
$20.9 million
. Changes in the fair value during each quarterly period, if any, are charged or credited to earnings in the accompanying consolidated statements of operations. Charges or credits to earnings for changes in the fair value of the Preferred Units, along with the interest expense for the accrual and payment of paid-in-kind distributions associated with the Preferred Units, are non-cash charges or credits associated with the Preferred Units.
Bank Credit Facilities
.
The Credit Agreement includes a maximum credit commitment of
$50.0 million
available for loans, letters of credit (with a sublimit of
$25.0 million
) and swingline loans (with a sublimit of
$5.0 million
), subject to a borrowing base to be determined by reference to the value of the Partnership’s and any other Borrowers’ accounts receivable. Such maximum credit commitment may be increased by
$25.0 million
in accordance with the terms and conditions of the Credit Agreement. As of
March 31, 2019
, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of
$18.4 million
.
The maturity date of the Credit Agreement is June 29, 2023. As of
March 31, 2019
, we had
no
outstanding balance and had $3.5 million in letters of credit against our Credit Agreement. As of
May 8, 2019
, we have
no
balance outstanding under our Credit Agreement and
$5.3 million
in letters of credit, leaving availability under the CCLP Credit Agreement of
$16.6 million
.
7.50% Senior Secured Notes
.
As of
May 8, 2019
,
$350.0 million
in aggregate principal amount of our
7.50%
Senior Secured Notes are outstanding. The
7.50%
Senior Secured Notes accrue interest at a rate of
7.50%
per annum and are scheduled to mature on April 1, 2025.
7.25% Senior Notes
.
As of
May 8, 2019
,
$295.9 million
in aggregate principal amount of our 7.25% Senior Notes are outstanding. The 7.25% Senior Notes accrue interest at a rate of 7.25% per annum and are scheduled to mature on
August 15, 2022
.
Off Balance Sheet Arrangements
As of
March 31, 2019
, 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.
Recently Adopted Accounting Guidance
We adopted the new lease accounting standard on January 1, 2019. The new lease standard had a material impact to our consolidated financial statements, resulting from the inclusion of operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheet. Refer to Part I, Item 1. Financial Statements- Note A - "Organization, Basis of Presentation and Significant Accounting Policies" and
Note J
- “Leases” for further discussion.
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 2019, there were no material
changes outside of the ordinary course of business in the specified contractual obligations.
For additional information about our contractual obligations as of
December 31, 2018
, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our
2018 Annual Report
.
Cautionary Statement for Purposes of Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” and information based on our beliefs and those of our general partner. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should, “targets”, “will” and “would”.
Such forward-looking statements reflect our current views with respect to future events and financial performance and are based on assumptions that we believe to be reasonable but such forward-looking statements
are subject to numerous risks, and uncertainties, including, but not limited to:
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economic and operating conditions that are outside of our control, including the supply, demand, and prices of oil and natural gas;
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•
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the availability of adequate sources of capital to us;
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•
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our existing debt levels and our flexibility to obtain additional financing;
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our ability to continue to make cash distributions, or increase cash distributions from current levels, after the establishment of reserves, payment of debt service and other contractual obligations;
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•
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the restrictions on our business that are imposed under our long-term debt agreements;
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•
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our dependence upon a limited number of customers and the activity levels of our customers;
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the levels of competition we encounter;
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our ability to replace our contracts with customers, which are generally short-term contracts;
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the availability of raw materials and labor at reasonable prices;
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risks related to acquisitions and our growth strategy;
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our operational performance;
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•
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risks related to our foreign operations;
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the credit and risk profile of TETRA;
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the ability of our general partner to retain key personnel;
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information technology risks including the risk from cyberattack;
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the effect and results of litigation, regulatory matters, settlements, audits, assessments, and contingencies, and
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other risks and uncertainties under “Item 1A. Risk Factors” in our
2018 Annual Report
, and as included in our other filings with the U.S. Securities and Exchange Commission ("SEC"), which are available free of charge on the SEC website at
www.sec.gov
.
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The risks and uncertainties referred to above are generally beyond our ability to control and we cannot predict all the risks and uncertainties that could cause our actual results to differ from those indicated by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may vary from those indicated by the forward-looking statements, and such variances may be material.
All subsequent written and oral forward-looking statements made by or attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements we may make, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or oil
in connection with our services and, accordingly, have no direct exposure to fluctuating
commodity
prices. For
a discussion of our indirect exposure to fluctuating
commodity
prices, please read “Risk Factors —
Certain
Business
Risks” in our
2018 Annual Report
. We depend on domestic and international demand for and production of
natural gas and oil and a reduction in this demand or production could adversely affect the demand or the prices we charge for our services, which could impact our revenues
and cash available for distribution to our common unitholders
in the
future.
We do not
currently hedge, and do not
intend to hedge,
our indirect exposure to fluctuating commodity prices.
Interest Rate Risk
Through
March 31, 2019
, there have been no material changes in the information pertaining to our interest rate risk exposures as disclosed in our
2018 Annual Report
. There is no balance outstanding under the Credit Agreement as of
March 31, 2019
. As such, we currently do not have any long-term debt obligations that have a variable rate of interest.
Exchange Rate Risk
As of
March 31, 2019
, there have been no material changes pertaining to our exchange rate exposures as disclosed in our
2018 Annual Report
.