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EX-32.2 - EXHIBIT 32.2 - CSI Compressco LPa20170630ex322cclp.htm
EX-32.1 - EXHIBIT 32.1 - CSI Compressco LPa20170630ex321cclp.htm
EX-31.2 - EXHIBIT 31.2 - CSI Compressco LPa20170630ex312cclp.htm
EX-31.1 - EXHIBIT 31.1 - CSI Compressco LPa20170630ex311cclp.htm
EX-4.1 - EXHIBIT 4.1 - CSI Compressco LPa20170630ex41cclp.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 

 
FORM 10-Q
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM _____ TO______
 
COMMISSION FILE NUMBER 001-35195
 
 
CSI Compressco LP
(Exact name of registrant as specified in its charter)

 
Delaware 
94-3450907
(State of incorporation)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands, Texas
77380
(Address of principal executive offices)
(zip code)
 
(281) 364-2244
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ]  No [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [  
Accelerated filer [ X ] 
Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [   ]
Emerging growth company [ ]
 





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for companying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]  No [ X ]
As of August 8, 2017, there were 35,495,113 Common Units outstanding.




CERTAIN REFERENCES IN THIS QUARTERLY REPORT
 
References in this Quarterly Report to “CSI Compressco,” “we,” “our,” “us,” “the Partnership” or like terms refer to CSI Compressco LP and its wholly owned subsidiaries. References to “CSI Compressco GP” or “our General Partner” refer to our general partner, CSI Compressco GP Inc. References to “TETRA” refer to TETRA Technologies, Inc. and TETRA’s controlled subsidiaries, other than us.





PART I
FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
CSI Compressco LP
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Amounts)
(Unaudited)

Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 

 
 

Compression and related services
$
50,256

 
$
57,827

 
$
100,753

 
$
120,238

Aftermarket services
10,529

 
9,530

 
19,916

 
18,117

Equipment sales
14,530

 
8,732

 
20,198

 
19,426

Total revenues
75,315

 
76,089

 
140,867

 
157,781

Cost of revenues (excluding depreciation and amortization expense):
 
 
 
 
 

 
 
Cost of compression and related services
28,803

 
29,760

 
57,846

 
61,565

Cost of aftermarket services
8,461

 
7,279

 
16,083

 
13,897

Cost of equipment sales
13,321

 
6,624

 
18,717

 
16,577

Total cost of revenues
50,585

 
43,663

 
92,646

 
92,039

Depreciation and amortization
17,204

 
18,742

 
34,499

 
37,194

Long-lived asset impairment

 

 

 
7,866

Selling, general, and administrative expense
8,230

 
8,183

 
16,996

 
18,413

Goodwill impairment

 

 

 
92,334

Interest expense, net
10,449

 
8,870

 
20,832

 
17,672

Series A Preferred fair value adjustment
(5,528
)
 

 
(3,663
)
 

Other (income) expense, net
141

 
707

 
103

 
995

Income (loss) before income tax provision
(5,766
)
 
(4,076
)
 
(20,546
)
 
(108,732
)
Provision for income taxes
606

 
604

 
1,419

 
1,297

Net income (loss)
$
(6,372
)
 
$
(4,680
)
 
$
(21,965
)
 
$
(110,029
)
General partner interest in net income (loss)
$
(127
)
 
$
(94
)
 
$
(439
)
 
$
(2,201
)
Common units interest in net income (loss)
$
(6,245
)
 
$
(4,586
)
 
$
(21,526
)
 
$
(107,828
)
 
 
 
 
 
 

 
 
Net income (loss) per common unit:
 
 
 
 
 
 
 
Basic
$
(0.18
)
 
$
(0.14
)
 
$
(0.63
)
 
$
(3.25
)
Diluted
$
(0.21
)
 
$
(0.14
)
 
$
(0.63
)
 
$
(3.25
)
Weighted average common units outstanding:
 
 
 
 
 
 
 
Basic
34,470,736

 
33,209,410

 
33,979,068

 
33,199,792

Diluted
45,300,057

 
33,209,410

 
33,979,068

 
33,199,792



See Notes to Consolidated Financial Statements

1



CSI Compressco LP
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(6,372
)
 
$
(4,680
)
 
$
(21,965
)
 
$
(110,029
)
Foreign currency translation adjustment
(568
)
 
(115
)
 
(318
)
 
(919
)
Comprehensive income (loss)
$
(6,940
)
 
$
(4,795
)
 
$
(22,283
)
 
$
(110,948
)
 

See Notes to Consolidated Financial Statements

2



CSI Compressco LP
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
 
June 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
5,020

 
$
20,797

Trade accounts receivable, net of allowances for doubtful accounts of $906 in 2017 and $2,253 in 2016
44,582

 
44,904

Inventories
39,949

 
31,442

Assets held for sale
44

 
214

Prepaid expenses and other current assets
5,623

 
4,647

Total current assets
95,218

 
102,004

Property, plant, and equipment:
 

 
 

Land and building
34,972

 
34,962

Compressors and equipment
835,091

 
834,921

Vehicles
11,018

 
11,040

Construction in progress
15,202

 
8,138

Total property, plant, and equipment
896,283

 
889,061

Less accumulated depreciation
(269,530
)
 
(242,055
)
Net property, plant, and equipment
626,753

 
647,006

Other assets:
 

 
 

Deferred tax asset
28

 
28

Intangible assets, net of accumulated amortization of $20,349 as of June 30, 2017 and $18,666 as of December 31, 2016
35,419

 
37,102

Total other assets
35,447

 
37,130

Total assets
$
757,418

 
$
786,140

LIABILITIES AND PARTNERS' CAPITAL
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
11,626

 
$
15,682

Unearned income
11,439

 
8,078

Accrued liabilities and other
20,784

 
19,974

Amounts payable to affiliates
7,424

 
6,180

Total current liabilities
51,273

 
49,914

Other liabilities:
 

 
 

Long-term debt, net
509,750

 
504,090

Series A Preferred Units
77,350

 
88,130

Deferred tax liabilities
974

 
718

Other long-term liabilities
71

 
39

Total other liabilities
588,145

 
592,977

Commitments and contingencies
 

 
 

Partners' capital:
 

 
 

General partner interest
2,241

 
3,061

Common units (35,374,597 units issued and outstanding at June 30, 2017 and 33,262,376 units issued and outstanding at December 31, 2016)
126,488

 
150,599

Accumulated other comprehensive income (loss)
(10,729
)
 
(10,411
)
Total partners' capital
118,000

 
143,249

Total liabilities and partners' capital
$
757,418

 
$
786,140

 
See Notes to Consolidated Financial Statements

3



CSI Compressco LP
Consolidated Statement of Partners’ Capital
(In Thousands)
(Unaudited)
 
 
Partners' Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Total Partners' Capital
 
 
 
 
General
Partner
 
Common
Unitholders
 
 
 
Amount
 
Units
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
3,061

 
33,262

 
$
150,599

 
$
(10,411
)
 
$
143,249

Net loss
(439
)
 

 
(21,526
)
 

 
(21,965
)
Distributions ($0.5650 per unit)
(381
)
 

 
(19,010
)
 

 
(19,391
)
Equity compensation

 

 
1,745

 

 
1,745

Vesting of Phantom Units

 
91

 

 

 

Conversions of Series A Preferred

 
1,582

 
11,458

 

 
11,458

Omnibus agreement charges settled with common units

 
439

 
3,322

 

 
3,322

Other comprehensive income (loss)

 

 

 
(318
)
 
(318
)
Other

 

 
(100
)
 

 
(100
)
Balance at June 30, 2017
$
2,241

 
35,374

 
$
126,488

 
$
(10,729
)
 
$
118,000

 

See Notes to Consolidated Financial Statements

4



CSI Compressco LP
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating activities:
 

 
 

Net income (loss)
$
(21,965
)
 
$
(110,029
)
Reconciliation of net income (loss) to cash provided by operating activities:
 

 
 

Depreciation and amortization
34,499

 
37,194

Impairment of long-lived assets

 
7,866

Impairment of goodwill

 
92,334

Provision for deferred income taxes
249

 
328

Series A Preferred offering costs
37

 

Series A Preferred paid in kind distributions in interest expense
4,342

 

Series A Preferred fair value adjustments
(3,663
)
 

Equity compensation expense
1,891

 
1,461

Provision for doubtful accounts
612

 
1,170

Amortization of deferred financing costs
1,477

 
1,370

Other non-cash charges and credits
338

 
875

(Gain) loss on sale of property, plant, and equipment
(216
)
 
(176
)
Changes in operating assets and liabilities:
 

 
 
Accounts receivable
(401
)
 
16,326

Inventories
(9,039
)
 
(2,278
)
Prepaid expenses and other current assets
(1,240
)
 
1,135

Accounts payable and accrued expenses
4,434

 
(12,081
)
Other
(1
)
 
69

Net cash provided by operating activities
11,354

 
35,564

Investing activities:
 

 
 
Purchases of property, plant, and equipment, net
(11,477
)
 
(3,806
)
Advances and other investing activities
32

 
21

Net cash used in investing activities
(11,445
)
 
(3,785
)
Financing activities:
 

 
 
Proceeds from long-term debt
42,500

 
36,000

Payments of long-term debt
(37,300
)
 
(35,000
)
Proceeds from Series A Preferred Units, net of offering costs
(37
)
 

Distributions
(19,391
)
 
(25,568
)
Other financing activities
(1,348
)
 
(725
)
Net cash used in financing activities
(15,576
)
 
(25,293
)
Effect of exchange rate changes on cash
(110
)
 
(415
)
Increase (decrease) in cash and cash equivalents
(15,777
)
 
6,071

Cash and cash equivalents at beginning of period
20,797

 
10,620

Cash and cash equivalents at end of period
$
5,020

 
$
16,691

Supplemental cash flow information:
 

 
 
Interest paid
$
15,293

 
$
16,279

Income taxes paid
$
1,967

 
$
927



See Notes to Consolidated Financial Statements

5



CSI Compressco LP
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
CSI Compressco LP, a Delaware limited partnership, is a provider of compression services and equipment for natural gas and oil production, gathering, transportation, processing, and storage. We sell standard and custom-designed compressor packages and oilfield fluid pump systems, and provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide these compression services and equipment to a broad base of natural gas and oil exploration and production, midstream, and transmission companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign countries, including Mexico, Canada, and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services and that we sell to customers.
Presentation
 
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of June 30, 2017, and for the three and six month periods ended June 30, 2017 and 2016, include all normal recurring adjustments that are necessary to provide a fair statement of our results for these interim periods. Operating results for the three and six month periods ended June 30, 2017 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2017.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission ("SEC") and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements for the year ended December 31, 2016, and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on February 28, 2017.

In April 2017, our General Partner announced a reduction of approximately 50% in the level of cash distributions on our common units for the quarter ended June 30, 2017. In May 2017, we entered into an amendment of the agreement governing our bank revolving credit facility (as amended, the "Credit Agreement") that, among other things, favorably amended certain financial covenants. (See Note B - Long-Term Debt and Other Borrowings.) We have reviewed our financial forecasts as of August 8, 2017 for the subsequent twelve month period, which consider the impact of the amended covenants and the current distribution levels to our common unitholders. Based on these financial forecasts, which are based on the current market conditions as of August 8, 2017, we believe that despite the current industry environment and activity levels, we will have adequate liquidity, earnings, and operating cash flows to fund our operations and debt obligations and maintain compliance with our debt covenants through August 8, 2018.

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

Reclassifications

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation.


6



Cash Equivalents
 
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.
 
Foreign Currencies
 
We have designated the Canadian dollar and Argentine peso as the functional currencies for our operations in Canada and Argentina, respectively. We are exposed to fluctuations between the U.S. dollar and certain foreign currencies, including the Canadian dollar, the Mexican peso, and the Argentine peso, as a result of our international operations. Foreign currency exchange gains and (losses) are included in other (income) expense, net and totaled $0.2 million and $0.4 million during the three and six month periods ended June 30, 2017 respectively, and $(0.6) million and $(0.8) million during the three and six month periods ended June 30, 2016, respectively.

Inventories
 
Inventories consist primarily of compressor package parts and supplies and work in progress and are stated at the lower of cost or market value. For parts and supplies, cost is determined using the weighted average cost method. The cost of work in progress is determined using the specific identification method. Work in progress inventories consist primarily of new compressor packages located at our fabrication facility in Midland, Texas. Components of inventories as of June 30, 2017, and December 31, 2016, are as follows: 

 
June 30, 2017
 
December 31, 2016
 
(In Thousands)
Parts and supplies
$
28,278

 
$
25,932

Work in progress
11,671

 
5,510

Total inventories
$
39,949

 
$
31,442

     
We write down the value of inventory by an amount equal to the difference between its cost and its estimated market value.

Compression and Related Services Revenues and Costs

Our compression and related services revenues include revenues from our U.S. corporate subsidiaries' operating lease agreements with customers. For the three and six month periods ended June 30, 2017 and 2016, the following operating lease revenues and associated costs were included in compression and related service revenues and cost of compression and related services, respectively, in the accompanying consolidated statements of operations. As a result of our customers entering into compression service contracts, our revenues from rental contracts have decreased during the period ended June 30, 2017 compared to the prior year period.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Rental revenue
$
6,916

 
$
9,905

 
$
14,346

 
$
21,425

Cost of rental revenue
$
3,350

 
$
5,376

 
$
8,164

 
$
12,293


Earnings Per Common Unit
 
Our computations of earnings per common unit are based on the weighted average number of common units outstanding during the applicable period. Basic earnings per common unit are determined by dividing net income (loss) allocated to the common units after deducting the amount allocated to our General Partner (including any distributions to our General Partner on its incentive distribution rights), by the weighted average number of outstanding common units during the period.
 

7



When computing earnings per common unit when distributions are greater than earnings, the amount of the distribution is deducted from net income and the excess of distributions over earnings is allocated between the General Partner and common units based on how our Partnership Agreement allocates net losses.
 
When earnings are greater than distributions, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our General Partner based on actual distributions. When computing earnings per common unit, the amount of the assumed incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the assumed incentive distribution rights, is allocated between the General Partner and common units based on how our Partnership Agreement allocates net earnings.

Diluted earnings per common unit are computed using the treasury stock method, which considers the potential future issuance of limited partner common units. Unvested phantom units are not included in basic earnings per common unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per common unit. For the three and six month periods ended June 30, 2017 and June 30, 2016, all incremental unvested phantom units were excluded from the calculation of diluted common units because the impact was anti-dilutive. Following the August and September 2016 issuances of the Series A Convertible Preferred Units (the "Preferred Units"), diluted earnings per common unit are computed using the "if converted" method, whereby the amount of net income (loss) and the number of common units issuable are each adjusted as if the Preferred Units had been converted as of the beginning of the period presented. The number of common units that may be issued upon future conversion of the Preferred Units is excluded from the calculation of diluted common units for the six month period ended June 30, 2017, as the impact would be anti-dilutive. The following is a reconciliation of the common unit interest in net loss and the weighted average common units outstanding to reflect the impact of the Preferred Units on diluted earnings per common unit under the "if converted" method:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
Common unit interest in net income (loss)
$
(6,245
)
 
$
(4,586
)
 
$
(21,526
)
 
$
(107,828
)
Assumed conversion of Preferred Units impact on common unit interest in net income (loss)
(5,430
)
 

 

 

Common unit interest in net income (loss) after assumed conversion of Preferred Units
$
(11,675
)
 
$
(4,586
)
 
$
(21,526
)
 
$
(107,828
)
 
 
 
 
 
 
 
 
Weighted average common units outstanding - Basic
34,470,736

 
33,209,410

 
33,979,068

 
33,199,792

Assumed conversion of Preferred Units
10,829,321

 

 

 

Weighted average common units outstanding - Diluted
45,300,057

 
33,209,410

 
33,979,068

 
33,199,792


Goodwill

During the first three months of 2016, low oil and natural gas commodity prices resulted in decreased demand for certain of our products and services. Specifically, demand for low-horsepower wellhead compression services and for sales of compressor equipment decreased significantly and was expected to continue to be decreased for the foreseeable future. In addition, the price per common unit as of March 31, 2016 decreased compared to December 31, 2015. Accordingly, our fair value, as reflected by our market capitalization and other indicators, was less than our carrying value as of March 31, 2016. After making the hypothetical purchase price adjustments as part of the second step of the goodwill impairment test, there was $0.0 million residual purchase price to be allocated to our goodwill. Based on this analysis, we concluded that an impairment of all of our recorded goodwill was required. Accordingly, during the three month period ended March 31, 2016, $92.4 million was charged to Goodwill Impairment expense in the accompanying consolidated statement of operations.

Impairments of Long-Lived Assets
 
During the first quarter of 2016, as a result of continuing decreased demand as a result of current market conditions, we recorded impairments of $7.9 million associated with certain identified intangible assets. This amount was charged to Long-Lived Asset Impairment expense in the accompanying consolidated statement of operations.

8



 
Accumulated Other Comprehensive Income (Loss)
 
Certain of our international operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of the foreign currency translation adjustment reflected as a component of accumulated other comprehensive income (loss). Accumulated other comprehensive income (loss) is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income (loss) during the three and six month periods ended June 30, 2017 and 2016, is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(In Thousands)
 
 
 
 
Balance, beginning of period
$
(10,161
)
 
$
(9,197
)
 
$
(10,411
)
 
$
(8,393
)
Foreign currency translation adjustment
(568
)
 
(115
)
 
(318
)
 
(919
)
Balance, end of period
$
(10,729
)
 
$
(9,312
)
 
$
(10,729
)
 
$
(9,312
)

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

Allocation of Net Income (Loss)
 
Our net income (loss) is allocated to partners’ capital accounts in accordance with the provisions of our partnership agreement.

Distributions
 
On January 20, 2017, our General Partner declared a cash distribution attributable to the quarter ended December 31, 2016 of $0.3775 per common unit. This distribution equates to a distribution of $1.51 per outstanding common unit on an annualized basis. Also on January 20, 2017, our General Partner approved the paid in kind distribution of 193,563 Preferred Units attributable to the quarter ended December 31, 2016 in accordance with the provisions of our partnership agreement, as amended. These distributions were paid on February 14, 2017, to the holders of common units and Preferred Units, respectively, of record as of the close of business on February 1, 2017.
    
On April 21, 2017, our General Partner declared a cash distribution attributable to the quarter ended March 31, 2017 of $0.1875 per common unit. This distribution equates to a distribution of $0.75 per outstanding common unit on an annualized basis, and represented a reduction of approximately 50% from the previous distribution level. Also on April 21, 2017, our General Partner approved the paid in kind distribution of 195,559 Preferred Units attributable to the quarter ended March 31, 2017 in accordance with the provisions of our partnership agreement, as amended. These distributions were paid on May 15, 2017 to each of the holders of common units and to the holders of the Preferred Units as a group, respectively, of record as of the close of business on May 1, 2017.

On July 21, 2017, our General Partner declared a cash distribution attributable to the quarter ended June 30, 2017 of $0.1875 per common unit. This distribution equates to a distribution of $0.75 per outstanding common unit on an annualized basis. Also on July 21, 2017, our General Partner approved the paid in kind distribution of 184,360 Preferred Units attributable to the quarter ended June 30, 2017 in accordance with the provisions of our partnership agreement, as amended. These distributions will be paid on August 14, 2017 to each of the holders of common units and to the holders of the Preferred Units as a group, respectively, of record as of the close of business on August 1, 2017.

Fair Value Measurements

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact

9



for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.

Under U.S. generally accepted accounting principles ("GAAP"), the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the determination of the carrying value of our Preferred Units (a Level 3 fair value measurement), which were issued in August and September 2016. We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward purchase and sale derivative contracts. For these fair value measurements, we utilize the quoted value as determined by our counterparty financial institution (a level 2 fair value measurement). Fair value measurements are also utilized on a nonrecurring basis, such as in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill (a Level 3 fair value measurement), and for the impairment of long-lived assets, including goodwill (a level 3 fair value measurement). The fair value of certain of our financial instruments, which may include cash, accounts receivable, short-term borrowings, and variable-rate long-term debt pursuant to our bank credit agreement, approximate their carrying amounts. The fair values of our publicly traded long-term 7.25% Senior Notes at June 30, 2017 and December 31, 2016 were approximately $272.6 million and $278.2 million, respectively, based on current interest rates on those dates which were different from the stated interest rate on the 7.25% Senior Notes (a level 2 fair value measurement). Those fair values compare to aggregate principal amounts of such notes at June 30, 2017 and December 31, 2016 of $295.9 million.

The Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items. These unobservable items include (i) the volatility of the trading price of our common units compared to a volatility analysis of equity prices of comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis. The fair valuation of our Preferred Units liability is increased by, among other factors, projected increases in our common unit price, and by increases in the volatility and decreases in the debt yields of comparable peer companies. Increases (or decreases) in the fair value of our Preferred Units will increase (decrease) the associated liability and result in future adjustments to earnings for the associated valuation losses (gains).
A summary of these recurring fair value measurements as of June 30, 2017 and December 31, 2016 is as follows:
 
 
 
 
Fair Value Measurements Using
Description
 
Total as of
June 30, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
(In Thousands)
Series A Preferred Units
 
$
(77,350
)
 
$

 
$

 
$
(77,350
)
Liability for foreign currency derivative contracts
 
(35
)
 

 
(35
)
 

 
 
$
(77,385
)
 
 
 
 
 
 

    

10



 
 
 
 
Fair Value Measurements Using
 
 
 
 
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Description
 
Total as of
December 31, 2016
 
 
 
 
 
(In Thousands)
Series A Preferred Units
 
$
(88,130
)
 
$

 
$

 
$
(88,130
)
Asset for foreign currency derivative contracts
 
$
57

 
$

 
$
57

 
$

 
 
$
(88,073
)
 
 
 
 
 
 

New Accounting Pronouncements

     In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most 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. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those years, under either full or modified retrospective adoption. During 2016, in preparation for the adoption of ASU 2014-09, we began a review of the various types of customer contract arrangements for our compression services, aftermarket services, and equipment sales operations. These reviews include 1) accumulating all customer contractual arrangements; 2) identifying individual performance obligations pursuant to each arrangement; 3) quantifying consideration under each arrangement; 4) allocating consideration among the identified performance obligations; and 5) determining the timing of revenue recognition pursuant to each arrangement. We have substantially completed these contract reviews and are implementing revised accounting system processes in order to capture information required to be disclosed under ASU 2014-09. While the timing and amount of revenue recognized for a large portion of our customer contractual arrangements under ASU 2014-09 will not change, in other cases the adoption of ASU 2014-09 may have an impact. Adoption of ASU 2014-09 will have a significant impact on disclosures. We plan to adopt ASU 2014-09 on January 1, 2018 using the modified retrospective adoption method.

In March 2016, the FASB issued ASU 2016-08,"Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" to clarify the guidance on principal versus agent considerations. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.

In April 2016, the FASB issued ASU 2016-10,"Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing" to clarify the guidance on identifying performance obligations and the licensing implementation guidance. This ASU does not change the effective date or adoption method under ASU 2014-09, which is noted above.

Additionally, in May 2016, the FASB issued ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients." This ASU addresses and amends several aspects of ASU 2014-09, but does not change the core principle of the guidance. This ASU does not change the effective date or adoption method under ASU 2014-09 which is noted above.
    
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which simplifies the subsequent measurement of inventory by requiring entities to measure inventory at the lower of cost or net realizable value, except for inventory measured using the last-in, first-out (LIFO) or the retail inventory methods. The ASU requires entities to compare the cost of inventory to one measure - net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, and is to be applied prospectively with early adoption

11



permitted. As a result of the adoption of this standard during the first quarter of 2017, there was no material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize lease assets and lease liabilities in the balance sheet and disclose key information about the leasing arrangements and cash flows. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted, under a modified retrospective adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" as part of a simplification initiative. The update addresses and simplifies several aspects of accounting for share-based payment transactions. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted, and is to be applied using either modified retrospective, retrospective, or prospective transition method based on which amendment is being applied. Upon adoption of ASU 2016-09, we elected to change our accounting policy to account for forfeitures as they occur, using a modified retrospective method and determined that a cumulative-effect adjustment to retained earnings would be immaterial at transition during the first quarter of 2017. As a result of the adoption of this ASU, there was no impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13, which has an effective date of the first quarter of fiscal 2022, also applies to employee benefit plan accounting. We are currently assessing the potential effects of these changes to our consolidated financial statements and employee benefit plan accounting.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" to reduce diversity in practice in classification of certain transactions in the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory" which requires companies to account for the income tax effects of intercompany transfers of assets other than inventory when the transfer occurs. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted, under a modified retrospective transition adoption. We are currently assessing the potential effects of these changes to our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, "Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting" to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

12




NOTE B LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Scheduled Maturity
 
(In Thousands)
Credit Agreement (presented net of the unamortized deferred financing costs of $4.9 million as of June 30, 2017 and $4.5 million as of December 31, 2016)
 
August 4, 2019
 
$
222,348

 
$
217,467

7.25% Senior Notes (presented net of the unamortized discount of $3.0 million as of June 30, 2017 and $3.3 million as of December 31, 2016 and unamortized deferred financing costs of $5.5 million as of June 30, 2017 and $6.0 million as of December 31, 2016
 
August 15, 2022
 
287,402

 
286,623

 
 
 
 
509,750

 
504,090

Less current portion
 
 
 

 

Total long-term debt
 
 
 
$
509,750

 
$
504,090


Bank Credit Facilities.

On May 5, 2017, we entered into an amendment (the "Fifth Amendment") to our Credit Agreement that modified certain financial covenants in the Credit Agreement, providing that (i) the consolidated total leverage ratio may not exceed (a) 5.95 to 1 as of March 31, 2017; (b) 6.75 to 1 as of June 30, 2017 and September 30, 2017; (c) 6.50 to 1 as of December 31, 2017 and March 31, 2018; (d) 6.25 to 1 as of June 30, 2018 and September 30, 2018; (e) 6.00 to 1 as of December 31, 2018; and (e) 5.75 to 1 as of March 31, 2019 and thereafter; and (ii) the consolidated secured leverage ratio may not exceed 3.25 to 1 as of the end of any fiscal quarter. The consolidated interest coverage ratio was not amended by the Fifth Amendment. In addition, the Fifth Amendment (i) increased the applicable margin by 0.25% in the event the consolidated total leverage ratio exceeds 6.00 to 1, resulting in a range for the applicable margin between 2.00% and 3.50% per annum for LIBOR-based loans and 1.00 to 2.50% per annum for base-rate loans, according to the consolidated total leverage ratio, and (ii) modified the appraisal delivery requirement from an annual requirement to a semi-annual requirement. In connection with the Fifth Amendment, the board of directors of our General Partner adopted resolutions limiting the cash distributions payable on our common units to no more than $0.1875 per common unit for the quarterly period ended June 30, 2017. The Fifth Amendment also included additional revisions that provide flexibility for the issuance of preferred securities.

At June 30, 2017, our consolidated total leverage ratio was 6.12 to 1 (compared to a 6.75 to 1 maximum allowed under the Credit Agreement), our consolidated secured leverage ratio was 2.66 to 1 (compared to a 3.25 to 1 maximum allowed under the Credit Agreement) and our consolidated interest coverage ratio was 2.72 to 1 (compared to a 2.25 to 1 minimum required under the Credit Agreement).

The consolidated total leverage ratio and the consolidated secured leverage ratio, as both are calculated under the Credit Agreement, exclude the long-term liability for the Preferred Units in the determination of total indebtedness.

As of June 30, 2017, we had a balance outstanding under our Credit Agreement of $227.2 million, and we had $1.9 million letters of credit and performance bonds outstanding thereunder, leaving a net availability under the Credit Agreement of $85.9 million, subject to a borrowing base limitation. Covenants and other provisions in the Credit Agreement also limit our borrowings of amounts available under the Credit Agreement. We are in compliance with all covenants of our Credit Agreement as of June 30, 2017.
    

13



NOTE C – SERIES A CONVERTIBLE PREFERRED UNITS

On August 8, 2016 and September 20, 2016, we entered into Series A Preferred Unit Purchase Agreements (the “Unit Purchase Agreements”) with certain purchasers with regard to our issuances and sales in private placements (the "Initial Private Placement" and "Subsequent Private Placement," respectively) of an aggregate of 6,999,126 Preferred Units for a cash purchase price of $11.43 per Preferred Unit (the “Issue Price”), resulting in total 2016 net proceeds, after deducting certain offering expenses, of approximately $77.3 million. One of the purchasers in the Initial Private Placement was TETRA, which purchased 874,891 of the Preferred Units at the aggregate Issue Price of $10.0 million.

In connection with the closing of the Initial Private Placement, our General Partner executed a Second Amended and Restated Agreement of Limited Partnership of the Partnership (the “Amended and Restated Partnership Agreement”) to, among other things, authorize and establish the rights and preferences of the Preferred Units. The Preferred Units are a new class of equity security that will rank senior to all classes or series of equity securities of the Partnership with respect to distribution rights and rights upon liquidation. The holders of Preferred Units (each, a “Preferred Unitholder”) receive quarterly distributions, which are paid in kind in additional Preferred Units, equal to an annual rate of 11.00% of the Issue Price (or $1.2573 per Preferred Unit annualized), subject to certain adjustments. The rights of the Preferred Units include certain anti-dilution adjustments, including adjustments for economic dilution resulting from the issuance of common units in the future below a set price.

A ratable portion of the Preferred Units have been, and will continue to be, converted into common units on the eighth day of each month over a period of thirty months that began in March 2017 (each, a “Conversion Date”), subject to certain provisions of the Amended and Restated Partnership Agreement that may delay or accelerate all or a portion of such monthly conversions. On each Conversion Date, a portion of the Preferred Units will convert into common units representing limited partner interests in the Partnership in an amount equal to, with respect to each Preferred Unitholder, the number of Preferred Units held by such Preferred Unitholder divided by the number of Conversion Dates remaining, subject to adjustment described in the Amended and Restated Partnership Agreement, with the conversion price (the "Conversion Price") determined by the trading prices of the common units over the prior month, among other factors, and as otherwise impacted by the existence of certain conditions related to the common units. On June, 7, 2017, as permitted under the Amended and Restated Partnership Agreement, we elected to defer the monthly conversion of Preferred Units for each of the Conversion Dates during the three month period beginning July 2017. Based on the number of Preferred Units outstanding as of June 30, 2017, the maximum aggregate number of common units that could be required to be issued pursuant to the conversion provisions of the Preferred Units is approximately 37.1 million common units; however, the Partnership may, at its option, pay cash, or a combination of cash and common units, to the Preferred Unitholders instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Amended and Restated Partnership Agreement and the Credit Agreement. The total number of Preferred Units outstanding as of June 30, 2017 was 6,488,842.

Because the Preferred Units may be settled using a variable number of common units, the fair value of the Preferred Units is classified as a long-term liability on our consolidated balance sheet in accordance with Accounting Standards Codification 480 "Distinguishing Liabilities and Equity." The fair value of the Preferred Units as of June 30, 2017 was $77.4 million. Changes in the fair value during each quarterly period, including the $3.7 million net decrease in fair value during the six month period ended June 30, 2017, are charged or credited to earnings in the accompanying consolidated statements of operations. Based on the conversion provisions of the Preferred Units, and using the Conversion Price calculated as of June 30, 2017, the theoretical number of common units that would be issued if all of the outstanding Preferred Units were converted on June 30, 2017 on the same basis as the monthly conversions would be approximately 17.2 million common units, with an aggregate market value of $83.3 million. A $1 decrease in the Conversion Price would result in the issuance of approximately 5.0 million additional common units pursuant to these conversion provisions.


14



NOTE D – MARKET RISKS AND DERIVATIVE CONTRACTS
 
We are exposed to financial and market risks that affect our businesses. We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facility, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables owed to us by companies in the energy industry. Our financial risk management activities may at times involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures.

Foreign Currency Derivative Contracts
 
As of June 30, 2017, we had the following foreign currency derivative contracts outstanding relating to a portion of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward sale Mexican peso
 
$
3,619

 
18.36
 
7/20/2017

Under a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries, we may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as economic hedges of the cash flow of our currency exchange risk exposure, they will not be formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.

The fair values of our foreign currency derivative instruments are based on quoted market values as reported to us by our counterparty (a Level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of June 30, 2017 and December 31, 2016, are as follows:
Foreign currency derivative instruments
 
Balance Sheet
 
Fair Value at
 
Location
 
June 30, 2017
 
December 31, 2016
 
 
 
 
(In Thousands)
Forward sale contracts
 
Current assets
 
$

 
$
57

Forward sale contracts
 
Current liabilities
 
(35
)
 
$

Net asset
 
 
 
$
(35
)
 
$
57


None of the foreign currency derivative contracts contains credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and six month periods ended June 30, 2017, we recognized $(0.1) million and $(0.4) million, respectively, of net gains (losses) associated with our foreign currency derivative program, and such amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations. During the three and six month periods ended June 30, 2016, we recognized $0.0 million and $0.1 million, respectively, of net gains in other expense, net, associated with our foreign currency derivative program.

NOTE E – RELATED PARTY TRANSACTIONS
 
Omnibus Agreement
 
     Under the terms of the Omnibus Agreement entered into on June 20, 2011, and later amended June 20, 2014 (the "Omnibus Agreement"), our General Partner provides all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico, Canada, and Argentina), and certain of TETRA’s Latin American-based subsidiaries provide personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provides certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk

15



management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. Pursuant to the Omnibus Agreement, we reimburse our General Partner and TETRA for services they provide to us. The Omnibus Agreement will terminate on the earlier of (i) a change of control of the General Partner or TETRA, or (ii) upon any party providing at least 180 days prior written notice of termination.

In January 2017, our General Partner and TETRA agreed that $1.6 million of Amounts Payable to Affiliates as of December 31, 2016 that were owed by us to TETRA under the Omnibus Agreement would be satisfied by newly issued common units instead of cash, with the number of common units calculated based on the average trading price of our common units over a defined period. This amount owed by us represented certain corporate and general and administrative services provided in the fourth quarter of 2016. Pursuant to this agreement, 159,192 units were issued to TETRA in January 2017.

In May 2017, our General Partner and TETRA entered into an agreement (the "First Quarter 2017 Omnibus Reimbursement Agreement") pursuant to which $1.7 million of Amounts Payable to Affiliates as of March 31, 2017 that were owed by us to TETRA under the Omnibus Agreement would be satisfied by newly issued common units instead of cash, with the number of common units calculated based on the average trading price of our common units, subject to limitations, over a defined period that began on May 12, 2017. This amount owed by us represented certain corporate and general and administrative services provided in the first quarter of 2017. Pursuant to the First Quarter 2017 Omnibus Reimbursement Agreement, 280,257 common units were issued to TETRA in June 2017.

Under the terms of the Omnibus Agreement, we or TETRA may, but neither of us are under any obligation to, perform for the other such production enhancement or other oilfield services on a subcontract basis as are needed or desired by the other, for such periods of time and in such amounts as may be mutually agreed upon by TETRA and our General Partner. Any such services are required to be performed on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner.
 
Under the terms of the Omnibus Agreement, we or TETRA may, but neither of us are under any obligation to, sell, lease or exchange on a like-kind basis to the other such production enhancement or other oilfield services equipment as is needed or desired to meet either of our production enhancement or other oilfield services obligations, in such amounts, upon such conditions and for such periods of time, if applicable, as may be mutually agreed upon by TETRA and our General Partner. Any such sales, leases, or like-kind exchanges are required to be on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner. In addition, unless otherwise approved by the conflicts committee of our General Partner’s board of directors, TETRA may purchase newly fabricated equipment from us at a negotiated price, provided that such price may not be less than the sum of the total costs (other than any allocations of general and administrative expenses) incurred by us in fabricating such equipment plus a fixed margin percentage thereof, and TETRA may purchase from us previously fabricated equipment for a price that is not less than the sum of the net book value of such equipment plus a fixed margin percentage thereof.

This description is not a complete discussion of this agreement and is qualified in its entirety by reference to the full text of the complete agreement, which is filed, along with other agreements, as exhibits to our filings with the SEC.

16




Amendment to Partnership Agreement

On August 8, 2016, in connection with the closing of the Initial Private Placement of the Preferred Units, our General Partner executed the Amended and Restated Partnership Agreement which, among other things, authorized and established the rights and preferences of the Preferred Units. For discussion of the issuance of the Preferred Units, see Note C - Series A Convertible Preferred Units.

TETRA and General Partner Ownership

As of June 30, 2017, TETRA's ownership interest in us was approximately 42% of the outstanding common units, 12.6% of the outstanding Preferred Units, and an approximately 2% general partner interest, through which it holds incentive distribution rights. For discussion of the purchase by TETRA of a portion of the Preferred Units, see Note C - Series A Convertible Preferred Units. As Preferred Units are converted to common units, it is expected that TETRA's percentage ownership of the common units will decrease.

NOTE F – INCOME TAXES
 
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S., and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.

Despite the pre-tax loss for the three and six month periods ended June 30, 2017, we recorded a provision for income tax, primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes. Our effective tax rates for the three and six month periods ended June 30, 2017 were negative 10.5% and negative 6.9%, respectively, primarily due to losses generated in entities for which no related tax benefit has been recorded. The losses generated by these entities do not result in tax benefits due to offsetting valuation allowances being recorded against their net deferred tax assets. We establish a valuation allowance to reduce the deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions. Further, the effective tax rate during 2016 was negatively impacted by the nondeductible portion of our goodwill impairments during the three month period ended March 31, 2016.

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

NOTE H – SEGMENTS

ASC 280-10-50, “Operating Segments”, defines the characteristics of an operating segment as (i) being engaged in business activity from which it may earn revenues and incur expenses, (ii) being reviewed by the company's chief operating decision maker ("CODM") to make decisions about resources to be allocated and to assess its performance, and (iii) having discrete financial information. Although management of our General Partner reviews our products and services to analyze the nature of our revenue, other financial information, such as certain costs and expenses, and net income are not captured or analyzed by these items. Therefore, discrete financial information is not available by product line and our CODM does not make resource allocation decisions or assess the performance of the business based on these items, but rather in the aggregate. Based on this, our General Partner believes that we operate in one business segment. 

NOTE I — SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
    

17



The $295.9 million in aggregate principal amount of the 7.25% Senior Notes as of June 30, 2017 is fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several senior unsecured basis, by the following domestic restricted subsidiaries (each a "Guarantor Subsidiary" and collectively the "Guarantor Subsidiaries"):

Compressor Systems, Inc.
CSI Compressco Field Services International LLC
CSI Compressco Holdings LLC
CSI Compressco International LLC
CSI Compressco Leasing LLC
CSI Compressco Operating LLC
CSI Compressco Sub, Inc.
CSI Compression Holdings, LLC
Pump Systems International, Inc.
Rotary Compressor Systems, Inc.

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% Senior Notes. In addition to the financial information of the Partnership, financial information of the Issuers includes CSI Compressco Finance Inc., which had no assets or operations for any of the periods presented.

Condensed Consolidating Balance Sheet
June 30, 2017
(In Thousands)
 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
$

 
$
74,247

 
$
20,971

 
$

 
$
95,218

Property, plant, and equipment, net
 

 
601,020

 
25,733

 

 
626,753

Investments in subsidiaries
 
187,199

 
15,822

 

 
(203,021
)
 

Intangible and other assets, net
 

 
35,124

 
323

 

 
35,447

Intercompany receivables
 
303,887

 

 

 
(303,887
)
 

Total non-current assets
 
491,086

 
651,966

 
26,056

 
(506,908
)
 
662,200

Total assets
 
$
491,086

 
$
726,213

 
$
47,027

 
$
(506,908
)
 
$
757,418

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
8,334

 
$
32,775

 
$
2,740

 
$

 
$
43,849

Amounts payable to affiliates
 

 
5,234

 
2,190

 

 
7,424

Long-term debt, net
 
287,402

 
222,348

 

 

 
509,750

Series A Preferred Units
 
77,350

 

 

 

 
77,350

Intercompany payables
 

 
278,586

 
25,301

 
(303,887
)
 

Other long-term liabilities
 

 
71

 
974

 

 
1,045

Total liabilities
 
373,086

 
539,014

 
31,205

 
(303,887
)
 
639,418

Total partners' capital
 
118,000

 
187,199

 
15,822

 
(203,021
)
 
118,000

Total liabilities and partners' capital
 
$
491,086

 
$
726,213

 
$
47,027

 
$
(506,908
)
 
$
757,418


18



Condensed Consolidating Balance Sheet
December 31, 2016
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Current assets
 
$
35

 
$
74,574

 
$
27,395

 
$

 
$
102,004

Property, plant, and equipment, net
 

 
624,051

 
22,955

 

 
647,006

Investments in subsidiaries
 
214,703

 
15,112

 

 
(229,815
)
 

Intangible and other assets, net
 

 
36,794

 
336

 

 
37,130

Intercompany receivables
 
312,227

 

 

 
(312,227
)
 

Total non-current assets
 
526,930

 
675,957

 
23,291

 
(542,042
)
 
684,136

Total assets
 
$
526,965

 
$
750,531

 
$
50,686

 
$
(542,042
)
 
$
786,140

 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
$
8,089

 
$
31,789

 
$
3,856

 
$

 
$
43,734

Amounts payable to affiliates
 
874

 
3,780

 
1,526

 

 
6,180

Long-term debt, net
 
286,623

 
217,467

 

 

 
504,090

Series A Preferred Units
 
88,130

 

 

 

 
88,130

Intercompany payables
 

 
282,753

 
29,474

 
(312,227
)
 

Other long-term liabilities
 

 
39

 
718

 

 
757

Total liabilities
 
383,716

 
535,828

 
35,574

 
(312,227
)
 
642,891

Total partners' capital
 
143,249

 
214,703

 
15,112

 
(229,815
)
 
143,249

Total liabilities and partners' capital
 
$
526,965

 
$
750,531

 
$
50,686

 
$
(542,042
)
 
$
786,140



19



Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended June 30, 2017
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$

 
$
70,515

 
$
6,321

 
$
(1,521
)
 
$
75,315

Cost of revenues (excluding depreciation and amortization expense)
 

 
47,668

 
4,438

 
(1,521
)
 
50,585

Selling, general and administrative expense
 
941

 
6,902

 
387

 

 
8,230

Depreciation and amortization
 

 
16,393

 
811

 

 
17,204

Interest expense, net
 
7,862

 
2,587

 

 

 
10,449

Series A Preferred FV Adjustment
 
(5,528
)
 

 

 

 
(5,528
)
Other expense, net
 

 
239

 
(98
)
 

 
141

Equity in net income of subsidiaries
 
3,097

 
(391
)
 

 
(2,706
)
 

Income before income tax provision
 
(6,372
)
 
(2,883
)
 
783

 
2,706

 
(5,766
)
Provision (benefit) for income taxes
 

 
214

 
392

 

 
606

Net income (loss)
 
(6,372
)
 
(3,097
)
 
391

 
2,706

 
(6,372
)
Other comprehensive income (loss)
 
(568
)
 
(568
)
 
(568
)
 
1,136

 
(568
)
Comprehensive income (loss)
 
$
(6,940
)
 
$
(3,665
)
 
$
(177
)
 
$
3,842

 
$
(6,940
)



20



Condensed Consolidating Statement of Operations
and Comprehensive Income
Three Months Ended June 30, 2016
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$

 
$
66,396

 
$
12,087

 
$
(2,394
)
 
$
76,089

Cost of revenues (excluding depreciation and amortization expense)
 

 
37,579

 
8,478

 
(2,394
)
 
43,663

Selling, general and administrative expense
 
676

 
7,001

 
506

 

 
8,183

Depreciation and amortization
 

 
18,011

 
731

 

 
18,742

Long-lived asset impairment
 

 

 

 

 

Goodwill impairment
 

 

 

 

 

Interest expense, net
 
6,482

 
2,388

 

 

 
8,870

Other expense, net
 

 
38

 
669

 

 
707

Equity in net income of subsidiaries
 
(2,478
)
 
(1,513
)
 

 
3,991

 

Income (loss) before income tax provision
 
(4,680
)
 
2,892

 
1,703

 
(3,991
)
 
(4,076
)
Provision (benefit) for income taxes
 

 
414

 
190

 

 
604

Net income (loss)
 
(4,680
)
 
2,478

 
1,513

 
(3,991
)
 
(4,680
)
Other comprehensive income (loss)
 
(115
)
 
(115
)
 
(115
)
 
230

 
(115
)
Comprehensive income (loss)
 
$
(4,795
)
 
$
2,363

 
$
1,398

 
$
(3,761
)
 
$
(4,795
)




21



Condensed Consolidating Statement of Operations
and Comprehensive Income
Six Months Ended June 30, 2017
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$

 
$
131,098

 
$
12,702

 
$
(2,933
)
 
$
140,867

Cost of revenues (excluding depreciation and amortization expense)
 

 
86,905

 
8,674

 
(2,933
)
 
92,646

Selling, general and administrative expense
 
1,984

 
14,303

 
709

 

 
16,996

Depreciation and amortization
 

 
32,917

 
1,582

 

 
34,499

Long-live asset impairment
 

 

 

 

 

Goodwill impairment
 

 

 

 

 

Interest expense, net
 
15,849

 
4,983

 

 

 
20,832

Series A Preferred FV Adjustment
 
(3,663
)
 

 

 

 
(3,663
)
Other expense, net
 

 
602

 
(499
)
 

 
103

Equity in net income of subsidiaries
 
7,795

 
(1,028
)
 

 
(6,767
)
 

Income before income tax provision
 
(21,965
)
 
(7,584
)
 
2,236

 
6,767

 
(20,546
)
Provision for income taxes
 

 
211

 
1,208

 

 
1,419

Net income
 
(21,965
)
 
(7,795
)
 
1,028

 
6,767

 
(21,965
)
Other comprehensive income (loss)
 
(318
)
 
(318
)
 
(318
)
 
636

 
(318
)
Comprehensive income (loss)
 
$
(22,283
)
 
$
(8,113
)
 
$
710

 
$
7,403

 
$
(22,283
)


22



Condensed Consolidating Statement of Operations
and Comprehensive Income
Six Months Ended June 30, 2016
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$

 
$
141,492

 
$
23,296

 
$
(7,007
)
 
$
157,781

Cost of revenues (excluding depreciation and amortization expense)
 

 
82,891

 
16,155

 
(7,007
)
 
92,039

Selling, general and administrative expense
 
1,311

 
16,174

 
928

 

 
18,413

Depreciation and amortization
 

 
35,754

 
1,440

 

 
37,194

Long-live asset impairment
 

 
7,797

 
69

 

 
7,866

Goodwill impairment
 

 
91,575

 
759

 

 
92,334

Interest expense, net
 
12,962

 
4,710

 

 

 
17,672

Other expense, net
 

 
104

 
891

 

 
995

Equity in net income of subsidiaries
 
95,756

 
(2,761
)
 

 
(92,995
)
 

Income before income tax provision
 
(110,029
)
 
(94,752
)
 
3,054

 
92,995

 
(108,732
)
Provision (benefit) for income taxes
 

 
1,004

 
293

 

 
1,297

Net income
 
(110,029
)
 
(95,756
)
 
2,761

 
92,995

 
(110,029
)
Other comprehensive income (loss)
 
(919
)
 
(919
)
 
(919
)
 
1,838

 
(919
)
Comprehensive income (loss)
 
$
(110,948
)
 
$
(96,675
)
 
$
1,842

 
$
94,833

 
$
(110,948
)


23



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2017
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$

 
$
15,735

 
$
(4,381
)
 
$

 
$
11,354

Investing activities:
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment, net
 

 
(11,850
)
 
373

 

 
(11,477
)
Intercompany investment activity
 
19,510

 

 

 
(19,510
)
 

Advances and other investing activities
 

 
32

 

 

 
32

Net cash provided by (used in) investing activities
 
19,510

 
(11,818
)
 
373

 
(19,510
)
 
(11,445
)
Financing activities:
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
 

 
42,500

 

 

 
42,500

Payments of long-term debt
 

 
(37,300
)
 

 

 
(37,300
)
Proceeds from Series A Preferred Units, net of offering costs
 
(37
)
 

 

 

 
(37
)
Distributions
 
(19,391
)
 

 

 

 
(19,391
)
Other Financing Activities
 
(82
)
 
(1,266
)
 

 

 
(1,348
)
Intercompany contribution (distribution)
 

 
(19,510
)
 

 
19,510

 

Net cash provided by (used in) financing activities
 
(19,510
)
 
(15,576
)
 

 
19,510

 
(15,576
)
Effect of exchange rate changes on cash
 

 

 
(110
)
 

 
(110
)
Increase (decrease) in cash and cash equivalents
 

 
(11,659
)
 
(4,118
)
 

 
(15,777
)
Cash and cash equivalents at beginning of period
 

 
12,201

 
8,596

 

 
20,797

Cash and cash equivalents at end of period
 
$

 
$
542

 
$
4,478

 
$

 
$
5,020



24



Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2016
(In Thousands)

 
 
Issuers
 
Guarantor
Subsidiaries
 
Other
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
 
$

 
$
33,128

 
$
2,436

 
$

 
$
35,564

Investing activities:
 
 
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment, net
 

 
(2,404
)
 
(1,402
)
 

 
(3,806
)
Intercompany investment activity
 
25,568

 

 

 
(25,568
)
 

Advances and other investing activities
 

 
21

 

 

 
21

Net cash provided by (used in) investing activities
 
25,568

 
(2,383
)
 
(1,402
)
 
(25,568
)
 
(3,785
)
Financing activities:
 
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
 

 
36,000

 

 

 
36,000

Payments of long-term debt
 

 
(35,000
)
 

 

 
(35,000
)
Distributions
 
(25,568
)
 

 

 

 
(25,568
)
Payment of financing costs
 

 
(725
)
 

 

 
(725
)
Intercompany contribution (distribution)
 

 
(25,568
)
 

 
25,568

 

Net cash provided by (used in) financing activities
 
(25,568
)
 
(25,293
)
 

 
25,568

 
(25,293
)
Effect of exchange rate changes on cash
 

 

 
(415
)
 

 
(415
)
Increase (decrease) in cash and cash equivalents
 

 
5,452

 
619

 

 
6,071

Cash and cash equivalents at beginning of period
 

 
2,711

 
7,909

 

 
10,620

Cash and cash equivalents at end of period
 
$

 
$
8,163

 
$
8,528

 
$

 
$
16,691


NOTE J – SUBSEQUENT EVENTS

On July 21, 2017, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended June 30, 2017 of $0.1875 per common unit. This distribution equates to a distribution of $0.75 per outstanding common unit, on an annualized basis. Also on July 21, 2017, the board of directors of our General Partner approved the paid-in-kind distribution of 184,360 Preferred Units attributable to the quarter ended June 30, 2017, in accordance with the provisions of our partnership agreement, as amended. These distributions will be paid on August 14, 2017 to each of the holders of common units, and to the holders of the Preferred Units as a group, respectively, of record as of the close of business on August 1, 2017.



25



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017. This discussion includes forward-looking statements that involve certain risks and uncertainties.
 
Business Overview
 
During the second quarter of 2017, and in response to improved oil and natural gas prices compared to early 2016, we continue to see signals of an improving market environment for the energy services industry generally and for the compression services and equipment business specifically. While consolidated revenues decreased slightly during the second quarter of 2017 compared to the corresponding prior year period, we have seen increasing improvement in overall compression fleet utilization compared to the most recent quarterly periods as well as some easing in customer pricing pressure. However, customer pricing still remains generally lower during the current year period compared to the prior year period. Our over-800 HP compressor fleet has performed at a higher utilization rate than our below-100 HP and our 101-800 HP compressor fleet in the current economic environment. Revenues from sales of new equipment increased during the second quarter of 2017 compared to the prior year period, as capital expenditure levels for compression projects of our customers are increasing. Additionally, more customer inquiries have materialized, resulting in increased demand for our new compressor packages compared to the prior year period. Despite the increase in revenues from sales of new equipment compared to the prior year period, pricing pressure continues to negatively impact our equipment sales margin. We have also seen a small increase in our backlog for new equipment sales as of June 30, 2017 compared to December 31, 2016, as new equipment sales orders have exceeded the increased equipment sales during the current year period, an indication that demand for equipment sales is improving. As the recovery from the industry downturn is expected to be gradual and prolonged, we have continued to focus on maintaining a low cost structure that includes strong discipline over operating expenses and capital expenditure levels. We plan to fund our capital expenditure needs through operating cash flows, borrowings under our Credit Agreement, and potentially other sources, if necessary. Our deferral of capital projects could affect our ability to compete in the future. Although our employee headcount remains reduced and the suspension of 401(k) employer contributions continues, during the first quarter of 2017 we reinstated employee salaries to the levels prior to early 2016 salary reductions. We continue to negotiate with our suppliers and service providers to reduce costs. In August 2017, we launched a new enterprise resource planning ("ERP") software system that enhances our sales, operations and back office functions to streamline our business practices that is expected to enhance customer services and result in lower operating and administrative costs going forward.
Anticipating an extended period of recovery in levels of revenues and operating cash flows, we continue to focus on liquidity and our ability to maintain compliance with financial covenants under our bank revolving credit facility (as amended, the "Credit Agreement"). In July 2017, our General Partner declared a common unit cash distribution attributable to the quarter ended June 30, 2017 of $0.1875 per common unit, consistent with the reduced distribution from the prior quarter. This distribution equates to a distribution of $0.75 per outstanding common unit on an annualized basis. We anticipate that we will utilize the increased funds available as a result of the current reduced level of distributions to reduce the amount of borrowings outstanding and to fund growth capital expenditures in advance of expected increased demand for compression services. In May 2017, we entered into an amendment of the Credit Agreement that, among other things, favorably amended certain financial covenants. In addition, beginning with the March 8, 2017 initial conversion of our Series A Convertible Preferred Units (the "Preferred Units"), we have begun to reduce the number of Preferred Units outstanding through the issuance of common units. (For further discussion of the Preferred Units, see Cash Flows - Financing Activities section below.) These steps are expected to enhance our liquidity position and improve our ability to maintain compliance with Credit Agreement covenants in the event current market conditions persist. Additional steps may be taken in the future. The scheduled maturities of our long-term debt are August 2019 for our Credit Agreement and August 2022 for our 7.25% Senior Notes.

How We Evaluate Our Operations
 
Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, quarter-to-quarter, year-to-date, and year-to-year comparisons and

26



as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and for the fuel and other supplies consumed while providing our services. Other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with our level of activity.

Our labor costs consist primarily of wages and benefits for our field and fabrication personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three and six month periods ended June 30, 2017, is provided within the Results of Operations sections below.
 
Adjusted EBITDA. We view Adjusted EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (typically compared to the prior month, prior year period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and before certain non-cash charges, consisting of impairments, bad debt expense attributable to bankruptcy of customer, equity compensation, non-cash costs of compressors sold, fair value adjustments of our Preferred Units, administrative expenses under the Omnibus Agreement paid in equity using common units, and excluding acquisition and transaction costs and severance. This definition conforms closely to the definition used in the financial covenant provisions in our Credit Agreement. Adjusted EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:
assess our ability to generate available cash sufficient to make distributions to our common unitholders and General Partner;
evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
measure operating performance and return on capital as compared to our competitors;
determine our ability to incur and service debt and fund capital expenditures; and
monitor the financial performance measures used in our Credit Agreement financial covenants.