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EX-31 - EXHIBIT 31.1 - CSI Compressco LPgsjk10q-20130510_ex311.htm
EX-32 - EXHIBIT 32.1 - CSI Compressco LPgsjk10q-20130510_ex321.htm
EX-32 - EXHIBIT 32.2 - CSI Compressco LPgsjk10q-20130510_ex322.htm
EX-31 - EXHIBIT 31.2 - CSI Compressco LPgsjk10q-20130510_ex312.htm


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM         TO______

 

COMMISSION FILE NUMBER 001-35195

 

 

Compressco Partners, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 

94-3450907

(State of incorporation)

(I.R.S. Employer Identification No.)

 

 

101 Park Avenue, Suite 1200

 

Oklahoma City, Oklahoma

73102

(Address of principal executive offices)

(zip code)

 

(405) 677-0221

(Registrant’s 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 [ X ]  No [   ]

 

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 [ X ]  No [   ]

 

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 [ 

Accelerated filer [   ] 

Non-accelerated filer [X] (Do not check if a smaller reporting company)

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 [   ]  No [ X ]

 

As of May 10, 2013, there were 9,221,790 Common Units and 6,273,970 Subordinated Units outstanding.

 

 

 

CERTAIN REFERENCES IN THIS QUARTERLY REPORT

 

References in this Quarterly Report to “Compressco Partners,” “we,” “our,” “us,” “the Partnership” or like terms refer to Compressco Partners, L.P. and its wholly owned subsidiaries. References to “Compressco Partners GP” or “our General Partner” refer to our general partner, Compressco Partners GP Inc. References to “TETRA” refer to TETRA Technologies, Inc. and TETRA’s controlled subsidiaries, other than us.

 

 

 

 

 

 

 

 

 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Compressco Partners, L.P.

Consolidated Statements of Operations

(In Thousands, Except Unit and Per Unit Amounts)

(Unaudited)

 

 

Three Months Ended

 

March 31,

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

Compression and other services

$

29,679 

 

 

$

21,369 

 

Sales of compressors and parts

 

1,088 

 

 

 

1,162 

 

Total revenues

 

30,767 

 

 

 

22,531 

 

 

 

 

 

 

 

 

 

Cost of revenues (excluding depreciation and

 

 

 

 

 

 

 

amortization expense):

 

 

 

 

 

 

 

Cost of compression and other services

 

16,769 

 

 

 

11,191 

 

Cost of compressors and parts sales

 

617 

 

 

 

608 

 

Total cost of revenues

 

17,386 

 

 

 

11,799 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

4,606 

 

 

 

4,589 

 

Depreciation and amortization

 

3,473 

 

 

 

3,089 

 

Interest (income) expense, net

 

58 

 

 

 

(12)

 

Other (income) expense, net

 

(17)

 

 

 

(190)

 

Income before income tax provision

 

5,261 

 

 

 

3,256 

 

Provision for income taxes

 

722 

 

 

 

489 

 

Net income

$

4,539 

 

 

$

2,767 

 

 

 

 

 

 

 

 

 

General partner interest in net income

$

91 

 

 

$

55 

 

Common units interest in net income

$

2,646 

 

 

$

1,608 

 

Subordinated units interest in net income

$

1,802 

 

 

$

1,104 

 

 

 

 

 

 

 

 

 

Net income per common unit:

 

 

 

 

 

 

 

Basic

$

0.29 

 

 

$

0.18 

 

Diluted

$

0.29 

 

 

$

0.18 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding:

 

 

 

 

 

 

 

Basic

 

9,216,331 

 

 

 

9,134,675 

 

Diluted

 

9,275,480 

 

 

 

9,134,675 

 

 

 

 

 

 

 

 

 

Net income per subordinated unit:

 

 

 

 

 

 

 

Basic and Diluted

$

0.29 

 

 

$

0.18 

 

 

 

 

 

 

 

 

 

Weighted average subordinated units outstanding:

 

 

 

 

 

 

 

Basic and Diluted

 

6,273,970 

 

 

 

6,273,970 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

1

 

Compressco Partners, L.P.

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

 

 

Three Months Ended

 

March 31,

 

2013

 

2012

 

 

 

 

 

 

 

 

Net income

$

4,539 

 

 

$

2,767 

 

Foreign currency translation adjustment

 

(27)

 

 

 

51 

 

Comprehensive income

$

4,512 

 

 

$

2,818 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

2

 

Compressco Partners, L.P.

Consolidated Balance Sheets

(In Thousands, Except Unit Amounts)

 

 

March 31,

 

December 31,

 

2013

 

2012

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,412 

 

 

$

12,966 

 

Trade accounts receivable, net of allowances for doubtful

 

 

 

 

 

 

 

accounts of $310 in 2013 and $329 in 2012

 

26,862 

 

 

 

18,599 

 

Inventories

 

16,057 

 

 

 

15,908 

 

Deferred tax asset

 

390 

 

 

 

195 

 

Prepaid expenses and other current assets

 

3,199 

 

 

 

3,495 

 

Total current assets

 

55,920 

 

 

 

51,163 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment:

 

 

 

 

 

 

 

Land and building

 

2,178 

 

 

 

2,178 

 

Compressors and equipment

 

163,782 

 

 

 

156,027 

 

Vehicles

 

13,121 

 

 

 

12,997 

 

Construction in progress

 

 

 

 

 

466 

 

Total property, plant, and equipment

 

179,081 

 

 

 

171,668 

 

Less accumulated depreciation

 

(81,431)

 

 

 

(78,053)

 

Net property, plant, and equipment

 

97,650 

 

 

 

93,615 

 

 

 

 

 

 

 

 

 

Other assets:

 

 

 

 

 

 

 

Goodwill

 

72,161 

 

 

 

72,161 

 

Deferred tax asset

 

626 

 

 

 

594 

 

Other assets

 

244 

 

 

 

253 

 

Total other assets

 

73,031 

 

 

 

73,008 

 

Total assets

$

226,601 

 

 

$

217,786 

 

 

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

6,505 

 

 

$

4,610 

 

Accrued liabilities and other

 

4,318 

 

 

 

4,108 

 

Accrued payroll and benefits

 

791 

 

 

 

1,613 

 

Amounts payable to affiliates

 

13,325 

 

 

 

8,232 

 

Deferred tax liabilities

 

2,084 

 

 

 

1,976 

 

Total current liabilities

 

27,023 

 

 

 

20,539 

 

 

 

 

 

 

 

 

 

Other liabilities:

 

 

 

 

 

 

 

Long-term debt, net

 

14,300 

 

 

 

10,050 

 

Deferred tax liabilities

 

4,800 

 

 

 

4,894 

 

Other long-term liabilities

 

54 

 

 

 

53 

 

Total other liabilities

 

19,154 

 

 

 

14,997 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Partners' capital:

 

 

 

 

 

 

 

General partner interest

 

3,304 

 

 

 

3,346 

 

Common units (9,218,457 units issued and outstanding)

 

108,019 

 

 

 

108,943 

 

Subordinated units (6,273,970 units issued and outstanding)

 

68,124 

 

 

 

68,957 

 

Accumulated other comprehensive income

 

977 

 

 

 

1,004 

 

Total partners' capital

 

180,424 

 

 

 

182,250 

 

Total liabilities and partners' capital

$

226,601 

 

 

$

217,786 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

3

 

Compressco Partners, L.P.

Consolidated Statement of Partners’ Capital

(In Thousands)

(Unaudited)

 

 

 

Partners' Capital

 

Accumulated

 

 

 

 

 

Limited Partners

 

Other

 

Total

 

General

 

Common

 

Subordinated

 

Comprehensive

 

Partners'

 

Partner

 

Unitholders

 

Unitholder

 

Income

 

Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

$

3,346 

 

 

$

108,943 

 

 

$

68,957 

 

 

$

1,004 

 

 

$

182,250 

 

Net income

 

91 

 

 

 

2,646 

 

 

 

1,802 

 

 

 

 

 

 

 

4,539 

 

Distributions ($0.42 per unit)

 

(133)

 

 

 

(3,892)

 

 

 

(2,635)

 

 

 

 

 

 

 

(6,660)

 

Equity compensation

 

 

 

 

 

322 

 

 

 

 

 

 

 

 

 

 

 

322 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

(27)

 

 

 

(27)

 

Balance as of March 31, 2013

$

3,304 

 

 

$

108,019 

 

 

$

68,124 

 

 

$

977 

 

 

$

180,424 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

4

 

Compressco Partners, L.P.

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

2013

 

2012

Operating activities:

 

 

 

 

 

 

 

Net income

$

4,539 

 

 

$

2,767 

 

Reconciliation of net income to cash provided

 

 

 

 

 

 

 

by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

3,473 

 

 

 

3,089 

 

Provision (benefit) for deferred income taxes

 

(172)

 

 

 

(32)

 

Equity compensation expense

 

322 

 

 

 

272 

 

Provision for doubtful accounts

 

(19)

 

 

 

119 

 

Loss on sale of property, plant, and equipment

 

97 

 

 

 

23 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(8,226)

 

 

 

(1,926)

 

Inventories

 

(172)

 

 

 

(841)

 

Prepaid expenses and other current assets

 

291 

 

 

 

(744)

 

Accounts payable and accrued expenses

 

6,623 

 

 

 

(507)

 

Other

 

8 

 

 

 

25 

 

Net cash provided by operating activities

 

6,764 

 

 

 

2,245 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Purchases of property, plant, and equipment, net

 

(7,889)

 

 

 

(7,652)

 

Other investing activities

 

1 

 

 

 

9 

 

Net cash used in investing activities

 

(7,888)

 

 

 

(7,643)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

4,250 

 

 

 

 

 

Distributions

 

(6,660)

 

 

 

(6,109)

 

Net cash used in financing activities

 

(2,410)

 

 

 

(6,109)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

(20)

 

 

 

51 

 

 

 

 

 

 

 

 

 

Increase (decrease) in cash and cash equivalents

 

(3,554)

 

 

 

(11,456)

 

Cash and cash equivalents at beginning of period

 

12,966 

 

 

 

17,476 

 

Cash and cash equivalents at end of period

$

9,412 

 

 

$

6,020 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Income taxes paid

$

977 

 

 

$

566 

 

 

 

 

 

 

 

 

 

 

See Notes to Consolidated Financial Statements

 

5

 

Compressco Partners, L.P.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE A BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

We are a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications and, in certain circumstances, well monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region.

 

Presentation

 

Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of March 31, 2013 and for the three month period ended March 31, 2013 and 2012 include all normal recurring adjustments that are, in the opinion of management, necessary to provide a fair statement of our results for the interim periods. Operating results for the period ended March 31, 2013 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2013.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the SEC and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements for the year ended December 31, 2012 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 11, 2013.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.

 

Cash Equivalents

 

We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.

 

Financial Instruments

 

The fair values of our financial instruments, which may include cash, accounts receivable, accounts payable, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts.

 

Inventories

 

Inventories consist primarily of compressor unit components and parts and are stated at the lower of cost or market value. Cost is determined using the weighted average cost method.

 

Net Income Per Common and Subordinated Unit

 

The computations of net income per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units meet the definition of a participating security and, therefore, we are required to use the two-class method in the computation of net income per unit. Basic net income per common and subordinated unit is determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to our General Partner (including any distributions to our General Partner on its

 

6

 

incentive distribution rights) by the weighted average number of outstanding common and subordinated units, respectively, during the period.

 

When computing net income per common and subordinated unit under the two-class method in periods when distributions are greater than net income, the amount of the incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the incentive distribution rights, is allocated among our General Partner, common, and subordinated units based on our partnership agreement.

 

When net income is greater than distributions, 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 net income per common and subordinated unit, the amount of the assumed incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the assumed incentive distribution rights, is allocated among our General Partner, common, and subordinated units based on how our partnership agreement allocates net income.

 

The following is a reconciliation of the weighted average number of common and subordinated units outstanding to the number of common and subordinated units used in the computations of net income per common and subordinated unit.

 

 

Three Months Ended

 

Three Months Ended

 

March 31, 2013

 

March 31, 2012

 

Common

 

Subordinated

 

Common

 

Subordinated

 

Units

 

Units

 

Units

 

Units

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of weighted average units outstanding

 

9,216,331 

 

 

 

6,273,970 

 

 

 

9,134,675 

 

 

 

6,273,970 

 

Restricted units outstanding

 

59,149 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted units outstanding

 

9,275,480 

 

 

 

6,273,970 

 

 

 

9,134,675 

 

 

 

6,273,970 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Environmental Liabilities

 

Costs to remediate and monitor environmental matters are accrued when such liabilities are considered probable and a reasonable estimate of such costs is determinable.

 

Accumulated Other Comprehensive Income

 

Certain of our international operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of the foreign currency translation adjustment reflected as a component of accumulated other comprehensive income. Accumulated other comprehensive income is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income during the three month periods ended March 31, 2013 and 2012, is as follows:

 

 

Three Months Ended March 31,

 

2013

 

2012

 

(In Thousands)

 

 

 

 

 

 

 

 

Balance, beginning of period

$

1,004 

 

 

$

902 

 

Foreign currency translation adjustment

 

(27)

 

 

 

51 

 

Balance, end of period

$

977 

 

 

$

953 

 

 

 

 

 

 

 

 

 

 

Activity within accumulated other comprehensive income includes no reclassifications to net income.

 

Allocation of Net Income

 

Our net income is allocated to partners’ capital accounts in accordance with the provisions of our partnership agreement.

 

7

 

Distributions

 

On January 18, 2013, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended December 31, 2012, of $0.42 per unit. This distribution equates to a distribution of $1.68 per outstanding unit, or approximately $26.6 million, on an annualized basis. This cash distribution was paid on February 15, 2013, to all unitholders of record as of the close of business on February 1, 2013.

 

Subsequent to March 31, 2013, on April 19, 2013, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2013, of $0.425 per unit. This distribution equates to a distribution of $1.70 per outstanding unit, or approximately $27.0 million, on an annualized basis. This cash distribution is to be paid on May 15, 2013, to all unitholders of record as of the close of business on May 1, 2013.

 

New Accounting Pronouncements

 

In June 2011, the Financial Accounting Standards Board (FASB) published ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (ASU 2011-05), with the stated objective of improving the comparability, consistency, and transparency of financial reporting and increasing the prominence of items reported in other comprehensive income. As part of ASU 2011-05, the FASB eliminated the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The ASU 2011-05 amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU 2011-05 amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are applied retrospectively. In December 2011, with the issuance of ASU 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” the FASB announced that it has deferred certain aspects of ASU 2011-05. In February 2013, the FASB issued ASU 2013-2, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” with the stated objective of improving the reporting of reclassifications out of accumulated other comprehensive income. The amendments in ASU 2013-2 are effective during interim and annual periods beginning after December 31, 2012. The adoption of ASU 2011-05, 2011-12 and 2013-2 regarding comprehensive income have not had a significant impact on the accounting or disclosures in our financial statements. 

 

In December 2011, the FASB published ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11), which requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The objective of ASU 2011-11 is to make financial statements that are prepared under U.S. generally accepted accounting principles more comparable to those prepared under International Financial Reporting Standards. The new disclosures will give financial statement users information about both gross and net exposures. In January 2013, the FASB published ASU 2013-01, “Balance Sheet (Topic 210), Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” (ASU 2013-01), with the stated objective of clarifying the scope of offsetting disclosures and address any unintended consequences of ASU 2011-11. ASU 2011-11 and ASU 2013-01 are effective for interim and annual reporting periods beginning after January 1, 2013 and will be applied on a retrospective basis. The adoption of ASU 2011-11 and ASU 2013-01 did not have a material impact on our financial condition, results of operations, or liquidity.

 

NOTE B LONG-TERM DEBT AND OTHER BORROWINGS

 

On June 24, 2011, we entered into a credit agreement with JPMorgan Chase Bank, N.A. which was amended on December 4, 2012 (as amended, the Credit Agreement). Under the Credit Agreement, we, along with certain of our subsidiaries, are named as borrowers, and all obligations under the Credit Agreement are guaranteed by all of our existing and future, direct and indirect, domestic subsidiaries. The Credit Agreement includes borrowing capacity of $20.0 million, is available for letters of credit (with a sublimit of $5.0 million), and includes an uncommitted $20.0 million expansion feature. The Credit Agreement may be used to fund our working capital needs, letters of credit, and for general partnership purposes, including capital expenditures and potential future acquisitions. So long as we are not in default, the Credit Agreement may also be used to fund quarterly distributions. Borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default. The maturity date of the Credit Agreement is June 24, 2015On March 25, 2013, we borrowed an additional $4.25 million pursuant to the Credit Agreement, which was used to fund ongoing capital expenditures related to the expansion of our domestic and Canadian fleet of compressor units and other

 

8

 

equipment and to fund ongoing upgrades to our domestic compressor fleet. Borrowings under the Credit Agreement bear interest at a rate equal to three month British Bankers Association LIBOR (adjusted to reflect any required bank reserves) plus a margin of 2.25% per annum. As of March 31, 2013, the $14.3 million outstanding under the Credit Agreement bears interest at a weighted average rate of 2.5625% per annum. As of March 31, 2013, we have availability under our revolving credit facility of $5.3 million, based upon a $19.6 million borrowing capacity and the $14.3 million outstanding balance.

 

NOTE C – RELATED PARTY TRANSACTIONS

 

Set forth below are descriptions of certain agreements we entered into with related parties in connection with the completion of our initial public offering (the Offering) on June 20, 2011. The descriptions are not complete and are qualified in their entirety by reference to the full text of the agreements, which are filed as exhibits to filings with the SEC.

 

Omnibus Agreement

 

On June 20, 2011, in connection with the completion of the Offering, we entered into an omnibus agreement (the Omnibus Agreement) with TETRA and our General Partner.

 

Under the terms of the Omnibus Agreement, our General Partner provides all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico and Argentina), and certain of TETRA’s Latin American-based subsidiaries provide personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provides certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. Pursuant to the Omnibus Agreement, we reimburse our General Partner and TETRA for services they provide to us.

 

Under the terms of the Omnibus Agreement, TETRA has agreed to indemnify us for three years after the completion of the Offering against certain potential environmental claims, losses, and expenses associated with the operation of the business prior to the completion of the Offering. TETRA’s maximum liability for this indemnification obligation is $5.0 million, and TETRA will not have any obligation under this indemnification until our aggregate losses exceed $250,000. TETRA will have no indemnification obligations with respect to environmental claims made as a result of new or modified environmental laws promulgated after the completion of the Offering. We have agreed to indemnify TETRA for environmental claims arising following the completion of the Offering regarding the business contributed to us.

 

Under the terms of the Omnibus Agreement, we or TETRA may, but neither are under any obligation to, perform for the other such production enhancement or other oilfield services on a subcontract basis as are needed or desired by the other, for such periods of time and in such amounts as may be mutually agreed upon by TETRA and our General Partner. Any such services are required to be performed on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner.

 

Under the terms of the Omnibus Agreement, we or TETRA may, but are under no obligation to, sell, lease or like-kind exchange to the other such production enhancement or other oilfield services equipment as is needed or desired to meet either of our production enhancement or other oilfield services obligations, in such amounts, upon such conditions and for such periods of time, if applicable, as may be mutually agreed upon by TETRA and our General Partner. Any such sales, leases, or like-kind exchanges are required to be on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner. In addition, unless otherwise approved by the conflicts committee of our General Partner’s board of directors, TETRA may purchase newly fabricated equipment from us at a negotiated price provided that such price may not be less than the sum of the total costs (other than any allocations of general and administrative expenses) incurred by us in fabricating such equipment plus a fixed margin percentage thereof, and TETRA may

 

9

 

purchase from us previously fabricated equipment for a price that is not less than the sum of the net book value of such equipment plus a fixed margin percentage thereof.

 

TETRA has also agreed to indemnify us for liabilities related to: (1) certain defects in title to our assets as of the completion of the Offering and any failure to obtain, prior to the completion of the Offering, certain consents and permits necessary to own and operate such assets, to the extent we notify TETRA within three years after the completion of the Offering; and (2) tax liabilities attributable to the operation of our assets prior to the completion of the Offering.

 

The Omnibus Agreement (other than the indemnification obligations described above) will terminate upon the earlier to occur of (i) a change of control of our General Partner or TETRA or (ii) the third anniversary of the completion of this Offering, unless we, our General Partner, or TETRA decide to extend the term of the Omnibus Agreement.

 

NOTE D – INCOME TAXES

 

Our operations are not subject to federal income tax other than the operations that are conducted through a taxable subsidiary. We will incur state and local income taxes in certain of the United States in which we conduct business. We incur income taxes and will be subject to withholding requirements related to certain of our operations in Mexico, Canada, and other foreign countries in which we operate. Furthermore, we will also incur Texas Margin Tax, which, in accordance with FASB ASC 740, is classified as an income tax for reporting purposes.

 

NOTE E – COMMITMENTS AND CONTINGENCIES

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of any lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.

 

NOTE F – SUBSEQUENT EVENTS

 

On April 19, 2013, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2013 of $0.425 per unit. This cash distribution is to be paid on May 15, 2013, to all unitholders of record as of the close of business on May 1, 2013.

 

10

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC on March 11, 2013. This discussion includes forward-looking statements that involve certain risks and uncertainties.

 

Business Overview

 

We are a provider of compression-based production enhancement services, which are used in both conventional wellhead compression applications and unconventional compression applications, and, in certain circumstances, well monitoring and sand separation services. We provide our services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region.

 

Over time, oil and natural gas wells exhibit declining pressure and production. Production enhancement technologies are designed to enhance daily production and total recoverable reserves. Our conventional compression-based production enhancement services are utilized to increase production by deliquifying wells, lowering wellhead pressure, and increasing gas velocity. Our conventional applications include production enhancement services for dry gas wells and liquid-loaded gas wells, and backside auto injection systems (“BAIS”) for liquid-loaded gas wells. Our unconventional applications are utilized primarily in connection with oil and liquids production and include vapor recovery and casing gas system applications. In certain circumstances, in connection with our primary production enhancement services, we also provide ongoing well monitoring services and automated sand separation services. While our conventional applications are primarily associated with mature gas wells with low formation pressures, they are also effectively utilized on newer gas wells that have experienced significant production declines. Our field services are performed by our highly trained staff of regional service supervisors, optimization specialists, and field mechanics. In addition, we design and manufacture most of the compressor units we use to provide our services, and, in certain markets, we sell our compressor units to customers.

 

The level of our production enhancement services operations is generally dependent upon the demand for, and prices of, natural gas in the locations in which we operate. Domestic natural gas prices increased over the second half of 2012 and continued to increase during the first quarter of 2013. Combined with increased unconventional applications, strengthening natural gas prices contributed to increased domestic services revenues compared to the prior year period. However, any prolonged substantial reduction in natural gas prices could result in a decline in demand for our production enhancement services.

 

Overall, our total revenues increased during the three months ended March 31, 2013, compared to the corresponding prior year period. This increase reflects:

 

         increased compression and well monitoring services in Latin America;

         growth of the fleet within our other international operations; and

         improved overall utilization of the existing fleet, including for our unconventional applications

 

The increased activity in Latin America has required investments in fixed assets and working capital and resulted in additional personnel and related administrative services provided through the Omnibus Services Agreement with TETRA. In addition, our ability to maintain the increased activity in Latin America is subject to potential volatility relating to our Mexico operations as addressed in more detail under “Liquidity and Capital Resources - Cash Flows.”

 

How We Evaluate Our Operations

 

Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, year-to-date, and year-to-year comparisons, and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures if possible. The most significant portions of our operating expenses are the labor costs of our field personnel, repair and maintenance of our equipment, and the fuel and other supplies consumed while providing our services. Other materials consumed while performing our services, ad valorem

 

11

 

taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with the level of activities performed.
 

Our labor costs consist primarily of wages and benefits for our field personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three month period ended March 31, 2013, is provided within the results of operations sections below.

 

EBITDA. We view EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (compared to the prior month, prior year period, and to budget). We define EBITDA as earnings before interest, taxes, depreciation, and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:

         assess our ability to generate available cash sufficient to make distributions to our unitholders and General Partner;

         evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;

         measure operating performance and return on capital as compared to our competitors; and

         determine our ability to incur and service debt and fund capital expenditures.

 

EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities, or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to EBITDA or similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.

 

The following table reconciles net income to EBITDA for the periods indicated:

 

 

Three Months Ended

 

March 31,

 

2013

 

2012

 

(In Thousands)

Net income

$

4,539 

 

 

$

2,767 

 

Provision for income taxes

 

722 

 

 

 

489 

 

Depreciation and amortization

 

3,473 

 

 

 

3,089 

 

Interest (income) expense, net

 

58 

 

 

 

(12)

 

EBITDA

$

8,792 

 

 

$

6,333 

 

 

 

 

 

 

 

 

 

 

The following table reconciles cash flow from operating activities to EBITDA:

 

 

Three Months Ended

 

March 31,

 

2013

 

2012

 

(In Thousands)

Cash flow from operating activities

$

6,764 

 

 

$

2,245 

 

Changes in current assets and current liabilities

 

1,476 

 

 

 

3,993 

 

Deferred income taxes

 

172 

 

 

 

32 

 

Other non-cash charges

 

(400)

 

 

 

(414)

 

Interest (income) expense, net

 

58 

 

 

 

(12)

 

Provision for income taxes

 

722 

 

 

 

489 

 

EBITDA

$

8,792 

 

 

$

6,333 

 

 

 

12

 

Average Utilization Rate of our Compressor Units. We measure the average compressor unit utilization rate of our fleet of compressor units as the average number of compressor units used to provide services during a particular period, divided by the average number of compressor units in our fleet during such period. Our management primarily uses this metric to determine our future need for additional compressor units.

 

The following table sets forth our historical fleet size and average number of compressor units being utilized to provide our production enhancement services during the periods shown and our average utilization rates during those periods.

 

 

Three Months Ended

 

March 31,

 

2013

 

2012

 

 

 

 

 

 

 

 

Total compressor units in fleet (at period end)

 

3,843 

 

 

 

3,659 

 

Total compressor units in service (at period end)

 

3,149 

 

 

 

2,877 

 

Average number of compressor units in service (during period)(1)

 

3,174 

 

 

 

2,909 

 

Average compressor unit utilization (during period)(2)

 

83.7% 

 

 

 

79.6% 

 


(1)

“Average number of compressor units in service” for each period shown is determined by calculating an average of two numbers, the first of which is the number of compressor units being used to provide services at the beginning of the period and the second of which is the number of compressor units being used to provide services at the end of the period.

(2)

“Average compressor unit utilization” for each period shown is determined by dividing the average number of compressor units in service during such period by the average of two numbers, the first of which is the total number of compressor units in our fleet at the beginning of such period and the second of which is the total number of compressor units in our fleet at the end of such period.

 

Net Increase in Compressor Fleet Size. We define the net increase in our compressor fleet size during a given period of time as the difference between the number of compressor units we placed into service, less the number of compressor units we removed from service. Management uses this metric to evaluate our operating performance and specifically the effectiveness of our marketing efforts. Additional information regarding changes in the size of our compressor fleet for the three month period ended March 31, 2013, is provided within the results of operations sections below.

 

Critical Accounting Policies

 

There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended December 31, 2012. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the useful life of long-lived assets, and the collectability of accounts receivable. Our estimates are based on historical experience and on future expectations that we believe are reasonable. The fair values of a large portion of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.

 

13

 

Results of Operations

 

The following data should be read in conjunction with the Consolidated Financial Statements and the associated Notes contained elsewhere in this document.

 

 

 

 

Period-to-Period

 

 

 

 

 

Change

 

 

 

Three

 

Three Months Ended

 

Months Ended

 

March 31,

 

March 31,

Combined Results of Operations

2013

 

2012

 

2013 vs. 2012

 

(In Thousands)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Compression and other services

$

29,679 

 

 

$

21,369 

 

 

$

8,310 

 

Sales of compressors and parts

 

1,088 

 

 

 

1,162 

 

 

 

(74)

 

Total revenues

$

30,767 

 

 

$

22,531 

 

 

$

8,236 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

Cost of compression and other

 

 

 

 

 

 

 

 

 

 

 

services

$

16,769 

 

 

$

11,191 

 

 

$

5,578 

 

Cost of compressors and parts sales

 

617 

 

 

 

608 

 

 

 

9 

 

Total cost of revenues

$

17,386 

 

 

$

11,799 

 

 

$

5,587 

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

expense

 

4,606 

 

 

 

4,589 

 

 

 

17 

 

Depreciation and amortization

 

3,473 

 

 

 

3,089 

 

 

 

384 

 

Interest (income) expense, net

 

58 

 

 

 

(12)

 

 

 

70 

 

Other (income) expense, net

 

(17)

 

 

 

(190)

 

 

 

173 

 

Income before income taxes

$

5,261 

 

 

$

3,256 

 

 

$

2,005 

 

Provision for income taxes

 

722 

 

 

 

489 

 

 

 

233 

 

Net income

$

4,539 

 

 

$

2,767 

 

 

$

1,772 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period-to-Period

 

 

 

 

 

Change

 

Percentage of Total Revenues

 

Three

 

Three Months Ended

 

Months Ended

 

March 31,

 

March 31,

Combined Results of Operations

2013

 

2012

 

2013 vs. 2012

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Compression and other services

 

96.5% 

 

 

 

94.8% 

 

 

 

38.9% 

 

Sales of compressors and parts

 

3.5% 

 

 

 

5.2% 

 

 

 

(6.4)%

 

Total revenues

 

100.0% 

 

 

 

100.0% 

 

 

 

36.6% 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

Cost of compression and other

 

 

 

 

 

 

 

 

 

 

 

services

 

54.5% 

 

 

 

49.7% 

 

 

 

49.8% 

 

Cost of compressors and parts sales

 

2.0% 

 

 

 

2.7% 

 

 

 

1.5% 

 

Total cost of revenues

 

56.5% 

 

 

 

52.4% 

 

 

 

47.4% 

 

Selling, general and administrative

 

 

 

 

 

 

 

 

 

 

 

expense

 

15.0% 

 

 

 

20.4% 

 

 

 

0.4% 

 

Depreciation and amortization

 

11.3% 

 

 

 

13.7% 

 

 

 

12.4% 

 

Interest (income) expense, net

 

0.2% 

 

 

 

(0.1)%

 

 

 

(583.3)%

 

Other (income) expense, net

 

(0.1)%

 

 

 

(0.8)%

 

 

 

(91.1)%

 

Income before income taxes

 

17.1% 

 

 

 

14.5% 

 

 

 

61.6% 

 

Net income

 

14.8% 

 

 

 

12.3% 

 

 

 

64.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

 

Revenues

 

Our consolidated revenues for the three months ended March 31, 2013, increased 36.6% to $30.8 million compared to $22.5 million for the three months ended March 31, 2012. This change was associated with a 38.9% increase in revenues from compression and other services, as we utilized an average of 3,174 compressor units to provide services during the three months ended March 31, 2013, compared to an average of 2,909 compressor units during the three months ended March 31, 2012. Latin America service revenues for the three months ended March 31, 2013, increased $6.4 million due to additional units in service, primarily in Mexico and Argentina. As a result of current budget re-evaluations by Petróleos Mexicanos (PEMEX), in March 2013, we began to experience a decline in the level of demand for our oil and gas services in Mexico, and this decline has continued into April 2013. As a result, we anticipate a corresponding decline in our revenues attributable to Mexico in the second quarter of 2013.  We believe this decline in demand is temporary. The continuation or increase of current levels of Latin America revenues is dependent on the resolution of these customer budget re-evaluations and the renewal of certain contracts with PEMEX. Issues regarding PEMEX are discussed in more detail under “Liquidity and Capital Resources - Cash Flows.”  An increase in domestic and Canadian natural gas prices from the prior year period positively affected demand for our compression services during the quarter ended March 31, 2013, and has resulted in a slight increase in average prices and an increase in the average numbers of compressor units in service in those regions. In addition, revenues increased from international markets other than Latin America, particularly the Asia-Pacific region, and we expect these revenues to continue to increase compared to the prior year period.

 

The increase in consolidated service revenues was slightly offset by a $0.1 million decrease in revenues from sales of compressor units and parts, to $1.1 million during the three month period ended March 31, 2013, from $1.2 million during the three months ended March 31, 2012. Although sales of compressor units are a typical part of our operations, the level of revenues from sales of compressors is volatile and more difficult to forecast than are our revenues from compression and other services.

 

Cost of revenues

 

Consolidated cost of revenues increased to $17.4 million for the three months ended March 31, 2013, from $11.8 million for the same period in 2012. Cost of compression and other services increased to $16.8 million during the current year period from $11.2 million during the prior year period. These increases were primarily due to the increased service activity, particularly in Latin America. Consolidated cost of compression and other services as a percentage of consolidated compression and other services revenues increased to 56.5% during the current year period from 52.4% during the prior year period. This increase was due to increased costs in Latin America, including fuel, equipment, and labor costs, and domestically, where costs increased primarily due to increased equipment maintenance expense and wage increases. We have taken appropriate cost reduction steps overall in response to the decline in demand for our services in Mexico noted above. Consistent with the relatively constant level of sales of compressor units, cost of compressors and part sales remained flat compared to the prior year period.

 

Selling, general, and administrative expense

 

Selling, general and administrative expense was consistent at $4.6 million for the three months ended March 31, 2013, and the three months ended March 31, 2012. As a percentage of consolidated revenues, our selling, general and administrative expense decreased during the current year quarter to 15.0% from 20.4% for the prior year period. Selling, general, and administrative expense levels were consistent with the prior year period despite the significant growth in revenues as increases in administrative salary and personnel related expenses were offset by decreases in bad debt and other administrative expenses.

 

Depreciation and amortization

 

Depreciation and amortization expense primarily consists of the depreciation of compressor units. In addition, it includes the depreciation of other operating equipment and facilities. Primarily as a result of additional units placed into service to meet increased demand in Latin America, depreciation and amortization expense increased $0.4 million to $3.5 million during the three months ended March 31, 2013, compared to $3.1 million for the three months ended March 31, 2012.

 

15

 

Interest (income) expense

 

On March 25, 2013, we borrowed an additional $4.25 million pursuant to the Credit Agreement, bringing our total outstanding borrowings under the Credit Agreement to $14.3 million, and this amount is outstanding at March 31, 2013.  We incurred $45,000 of interest expense in the current year period associated with our borrowings under the Credit Agreement. There was no outstanding Credit Agreement debt or related interest expense in the prior year period.

 

Other (income) expense, net

 

Other (income) expense, net, decreased by $0.2 million during the three months ended March 31, 2013, compared to the prior year period, primarily due to decreased foreign currency exchange net gains from our Latin America operations.

 

Income before taxes, provision for income taxes, and net income

 

Income before taxes increased $2.0 million for the three months ended March 31, 2013 to $5.3 million, compared to $3.3 million for the three months ended March 31, 2012. As a percentage of consolidated total revenues, income before taxes increased to 17.1% for the three months ended March 31, 2013, compared to 14.5% for the corresponding prior year period. Our operations are not subject to U.S. federal income tax other than with respect to the operations that are conducted through our taxable U.S. corporate subsidiary. We also incur state and local income taxes in certain states and we incur income taxes related to our foreign operations. Net income for the three months ended March 31, 2013, increased $1.8 million compared to the corresponding prior year period. As described above, our profitability increased due to increased revenues, primarily internationally.

 

Liquidity and Capital Resources

 

Our primary cash requirements are for distributions, working capital requirements, normal operating expenses, and capital expenditures. Our sources of funds are our existing cash balances, cash generated from our operations, long-term and short-term borrowings, and future issuances of equity, which we believe will be sufficient to meet our working capital requirements. We believe that we have sufficient liquid assets, cash flow from operations, and borrowing capacity to meet our financial commitments, debt service obligations, and anticipated capital expenditures. We expect to fund future acquisitions and capital expenditures with cash flow generated from operations, funds borrowed under our credit facility, funds received from the issuance of long-term debt, and the issuance of additional equity. However, we are subject to business and operational risks that could materially adversely affect our cash flows. Please read Part II, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

The continued growth in our operations, both internationally and domestically, requires ongoing significant capital expenditure investment. In addition to this capital expenditure investment, budget re-evaluations and related increased receivable collection time from our primary customer in Mexico has resulted in increased working capital requirements. Continued growth of our operations or increased working capital requirements could result in the need for additional borrowings. 

 

On April 19, 2013, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2013, of $0.425 per unit. This distribution equates to a distribution of $1.70 per outstanding unit, or approximately $27.0 million, on an annualized basis. This cash distribution is to be paid on May 15, 2013, to all unitholders of record as of the close of business on May 1, 2013.

 

Cash Flows

 

The following table summarizes our primary sources and uses of cash for the three month periods ended March 31, 2013 and 2012:

 

 

Three Months Ended March 31,

 

2013

 

2012

 

(In Thousands)

Net cash provided by operating activities

$

6,764 

 

 

$

2,245 

 

Net cash used in investing activities

 

(7,888)

 

 

 

(7,643)

 

Net cash used in financing activities

 

(2,410)

 

 

 

(6,109)

 

 

16

 

Operating Activities

 

Net cash from operating activities increased by $4.5 million during the three month period ended March 31, 2013, to $6.8 million compared to $2.2 million for the 2012 period, due to the operating cash flow growth related to increases in our overall revenues and earnings. Increased overall service revenue, particularly in Latin America, contributed to the increase in our amounts payable to affiliates as of March 31, 2013. As discussed above, this increase in payables was offset by an increase in receivables in Latin America, particularly in Mexico, partly due to increased collection time. Cash provided from operating activities in Mexico, including the timing of collection of our receivables from PEMEX, is subject to the volatility associated with our Mexico operations, including operations interruptions and collection delays caused by current PEMEX budgetary issues, uncertainties regarding the renewal of our existing customer contracts with PEMEX under their current terms and the possibility that new contracts for such projects could be awarded to our competitors, other changes in contract arrangements, security concerns, and other risks.   

 

During the three month period ended March 31, 2013, PEMEX represented 31.6% of our total revenues.  Certain of our existing PEMEX contracts, which represent a majority of these revenues, were extended in the fourth quarter of 2012 until June 30, 2013. We expect that we will bid on new contracts covering these activities during the second quarter of 2013.  Based on our prior course of business with PEMEX, we anticipate that we will be awarded new contracts or be able to extend some or a majority of our activities under the existing contracts on the same or similar terms, or to provide similar services under other of our contracts with PEMEX.  However, there are no assurances that we will retain all of our current business with PEMEX.

 

Investing Activities

 

Capital expenditures during the three month period ended March 31, 2013, increased by $0.2 million to $7.9 million compared to $7.6 million for 2012, primarily due to an increase in the number of compressor units manufactured or upgraded during the period. Included within this amount of current year period capital expenditures were maintenance capital expenditures of $0.2 million. The increase in the number of compressor units manufactured was primarily due to the increasing demand for domestic compression services. Compressor units were also upgraded during the current year period to facilitate the use of such units in domestic unconventional applications such as vapor recovery. We anticipate that additional capital expenditures will be required to meet increased demand, particularly if the price of natural gas continues to rise.

 

Financing Activities

 

Our partnership agreement requires that, within 45 days after the end of each quarter, we distribute all of our available cash, to our unitholders of record on the applicable record date and to our General Partner. During the three month period ended March 31, 2013, we distributed approximately $6.7 million to our unitholders and General Partner attributed to the quarter ended December 31, 2012. On April 19, 2013, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2013, of $0.425 per unit. This distribution equates to a distribution of $1.70 per outstanding unit, or approximately $27.0 million, on an annualized basis. This cash distribution is to be paid on May 15, 2013, to all unitholders of record as of the close of business on May 1, 2013.

 

Our sources of funds for liquidity needs are existing cash balances, cash generated from our operations, long-term and short-term borrowings, and future issuances of equity.

 

Bank Credit Facilities On June 24, 2011, we entered into a Credit Agreement with JPMorgan Chase Bank, N.A., which was subsequently amended on December 4, 2012. Under the Credit Agreement, we, along with certain of our subsidiaries, are named as borrowers, and all obligations under the Credit Agreement are guaranteed by all of our existing and future, direct and indirect, domestic subsidiaries. The Credit Agreement includes borrowing capacity of $20.0 million, is available for letters of credit (with a sublimit of $5.0 million), and includes an uncommitted $20.0 million expansion feature. The Credit Agreement may be used to fund our working capital needs, letters of credit, and for general partnership purposes, including capital expenditures and potential acquisitions. So long as we are not in default, the Credit Agreement may also be used to fund quarterly distributions. Borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default. The maturity date of the Credit Agreement is June 24, 2015.  On March 25, 2013, we borrowed an additional $4.25 million pursuant to the Credit Agreement, which was used to fund ongoing

 

17

 

capital expenditures related to the expansion of our domestic and Canadian fleet of compressor units and other equipment and to fund ongoing upgrades to our domestic compressor fleet.

 

All obligations under the Credit Agreement and the guarantees of those obligations are secured, subject to certain exceptions, by a first-lien security interest in substantially all of our assets and the assets (excluding real property) of our existing and future, direct and indirect, domestic subsidiaries, and all of the capital stock of our existing and future, direct and indirect, subsidiaries (limited, in the case of foreign subsidiaries, to 65% of the capital stock of first-tier foreign subsidiaries). Borrowings under the Credit Agreement are limited to a borrowing capacity that is determined based on our domestic accounts receivable, inventory, and compressor fleet less a reserve of $3 million. As of March 31, 2013, we have availability under our revolving credit facility of $5.3 million, based upon a $19.6 million calculated current borrowing capacity and the $14.3 million outstanding balance.

 

Borrowings under the Credit Agreement bear interest at a rate per annum equal to, at our option, either (a) British Bankers Association LIBOR (adjusted to reflect any required bank reserves) for an interest period equal to one, two, three or six months (as we select) plus a margin of 2.25% per annum or (b) a base rate determined by reference to the highest of (1) the prime rate of interest announced from time to time by JPMorgan Chase Bank, N.A. or (2) British Bankers Association LIBOR (adjusted to reflect any required bank reserves) for a one-month interest period on such day, plus 2.50% per annum. In addition to paying interest on any outstanding principal under the Credit Agreement, we are required to pay a commitment fee in respect of the unutilized commitments thereunder of 0.425% per annum, paid quarterly in arrears. We are also required to pay customary collateral monitoring fees and letter of credit fees, including without limitation, a letter of credit fee equal to the applicable margin on revolving credit LIBOR loans and fronting fees.

 

At any time, we may voluntarily reduce the unutilized portion of the revolving commitment amount or prepay, in whole or in part, outstanding amounts under the Credit Agreement without premium or penalty, other than customary “breakage” costs with respect to Eurodollar rate loans. The Credit Agreement contains a mandatory prepayment feature that requires the prepayment of amounts outstanding under the Credit Agreement (without a concurrent reduction of the revolving credit facility commitment): (i) upon a sale or transfer of our assets (excluding inventory sold in the ordinary course of business and subject to exceptions, including reinvestment of proceeds); (ii) upon the receipt of proceeds from the issuance of any indebtedness (other than indebtedness permitted by the Credit Agreement); (iii) when there is an availability shortfall under the Credit Agreement; and (iv) upon receipt of property or casualty insurance proceeds or condemnation awards (unless applied to replace lost or condemned assets).

 

The Credit Agreement requires us to maintain a minimum interest coverage ratio (ratio of earnings before interest and taxes to interest) of 2.5 to 1.0 as of the last day of any fiscal quarter, calculated on a trailing four quarter basis, whenever availability is less than $5 million. In addition, the Credit Agreement includes customary negative covenants, which, among other things, limit our ability to incur additional debt, incur or permit certain liens to exist, or make certain loans, investment, acquisitions or other restricted payments. The Credit Agreement contains certain customary representations and warranties, affirmative covenants, and events of default, including among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, or ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the revolving credit facility to be in force and effect, and change of control. If an event of default occurs, our lenders would be entitled to take various actions, including the acceleration of amounts due under the Credit Agreement and all actions permitted to be taken by secured creditors. We are in compliance with the covenants and conditions of our Credit Agreement as of March 31, 2013.

 

Off Balance Sheet Arrangements

 

As of March 31, 2013, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.

 

Commitments and Contingencies

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations or cash flows.

 

18

 

Cautionary Statement for Purposes of Forward-Looking Statements

 

Certain statements contained herein and elsewhere may be deemed to be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to the “safe harbor” provisions of that act. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “will,” “would,” “could,” “estimates,” and similar terms. These forward-looking statements include, without limitation, statements concerning our business outlook, future or expected sales, earnings, costs, expenses, acquisitions, asset recoveries, working capital, capital expenditures, financial condition, other results of operations, anticipated activities by our customers, our ability to extend or obtain contracts with our customers, the expected impact of current economic and capital market conditions on the oil and gas industry and our operations, other statements regarding our beliefs, plans, goals, future events and performance, and other statements that are not purely historical. Such statements reflect our current views with respect to future events and financial performance and involve risks and uncertainties, many of which are beyond our control. Actual results could differ materially from the expectations expressed in such forward-looking statements. Some of the risk factors that could affect our actual results and cause actual results to differ materially from any such results that might be projected, forecast, estimated, or budgeted by us in such forward-looking statements are set forth in Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 11, 2013, and others that may be set forth from time to time in our filings with the SEC. We undertake no obligation to publicly update or revise any forward-looking statement, except as may be required by law.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any commodities in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. While we have a significant number of customers who have retained our services through periods of high and low commodity prices, we generally experience less growth and more customer attrition during periods of significantly high or low commodity prices. For a discussion of our indirect exposure to fluctuating commodity prices, please read “Risk Factors — Certain Business Risks” in our Annual Report on Form 10-K filed with the SEC on March 11, 2013. We depend on domestic and international demand for and production of oil and natural gas, and a reduction in this demand or production could adversely affect the demand or the prices we charge for our services, which could cause our revenues and cash available for distribution to our unitholders to decrease in the future. We do not currently hedge, and do not intend to hedge, our indirect exposure to fluctuating commodity prices.

 

We have exposure to changes in interest rates on our indebtedness associated with the revolving credit facility. On March 31, 2013, we had a total of $14.3 million outstanding under the Credit Agreement. As interest charged on the Credit Facility is based on a variable rate, we are exposed to floating interest rate risk on outstanding borrowings. Any increase or decrease in the prevailing interest rate will impact our interest expense during periods of indebtedness under the Credit Facility. We may use certain derivative instruments to hedge our exposure to variable interest rates in the future, but as of May 10, 2013, we do not have in place any hedges or forward contracts.

 

 

Expected Maturity Date

 

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market

 

2013

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Value

 

(In Thousands, Except Percentages)

As of March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. dollar variable rate

$

 

 

$

 

 

$

 

 

$

14,300

 

 

$

 

 

$

 

 

$

 

 

$

14,300

 

 

$

14,300

 

Weighted average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interest rate

 

 

 

 

 

 

 

 

 

 

2.563%

 

 

 

 

 

 

 

 

 

 

 

 

2.563%

 

 

 

2.563%

 

Variable to fixed swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed pay rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable receive rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We have exposure to changes in foreign exchange rates associated with our operations in Latin America and Canada. Most of our billings under our contracts with PEMEX and other clients in Mexico are denominated in U.S. dollars; however, a large portion of our expenses and costs under those contracts are incurred in Mexican pesos, and we retain cash balances denominated in pesos. As such, we are exposed to fluctuations in the value of

 

19

 

the Mexican peso against the U.S. dollar. As Mexican peso denominated assets are largely offset by Mexican peso denominated liabilities, a hypothetical increase or decrease in the U.S. dollar-Mexican peso foreign exchange rate of 2.0% would have a $159,000 impact on our net income for the three month period ended March 31, 2013. We may use certain derivative instruments to hedge our exposure to foreign exchange rates in the future, but, as of May 10, 2013, we do not have in place any hedges or forward contracts.

 

Item 4. Controls and Procedures.

 

Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer of our General Partner, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer of our General Partner concluded that our disclosure controls and procedures were effective as of March 31, 2013, the end of the period covered by this quarterly report.

 

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors.

 

There have been no material changes in the information pertaining to our Risk Factors as disclosed in our Annual Report on Form 10-K filed with SEC on March 11, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a)  None.

 

(b)  None.

 

(c)  Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

 

 

 

 

 

 

 

 

 

 

 

Maximum Number (or

 

 

 

 

 

Average

 

 

Total Number of Units

 

 

Approximate Dollar Value) of

 

 

Total Number

 

 

Price

 

 

Purchased as Part of

 

 

Units that May Yet be

 

 

of Units

 

 

Paid per

 

 

Publicly Announced

 

 

Purchased Under the Publicly

Period

 

Purchased

 

 

Unit

 

 

Plans or Programs(1)

 

 

Announced Plans or Programs(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan 1 – Jan 31, 2013

 

12,549 

 

 

$

17.46 

 

 

N/A

 

 

 

N/A

Feb 1 – Feb 28, 2013

 

 

 

 

 

 

 

 

N/A

 

 

 

N/A

Mar 1 – Mar 31, 2013

 

 

 

 

 

 

 

 

N/A

 

 

 

N/A

Total

 

12,549 

 

 

 

 

 

 

N/A

 

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Units acquired in connection with the vesting of certain employee restricted units.

 

20

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

None.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibits:

 

31.1

Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer Furnished 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 Principal Financial Officer Furnished Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document


*

Previously Filed.

**

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three month periods ended March 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012; (iii) Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012; (iv) Consolidated Statement of Partners’ Capital for the three months ended March 31, 2013; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012; and (iv) Notes to Consolidated Financial Statements for the three months ended March 31, 2013. Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data files in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.

 

21

 

 

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.

 

 

 

COMPRESSCO PARTNERS, L.P.

 

 

By:

Compressco Partners GP Inc.,

 

 

  its General Partner

 

 

 

 

Date: May 10, 2013

By:

/s/Ronald J. Foster

 

 

Ronald J. Foster, President

 

 

Principal Executive Officer

 

 

 

 

 

 

 

 

 

Date: May 10, 2013

By:

/s/James P. Rounsavall

 

 

James P. Rounsavall

 

 

Chief Financial Officer, Treasurer and Secretary

Principal Financial Officer

 

 

 

 

 

 

 

 

 

22

 

EXHIBIT INDEX

 

31.1

Certification of Principal Executive Officer Furnished Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Principal Financial Officer Furnished Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

Certification of Principal Executive Officer Furnished 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 Principal Financial Officer Furnished Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document


*

Previously Filed.

**

Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three month periods ended March 31, 2013 and 2012; (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012; (iii) Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012; (iv) Consolidated Statement of Partners’ Capital for the three months ended March 31, 2013; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012; and (iv) Notes to Consolidated Financial Statements for the three months ended March 31, 2013. Users of this data are advised pursuant to Rule 406T of Regulation S-T that the interactive data files in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and shall not be part of any registration statement or other document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly set forth by specific reference in such filing.