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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

(MARK ONE)

 

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED March 31, 2015

 

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. 001-33666

 

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-3204509

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

16666 Northchase Drive

 

 

Houston, Texas

 

77060

(Address of principal executive offices)

 

(Zip Code)

 

(281) 836-7000

(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 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 x 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 x

 

Accelerated filer o

 

 

 

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 x

 

Number of shares of the common stock of the registrant outstanding as of April 28, 2015: 69,410,744 shares.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Income

5

Condensed Consolidated Statements of Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

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

32

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

Item 4. Controls and Procedures

48

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

49

Item 1A. Risk Factors

49

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

49

Item 3. Defaults Upon Senior Securities

49

Item 4. Mine Safety Disclosures

49

Item 5. Other Information

49

Item 6. Exhibits

50

SIGNATURES

51

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

(unaudited)

 

 

 

March 31,
2015

 

December 31,
2014

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

52,011

 

$

39,739

 

Restricted cash

 

1,490

 

1,490

 

Accounts receivable, net of allowance of $4,137 and $4,419 respectively

 

505,948

 

558,042

 

Inventory, net

 

417,815

 

403,571

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

122,407

 

120,938

 

Current deferred income taxes

 

81,480

 

79,856

 

Other current assets

 

74,376

 

61,503

 

Current assets associated with discontinued operations

 

453

 

537

 

Total current assets

 

1,255,980

 

1,265,676

 

Property, plant and equipment, net

 

3,334,161

 

3,326,892

 

Goodwill

 

3,738

 

3,738

 

Intangible and other assets, net

 

232,659

 

243,372

 

Long-term assets associated with discontinued operations

 

 

17,469

 

Total assets

 

$

4,826,538

 

$

4,857,147

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable, trade

 

$

183,917

 

$

203,306

 

Accrued liabilities

 

225,693

 

259,759

 

Deferred revenue

 

70,169

 

69,310

 

Billings on uncompleted contracts in excess of costs and estimated earnings

 

90,237

 

76,277

 

Current liabilities associated with discontinued operations

 

1,771

 

2,066

 

Total current liabilities

 

571,787

 

610,718

 

Long-term debt

 

2,047,575

 

2,026,902

 

Deferred income taxes

 

174,140

 

187,445

 

Other long-term liabilities

 

81,115

 

78,720

 

Long-term liabilities associated with discontinued operations

 

340

 

317

 

Total liabilities

 

2,874,957

 

2,904,102

 

Commitments and contingencies (Note 15)

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero issued

 

 

 

Common stock, $0.01 par value per share; 250,000,000 shares authorized; 74,474,529 and 73,808,200 shares issued, respectively

 

745

 

738

 

Additional paid-in capital

 

3,721,241

 

3,715,586

 

Accumulated other comprehensive income

 

4,461

 

15,865

 

Accumulated deficit

 

(1,844,595

)

(1,866,397

)

Treasury stock — 5,079,748 and 4,963,013 common shares, at cost, respectively

 

(72,122

)

(68,532

)

Total Exterran stockholders’ equity

 

1,809,730

 

1,797,260

 

Noncontrolling interest

 

141,851

 

155,785

 

Total equity

 

1,951,581

 

1,953,045

 

Total liabilities and equity

 

$

4,826,538

 

$

4,857,147

 

 

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

 

3



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Revenues:

 

 

 

 

 

North America contract operations

 

$

202,261

 

$

156,523

 

International contract operations

 

120,691

 

111,040

 

Aftermarket services

 

86,856

 

88,048

 

Fabrication

 

319,274

 

287,397

 

 

 

729,082

 

643,008

 

Costs and expenses:

 

 

 

 

 

Cost of sales (excluding depreciation and amortization expense):

 

 

 

 

 

North America contract operations

 

82,679

 

71,081

 

International contract operations

 

44,339

 

41,032

 

Aftermarket services

 

65,934

 

67,821

 

Fabrication

 

267,118

 

229,588

 

Selling, general and administrative

 

86,686

 

92,578

 

Depreciation and amortization

 

95,808

 

85,522

 

Long-lived asset impairment

 

12,732

 

3,807

 

Restructuring charges

 

4,790

 

4,822

 

Interest expense

 

27,298

 

28,308

 

Equity in income of non-consolidated affiliates

 

(5,006

)

(4,693

)

Other (income) expense, net

 

7,841

 

(2,434

)

 

 

690,219

 

617,432

 

Income before income taxes

 

38,863

 

25,576

 

Provision for income taxes

 

16,491

 

9,409

 

Income from continuing operations

 

22,372

 

16,167

 

Income from discontinued operations, net of tax

 

18,713

 

18,727

 

Net income

 

41,085

 

34,894

 

Less: Net income attributable to the noncontrolling interest

 

(8,943

)

(2,298

)

Net income attributable to Exterran stockholders

 

$

32,142

 

$

32,596

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

Income from continuing operations attributable to Exterran common stockholders

 

$

0.19

 

$

0.21

 

Income from discontinued operations attributable to Exterran common stockholders

 

0.27

 

0.28

 

Net income attributable to Exterran common stockholders

 

$

0.46

 

$

0.49

 

 

 

 

 

 

 

Diluted income per common share:

 

 

 

 

 

Income from continuing operations attributable to Exterran common stockholders

 

$

0.19

 

$

0.20

 

Income from discontinued operations attributable to Exterran common stockholders

 

0.27

 

0.27

 

Net income attributable to Exterran common stockholders

 

$

0.46

 

$

0.47

 

 

 

 

 

 

 

Weighted average common shares outstanding used in income per common share:

 

 

 

 

 

Basic

 

68,252

 

65,390

 

Diluted

 

68,534

 

67,792

 

 

 

 

 

 

 

Dividends declared and paid per common share

 

$

0.15

 

$

0.15

 

 

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

 

4



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Net income

 

$

41,085

 

$

34,894

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Derivative loss, net of reclassifications to earnings

 

(4,650

)

(570

)

Amortization of terminated interest rate swaps

 

635

 

780

 

Foreign currency translation adjustment

 

(10,362

)

1,134

 

Total other comprehensive income (loss)

 

(14,377

)

1,344

 

Comprehensive income

 

26,708

 

36,238

 

Less: Comprehensive income attributable to the noncontrolling interest

 

(5,970

)

(2,324

)

Comprehensive income attributable to Exterran stockholders

 

$

20,738

 

$

33,914

 

 

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

 

5



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(unaudited)

 

 

 

Exterran Holdings, Inc. Stockholders

 

 

 

 

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury
Stock

 

Accumulated
Deficit

 

Noncontrolling
Interest

 

Total

 

Balance, January 1, 2014

 

$

725

 

$

3,769,429

 

$

30,078

 

$

(213,898

)

$

(1,924,244

)

$

151,338

 

$

1,813,428

 

Treasury stock purchased

 

 

 

 

 

 

 

(5,349

)

 

 

 

 

(5,349

)

Options exercised

 

4

 

8,516

 

 

 

 

 

 

 

 

 

8,520

 

Cash dividends

 

 

 

 

 

 

 

 

 

(9,989

)

 

 

(9,989

)

Shares issued in employee stock purchase plan

 

 

 

404

 

 

 

 

 

 

 

 

 

404

 

Stock-based compensation, net of forfeitures

 

4

 

6,797

 

 

 

 

 

 

 

468

 

7,269

 

Income tax benefit from stock-based compensation expense

 

 

 

6,396

 

 

 

 

 

 

 

 

 

6,396

 

Cash distribution to noncontrolling unitholders of the Partnership

 

 

 

 

 

 

 

 

 

 

 

(15,869

)

(15,869

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

32,596

 

2,298

 

34,894

 

Derivatives gain (loss), net of reclassifications to earnings
and tax

 

 

 

 

 

(596

)

 

 

 

 

26

 

(570

)

Amortization of terminated interest rate swaps, net of tax

 

 

 

 

 

780

 

 

 

 

 

 

 

780

 

Foreign currency translation adjustment

 

 

 

 

 

1,134

 

 

 

 

 

 

 

1,134

 

Balance, March 31, 2014

 

$

733

 

$

3,791,542

 

$

31,396

 

$

(219,247

)

$

(1,901,637

)

$

138,261

 

$

1,841,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

$

738

 

$

3,715,586

 

$

15,865

 

$

(68,532

)

$

(1,866,397

)

$

155,785

 

$

1,953,045

 

Treasury stock purchased

 

 

 

 

 

 

 

(3,678

)

 

 

 

 

(3,678

)

Options exercised

 

1

 

571

 

 

 

 

 

 

 

 

 

572

 

Cash dividends

 

 

 

 

 

 

 

 

 

(10,340

)

 

 

(10,340

)

Shares issued in employee stock purchase plan

 

 

 

419

 

 

 

 

 

 

 

 

 

419

 

Stock-based compensation, net of forfeitures

 

6

 

4,451

 

 

 

 

 

 

 

241

 

4,698

 

Income tax benefit from stock-based compensation expense

 

 

 

302

 

 

 

 

 

 

 

 

 

302

 

Cash distribution to noncontrolling unitholders of the Partnership

 

 

 

 

 

 

 

 

 

 

 

(20,145

)

(20,145

)

Shares issued for exercise of warrants

 

 

 

(88

)

 

 

88

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

32,142

 

8,943

 

41,085

 

Derivatives loss, net of reclassifications to earnings
and tax

 

 

 

 

 

(1,677

)

 

 

 

 

(2,973

)

(4,650

)

Amortization of terminated interest rate swaps, net of tax

 

 

 

 

 

635

 

 

 

 

 

 

 

635

 

Foreign currency translation adjustment

 

 

 

 

 

(10,362

)

 

 

 

 

 

 

(10,362

)

Balance, March 31, 2015

 

$

745

 

$

3,721,241

 

$

4,461

 

$

(72,122

)

$

(1,844,595

)

$

141,851

 

$

1,951,581

 

 

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

 

6



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

41,085

 

$

34,894

 

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

 

 

 

 

 

Depreciation and amortization

 

95,808

 

85,522

 

Long-lived asset impairment

 

12,732

 

3,807

 

Amortization of deferred financing costs

 

1,618

 

1,581

 

Income from discontinued operations, net of tax

 

(18,713

)

(18,727

)

Amortization of debt discount

 

286

 

6,363

 

Provision for doubtful accounts

 

622

 

1,081

 

Gain on sale of property, plant and equipment

 

(489

)

(2,362

)

Equity in income of non-consolidated affiliates

 

(5,006

)

(4,693

)

Amortization of terminated interest rate swaps

 

977

 

1,199

 

Interest rate swaps

 

(136

)

64

 

(Gain) loss on remeasurement of intercompany balances

 

7,508

 

(81

)

Stock-based compensation expense

 

4,698

 

7,269

 

Deferred income tax provision

 

620

 

(11,956

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable and notes

 

47,687

 

42,018

 

Inventory

 

(14,548

)

(8,540

)

Costs and estimated earnings versus billings on uncompleted contracts

 

12,304

 

(44,336

)

Other current assets

 

(15,417

)

(5,845

)

Accounts payable and other liabilities

 

(40,086

)

(18,010

)

Deferred revenue

 

3,764

 

(15,728

)

Other

 

(2,846

)

(667

)

Net cash provided by continuing operations

 

132,468

 

52,853

 

Net cash provided by discontinued operations

 

2,166

 

1,039

 

Net cash provided by operating activities

 

134,634

 

53,892

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(139,783

)

(99,214

)

Proceeds from sale of property, plant and equipment

 

8,910

 

10,863

 

Escrow deposit for business acquisition

 

 

(17,000

)

Return of investments in non-consolidated affiliates

 

5,006

 

4,890

 

Cash invested in non-consolidated affiliates

 

 

(197

)

Net cash used in continuing operations

 

(125,867

)

(100,658

)

Net cash provided by discontinued operations

 

16,530

 

16,726

 

Net cash used in investing activities

 

(109,337

)

(83,932

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

417,000

 

332,500

 

Repayments of long-term debt

 

(396,500

)

(255,500

)

Payments for debt issuance costs

 

(1,311

)

 

Payments for settlement of interest rate swaps that include financing elements

 

(942

)

(913

)

Proceeds from stock options exercised

 

572

 

8,520

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

419

 

404

 

Purchases of treasury stock

 

(3,678

)

(5,349

)

Dividends to Exterran stockholders

 

(10,340

)

(9,989

)

Stock-based compensation excess tax benefit

 

2,131

 

6,470

 

Distributions to noncontrolling partners in the Partnership

 

(20,145

)

(15,869

)

Net cash provided by (used in) financing activities

 

(12,794

)

60,274

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(231

)

(4,409

)

Net increase in cash and cash equivalents

 

12,272

 

25,825

 

Cash and cash equivalents at beginning of period

 

39,739

 

35,665

 

Cash and cash equivalents at end of period

 

$

52,011

 

$

61,490

 

 

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

 

7



Table of Contents

 

EXTERRAN HOLDINGS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements of Exterran Holdings, Inc. (“Exterran”, “our”, “we” or “us”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) 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 GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes 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, 2014. That report contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year.

 

On November 17, 2014, we announced that our board of directors had authorized management to pursue a plan to separate (the “Spin-off”) our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company (“Spinco”). Unless otherwise indicated, the financial statements and related footnote disclosures within this report exclude the potential future impact of the proposed Spin-off, if consummated. The effect of the proposed Spin-off could significantly change and materially impact future disclosures, results of operations, balance sheet and cash flow positions. See Note 2 for further discussion of the proposed Spin-off.

 

Earnings (Loss) Attributable to Exterran Common Stockholders Per Common Share

 

Basic income (loss) attributable to Exterran common stockholders per common share is computed using the two-class method, which is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two-class method, basic income (loss) attributable to Exterran common stockholders per common share is determined by dividing income (loss) attributable to Exterran common stockholders after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include our unvested restricted stock and certain stock settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.

 

Diluted income (loss) attributable to Exterran common stockholders per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock units, stock to be issued pursuant to our employee stock purchase plan and convertible senior notes, unless their effect would be anti-dilutive.

 

The following table summarizes net income attributable to Exterran common stockholders used in the calculation of basic and diluted income per common share (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Income from continuing operations attributable to Exterran stockholders

 

$

13,429

 

$

13,869

 

Income from discontinued operations, net of tax

 

18,713

 

18,727

 

Less: Net income attributable to participating securities

 

(410

)

(480

)

Net income attributable to Exterran common stockholders

 

$

31,732

 

$

32,116

 

 

8



Table of Contents

 

The following table shows the potential shares of common stock that were included in computing diluted income attributable to Exterran common stockholders per common share (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Weighted average common shares outstanding including participating securities

 

69,179

 

66,416

 

Less: Weighted average participating securities outstanding

 

(927

)

(1,026

)

Weighted average common shares outstanding — used in basic income per common share

 

68,252

 

65,390

 

Net dilutive potential common shares issuable:

 

 

 

 

 

On exercise of options and vesting of restricted stock units

 

282

 

616

 

On settlement of employee stock purchase plan shares

 

 

2

 

On exercise of warrants

 

 

1,784

 

On conversion of 4.25% convertible senior notes due 2014

 

*

 

**

 

Weighted average common shares outstanding — used in diluted income per common share

 

68,534

 

67,792

 

 


*                  Not applicable as the debt instrument was not outstanding during the period.

**           Excluded from diluted income per common share as their inclusion would have been anti-dilutive.

 

There were no adjustments to net income attributable to Exterran common stockholders for the diluted earnings (loss) per common share calculation during the three months ended March 31, 2015 and 2014.

 

The following table shows the potential shares of common stock issuable that were excluded from computing diluted income (loss) attributable to Exterran common stockholders per common share as their inclusion would have been anti-dilutive (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Net dilutive potential common shares issuable:

 

 

 

 

 

On exercise of options where exercise price is greater than average market value for the period

 

568

 

586

 

On conversion of 4.25% convertible senior notes due 2014

 

 

15,393

 

Net dilutive potential common shares issuable

 

568

 

15,979

 

 

Comprehensive Income (Loss)

 

Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive income (loss) consists of foreign currency translation adjustments, changes in the fair value of derivative financial instruments, net of tax, that are designated as cash flow hedges and to the extent the hedge is effective, amortization of terminated interest rate swaps and adjustments related to changes in our ownership of Exterran Partners, L.P. (the “Partnership”).

 

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The following table presents the changes in accumulated other comprehensive income (loss) by component, net of tax and excluding noncontrolling interest, during the three months ended March 31, 2014 and 2015 (in thousands):

 

 

 

Derivatives
Cash Flow
Hedges

 

Foreign
Currency
Translation
Adjustment

 

Total

 

Accumulated other comprehensive income (loss), January 1, 2014

 

$

(1,346

)

$

31,424

 

$

30,078

 

Gain (loss) recognized in other comprehensive income (loss), net of tax

 

(254

)(1)

1,134

 

880

 

Loss reclassified from accumulated other comprehensive income (loss), net of tax

 

438

(2)

 

438

 

Other comprehensive income attributable to Exterran stockholders

 

184

 

1,134

 

1,318

 

Accumulated other comprehensive income (loss), March 31, 2014

 

$

(1,162

)

$

32,558

 

$

31,396

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss), January 1, 2015

 

$

(911

)

$

16,776

 

$

15,865

 

Loss recognized in other comprehensive income (loss), net of tax

 

(1,502

)(3)

(10,362

)

(11,864

)

Loss reclassified from accumulated other comprehensive income (loss), net of tax

 

460

(4)

 

460

 

Other comprehensive loss attributable to Exterran stockholders

 

(1,042

)

(10,362

)

(11,404

)

Accumulated other comprehensive income (loss), March 31, 2015

 

$

(1,953

)

$

6,414

 

$

4,461

 

 


(1)         During the three months ended March 31, 2014, we recognized a loss of $0.4 million and a tax benefit of $0.1 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments.

 

(2)         During the three months ended March 31, 2014, we reclassified a $0.6 million loss to interest expense and a tax benefit of $0.2 million to provision for income taxes, in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

 

(3)         During the three months ended March 31, 2015, we recognized a loss of $2.3 million and a tax benefit of $0.8 million, in other comprehensive income (loss), net of tax, related to changes in the fair value of derivative financial instruments.

 

(4)        During the three months ended March 31, 2015, we reclassified a $0.7 million loss to interest expense and a tax benefit of $0.2 million to provision for (benefit from) income taxes, in our condensed consolidated statements of operations from accumulated other comprehensive income (loss).

 

Financial Instruments

 

Our financial instruments consist of cash, restricted cash, receivables, payables, interest rate swaps and debt. At March 31, 2015 and December 31, 2014, the estimated fair values of these financial instruments approximated their carrying amounts as reflected in our condensed consolidated balance sheets. The fair value of our fixed rate debt was estimated based on quoted market yields in inactive markets, which are Level 2 inputs. The fair value of our floating rate debt was estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs. See Note 10 for additional information regarding the fair value hierarchy.

 

The following table summarizes the carrying amount and fair value of our debt as of March 31, 2015 and December 31, 2014 (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Fixed rate debt

 

$

1,041,575

 

$

1,006,000

 

$

1,041,402

 

$

960,000

 

Floating rate debt

 

1,006,000

 

1,007,000

 

985,500

 

986,000

 

Total debt

 

$

2,047,575

 

$

2,013,000

 

$

2,026,902

 

$

1,946,000

 

 

GAAP requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value and that changes in such fair values be recognized in earnings (loss) unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

 

2.  Proposed Spin-off Transaction

 

On November 17, 2014, we announced that our board of directors had authorized management to pursue a plan to separate our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company. To effect the Spin-off, we intend to distribute on the distribution date, on a pro rata basis, all of the shares of Spinco common stock to our stockholders as of the record date. Our board of directors will set the record date and distribution date prior to the Spin-off. The Spin-off is subject to, among other things, market conditions, the receipt of an opinion of counsel as to the tax-free nature of the transaction, completion of a review by the SEC of a registration statement on Form 10 filed by Spinco, the execution of a separation and distribution agreement and related ancillary agreements and final approval of our board of directors. Upon completion of the Spin-off, we and Spinco will be independent, publicly traded companies with separate public ownership, boards of directors and management, and we will continue to own and operate the U.S. contract operations and U.S. aftermarket services businesses that we currently own. In addition, we will continue to hold interests in the Partnership, which include the sole general partner interest and certain limited partner interests, as well as all of the incentive distribution rights in the Partnership. Although our current goal is to complete the Spin-off in the second half of 2015, there are no assurances as to when the proposed Spin-off will be completed, if at all, or if the Spin-off will be completed as currently contemplated.

 

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3.  Discontinued Operations

 

In August 2012, our Venezuelan subsidiary sold its previously nationalized assets to PDVSA Gas, S.A. (“PDVSA Gas”) for a purchase price of approximately $441.7 million. We received installment payments, including an annual charge, totaling $18.7 million and $17.8 million during the three months ended March 31, 2015 and 2014, respectively. The remaining principal amount due to us of approximately $99 million as of March 31, 2015, is payable in quarterly cash installments through the third quarter of 2016. We have not recognized amounts payable to us by PDVSA Gas as a receivable and will therefore recognize quarterly payments received in the future as income from discontinued operations in the periods such payments are received. The proceeds from the sale of the assets are not subject to Venezuelan national taxes due to an exemption allowed under the Venezuelan Reserve Law applicable to expropriation settlements. In addition, and in connection with the sale, we and the Venezuelan government agreed to waive rights to assert certain claims against each other.

 

In connection with the sale of these assets, we have agreed to suspend the arbitration proceeding previously filed by our Spanish subsidiary against Venezuela pending payment in full by PDVSA Gas of the purchase price for these nationalized assets.

 

In December 2013, we abandoned our contract water treatment business as part of our continued emphasis on simplification and focus on our core businesses. The abandonment of this business meets the criteria established for recognition as discontinued operations under GAAP. Therefore, our contract water treatment business is reflected as discontinued operations in our condensed consolidated financial statements. This business was previously included in our North American contract operations business segment. During the three months ended March 31, 2015, we reversed the remaining tax deductible temporary differences relating to our contract water treatment business. There was no impact on income from discontinued operations, net of tax, as the reversal resulted in a deferred tax asset for net operating losses. The resulting deferred tax asset is reflected as current deferred income taxes in our condensed consolidated balance sheet.

 

The following table summarizes the operating results of discontinued operations (in thousands):

 

 

 

Three Months Ended March 31, 2015

 

Three Months Ended March 31, 2014

 

 

 

Venezuela

 

Contract
Water

Treatment
Business

 

Total

 

Venezuela

 

Contract
Water

Treatment
Business

 

Total

 

Revenue

 

$

 

$

 

$

 

$

 

$

 

$

 

Expenses and selling, general and administrative

 

84

 

72

 

156

 

124

 

73

 

197

 

Recovery attributable to expropriation

 

(16,506

)

 

(16,506

)

(16,421

)

 

(16,421

)

Other (income) loss, net

 

(2,321

)

 

(2,321

)

(2,386

)

(147

)

(2,533

)

Provision for (benefit from) income taxes

 

 

(42

)

(42

)

 

30

 

30

 

Income (loss) from discontinued operations, net of tax

 

$

18,743

 

$

(30

)

$

18,713

 

$

18,683

 

$

44

 

$

18,727

 

 

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

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Venezuela

 

Contract
Water

Treatment
Business

 

Total

 

Venezuela

 

Contract
Water

Treatment
Business

 

Total

 

Cash

 

$

408

 

$

 

$

408

 

$

431

 

$

 

$

431

 

Accounts receivable

 

2

 

 

2

 

2

 

69

 

71

 

Other current assets

 

43

 

 

43

 

35

 

 

35

 

Total current assets associated with discontinued operations

 

453

 

 

453

 

468

 

69

 

537

 

Deferred tax assets

 

 

 

 

 

17,469

 

17,469

 

Total assets associated with discontinued operations

 

$

453

 

$

 

$

453

 

$

468

 

$

17,538

 

$

18,006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

2

 

$

2

 

$

214

 

$

1

 

$

215

 

Accrued liabilities

 

1,114

 

655

 

1,769

 

1,124

 

727

 

1,851

 

Total current liabilities associated with discontinued operations

 

1,114

 

657

 

1,771

 

1,338

 

728

 

2,066

 

Other long-term liabilities

 

340

 

 

340

 

317

 

 

317

 

Total liabilities associated with discontinued operations

 

$

1,454

 

$

657

 

$

2,111

 

$

1,655

 

$

728

 

$

2,383

 

 

4.  Business Acquisitions

 

August 2014 MidCon Acquisition

 

On August 8, 2014, the Partnership completed an acquisition of natural gas compression assets, including a fleet of 162 compressor units, comprising approximately 110,000 horsepower from MidCon Compression, L.L.C. (“MidCon”) for $130.1 million. The purchase price was funded with borrowings under the Partnership’s revolving credit facility. The majority of the horsepower acquired is utilized under a five-year contract operations services agreement with BHP Billiton Petroleum (“BHP Billiton”) to provide compression services. In connection with the acquisition, the contract operations services agreement with BHP Billiton was assigned to the Partnership effective as of the closing.

 

In accordance with the terms of the Purchase and Sale Agreement between the Partnership and MidCon relating to this acquisition, the Partnership directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to our wholly-owned subsidiary Exterran Energy Solutions, L.P. (“EESLP”), an indirect parent company of the Partnership, for $4.1 million. The assets acquired by EESLP are used in conjunction with the compression units the Partnership acquired from MidCon to provide compression services. The acquisition of the assets by the Partnership and EESLP from MidCon is referred to as the “August 2014 MidCon Acquisition.”

 

We accounted for the August 2014 MidCon Acquisition using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The excess of the consideration transferred over those fair values is recorded as goodwill. The following table summarizes the purchase price allocation based on estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):

 

 

 

Fair Value

 

Inventory

 

$

2,302

 

Property, plant and equipment

 

80,154

 

Goodwill

 

3,738

 

Intangible assets

 

48,373

 

Current liabilities

 

(372

)

Purchase price

 

$

134,195

 

 

Property, Plant and Equipment, Goodwill and Intangible Assets Acquired

 

Property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 24 years.

 

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Goodwill of $3.7 million resulting from the acquisition is attributable to the expansion of our services in the region and was assigned to our North America contract operations segment. The goodwill recorded is considered to have an indefinite life and will be reviewed annually for impairment or more frequently if indicators of impairment exist.

 

The amount of finite life intangible assets, and their associated average useful lives, was determined based on the period which the assets are expected to contribute directly or indirectly to our future cash flows, consisting of the following:

 

 

 

Amount
(In
 thousands)

 

Average
Useful Life

 

Customer related

 

$

21,590

 

25 years

 

Contract based

 

26,783

 

5 years

 

Total acquired identifiable intangible assets

 

$

48,373

 

 

 

 

The results of operations attributable to the assets acquired in the August 2014 MidCon Acquisition have been included in our condensed consolidated financial statements as part of our North America contract operations segment since the date of acquisition.

 

April 2014 MidCon Acquisition

 

On April 10, 2014, the Partnership completed an acquisition of natural gas compression assets, including a fleet of 337 compressor units, comprising approximately 444,000 horsepower from MidCon for $352.9 million. The purchase price was funded with the net proceeds from the Partnership’s public sale of 6.2 million common units and a portion of the net proceeds from the Partnership’s issuance of $350.0 million aggregate principal amount of 6% senior notes due October 2022 (the “Partnership 2014 Notes”). The compressor units were previously used by MidCon to provide compression services to a subsidiary of Access Midstream Partners LP (“Access”). Effective as of the closing of the acquisition, the Partnership and Access entered into a seven-year contract operations services agreement under which the Partnership provides compression services to Williams Partners, L.P. (formerly Access). During the three months ended March 31, 2014, the Partnership incurred transaction costs of approximately $1.5 million related to this acquisition, which is reflected in other (income) expense, net, in our condensed consolidated statements of operations.

 

In accordance with the terms of the Purchase and Sale Agreement between the Partnership and MidCon relating to this acquisition, the Partnership directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to our wholly-owned subsidiary EESLP, an indirect parent company of the Partnership, for $7.7 million. The assets acquired by EESLP are used in conjunction with the compression units the Partnership acquired from MidCon to provide compression services. The acquisition of the assets by the Partnership and EESLP from MidCon is referred to as the “April 2014 MidCon Acquisition.”

 

We accounted for the April 2014 MidCon Acquisition using the acquisition method, which requires, among other things, assets acquired and liabilities assumed to be recorded at their fair value on the acquisition date. The following table summarizes the purchase price allocation based on estimated fair values of the acquired assets and liabilities as of the acquisition date (in thousands):

 

 

 

Fair Value

 

Inventory

 

$

4,357

 

Property, plant and equipment

 

314,556

 

Intangible assets

 

42,474

 

Current liabilities

 

(827

)

Purchase price

 

$

360,560

 

 

Property, Plant and Equipment and Intangible Assets Acquired

 

Property, plant and equipment is primarily comprised of compression equipment that will be depreciated on a straight-line basis over an estimated average remaining useful life of 25 years.

 

The amount of finite life intangible assets, and their associated average useful lives, was determined based on the period which the assets are expected to contribute directly or indirectly to our future cash flows, consisting of the following:

 

 

 

Amount
(In
 thousands)

 

Average
Useful Life

 

Customer related

 

$

4,701

 

25 years

 

Contract based

 

37,773

 

7 years

 

Total acquired identifiable intangible assets

 

$

42,474

 

 

 

 

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The results of operations attributable to the assets acquired in the April 2014 MidCon Acquisition have been included in our condensed consolidated financial statements as part of our North America contract operations segment since the date of acquisition.

 

Pro Forma Financial Information

 

Pro forma financial information for the three months ended March 31, 2014 has been included to give effect to the additional assets acquired in the August 2014 MidCon Acquisition and the April 2014 MidCon Acquisition. The August 2014 MidCon Acquisition and the April 2014 MidCon Acquisition are presented in the pro forma financial information as though these transactions occurred as of January 1, 2014. The pro forma financial information reflects the following transactions:

 

As related to the August 2014 MidCon Acquisition:

 

·                  the Partnership’s acquisition in August 2014 of natural gas compression assets and identifiable intangible assets from MidCon;

 

·                  our wholly-owned subsidiary EESLP’s, an indirect parent company of the Partnership, acquisition from MidCon, as directed by the Partnership, of a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory;

 

·                  the Partnership’s borrowings under its revolving credit facility to pay $130.1 million to MidCon for the August 2014 MidCon Acquisition; and

 

·                  our borrowings under our revolving credit facility to pay $4.1 million to MidCon for assets acquired by EESLP in the August 2014 MidCon Acquisition.

 

As related to the April 2014 MidCon Acquisition:

 

·                  the Partnership’s acquisition in April 2014 of natural gas compression assets and identifiable intangible assets from MidCon;

 

·                  our wholly-owned subsidiary EESLP’s, an indirect parent company of the Partnership, acquisition from MidCon, as directed by the Partnership, of a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory;

 

·                  the Partnership’s issuance of 6.2 million common units to the public and approximately 126,000 general partner units to us;

 

·                  the Partnership’s issuance of $350.0 million aggregate principal amount of the Partnership 2014 Notes;

 

·                  the Partnership’s use of proceeds from the issuance of common units, general partner units and the Partnership 2014 Notes to pay $352.9 million to MidCon for the April 2014 MidCon Acquisition and to pay down $157.5 million on its revolving credit facility; and

 

·                  our borrowings under our revolving credit facility to pay $7.7 million to MidCon for assets acquired by EESLP in the April 2014 MidCon Acquisition.

 

The pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had each transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. The pro forma financial information below was derived by adjusting our historical financial statements.

 

The following table shows pro forma financial information for the three months ended March 31, 2014 (in thousands, except per share amounts):

 

 

 

Three Months Ended
March 31,

 

 

 

2014

 

Revenue

 

$

670,547

 

Net income attributable to Exterran common stockholders

 

$

34,072

 

Basic net income per common share attributable to Exterran common stockholders

 

$

0.51

 

Diluted net income per common share attributable to Exterran common stockholders

 

$

0.50

 

 

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5.  Inventory, net

 

Inventory, net of reserves, consisted of the following amounts (in thousands):

 

 

 

March 31,
2015

 

December 31,
2014

 

Parts and supplies

 

$

271,256

 

$

269,370

 

Work in progress

 

108,939

 

100,499

 

Finished goods

 

37,620

 

33,702

 

Inventory, net

 

$

417,815

 

$

403,571

 

 

As of March 31, 2015 and December 31, 2014, we had inventory reserves of $20.4 million and $20.2 million, respectively.

 

6.  Property, Plant and Equipment, net

 

Property, plant and equipment, net, consisted of the following (in thousands):

 

 

 

March 31,
2015

 

December 31,
2014

 

Compression equipment, facilities and other fleet assets

 

$

4,974,157

 

$

4,916,576

 

Land and buildings

 

202,890

 

206,257

 

Transportation and shop equipment

 

294,476

 

297,239

 

Other

 

199,143

 

197,114

 

 

 

5,670,666

 

5,617,186

 

Accumulated depreciation

 

(2,336,505

)

(2,290,294

)

Property, plant and equipment, net

 

$

3,334,161

 

$

3,326,892

 

 

7.  Investments in Non-Consolidated Affiliates

 

Investments in affiliates that are not controlled by us where we have the ability to exercise significant control over the operations are accounted for using the equity method.

 

We own a 30.0% interest in WilPro Energy Services (PIGAP II) Limited and 33.3% interest in WilPro Energy Services (El Furrial) Limited, which are joint ventures that provided natural gas compression and injection services in Venezuela. In May 2009, Petroleos de Venezuela S.A. (“PDVSA”) assumed control over the assets of our Venezuelan joint ventures and transitioned the operations, including the hiring of their employees, to PDVSA. In March 2011, our Venezuelan joint ventures, together with the Netherlands’ parent company of our joint venture partners, filed a request for the institution of an arbitration proceeding against Venezuela with the International Centre for Settlement of Investment Disputes related to the seized assets and investments.

 

In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas. We received installment payments, including an annual charge, totaling $5.0 million and $4.9 million during the three months ended March 31, 2015 and 2014, respectively. The remaining principal amount due to us of approximately $22 million as of March 31, 2015, is payable in quarterly cash installments through the first quarter of 2016. We have not recognized amounts payable to us by PDVSA Gas as a receivable and will therefore recognize quarterly payments received in the future as equity in (income) loss of non-consolidated affiliates in our consolidated statements of operations in the periods such payments are received. In connection with the sale of our Venezuelan joint ventures’ assets, the joint ventures and our joint venture partners have agreed to suspend their previously filed arbitration proceeding against Venezuela pending payment in full by PDVSA Gas of the purchase price for the assets.

 

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8.  Long-Term Debt

 

Long-term debt consisted of the following (in thousands):

 

 

 

March 31,
2015

 

December 31,
2014

 

Revolving credit facility due July 2016

 

$

354,000

 

$

375,500

 

Partnership’s revolving credit facility due May 2018

 

502,000

 

460,000

 

Partnership’s term loan facility due May 2018

 

150,000

 

150,000

 

Partnership’s 6% senior notes due April 2021 (presented net of the unamortized discount of $4.3 million and $4.5 million, respectively)

 

345,677

 

345,528

 

Partnership’s 6% senior notes due October 2022 (presented net of the unamortized discount of $5.1 million and $5.2 million, respectively)

 

344,904

 

344,767

 

7.25% senior notes due December 2018

 

350,000

 

350,000

 

Other, interest at various rates, collateralized by equipment and other assets

 

994

 

1,107

 

Long-term debt

 

$

2,047,575

 

$

2,026,902

 

 

Exterran Senior Secured Credit Facility

 

As of March 31, 2015, we had $354.0 million in outstanding borrowings and $91.3 million in outstanding letters of credit under our senior secured revolving credit facility (the “Credit Facility”). At March 31, 2015, taking into account guarantees through letters of credit, we had undrawn and available capacity of $454.7 million under the Credit Facility.

 

The Partnership Revolving Credit Facility and Term Loan

 

In February 2015, the Partnership amended its senior secured credit agreement (the “Partnership Credit Agreement”), which among other things, increased the borrowing capacity under its revolving credit facility by $250.0 million to $900.0 million. The Partnership Credit Agreement, which matures in May 2018, also includes a $150.0 million term loan facility. During the three months ended March 31, 2015, the Partnership incurred transaction costs of $1.3 million related to the amendment of the Partnership Credit Agreement. These costs were included in intangible and other assets, net, and are being amortized over the term of the facility.

 

As of March 31, 2015, the Partnership had undrawn capacity of $398.0 million under its revolving credit facility. The Partnership Credit Agreement limits the Partnership’s ratio of Total Debt (as defined in the Partnership Credit Agreement) to EBITDA (as defined in the Partnership Credit Agreement) to not greater than 5.25 to 1.0 (subject to a temporary increase to 5.5 to 1.0 following the occurrence of certain events specified in the Partnership Credit Agreement). Because the August 2014 MidCon Acquisition closed during the third quarter of 2014, the Partnership’s Total Debt to EBITDA ratio threshold was temporarily increased to 5.5 to 1.0 during the quarter ended September 30, 2014 and continued at that level through March 31, 2015. As a result of this limitation, $354.7 million of the $398.0 million of undrawn capacity under the Partnership’s revolving credit facility was available for additional borrowings as of March 31, 2015. If the maximum allowed ratio of Total Debt to EBITDA had been 5.25 to 1.0 at March 31, 2015, then $277.5 million of the $398.0 million of undrawn capacity under the Partnership’s revolving credit facility would have been available for additional borrowings as of March 31, 2015.

 

9.  Accounting for Derivatives

 

We are exposed to market risks associated with changes in interest rates. We use derivative financial instruments to minimize the risks and/or 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.

 

Interest Rate Risk

 

During the three months ended March 31, 2015, the Partnership entered into an interest rate swap with a notional value of $100.0 million. At March 31, 2015, the Partnership was a party to interest rate swaps with a total notional value of $500.0 million, pursuant to which it makes fixed payments and receives floating payments. The Partnership entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. The Partnership’s interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $300.0 million expiring in May 2018, interest rate swaps having a notional amount of $100.0 million expiring in May 2019 and the remaining interest rate swaps having a notional amount of $100.0 million expiring in May 2020. As of March 31, 2015, the weighted average effective fixed interest rate on the interest rate swaps was 1.6%. 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 (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. As 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, 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. We recorded $0.3 million of interest income during the three months ended March 31, 2015 due to ineffectiveness related to interest rate swaps. There was no ineffectiveness related to interest rate swaps during the three months ended March 31, 2014. We estimate that $5.8 million of deferred pre-tax losses attributable to interest rate swaps and included in our accumulated other comprehensive income (loss) at March 31, 2015, will be reclassified into earnings as interest expense at then current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions, unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities in our condensed consolidated statements of cash flows.

 

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The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

 

 

 

March 31, 2015

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Accrued liabilities

 

$

(6,138

)

Interest rate hedges

 

Other long-term liabilities

 

(2,747

)

Total derivatives

 

 

 

$

(8,885

)

 

 

 

December 31, 2014

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Intangible and other assets, net

 

$

712

 

Interest rate hedges

 

Accrued liabilities

 

(4,958

)

Interest rate hedges

 

Other long-term liabilities

 

(150

)

Total derivatives

 

 

 

$

(4,396

)

 

 

 

 

 

Pre-tax Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Pre-tax
Gain (Loss)

 Reclassified from
Accumulated Other
 Comprehensive
Income (Loss) into
Income (Loss)

 

Pre-tax Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

Interest rate hedges

 

 

 

 

 

 

 

Three months ended March 31, 2015

 

$

(6,253

)

Interest expense

 

$

(1,675

)

Three months ended March 31, 2014

 

(955

)

Interest expense

 

(1,264

)

 

The counterparties to the 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. The Partnership has no specific collateral posted for its derivative instruments. The counterparties to the interest rate swaps are also lenders under the Partnership’s senior secured credit facility and, in that capacity, share proportionally in the collateral pledged under the related facility.

 

10.  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.

 

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·                  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 presents our assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, with pricing levels as of the date of valuation (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Interest rate swaps asset

 

$

 

$

 

$

 

$

 

$

712

 

$

 

Interest rate swaps liability

 

 

(8,885

)

 

 

(5,108

)

 

 

On a quarterly basis, the interest rate swaps are recorded at fair value utilizing a combination of the market approach and income approach to estimate fair value based on forward LIBOR curves.

 

The following table presents our assets and liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2015 and 2014, with pricing levels as of the date of valuation (in thousands):

 

 

 

Three Months Ended March 31, 2015

 

Three Months Ended March 31, 2014

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired long-lived assets

 

$

 

$

 

$

744

 

$

 

$

 

$

368

 

Inventory write-down—Restructuring

 

 

 

 

 

 

2,331

 

Long-term receivable from the sale of our Canadian Operations

 

 

 

5,100

 

 

 

 

 

Our estimate of the impaired long-lived assets’ fair value was primarily based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years and a weighted average discount rate of 10% and 9% for the three months ended March 31, 2015 and 2014, respectively. Our estimate of the fair value of the inventory associated with the restructuring of our make-ready operations was based on expected net sale proceeds. See Note 12 for further discussion of the restructuring of our make-ready operations. In April 2015, we accepted an offer to early settle the outstanding note receivable due to us relating to the previous sale of our Canadian contract operations and aftermarket services businesses for $5.1 million.

 

11.  Long-Lived Asset Impairment

 

We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.

 

During the three months ended March 31, 2015, we evaluated the future deployment of our idle fleet and determined to retire and either sell or re-utilize the key components of approximately 80 idle compressor units, representing approximately 30,000 horsepower, previously used to provide services in our North America contract operations and international contract operations segments. As a result, we performed an impairment review and recorded an $11.3 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.

 

During the three months ended March 31, 2015, we evaluated other long-lived assets for impairment and recorded long-lived asset impairments of $1.4 million on these assets.

 

During the three months ended March 31, 2014, we evaluated the future deployment of our idle fleet and determined to retire and either sell or re-utilize the key components of approximately 40 idle compressor units, representing approximately 11,000 horsepower, previously used to provide services in our North America contract operations segment. As a result, we performed an impairment review and recorded a $3.8 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.

 

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12.  Restructuring Charges

 

As discussed in Note 2, in November 2014, we announced that our board of directors had authorized management to pursue a plan to separate our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company. During the three months ended March 31, 2015, we incurred $4.8 million of costs associated with the proposed Spin-off which were primarily related to legal, consulting, audit and professional fees. The separation costs have not been allocated to the segments because they consist mostly of professional service fees within the finance and legal functions. The costs incurred in conjunction with the proposed Spin-off are included in restructuring charges in our condensed consolidated statements of operations. This Spin-off is expected to be completed in the second half of 2015. We cannot currently estimate the total restructuring costs that will be incurred as a result of the proposed Spin-off. As of March 31, 2015, we had an accrued liability balance of $1.8 million for planned separation charges incurred.

 

In January 2014, we announced a plan to centralize our make-ready operations to improve the cost and efficiency of our shops and further enhance the competitiveness of our fleet of compressors. As part of this plan, we examined both recent and anticipated changes in the North America market, including the throughput demand of our shops and the addition of new equipment to our fleet. To better align our costs and capabilities with the current market, we determined to close several of our make-ready shops. The centralization of our make-ready operations was completed in the second quarter of 2014. During the three months ended March 31, 2014, we incurred $4.8 million of restructuring charges primarily related to termination benefits and a non-cash write-down of inventory associated with the centralization of our make-ready operations. These charges are reflected as restructuring charges in our condensed consolidated statements of operations and are related to our North America contract operations and aftermarket services segments.

 

13.  Stock-Based Compensation

 

Stock Incentive Plan

 

In April 2013, we adopted the Exterran Holdings, Inc. 2013 Stock Incentive Plan (the “2013 Plan”) to provide for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance units, other stock-based awards and dividend equivalent rights to employees, directors and consultants of Exterran. Under the 2013 Plan, the maximum number of shares of common stock available for issuance pursuant to awards is 6,500,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and any share subject to a stock settled award other than a stock option, stock appreciation right or other award for which the recipient pays intrinsic value counts as 1.75 shares against the aggregate share limit. Awards granted under the 2013 Plan that are subsequently cancelled, terminated or forfeited are available for future grant. Cash settled awards are not counted against the aggregate share limit. Upon effectiveness of the 2013 Plan, no additional grants may be made under the Exterran Holdings, Inc. 2007 Amended and Restated Stock Incentive Plan (the “2007 Plan”) or the Exterran Holdings, Inc. 2011 Employment Inducement Long-Term Equity Plan (the “Employment Inducement Plan”). Previous grants made under the 2007 Plan and the Employment Inducement Plan will continue to be governed by their respective plans.

 

Stock Options

 

Stock options are granted at fair market value at the grant date, are exercisable according to the vesting schedule established by the compensation committee of our board of directors in its sole discretion and expire no later than seven years after the grant date. Stock options generally vest one-third per year on each of the first three anniversaries of the grant date.

 

The following table presents stock option activity during the three months ended March 31, 2015:

 

 

 

 

Stock
Options
(in thousands)

 

Weighted
Average
Exercise Price
Per Share

 

Weighted
Average
Remaining
Life
(in years)

 

Aggregate
Intrinsic
Value
(in thousands)

 

Options outstanding, January 1, 2015

 

1,495

 

$

33.39

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(56

)

10.21

 

 

 

 

 

Cancelled

 

(273

)

61.79

 

 

 

 

 

Options outstanding, March 31, 2015

 

1,166

 

27.85

 

3.0

 

$

12,513

 

Options exercisable, March 31, 2015

 

1,044

 

27.08

 

2.7

 

12,083

 

 

Intrinsic value is the difference between the market value of our stock and the exercise price of each stock option multiplied by the number of stock options outstanding for those stock options where the market value exceeds their exercise price. The total intrinsic value of stock options exercised during the three months ended March 31, 2015 was $1.0 million. As of March 31, 2015, we expect $1.4 million of unrecognized compensation cost related to unvested stock options to be recognized over the weighted-average period of 1.6 years.

 

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Restricted Stock, Restricted Stock Units, Performance Units, Cash Settled Restricted Stock Units and Cash Settled Performance Units

 

For grants of restricted stock, restricted stock units and performance units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the grant date. Our restricted stock and certain of our stock settled restricted stock units include nonforfeitable rights to receive dividends or dividend equivalents. We remeasure the fair value of cash settled restricted stock units and cash settled performance units and record a cumulative adjustment of the expense previously recognized. Our obligation related to the cash settled restricted stock units and cash settled performance units is reflected as a liability in our condensed consolidated balance sheets. Restricted stock, restricted stock units, performance units, cash settled restricted stock units and cash settled performance units generally vest one-third per year on each of the first three anniversaries of the grant date.

 

The following table presents restricted stock, restricted stock unit, performance unit, cash settled restricted stock unit and cash settled performance unit activity during the three months ended March 31, 2015:

 

 

 

Shares
(in thousands)

 

Weighted
Average
Grant-Date
Fair Value
Per Share

 

Non-vested awards, January 1, 2015

 

1,170

 

$

27.37

 

Granted

 

676

 

31.99

 

Vested

 

(695

)

23.23

 

Cancelled

 

(9

)

32.68

 

Non-vested awards, March 31, 2015(1)

 

1,142

 

32.58

 

 


(1) Non-vested awards as of March 31, 2015 are comprised of 56,000 cash settled restricted stock units and cash settled performance units and 1,086,000 restricted shares, restricted stock units and performance units.

 

As of March 31, 2015, we expect $34.7 million of unrecognized compensation cost related to unvested restricted stock, restricted stock units, performance units, cash settled restricted stock units and cash settled performance units to be recognized over the weighted-average period of 2.3 years.

 

Employee Stock Purchase Plan

 

In August 2007, we adopted the Exterran Holdings, Inc. Employee Stock Purchase Plan (“ESPP”), which is intended to provide employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended. Each quarter, an eligible employee may elect to withhold a portion of his or her salary up to the lesser of $25,000 per year or 10% of his or her eligible pay to purchase shares of our common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter, the last trading day of the quarter or the lower of the first trading day of the quarter and the last trading day of the quarter, as the compensation committee of our board of directors may determine. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. In May 2011, we amended the ESPP to increase the maximum number of shares of common stock available for purchase under the ESPP to 1,000,000. At March 31, 2015, 174,466 shares remained available for purchase under the ESPP. Our ESPP is compensatory and, as a result, we record an expense in our consolidated statements of operations related to the ESPP. The purchase discount under the ESPP is 5% of the fair market value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower. Due to a plan to separate our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company (as discussed in Note 2), the ESPP will be suspended after the second quarter 2015 purchase period.

 

Partnership Long-Term Incentive Plan

 

The Partnership’s Long-Term Incentive Plan (the “Partnership Plan”) was adopted in October 2006 for employees, directors and consultants of the Partnership, us and our respective affiliates. A maximum of 1,035,378 common units, common unit options, restricted units and phantom units are available under the Partnership Plan. The Partnership Plan is administered by the board of directors of Exterran GP LLC, the general partner of the Partnership’s general partner, or a committee thereof (the “Partnership Plan Administrator”).

 

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Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of a phantom unit or, at the discretion of the Partnership Plan Administrator, cash equal to the fair market value of a common unit. Phantom units granted under the Partnership Plan may include nonforfeitable tandem distribution equivalent rights to receive cash distributions on unvested phantom units in the quarter in which distributions are paid on common units. Phantom units generally vest one-third per year on each of the first three anniversaries of the grant date.

 

Partnership Phantom Units

 

The following table presents phantom unit activity during the three months ended March 31, 2015:

 

 

 

Phantom
Units
(in thousands)

 

Weighted
Average
Grant-Date
Fair Value
per Unit

 

Phantom units outstanding, January 1, 2015

 

92

 

$

27.38

 

Granted

 

45

 

24.87

 

Vested

 

(51

)

25.77

 

Phantom units outstanding, March 31, 2015

 

86

 

27.01

 

 

As of March 31, 2015, we expect $2.2 million of unrecognized compensation cost related to unvested phantom units to be recognized over the weighted-average period of 2.2 years.

 

14.  Cash Dividends

 

The following table summarizes our dividends per common share:

 

Declaration Date

 

Payment Date

 

Dividends per
Common Share

 

Total Dividends

 

February 25, 2014

 

March 28, 2014

 

$

0.15

 

$

10.0 million

 

April 29, 2014

 

May 16, 2014

 

0.15

 

10.0 million

 

July 31, 2014

 

August 18, 2014

 

0.15

 

10.0 million

 

October 30, 2014

 

November 17, 2014

 

0.15

 

10.3 million

 

January 30, 2015

 

February 17, 2015

 

0.15

 

10.3 million

 

 

On April 28, 2015, our board of directors declared a quarterly dividend of $0.15 per share of common stock, which is expected to be paid on May 18, 2015 to stockholders of record at the close of business on May 11, 2015. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our board of directors and will be dependent upon our financial condition and results of operations, credit and loan agreements in effect at that time and other factors deemed relevant by our board of directors.

 

15.  Commitments and Contingencies

 

We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

 

 

 

Term

 

Maximum Potential
Undiscounted
Payments as of
March 31, 2015

 

Performance guarantees through letters of credit(1)

 

2015-2019

 

$

149,362

 

Standby letters of credit

 

2015

 

12,910

 

Commercial letters of credit

 

2015

 

3,426

 

Bid bonds and performance bonds(1)

 

2015-2023

 

78,602

 

Maximum potential undiscounted payments

 

 

 

$

244,300

 

 


(1)       We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by third parties.

 

As part of an acquisition in 2001, we may be required to make contingent payments of up to $46 million to the seller, depending on our realization of certain U.S. federal tax benefits through the year 2015. To date, we have not realized any such benefits that would require a payment and we do not anticipate realizing any such benefits that would require a payment before the year 2016.

 

See Note 3 and Note 7 for a discussion of our gain contingencies related to assets that were expropriated in Venezuela.

 

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In addition to U.S. federal, state, local and foreign income taxes, we are subject to a number of taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of March 31, 2015 and December 31, 2014, we had accrued $9.1 million and $9.2 million, respectively, for the outcomes of non-income based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We do not have any unasserted claims from non-income based tax audits that we have determined are probable of assertion. We also believe the likelihood is remote that the impact of potential unasserted claims from non-income based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our results of operations or cash flows for the period in which the resolution occurs.

 

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. In addition, we have a minimal amount of insurance on our offshore assets. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

 

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

 

Litigation and Claims

 

In 2011, the Texas Legislature enacted changes related to the appraisal of natural gas compressors for ad valorem tax purposes by expanding the definitions of “Heavy Equipment Dealer” and “Heavy Equipment” effective from the beginning of 2012 (the “Heavy Equipment Statutes”). Under the revised statutes, we believe we are a Heavy Equipment Dealer, that our natural gas compressors are Heavy Equipment and that we, therefore, are required to file our ad valorem tax renditions under this new methodology. A large number of appraisal review boards denied our position, and we filed petitions for review in the appropriate district courts.

 

During 2013 and 2014, we were party to three Heavy Equipment Statutes cases tried and completed in Texas state district courts. In each case the court held that the revised Heavy Equipment Statutes apply to natural gas compressors. However, in each case the court further held that the revised Heavy Equipment Statutes are unconstitutional as applied to natural gas compressors, which is favorable to the county appraisal districts. We continue to believe that the revised statutes are constitutional as applied to natural gas compressors and have appealed the courts’ decisions in our cases. All three of these cases have been appealed. For two of these appeals, oral arguments were made before the Eighth Court of Appeals in El Paso, Texas on October 9, 2014. No decision has been issued. The third appeal was argued before the Fourteenth Court of Appeals in Houston, Texas on February 12, 2015. No decision has been issued. In a fourth state district court case, both parties’ respective motions for summary judgment are pending and we have yet to receive the court’s decision. In a fifth state district court case, the court denied both parties’ respective motions for summary judgment concerning the 2012 tax year, consolidated the 2012 tax year case with a 2013 tax year case, and set a trial date for the consolidated case of August 10-11, 2015.

 

As a result of the new methodology, our ad valorem tax expense (which is reflected in our condensed consolidated statements of operations as a component of cost of sales (excluding depreciation and amortization expense)) includes a benefit of $3.7 million during the three months ended March 31, 2015. Since the change in methodology became effective in 2012, we have recorded an aggregate benefit of $30.6 million as of March 31, 2015, of which approximately $6.2 million has been agreed to by a number of appraisal review boards and county appraisal districts and $24.4 million has been disputed and is currently in litigation. Recognizing the similarity of the issues and that these cases will ultimately be resolved by the Texas appellate courts, we have reached, or intend to reach, agreements with some of the appraisal districts to stay or abate certain of these pending district court cases. If we are unsuccessful in our litigation with the appraisal districts, we would be required to pay ad valorem taxes up to the aggregate benefit we have recorded, and the additional ad valorem tax payments may also be subject to substantial penalties and interest. Also, if we are unsuccessful in our litigation with the appraisal districts, or if legislation is enacted in Texas that repeals or alters the Heavy Equipment Statutes such that in the future we do not qualify as a Heavy Equipment Dealer or our compressors do not qualify as Heavy Equipment, then we would likely be required to pay these ad valorem taxes under the old methodology going forward, which would increase our quarterly cost of sales expense up to approximately the amount of our then most recent quarterly benefit recorded, and as a result impact our future results of operations and cash flows.

 

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In the ordinary course of business, we are also involved in various other 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 any of these other actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

 

16.  Recent Accounting Developments

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued an update to the authoritative guidance on the presentation of debt issuance costs. The update requires an entity to present such costs in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. The update will be effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. We are currently evaluating the potential impact of the update on our financial statements.

 

In February 2015, the FASB issued an update to the authoritative guidance which revises the consolidation model. The update modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The update will be effective for reporting periods beginning after December 15, 2015. Early adoption is permitted. We do not believe the adoption of this update will have a material impact on our financial statements.

 

In May 2014, the FASB issued an update to the authoritative guidance related to revenue recognition. The update outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The update also requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The update will be effective for reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the potential impact of the update on our financial statements.

 

17.  Reportable Segments

 

We manage our business segments primarily based upon the type of product or service provided. We have four reportable segments: North America contract operations, international contract operations, aftermarket services and fabrication. The North America and international contract operations segments primarily provide natural gas compression services, production and processing equipment services and maintenance services to meet specific customer requirements on Exterran-owned assets. The aftermarket services segment provides a full range of services to support the surface production, compression and processing needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. The fabrication segment provides (i) design, engineering, fabrication, installation and sale of natural gas compression units and accessories and equipment used in the production, treating and processing of crude oil and natural gas and (ii) engineering, procurement and fabrication services related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and evaporators and brine heaters for desalination plants.

 

We evaluate the performance of our segments based on gross margin for each segment. Revenue includes only sales to external customers. We do not include intersegment sales when we evaluate our segments’ performance.

 

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The following table presents revenue and other financial information by reportable segment during the three months ended March 31, 2015 and 2014 (in thousands):

 

Three months ended

 

North
America
Contract
Operations

 

International
Contract
Operations

 

Aftermarket
Services

 

Fabrication

 

Reportable
Segments
Total

 

March 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

202,261

 

$

120,691

 

$

86,856

 

$

319,274

 

$

729,082

 

Gross margin(1)

 

119,582

 

76,352

 

20,922

 

52,156

 

269,012

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

156,523

 

$

111,040

 

$

88,048

 

$

287,397

 

$

643,008

 

Gross margin(1)

 

85,442

 

70,008

 

20,227

 

57,809

 

233,486

 

 


(1)      Gross margin, a non-GAAP financial measure, is reconciled, in total, to net income (loss), its most directly comparable measure calculated and presented in accordance with GAAP, below.

 

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 to evaluate the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key components of our operations. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) 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.

 

The following table reconciles net income to gross margin (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Net income

 

$

41,085

 

$

34,894

 

Selling, general and administrative

 

86,686

 

92,578

 

Depreciation and amortization

 

95,808

 

85,522

 

Long-lived asset impairment

 

12,732

 

3,807

 

Restructuring charges

 

4,790

 

4,822

 

Interest expense

 

27,298

 

28,308

 

Equity in income of non-consolidated affiliates

 

(5,006

)

(4,693

)

Other (income) expense, net

 

7,841

 

(2,434

)

Provision for income taxes

 

16,491

 

9,409

 

Income from discontinued operations, net of tax

 

(18,713

)

(18,727

)

Gross margin

 

$

269,012

 

$

233,486

 

 

18.  Supplemental Guarantor Financial Information

 

Exterran Holdings, Inc. (“Parent”) is the issuer of our 7.25% senior notes with an aggregate principal amount of $350.0 million due December 2018 (the “7.25% Notes”). EESLP, EES Leasing LLC, EXH GP LP LLC and EXH MLP LP LLC (each a 100% owned subsidiary; together, the “Guarantor Subsidiaries”), have agreed to fully and unconditionally (subject to customary release provisions) on a joint and several senior unsecured basis guarantee Parent’s obligations relating to the 7.25% Notes. As a result of these guarantees, we are presenting the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions. The Other Subsidiaries column includes financial information for those subsidiaries that do not guarantee the 7.25% Notes.

 

24



Table of Contents

 

Condensed Consolidating Balance Sheet

March 31, 2015

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

4,951

 

$

626,161

 

$

624,415

 

$

 

$

1,255,527

 

Current assets associated with discontinued operations

 

 

 

453

 

 

453

 

Total current assets

 

4,951

 

626,161

 

624,868

 

 

1,255,980

 

Property, plant and equipment, net

 

 

1,124,005

 

2,210,156

 

 

3,334,161

 

Investments in affiliates

 

1,799,536

 

1,689,947

 

 

(3,489,483

)

 

Goodwill

 

 

 

3,738

 

 

3,738

 

Intangible and other assets, net

 

5,379

 

33,015

 

194,265

 

 

232,659

 

Intercompany receivables

 

712,765

 

11,758

 

516,276

 

(1,240,799

)

 

Total long-term assets

 

2,517,680

 

2,858,725

 

2,924,435

 

(4,730,282

)

3,570,558

 

Total assets

 

$

2,522,631

 

$

3,484,886

 

$

3,549,303

 

$

(4,730,282

)

$

4,826,538

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

8,901

 

$

302,920

 

$

258,195

 

$

 

$

570,016

 

Current liabilities associated with discontinued operations

 

 

 

1,771

 

 

1,771

 

Total current liabilities

 

8,901

 

302,920

 

259,966

 

 

571,787

 

Long-term debt

 

704,000

 

994

 

1,342,581

 

 

2,047,575

 

Intercompany payables

 

 

1,229,041

 

11,758

 

(1,240,799

)

 

Other long-term liabilities

 

 

152,395

 

102,860

 

 

255,255

 

Long-term liabilities associated with discontinued operations

 

 

 

340

 

 

340

 

Total liabilities

 

712,901

 

1,685,350

 

1,717,505

 

(1,240,799

)

2,874,957

 

Total equity

 

1,809,730

 

1,799,536

 

1,831,798

 

(3,489,483

)

1,951,581

 

Total liabilities and equity

 

$

2,522,631

 

$

3,484,886

 

$

3,549,303

 

$

(4,730,282

)

$

4,826,538

 

 

25



Table of Contents

 

Condensed Consolidating Balance Sheet

December 31, 2014

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

4,846

 

$

649,719

 

$

610,574

 

$

 

$

1,265,139

 

Current assets associated with discontinued operations

 

 

 

537

 

 

537

 

Total current assets

 

4,846

 

649,719

 

611,111

 

 

1,265,676

 

Property, plant and equipment, net

 

 

1,124,786

 

2,202,106

 

 

3,326,892

 

Investments in affiliates

 

1,786,572

 

1,744,614

 

 

(3,531,186

)

 

Goodwill

 

 

 

3,738

 

 

3,738

 

Intangible and other assets, net

 

5,966

 

33,292

 

204,114

 

 

243,372

 

Intercompany receivables

 

727,896

 

12,023

 

529,274

 

(1,269,193

)

 

Long-term assets associated with discontinued operations

 

 

 

17,469

 

 

17,469

 

Total long-term assets

 

2,520,434

 

2,914,715

 

2,956,701

 

(4,800,379

)

3,591,471

 

Total assets

 

$

2,525,280

 

$

3,564,434

 

$

3,567,812

 

$

(4,800,379

)

$

4,857,147

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

2,520

 

$

353,851

 

$

252,281

 

$

 

$

608,652

 

Current liabilities associated with discontinued operations

 

 

 

2,066

 

 

2,066

 

Total current liabilities

 

2,520

 

353,851

 

254,347

 

 

610,718

 

Long-term debt

 

725,500

 

1,107

 

1,300,295

 

 

2,026,902

 

Intercompany payables

 

 

1,257,170

 

12,023

 

(1,269,193

)

 

Other long-term liabilities

 

 

165,734

 

100,431

 

 

266,165

 

Long-term liabilities associated with discontinued operations

 

 

 

317

 

 

317

 

Total liabilities

 

728,020

 

1,777,862

 

1,667,413

 

(1,269,193

)

2,904,102

 

Total equity

 

1,797,260

 

1,786,572

 

1,900,399

 

(3,531,186

)

1,953,045

 

Total liabilities and equity

 

$

2,525,280

 

$

3,564,434

 

$

3,567,812

 

$

(4,800,379

)

$

4,857,147

 

 

26



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income

Three Months Ended March 31, 2015

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

372,777

 

$

416,988

 

$

(60,683

)

$

729,082

 

Costs of sales (excluding depreciation and amortization expense)

 

 

278,108

 

242,645

 

(60,683

)

460,070

 

Selling, general and administrative

 

63

 

40,352

 

46,271

 

 

86,686

 

Depreciation and amortization

 

 

32,433

 

63,375

 

 

95,808

 

Long-lived asset impairment

 

 

7,847

 

4,885

 

 

12,732

 

Restructuring charges

 

 

4,790

 

 

 

4,790

 

Interest expense

 

9,321

 

107

 

17,870

 

 

27,298

 

Intercompany charges, net

 

(8,734

)

7,792

 

942

 

 

 

Equity in income of affiliates

 

(32,575

)

(37,687

)

(5,006

)

70,262

 

(5,006

)

Other (income) expense, net

 

10

 

791

 

7,040

 

 

7,841

 

Income before income taxes

 

31,915

 

38,244

 

38,966

 

(70,262

)

38,863

 

Provision for (benefit from) income taxes

 

(227

)

5,669

 

11,049

 

 

16,491

 

Income from continuing operations

 

32,142

 

32,575

 

27,917

 

(70,262

)

22,372

 

Income from discontinued operations, net of tax

 

 

 

18,713

 

 

18,713

 

Net income

 

32,142

 

32,575

 

46,630

 

(70,262

)

41,085

 

Less: Net income attributable to the noncontrolling interest

 

 

 

(8,943

)

 

(8,943

)

Net income attributable to Exterran stockholders

 

32,142

 

32,575

 

37,687

 

(70,262

)

32,142

 

Other comprehensive loss attributable to Exterran stockholders

 

(11,404

)

(12,308

)

(12,117

)

24,425

 

(11,404

)

Comprehensive income attributable to Exterran stockholders

 

$

20,738

 

$

20,267

 

$

25,570

 

$

(45,837

)

$

20,738

 

 

27



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income

Three Months Ended March 31, 2014

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

340,903

 

$

346,638

 

$

(44,533

)

$

643,008

 

Costs of sales (excluding depreciation and amortization expense)

 

 

245,916

 

208,139

 

(44,533

)

409,522

 

Selling, general and administrative

 

46

 

45,812

 

46,720

 

 

92,578

 

Depreciation and amortization

 

 

35,407

 

50,115

 

 

85,522

 

Long-lived asset impairment

 

 

1,321

 

2,486

 

 

3,807

 

Restructuring charges

 

 

4,443

 

379

 

 

4,822

 

Interest expense

 

18,480

 

258

 

9,570

 

 

28,308

 

Intercompany charges, net

 

(8,963

)

8,243

 

720

 

 

 

Equity in income of affiliates

 

(38,822

)

(42,431

)

(4,693

)

81,253

 

(4,693

)

Other (income) expense, net

 

10

 

595

 

(3,039

)

 

(2,434

)

Income before income taxes

 

29,249

 

41,339

 

36,241

 

(81,253

)

25,576

 

Provision for (benefit from) income taxes

 

(3,347

)

2,517

 

10,239

 

 

9,409

 

Income from continuing operations

 

32,596

 

38,822

 

26,002

 

(81,253

)

16,167

 

Income from discontinued operations, net of tax

 

 

 

18,727

 

 

18,727

 

Net income

 

32,596

 

38,822

 

44,729

 

(81,253

)

34,894

 

Less: Net income attributable to the noncontrolling interest

 

 

 

(2,298

)

 

(2,298

)

Net income attributable to Exterran stockholders

 

32,596

 

38,822

 

42,431

 

(81,253

)

32,596

 

Other comprehensive income attributable to Exterran stockholders

 

1,318

 

998

 

1,153

 

(2,151

)

1,318

 

Comprehensive income attributable to Exterran stockholders

 

$

33,914

 

$

39,820

 

$

43,584

 

$

(83,404

)

$

33,914

 

 

28



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2015

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by continuing operations

 

$

4,465

 

$

23,727

 

$

104,276

 

$

 

$

132,468

 

Net cash provided by discontinued operations

 

 

 

2,166

 

 

2,166

 

Net cash provided by operating activities

 

4,465

 

23,727

 

106,442

 

 

134,634

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(39,963

)

(99,820

)

 

(139,783

)

Proceeds from sale of property, plant and equipment

 

 

982

 

7,928

 

 

8,910

 

Capital distributions received from consolidated subsidiaries

 

 

15,178

 

 

(15,178

)

 

Return of investments in non-consolidated affiliates

 

 

 

5,006

 

 

5,006

 

Return of investments in consolidated subsidiaries

 

10,340

 

 

 

(10,340

)

 

Net cash provided by (used in) continuing operations

 

10,340

 

(23,803

)

(86,886

)

(25,518

)

(125,867

)

Net cash provided by discontinued operations

 

 

 

16,530

 

 

16,530

 

Net cash provided by (used in) investing activities

 

10,340

 

(23,803

)

(70,356

)

(25,518

)

(109,337

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

277,000

 

 

140,000

 

 

417,000

 

Repayments of long-term debt

 

(298,500

)

 

(98,000

)

 

(396,500

)

Payments for debt issuance costs

 

 

 

(1,311

)

 

(1,311

)

Payments for settlement of interest rate swaps that include financing elements

 

 

 

(942

)

 

(942

)

Proceeds from stock options exercised

 

572

 

 

 

 

572

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

419

 

 

 

 

419

 

Purchases of treasury stock

 

(3,678

)

 

 

 

(3,678

)

Dividends to Exterran stockholders

 

(10,340

)

 

 

 

(10,340

)

Stock-based compensation excess tax benefit

 

2,131

 

 

 

 

2,131

 

Distributions to noncontrolling partners in the Partnership

 

 

 

(35,323

)

15,178

 

(20,145

)

Capital distributions to affiliates

 

 

(10,340

)

 

10,340

 

 

Borrowings (repayments) between consolidated subsidiaries, net

 

17,647

 

12,432

 

(30,079

)

 

 

Net cash provided by (used in) financing activities

 

(14,749

)

2,092

 

(25,655

)

25,518

 

(12,794

)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(231

)

 

(231

)

Net increase in cash and cash equivalents

 

56

 

2,016

 

10,200

 

 

12,272

 

Cash and cash equivalents at beginning of period

 

42

 

655

 

39,042

 

 

39,739

 

Cash and cash equivalents at end of period

 

$

98

 

$

2,671

 

$

49,242

 

$

 

$

52,011

 

 

29



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

Three Months Ended March 31, 2014

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) continuing operations

 

$

4,856

 

$

(20,344

)

$

68,341

 

$

 

$

52,853

 

Net cash provided by discontinued operations

 

 

 

1,039

 

 

1,039

 

Net cash provided by (used in) operating activities

 

4,856

 

(20,344

)

69,380

 

 

53,892

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(32,264

)

(66,950

)

 

(99,214

)

Proceeds from sale of property, plant and equipment

 

 

5,490

 

5,373

 

 

10,863

 

Escrow deposit for business acquisition

 

 

 

(17,000

)

 

(17,000

)

Capital distributions received from consolidated subsidiaries

 

 

12,971

 

 

(12,971

)

 

Return of investments in non-consolidated affiliates

 

 

 

4,890

 

 

4,890

 

Investment in consolidated subsidiaries

 

 

(6,156

)

 

6,156

 

 

Cash invested in non-consolidated affiliates

 

 

 

(197

)

 

(197

)

Return of investments in consolidated subsidiaries

 

7,481

 

 

 

(7,481

)

 

Net cash provided by (used in) continuing operations

 

7,481

 

(19,959

)

(73,884

)

(14,296

)

(100,658

)

Net cash provided by discontinued operations

 

 

 

16,726

 

 

16,726

 

Net cash provided by (used in) investing activities

 

7,481

 

(19,959

)

(57,158

)

(14,296

)

(83,932

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

241,500

 

 

91,000

 

 

332,500

 

Repayments of long-term debt

 

(208,000

)

 

(47,500

)

 

(255,500

)

Payments for settlement of interest rate swaps that include financing elements

 

 

 

(913

)

 

(913

)

Proceeds from stock options exercised

 

8,520

 

 

 

 

8,520

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

404

 

 

 

 

404

 

Purchases of treasury stock

 

(5,349

)

 

 

 

(5,349

)

Dividends to Exterran stockholders

 

(9,989

)

 

 

 

(9,989

)

Stock-based compensation excess tax benefit

 

6,470

 

 

 

 

6,470

 

Distributions to noncontrolling partners in the Partnership

 

 

 

(28,840

)

12,971

 

(15,869

)

Capital distributions to affiliates

 

 

(7,481

)

 

7,481

 

 

Capital contributions received from consolidated subsidiaries

 

 

 

6,156

 

(6,156

)

 

Borrowings (repayments) between consolidated subsidiaries, net

 

(45,862

)

48,373

 

(2,511

)

 

 

Net cash provided by (used in) financing activities

 

(12,306

)

40,892

 

17,392

 

14,296

 

60,274

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(4,409

)

 

(4,409

)

Net increase in cash and cash equivalents

 

31

 

589

 

25,205

 

 

25,825

 

Cash and cash equivalents at beginning of period

 

11

 

1,554

 

34,100

 

 

35,665

 

Cash and cash equivalents at end of period

 

$

42

 

$

2,143

 

$

59,305

 

$

 

$

61,490

 

 

30



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19.  Subsequent Events

 

On April 17, 2015, we sold to the Partnership contract operations customer service agreements with 60 customers and a fleet of 238 compressor units used to provide compression services under those agreements, comprising approximately 148,000 horsepower, or 3% (by then available horsepower) of our and the Partnership’s combined U.S. contract operations business. The assets sold also included 179 compressor units, comprising approximately 66,000 horsepower, previously leased by us to the Partnership. Total consideration for the transaction was approximately $102.3 million, excluding transaction costs, and consisted of the Partnership’s issuance to us of approximately 4.0 million common units and approximately 80,000 general partner units. Based on the terms of the contribution, conveyance and assumption agreement, the common units and general partner units, including incentive distribution rights, we received from this sale are not entitled to receive a cash distribution relating to the quarter ended March 31, 2015.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Disclosure Regarding Forward-Looking Statements

 

This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 expected amount of our capital expenditures; anticipated cost savings, future revenue, gross margin and other financial or operational measures related to our business and our primary business segments; the future value of our equipment and non-consolidated affiliates; and plans and objectives of our management for our future operations. 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. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2014, 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 SEC’s website at www.sec.gov, as well as the following risks and uncertainties:

 

·                  conditions in the oil and natural gas industry, including a sustained decrease in the level of supply or demand for oil or natural gas or a sustained low price of oil or natural gas, which could cause a decline in the demand or pricing for our natural gas compression and oil and natural gas production and processing equipment and services;

 

·                  our reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;

 

·                  the success of our subsidiaries, including Exterran Partners, L.P. (along with its subsidiaries, the “Partnership”);

 

·                  our ability to complete the proposed separation (the “Spin-off”) of our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company (“Spinco”);

 

·                  changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, kidnappings, violence associated with drug cartels, legislative changes and the expropriation, confiscation or nationalization of property without fair compensation;

 

·                  changes in currency exchange rates, including the risk of currency devaluations by foreign governments, and restrictions on currency repatriation;

 

·                  the inherent risks associated with our operations, such as equipment defects, impairments, malfunctions and natural disasters;

 

·                  loss of the Partnership’s status as a partnership for United States of America (“U.S.”) federal income tax purposes;

 

·                  a decline in the Partnership’s quarterly distribution of cash to us attributable to our ownership interest in the Partnership;

 

·                  the risk that counterparties will not perform their obligations under our financial instruments;

 

·                  the financial condition of our customers;

 

·                  our ability to timely and cost-effectively obtain components necessary to conduct our business;

 

·                  employment and workforce factors, including our ability to hire, train and retain key employees;

 

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·                  our ability to implement certain business and financial objectives, such as:

 

·                           winning profitable new business;

 

·                           sales of additional U.S. contract operations contracts and equipment to the Partnership;

 

·                           timely and cost-effective execution of projects;

 

·                           enhancing our asset utilization, particularly with respect to our fleet of compressors;

 

·                           integrating acquired businesses;

 

·                           generating sufficient cash; and

 

·                           accessing the capital markets at an acceptable cost;

 

·                  liability related to the use of our products and 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

 

Exterran Holdings, Inc., together with its subsidiaries (“Exterran”, “our”, “we” or “us”), is a global market leader in the full-service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Our global customer base consists of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent producers and natural gas processors, gatherers and pipelines. We operate in three primary business lines: contract operations, aftermarket services and fabrication. In our contract operations business line, we use our fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment to provide operations services to our customers. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, processing, treating and other equipment. In our fabrication business line, we fabricate natural gas compression and oil and natural gas production and processing equipment for sale to our customers and for use in our contract operations services. In addition, our fabrication business line provides engineering, procurement and fabrication services related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants. We offer our customers, on either a contract operations basis or a sale basis, the engineering, design, project management, procurement and construction services necessary to incorporate our products into production, processing and compression facilities, which we refer to as Integrated Projects.

 

Exterran Partners, L.P.

 

We have an equity interest in the Partnership, a master limited partnership that provides natural gas contract operations services to customers throughout the U.S. As of March 31, 2015, public unitholders held a 63% ownership interest in the Partnership and we owned the remaining equity interest, including all of the general partner interest and incentive distribution rights. We consolidate the financial position and results of operations of the Partnership. It is our intention for the Partnership to be the primary vehicle for the growth of our U.S. contract operations business and we may grow the Partnership through third party acquisitions, organic growth and transfers by us of additional U.S. contract operations customer contracts and equipment to the Partnership over time in exchange for cash, the Partnership’s assumption of our debt and/or additional equity interests in the Partnership. As of March 31, 2015, the Partnership’s fleet included 6,478 compressor units comprising approximately 3,177,000 horsepower, or 75% of our and the Partnership’s combined total U.S. horsepower. The Partnership’s fleet included 186 compressor units, comprising approximately 70,000 horsepower, leased from our wholly-owned subsidiaries and excluded 1 compressor unit, comprising approximately 1,000 horsepower, owned by the Partnership but leased to our wholly-owned subsidiaries as of March 31, 2015.

 

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April 2015 Contract Operations Acquisition

 

On April 17, 2015, we sold to the Partnership contract operations customer service agreements with 60 customers and a fleet of 238 compressor units used to provide compression services under those agreements, comprising approximately 148,000 horsepower, or 3% (by then available horsepower) of our and the Partnership’s combined U.S. contract operations business. The assets sold also included 179 compressor units, comprising approximately 66,000 horsepower, previously leased by us to the Partnership. Total consideration for the transaction was approximately $102.3 million, excluding transaction costs, and consisted of the Partnership’s issuance to us of approximately 4.0 million common units and approximately 80,000 general partner units. Based on the terms of the contribution, conveyance and assumption agreement, the common units and general partner units, including incentive distribution rights, we received from this sale are not entitled to receive a cash distribution relating to the quarter ended March 31, 2015. The acquisition of the assets by the Partnership from us is referred to as the “April 2015 Contract Operations Acquisition.”

 

August 2014 MidCon Acquisition

 

On August 8, 2014, the Partnership completed an acquisition of natural gas compression assets, including a fleet of 162 compressor units, comprising approximately 110,000 horsepower from MidCon Compression, L.L.C. (“MidCon”) for $130.1 million. The purchase price was funded with borrowings under the Partnership’s revolving credit facility. The majority of the horsepower acquired is utilized under a five-year contract operations services agreement with BHP Billiton Petroleum (“BHP Billiton”) to provide compression services. In connection with the acquisition, the contract operations services agreement with BHP Billiton was assigned to the Partnership effective as of the closing.

 

In accordance with the terms of the Purchase and Sale Agreement between the Partnership and MidCon relating to this acquisition, the Partnership directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to our wholly-owned subsidiary Exterran Energy Solutions, L.P. (“EESLP”), an indirect parent company of the Partnership, for $4.1 million. The assets acquired by EESLP are used in conjunction with the compression units the Partnership acquired from MidCon to provide compression services. The acquisition of the assets by the Partnership and EESLP from MidCon is referred to as the “August 2014 MidCon Acquisition.”

 

April 2014 MidCon Acquisition

 

On April 10, 2014, the Partnership completed an acquisition of natural gas compression assets, including a fleet of 337 compressor units, comprising approximately 444,000 horsepower from MidCon for $352.9 million. The purchase price was funded with the net proceeds from the Partnership’s public sale of 6.2 million common units and a portion of the net proceeds from the Partnership’s issuance of $350.0 million aggregate principal amount of 6% senior notes due October 2022 (the “Partnership 2014 Notes”). The compressor units were previously used by MidCon to provide compression services to a subsidiary of Access Midstream Partners LP (“Access”). Effective as of the closing of the acquisition, the Partnership and Access entered into a seven-year contract operations services agreement under which the Partnership provides compression services to Williams Partners, L.P. (formerly Access).

 

In accordance with the terms of the Purchase and Sale Agreement between the Partnership and MidCon relating to this acquisition, the Partnership directed MidCon to sell a tract of real property and the facility located thereon, a fleet of vehicles, personal property and parts inventory to our wholly-owned subsidiary EESLP, an indirect parent company of the Partnership, for $7.7 million. The assets acquired by EESLP are used in conjunction with the compression units the Partnership acquired from MidCon to provide compression services. The acquisition of the assets by the Partnership and EESLP from MidCon is referred to as the “April 2014 MidCon Acquisition.”

 

Proposed Spin-off Transaction

 

On November 17, 2014, we announced that our board of directors had authorized management to pursue a plan to separate our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company. To effect the Spin-off, we intend to distribute on the distribution date, on a pro rata basis, all of the shares of Spinco common stock to our stockholders as of the record date. Our board of directors will set the record date and distribution date prior to the Spin-off. The Spin-off is subject to, among other things, market conditions, the receipt of an opinion of counsel as to the tax-free nature of the transaction, completion of a review by the SEC of a registration statement on Form 10 filed by Spinco, the execution of a separation and distribution agreement and related ancillary agreements and final approval of our board of directors. Upon completion of the Spin-off, we and Spinco will be independent, publicly traded companies with separate public ownership, boards of directors and management, and we will continue to own and operate the U.S. contract operations and U.S. aftermarket services businesses that we currently own. In addition, we will continue to hold interests in the Partnership, which include the sole general partner interest and certain limited partner interests, as well as all of the incentive distribution rights in the Partnership.

 

Spinco is expected to issue certain third-party debt instruments and borrow funds on or before the completion of the Spin-off. Certain, if not all, of the proceeds received by Spinco from such borrowings are expected to be distributed to us on or before the completion of the Spin-off and we expect to use those distributed funds to repay, in whole or in part, our (but not the Partnership’s) outstanding debt instruments. Although we expect to complete the Spin-off in the second half of 2015, there are no assurances as to when the proposed Spin-off will be completed, if at all, or if the Spin-off will be completed as currently contemplated.

 

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Unless otherwise indicated, this discussion in Part I, Item 2 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) excludes the potential future impact of the proposed Spin-off transaction, if consummated. The effect of the proposed Spin-off transaction could significantly change and materially impact our business, financial condition, results of operations and cash flows.

 

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 oil and natural gas reserves. Spending by oil and 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 contract operations business is typically less impacted by commodity prices than certain other energy products and service providers, changes in oil and natural gas exploration and production spending normally result in changes in demand for our products and services.

 

Natural gas consumption in the U.S. for the twelve months ended January 31, 2015 increased by approximately 1% compared to the twelve months ended January 31, 2014. The U.S. Energy Information Administration (“EIA”) forecasts that total U.S. natural gas consumption will increase by 3.9% in 2015 compared to 2014 and increase by an average of 0.7% per year thereafter until 2040. The EIA estimates that the U.S. natural gas consumption level will be approximately 30 trillion cubic feet in 2040, or 16% of the projected worldwide total of approximately 185 trillion cubic feet.

 

Natural gas marketed production in the U.S. for the twelve months ended January 31, 2015 increased by approximately 7% compared to the twelve months ended January 31, 2014. The EIA forecasts that total U.S. natural gas marketed production will increase by 5% in 2015 compared to 2014, and U.S. natural gas production will increase by an average of 1.5% per year thereafter until 2040. The EIA estimates that the U.S. natural gas production level will be approximately 33 trillion cubic feet in 2040, or 18% of the projected worldwide total of approximately 187 trillion cubic feet.

 

Global oil and U.S. natural gas prices have declined significantly in the last several months, and, as a result, research analysts are forecasting declines in U.S. and worldwide capital spending for drilling activity in 2015, and U.S. producers and other producers around the world have announced reduced capital budgets for this year.

 

Our Performance Trends and Outlook

 

Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and pricing for natural gas compression and oil and natural gas production and processing and our customers’ decisions among using our products and services, using our competitors’ products and services or owning and operating the equipment themselves.

 

During 2014, we saw steady activity in North America shale plays and areas focused on the production of oil and natural gas liquids. This activity has increased the overall amount of compression horsepower in the industry; however, these increases continued to be partially offset by horsepower declines in more mature and predominantly dry gas markets, where we provide a significant amount of contract operations services. Historically, oil and natural gas prices in North America have been volatile. Global oil prices have fallen significantly since the third quarter of 2014. West Texas Intermediate crude oil spot prices as of March 31, 2015 were approximately 11% and 53% lower than prices at December 31, 2014 and March 31, 2014, respectively, which is expected to lead to reduced drilling of oil wells in 2015. Because we provide a significant amount of contract operations services related to the production of associated gas from oil wells and a significant amount of contract operations services related to the use of gas lift to enhance production of oil from oil wells, our operations and our levels of operating horsepower are also impacted by crude oil drilling and production activity. In addition, the Henry Hub spot price for natural gas was $2.65 per MMBtu at March 31, 2015, which was approximately 16% and 41% lower than prices at December 31, 2014 and March 31, 2014, respectively, and the U.S. natural gas liquid composite price was approximately $5.08 per MMBtu for the month of January 2015, which was approximately 10% and 49% lower than prices for the months of December 2014 and March 2014, respectively, which is expected to lead to reduced drilling of gas wells in North America in 2015. We may experience lower overall activity levels in our North America contract operations business in 2015 compared to 2014 as a result of the low oil and natural gas price environment in North America. During the three months ended March 31, 2015, our operating horsepower in North America decreased by 0.3%. During periods of lower oil or natural gas prices, oil and natural gas production growth could moderate or decline, and as a result the demand or pricing for our contract operations services and fabricated equipment could be adversely affected. Booking activity levels for our fabricated products in North America during the three months ended March 31, 2015 have decreased by approximately 82% compared to the three months ended December 31, 2014 and our North America fabrication backlog as of March 31, 2015 decreased by approximately 29% compared to December 31, 2014 and increased by approximately 27% compared to March 31, 2014. Continued growth in North America requires capital investment by our customers in new projects over the long run. As a result of the low oil and gas prices, we believe there will be less oil and gas drilling activity in North America in 2015 compared to 2014. If capital investment in drilling activities remains low throughout 2015, we expect lower bookings in our North America fabrication business in 2015 compared to 2014.

 

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Similarly, in international markets, lower oil and gas prices may have a negative impact on the amount of capital investment by our customers in new projects. However, we believe the impact will be less than we expect to experience in North America for two reasons: first, the longer-term fundamentals influencing our international customers’ demand and, second, the long-term contracts we have in place with those international customers. Growth in our international markets depends in part on international infrastructure projects, many of which are based on longer-term plans of our customers that can be driven by their local market demand and local pricing for natural gas. As a result, we believe our international customers make decisions based on longer-term fundamentals that can be less tied to near term commodity prices than our North American customers. Therefore, we believe the demand for our services and products in international markets will continue, and we expect to have opportunities to grow our international businesses over the long term. In the short term, however, we believe our customers may seek ways to reduce their capital and operating expenditure requirements due to lower oil and natural gas prices. As a result, the demand and pricing for our services and products in international markets could be adversely impacted. However, due to the long-term nature of the contracts we have with our customers in our international contract operations business, we believe this impact will be less severe than in our North American business.

 

Our level of capital spending depends on our forecast for the demand for our products and services and the equipment required to provide services to our customers. Based on demand we see for contract operations, we anticipate investing more capital in our international contract operations business and less capital in our North America contract operations business in 2015 than we did in 2014. The increased investment in our international contract operations business during 2015 is driven by large multi-year projects contracted in 2014 that are scheduled to start earning revenue in 2015 and 2016.

 

Based on current market conditions, we expect that net cash provided by operating activities and availability under our credit facilities will be sufficient to finance our operating expenditures, capital expenditures, scheduled interest and debt repayments and anticipated dividends through December 31, 2015; however, to the extent it is not, we may seek additional debt or equity financing. We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity or other debt securities, in open market purchases, privately negotiated transactions or otherwise, and may from time to time seek to repurchase our equity. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

 

We may contribute over time additional U.S. contract operations customer contracts and equipment to the Partnership in exchange for cash, the Partnership’s assumption of our debt and/or our receipt of additional interests in the Partnership. Such transactions depend on, among other things, market and economic conditions, our ability to agree with the Partnership regarding the terms of any purchase and the availability to the Partnership of debt and equity capital on reasonable terms.

 

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Operating Highlights

 

The following tables summarize our total available horsepower, total operating horsepower, average operating horsepower, horsepower utilization percentages and fabrication backlog (in thousands, except percentages):

 

 

 

Three Months Ended

 

 

 

March 31,
2015

 

December 31,
2014

 

March 31,
2014

 

Total Available Horsepower (at period end):

 

 

 

 

 

 

 

North America

 

4,246

 

4,209

 

3,476

 

International

 

1,239

 

1,236

 

1,254

 

Total

 

5,485

 

5,445

 

4,730

 

Total Operating Horsepower (at period end):

 

 

 

 

 

 

 

North America

 

3,689

 

3,700

 

2,901

 

International

 

960

 

976

 

984

 

Total

 

4,649

 

4,676

 

3,885

 

Average Operating Horsepower:

 

 

 

 

 

 

 

North America

 

3,695

 

3,638

 

2,894

 

International

 

971

 

975

 

982

 

Total

 

4,666

 

4,613

 

3,876

 

Horsepower Utilization (at period end):

 

 

 

 

 

 

 

North America

 

87

%

88

%

83

%

International

 

77

%

79

%

78

%

Total

 

85

%

86

%

82

%

 

 

 

 

 

 

 

 

 

 

March 31,
2015

 

December 31,
2014

 

March 31,
2014

 

Compressor and Accessory Fabrication Backlog

 

$

185,640

 

$

270,297

 

$

176,708

 

Production and Processing Equipment Fabrication Backlog

 

458,143

 

561,153

 

433,842

 

Installation Backlog

 

86,590

 

121,751

 

58,513

 

Total Fabrication Backlog(1)

 

$

730,373

 

$

953,201

 

$

669,063

 

 


(1)      Our fabrication backlog consists of unfilled orders based on signed contracts and does not include potential fabrication sales pursuant to letters of intent received from customers.

 

Financial Results of Operations

 

Summary of Results

 

As discussed in Note 3 to the Financial Statements, the results from continuing operations for all periods presented exclude the results of our Venezuelan contract operations business and our contract water treatment business. Those results are reflected in discontinued operations for all periods presented.

 

Revenue.  Revenue during the three months ended March 31, 2015 was $729.1 million compared to $643.0 million during the three months ended March 31, 2014. The increase in revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily caused by increases in North America contract operations revenue and fabrication revenue.

 

Net income attributable to Exterran stockholders and EBITDA, as adjusted.  We generated net income attributable to Exterran stockholders of $32.1 million and $32.6 million during the three months ended March 31, 2015 and 2014, respectively. The increase in net income attributable to Exterran stockholders was primarily due to an increase in gross margin mostly driven by our North America contract operations segment and a decrease in selling, general and administrative (“SG&A”) expense. These activities were partially offset by an increase in depreciation and amortization expense, an increase in foreign currency losses of $9.4 million, an increase in long-lived asset impairment, an increase in income tax expense and an increase in the portion of our net income attributable to noncontrolling interest. Our EBITDA, as adjusted, was $182.0 million and $144.8 million during the three months ended March 31, 2015 and 2014, respectively. EBITDA, as adjusted, increased primarily due to higher gross margin discussed above and a decrease in SG&A expense. For a reconciliation of EBITDA, as adjusted, to net income (loss), 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.”

 

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The Three Months Ended March 31, 2015 Compared to the Three Months Ended March 31, 2014

 

North America Contract Operations

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Revenue

 

$

202,261

 

$

156,523

 

29

%

Cost of sales (excluding depreciation and amortization expense)

 

82,679

 

71,081

 

16

%

Gross margin

 

$

119,582

 

$

85,442

 

40

%

Gross margin percentage

 

59

%

55

%

4

%

 

The increase in revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily attributable to a 28% increase in average operating horsepower, which included the assets acquired in the August 2014 MidCon Acquisition and the April 2014 MidCon Acquisition as well as organic growth in operating horsepower. Gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) and gross margin percentage increased during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 primarily due to the revenue increase explained above. Gross margin, a non-GAAP financial measure, is reconciled, in total, to net income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP, in Note 17 to the Financial Statements.

 

International Contract Operations

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Revenue

 

$

120,691

 

$

111,040

 

9

%

Cost of sales (excluding depreciation and amortization expense)

 

44,339

 

41,032

 

8

%

Gross margin

 

$

76,352

 

$

70,008

 

9

%

Gross margin percentage

 

63

%

63

%

0

%

 

The increase in revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a $7.0 million increase in revenue in Mexico primarily driven by contracts that commenced or were expanded in scope in 2014 and 2015 and a $4.2 million increase in revenue in Argentina primarily due to higher rates and inflationary cost recoveries billed to customers in the current year period partially offset by the devaluation of the Argentine peso in the current year period. Gross margin increased during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 primarily due to the revenue increase explained above, excluding the devaluation of the Argentine peso in the current year as the impact on gross margin and gross margin percentage was insignificant.

 

Aftermarket Services

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Revenue

 

$

86,856

 

$

88,048

 

(1

)%

Cost of sales (excluding depreciation and amortization expense)

 

65,934

 

67,821

 

(3

)%

Gross margin

 

$

20,922

 

$

20,227

 

3

%

Gross margin percentage

 

24

%

23

%

1

%

 

The decrease in revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a decrease in revenue in North America of $2.6 million, partially offset by an increase in revenue in the Eastern Hemisphere of $1.1 million. Gross margin increased during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 primarily due to an increase in gross margin in the Eastern Hemisphere of $1.2 million, partially offset by a decrease in gross margin in North America of $0.6 million. The increase in gross margin percentage during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due to the receipt of a settlement from a customer in the Eastern Hemisphere during the three months ended March 31, 2015, which positively impacted revenue and gross margin by $3.7 million and $2.2 million, respectively.

 

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Fabrication

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Revenue

 

$

319,274

 

$

287,397

 

11

%

Cost of sales (excluding depreciation and amortization expense)

 

267,118

 

229,588

 

16

%

Gross margin

 

$

52,156

 

$

57,809

 

(10

)%

Gross margin percentage

 

16

%

20

%

(4

)%

 

The increase in revenue during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was due to higher revenue in North America and Latin America of $36.5 million and $6.9 million, respectively, partially offset by a decrease in revenue in the Eastern Hemisphere of $11.5 million. The increase in revenue in North America was primarily due to increases of $21.9 million and $15.7 million in production and processing equipment revenue and installation revenue, respectively. The increase in Latin America revenue was primarily due to an increase of $7.5 million in compressor revenue. The decrease in the Eastern Hemisphere revenue was due to decreases of $14.1 million and $10.3 million in compressor revenue and installation revenue, respectively, partially offset by an increase of $12.9 million in production and processing equipment revenue. The decreases in gross margin and gross margin percentage were primarily caused by subcontractor delays during the three months ended March 31, 2015 resulting in schedule extensions and additional costs of $4.3 million associated with projects in the Eastern Hemisphere and an increase of $0.9 million in expense for inventory reserves during the current year period.

 

Costs and Expenses

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Selling, general and administrative

 

$

86,686

 

$

92,578

 

(6

)%

Depreciation and amortization

 

95,808

 

85,522

 

12

%

Long-lived asset impairment

 

12,732

 

3,807

 

234

%

Restructuring charges

 

4,790

 

4,822

 

(1

)%

Interest expense

 

27,298

 

28,308

 

(4

)%

Equity in income of non-consolidated affiliates

 

(5,006

)

(4,693

)

7

%

Other (income) expense, net

 

7,841

 

(2,434

)

(422

)%

 

The decrease in SG&A expense during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a $5.6 million decrease in compensation and benefits costs. SG&A as a percentage of revenue was 12% and 14% during the three months ended March 31, 2015 and 2014, respectively.

 

Depreciation and amortization expense during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 increased primarily due to an increase of $4.8 million in depreciation of installation costs on contract operations projects in Mexico and an increase in property, plant and equipment and intangible asset additions, including the assets acquired in the August 2014 MidCon Acquisition and the April 2014 MidCon Acquisition. Installation costs capitalized on contract operations projects are depreciated over the life of the underlying contract.

 

During the three months ended March 31, 2015, we evaluated the future deployment of our idle fleet and determined to retire and either sell or re-utilize the key components of approximately 80 idle compressor units, representing approximately 30,000 horsepower, previously used to provide services in our North America contract operations and international contract operations segments. As a result, we performed an impairment review and recorded an $11.3 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.

 

During the three months ended March 31, 2015, we evaluated other long-lived assets for impairment and recorded long-lived asset impairments of $1.4 million on these assets.

 

During the three months ended March 31, 2014, we evaluated the future deployment of our idle fleet and determined to retire and either sell or re-utilize the key components of approximately 40 idle compressor units, representing approximately 11,000 horsepower, previously used to provide services in our North America contract operations segment. As a result, we performed an impairment review and recorded a $3.8 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.

 

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As discussed in Note 2 to the Financial Statements, in November 2014, we announced that our board of directors had authorized management to pursue a plan to separate our international contract operations, international aftermarket services and global fabrication businesses into an independent, publicly traded company. During the three months ended March 31, 2015, we incurred $4.8 million of costs associated with the proposed Spin-off which were primarily related to legal, consulting, audit and professional fees. The costs incurred in conjunction with the proposed Spin-off are included in restructuring charges in our condensed consolidated statements of operations. This Spin-off is expected to be completed in the second half of 2015. We cannot currently estimate the total restructuring costs that will be incurred as a result of the proposed Spin-off. See Note 12 to the Financial Statements for further discussion of these charges.

 

In January 2014, we announced a plan to centralize our make-ready operations to improve the cost and efficiency of our shops and further enhance the competitiveness of our fleet of compressors. As part of this plan, we examined both recent and anticipated changes in the North America market, including the throughput demand of our shops and the addition of new equipment to our fleet. To better align our costs and capabilities with the current market, we determined to close several of our make-ready shops. The centralization of our make-ready operations was completed in the second quarter of 2014. During the three months ended March 31, 2014, we incurred $4.8 million of restructuring charges primarily related to termination benefits and a non-cash write-down of inventory associated with the centralization of our make-ready operations. See Note 12 to the Financial Statements for further discussion of these charges.

 

The decrease in interest expense during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a decrease in the average effective interest rate on our debt, partially offset by an increase in the average balance of long-term debt. The decrease in the average effective interest rate was primarily due to the redemption of $355.0 million aggregate principal amount of 4.25% convertible senior notes, which including the debt discount had an effective interest rate of 11.67%, in the second quarter of 2014 with borrowings from our revolving credit facility, partially offset by the issuance of the Partnership 2014 Notes in April 2014.

 

In March 2012, our Venezuelan joint ventures sold their assets to PDVSA Gas, S.A. (“PDVSA Gas”). We received payments, including an annual charge, of $5.0 million and $4.9 million during the three months ended March 31, 2015 and 2014, respectively. The remaining principal amount due to us of approximately $22 million as of March 31, 2015, is payable in quarterly cash installments through the first quarter of 2016. Payments we receive from the sale will be recognized as equity in (income) loss of non-consolidated affiliates in our consolidated statements of operations in the periods such payments are received.

 

The change in other (income) expense, net, during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a $9.4 million increase in foreign currency losses. Foreign currency losses included a translation loss of $7.5 million and a translation gain of $0.1 million during the three months ended March 31, 2015 and 2014, respectively, related to the functional currency remeasurement of our foreign subsidiaries’ U.S. dollar denominated intercompany obligations.

 

Income Taxes

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Provision for income taxes

 

$

16,491

 

$

9,409

 

75

%

Effective tax rate

 

42.4

%

36.8

%

5.6

%

 

The increase in our income tax expense during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily attributable to a $13.3 million increase in pre-tax income.

 

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Discontinued Operations

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Income from discontinued operations, net of tax

 

$

18,713

 

$

18,727

 

0

%

 

Income from discontinued operations, net of tax, during the three months ended March 31, 2015 and 2014 includes our operations in Venezuela that were expropriated in June 2009, including compensation for expropriation and costs associated with our arbitration proceeding and results from our contract water treatment business.

 

As discussed in Note 3 to the Financial Statements, in August 2012, our Venezuelan subsidiary sold its previously nationalized assets to PDVSA Gas. We received installment payments, including an annual charge, totaling $18.7 million and $17.8 million during the three months ended March 31, 2015 and 2014, respectively. The remaining principal amount due to us of approximately $99 million as of March 31, 2015, is payable in quarterly cash installments through the third quarter of 2016. We have not recognized amounts payable to us by PDVSA Gas as a receivable and will therefore recognize quarterly payments received in the future as income from discontinued operations in the periods such payments are received. The proceeds from the sale of the assets are not subject to Venezuelan national taxes due to an exemption allowed under the Venezuelan Reserve Law applicable to expropriation settlements. In addition, and in connection with the sale, we and the Venezuelan government agreed to waive rights to assert certain claims against each other.

 

Net Income Attributable to the Noncontrolling Interest

(dollars in thousands)

 

 

 

Three Months Ended
March 31,

 

Increase

 

 

 

2015

 

2014

 

(Decrease)

 

Net income attributable to the noncontrolling interest

 

$

(8,943

)

$

(2,298

)

289

%

 

Noncontrolling interest comprises of the portion of the Partnership’s earnings that is applicable to the Partnership’s publicly-held limited partner interest. As of March 31, 2015 and March 31, 2014, public unitholders held an ownership interest in the Partnership of 63% and 59%, respectively. The increase in net income attributable to the noncontrolling interest during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to an increase in earnings of the Partnership as a result of the August 2014 MidCon Acquisition and the April 2014 MidCon Acquisition as well as organic growth in operating horsepower.

 

Liquidity and Capital Resources

 

Our unrestricted cash balance was $52.0 million at March 31, 2015 compared to $39.7 million at December 31, 2014. Working capital increased to $684.2 million at March 31, 2014 from $655.0 million at December 31, 2014. The increase in working capital was primarily due to a decrease in accrued liabilities, a decrease in accounts payable, an increase in inventory and an increase in cash, partially offset by a decrease in accounts receivable. The decrease in accounts receivable was primarily driven by the timing of payments received from customers in North America and Mexico during the current year period. The decrease in accrued liabilities was primarily due to a decrease in accrued compensation benefits, partially offset by an increase in accrued interest expense. The decrease in accounts payable was primarily caused by the timing of payments to vendors in North America. The increase in inventory was primarily driven by the North America fabrication business.

 

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Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the following table (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2015

 

2014

 

Net cash provided by (used in) continuing operations:

 

 

 

 

 

Operating activities

 

$

132,468

 

$

52,853

 

Investing activities

 

(125,867

)

(100,658

)

Financing activities

 

(12,794

)

60,274

 

Effect of exchange rate changes on cash and cash equivalents

 

(231

)

(4,409

)

Discontinued operations

 

18,696

 

17,765

 

Net change in cash and cash equivalents

 

$

12,272

 

$

25,825

 

 

Operating Activities.  The increase in net cash provided by operating activities during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to lower current period increases in working capital and improved gross margin primarily in our North America contract operations segment. Working capital changes during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 were primarily driven by an increase of $12.3 million in costs and estimated earnings versus billings on uncompleted contracts during the three months ended March 31, 2015 compared to a decrease of $44.3 million in costs and estimated earnings versus billings on uncompleted contracts during the three months ended March 31, 2014.

 

Investing Activities.  The increase in net cash used in investing activities during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily attributable to a $40.6 million increase in capital expenditures, partially offset by an escrow deposit of $17.0 million made by the Partnership in February 2014 associated with the April 2014 MidCon Acquisition.

 

Financing Activities.  The increase in net cash used in financing activities during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to a $56.5 million decrease in net borrowings of long-term debt and a $7.9 million decrease in proceeds from exercised stock options.

 

Discontinued Operations.  The increase in net cash provided by discontinued operations during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was attributable to a $0.9 million increase in proceeds received from the sale of our Venezuelan subsidiary’s assets to PDVSA Gas.

 

Capital Requirements.  Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to render those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:

 

·          growth capital expenditures, which are 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; and

 

·          maintenance capital expenditures, which are made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets.

 

The majority of our growth capital expenditures are related to the acquisition cost of new compressor units and processing and treating equipment that we add to our fleet and installation costs on integrated projects. In addition, growth capital expenditures can also include the upgrading of major components on an existing compressor unit where the current configuration of the compressor unit is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compressor unit such that it can be used in applications for which it previously was not suited. Maintenance capital expenditures are related to major overhauls of significant components of a compressor unit, such as the engine, compressor and cooler, that return the components to a like new condition, but do not modify the applications for which the compressor unit was designed.

 

We generally invest funds necessary to fabricate fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceeds our targeted return on capital. We currently plan to spend approximately $400 million to $450 million in net capital expenditures during 2015, including (1) approximately $250 million to $300 million on contract operations growth capital expenditures and (2) approximately $100 million to $110 million on equipment maintenance capital related to our contract operations business. Net capital expenditures are net of proceeds from used fleet sales.

 

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Long-Term Debt.  As of March 31, 2015, we had approximately $2.0 billion in outstanding debt obligations, consisting of $354.0 million outstanding under our revolving credit facility, $350.0 million outstanding under our 7.25% senior notes, $502.0 million outstanding under the Partnership’s revolving credit facility, $150.0 million outstanding under the Partnership’s term loan facility, $345.7 million outstanding under the Partnership 2013 Notes and $344.9 million outstanding under the Partnership 2014 Notes.

 

In July 2011, we entered into a five-year, $1.1 billion senior secured revolving credit facility (the “Credit Facility”). In March 2012, we decreased the borrowing capacity under this facility to $900.0 million. As of March 31, 2015, we had $354.0 million in outstanding borrowings and $91.3 million in outstanding letters of credit under the Credit Facility. At March 31, 2015, taking into account guarantees through letters of credit, we had undrawn and available capacity of $454.7 million under the Credit Facility.

 

Borrowings under the Credit Facility bear interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our Total Leverage Ratio (as defined in the credit agreement), the applicable margin for revolving loans varies (i) in the case of LIBOR loans, from 1.50% to 2.50% and (ii) in the case of base rate loans, from 0.50% to 1.50%. The base rate is the highest of the prime rate announced by Wells Fargo Bank, National Association, the Federal Funds Rate plus 0.5% and one-month LIBOR plus 1.0%. At March 31, 2015, all amounts outstanding under the Credit Facility were LIBOR loans and the applicable margin was 1.5%. The weighted average annual interest rate at March 31, 2015 and March 31, 2014 on the outstanding balance under the Credit Facility was 1.7%. During the three months ended March 31, 2015 and 2014, the average daily debt balance under the Credit Facility was $405.9 million and $53.9 million, respectively.

 

Our Significant Domestic Subsidiaries (as defined in the credit agreement) guarantee the debt under the Credit Facility. Borrowings under the Credit Facility are secured by substantially all of the personal property assets and certain real property assets of us and our Significant Domestic Subsidiaries, including all of the equity interests of our U.S. subsidiaries (other than certain excluded subsidiaries) and 65% of the equity interests in certain of our first-tier foreign subsidiaries. The Partnership does not guarantee the debt under the Credit Facility, its assets are not collateral under the Credit Facility and the general partner units in the Partnership are not pledged under the Credit Facility. Subject to certain conditions, at our request, and with the approval of the lenders, the aggregate commitments under the Credit Facility may be increased by up to an additional $300 million.

 

The Credit Facility contains various covenants with which we or certain of our subsidiaries must comply, including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, enter into 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 are also subject to financial covenants, including a ratio of Adjusted EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.25 to 1.0, a ratio of consolidated Total Debt (as defined in the credit agreement) to Adjusted EBITDA of not greater than 5.0 to 1.0 and a ratio of Senior Secured Debt (as defined in the credit agreement) to Adjusted EBITDA of not greater than 4.0 to 1.0. As of March 31, 2015, we maintained a 16.1 to 1.0 Adjusted EBITDA to Total Interest Expense ratio, a 1.5 to 1.0 consolidated Total Debt to Adjusted EBITDA ratio and a 0.7 to 1.0 Senior Secured Debt to Adjusted EBITDA ratio. If we fail to remain in compliance with our financial covenants we would be in default under our debt agreements. In addition, 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 our debt agreements, this could lead to a default under our debt agreements. A default under one or more of our debt agreements would trigger cross-default provisions under certain of our other debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements. As of March 31, 2015, we were in compliance with all financial covenants under the Credit Facility.

 

In November 2010, we issued $350.0 million aggregate principal amount of 7.25% senior notes (the “7.25% Notes”). The 7.25% Notes are guaranteed on a senior unsecured basis by all of our existing subsidiaries that guarantee indebtedness under the Credit Facility and certain of our future subsidiaries. The Partnership and its subsidiaries have not guaranteed the 7.25% Notes. The 7.25% Notes and the guarantees, respectively, are our and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of our and the guarantors’ other senior obligations, and are effectively subordinated to all of our and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness. In addition, the 7.25% Notes and guarantees are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, of our non-guarantor subsidiaries. Effective December 1, 2014, we may redeem all or a part of the 7.25% Notes at redemption prices (expressed as percentages of principal amount) equal to 103.625% for the twelve-month period beginning on December 1, 2014, 101.813% for the twelve-month period beginning on December 1, 2015 and 100.000% for the twelve-month period beginning on December 1, 2016 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date of the 7.25% Notes.

 

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Table of Contents

 

In November 2010, the Partnership amended and restated its senior secured credit agreement (the “Partnership Credit Agreement”) to provide for a 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. The revolving borrowing capacity under this facility increased to $550.0 million in March 2011 and to $750.0 million in March 2012. The Partnership amended the Partnership Credit Agreement in March 2013 to reduce the borrowing capacity under its revolving credit facility to $650.0 million and extend the maturity date of the term loan and revolving credit facilities to May 2018. In February 2015, the Partnership amended its Partnership Credit Agreement, which among other things, increased the borrowing capacity under its revolving credit facility by $250.0 million to $900.0 million.

 

As of March 31, 2015, the Partnership had undrawn capacity of $398.0 million under its revolving credit facility. The Partnership Credit Agreement limits the Partnership’s ratio of Total Debt (as defined in the Partnership Credit Agreement) to EBITDA (as defined in the Partnership Credit Agreement) to not greater than 5.25 to 1.0 (subject to a temporary increase to 5.5 to 1.0 following the occurrence of certain events specified in the Partnership Credit Agreement). Because the August 2014 MidCon Acquisition closed during the third quarter of 2014, the Partnership’s Total Debt to EBITDA ratio threshold was temporarily increased to 5.5 to 1.0 during the quarter ended September 30, 2014 and continued at that level through March 31, 2015. As a result of this limitation, $354.7 million of the $398.0 million of undrawn capacity under the Partnership’s revolving credit facility was available for additional borrowings as of March 31, 2015. If the maximum allowed ratio of Total Debt to EBITDA had been 5.25 to 1.0 at March 31, 2015, then $277.5 million of the $398.0 million of undrawn capacity under the Partnership’s revolving credit facility would have been available for additional borrowings as of March 31, 2015.

 

The Partnership’s revolving credit and term loan facilities bear interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. Depending on the Partnership’s leverage ratio, the applicable margin for the revolving and term loans varies (i) in the case of LIBOR loans, from 2.0% to 3.0% and (ii) in the case of base rate loans, from 1.0% to 2.0%. 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 March 31, 2015, all amounts outstanding under these facilities were LIBOR loans and the applicable margin was 2.75%. The weighted average annual interest rate on the outstanding balance under these facilities at March 31, 2015 and March 31, 2014, excluding the effect of interest rate swaps, was 3.0% and 2.2%, respectively. During the three months ended March 31, 2015 and 2014, the average daily debt balance under these facilities was $619.9 million and $421.9 million, respectively.

 

Borrowings under the Partnership Credit Agreement are secured by substantially all of the U.S. personal property assets of the Partnership and its Significant Domestic Subsidiaries (as defined in the Partnership Credit Agreement), including all of the membership interests of the Partnership’s Domestic Subsidiaries (as defined in the Partnership Credit Agreement). Subject to certain conditions, at the Partnership’s request, and with the approval of the lenders, the aggregate commitments under the Partnership Credit Agreement may be increased by up to an additional $50 million.

 

The Partnership Credit Agreement contains various covenants with which the Partnership must comply, including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on the Partnership’s 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. The Partnership Credit Agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. The Partnership must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the Partnership Credit Agreement) to Total Interest Expense (as defined in the Partnership Credit Agreement) of not less than 2.75 to 1.0, a ratio of Total Debt (as defined in the Partnership Credit Agreement) to EBITDA of not greater than 5.25 to 1.0 (subject to a temporary increase to 5.5 to 1.0 for any quarter during which an acquisition meeting certain thresholds is completed and for the following two quarters after the acquisition closes) and a ratio of Senior Secured Debt (as defined in the Partnership Credit Agreement) to EBITDA of not greater than 4.0 to 1.0. Because the August 2014 MidCon Acquisition closed during the third quarter of 2014, the Partnership’s Total Debt to EBITDA ratio threshold was temporarily increased to 5.5 to 1.0 during the quarter ended September 30, 2014 and continued at that level through March 31, 2015. Additionally, because the April 2015 Contract Operations Acquisition closed during the second quarter of 2015, the Partnership’s Total Debt to EBITDA ratio will continue at 5.5 to 1.0 through December 31, 2015, reverting to 5.25 to 1.0 for the quarter ending March 31, 2016 and subsequent quarters. As of March 31, 2015, the Partnership maintained a 4.9 to 1.0 EBITDA to Total Interest Expense ratio, a 4.4 to 1.0 Total Debt to EBITDA ratio and a 2.1 to 1.0 Senior Secured Debt to EBITDA ratio. A material adverse effect with respect to the Partnership’s assets, liabilities, financial condition, business or operations that, taken as a whole, impacts the Partnership’s ability to perform its obligations under the Partnership Credit Agreement, could lead to a default under that agreement. A default under one of the Partnership’s debt agreements would trigger cross-default provisions under the Partnership’s other debt agreements, which would accelerate the Partnership’s obligation to repay its indebtedness under those agreements. As of March 31, 2015, the Partnership was in compliance with all financial covenants under the Partnership Credit Agreement.

 

In March 2013, the Partnership issued $350.0 million aggregate principal amount of 6% senior notes due April 2021 (the “Partnership 2013 Notes”). The Partnership used the net proceeds of $336.9 million, after original issuance discount and issuance costs, to repay borrowings outstanding under its revolving credit facility. The Partnership 2013 Notes were issued at an original issuance discount of $5.5 million, which is being amortized using the effective interest method at an interest rate of 6.25% over their term. In January 2014, holders of the Partnership 2013 Notes exchanged their Partnership 2013 Notes for registered notes with the same terms.

 

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Prior to April 1, 2017, the Partnership may redeem all or a part of the Partnership 2013 Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. In addition, the Partnership may redeem up to 35% of the aggregate principal amount of the Partnership 2013 Notes prior to April 1, 2016 with the net proceeds of one or more equity offerings at a redemption price of 106.000% of the principal amount of the Partnership 2013 Notes, plus any accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the Partnership 2013 Notes issued under the indenture remains outstanding after such redemption and the redemption occurs within 180 days of the date of the closing of such equity offering. On or after April 1, 2017, the Partnership may redeem all or a part of the Partnership 2013 Notes at redemption prices (expressed as percentages of principal amount) equal to 103.000% for the twelve-month period beginning on April 1, 2017, 101.500% for the twelve-month period beginning on April 1, 2018 and 100.000% for the twelve-month period beginning on April 1, 2019 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date of the Partnership 2013 Notes.

 

In April 2014, the Partnership issued $350.0 million aggregate principal amount of the Partnership 2014 Notes. The Partnership received net proceeds of $337.4 million, after original issuance discount and issuance costs, from this offering, which it used to fund a portion of the April 2014 MidCon Acquisition and repay borrowings under its revolving credit facility. The Partnership 2014 Notes were issued at an original issuance discount of $5.7 million, which is being amortized using the effective interest method at an interest rate of 6.25% over their term. In February 2015, holders of the Partnership 2014 Notes exchanged their Partnership 2014 Notes for registered notes with the same terms.

 

Prior to April 1, 2018, the Partnership may redeem all or a part of the Partnership 2014 Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. In addition, the Partnership may redeem up to 35% of the aggregate principal amount of the Partnership 2014 Notes prior to April 1, 2017 with the net proceeds of one or more equity offerings at a redemption price of 106.000% of the principal amount of the Partnership 2014 Notes, plus any accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the Partnership 2014 Notes issued under the indenture remains outstanding after such redemption and the redemption occurs within 180 days of the date of the closing of such equity offering. On or after April 1, 2018, the Partnership may redeem all or a part of the Partnership 2014 Notes at redemption prices (expressed as percentages of principal amount) equal to 103.000% for the twelve-month period beginning on April 1, 2018, 101.500% for the twelve-month period beginning on April 1, 2019 and 100.000% for the twelve-month period beginning on April 1, 2020 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date of the Partnership 2014 Notes.

 

The Partnership 2013 Notes and the Partnership 2014 Notes are guaranteed on a senior unsecured basis by all of the Partnership’s existing subsidiaries (other than EXLP Finance Corp., which is a co-issuer of the Partnership 2013 Notes and the Partnership 2014 Notes) and certain of the Partnership’s future subsidiaries. The Partnership 2013 Notes and the Partnership 2014 Notes and the guarantees, respectively, are the Partnership’s and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of the Partnership’s and the guarantors’ other senior obligations, and are effectively subordinated to all of the Partnership’s and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness. In addition, the Partnership 2013 Notes and the Partnership 2014 Notes and guarantees are effectively subordinated to all existing and future indebtedness and other liabilities of any future non-guarantor subsidiaries.

 

The Partnership has entered into interest rate swap agreements to offset changes in expected cash flows due to fluctuations in the interest rates associated with its variable rate debt. At March 31, 2015, the Partnership was a party to interest rate swaps with a notional value of $500.0 million pursuant to which it makes fixed payments and receives floating payments. The Partnership’s interest rate swaps expire over varying dates, with interest rate swaps having a notional amount of $300.0 million expiring in May 2018, interest rate swaps having a notional amount of $100.0 million expiring in May 2019 and the remaining interest rate swaps having a notional amount of $100.0 million expiring in May 2020. As of March 31, 2015, the weighted average effective fixed interest rate on the interest rate swaps was 1.6%. See Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this report for further discussion of the 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.

 

Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. 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 adverse impact on our ability to maintain our operations and to grow. If any of our lenders become unable to perform their obligations under our credit facilities, our borrowing capacity under these facilities could be reduced. Inability to borrow additional amounts under those facilities could limit our ability to fund our future growth and operations. Based on current market conditions, we expect that net cash provided by operating activities and borrowings under our credit facilities will be sufficient to finance our operating expenditures, capital expenditures, scheduled interest and debt repayments and anticipated dividends through December 31, 2015; however, to the extent it is not, we may seek additional debt or equity financing.

 

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Argentina’s current regulations restrict foreign exchange, including exchanging Argentine pesos for U.S. dollars in certain cases, and we are unable to freely repatriate cash from Argentina. Therefore, the cash flow from our operations in Argentina may not be a reliable source of funding for our operations outside of Argentina, which could limit our ability to grow. Restrictions on our ability to exchange Argentine pesos for U.S. dollars subject us to risk of currency devaluation on future earnings in Argentina. In future periods, we may seek to use Argentine pesos to purchase certain short-term investments in Argentine government issued U.S. dollar denominated bonds, which may result in transaction losses due to the effective peso to U.S. dollar exchange rate embedded in the purchase price of such bonds. As of March 31, 2015, $23.1 million of our cash was in Argentina.

 

Dividends.  On April 28, 2015, our board of directors declared a quarterly dividend of $0.15 per share of common stock, which is expected to be paid on May 18, 2015 to stockholders of record at the close of business on May 11, 2015. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our board of directors and will be dependent upon our financial condition and results of operations, credit and loan agreements in effect at that time and other factors deemed relevant by our board of directors.

 

Partnership Distributions to Unitholders.  The Partnership’s partnership agreement requires it to distribute all of its “available cash” quarterly. Under the partnership agreement, available cash is defined generally to mean, for each fiscal quarter, (i) cash on hand at the Partnership at the end of the quarter in excess of the amount of reserves its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law, any of its debt instruments or other agreements or to provide for future distributions to its unitholders for any one or more of the upcoming four quarters, plus, (ii) if the Partnership’s general partner so determines, all or a portion of the Partnership’s cash on hand on the date of determination of available cash for the quarter.

 

Through our ownership of common units and all of the equity interests in the Partnership’s general partner, we expect to receive cash distributions from the Partnership.

 

Under the terms of the partnership agreement, there is no guarantee that unitholders will receive quarterly distributions from the Partnership. The Partnership’s distribution policy, which may be changed at any time, is subject to certain restrictions, including (i) restrictions contained in the Partnership’s revolving credit facility, (ii) the Partnership’s general partner’s establishment of reserves to fund future operations or cash distributions to the Partnership’s unitholders, (iii) restrictions contained in the Delaware Revised Uniform Limited Partnership Act and (iv) the Partnership’s lack of sufficient cash to pay distributions.

 

On April 27, 2015, Exterran GP LLC’s board of directors approved a cash distribution by the Partnership of $0.5625 per limited partner unit, or approximately $35.9 million, including distributions to the Partnership’s general partner on its incentive distribution rights. The distribution covers the period from January 1, 2015 through March 31, 2015. The record date for this distribution is May 11, 2015 and payment is expected to occur on May 15, 2015.

 

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 to evaluate 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 operating 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 taxes. Depreciation and amortization expense may not accurately reflect the 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 (loss) 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 (loss). These limitations are primarily due to the exclusion of interest expense, depreciation and amortization expense, SG&A expense, impairments and restructuring charges. Each of these excluded expenses is material to our condensed consolidated statements 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 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.

 

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For a reconciliation of gross margin to net income, see Note 17 to the Financial Statements.

 

We define EBITDA, as adjusted, as net income (loss) excluding income (loss) from discontinued operations (net of tax), cumulative effect of accounting changes (net of tax), income taxes, interest expense (including debt extinguishment costs and gain or loss on termination of interest rate swaps), depreciation and amortization expense, impairment charges, restructuring charges, non-cash gains or losses from foreign currency exchange rate changes recorded on intercompany obligations, expensed acquisition costs and other items. We believe EBITDA, as 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), our subsidiaries’ capital structure (non-cash gains or losses from foreign currency exchange rate changes on intercompany obligations), tax consequences, impairment charges, restructuring charges, expensed acquisition costs and other items. Management uses EBITDA, as adjusted, as a supplemental measure to review current period operating performance, comparability measures and performance measures for period to period comparisons. Our EBITDA, as 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 adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from EBITDA, as adjusted, are significant and necessary components to the operations of our business, and, therefore, EBITDA, as adjusted, should only be used as a supplemental measure of our operating performance.

 

The following table reconciles our net income to EBITDA, as adjusted (in thousands):

 

 

 

Three Months Ended
March 31,

 

 

 

2015

 

2014

 

Net income

 

$

41,085

 

$

34,894

 

Income from discontinued operations, net of tax

 

(18,713

)

(18,727

)

Depreciation and amortization

 

95,808

 

85,522

 

Long-lived asset impairment

 

12,732

 

3,807

 

Restructuring charges

 

4,790

 

4,822

 

Investment in non-consolidated affiliates impairment

 

 

197

 

Proceeds from sale of joint venture assets

 

(5,006

)

(4,890

)

Interest expense

 

27,298

 

28,308

 

(Gain) loss on currency exchange rate remeasurement of intercompany balances

 

7,508

 

(81

)

Expensed acquisition costs

 

 

1,544

 

Provision for income taxes

 

16,491

 

9,409

 

EBITDA, as adjusted

 

$

181,993

 

$

144,805

 

 

Off-Balance Sheet Arrangements

 

We have no material off-balance sheet arrangements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks primarily associated with changes in foreign currency exchange rates and interest rates under our financing arrangements. We use derivative financial instruments to minimize the risks and/or 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.

 

We have significant international operations. The net assets and liabilities of these operations are exposed to changes in currency exchange rates. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. We recorded a foreign currency loss in our condensed consolidated statements of operations of $10.0 million and $0.6 million during the three months ended March 31, 2015 and 2014, respectively. Our foreign currency gains and losses are primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency, including foreign currency exchange rate changes recorded on intercompany obligations. Changes in exchange rates may create gains or losses in future periods to the extent we maintain net assets and liabilities not denominated in the functional currency.

 

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Argentina’s current regulations restrict foreign exchange, including exchanging Argentine pesos for U.S. dollars in certain cases, and we are unable to freely repatriate cash from Argentina. Therefore, the cash flow from our operations in Argentina may not be a reliable source of funding for our operations outside of Argentina, which could limit our ability to grow. Restrictions on our ability to exchange Argentine pesos for U.S. dollars subject us to risk of currency devaluation on future earnings in Argentina. In future periods, we may seek to use Argentine pesos to purchase certain short-term investments in Argentine government issued U.S. dollar denominated bonds, which may result in transaction losses due to the effective peso to U.S. dollar exchange rate embedded in the purchase price of such bonds. As of March 31, 2015, $23.1 million of our cash was in Argentina.

 

As of March 31, 2015, after taking into consideration interest rate swaps, we had $506.0 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 March 31, 2015 would result in an annual increase in our interest expense of approximately $5.1 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 9 to the Financial Statements.

 

Item 4.  Controls and Procedures

 

Management’s 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 Exchange Act), 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 March 31, 2015 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 SEC’s 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

 

A description of certain legal proceedings can be found in Litigation and Claims in Note 15 (“Commitments and Contingencies”) to the Financial Statements included in this report and is incorporated by reference into this Item 1.

 

Item 1A.  Risk Factors

 

There have been no material changes or updates to our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

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

 

(a)         Not applicable.

 

(b)         Not applicable.

 

(c)          The following table summarizes our repurchases of equity securities during the three months ended March 31, 2015:

 

Period

 

Total Number of
Shares Repurchased
(1)

 

Average
Price Paid
Per Unit

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

 

Maximum Number of Shares
yet to be Purchased Under the
Publicly Announced Plans or
Programs

 

January 1, 2015 - January 31, 2015

 

1,167

 

$

30.78

 

N/A

 

N/A

 

February 1, 2015 - February 28, 2015

 

 

 

N/A

 

N/A

 

March 1, 2015 - March 31, 2015

 

115,313

 

31.93

 

N/A

 

N/A

 

Total

 

116,480

 

$

31.92

 

N/A

 

N/A

 

 


(1)         Represents shares withheld to satisfy employees’ tax withholding obligations in connection with vesting of restricted stock awards during the period.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

 

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Item 6.  Exhibits

 

Exhibit No.

 

Description

2.1

 

Contribution, Conveyance and Assumption Agreement, dated April 17, 2015, 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 Registrant’s Current Report on Form 8-K filed on April 20, 2015

3.1

 

Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 20, 2007

3.2

 

Third Amended and Restated Bylaws of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013

4.1

 

Ninth Supplemental Indenture, dated as of June 27, 2012, by and among Exterran Holdings, Inc., Exterran Energy LLC and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2012

4.2

 

Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

4.3

 

Supplemental Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, for the 4.25% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

4.4

 

Indenture, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as trustee, for the 7.25% Senior Notes due 2018, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

10.1

 

Fourth Amendment to Amended and Restated Senior Secured Credit Agreement, dated February 4, 2015, among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on February 5, 2015

10.2

 

Fifth Amendment to Third Amended and Restated Omnibus Agreement, dated February 23, 2015, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., Exterran Partners, L.P. and EXLP Operating LLC, incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014

10.3*

 

Sixth Amendment to Third Amended and Restated Omnibus Agreement, dated April 17, 2015, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., Exterran Partners, L.P. and EXLP Operating LLC (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)

10.4†

 

Form of Exterran Holdings, Inc. Award Notice and Agreement for Performance Units incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015

10.5†*

 

Offer Letter, dated March 13, 2014, to Steven W. Muck (Mr. Muck became an executive officer of Exterran Holdings, Inc. in February 2015)

10.6†*

 

Offer Letter, dated January 30, 2015, to Christopher T. Werner

10.7†

 

Form of Exterran Holdings, Inc. Severance Benefit Agreement applicable to Messrs. Muck and Werner, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed on August 6, 2013

10.8†

 

Form of Exterran Holdings, Inc. Change of Control Agreement applicable to Messrs. Muck and Werner, incorporated by reference to Exhibit 10.57 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014

31.1*

 

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

 

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

 

Certification of the Chief Executive Officer 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 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

 


 

Management contract or compensatory plan or arrangement.

*

 

Filed herewith.

**

 

Furnished, not filed.

 

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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.

 

 

 

EXTERRAN HOLDINGS, INC.

 

 

 

 

Date: May 5, 2015

 

By:

/s/ JON C. BIRO

 

 

 

Jon C. Biro

 

 

 

Senior Vice President and Chief Financial Officer

 

 

 

(Principal Financial Officer)

 

 

 

 

 

 

By:

/s/ KENNETH R. BICKETT

 

 

 

Kenneth R. Bickett

 

 

 

Vice President and Controller

 

 

 

(Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

2.1

 

Contribution, Conveyance and Assumption Agreement, dated April 17, 2015, 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 Registrant’s Current Report on Form 8-K filed on April 20, 2015

3.1

 

Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 20, 2007

3.2

 

Third Amended and Restated Bylaws of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on March 20, 2013

4.1

 

Ninth Supplemental Indenture, dated as of June 27, 2012, by and among Exterran Holdings, Inc., Exterran Energy LLC and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2012

4.2

 

Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

4.3

 

Supplemental Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, for the 4.25% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

4.4

 

Indenture, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as trustee, for the 7.25% Senior Notes due 2018, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

10.1

 

Fourth Amendment to Amended and Restated Senior Secured Credit Agreement, dated February 4, 2015, among EXLP Operating LLC, as Borrower, Exterran Partners, L.P., as Guarantor, Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders party thereto, incorporated by reference to Exhibit 10.1 to Exterran Partners, L.P.’s Current Report on Form 8-K filed on February 5, 2015

10.2

 

Fifth Amendment to Third Amended and Restated Omnibus Agreement, dated February 23, 2015, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., Exterran Partners, L.P. and EXLP Operating LLC, incorporated by reference to Exhibit 10.24 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014

10.3*

 

Sixth Amendment to Third Amended and Restated Omnibus Agreement, dated April 17, 2015, by and among Exterran Holdings, Inc., Exterran Energy Solutions, L.P., Exterran GP LLC, Exterran General Partner, L.P., Exterran Partners, L.P. and EXLP Operating LLC (portions of this exhibit have been omitted by redacting a portion of the text (indicated by asterisks in the text) and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment)

10.4†

 

Form of Exterran Holdings, Inc. Award Notice and Agreement for Performance Units incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 25, 2015

10.5†*

 

Offer Letter, dated March 13, 2014, to Steven W. Muck (Mr. Muck became an executive officer of Exterran Holdings, Inc. in February 2015)

10.6†*

 

Offer Letter, dated January 30, 2015, to Christopher T. Werner

10.7†

 

Form of Exterran Holdings, Inc. Severance Benefit Agreement applicable to Messrs. Muck and Werner, incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 filed on August 6, 2013

10.8†

 

Form of Exterran Holdings, Inc. Change of Control Agreement applicable to Messrs. Muck and Werner, incorporated by reference to Exhibit 10.57 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on February 26, 2014

31.1*

 

Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

 

Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

 

Certification of the Chief Executive Officer 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 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

 


 

Management contract or compensatory plan or arrangement.

*

 

Filed herewith.

**

 

Furnished, not filed.

 

52