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Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(MARK ONE)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED September 30, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM _______________ TO ______________.
Commission File No. 001-33078
EXTERRAN PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware (State or Other Jurisdiction of Incorporation or Organization) |
22-3935108 (I.R.S. Employer Identification No.) |
|
16666 Northchase Drive Houston, Texas (Address of principal executive offices) |
77060 (Zip Code) |
(281) 836-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of October 27, 2011, there were 34,098,414 common units and 3,162,500 subordinated units
outstanding.
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. | Financial Statements |
EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for unit amounts)
(unaudited)
(In thousands, except for unit amounts)
(unaudited)
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 374 | $ | 50 | ||||
Accounts receivable, trade, net of allowance of $1,148 and $1,232, respectively |
32,826 | 24,550 | ||||||
Due from affiliates, net |
6,909 | 3,759 | ||||||
Total current assets |
40,109 | 28,359 | ||||||
Property, plant and equipment |
1,221,397 | 953,759 | ||||||
Accumulated depreciation |
(408,356 | ) | (316,806 | ) | ||||
Net property, plant and equipment |
813,041 | 636,953 | ||||||
Goodwill |
124,019 | 124,019 | ||||||
Interest rate swaps |
| 5,769 | ||||||
Intangibles and other assets, net |
23,196 | 18,245 | ||||||
Total assets |
$ | 1,000,365 | $ | 813,345 | ||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||
Current liabilities: |
||||||||
Accounts payable, trade |
$ | | $ | 166 | ||||
Accrued liabilities |
12,317 | 9,347 | ||||||
Accrued interest |
1,200 | 983 | ||||||
Current portion of interest rate swaps |
3,244 | 3,112 | ||||||
Total current liabilities |
16,761 | 13,608 | ||||||
Long-term debt |
544,000 | 449,000 | ||||||
Interest rate swaps |
5,086 | | ||||||
Total liabilities |
565,847 | 462,608 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Partners capital: |
||||||||
Limited partner units: |
||||||||
Common units, 34,124,510 and 27,363,451 units issued, respectively |
452,310 | 379,748 | ||||||
Subordinated units, 3,162,500 and 4,743,750 units issued and outstanding, respectively |
(18,527 | ) | (30,702 | ) | ||||
General partner units, 2% interest with 757,722 and 653,318 equivalent units issued and
outstanding, respectively |
13,265 | 10,638 | ||||||
Accumulated other comprehensive loss |
(11,962 | ) | (8,673 | ) | ||||
Treasury units, 26,096 and 15,756 common units, respectively |
(568 | ) | (274 | ) | ||||
Total partners capital |
434,518 | 350,737 | ||||||
Total liabilities and partners capital |
$ | 1,000,365 | $ | 813,345 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per unit amounts)
(unaudited)
(In thousands, except per unit amounts)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenue: |
||||||||||||||||
Revenue third parties |
$ | 84,103 | $ | 62,571 | $ | 224,046 | $ | 168,518 | ||||||||
Revenue affiliates |
334 | 150 | 961 | 703 | ||||||||||||
Total revenue |
84,437 | 62,721 | 225,007 | 169,221 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Cost of sales (excluding depreciation and
amortization expense) affiliates |
43,355 | 33,819 | 120,231 | 88,796 | ||||||||||||
Depreciation and amortization |
19,087 | 13,697 | 48,695 | 37,338 | ||||||||||||
Long-lived asset impairment |
384 | 93 | 689 | 324 | ||||||||||||
Selling, general and administrative affiliates |
10,594 | 8,504 | 30,737 | 24,718 | ||||||||||||
Interest expense |
7,860 | 6,020 | 22,488 | 17,436 | ||||||||||||
Other (income) expense, net |
(338 | ) | 333 | (104 | ) | (73 | ) | |||||||||
Total costs and expenses |
80,942 | 62,466 | 222,736 | 168,539 | ||||||||||||
Income before income taxes |
3,495 | 255 | 2,271 | 682 | ||||||||||||
Income tax expense |
242 | 172 | 733 | 518 | ||||||||||||
Net income |
$ | 3,253 | $ | 83 | $ | 1,538 | $ | 164 | ||||||||
General partner interest in net income |
$ | 837 | $ | 420 | $ | 2,085 | $ | 1,045 | ||||||||
Common units interest in net income |
$ | 2,160 | $ | (271 | ) | $ | (476 | ) | $ | (671 | ) | |||||
Subordinated units interest in net income |
$ | 256 | $ | (66 | ) | $ | (71 | ) | $ | (210 | ) | |||||
Weighted average common units outstanding: |
||||||||||||||||
Basic |
33,308 | 22,882 | 29,942 | 19,342 | ||||||||||||
Diluted |
33,325 | 22,882 | 29,942 | 19,342 | ||||||||||||
Weighted average subordinated units outstanding: |
||||||||||||||||
Basic |
3,953 | 5,552 | 4,477 | 6,064 | ||||||||||||
Diluted |
3,953 | 5,552 | 4,477 | 6,064 | ||||||||||||
Earnings (loss) per common unit: |
||||||||||||||||
Basic |
$ | 0.06 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
Diluted |
$ | 0.06 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
Earnings (loss) per subordinated unit: |
||||||||||||||||
Basic |
$ | 0.06 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
Diluted |
$ | 0.06 | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.03 | ) | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(unaudited)
(In thousands)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 3,253 | $ | 83 | $ | 1,538 | $ | 164 | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Interest rate swap gain (loss) |
(6,891 | ) | 690 | (10,985 | ) | 1,609 | ||||||||||
Amortization of payments to terminate interest rate swaps |
2,565 | | 7,696 | | ||||||||||||
Total other comprehensive income (loss) |
(4,326 | ) | 690 | (3,289 | ) | 1,609 | ||||||||||
Comprehensive income (loss) |
$ | (1,073 | ) | $ | 773 | $ | (1,751 | ) | $ | 1,773 | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Table of Contents
EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
(In thousands, except for unit amounts)
(unaudited)
(In thousands, except for unit amounts)
(unaudited)
Partners Capital | Accumulated | |||||||||||||||||||||||||||||||||||||||
General Partner | Treasury | Other | ||||||||||||||||||||||||||||||||||||||
Common Units | Subordinated Units | Units | Units | Comprehensive | ||||||||||||||||||||||||||||||||||||
$ | Units | $ | Units | $ | Units | $ | Units | Loss | Total | |||||||||||||||||||||||||||||||
Balance, December 31, 2009 |
$ | 298,010 | 17,541,965 | $ | (33,194 | ) | 6,325,000 | $ | 8,457 | 486,243 | $ | (108 | ) | (8,426 | ) | $ | (14,857 | ) | $ | 258,308 | ||||||||||||||||||||
Issuance of common units for
vesting of phantom units |
33,373 | | ||||||||||||||||||||||||||||||||||||||
Treasury units purchased |
(166 | ) | (7,330 | ) | (166 | ) | ||||||||||||||||||||||||||||||||||
Transaction costs for the
public offering of common
units by Exterran Holdings |
(189 | ) | (189 | ) | ||||||||||||||||||||||||||||||||||||
Transaction costs for
conversion of subordinated
units |
(25 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||
Conversion of subordinated
units to common units |
(8,721 | ) | 1,581,250 | 8,721 | (1,581,250 | ) | | |||||||||||||||||||||||||||||||||
Issuance of units to Exterran
Holdings for a portion of its
U.S. contract operations
business |
125,043 | 8,206,863 | 2,548 | 167,075 | 127,591 | |||||||||||||||||||||||||||||||||||
Contribution of capital |
15,006 | 8,097 | 631 | 23,734 | ||||||||||||||||||||||||||||||||||||
Excess of purchase price of
equipment over Exterran
Holdings cost of equipment |
(558 | ) | (385 | ) | (29 | ) | (972 | ) | ||||||||||||||||||||||||||||||||
Cash distributions |
(24,354 | ) | (8,776 | ) | (1,628 | ) | (34,758 | ) | ||||||||||||||||||||||||||||||||
Unit based compensation expense |
645 | 645 | ||||||||||||||||||||||||||||||||||||||
Interest rate swap gain |
1,609 | 1,609 | ||||||||||||||||||||||||||||||||||||||
Net income |
(671 | ) | (210 | ) | 1,045 | 164 | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2010 |
$ | 404,186 | 27,363,451 | $ | (25,747 | ) | 4,743,750 | $ | 11,024 | 653,318 | $ | (274 | ) | (15,756 | ) | $ | (13,248 | ) | $ | 375,941 | ||||||||||||||||||||
Balance, December 31, 2010 |
$ | 379,748 | 27,363,451 | $ | (30,702 | ) | 4,743,750 | $ | 10,638 | 653,318 | $ | (274 | ) | (15,756 | ) | $ | (8,673 | ) | $ | 350,737 | ||||||||||||||||||||
Issuance of common units for
vesting of phantom units |
45,634 | | ||||||||||||||||||||||||||||||||||||||
Treasury units purchased |
(294 | ) | (10,340 | ) | (294 | ) | ||||||||||||||||||||||||||||||||||
Transaction costs for
conversion of subordinated
units |
(20 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||
Conversion of subordinated
units to common units |
(9,569 | ) | 1,581,250 | 9,569 | (1,581,250 | ) | | |||||||||||||||||||||||||||||||||
Net proceeds from issuance of
common units |
127,672 | 5,134,175 | 127,672 | |||||||||||||||||||||||||||||||||||||
Proceeds from sale of general
partner units to Exterran
Holdings |
1,316 | 53,431 | 1,316 | |||||||||||||||||||||||||||||||||||||
Transaction costs for the
public offering of common
units by Exterran Holdings |
(261 | ) | (261 | ) | ||||||||||||||||||||||||||||||||||||
Acquisition of a portion of
Exterran Holdings U.S.
contract operations business |
(24,655 | ) | 767 | 50,973 | (23,888 | ) | ||||||||||||||||||||||||||||||||||
Contribution of capital |
21,261 | 9,472 | 1,281 | 32,014 | ||||||||||||||||||||||||||||||||||||
Cash distributions |
(41,689 | ) | (6,795 | ) | (2,822 | ) | (51,306 | ) | ||||||||||||||||||||||||||||||||
Unit based compensation expense |
299 | 299 | ||||||||||||||||||||||||||||||||||||||
Interest rate swap loss |
(10,985 | ) | (10,985 | ) | ||||||||||||||||||||||||||||||||||||
Amortization of payments to
terminate interest rate swaps |
7,696 | 7,696 | ||||||||||||||||||||||||||||||||||||||
Net income |
(476 | ) | (71 | ) | 2,085 | 1,538 | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2011 |
$ | 452,310 | 34,124,510 | $ | (18,527 | ) | 3,162,500 | $ | 13,265 | 757,722 | $ | (568 | ) | (26,096 | ) | $ | (11,962 | ) | $ | 434,518 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
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EXTERRAN PARTNERS, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(In thousands)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,538 | $ | 164 | ||||
Adjustments to reconcile net income to cash provided by operating activities: |
||||||||
Depreciation and amortization |
48,695 | 37,338 | ||||||
Long-lived asset impairment |
689 | 324 | ||||||
Amortization of debt issuance cost |
982 | 707 | ||||||
Amortization of fair value of acquired interest rate swaps |
| 111 | ||||||
Amortization of payments to terminate interest rate swaps |
7,696 | | ||||||
Unit based compensation expense |
310 | 660 | ||||||
Provision for doubtful accounts |
268 | 592 | ||||||
Gain on sale of compression equipment |
(646 | ) | (425 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, trade |
(8,544 | ) | (4,873 | ) | ||||
Accounts payable, trade |
(166 | ) | 72 | |||||
Other liabilities |
2,898 | 2,427 | ||||||
Net cash provided by operating activities |
53,720 | 37,097 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(33,144 | ) | (21,578 | ) | ||||
Payment to Exterran Holdings for a portion of the June 2011 Contract Operations Acquisition |
(62,217 | ) | | |||||
Proceeds from the sale of compression equipment |
2,308 | 823 | ||||||
Increase in restricted cash |
| (213 | ) | |||||
(Increase) decrease in amounts due from affiliates, net |
359 | (22 | ) | |||||
Net cash used in investing activities |
(92,694 | ) | (20,990 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under long-term debt |
506,500 | 17,000 | ||||||
Repayments under long-term debt |
(570,934 | ) | (14,000 | ) | ||||
Distributions to unitholders |
(51,306 | ) | (34,758 | ) | ||||
Net proceeds from issuance of common units |
127,672 | | ||||||
Net proceeds from sale of general partner units |
1,316 | | ||||||
Debt issuance costs |
(980 | ) | | |||||
Purchase of treasury units |
(294 | ) | (166 | ) | ||||
Capital contribution from limited partners and general partner |
27,324 | 16,940 | ||||||
Decrease in amounts due to affiliates, net |
| (1,293 | ) | |||||
Net cash provided by (used in) financing activities |
39,298 | (16,277 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
324 | (170 | ) | |||||
Cash and cash equivalents at beginning of period |
50 | 203 | ||||||
Cash and cash equivalents at end of period |
$ | 374 | $ | 33 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Non-cash capital contribution from limited and general partner |
$ | 5,156 | $ | 2,603 | ||||
Non-cash capital contribution for contract operations equipment acquired/exchanged, net |
$ | 190,897 | $ | 126,015 | ||||
Intangible assets allocated in acquisitions |
$ | 6,400 | $ | 5,864 | ||||
Debt assumed in the June 2011 Contract Operations Acquisition |
$ | 159,434 | $ | | ||||
Non-cash capital distribution due to the June 2011 Contract Operations Acquisition |
$ | 24,655 | $ | | ||||
Common units issued to limited partner due to the August 2010 Contract Operations Acquisition |
$ | | $ | 125,043 | ||||
General partner units issued in acquisitions |
$ | 767 | $ | 2,548 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
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EXTERRAN PARTNERS, L.P.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying unaudited condensed consolidated financial statements of Exterran Partners, L.P.
(we, or the Partnership) included herein have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S.) for interim financial
information and the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the U.S. (GAAP) are not required in
these interim financial statements and have been condensed or omitted. It is the opinion of
management that the information furnished includes all adjustments, consisting only of normal
recurring adjustments, that are necessary to present fairly our consolidated financial position,
results of operations and cash flows for the periods indicated. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements presented in our Annual Report on Form 10-K for the year ended December 31,
2010. That report contains a more comprehensive summary of our accounting policies. These interim
results are not necessarily indicative of results for a full year.
Exterran General Partner, L.P. is our general partner and an indirect wholly-owned subsidiary of
Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, Exterran
Holdings). As Exterran General Partner, L.P. is a limited partnership, its general partner,
Exterran GP LLC, conducts our business and operations, and the board of directors and officers of
Exterran GP LLC make decisions on our behalf.
Fair Value of Financial Instruments
Our financial instruments consist of cash, trade receivables and payables, interest rate swaps and
long-term debt. At September 30, 2011 and December 31, 2010, the estimated fair values of those
financial instruments approximated their carrying values as reflected in our condensed consolidated
balance sheets. The fair value of our debt has been estimated based on similar debt transactions
that occurred near the valuation dates.
Earnings Per Common and Subordinated Unit
The computations of earnings per common and subordinated unit are based on the weighted average
number of common and subordinated units, respectively, outstanding during the applicable period.
Our subordinated units meet the definition of a participating security and therefore we are
required to use the two-class method in the computation of earnings per unit. Basic earnings per
common and subordinated unit are determined by dividing net income allocated to the common units
and subordinated units, respectively, after deducting the amount allocated to our general partner
(including distributions to our general partner on its incentive distribution rights), by the
weighted average number of outstanding common and subordinated units, respectively, during the
period.
When computing earnings per common and subordinated unit under the two-class method in periods when
distributions are greater than earnings, the amount of the incentive distribution rights is
deducted from net income and allocated to our general partner for the period to which the
calculation relates. The remaining amount of net income, after deducting the incentive distribution
rights, is allocated between the general partner, common and subordinated units based on how our
partnership agreement allocates net losses.
When computing earnings per common and subordinated unit under the two-class method in periods when
earnings are greater than distributions, earnings are allocated to the general partner, common and
subordinated units based on how our partnership agreement would allocate earnings if the full
amount of earnings for the period had been distributed. This allocation of net income does not
impact our total net income, consolidated results of operations or total cash distributions;
however, it may result in our general partner being allocated additional incentive distributions
for purposes of our earnings per unit calculation, which could reduce net income per common and
subordinated unit. However, as defined in our partnership agreement, we determine cash
distributions based on available cash and determine the actual incentive distributions allocable to
our general partner based on actual distributions. When computing earnings per common and
subordinated unit, the amount of the assumed incentive distribution rights is deducted from net
income and allocated to our general partner for the period to which the calculation relates. The
remaining amount of net income, after deducting the assumed incentive distribution rights, is
allocated between the general partner, common and subordinated units based on how our partnership
agreement allocates net income.
8
Table of Contents
The potentially dilutive securities issued by us include phantom units, which do not require an
adjustment to the amount of net income used for dilutive earnings (loss) per common unit purposes.
The table below indicates the potential common units that were included in computing the dilutive
potential common units used in diluted earnings (loss) per common unit (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average common units
outstanding used in basic earnings (loss)
per common unit |
33,308 | 22,882 | 29,942 | 19,342 | ||||||||||||
Net dilutive potential common units issuable: |
||||||||||||||||
Phantom units |
17 | ** | ** | ** | ||||||||||||
Weighted average common units and dilutive
potential common units used in diluted
earnings (loss) per common unit |
33,325 | 22,882 | 29,942 | 19,342 | ||||||||||||
** | Excluded from diluted earnings (loss) per common unit as the effect would have been anti-dilutive. |
The table below indicates the potential number of common units that were excluded from net dilutive
potential units of common units as their effect would have been anti-dilutive (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net dilutive potential common units issuable: |
||||||||||||||||
Phantom units |
| 27 | 4 | 14 | ||||||||||||
Net dilutive potential common units issuable |
| 27 | 4 | 14 | ||||||||||||
2. JUNE 2011 AND AUGUST 2010 CONTRACT OPERATIONS ACQUISITIONS
In June 2011, we acquired from Exterran Holdings contract operations customer service agreements
with 34 customers and a fleet of 407 compressor units used to provide compression services under
those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower)
of the combined U.S. contract operations business of Exterran Holdings and us (the June 2011
Contract Operations Acquisition). In addition, the acquired assets included 207 compressor units,
comprising approximately 98,000 horsepower previously leased from Exterran Holdings to us, and a
natural gas processing plant with a capacity of 8 million cubic feet per day used to provide
processing services pursuant to a long-term services agreement. At the date of acquisition, the
acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of
$85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding
transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran
Holdings debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to
our general partner, a wholly-owned subsidiary of Exterran Holdings.
In connection with this acquisition, we were allocated $6.4 million finite life intangible assets
associated with customer relationships of Exterran Holdings North America contract operations
segment. The amounts allocated were based on the ratio of fair value of the net assets transferred
to us to the total fair value of Exterran Holdings North America contract operations segment.
These intangible assets are being amortized through 2024, based on the present value of expected
income to be realized from these intangible assets.
In August 2010, we acquired from Exterran Holdings contract operations customer service agreements
with 43 customers and a fleet of approximately 580 compressor units used to provide compression
services under those agreements having a net book value of $121.8 million, net of accumulated
depreciation of $53.6 million, and comprising approximately 255,000 horsepower, or 6% (by then
available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us
(the August 2010 Contract Operations Acquisition) for approximately $214.0 million, excluding
transaction costs. In connection with this acquisition, we issued approximately 8.2 million common
units and approximately 167,000 general partner units to Exterran Holdings wholly-owned
subsidiaries.
In connection with this acquisition, we were allocated $5.9 million finite life intangible assets
associated with customer relationships of Exterran Holdings North America contract operations
segment. The amounts allocated were based on the ratio of fair value of the net assets transferred
to us to the total fair value of Exterran Holdings North America contract operations segment.
These intangible assets are being amortized through 2024, based on the present value of expected
income to be realized from these intangible assets.
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Because Exterran Holdings and we are considered entities under common control, GAAP requires that
we record the assets acquired and liabilities assumed from Exterran Holdings in connection with the
June 2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition using
Exterran Holdings historical cost basis in the assets and liabilities.
An acquisition of a business from an entity under common control is generally accounted for under
GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of
the earliest period included in the financial statements. Retroactive effect to the June 2011
Contract Operations Acquisition and the August 2010 Contract Operations Acquisition was
impracticable because such retroactive application would have required significant assumptions in a
prior period that cannot be substantiated. Accordingly, our financial statements include the assets
acquired, liabilities assumed, revenues and direct operating expenses associated with the
acquisition beginning on the date of such acquisition. However, the preparation of pro forma
financial information allows for certain assumptions that do not meet the standards of financial
statements prepared in accordance with GAAP.
Unaudited Pro Forma Financial Information
Pro forma financial information for the nine months ended September 30, 2011 and the three and nine
months ended September 30, 2010 has been included to give effect to the expansion of our compressor
fleet and service contracts and addition of a natural gas processing plant as a result of the June
2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition. The June
2011 Contract Operations Acquisition and the August 2010 Contract Operations Acquisition are
presented in the pro forma financial information as though the transactions occurred as of January
1, 2010. The unaudited pro forma financial information reflect the following transactions:
As related to the June 2011 Contract Operations Acquisition:
| our acquisition in June 2011 of certain contract operations customer service agreements, compression equipment and a natural gas processing plant from Exterran Holdings; | ||
| our assumption of $159.4 million of Exterran Holdings long-term debt; | ||
| our payment of $62.2 million in cash to Exterran Holdings; and | ||
| our issuance of approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings. |
As related to the August 2010 Contract Operations Acquisition:
| our acquisition in August 2010 of certain contract operations customer service agreements and compression equipment from Exterran Holdings; and | ||
| our issuance of approximately 8.2 million common units and approximately 167,000 general partner units to Exterran Holdings wholly-owned subsidiaries. |
The unaudited pro forma financial information below is presented for informational purposes only
and is not necessarily indicative of the results of operations that would have occurred had the
transaction been consummated at the beginning of the period presented, nor is it necessarily
indicative of future results. The unaudited pro forma consolidated financial information below was
derived by adjusting our historical financial statements.
The following table presents unaudited pro forma financial information for the nine months ended
September 30, 2011 and the three and nine months ended September 30, 2010 (in thousands, except per
unit amounts):
Three Months Ended | Nine Months Ended September 30, | |||||||||||
September 30, 2010 | 2011 | 2010 | ||||||||||
Revenue |
$ | 81,768 | $ | 250,817 | $ | 240,461 | ||||||
Net income |
$ | 3,309 | $ | 3,012 | $ | 14,159 | ||||||
Basic earnings per common and subordinated limited partner unit |
$ | 0.09 | $ | 0.03 | $ | 0.39 | ||||||
Diluted earnings per common and subordinated limited partner unit |
$ | 0.09 | $ | 0.03 | $ | 0.39 | ||||||
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Pro forma net income per limited partner unit is determined by dividing the pro forma net income
that would have been allocated to the common and subordinated unitholders by the weighted average
number of common and subordinated units expected to be outstanding after the completion of the
transactions included in the pro forma consolidated financial statements. All units issued in
connection with the June 2011 Contract Operations Acquisition and the August 2010 Contract
Operations Acquisition were assumed to have been outstanding since the beginning of the period
presented. Pursuant to our partnership agreement, to the extent that the quarterly distributions
exceed certain targets, our general partner is entitled to receive certain incentive distributions
that will result in more net income proportionately being allocated to our general partner than to
the holders of our common and subordinated units. The pro forma net earnings per limited partner
unit calculations reflect pro forma incentive distributions to our general partner. There was no
additional pro forma reduction of net income allocable to our limited partners, including the
amount of additional incentive distributions that would have occurred, for the nine months ended
September 30, 2011. The pro forma net earnings per limited partner unit calculations reflect pro
forma incentive distributions to our general partner, including an additional pro forma reduction
of net income allocable to our limited partners of approximately $0.1 million and $0.4 million for
the three and nine months ended September 30, 2010, respectively, which includes the amount of
additional incentive distributions that would have occurred during the period.
3. RELATED PARTY TRANSACTIONS
We are a party to an omnibus agreement with Exterran Holdings and others (as amended and restated,
the Omnibus Agreement), the terms of which include, among other things:
| certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand; | ||
| Exterran Holdings obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below; | ||
| the terms under which we, Exterran Holdings, and our respective affiliates may transfer compression equipment among one another; | ||
| the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings affiliates; | ||
| Exterran Holdings grant of a license of certain intellectual property to us, including our logo; and | ||
| Exterran Holdings obligation to indemnify us for certain liabilities and our obligation to indemnify Exterran Holdings for certain liabilities. |
The Omnibus Agreement will terminate upon a change of control of our general partner or the removal
or withdrawal of our general partner, and certain provisions of the Omnibus Agreement will
terminate upon a change of control of Exterran Holdings.
During the nine months ended September 30, 2011, pursuant to the terms of the Omnibus Agreement, we
transferred ownership of 196 compressor units, totaling approximately 83,700 horsepower with a net
book value of approximately $39.0 million, to Exterran Holdings. In exchange, Exterran Holdings
transferred ownership of 196 compressor units, totaling approximately 74,200 horsepower with a net
book value of approximately $38.6 million, to us. During the nine months ended September 30, 2010,
pursuant to the terms of the Omnibus Agreement, we transferred ownership of 105 compressor units,
totaling approximately 45,900 horsepower with a net book value of approximately $21.1 million, to
Exterran Holdings. In exchange, Exterran Holdings transferred ownership of 179 compressor units,
totaling approximately 43,200 horsepower with a net book value of approximately $25.2 million, to
us. During the nine months ended September 30, 2011, we recorded capital distributions of
approximately $0.4 million related to the differences in net book value on the compression
equipment that was exchanged with us. During the nine months ended September 30, 2010, we recorded
capital contributions of approximately $4.1 million related to the differences in net book value on
the compression equipment that was exchanged with us. No customer contracts were included in the
transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised
value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result,
Exterran Holdings paid to us a nominal amount for the difference in fair value of the equipment in
connection with the transfers.
Exterran Holdings provides all operational staff, corporate staff and support services reasonably
necessary to run our business. The services provided by Exterran Holdings may include, without
limitation, operations, marketing, maintenance and repair, periodic
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overhauls of compression equipment, inventory management, legal, accounting, treasury, insurance
administration and claims processing, risk management, health, safety and environmental,
information technology, human resources, credit, payroll, internal audit, taxes, facilities
management, investor relations, enterprise resource planning system, training, executive, sales,
business development and engineering.
We are charged costs incurred by Exterran Holdings directly attributable to us. Costs incurred by
Exterran Holdings that are indirectly attributable to us and Exterran Holdings other operations are
allocated among Exterran Holdings other operations and us. The allocation methodologies vary based
on the nature of the charge and include, among other things, revenue and horsepower. We believe
that the allocation methodologies used to allocate indirect costs to us are reasonable.
Under the Omnibus Agreement, Exterran Holdings has agreed that, for a period that will terminate on
December 31, 2012, our obligation to reimburse Exterran Holdings for: (i) any cost of sales that it
incurs in the operation of our business will be capped (after taking into account any such costs we
incur and pay directly); and (ii) any cash selling, general and administrative (SG&A) costs
allocated to us will be capped (after taking into account any such costs we incur and pay
directly). Cost of sales is capped at $21.75 per operating horsepower per quarter from July 30,
2008 through December 31, 2012. SG&A costs were capped at $6.0 million per quarter from July 30,
2008 through November 9, 2009, at $7.6 million per quarter from November 10, 2009 through June 9,
2011, and are capped at $9.0 million per quarter from June 10, 2011 through December 31, 2012.
These caps may be subject to future adjustment or termination in connection with expansions of our
operations through the acquisition or construction of new assets or businesses.
For the three months ended September 30, 2011 and 2010, our cost of sales exceeded the cap provided
in the Omnibus Agreement by $6.2 million and $7.1 million, respectively. For the nine months ended
September 30, 2011 and 2010, our cost of sales exceeded the cap provided in the Omnibus Agreement
by $21.4 million and $15.6 million, respectively. For the three months ended September 30, 2011 and
2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $1.8 million and $0.7
million, respectively. For the nine months ended September 30, 2011 and 2010, our SG&A expenses
exceeded the cap provided in the Omnibus Agreement by $5.9 million and $1.4 million, respectively.
The excess amounts over the caps are included in the consolidated statements of operations as cost
of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as
a capital contribution in our consolidated balance sheets and consolidated statements of cash
flows.
Pursuant to the Omnibus Agreement, we are permitted to purchase newly-fabricated compression
equipment from Exterran Holdings or its affiliates at Exterran Holdings cost to fabricate such
equipment plus a fixed margin of 10%, which may be modified with the approval of Exterran Holdings
and the conflicts committee of Exterran GP LLCs board of directors. During the nine months ended
September 30, 2011, we did not purchase any newly-fabricated compression equipment from Exterran
Holdings. During the nine months ended September 30, 2010, we purchased $9.8 million of
newly-fabricated compression equipment from Exterran Holdings. Under GAAP, transfers of assets and
liabilities between entities under common control are to be initially recorded on the books of the
receiving entity at the carrying value of the transferor. Any difference between consideration
given and the carrying value of the assets or liabilities is treated as a capital distribution or
contribution. Transactions between us and Exterran Holdings and its affiliates are transactions
between entities under common control. As a result, the equipment purchased during the nine months
ended September 30, 2010 was recorded in our consolidated balance sheet as property, plant and
equipment of $8.8 million, which represents the carrying value of the Exterran Holdings affiliates
that sold it to us, and as a distribution of equity of $1.0 million, which represents the fixed
margin we paid above the carrying value in accordance with the Omnibus Agreement. During the nine
months ended September 30, 2011 and 2010, Exterran Holdings contributed to us $5.2 million and $2.6
million, respectively, primarily related to the completion of overhauls on compression equipment
that was exchanged with us or contributed to us and where overhauls were in progress on the date of
exchange or contribution.
Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith
that there exists a need on the part of Exterran Holdings contract operations services business or
on our part to transfer, exchange or lease compression equipment between Exterran Holdings and us,
such equipment may be transferred, exchanged or leased if it will not cause us to breach any
existing contracts or to suffer a loss of revenue under an existing compression services contract or to incur any
unreimbursed costs. At September 30, 2011, we had equipment on lease to Exterran Holdings with an
aggregate cost of $14.4 million and accumulated depreciation of $3.4 million.
For the nine months ended September 30, 2011 and 2010, we had revenues of $1.0 million and $0.7
million, respectively, from Exterran Holdings related to the lease of our compression equipment.
For the nine months ended September 30, 2011 and 2010, we had cost of sales of $11.2 million and
$11.1 million, respectively, with Exterran Holdings related to the lease of Exterran Holdings
compression equipment.
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4. DEBT
Long-term debt consisted of the following (in thousands):
September 30, 2011 | December 31, 2010 | |||||||
Revolving credit facility due November 2015 |
$ | 394,000 | $ | 299,000 | ||||
Term loan facility due November 2015 |
150,000 | 150,000 | ||||||
Long-term debt |
$ | 544,000 | $ | 449,000 | ||||
On November 3, 2010, we entered into an amendment and restatement of our senior secured credit
agreement (as so amended and restated, the Credit Agreement) to provide for a new five-year,
$550.0 million senior secured credit facility consisting of a $400.0 million revolving credit
facility and a $150.0 million term loan facility. In March 2011, the revolving borrowing capacity
under this facility was increased by $150.0 million to $550.0 million.
As of September 30, 2011, we had undrawn capacity of $156.0 million under our revolving credit
facility.
5. CASH DISTRIBUTIONS
We will make distributions of available cash (as defined in our partnership agreement) from
operating surplus for any quarter during any subordination period in the following manner:
| first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter; | ||
| second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period; | ||
| third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; | ||
| fourth, 98% to all common and subordinated unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.4025; | ||
| fifth, 85% to all common and subordinated unitholders, pro rata, and 15% to our general partner, until each unit has received a distribution of $0.4375; | ||
| sixth, 75% to all common and subordinated unitholders, pro rata, and 25% to our general partner, until each unit has received a total of $0.525; and | ||
| thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% to our general partner. |
The following table summarizes our distributions per unit for 2010 and 2011:
Distribution per | ||||||||||
Limited Partner | ||||||||||
Period Covering | Payment Date | Unit | Total Distribution (1) | |||||||
1/1/2010 3/31/2010 |
May 14, 2010 | $ | 0.4625 | $11.6 million | ||||||
4/1/2010 6/30/2010 |
August 13, 2010 | 0.4625 | 11.6 million | |||||||
7/1/2010 9/30/2010 |
November 12, 2010 | 0.4675 | 15.7 million | |||||||
10/1/2010 12/31/2010 |
February 14, 2011 | 0.4725 | 16.0 million | |||||||
1/1/2011 3/31/2011 |
May 13, 2011 | 0.4775 | 16.2 million | |||||||
4/1/2011 6/30/2011 |
August 12, 2011 | 0.4825 | 19.1 million |
(1) | Includes distributions to our general partner on its incentive distribution rights. |
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On October 28, 2011, Exterran GP LLCs board of directors approved a cash distribution of $0.4875
per limited partner unit, or approximately $19.3 million, including distributions to our general
partner on its incentive distribution rights. The distribution covers the time period from July 1,
2011 through September 30, 2011. The record date for this distribution is November 10, 2011 and
payment is expected to occur on November 14, 2011.
6. UNIT-BASED COMPENSATION
Long-Term Incentive Plan
We have a long-term incentive plan that was adopted by Exterran GP LLC, the general partner of our
general partner, in October 2006 for employees, directors and consultants of us, Exterran Holdings
or our respective affiliates. The long-term incentive plan currently permits the grant of awards
covering an aggregate of 1,035,378 common units, unit options, restricted units and phantom units.
The long-term incentive plan is administered by the board of directors of Exterran GP LLC or a
committee thereof (the Plan Administrator).
Unit options have an exercise price that is not less than the fair market value of the units on the
date of grant and become exercisable over a period determined by the Plan Administrator. Phantom
units are notional units that entitle the grantee to receive a common unit upon the vesting of the
phantom unit or, at the discretion of the Plan Administrator, cash equal to the fair value of a
common unit.
Phantom Units
Exterran GP LLCs general practice has been to grant equity-based awards (i) to its officers once a
year, in late February or early March around the time the compensation committee of the board of
directors of Exterran Holdings grants equity-based awards to Exterran Holdings officers, and (ii)
to its directors once a year in October or November, around the anniversary of our initial public
offering. The schedule for making equity-based awards is typically established several months in
advance and is not set based on knowledge of material nonpublic information or in response to our
unit price. This practice results in awards being granted on a regular, predictable annual cycle.
Equity-based awards are occasionally granted at other times during the year, such as upon the
hiring of a new employee or following the promotion of an employee. In some instances, Exterran GP
LLCs board of directors may be aware, at the time grants are made, of matters or potential
developments that are not ripe for public disclosure at that time but that may result in public
announcement of material information at a later date.
The following table presents phantom unit activity for the nine months ended September 30, 2011:
Weighted | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Phantom | Fair Value | |||||||
Units | per Unit | |||||||
Phantom units outstanding, December 31, 2010 |
98,537 | $ | 19.23 | |||||
Granted |
20,851 | 28.50 | ||||||
Vested |
(45,634 | ) | 19.04 | |||||
Cancelled |
(851 | ) | 18.60 | |||||
Phantom units outstanding, September 30, 2011 |
72,903 | 22.01 | ||||||
As of September 30, 2011, $1.1 million of unrecognized compensation cost related to unvested
phantom units is expected to be recognized over the weighted-average period of 1.5 years.
Unit Options
As of September 30, 2011 and December 31, 2010, we had no unit options outstanding.
7. ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS
We are exposed to market risks primarily associated with changes in interest rates. We use
derivative financial instruments to minimize the risks and costs associated with financial
activities by managing our exposure to interest rate fluctuations on a portion of our debt
obligations. We do not use derivative financial instruments for trading or other speculative
purposes.
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Interest Rate Risk
At September 30, 2011, we were party to interest rate swaps pursuant to which we pay fixed payments
and receive floating payments on a notional value of $250.0 million. We entered into these swaps to
offset changes in expected cash flows due to fluctuations in the associated variable interest
rates. Our interest rate swaps expire in November 2015. As of September 30, 2011, the weighted
average effective fixed interest rate on our interest rate swaps was 1.8%. We have designated these
interest rate swaps as cash flow hedging instruments so that any change in their fair values is
recognized as a component of comprehensive income and is included in accumulated other
comprehensive loss to the extent the hedge is effective. The swap terms substantially coincide with
the hedged item and are expected to offset changes in expected cash flows due to fluctuations in
the variable rate, and, therefore, we currently do not expect a significant amount of
ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap
agreements are still effective and to calculate any ineffectiveness. For the three and nine months
ended September 30, 2011 and 2010, there was no ineffectiveness related to interest rate swaps. We
estimate that $3.2 million of deferred pre-tax losses from existing interest rate swaps will be
realized as an expense during the next twelve months. Cash flows from derivatives designated as
hedges are classified in our consolidated statements of cash flows under the same category as the
cash flows from the underlying assets, liabilities or anticipated transactions.
In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total
notional value of $285.0 million and a weighted average effective fixed interest rate of 4.4%.
These swaps qualified for hedge accounting and were previously included on our balance sheet as a
liability and in accumulated other comprehensive loss. The liability was paid in connection with
the termination, and the associated amount in accumulated other comprehensive loss is being
amortized into interest expense over the original term of the swaps. We estimate that $3.3 million
of deferred pre-tax losses from these terminated interest rate swaps will be amortized into
interest expense during the next twelve months.
The following tables present the effect of derivative instruments on our consolidated financial
position and results of operations (in thousands):
September 30, 2011 | ||||||
Fair Value | ||||||
Asset | ||||||
Balance Sheet Location | (Liability) | |||||
Derivatives designated as hedging instruments: |
||||||
Interest rate hedges |
Current portion of interest rate swaps | $ | (3,244 | ) | ||
Interest rate hedges |
Interest rate swaps | (5,086 | ) | |||
Total derivatives |
$ | (8,330 | ) | |||
December 31, 2010 | ||||||
Fair Value | ||||||
Asset | ||||||
Balance Sheet Location | (Liability) | |||||
Derivatives designated as hedging instruments: |
||||||
Interest rate hedges |
Interest rate swaps | $ | 5,769 | |||
Interest rate hedges |
Current portion of interest rate swaps | (3,112 | ) | |||
Total derivatives |
$ | 2,657 | ||||
Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 | |||||||||||||||||||
Gain (Loss) | Location of Gain | Gain (Loss) | Location of Gain | Gain (Loss) | ||||||||||||||||
Recognized in | (Loss) Reclassified | Reclassified from | Gain (Loss) | (Loss) Reclassified | Reclassified from | |||||||||||||||
Other | from Accumulated | Accumulated Other | Recognized in Other | from Accumulated | Accumulated Other | |||||||||||||||
Comprehensive | Other Comprehensive | Comprehensive | Comprehensive | Other Comprehensive | Comprehensive | |||||||||||||||
Income (Loss) on | Income (Loss) into | Income (Loss) into | Income (Loss) on | Income (Loss) into | Income (Loss) into | |||||||||||||||
Derivatives | Income (Loss) | Income (Loss) | Derivatives | Income (Loss) | Income (Loss) | |||||||||||||||
Derivatives designated
as cash flow hedges: |
||||||||||||||||||||
Interest rate hedges |
$ | (7,889 | ) | Interest expense | $ | (3,563 | ) | $ | (13,733 | ) | Interest expense | $ | (10,444 | ) | ||||||
Three Months Ended September 30, 2010 | Nine Months Ended September 30, 2010 | |||||||||||||||||||
Location of Gain | Gain (Loss) | Location of Gain | Gain (Loss) | |||||||||||||||||
Gain (Loss) | (Loss) Reclassified | Reclassified from | Gain (Loss) | (Loss) Reclassified | Reclassified from | |||||||||||||||
Recognized in Other | from Accumulated | Accumulated Other | Recognized in Other | from Accumulated | Accumulated Other | |||||||||||||||
Comprehensive | Other Comprehensive | Comprehensive | Comprehensive | Other Comprehensive | Comprehensive | |||||||||||||||
Income (Loss) on | Income (Loss) into | Income (Loss) into | Income (Loss) on | Income (Loss) into | Income (Loss) into | |||||||||||||||
Derivatives | Income (Loss) | Income (Loss) | Derivatives` | Income (Loss) | Income (Loss) | |||||||||||||||
Derivatives designated
as cash flow hedges: |
||||||||||||||||||||
Interest rate hedges |
$ | (2,241 | ) | Interest expense | $ | (2,931 | ) | $ | (7,204 | ) | Interest expense | $ | (8,813 | ) | ||||||
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The counterparties to our derivative agreements are major international financial institutions. We
monitor the credit quality of these financial institutions and do not expect non-performance by any
counterparty, although such non-performance could have a material adverse effect on us. We have no
specific collateral posted for our derivative instruments. The counterparties to our interest rate
swaps are also lenders under our credit facility and, in that capacity, share proportionally in the
collateral pledged under the credit facility.
8. FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements and disclosures establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the
following three broad categories.
| Level 1 Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement. | ||
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers. | ||
| Level 3 Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information. |
The following table summarizes the valuation of our interest rate swaps and impaired long-lived
assets as of and for the nine months ended September 30, 2011 with pricing levels as of the date of
valuation (in thousands):
Quoted | ||||||||||||||||
Market | Significant | |||||||||||||||
Prices in | Other | Significant | ||||||||||||||
Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Interest rate swaps asset (liability) |
$ | (8,330 | ) | $ | | $ | (8,330 | ) | $ | | ||||||
Impaired long-lived assets |
186 | | | 186 |
The following table summarizes the valuation of our interest rate swaps and impaired long-lived
assets as of and for the nine months ended September 30, 2010 with pricing levels as of the date of
valuation (in thousands):
Quoted | ||||||||||||||||
Market | Significant | |||||||||||||||
Prices in | Other | Significant | ||||||||||||||
Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Interest rate swaps asset (liability) |
$ | (14,026 | ) | $ | | $ | (14,026 | ) | $ | | ||||||
Impaired long-lived assets |
34 | | | 34 |
On a quarterly basis, our interest rate swaps are recorded at fair value utilizing a combination of
the market approach and income approach to estimate fair value. Our estimate of the fair value of
the impaired long-lived assets was based on the estimated component value of the equipment that we
plan to use.
9. UNIT TRANSACTIONS
All of our subordinated units are owned by a wholly-owned subsidiary of Exterran Holdings. As of
both June 30, 2011 and 2010, we met the requirements under our partnership agreement for early
conversion of 1,581,250 of these subordinated units into common units. Accordingly, in each of
August 2011 and 2010, 1,581,250 subordinated units owned by Exterran Holdings converted into common
units. As of September 30, 2011, we met the requirements under our partnership agreement for the
end of the subordination period and, therefore, we expect our remaining 3,162,500 subordinated
units will convert into common units in November 2011.
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In June 2011, we completed the June 2011 Contract Operations Acquisition from Exterran Holdings. In
connection with this acquisition, we issued approximately 51,000 general partner units to our
general partner, a wholly-owned subsidiary of Exterran Holdings.
In May 2011, we sold, pursuant to a public underwritten offering, 5,134,175 common units
representing limited partner interests in us, including 134,175 common units sold pursuant to an
over-allotment option. The net proceeds from this offering were used (i) to repay approximately
$64.8 million of borrowings outstanding under the revolving credit facility and (ii) for general
partnership purposes, including to fund a portion of the consideration for the June 2011 Contract
Operations Acquisition from Exterran Holdings. In connection with this sale and as permitted under
the partnership agreement, we issued approximately 53,000 general partner units to our general
partner in consideration of the continuation of its approximate 2.0% general partner interest in
us. Our general partner made a capital contribution to us in the amount of $1.3 million as
consideration for such units.
In March 2011, Exterran Holdings sold, pursuant to a public underwritten offering, 5,914,466 common
units representing limited partner interests in us, including 664,466 common units sold pursuant to
an over-allotment option. We did not sell any common units in this offering and did not receive any
proceeds from the sale of the common units by Exterran Holdings. In connection with our initial
issuance of these units to Exterran Holdings, we agreed to pay certain costs relating to their
future public sale. These costs have been recorded as a reduction to partners capital.
In September 2010, Exterran Holdings sold, pursuant to a public underwritten offering, 5,290,000
common units representing limited partner interests in us, including 690,000 common units sold
pursuant to an over-allotment option. We did not sell any common units in this offering and did not
receive any proceeds from the sale of the common units by Exterran Holdings. In connection with our
initial issuance of units to Exterran Holdings, we agreed to pay certain costs relating to their
future public sale. These costs have been recorded as a reduction to partners capital.
As of September 30, 2011, Exterran Holdings owned 9,332,891 common units, 3,162,500 subordinated
units and 757,722 general partner units, collectively representing a 35% interest in us.
10. RECENT ACCOUNTING DEVELOPMENTS
In December 2010, the Financial Accounting Standards Board (FASB) issued ASU No. 2010-29,
Disclosure of Supplementary Pro Forma Information for Business Combinations. This standard update
clarifies that, when presenting comparative financial statements, public companies should disclose
revenue and earnings of the combined entity as though the current period business combinations had
occurred as of the beginning of the comparable prior annual reporting period only. The update also
expands the supplemental pro forma disclosures to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings. The update is effective prospectively for
business combinations entered into in fiscal years beginning on or after December 15, 2010. Our
adoption of this new guidance did not have a material impact on our condensed consolidated
financial statements.
In May 2011, the FASB issued an update to provide a consistent definition of fair value and ensure
that the fair value measurement and disclosure requirements are similar between GAAP and
International Financial Reporting Standards. This update changes certain fair value measurement
principles and enhances the disclosure requirements particularly for Level 3 fair value
measurements. This update is effective for interim and annual periods beginning on or after
December 15, 2011. We do not believe the adoption of this update will have a material impact on our
consolidated financial statements.
In June 2011, the FASB issued an update on the presentation of other comprehensive income. Under
this update, entities will be required to present the total of comprehensive income, the components
of net income, and the components of other comprehensive income either in a single continuous
statement of comprehensive income or in two separate but consecutive statements. The current option
to report other comprehensive income and its components in the statement of changes in equity has
been eliminated. This update is effective for interim and annual periods beginning on or after
December 15, 2011. We do not believe the adoption of this update will have a material impact on our
consolidated financial statements.
In September 2011, the FASB issued an update allowing entities to use a qualitative approach to
test goodwill for impairment. Under this update, entities are permitted to first perform a
qualitative assessment to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If it is concluded that this is the case, it is
necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the
two-step goodwill impairment test is not required. This update is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early
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adoption is permitted. We adopted this authoritative guidance in October 2011. Our adoption of this
new guidance did not have a material impact on our condensed consolidated financial statements.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we are involved in various pending or threatened legal actions.
In the opinion of management, the amount of ultimate liability, if any, with respect to these
actions will not have a material effect on our consolidated financial position, results of
operations or cash flows; however, because of the inherent uncertainty of litigation, we cannot
provide assurance that the resolution of any particular claim or proceeding to which we are a party
will not have a material effect on our consolidated financial position, results of operations or
cash flows for the period in which that resolution occurs.
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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this report are
forward-looking statements, including, without limitation, statements regarding our business growth
strategy and projected costs; future financial position; the sufficiency of available cash flows to
fund continuing operations; the sufficiency of available cash flows to make cash distributions; the
expected amount of our capital expenditures; future revenue, gross margin and other financial or
operational measures related to our business; the future value of our equipment; plans and
objectives of our management for our future operations; and any potential contribution of
additional assets from Exterran Holdings, Inc. (individually, and together with its wholly-owned
subsidiaries, Exterran Holdings) to us. You can identify many of these statements by looking for
words such as believe, expect, intend, project, anticipate, estimate, will continue
or similar words or the negative thereof.
Such forward-looking statements are subject to various risks and uncertainties that could cause
actual results to differ materially from those anticipated as of the date of this report. Although
we believe that the expectations reflected in these forward-looking statements are based on
reasonable assumptions, no assurance can be given that these expectations will prove to be correct.
These forward-looking statements are also affected by the risk factors described in our Annual
Report on Form 10-K for the year ended December 31, 2010, and those set forth from time to time in
our filings with the Securities and Exchange Commission (SEC), which are available through our
website at www.exterran.com and through the SECs Electronic Data Gathering and Retrieval
System at www.sec.gov. Important factors that could cause our actual results to differ
materially from the expectations reflected in these forward-looking statements include, among other
things:
| conditions in the oil and gas industry, including a sustained decrease in the level of supply or demand for oil or natural gas and the impact on the price of oil or natural gas, which could cause a decline in the demand for our natural gas compression services; | ||
| reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies; | ||
| our dependence on Exterran Holdings to provide services and compression equipment, including its ability to hire, train and retain key employees and to timely and cost effectively obtain compression equipment and components necessary to conduct our business; | ||
| our dependence on and the availability of cost caps from Exterran Holdings to generate sufficient cash to enable us to make cash distributions at our current distribution rate; | ||
| changes in economic or political conditions, including terrorism and legislative changes; | ||
| the inherent risks associated with our operations, such as equipment defects, impairments, malfunctions and natural disasters; | ||
| an Internal Revenue Service challenge to our valuation methodologies, which may result in a shift of income, gains, losses and/or deductions between our general partner and our unitholders; | ||
| loss of our status as a partnership for federal income tax purposes; | ||
| the risk that counterparties will not perform their obligations under our financial instruments; | ||
| the financial condition of our customers; | ||
| our ability to implement certain business and financial objectives, such as: |
| growing our asset base and utilization, particularly for our fleet of compressors; | ||
| integrating acquired businesses; | ||
| generating sufficient cash; |
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| accessing the capital markets at an acceptable cost; and | ||
| purchasing additional contract operation contracts and equipment from Exterran Holdings; |
| liability related to the provision of our services; | |
| changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and | |
| our level of indebtedness and ability to fund our business. |
All forward-looking statements included in this report are based on information available to us on
the date of this report. Except as required by law, we undertake no obligation to publicly update
or revise any forward-looking statement, whether as a result of new information, future events or
otherwise. All subsequent written and oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the cautionary statements
contained throughout this report.
GENERAL
We are a publicly held Delaware limited partnership formed in 2006 to acquire certain contract
operations customer service agreements and a compressor fleet used to provide compression services
under those agreements. We completed our initial public offering in October 2006.
June 2011 Contract Operations Acquisition
In June 2011, we acquired from Exterran Holdings contract operations customer service agreements
with 34 customers and a fleet of 407 compressor units used to provide compression services under
those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower)
of the combined U.S. contract operations business of Exterran Holdings and us (the June 2011
Contract Operations Acquisition). In addition, the acquired assets included 207 compressor units,
comprising approximately 98,000 horsepower previously leased from Exterran Holdings to us, and a
natural gas processing plant with a capacity of 8 million cubic feet per day used to provide
processing services pursuant to a long-term services agreement. At the date of acquisition, the
acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of
$85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding
transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran
Holdings debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to
our general partner, a wholly-owned subsidiary of Exterran Holdings.
August 2010 Contract Operations Acquisition
In August 2010, we acquired from Exterran Holdings contract operations customer service agreements
with 43 customers and a fleet of approximately 580 compressor units used to provide compression
services under those agreements, comprising approximately 255,000 horsepower, or approximately 6%
(by available horsepower) of the combined U.S. contract operations business of Exterran Holdings
and us (the August 2010 Contract Operations Acquisition), for approximately $214.0 million,
excluding transaction costs. In connection with this acquisition, we issued to Exterran Holdings
wholly-owned subsidiaries approximately 8.2 million common units and approximately 167,000 general
partner units.
Omnibus Agreement
We are a party to an omnibus agreement with Exterran Holdings, our general partner, and others (as
amended and restated, the Omnibus Agreement), the terms of which include, among other things:
| certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand; | ||
| Exterran Holdings obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below; |
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| the terms under which we, Exterran Holdings and our respective affiliates may transfer compression equipment among one another; and | ||
| the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings affiliates. |
For further discussion of the Omnibus Agreement, please see Note 3 to the Consolidated Financial
Statements included in Part I, Item 1 (Financial Statements) of this report.
OVERVIEW
Industry Conditions and Trends
Our business environment and corresponding operating results are affected by the level of energy
industry spending for the exploration, development and production of natural gas reserves in the
U.S. Spending by natural gas exploration and production companies is dependent upon these
companies forecasts regarding the expected future supply, demand and pricing of, oil and natural
gas products as well as their estimates of risk-adjusted costs to find, develop and produce
reserves. Although we believe our business is typically less impacted by commodity prices than
certain other oil and natural gas service providers, changes in natural gas exploration and
production spending will normally result in changes in demand for our services.
Natural gas consumption in the U.S. for the twelve months ended July 31, 2011 increased by
approximately 4% over the twelve months ended July 31, 2010. The Energy Information Administration
(EIA) estimates that natural gas consumption in the U.S. will increase by 0.7% in 2012 and will
increase by an average of 0.5% per year thereafter until 2035. In 2009, the U.S. accounted for an
estimated annual production of approximately 22 trillion cubic feet of natural gas. The EIA expects
total U.S. marketed natural gas production to increase by 2.1% in 2012. The EIA estimates that the
natural gas production level in the U.S. will be approximately 26 trillion cubic feet in calendar
year 2035. Natural gas marketed production in the U.S. for the twelve months ended July 31, 2011
increased by approximately 7% compared to the twelve months ended July 31, 2010.
Our Performance Trends and Outlook
Our results of operations depend upon the level of activity in the U.S. energy market. Oil and
natural gas prices and the level of drilling and exploration activity can be volatile. For example,
oil and natural gas exploration and development activity and the number of well completions
typically decline when there is a significant reduction in oil and natural gas prices or
significant instability in energy markets.
Our revenue, earnings, financial position and capital spending are affected by, among other things,
(i) market conditions that impact demand and pricing for natural gas compression, (ii) our
customers decisions to utilize our services rather than utilize products or services from our
competitors, (iii) our customers decisions regarding whether to own and operate the equipment
themselves, and (iv) the timing and consummation of acquisitions of additional contract operations
customer contracts and equipment from Exterran Holdings. In particular, many of our contracts with
customers have short initial terms; we cannot be certain that these contracts will be renewed after
the end of the initial contractual term, and any such nonrenewal, or renewal at a reduced rate,
could adversely impact our results of operations and cash available for distribution. As we believe
there will be increased activity in certain U.S. natural gas plays, we anticipate investing in more
new fleet units, and therefore investing more capital, in 2011 and 2012 than we did in 2010.
During 2011, we have seen an increase in drilling activity, particularly in shale plays and areas
focused on the production of oil and natural gas liquids. Our total operating horsepower increased
by approximately 2%, excluding the impact of the June 2011 Contract Operations Acquisition, during
the nine months ended September 30, 2011. We believe these activity levels around the natural gas
industry in the U.S. will continue in the fourth quarter of 2011, particularly in shale plays and
areas focused on the production of oil and natural gas liquids. However, these increases have been
significantly offset by horsepower declines in more mature and predominantly conventional markets.
We also believe that the low natural gas price environment, the current available supply of idle
and underutilized compression equipment in the industry and the new investment of capital in
equipment could make it challenging for us to significantly improve our horsepower utilization and
pricing in the near term (excluding the impact of potential transfers of additional contract
operations customer contracts and equipment from Exterran Holdings to us). A 1% decrease in average
utilization of our contract operations fleet would result in a decrease in our revenue and gross
margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for
the nine months ended September 30, 2011 of approximately $2.3 million and $1.0 million,
respectively. Gross margin is a non-GAAP financial measure. For a reconciliation of gross margin to
net income, its
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most directly comparable financial measure, calculated and presented in accordance with GAAP,
please read Non-GAAP Financial Measures.
Pursuant to the Omnibus Agreement between us and Exterran Holdings, our obligation to reimburse
Exterran Holdings for cost of sales and selling, general and administrative (SG&A) expenses is
capped through December 31, 2012 (see Note 3 to the Financial Statements). During the three months
ended September 30, 2011 and 2010, our cost of sales exceeded this cap by $6.2 million and $7.1
million, respectively. During the nine months ended September 30, 2011 and 2010, our cost of sales
exceeded this cap by $21.4 million and $15.6 million, respectively. For the three months ended
September 30, 2011 and 2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement
by $1.8 million and $0.7 million, respectively. For the nine months ended September 30, 2011 and
2010, our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $5.9 million and $1.4
million, respectively.
On
November 3, 2011, Exterran Holdings announced a cost reduction
program, initially related to
workforce reductions across all of its business segments. These actions are the result of a review
of its cost structure aimed at identifying ways to reduce on-going operating costs and SG&A.
Exterran expects that a significant portion of the workforce
reductions under the program will be completed in
the fourth quarter of 2011, with the remainder completed in the first half of 2012. We expect that
as Exterran Holdings realizes the benefits of these initiatives, we will primarily benefit from a
reduction of the costs allocated to us for selling, general and administrative services. The amount
of the savings will be based on our average available horsepower at the time of the allocation.
However, due to the cost of sales and SG&A cost caps (see Note 3 to the Financial Statements) the
impact on distributable cash flow will be significantly less than the annual savings during the
period the cost caps are in effect.
Exterran Holdings intends for us to be the primary long-term growth vehicle for its U.S. contract
operations business and intends to offer us the opportunity to purchase the remainder of its U.S.
contract operations business over time, but is not obligated to do so. Likewise, we are not
required to purchase any additional portions of such business. The consummation of any future
purchase of additional portions of Exterran Holdings U.S. contract operations business and the
timing of any such purchase will depend upon, among other things, our reaching an agreement with
Exterran Holdings regarding the terms of such purchase, which will require the approval of the
conflicts committee of Exterran GP LLCs board of directors. The timing of such transactions would
also depend on, among other things, market and economic conditions and our access to debt and
equity capital. Future contributions of assets to us upon consummation of transactions with
Exterran Holdings may increase or decrease our operating performance, financial position and
liquidity. Unless otherwise indicated, this discussion of performance trends and outlook excludes
any future potential transfers of additional contract operations customer contracts and equipment
from Exterran Holdings to us.
Operating Highlights
The following table summarizes total available horsepower, total operating horsepower, average
operating horsepower and horsepower utilization percentages (in thousands, except percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total Available Horsepower (at period end)(1) |
1,885 | 1,655 | 1,885 | 1,655 | ||||||||||||
Total Operating Horsepower (at period end)(1) |
1,703 | 1,362 | 1,703 | 1,362 | ||||||||||||
Average Operating Horsepower |
1,691 | 1,208 | 1,501 | 1,123 | ||||||||||||
Horsepower Utilization: Spot (at period end) |
90 | % | 82 | % | 90 | % | 82 | % | ||||||||
Average |
89 | % | 81 | % | 88 | % | 81 | % |
(1) | Includes compressor units with an aggregate horsepower of 252 thousand and 242 thousand leased from Exterran Holdings as of September 30, 2011 and 2010, respectively. Excludes compressor units with an aggregate horsepower of 29 thousand and 18 thousand leased to Exterran Holdings as of September 30, 2011 and 2010, respectively. |
Summary of Results
Net income. We recorded net income of $3.3 million and $0.1 million for the three months ended
September 30, 2011 and 2010, respectively. We recorded net income of $1.5 million and $0.2 million
for the nine months ended September 30, 2011 and 2010, respectively.
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EBITDA, as further adjusted. Our EBITDA, as further adjusted, was $38.6 million and $28.0 million
for the three months ended September 30, 2011 and 2010, respectively. Our EBITDA, as further
adjusted, was $101.8 million and $73.4 million for the nine months ended September 30, 2011 and
2010, respectively. The increase in EBITDA, as further adjusted, during the three and nine months
ended September 30, 2011 compared to the three and nine months ended September 30, 2010 was
primarily caused by the inclusion of the results from the June 2011 Contract Operations Acquisition
and the August 2010 Contract Operations Acquisition. EBITDA, as further adjusted, is a non-GAAP
financial measure. For a reconciliation of EBITDA, as further adjusted, to net income, its most
directly comparable financial measure, calculated and presented in accordance with accounting
principles generally accepted in the U.S. (GAAP), please read Non-GAAP Financial Measures.
FINANCIAL RESULTS OF OPERATIONS
The three months ended September 30, 2011 compared to the three months ended September 30, 2010
The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net
income (dollars in thousands):
Three Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenue |
$ | 84,437 | $ | 62,721 | ||||
Gross margin(1) |
41,082 | 28,902 | ||||||
Gross margin percentage |
49 | % | 46 | % | ||||
Expenses: |
||||||||
Depreciation and amortization |
$ | 19,087 | $ | 13,697 | ||||
Long-lived asset impairment |
384 | 93 | ||||||
Selling, general and administrative affiliates |
10,594 | 8,504 | ||||||
Interest expense |
7,860 | 6,020 | ||||||
Other (income) expense, net |
(338 | ) | 333 | |||||
Income tax expense |
242 | 172 | ||||||
Net income |
$ | 3,253 | $ | 83 | ||||
(1) | For a reconciliation of gross margin to net income, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read Non-GAAP Financial Measures. |
Revenue. Average monthly operating horsepower was approximately 1,691,000 and 1,208,000 for the
three months ended September 30, 2011 and 2010, respectively. The increase in revenue and average
monthly operating horsepower was primarily due to the inclusion of the results from the assets
acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations
Acquisition.
Gross Margin. The increase in gross margin during the three months ended September 30, 2011
compared to the three months ended September 30, 2010 was primarily due to the inclusion of results
from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010
Contract Operations Acquisition. The increase in gross margin percentage was primarily caused by a
$1.1 million reduction in intercompany lease expense and efficiency gains in our field operations
during the three months ended September 30, 2011 compared to the three months ended September 30,
2010, partially offset by an increase in lube oil expenses.
Depreciation and Amortization. The increase in depreciation and amortization expense during the
three months ended September 30, 2011 compared to the three months ended September 30, 2010 was
primarily due to additional depreciation on compression equipment additions, including the assets
acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations
Acquisition.
Long-lived Asset Impairment. Long-lived asset impairments in the three months ended September 30,
2011 and 2010 were $0.4 million and $0.1 million, respectively, and resulted from impairments that
were recorded on idle compression units.
SG&A affiliates. SG&A expenses are primarily comprised of an allocation of expenses, including
costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the
terms of the Omnibus Agreement. The increase in SG&A expense was primarily due to increased costs
associated with the impact of the June 2011 Contract Operations Acquisition and the August 2010
Contract Operations Acquisition. SG&A expenses represented 13% and 14% of revenues for the three
months ended September 30, 2011 and 2010, respectively.
Interest Expense. The increase in interest expense for the three months ended September 30, 2011
compared to the three months ended September 30, 2010 was primarily due to a higher average balance
of long-term debt for the three months ended September 30, 2011 compared to the three months ended
September 30, 2010.
Other (Income) Expense, Net. Other (income) expense, net for the three months ended September 30,
2011 included a $0.3 million gain on the sale of used compression equipment. Other (income)
expense, net for the three months ended September 30, 2010 included $0.4 million of transaction
costs associated with the August 2010 Contract Operations Acquisition.
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Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins
tax and the Michigan business tax. The increase in income tax expense for the three months ended
September 30, 2011 compared to the three months ended September 30, 2010 was primarily due to an
increase in our revenue earned within the state of Texas.
The nine months ended September 30, 2011 compared to the nine months ended September 30, 2010
The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net
income (dollars in thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Revenue |
$ | 225,007 | $ | 169,221 | ||||
Gross margin(1) |
104,776 | 80,425 | ||||||
Gross margin percentage |
47 | % | 48 | % | ||||
Expenses: |
||||||||
Depreciation and amortization |
$ | 48,695 | $ | 37,338 | ||||
Long-lived asset impairment |
689 | 324 | ||||||
Selling, general and administrative affiliates |
30,737 | 24,718 | ||||||
Interest expense |
22,488 | 17,436 | ||||||
Other (income) expense, net |
(104 | ) | (73 | ) | ||||
Income tax expense |
733 | 518 | ||||||
Net income |
$ | 1,538 | $ | 164 | ||||
(1) | For a reconciliation of gross margin to net income, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read Non-GAAP Financial Measures. |
Revenue. Average monthly operating horsepower was approximately 1,501,000 and 1,123,000 for the
nine months ended September 30, 2011 and 2010, respectively. The increase in revenue and average
monthly operating horsepower was primarily due to the inclusion of the results from the assets
acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations
Acquisition.
Gross Margin. The increase in gross margin during the nine months ended September 30, 2011
compared to the nine months ended September 30, 2010 was primarily due to the inclusion of results
from the assets acquired in the June 2011 Contract Operations Acquisition and the August 2010
Contract Operations Acquisition. Gross margin for the nine months ended September 30, 2011 was also
impacted by an increase in lube oil expense.
Depreciation and Amortization. The increase in depreciation and amortization expense during the
nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 was
primarily due to additional depreciation on compression equipment additions, including the assets
acquired in the June 2011 Contract Operations Acquisition and the August 2010 Contract Operations
Acquisition.
Long-lived Asset Impairment. Long-lived asset impairments in the nine months ended September 30,
2011 and 2010 were $0.7 million and $0.3 million, respectively, and resulted from impairments that
were recorded on idle compression units.
SG&A affiliates. SG&A expenses are primarily comprised of an allocation of expenses, including
costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the
terms of the Omnibus Agreement. The increase in SG&A expense was primarily due to increased costs
associated with the impact of the June 2011 Contract Operations Acquisition and the August 2010
Contract Operations Acquisition. In addition, SG&A expenses for the nine months ended September 30,
2010 included $0.8 million in additional sales taxes as a result of a state tax ruling received in
June 2010 that applies retroactively to July 2007 to certain contract compression transactions.
SG&A expenses represented 14% and 15% of revenues for the nine months ended September 30, 2011 and
2010, respectively.
Interest Expense. The increase in interest expense for the nine months ended September 30, 2011
compared to the nine months ended September 30, 2010 was primarily due to the refinancing of our
senior secured credit facility at a higher interest rate than the debt it replaced. The increase in
interest expense was also due to a higher average balance of long-term debt for the nine months
ended September 30, 2011 compared to the nine months ended September 30, 2010.
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Other (Income) Expense, Net. Other (income) expense, net for the nine months ended September 30,
2011 included $0.5 million of transaction costs associated with the June 2011 Contract Operations
Acquisition. Other (income) expense, net for the nine months ended September 30, 2010 included $0.4
million of transaction costs associated with the August 2010 Contract Operations Acquisition.
Additionally, other (income) expense, net for the nine months ended September 30, 2011 and 2010
included a $0.6 million and $0.4 million gain on the sale of used compression equipment,
respectively.
Income Tax Expense. Income tax expense primarily reflects taxes recorded under the Texas margins
tax and the Michigan business tax. The increase in income tax expense for the nine months ended
September 30, 2011 compared to the nine months ended September 30, 2010 was primarily due to an
increase in our revenue earned within the state of Texas.
LIQUIDITY AND CAPITAL RESOURCES
The following tables summarize our sources and uses of cash for the nine months ended September 30,
2011 and 2010, and our cash and working capital as of the end of the periods presented (in
thousands):
Nine Months Ended | ||||||||
September 30, | ||||||||
2011 | 2010 | |||||||
Net cash provided by (used in): |
||||||||
Operating activities |
$ | 53,720 | $ | 37,097 | ||||
Investing activities |
(92,694 | ) | (20,990 | ) | ||||
Financing activities |
39,298 | (16,277 | ) | |||||
Net change in cash and cash equivalents |
$ | 324 | $ | (170 | ) | |||
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents |
$ | 374 | $ | 50 | ||||
Working capital |
23,348 | 14,751 |
Operating Activities. Net cash provided by operating activities increased in the nine months ended
September 30, 2011 compared to the nine months ended September 30, 2010 primarily due to the
increase in business levels resulting from the June 2011 Contract Operations Acquisition and the
August 2010 Contract Operations Acquisition.
Investing Activities. The increase in cash used in investing activities was primarily attributable
to a $62.2 million increase in cash used to pay a portion of the purchase price for the June 2011
Contract Operations Acquisition. In addition, cash used for investing activities increased for the
nine months ended September 30, 2011 compared to the nine months ended September 30, 2010 due to an
$11.6 million increase in capital expenditures. Capital expenditures for the nine months ended
September 30, 2011 were $33.1 million, consisting of $11.8 million for fleet growth capital and
$21.3 million for compressor maintenance activities.
Financing Activities. The increase in net cash provided by financing activities during the nine
months ended September 30, 2011 compared to the nine months ended September 30, 2010 was primarily
due to the $127.7 million in net proceeds we received from a public offering of common units, a
portion of which we used to repay borrowings under our senior secured credit facility.
Capital Requirements. The natural gas compression business is capital intensive, requiring
significant investment to maintain and upgrade existing operations. Our capital spending is
dependent on the demand for our services and the availability of the type of compression equipment
required for us to render those services to our customers. Our capital requirements have consisted
primarily of, and we anticipate that our capital requirements will continue to consist of, the
following:
| maintenance capital expenditures, which are capital expenditures made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets; and | ||
| expansion capital expenditures, which are capital expenditures made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification. |
Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we
currently plan to spend approximately $27.0 million to $29.0 million on equipment maintenance
capital during 2011. Exterran Holdings manages its and our respective U.S. fleets as one pool of
compression equipment from which we can each readily fulfill our respective customers service
needs. When we
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or Exterran Holdings are advised of a contract operations services opportunity, Exterran Holdings
reviews both our and its fleet for an available and appropriate compressor unit. Given that the
majority of the idle compression equipment has been and is currently held by Exterran Holdings,
much of the idle compression equipment required for these contract operations services
opportunities has been held by Exterran Holdings. Under the Omnibus Agreement, the owner of the
equipment being transferred is required to pay the costs associated with making the idle equipment
suitable for the proposed customer and then has generally leased the equipment to the recipient of
the equipment or exchanged the equipment for other equipment of the recipient. Because Exterran
Holdings has owned the majority of such equipment, Exterran Holdings has generally had to bear a
larger portion of the maintenance capital expenditures associated with making transferred equipment
ready for service. For equipment that is then leased, the maintenance capital cost is a component
of the lease rate that is paid under the lease. As we acquire more compression equipment, we expect
that more of our equipment will be available to satisfy our or Exterran Holdings customer
requirements. As a result, we expect that our maintenance capital expenditures will increase (and
that lease expense will be reduced).
In addition, our capital requirements include funding distributions to our unitholders. We
anticipate such distributions will be funded through cash provided by operating activities and
borrowings under our credit facility and that we have the ability to generate adequate amounts of
cash to meet our short-term needs and needs for the foreseeable future. Given our objective of
long-term growth through acquisitions, expansion capital expenditure projects and other internal
growth projects, we anticipate that over time we will continue to invest capital to grow and
acquire assets. We expect to actively consider a variety of assets for potential acquisitions and
expansion projects. We expect to fund future capital expenditures with borrowings under our credit
facility, the issuance of additional partnership units, and future debt offerings, as appropriate,
given market conditions. The timing of future capital expenditures will be based on the economic
environment, including the availability of debt and equity capital.
Our Ability to Grow Depends on Our Ability to Access External Expansion Capital. We expect that we
will rely primarily upon external financing sources, including our senior secured credit facility
and the issuance of debt and equity securities, rather than cash reserves established by our
general partner, to fund our acquisitions and expansion capital expenditures. Our ability to access
the capital markets may be restricted at a time when we would like, or need, to do so, which could
have an impact on our ability to grow.
We expect that we will distribute all of our available cash to our unitholders. Available cash is
reduced by cash reserves established by our general partner to provide for the proper conduct of
our business, including future capital expenditures. To the extent we are unable to finance growth
externally and we are unwilling to establish cash reserves to fund future acquisitions, our cash
distribution policy will significantly impair our ability to grow. Because we distribute all of our
available cash, we may not grow as quickly as businesses that reinvest their available cash to
expand ongoing operations. To the extent we issue additional units in connection with any
acquisitions or expansion capital expenditures, the payment of distributions on those additional
units may increase the risk that we will be unable to maintain or increase our per unit
distribution level, which in turn may impact the available cash that we have to distribute for each
unit. There are no limitations in our partnership agreement or in the terms of our credit facility
on our ability to issue additional units, including units ranking senior to our common units.
Long-term Debt. On November 3, 2010, we entered into an amendment and restatement of our senior
secured credit agreement (as so amended and restated, the Credit Agreement) to provide for a new
five-year, $550.0 million senior secured credit facility consisting of a $400.0 million revolving
credit facility and a $150.0 million term loan facility. In March 2011, the revolving borrowing
capacity under this facility was increased by $150.0 million to $550.0 million.
As of September 30, 2011, we had undrawn capacity of $156.0 million under our revolving credit
facility. Our Credit Agreement limits our Total Debt to EBITDA ratio (as defined in the Credit
Agreement) to not greater than 4.75 to 1.0. The Credit Agreement allows for our Total Debt to
EBITDA ratio to be increased from 4.75 to 1.0 to 5.25 to 1.0 during a quarter when an acquisition
meeting certain thresholds is completed and for the following two quarters after such an
acquisition closes. Therefore, because the June 2011 Contract Operations Acquisition closed in the
second quarter of 2011, the maximum allowed ratio of Total Debt to EBITDA is 5.25 to 1.0 through
December 31, 2011, reverting to 4.75 to 1.0 for the quarter ending March 31, 2012 and subsequent
quarters.
The revolving credit facility bears interest at a base rate or LIBOR, at our option, plus an
applicable margin. Depending on our leverage ratio, the applicable margin for revolving loans
varies (i) in the case of LIBOR loans, from 2.25% to 3.25% and (ii) in the case of base rate loans,
from 1.25% to 2.25%. The base rate is the highest of the prime rate announced by Wells Fargo Bank,
National Association, the Federal Funds Effective Rate plus 0.5% and one-month LIBOR plus 1.0%. At
September 30, 2011, all amounts outstanding under the revolving credit facility were LIBOR loans
and the applicable margin was 2.5%. The weighted average annual interest rate on the outstanding
balance of our revolving credit facility at September 30, 2011, excluding the effect of interest
rate swaps, was 2.8%.
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The term loan facility bears interest at a base rate or LIBOR, at our option, plus an applicable
margin. Depending on our leverage ratio, the applicable margin for term loans varies (i) in the
case of LIBOR loans, from 2.5% to 3.5% and (ii) in the case of base rate loans, from 1.5% to 2.5%.
At September 30, 2011, all amounts outstanding under the term loan facility were LIBOR loans and
the applicable margin was 2.75%. The average annual interest rate on the outstanding balance of the
term loan at September 30, 2011, excluding the effect of interest rate swaps, was 3.0%.
Borrowings under the Credit Agreement are secured by substantially all of the U.S. personal
property assets of us and our Significant Domestic Subsidiaries (as defined in the Credit
Agreement), including all of the membership interests of our Domestic Subsidiaries (as defined in
the Credit Agreement).
The Credit Agreement contains various covenants with which we must comply, including restrictions
on the use of proceeds from borrowings and limitations on our ability to incur additional
indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make
certain investments and acquisitions, make loans, grant liens, repurchase equity and pay dividends
and distributions. We must maintain various consolidated financial ratios, including a ratio of
EBITDA (as defined in the Credit Agreement) to Total Interest Expense (as defined in the Credit
Agreement) of not less than 3.0 to 1.0 (which will decrease to 2.75 to 1.0 following the occurrence
of certain events specified in the Credit Agreement) and a ratio of Total Debt (as defined in the
Credit Agreement) to EBITDA of not greater than 4.75 to 1.0. As discussed above, because the June
2011 Contract Operations Acquisition closed during the second quarter of 2011, our Total Debt to
EBITDA ratio was temporarily increased from 4.75 to 1.0 to 5.25 to 1.0 during the quarter ended
June 30, 2011 and will continue at that level through December 31, 2011, reverting to 4.75 to 1.0
for the quarter ending March 31, 2012 and subsequent quarters. As of September 30, 2011, we
maintained a 7.1 to 1.0 EBITDA to Total Interest Expense ratio and a 3.7 to 1.0 Total Debt to
EBITDA ratio. The Credit Agreement also contains various covenants requiring mandatory prepayments
from the net cash proceeds of certain asset transfers and debt issuances. If we experience a
material adverse effect on our assets, liabilities, financial condition, business or operations
that, taken as a whole, impacts our ability to perform our obligations under the Credit Agreement,
this, among other things, could lead to a default under that agreement. As of September 30, 2011,
we were in compliance with all financial covenants under the Credit Agreement.
We have entered into interest rate swap agreements related to a portion of our variable rate debt.
In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total
notional value of $285.0 million and a weighted average rate of 4.4%. These swaps qualified for
hedge accounting and were previously included on our balance sheet as a liability and in
accumulated other comprehensive loss. The liability was paid in connection with the termination,
and the associated amount in accumulated other comprehensive loss will be amortized into interest
expense over the original term of the swaps. Of the total amount included in accumulated other
comprehensive loss, $7.7 million was amortized into interest expense during the nine months ended
September 30, 2011 and we expect $2.6 million to be amortized into interest expense during the
remainder of 2011. See Note 7 to the Financial Statements for further discussion of our interest
rate swap agreements.
We may from time to time seek to retire or purchase our
outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately
negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions,
our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Distributions to Unitholders. Our partnership agreement requires us to distribute all of our
available cash quarterly. Under the partnership agreement, available cash is defined generally to
mean, for each fiscal quarter, (i) our cash on hand at the end of the quarter in excess of the
amount of reserves our general partner determines is necessary or appropriate to provide for the
conduct of our business, to comply with applicable law, any of our debt instruments or other
agreements or to provide for future distributions to our unitholders for any one or more of the
upcoming four quarters, plus, (ii) if our general partner so determines, all or a portion of our
cash on hand on the date of determination of available cash for the quarter.
On October 28, 2011, Exterran GP LLCs board of directors approved a cash distribution of $0.4875
per limited partner unit, or approximately $19.3 million, including distributions to our general
partner on its incentive distribution rights. The distribution covers the time period from July 1,
2011 through September 30, 2011. The record date for this distribution is November 10, 2011 and
payment is expected to occur on November 14, 2011.
NON-GAAP FINANCIAL MEASURES
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization
expense). Gross margin is included as a supplemental disclosure because it is a primary measure
used by our management as it represents the results of revenue and cost of sales (excluding
depreciation and amortization expense), which are key components of our operations. We believe
gross margin is important because it focuses on the current performance of our operations and
excludes the impact of the prior historical costs of the assets acquired or constructed that are
utilized in those operations, the indirect costs associated with our SG&A activities, the impact of
our financing methods and income tax expense. Depreciation and amortization expense may not
accurately reflect the
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costs required to maintain and replenish the operational usage of our assets and therefore may not
portray the costs from current operating activity. As an indicator of our operating performance,
gross margin should not be considered an alternative to, or more meaningful than, net income as
determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled
measure of another company because other entities may not calculate gross margin in the same
manner.
Gross margin has certain material limitations associated with its use as compared to net income.
These limitations are primarily due to the exclusion of interest expense, depreciation and
amortization expense and SG&A expense. Each of these excluded expenses is material to our
consolidated results of operations. Because we intend to finance a portion of our operations
through borrowings, interest expense is a necessary element of our costs and our ability to
generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary
element of our costs and our ability to generate revenue, and SG&A expenses are necessary costs to
support our operations and required corporate activities. To compensate for these limitations,
management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a
more complete understanding of our performance.
The following table reconciles our net income to our gross margin (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 3,253 | $ | 83 | $ | 1,538 | $ | 164 | ||||||||
Depreciation and amortization |
19,087 | 13,697 | 48,695 | 37,338 | ||||||||||||
Long-lived asset impairment |
384 | 93 | 689 | 324 | ||||||||||||
Selling, general and administrative affiliates |
10,594 | 8,504 | 30,737 | 24,718 | ||||||||||||
Interest expense |
7,860 | 6,020 | 22,488 | 17,436 | ||||||||||||
Other (income) expense, net |
(338 | ) | 333 | (104 | ) | (73 | ) | |||||||||
Income tax expense |
242 | 172 | 733 | 518 | ||||||||||||
Gross margin |
$ | 41,082 | $ | 28,902 | $ | 104,776 | $ | 80,425 | ||||||||
We define EBITDA, as further adjusted, as net income plus income taxes, interest expense (including
debt extinguishment costs and gain or loss on termination of interest rate swaps), depreciation and
amortization expense, impairment charges, non-cash SG&A costs and any amounts by which cost of
sales, other charges, and SG&A costs are reduced as a result of caps on these costs contained in
the Omnibus Agreement, which amounts are treated as capital contributions from Exterran Holdings
for accounting purposes. We believe EBITDA, as further adjusted, is an important measure of
operating performance because it allows management, investors and others to evaluate and compare
our core operating results from period to period by removing the impact of our capital structure
(interest expense from our outstanding debt), asset base (depreciation and amortization expense,
impairment charges), tax consequences, caps on operating and SG&A costs, non-cash SG&A costs and
reimbursements. Management uses EBITDA, as further adjusted, as a supplemental measure to review
current period operating performance, comparability measures and performance measures for period to
period comparisons. Our EBITDA, as further adjusted, may not be comparable to a similarly titled
measure of another company because other entities may not calculate EBITDA in the same manner.
EBITDA, as further adjusted, is not a measure of financial performance under GAAP, and should not
be considered in isolation or as an alternative to net income, cash flows from operating activities
and other measures determined in accordance with GAAP. Items excluded from EBITDA, as further
adjusted, are significant and necessary components to the operations of our business, and,
therefore, EBITDA, as further adjusted, should only be used as a supplemental measure of our
operating performance.
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The following table reconciles our net income to EBITDA, as further adjusted (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 3,253 | $ | 83 | $ | 1,538 | $ | 164 | ||||||||
Income tax expense |
242 | 172 | 733 | 518 | ||||||||||||
Depreciation and amortization |
19,087 | 13,697 | 48,695 | 37,338 | ||||||||||||
Long-lived asset impairment |
384 | 93 | 689 | 324 | ||||||||||||
Cap on operating and selling, general and administrative costs
provided by Exterran Holdings |
7,995 | 7,770 | 27,324 | 16,940 | ||||||||||||
Non-cash selling, general and administrative costs affiliates |
(207 | ) | 212 | 310 | 660 | |||||||||||
Interest expense |
7,860 | 6,020 | 22,488 | 17,436 | ||||||||||||
EBITDA, as further adjusted |
$ | 38,614 | $ | 28,047 | $ | 101,777 | $ | 73,380 | ||||||||
We define distributable cash flow as net income plus depreciation and amortization expense,
impairment charges, non-cash SG&A costs, interest expense and any amounts by which cost of sales
and SG&A costs are reduced as a result of caps on these costs contained in the Omnibus Agreement,
which amounts are treated as capital contributions from Exterran Holdings for accounting purposes,
less cash interest expense (excluding amortization of deferred financing fees and costs incurred to
early terminate interest rate swaps) and maintenance capital expenditures, and excluding gains or
losses on asset sales and other charges. We believe distributable cash flow is an important measure
of operating performance because it allows management, investors and others to compare basic cash
flows we generate (prior to the establishment of any retained cash reserves by our general partner)
to the cash distributions we expect to pay our unitholders. Using distributable cash flow,
management can quickly compute the coverage ratio of estimated cash flows to planned cash
distributions. Our distributable cash flow may not be comparable to a similarly titled measure of
another company because other entities may not calculate distributable cash flow in the same
manner.
Distributable cash flow is not a measure of financial performance under GAAP, and should not be
considered in isolation or as an alternative to net income, cash flows from operating activities
and other measures determined in accordance with GAAP. Items excluded from distributable cash flow
are significant and necessary components to the operations of our business, and, therefore,
distributable cash flow should only be used as a supplemental measure of our operating performance.
The following table reconciles our net income to distributable cash flow (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 3,253 | $ | 83 | $ | 1,538 | $ | 164 | ||||||||
Depreciation and amortization |
19,087 | 13,697 | 48,695 | 37,338 | ||||||||||||
Long-lived asset impairment |
384 | 93 | 689 | 324 | ||||||||||||
Cap on operating and selling, general and administrative costs
provided by Exterran Holdings |
7,995 | 7,770 | 27,324 | 16,940 | ||||||||||||
Non-cash selling, general and administrative costs affiliates |
(207 | ) | 212 | 310 | 660 | |||||||||||
Interest expense |
7,860 | 6,020 | 22,488 | 17,436 | ||||||||||||
Expensed acquisition costs |
| 356 | 514 | 356 | ||||||||||||
Less: Gain on sale of compression equipment |
(319 | ) | (8 | ) | (646 | ) | (425 | ) | ||||||||
Less: Cash interest expense |
(4,951 | ) | (5,747 | ) | (13,810 | ) | (16,618 | ) | ||||||||
Less: Maintenance capital expenditures |
(7,382 | ) | (3,204 | ) | (21,293 | ) | (9,716 | ) | ||||||||
Distributable cash flow |
$ | 25,720 | $ | 19,272 | $ | 65,809 | $ | 46,459 | ||||||||
OFF-BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet arrangements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
We are exposed to market risk due to variable interest rates under our financing arrangements.
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As of September 30, 2011, after taking into consideration interest rate swaps, we had approximately
$294.0 million of outstanding indebtedness that was effectively subject to floating interest rates.
A 1% increase in the effective interest rate on our outstanding debt subject to floating interest
rates at September 30, 2011 would result in an annual increase in our interest expense of
approximately $2.9 million.
For further information regarding our use of interest rate swap agreements to manage our exposure
to interest rate fluctuations on a portion of our debt obligations, see Note 7 to the Financial
Statements.
ITEM 4. Controls and Procedures
Managements Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our principal executive officer and principal
financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined
in Rule 13a-15(e) of the Securities Exchange Act of 1934), which are designed to provide reasonable
assurance that we are able to record, process, summarize and report the information required to be
disclosed in our reports under the Exchange Act within the time periods specified in the rules and
forms of the Securities and Exchange Commission. Based on the evaluation, as of September 30, 2011,
our principal executive officer and principal financial officer concluded that our disclosure
controls and procedures were effective to provide reasonable assurance that the information
required to be disclosed in reports that we file or submit under the Exchange Act is accumulated
and communicated to management, and made known to our principal executive officer and principal
financial officer, on a timely basis to ensure that it is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of business, we are involved in various pending or threatened legal actions.
While management is unable to predict the ultimate outcome of these actions, it believes that any
ultimate liability arising from these actions will not have a material effect on our consolidated
financial position, results of operations or cash flows; however, because of the inherent
uncertainty of litigation, we cannot provide assurance that the resolution of any particular claim
or proceeding to which we are a party will not have a material effect on our financial position,
results of operation or cash flows for the period in which the resolution occurs.
ITEM 1A. Risk Factors
There have been no material changes in our risk factors that were previously disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2010, except as follows:
New regulations, proposed regulations and proposed modifications to existing regulations under the
Clean Air Act (CAA), if implemented, could result in increased compliance costs.
On August 20, 2010, the Environmental Protection Agency (EPA) published new regulations under the
CAA to control emissions of hazardous air pollutants from existing stationary reciprocal internal
combustion engines. The rule will require us to undertake certain expenditures and activities,
likely including purchasing and installing emissions control equipment, such as oxidation catalysts
or non-selective catalytic reduction equipment, on a portion of our engines located at major
sources of hazardous air pollutants and all our engines over a certain size regardless of location,
following prescribed maintenance practices for engines (which are consistent with our existing
practices), and implementing additional emissions testing and monitoring. On October 19, 2010, we
submitted a legal challenge to the U.S. Court of Appeals for the D.C. Circuit and a Petition for
Administrative Reconsideration to the EPA for some monitoring aspects of the rule. The legal
challenge has been held in abeyance since December 3, 2010, pending the EPAs consideration of the
Petition for Administrative Reconsideration. On January 5, 2011, the EPA approved the request for
reconsideration of the monitoring issues and that reconsideration process is ongoing. At this
point, we cannot predict when, how or if an EPA or a court ruling would modify the final rule, and
as a result we cannot currently accurately predict the cost to comply with the rules requirements.
Compliance with the final rule is required by October 2013.
In addition, the Texas Commission on Environmental Quality (TCEQ) has finalized revisions to
certain air permit programs that significantly increase the air permitting requirements for new and
certain existing oil and gas production and gathering sites for 23 counties in the Barnett Shale
production area. The final rule establishes new emissions standards for engines, which could impact
the operation of specific categories of engines by requiring the use of alternative engines,
compressor packages or the installation of aftermarket emissions control equipment. The rule became
effective for the Barnett Shale production area in April 2011, and the lower emissions standards
will become applicable between 2015 and 2030 depending on the type of engine and the permitting
requirements. Our cost to comply with the revised air permit programs is not expected to be
material at this time. Although the TCEQ had previously stated it would consider expanding
application of the new air permit program statewide, the Texas Legislature adopted legislation
prohibiting such an expansion in the near term. At this point, we cannot predict whether or when
such a geographic expansion of those rules might occur or the cost to comply with any such
requirements.
On July 28, 2011, the EPA proposed regulations focused on reducing the emissions of certain
chemicals by the oil and natural gas industry, including volatile organic compounds, sulfur dioxide
and certain air toxics. Based on a review of the proposed regulations, it appears our business
could be affected by certain portions of those proposed regulations. We will continue to review and
evaluate this proposal as it might apply to our different equipment and activities. At this point,
however, we cannot predict what applicable requirements may eventually be adopted with
respect to this proposed rule or the cost to comply with such requirements.
These new regulations and proposals, when finalized, and any other new regulations requiring the
installation of more sophisticated pollution control equipment or the adoption of other
environmental protection measures, could have a material adverse impact on our business, financial
condition, results of operations and ability to make cash distributions to our unitholders.
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ITEM 6. Exhibits
Exhibit No. | Description | |
2.1
|
Contribution, Conveyance and Assumption Agreement, dated October 2, 2009, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on October 5, 2009 | |
2.2
|
Contribution, Conveyance and Assumption Agreement, dated July 26, 2010, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on July 28, 2010 | |
2.3
|
Contribution, Conveyance and Assumption Agreement, dated May 23, 2011, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K filed on May 24, 2011 | |
3.1
|
Certificate of Limited Partnership of Universal Compression Partners, L.P., incorporated by reference to Exhibit 3.1 to the Registrants Registration Statement on Form S-1 filed on June 27, 2006 | |
3.2
|
Certificate of Amendment to Certificate of Limited Partnership of Universal Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on August 24, 2007 | |
3.3
|
First Amended and Restated Agreement of Limited Partnership of Exterran Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 | |
3.4
|
Certificate of Partnership of UCO General Partner, LP, incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-1 filed on June 27, 2006 | |
3.5
|
Amended and Restated Limited Partnership Agreement of UCO General Partner, LP, incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed on October 26, 2006 | |
3.6
|
Certificate of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5 to the Registrants Registration Statement on Form S-1 filed June 27, 2006 | |
3.7
|
Amended and Restated Limited Liability Company Agreement of UCO GP, LLC, incorporated by reference to Exhibit 3.3 to the Registrants Current Report on Form 8-K filed on October 26, 2006 | |
31.1 *
|
Certification of the Interim Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 | |
31.2 *
|
Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 | |
32.1 **
|
Certification of the Interim Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 **
|
Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.1 **
|
Interactive data files pursuant to Rule 405 of Regulation S-T |
* | Filed herewith. | |
** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 4, 2011 | EXTERRAN PARTNERS, L.P. |
|||
By: | EXTERRAN GENERAL PARTNER, L.P. its General Partner |
|||
By: | EXTERRAN GP LLC its General Partner |
|||
By: | /s/ MICHAEL J. AARONSON | |||
Michael J. Aaronson | ||||
Vice President and Chief Financial Officer (Principal Financial Officer) |
||||
By: | /s/ KENNETH R. BICKETT | |||
Kenneth R. Bickett | ||||
Vice President, Finance and Accounting (Principal Accounting Officer) |
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Index to Exhibits
Exhibit No. | Description | |
2.1
|
Contribution, Conveyance and Assumption Agreement, dated October 2, 2009, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on October 5, 2009 | |
2.2
|
Contribution, Conveyance and Assumption Agreement, dated July 26, 2010, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrants Current Report on Form 8-K filed on July 28, 2010 | |
2.3
|
Contribution, Conveyance and Assumption Agreement, dated May 23, 2011, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K filed on May 24, 2011 | |
3.1
|
Certificate of Limited Partnership of Universal Compression Partners, L.P., incorporated by reference to Exhibit 3.1 to the Registrants Registration Statement on Form S-1 filed on June 27, 2006 | |
3.2
|
Certificate of Amendment to Certificate of Limited Partnership of Universal Compression Partners, L.P. (now Exterran Partners, L.P.), dated as of August 20, 2007, incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on August 24, 2007 | |
3.3
|
First Amended and Restated Agreement of Limited Partnership of Exterran Partners, L.P., as amended, incorporated by reference to Exhibit 3.3 to the Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 | |
3.4
|
Certificate of Partnership of UCO General Partner, LP, incorporated by reference to Exhibit 3.3 to the Registrants Registration Statement on Form S-1 filed on June 27, 2006 | |
3.5
|
Amended and Restated Limited Partnership Agreement of UCO General Partner, LP, incorporated by reference to Exhibit 3.2 to the Registrants Current Report on Form 8-K filed on October 26, 2006 | |
3.6
|
Certificate of Formation of UCO GP, LLC, incorporated by reference to Exhibit 3.5 to the Registrants Registration Statement on Form S-1 filed June 27, 2006 | |
3.7
|
Amended and Restated Limited Liability Company Agreement of UCO GP, LLC, incorporated by reference to Exhibit 3.3 to the Registrants Current Report on Form 8-K filed on October 26, 2006 | |
31.1 *
|
Certification of the Interim Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 | |
31.2 *
|
Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 | |
32.1 **
|
Certification of the Interim Chief Executive Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 **
|
Certification of the Chief Financial Officer of Exterran GP LLC (as general partner of the general partner of Exterran Partners, L.P.) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.1 **
|
Interactive data files pursuant to Rule 405 of Regulation S-T |
* | Filed herewith. | |
** | Furnished herewith. |
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