[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO______
COMMISSION FILE NUMBER 001-35195
Compressco Partners, L.P.
(Exact name of registrant as specified in its charter)
(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).
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):
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
As of November 6, 2012, there were 9,266,297 Common Units and 6,273,970 Subordinated Units outstanding.
References in this Quarterly Report to “Compressco Partners,” “we,” “our,” “us,” “the Partnership” or like terms refer to Compressco Partners, L.P. and its wholly owned subsidiaries. References to “Compressco Partners GP” or “our General Partner” refer to our general partner, Compressco Partners GP Inc. References to “TETRA” refer to TETRA Technologies, Inc. and TETRA’s controlled subsidiaries, other than us. References to “Compressco” refer to Compressco, Inc. and its controlled subsidiaries, other than us. References to “TETRA International” refer to TETRA International Incorporated and TETRA International’s controlled subsidiaries. References to “Compressco Partners Predecessor” or “our Predecessor” refer to the predecessor of Compressco Partners for accounting purposes. As further described elsewhere in this Quarterly Report, our Predecessor consists of (1) all of the historical assets, liabilities and operations of Compressco, combined with (2) certain assets, liabilities and operations of TETRA International conducting wellhead compression-based production enhancement services and related well monitoring and automated sand separation services in Mexico. References to the “Offering” refers to the Partnership’s initial public offering (the Offering) of 2,670,000 common units representing limited partner interests in the Partnership (common units) at $20.00 per common unit completed on June 20, 2011 pursuant to a Registration Statement on Form S-1, as amended (File No. 333-155260) (the Registration Statement), initially filed on November 10, 2008 by the Partnership with the Securities and Exchange Commission (the SEC) pursuant to the Securities Act of 1933, as amended (the Securities Act), including a prospectus regarding the Offering (the Prospectus) filed with the Commission on June 16, 2011 pursuant to Rule 424(b).
Item 1. Financial Statements.
Compressco Partners, L.P.
Consolidated Statements of Operations
(In Thousands, Except Unit and Per Unit Amounts)
See Notes to Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
See Notes to Consolidated Financial Statements
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
See Notes to Consolidated Financial Statements
Consolidated Statement of Partners’ Capital
See Notes to Consolidated Financial Statements
Consolidated Statements of Cash Flows
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
We are a provider of compression-based production enhancement services, including both conventional wellhead compression services and unconventional compression services, and, in certain markets, well monitoring and sand separation services. We provide services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe and the Asia-Pacific region.
For periods prior to June 20, 2011, the accompanying unaudited consolidated financial statements and related notes thereto represent the unaudited combined financial position, results of operations, cash flows, and changes in owner’s equity of our Predecessor. For the periods on and after June 20, 2011, the accompanying unaudited consolidated financial statements and related notes thereto represent our financial position, results of operations, cash flows, and changes in partners’ capital.
Our unaudited consolidated financial statements have been prepared in accordance with Regulation S-X, Article 3 “General instructions as to financial statements” and Staff Accounting Bulletin (SAB) Topic 1-B “Allocations of Expenses and Related Disclosure in Financial Statements of Subsidiaries, Divisions or Lesser Business Components of Another Entity.” Prior to the Offering, certain administrative expenses were incurred by TETRA on behalf of our Predecessor. The portion of TETRA’s cost of providing these services that could be directly or indirectly attributed to our operations were allocated to our Predecessor and included in the accompanying consolidated financial statements. Such allocations were calculated based on allocation factors, such as the estimated percentage of time and costs spent by TETRA to perform these administrative services on our Predecessor’s behalf, which our management believes is reasonable; however, these allocations may not be indicative of the cost of operations or the amount of allocations subsequent to the Offering. Subsequent to the Offering, our General Partner and other subsidiaries of TETRA provide goods and services to us pursuant to an Omnibus Agreement, as further described in Note C – “Related Party Transactions.”
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of September 30, 2012 and for the three and nine month periods ended September 30, 2012 and 2011 include all normal recurring adjustments that are, in the opinion of management, necessary to provide a fair statement of our results for the interim periods. Operating results for the periods ended September 30, 2012 and 2011 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2012.
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the SEC and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. These financial statements should be read in connection with the financial statements and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 21, 2012.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could be material.
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.
Prior to the Offering, all payments made on behalf of our Predecessor, such as direct costs, indirect costs, and capital expenditures, were made by TETRA and recorded as increases in net parent equity. All payments received on behalf of our Predecessor, including receipts for revenues earned or sales of assets, were received by TETRA and recorded as decreases in net parent equity. Consequently, cash balances for periods prior to the Offering are not a meaningful presentation of our liquidity position.
The fair values of our financial instruments, which may include cash, accounts receivable, and accounts payable, approximate their carrying amounts.
Inventories consist primarily of compressor unit components and parts and are stated at the lower of cost or market value. Cost is determined using the weighted average cost method.
Net Income Per Common and Subordinated Unit
The computations of net income per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units meet the definition of a participating security and, therefore, we are required to use the two-class method in the computation of earnings per unit. Basic net income per common and subordinated unit is determined by dividing net income allocated to the common units and subordinated units, respectively, after deducting the amount allocated to our General Partner (including distributions to our General Partner on its incentive distribution rights) by the weighted average number of outstanding common and subordinated units, respectively, during the period. Prior to the Offering, we were wholly owned by TETRA. Accordingly, net income per common unit is not presented for periods prior to the Offering.
When computing net income per common and subordinated unit under the two-class method in periods when distributions are greater than net income, the amount of the incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the incentive distribution rights, is allocated between our General Partner, common, and subordinated units based on how our partnership agreement allocates net earnings.
When net income is greater than distributions, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our General Partner based on actual distributions. When computing net income per common and subordinated unit, the amount of the assumed incentive distribution rights, if any, is deducted from net income and allocated to our General Partner for the period to which the calculation relates. The remaining amount of net income, after deducting the assumed incentive distribution rights, is allocated between our General Partner, common, and subordinated units based on how our partnership agreement allocates net income.
The following is a reconciliation of the weighted average number of common and subordinated units outstanding to the number of common and subordinated units used in the computations of net income per common and subordinated unit.
Average diluted units outstanding for the three and nine month periods ended September 30, 2012, excludes the impact of 102,559 and 110,366, respectively, of unvested restricted common units, as the inclusion of these unvested restricted units would be antidilutive.
Costs to remediate and monitor environmental matters are accrued when such liabilities are considered probable and a reasonable estimate of such costs is determinable.
Accumulated Other Comprehensive Income
Certain of our international operations maintain their accounting records in the local currencies that are their functional currencies. For these operations, the functional currency financial statements are converted to United States dollar equivalents, with the effect of the foreign currency translation adjustment reflected as a component of accumulated other comprehensive income. Accumulated other comprehensive income is included in partners’ capital in the accompanying unaudited consolidated balance sheets and consists of the cumulative currency translation adjustments associated with such international operations. Activity within accumulated other comprehensive income during the three and nine month periods ended September 30, 2012 and 2011, is as follows:
Allocation of Net Income
Our net income is allocated to partners’ capital accounts in accordance with the provisions of the partnership agreement.
On January 20, 2012, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended December 31, 2011, of $0.3875 per outstanding unit. This distribution equates to a distribution of $1.55 per outstanding unit on an annualized basis. This cash distribution was paid on February 15, 2012, to all unitholders of record as of the close of business on February 1, 2012.
On April 20, 2012, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2012, of $0.3875 per outstanding unit. This distribution equates to a distribution of $1.55 per outstanding unit on an annualized basis. This cash distribution was paid on May 15, 2012, to all unitholders of record as of the close of business on May 1, 2012.
On July 19, 2012, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended June 30, 2012, of $0.3875 per outstanding unit. This distribution equates to a distribution of $1.55 per outstanding unit on an annualized basis. This cash distribution was paid on August 15, 2012, to all unitholders of record as of the close of business on August 1, 2012.
Subsequent to September 30, 2012, on October 18, 2012, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended September 30, 2012, of $0.3975 per outstanding unit. This distribution equates to a distribution of $1.59 per outstanding unit on an annualized basis. This cash distribution will be paid on November 15, 2012, to all unitholders of record as of the close of business on November 1, 2012.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (FASB) published ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income” (ASU 2011-05), which has the objective of improving the comparability, consistency, and transparency of financial reporting and increasing the prominence of items reported in other comprehensive income. As part of ASU 2011-05, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity, among other amendments in this ASU. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and the amendments are applied retrospectively. In December 2011, the FASB deferred certain aspects of ASU 2011-05. The portion of this ASU that has been adopted has not had a significant impact on our financial statements.
In May 2011, the FASB published ASU 2011-04, “Fair Value Measurement (Topic 820) – Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” whereby the FASB and the International Accounting Standards Board (IASB) aligned their definitions of fair value such that their fair value measurement and disclosure requirements are the same (except for minor differences in wording and style). The Boards concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The amendments in this ASU are effective during interim and annual periods beginning after December 15, 2011, and are applied prospectively. The adoption of the accounting and disclosure requirements of this ASU did not have a significant impact on our financial statements.
On June 24, 2011, we entered into a credit agreement (the Credit Agreement) with JPMorgan Chase Bank, N.A. Under the Credit Agreement, we, along with certain of our subsidiaries, are named as borrowers, and all obligations under the Credit Agreement are guaranteed by all of our existing and future, direct and indirect, domestic subsidiaries. The Credit Agreement includes borrowing capacity of $20.0 million less $3.0 million that is required to be set aside as a reserve that cannot be borrowed. The credit facility is available for letters of credit (with a sublimit of $5.0 million) and includes an uncommitted $20.0 million expansion feature. The Credit Agreement may be used to fund our working capital needs, letters of credit, and for general partnership purposes, including capital expenditures and potential future acquisitions. So long as we are not in default, the Credit Agreement may also be used to fund quarterly distributions. Borrowings under the Credit Agreement are subject to the satisfaction of customary conditions, including the absence of a default. On July 5, 2012, we borrowed a total of $5.8 million pursuant to the Credit Agreement, which was used to fund ongoing capital expenditures related to the expansion of our Latin American fleet of compressors and other equipment and to fund ongoing upgrades to our domestic compressor fleet. As of September 30, 2012, $5.8 million was outstanding under the Credit Agreement. This borrowing bears interest at a rate equal to three month British Bankers Association LIBOR (adjusted to reflect any required bank reserves) plus a margin of 2.25% per annum (2.75% as of September 30, 2012).
Set forth below are descriptions of certain agreements we entered into with related parties in connection with the Offering. The descriptions are not complete and are qualified in their entirety by reference to the full text of the agreements, which are filed as exhibits to filings with the SEC.
On June 20, 2011, in connection with the completion of the Offering, we entered into an omnibus agreement (the Omnibus Agreement) with TETRA and our General Partner.
Under the terms of the Omnibus Agreement, our General Partner provides all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico and Argentina), and certain of TETRA’s Latin American-based subsidiaries provide personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provides certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. The services provided by the employees of our General Partner, TETRA, and TETRA’s subsidiaries under the Omnibus Agreement are required to be substantially similar in nature and quality to the services previously provided by these employees to our Predecessor in connection with their management and operation of the Predecessor’s business and no lower in quantity than is reasonably necessary to assist us in the management and operation of our business, even if greater in quantity than previously provided prior to the completion of the Offering. Pursuant to the Omnibus Agreement, we reimburse our General Partner and TETRA for services they provide to us.
Under the terms of the Omnibus Agreement, TETRA has agreed to indemnify us for three years after the completion of the Offering against certain potential environmental claims, losses, and expenses associated with the operation of our Predecessor prior to the completion of the Offering. TETRA’s maximum liability for this indemnification obligation is $5.0 million, and TETRA will not have any obligation under this indemnification until our aggregate losses exceed $250,000. TETRA will have no indemnification obligations with respect to environmental claims made as a result of new or modified environmental laws promulgated after the completion of the Offering. We have agreed to indemnify TETRA for environmental claims arising following the completion of the Offering regarding the business contributed to us.
Under the terms of the Omnibus Agreement, we or TETRA may, but neither are under any obligation to, perform for the other such production enhancement or other oilfield services on a subcontract basis as are needed or desired by the other, for such periods of time and in such amounts as may be mutually agreed upon by TETRA and our General Partner. Any such services are required to be performed on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner.
Under the terms of the Omnibus Agreement, we or TETRA may, but are under no obligation to, sell, lease or like-kind exchange to the other such production enhancement or other oilfield services equipment as is needed or desired to meet either of our production enhancement or other oilfield services obligations, in such amounts, upon such conditions and for such periods of time, if applicable, as may be mutually agreed upon by TETRA and our General Partner. Any such sales, leases, or like-kind exchanges are required to be on terms that are (i) approved by the conflicts committee of our General Partner’s board of directors, (ii) no less favorable to us than those generally being provided to or available from non-affiliated third parties, as determined by our General Partner, or (iii) fair and reasonable to us, taking into account the totality of the relationships between TETRA and us (including other transactions that may be particularly favorable or advantageous to us), as determined by our General Partner. In addition, unless otherwise approved by the conflicts committee of our General Partner’s board of directors, TETRA may purchase newly fabricated equipment from us at a negotiated price provided that such price may not be less than the sum of the total costs (other than any allocations of general and administrative expenses) incurred by us in fabricating such equipment plus a fixed margin percentage thereof, and TETRA may purchase from us previously fabricated equipment for a price that is not less than the sum of the net book value of such equipment plus a fixed margin percentage thereof.
TETRA has also agreed to indemnify us for liabilities related to: (1) certain defects in title to our assets as of the completion of the Offering and any failure to obtain, prior to the completion of the Offering, certain consents and permits necessary to own and operate such assets, to the extent we notify TETRA within three years after the completion of the Offering; and (2) tax liabilities attributable to the operation of our assets prior to the completion of the Offering.
The Omnibus Agreement (other than the indemnification obligations described above) will terminate upon the earlier to occur of (i) a change of control of our General Partner or TETRA or (ii) the third anniversary of the completion of this Offering, unless we, our General Partner, or TETRA decide to extend the term of the Omnibus Agreement.
Our operations are not subject to federal income tax other than the operations that are conducted through a taxable subsidiary. We will incur state and local income taxes in certain of the United States in which we conduct business. We incur income taxes and will be subject to withholding requirements related to certain of our operations in Mexico, Canada, and other foreign countries in which we operate. Furthermore, we will also incur Texas Margin Tax, which, in accordance with FASB ASC 740, is classified as an income tax for reporting purposes.
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 against us cannot be predicted with certainty, management does not expect that any of these legal proceedings would, if determined adversely against us, individually or in the aggregate, have a material adverse effect on our financial position, results of operations, or cash flows.
On October 18, 2012, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended September 30, 2012 of $0.3975 per unit. This cash distribution will be paid on November 15, 2012, to all unitholders of record as of the close of business on November 1, 2012.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K filed with the SEC on March 21, 2012. This discussion includes forward-looking statements that involve certain risks and uncertainties. For periods prior to June 20, 2011, the accompanying unaudited consolidated financial statements and related notes represent the unaudited combined results of operations and cash flows of our Predecessor, which consists of the assets, liabilities, and operations of Compressco, Inc. and its subsidiaries and certain assets, liabilities, and operations of certain other subsidiaries of TETRA conducting business primarily in Mexico (together, our Predecessor). For the periods on and after June 20, 2011, the accompanying unaudited consolidated financial statements and related notes thereto represent our financial position, results of operations, cash flows, and changes in partners’ capital.
We are a provider of compression-based production enhancement services, including both conventional wellhead compression services and unconventional compression services, and, in certain markets, well monitoring and sand separation services. We provide services to a broad base of natural gas and oil exploration and production companies operating throughout many of the onshore producing regions of the United States. Internationally, we have significant operations in Mexico and Canada and a growing presence in certain countries in South America, Eastern Europe, and the Asia-Pacific region. While our conventional services are primarily applied to mature gas wells with low formation pressures, they are also effectively utilized on newer gas wells that have experienced significant production declines and gas wells that are characterized by lower formation pressures. Our conventional applications include production enhancement services for dry gas wells and liquid loaded gas wells, and backside auto injection systems (BAIS). BAIS monitor tubing pressure to redirect gas flow into the casing
annulus as needed to help wells unload liquids. Our unconventional applications are used primarily in connection with oil and liquids production and include vapor recovery, which captures gas vapors from oil storage tanks, and casing gas systems, which enhance oil production by reducing down-hole pressure. Our services are performed by our highly trained staff of regional service supervisors, optimization specialists, and field mechanics. In addition, we design and manufacture most of the compressor units we use to provide our services, and, in certain markets, we sell our compressor units to customers.
The level of our production enhancement services operations is generally dependent upon the demand for, and prices of, natural gas in the locations in which we operate. However, despite significantly lower natural gas prices during the first nine months of 2012 compared to the first nine months of 2011, our overall production enhancement service revenues increased. This was primarily due to a continued increase in our Latin America and other international operations, as well as increased unconventional applications, primarily vapor recovery services. Nevertheless, any prolonged substantial reduction in natural gas prices could result in a decline in demand for our production enhancement services.
Overall, our total revenues increased during the three and nine month periods ended September 30, 2012, compared to the corresponding prior year periods. This increase reflects:
· increased compression and well monitoring services in Latin America;
· growth of the fleet within our other international operations; and
· improved overall utilization of the existing fleet, including for our unconventional applications.
The increased activity in Latin America has required investments in fixed assets and working capital and resulted in additional personnel and related administrative services provided through the Omnibus Services Agreement with TETRA. In addition, our ability to maintain the increased activity in Latin America is subject to potential volatility relating to our Mexico operations as addressed in more detail under “Liquidity and Capital Resources - Cash Flows.”
Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, year-to-date, and year-to-year comparisons, and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures if possible. The most significant portions of our operating expenses are the labor costs of our field personnel, repair and maintenance of our equipment, and the fuel and other supplies
consumed while providing our services. Other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with the level of activities performed during a specific period.
Our labor costs consist primarily of wages and benefits for our field personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three and nine month periods ended September 30, 2012, is provided within the results of operations sections below.
EBITDA. We view EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (compared to the prior month, prior year period, and to budget). We define EBITDA as earnings before interest, taxes, depreciation, and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:
· assess our ability to generate available cash sufficient to make distributions to our unitholders and General Partner;
· evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
· measure operating performance and return on capital as compared to our competitors; and
· determine our ability to incur and service debt and fund capital expenditures.
EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities, or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to EBITDA or similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. EBITDA should not be viewed as indicative of the actual amount we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.
The following table reconciles net income to EBITDA for the periods indicated:
The following table reconciles cash flow from operating activities to EBITDA:
Average Utilization Rate of our Compressor Units. We measure the average compressor unit utilization rate of our fleet of compressor units as the average number of compressor units used to provide services during a particular period, divided by the average number of compressor units in our fleet during such period. Our management primarily uses this metric to determine our future need for additional compressor units.
The following table sets forth our historical fleet size and average number of compressor units being utilized to provide our production enhancement services during the periods shown and our average utilization rates during those periods.
Net Increase in Compressor Fleet Size. We define the net increase in our compressor fleet size during a given period of time as the difference between the number of compressor units we placed into service, less the number of compressor units we removed from service. Management uses this metric to evaluate our operating performance and specifically the effectiveness of our marketing efforts. Additional information regarding changes in the size of our compressor fleet for the three and nine month periods ended September 30, 2012, is provided within the results of operations sections below.
Results of our operations after the June 20, 2011 completion date of the Offering may not be comparable to the historical results of operations of our Predecessor for the nine month period presented below, for the following reasons:
· A significant majority of our production enhancement services is being performed by our non-corporate subsidiary, Compressco Partners Operating, LLC, pursuant to contracts that our counsel has concluded generate qualifying income under Section 7704 of the Internal Revenue Code, or “qualifying income”. Our corporate subsidiary, Compressco Partners Sub, Inc., conducts substantially all of our operations that our counsel has not concluded generate qualifying income, and it pays U.S. federal income tax with respect to such operations. Going forward, we intend to conduct substantially all of our new domestic production enhancement service business pursuant to contracts that our counsel concludes will generate qualifying income, and such business will be conducted through Compressco Partners Operating, LLC. Our international compression services operations are conducted primarily through foreign subsidiaries that are subject to local country taxation.
· The contracts pursuant to which we provide production enhancement services that our counsel has concluded generate qualifying income generally require us to pay related ad valorem taxes and insurance expenses.
· The results of our Predecessor’s operations include an allocation of certain general and administrative expenses from TETRA. We are charged for certain general and administrative costs in accordance with the Omnibus Agreement we entered into with TETRA and our General Partner on June 20, 2011, and the amount of such charges reflected in our financial results could vary from the amounts of similar allocations included in our historical results of operations.
· The results of our Predecessor’s operations include interest expense associated with revolving credit indebtedness owed to an affiliate of TETRA. Under this indebtedness, which was refinanced in December 2010, our Predecessor could borrow up to $150 million at an interest rate of 7.5% per annum. The outstanding principal balance prior to the completion of the Offering was $145.1 million. We assumed approximately $32.2 million of this indebtedness (as partial consideration for the assets we acquired from TETRA in connection with the Offering), and this $32.2 million balance was repaid in full from the proceeds of the Offering. The balance of this intercompany indebtedness was repaid prior to the Offering.
· On June 24, 2011, we entered into a credit agreement, and borrowed $5.8 million under that credit agreement on July 5, 2012. As of September 30, 2012, we have availability under our revolving credit facility of $10.9 million, based upon a $16.7 million borrowing capacity and the $5.8 million outstanding balance. Borrowings bear interest at a rate equal to three month British Bankers Association LIBOR (adjusted to reflect any required bank reserves) plus a margin of 2.25% per annum (2.75% as of September 30, 2012).
· We incur additional general and administrative expenses of approximately $2.0 million per year as a result of being a publicly traded limited partnership, including costs associated with annual and quarterly reports to our unitholders, annual financial audits, Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, legal fees, director and executive officer liability insurance costs, and director compensation.
· Given our partnership structure and cash distribution policy, we distribute all of our “available cash” from “operating surplus” or “capital surplus” (as such terms are defined in our partnership agreement) at the end of each quarter.
We are not a restricted subsidiary of TETRA for purposes of TETRA’s credit facility with J.P. Morgan Chase Bank, N.A., as Administrative Agent, which we refer to as the “TETRA Credit Facility,” or under several series of notes that TETRA has issued pursuant to certain note purchase agreements in April 2006, April 2008, and October 2010, which we collectively refer to as the “TETRA Senior Notes.” As such, our ability to take certain actions, including incurring indebtedness, granting liens on our assets, and making acquisitions and capital expenditures, will not be restricted by the TETRA Credit Facility and the TETRA Senior Notes.
There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our Form 10-K for the year ended December 31, 2011. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. We periodically evaluate these estimates and judgments, including those related to potential impairments of long-lived assets (including goodwill), the useful life of long-lived assets, and the collectability of accounts receivable. Our estimates are based on historical experience and on future expectations that we believe are reasonable. The fair values of a large portion of our total assets and liabilities are measured using significant unobservable inputs. The combination of these factors forms the basis for judgments made about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.
The following data should be read in conjunction with the Consolidated Financial Statements and the associated Notes contained elsewhere in this document.