Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CSI Compressco LP, a Delaware limited partnership, is a provider of compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. We sell standard and custom-designed, engineered compressor packages 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 locations, including the countries of Mexico, Canada, and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services and 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 March 31, 2020, and for the three month periods ended March 31, 2020 and 2019, 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 month periods ended March 31, 2020 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2020.
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 U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2019 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 16, 2020.
Segments
Our General Partner has concluded that we operate in one business segment.
Significant Accounting Policies
Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K. There have been no significant changes in our accounting policies or the application thereof during the first quarter of 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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's presentation. The impact of such reclassifications was not significant to the prior year's overall presentation.
Cash Equivalents
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.
Financial Instruments
Financial instruments that subject us to concentrations of credit risk consist principally of trade accounts receivable, which are primarily due from customers of varying size engaged in oil and gas activities in the United States, Canada, Mexico, and Argentina. Our policy is to review the financial condition of potential customers before extending credit and periodically update their credit information. Payment terms are on a short-term basis. The risk of loss from the inability to collect trade receivables is heightened during prolonged periods of low oil and natural gas commodity prices.
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. Our risk management activities include the use of foreign currency forward purchase and sale derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected international operations.
We have a $3.0 million outstanding balance under our variable rate revolving credit facility as of March 31, 2020 and face market risk exposure related to changes in applicable interest rates.
Foreign Currencies
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 our international operations. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $1.7 million and $(1.0) million during the three month periods ended March 31, 2020 and March 31, 2019, respectively.
Inventories
Inventories consist primarily of compressor package parts and supplies and work in process and are stated at the lower of cost or net realizable 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.
Impairments and Other Charges
Impairments of long-lived assets, including identified intangible assets, are determined periodically, when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgment as to the future undiscounted operating cash flows to be generated from the relevant assets throughout their remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related assets, an impairment is recognized for the excess of the carrying value over fair value. Fair value of intangible assets is generally determined using the discounted present value of future cash flows using discount rates commensurate with the risks inherent with the specific assets. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less estimated selling costs. See Note 3 - "Impairments and Other Charges" for additional discussion of recorded impairments.
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.
When computing earnings per common unit under the two class method in periods when distributions are greater than earnings, the amount of the distribution is deducted from net income (loss) 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.
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 month periods ended March 31, 2020 and March 31, 2019, all unvested phantom units were excluded from the calculation of diluted common units because the impact was anti-dilutive. 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 calculation of diluted earnings per common unit for the three month period ended March 31, 2019 excludes the impact of the Preferred Units, as the inclusion of the impact from the conversion of the Preferred Units into common units would have been anti-dilutive. All remaining outstanding Preferred Units were redeemed for cash on August 8, 2019.
Revenue Recognition
Performance Obligations. Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers. We receive cash equal to the invoice price for most product sales and services and payment terms typically range from 30 to 60 days from the date we invoice our customer. With the exception of the initial terms of our compression services contracts of our medium- and high-horsepower compressor packages, our customer contracts are generally for terms of one year or less. Since the period between when we deliver products or services and when the customer pays for products or services is not to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.
Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer.
For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period.
Compression and related services. For compression services revenues recognized over time, our customer contracts typically provide agreed upon monthly service rates and we recognize service revenue based upon the number of days that services have been performed. The majority of our compression services are provided pursuant to contract terms ranging from one month to twenty-four months. Monthly agreements are generally cancellable with 30 days written notice by the customer.
Sales taxes, value added taxes, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We recognize the cost for freight and shipping costs when control over our products (i.e. delivery) has transferred to the customer as part of cost of product sales.
Use of Estimates. Our revenues do not include material amounts of variable consideration, as our revenues typically do not require significant estimates or judgments. The transaction price on a majority of our arrangements are fixed and product returns are immaterial. Additionally, our arrangements typically do not include multiple performance obligations that require estimates of the stand-alone purchase price for each performance obligation. Revenue on certain aftermarket service arrangements that include time as a component of the transaction price is not recognized until the performance obligation is complete.
Contract Assets and Liabilities. We consider contract assets to be trade accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain instances, particularly those requiring customer specific documentation prior to invoicing, our invoicing of the customer is delayed until certain documentation requirements are met. In those cases, we recognize a contract asset rather than a billed trade accounts receivable until we are able to invoice the customer. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.
We classify contract liabilities as unearned income in our consolidated balance sheets. Such unearned income typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract. New equipment sales orders generally take less than twelve months to build and deliver.
Bill-and-Hold Arrangements. We design compressor packages based on our customer’s specifications. In some cases, the customer will request us to hold the equipment, upon completion of the unit, until the job site is ready to receive the equipment. When this occurs, we along with the customer sign a bill-and-hold agreement, which outlines that the customer has title to the equipment, the equipment is ready for delivery, we cannot use the equipment or direct it to another customer, and we have a present right to payment. When those criteria have been met and the agreement is executed, we recognize the revenue on the equipment because control of the equipment has passed to our customer and our performance obligations are complete. Entering into these arrangements is something we have done as a courtesy for certain customers for many years. The equipment subject to the bill-and-hold agreements have generally been invoiced and paid for through progressive billings such that at the time the bill-and-hold agreement is executed, the majority of the contractual cash obligation of the customer has been received by us.
Fair Value Measurements
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements were utilized in the determination of the carrying value of our Series A Preferred Units (a Level 3 fair value measurement). 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 (a Level 2 fair value measurement). Refer to Note 9 - "Fair Value Measurements" for further discussion.
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 (a Level 3 fair value measurement) and for the impairment of long-lived assets (a Level 3 fair value measurement).
Distributions
On January 20, 2020, our General Partner declared a cash distribution attributable to the quarter ended December 31, 2019 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution was paid on February 14, 2020, to each of the holders of common units of record as of the close of business on February 1, 2020.
New Accounting Pronouncements
Standards adopted in 2020
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for us the first quarter of fiscal 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
Standards not yet adopted
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 on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairments will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. Updates at each reporting date after initial adoption will be recorded through selling, general, and
administrative expense. ASU 2016-13 is effective for us the first quarter of fiscal 2023. We continue to assess the potential effects of these changes to our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to intraperiod tax allocation, interim period income tax calculation methodology, and the recognition of deferred tax liabilities for outside basis differences. It also simplifies certain aspects of accounting for franchise taxes and clarifies the accounting for transactions that results in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for us the first quarter of fiscal 2021. We continue to assess the potential effects of these changes to our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the impacts of the provisions of ASU 2020-04 on our consolidated financial statements.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
As of March 31, 2020, we had $56.7 million of remaining contractual performance obligations for compression services. As a practical expedient, this amount does not include revenue for compression service contracts whose original expected duration is less than twelve months and does not consider the effects of the time value of money. Expected revenue to be recognized in the future as of March 31, 2020 for completion of performance obligations of compression service contracts are as follows:
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2020
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2021
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2022
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2023
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2024
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Total
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(In Thousands)
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Compression service contracts remaining performance obligations
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$
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38,720
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$
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15,941
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$
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2,026
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$
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54
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$
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—
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$
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56,741
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Our contract asset balances included in trade accounts receivable in our consolidated balance sheets, primarily associated with customer documentation requirements prior to invoicing, were $8.0 million and $9.6 million as of March 31, 2020 and December 31, 2019, respectively.
Collections associated with progressive billings to customers for the construction of compression equipment is included in unearned income in the consolidated balance sheets. The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:
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Three Months Ended
March 31,
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2020
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2019
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(In Thousands)
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Unearned income, beginning of period
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$
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9,505
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$
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24,898
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Additional unearned income
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23,545
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48,955
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Revenue recognized
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(5,624
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)
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(24,557
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)
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Unearned income, end of period
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$
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27,426
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$
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49,296
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During the three months ended March 31, 2020, we recognized in equipment sales revenue $2.7 million from unearned income that was deferred as of December 31, 2019. During the three months ended March 31, 2019, we recognized in equipment sales revenue of $10.5 million from unearned income that was deferred as of December 31, 2018.
As of March 31, 2020 and March 31, 2019, contract costs were immaterial.
Disaggregated revenue from contracts with customers by geography is as follows:
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Three Months Ended
March 31,
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2020
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2019
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(In Thousands)
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Compression and related services
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U.S.
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$
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57,275
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$
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54,018
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International
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8,490
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9,042
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65,765
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63,060
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Aftermarket services
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U.S.
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17,285
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13,332
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International
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685
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282
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17,970
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13,614
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Equipment sales
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U.S.
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6,038
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26,166
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International
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506
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596
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6,544
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26,762
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Total Revenue
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U.S.
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80,598
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93,516
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International
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9,681
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9,920
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$
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90,279
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$
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103,436
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NOTE 3 – IMPAIRMENTS AND OTHER CHARGES
Impairments of Long-Lived Assets
During the first quarter of 2020, the COVID-19 pandemic and decline in oil prices had a significant impact on our customers and industry. We started to see our customers revise their capital budgets downwards and adjust their operations accordingly, which led to a decline in orders for new compression equipment to be fabricated and sold to third parties. We concluded that these events were indicators of impairment for all our asset groups. As a result, we performed a recoverability analysis on all our long-lived asset groups and we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million during the first quarter of 2020 related to these assets. Fair value was estimated based on a market approach. Our recoverability analysis for all our compression services asset groups indicated no impairments as of March 31, 2020. Given the dynamic nature of the events beginning in the first quarter of 2020, we are not able to reasonably estimate how long our operations will be impacted and the full extent these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments.
NOTE 4 – INVENTORIES
Components of inventories as of March 31, 2020 and December 31, 2019, are as follows:
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March 31, 2020
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December 31, 2019
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(In Thousands)
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Parts and supplies
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$
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33,388
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$
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42,814
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Work in progress
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29,900
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13,223
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Total inventories
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$
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63,288
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$
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56,037
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Inventories consist primarily of compressor package parts and supplies. Work in progress inventories consist primarily of new compressor packages located at our manufacturing facility in Midland, Texas.
NOTE 5 – LEASES
We have operating leases for some of our office space, warehouse space, operating locations, and machinery and equipment. Our leases have remaining lease terms ranging from 1 to 10 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. Our leases generally require us to pay all maintenance and insurance costs. During the fourth quarter of 2019, we entered into a lease agreement commitment for 14 compressor packages. The leases are for an initial term of seven years and commence upon the completion of the fabrication of the compressor packages. During the first quarter, we took delivery of eight compressor packages. We anticipate taking delivery of the remaining six compressor packages when the compression units are completed, which is expected to occur during the second quarter of 2020. We have no other lease agreement commitments that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In November 2019, we entered into a sale and leaseback transaction with a third-party lessor whereby we received $9.8 million of proceeds from the sale of certain of our compression equipment in service and entered into an associated lease of the same equipment having an initial lease term of seven years.
Lease costs are included in either cost of revenues or selling, general, and administrative expense depending on the use of the underlying asset. Total lease expense (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less), was $3.2 million for the three month period ended March 31, 2020, of which, $0.9 million related to short-term leases. Variable rent expense was not material.
Operating lease supplemental cash flow information:
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Three Months Ended March 31,
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2020
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2019
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(In Thousands)
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Cash paid for amounts included in the measurement of lease liabilities:
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Operating cash flows - operating leases
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$
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2,216
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$
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1,174
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Right-of-use assets obtained in exchange for lease obligations:
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Operating leases
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$
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7,626
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$
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2,487
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Supplemental balance sheet information:
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March 31, 2020
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December 31, 2019
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(In Thousands)
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Operating leases:
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Operating right-of-use asset
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$
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27,374
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$
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21,006
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Accrued liabilities and other
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$
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7,667
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$
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6,706
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Operating lease liabilities
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18,903
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13,822
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Total operating lease liabilities
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$
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26,570
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$
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20,528
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Additional operating lease information:
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March 31, 2020
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December 31, 2019
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Weighted average remaining lease term:
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Operating leases
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4.90 Years
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4.51 Years
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Weighted average discount rate:
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Operating leases
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9.05
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%
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8.73
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%
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Future minimum lease payments by year and in the aggregate, under non-cancelable operating leases with terms in excess of one year, consist of the following at March 31, 2020:
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Operating Leases
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(In Thousands)
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Remainder of 2019
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$
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7,160
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2020
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7,622
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2021
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5,499
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2022
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3,295
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2023
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3,257
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Thereafter
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6,503
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Total lease payments
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33,336
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Less imputed interest
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(6,766
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)
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Total lease liabilities
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$
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26,570
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NOTE 6 – LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
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March 31, 2020
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December 31, 2019
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Scheduled Maturity
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(In Thousands)
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Credit Agreement (presented net of the unamortized deferred financing costs of $0.8 million as of March 31, 2020 and $0.9 million as of December 31, 2019)
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June 2023
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$
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2,184
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$
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2,622
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7.25% Senior Notes (presented net of the unamortized discount of $1.5 million as of March 31, 2020 and $1.7 million as of December 31, 2019 and unamortized deferred financing costs of $2.6 million as of March 31, 2020 and $2.8 million as of December 31, 2019)
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August 2022
|
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291,863
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291,444
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7.50% Senior Secured Notes (presented net of the unamortized deferred financing costs of $5.6 million as of March 31, 2020 and $5.8 million as of December 31, 2019)
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April 2025
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344,382
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344,172
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638,429
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638,238
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Less current portion
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—
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—
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Total long-term debt
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$
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638,429
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$
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638,238
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There was a $3.0 million balance outstanding and $3.0 million in letters of credit issued under the Credit Agreement as of March 31, 2020. As of March 31, 2020, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of $20.4 million.
Our credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. We are in compliance with all covenants of our credit and senior note agreements as of March 31, 2020.
Refer to Note 7 - "Related Party Transactions," for a discussion of our amounts payable to affiliates and long-term affiliate payable to TETRA.
NOTE 7 – RELATED PARTY TRANSACTIONS
Omnibus Agreement
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, 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 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.
TETRA and General Partner Ownership
As of March 31, 2020, TETRA's ownership interest in us was approximately 34% of the outstanding common units and an approximate 1.4% general partner interest, through which it holds incentive distribution rights.
Other Sources of Financing
In February 2019, we entered into a transaction with TETRA whereby TETRA agreed to fund the construction of and purchase from us up to $15.0 million of new compression services equipment and to subsequently lease the equipment back to us in exchange for a monthly rental fee. As of March 31, 2020, pursuant to this arrangement, $14.8 million has been funded by TETRA for the construction of new compression services equipment and all such equipment was completed and deployed under this agreement. For accounting purposes, the inclusion of an option that allows us to repurchase the equipment at a fixed price during certain periods of the agreement caused the transaction to be accounted for as a financing transaction, as opposed to a sale-leaseback, resulting in the funded amount being recorded as a financing obligation. Accordingly, the compression services equipment is included in property, plant, and equipment and the corresponding financing obligations are included in amounts payable to affiliates and long-term affiliate payable in our consolidated balance sheet. As of March 31, 2020, the financing obligation was $14.6 million. Imputed interest expense recognized for the three month period ended March 31, 2020 was $0.6 million.
NOTE 8 – 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 9 – 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 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. 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 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. We enter into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of March 31, 2020, we had the following foreign currency derivative contract outstanding relating to a portion of our foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Dollar Notional Amount
|
|
Traded Exchange Rate
|
|
Settlement Date
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Forward sale Mexican peso
|
|
$
|
4,974
|
|
|
24.40
|
|
4/21/2020
|
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 contracts are based on quoted market values (a Level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of March 31, 2020 and December 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative contracts
|
|
Balance Sheet
|
|
Fair Value at
|
|
|
Location
|
|
March 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
(In Thousands)
|
|
Forward sale contracts
|
|
Current liabilities
|
|
(155
|
)
|
|
(53
|
)
|
|
Net asset (liability)
|
|
|
|
$
|
(155
|
)
|
|
$
|
(53
|
)
|
None of our foreign currency derivative instruments 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 month periods ended March 31, 2020 and March 31, 2019, we recognized $(1.4) million and $0.1 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 first quarter of 2020, we recorded impairments of approximately $5.4 million, reflecting the decreased fair value for certain assets. The fair values used in these impairment calculations were estimated based on a market approach, which is based on significant unobservable inputs (Level 3) in accordance with the fair value hierarchy.
Recurring and nonrecurring fair value measurements by valuation hierarchy as of March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Description
|
Total as of
March 31, 2020
|
|
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)
|
|
Midland manufacturing facility and related assets
|
$
|
19,646
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,646
|
|
|
Liability for foreign currency derivative contracts
|
(155
|
)
|
|
—
|
|
|
(155
|
)
|
|
—
|
|
|
|
$
|
19,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019
|
|
|
|
|
|
(In Thousands)
|
|
Liability for foreign currency derivative contracts
|
(53
|
)
|
|
—
|
|
|
(53
|
)
|
|
—
|
|
|
|
$
|
(53
|
)
|
|
|
|
|
|
|
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings, and variable-rate long-term debt pursuant to our Credit Agreement approximate their carrying amounts. The fair values of our publicly traded long-term 7.25% Senior Notes at March 31, 2020 and December 31, 2019 were approximately $148.0 million and $266.0 million, respectively. Those fair values compare to aggregate principal amounts of such notes at March 31, 2020 and December 31, 2019 of $295.9 million. The fair values of our long-term 7.50% Senior Secured Notes at March 31, 2020 and December 31, 2019 were approximately $239.8 million and $344.8 million, respectively. These fair values compare to an aggregate principal amount of such notes at March 31, 2020 and December 31, 2019 of $350.0 million. We based the fair values of our 7.25% Senior Notes and our 7.50% Senior Secured Notes as of March 31, 2020 on recent trades for these notes.
NOTE 10 – 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.
Our effective tax rate for the three month period ended March 31, 2020, was negative 1.6% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. 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.
NOTE 11 – SUBSEQUENT EVENTS
In April 2020, we announced our plan to shutdown our Midland manufacturing facility as a result of a decline in orders for new equipment from third parties and the expectation that no incremental equipment will be fabricated for our fleet in the second half of 2020. As a result of the decision to close this facility and solely utilize third party fabricators in the future for our own service fleet, we are pursuing the sale of the Midland facility in an effort to further improve our balance sheet, and have entered into an agreement with a third party purchaser, which is subject to numerous conditions. While we will continue to operate the facility until the completion and sale of our remaining backlog, we no longer intend to fabricate new compressor packages for sales to third parties. We have and will continue to evaluate the sale of other non-core assets, including our low-horsepower compression fleet. We can provide no assurance that we will consummate a sale of the Midland manufacturing facility, our low-horsepower compression fleet, or any other non-core asset.
On April 20, 2020, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit, on an annualized basis. This distribution will be paid on May 15, 2020 to each of the holders of common units of record as of the close of business on May 1, 2020.
On April 17, 2020, we announced the commencement of an offer (the "Exchange Offer") to certain eligible noteholders ("Eligible Holders") to exchange any and all of their outstanding 7.25% Senior Notes due 2022 (the “Unsecured Notes”) for newly issued 7.50% Senior Secured First Lien Notes due 2025 and 7.25% Senior Secured
Second Lien Notes due 2027. In conjunction with the offer, consents are being solicited from Eligible Holders to eliminate substantially all restrictive covenants and certain of the default provisions in the indenture governing the Unsecured Notes.
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, 2019 filed with the SEC on March 16, 2020 ("2019 Annual Report"). This discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview
We provide compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. Our compression and related services business includes a fleet of more than 5,200 compressor packages providing approximately 1.2 million in aggregate horsepower, utilizing a full spectrum of low-, medium-, and high-horsepower engines. Our equipment sales business includes the design, and sale of both standard and custom-designed, engineered compressor packages. Our aftermarket business provides compressor package reconfiguration and maintenance services, as well as the sale of compressor package parts and components manufactured by third-party suppliers. Our customers operate throughout many of the onshore producing regions of the United States, as well as in a number of foreign locations, including the countries of Mexico, Canada and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services and sell to customers. Going forward, we plan to have such compressor packages fabricated through one or more third party packagers.
Our operations are significantly dependent upon the demand for, and production of, oil and the associated natural gas from unconventional oil and natural gas production in the domestic and international markets in which we operate. During the first part of the first quarter, we continued to see increased demand for our products and services, with the exception of a declining backlog for new unit sales. However, during the latter part of the quarter, as the macroeconomic uncertainty resulting from declining oil and natural gas prices and the COVID-19 pandemic continued and the Organization of Petroleum Exporting Countries and other oil producing nations (collectively, “OPEC+”) price war events, we started to see our customers revise their capital budgets substantially downward and adjust their operations accordingly which we believe will continue for an indefinite period. In response to both market uncertainty and the lower levels of spending by our customers, we withdrew our previously issued guidance for the full year 2020 and lowered our projected growth and maintenance capital expenditures. In addition, given the decline in orders for new compression equipment to be fabricated and sold to third parties, we announced our plan to shut down our Midland manufacturing facility in early April. We have retained our new equipment design and engineering personnel and plan to outsource the fabrication of new service fleet equipment but no longer plan to fabricate new compressor packages for sales to third parties. Due to excess compression equipment in the industry, we have started to and expect to continue to see lower utilization of our compression fleet, requests from our customers for stand-by service rates, and service pricing pressures as customers try to reduce their costs. We expect a significant decline in activity, particularly in North America, coupled with downward pricing pressure and corresponding reductions in revenue and profitability for the remainder of 2020.
The COVID-19 pandemic and decline in oil prices had a significant impact on our customers and industry. We concluded that these events were indicators of impairment for all our asset groups. As a result, we performed a recoverability analysis on all our long-lived asset groups and we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million during the first quarter of 2020 related to these assets. Our recoverability analysis for all our compression services asset groups indicated no impairments as of March 31, 2020. Given the dynamic nature of the events beginning in the first quarter of 2020, we are not able to reasonably estimate how long our operations will be impacted and the full extent these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments.
We are continuing to monitor the 2020 spending plans of our customers and are aggressively managing our working capital and capital expenditures in order to maximize our liquidity in the current oil and gas industry environment. As obtaining additional financing is challenging in the current debt and equity markets, capital expenditures are expected to be primarily funded by available cash and cash expected to be provided by operating
activities. We plan to manage our flexible cost structure to proactively respond to changing market conditions and take actions necessary to manage through these conditions, some of which could result in impairments or restructuring charges in future periods.
Cost reductions we have recently implemented or are in the process of implementing include reductions in 2020 capital expenditures, workforce reductions, salary reductions, a reduction in the cash retainers for the directors of our general partner, the suspension of 401(k) matching contributions for our employees, targeted reduction in SG&A expenses, and negotiated reductions in expenditures with many of our suppliers. Absent a meaningful recovery in oil and natural gas prices and a material improvement in demand for oil and gas, we expect our operations to continue to be negatively impacted, particularly in our onshore producing regions of the United States. We are not able to predict how long market disruptions resulting from the COVID-19 pandemic and oversupply of oil and gas will continue, or what impact they will ultimately have on our business. Despite that, we will continue to maintain our commitment to safety and service quality for our customers.
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 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. The costs of 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 month period ended March 31, 2020, 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, including impairments, bad debt expense attributable to bankruptcy of customer, equity compensation, non-cash costs of compressors sold, fair value adjustments of our Preferred Units that were issued in late 2016 and redeemed for cash on August 8, 2019, gain on extinguishment of debt, write-off of unamortized financing costs, and excluding Preferred Units redemption premium, severance and other non-recurring or unusual expenses or charges. Adjusted EBITDA is used as a supplemental financial measure by our management 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 those of our competitors; and
|
|
|
|
|
•
|
determine our ability to incur and service debt and fund capital expenditures.
|
The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
|
(In Thousands)
|
|
Net loss
|
$
|
(13,630
|
)
|
|
$
|
(12,456
|
)
|
|
Provision (benefit) for income taxes
|
212
|
|
|
4,373
|
|
|
Depreciation and amortization
|
19,908
|
|
|
18,532
|
|
|
Impairments and other charges
|
5,371
|
|
|
—
|
|
|
Interest expense, net
|
13,169
|
|
|
13,299
|
|
|
Equity compensation
|
324
|
|
|
365
|
|
|
Series A Preferred redemption premium
|
—
|
|
|
448
|
|
|
Series A Preferred fair value adjustments
|
—
|
|
|
1,304
|
|
|
Severance
|
272
|
|
|
—
|
|
|
Non-cash cost of compressors sold
|
1,809
|
|
|
940
|
|
|
Other
|
327
|
|
|
—
|
|
|
Adjusted EBITDA
|
$
|
27,762
|
|
|
$
|
26,805
|
|
The following table reconciles cash flow from operating activities to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
|
(In Thousands)
|
|
Cash flow from operating activities
|
$
|
13,357
|
|
|
$
|
31,632
|
|
|
Changes in current assets and current liabilities
|
(562
|
)
|
|
(20,604
|
)
|
|
Deferred income taxes
|
(8
|
)
|
|
(1,466
|
)
|
|
Other non-cash charges
|
(814
|
)
|
|
(684
|
)
|
|
Interest expense, net
|
13,169
|
|
|
13,299
|
|
|
Series A Preferred accrued paid in kind distributions
|
—
|
|
|
(685
|
)
|
|
Provision for income taxes
|
212
|
|
|
4,373
|
|
|
Severance
|
272
|
|
|
—
|
|
|
Non-cash cost of compressors sold
|
1,809
|
|
|
940
|
|
|
Other
|
327
|
|
|
—
|
|
|
Adjusted EBITDA
|
$
|
27,762
|
|
|
$
|
26,805
|
|
Free Cash Flow. We define Free Cash Flow as cash from operations less capital expenditures, net of sales proceeds. Management primarily uses this metric to assess our ability to retire debt, evaluate our capacity to further invest and grow, and measure our performance as compared to our peers. The following table reconciles cash provided by operations, net, to Free Cash Flow for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2020
|
|
2019
|
|
|
(In Thousands)
|
|
Cash from operations
|
$
|
13,357
|
|
|
$
|
31,632
|
|
|
Capital expenditures, net of sales proceeds
|
(6,483
|
)
|
|
(23,152
|
)
|
|
Free cash flow
|
$
|
6,874
|
|
|
$
|
8,480
|
|
Adjusted EBITDA and Free Cash Flow are financial measures that are not in accordance with U.S. GAAP and should not be considered an alternative to net income, operating income, cash from operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. These measures may not be
comparable to similarly titled financial metrics of other entities, as other entities may not calculate Adjusted EBITDA or Free Cash Flow in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA and Free Cash Flow as analytical tools by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. Adjusted EBITDA and Free Cash Flow should not be viewed as indicative of the actual amount of cash 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.
Horsepower Utilization Rate of our Compressor Packages. We measure the horsepower utilization rate of our fleet of compressor packages as the amount of horsepower of compressor packages used to provide services as of a particular date, divided by the amount of horsepower of compressor packages in our services fleet as of such date. Management primarily uses this metric to determine our future need for additional compressor packages for our service fleet and to measure marketing effectiveness.
The following table sets forth the total horsepower in our compression fleet, our total horsepower in service, and our horsepower utilization rate as of the dates shown.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
|
Horsepower
|
|
|
|
|
Total horsepower in fleet
|
1,195,186
|
|
|
1,167,164
|
|
|
Total horsepower in service
|
1,033,256
|
|
|
1,017,452
|
|
|
Total horsepower utilization rate
|
86.5
|
%
|
|
87.2
|
%
|
The following table sets forth our horsepower utilization rates by each horsepower class of our compression fleet as of the dates shown.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
2020
|
|
2019
|
|
Horsepower utilization rate by class
|
|
|
|
|
Low-horsepower (0-100)
|
66.4
|
%
|
|
65.7
|
%
|
|
Medium-horsepower (101-1,000)
|
83.6
|
%
|
|
85.4
|
%
|
|
High-horsepower (1,001 and over)
|
93.5
|
%
|
|
95.6
|
%
|
Through new equipment fabrication, we added 22,160 of horsepower to our fleet during the three months ended March 31, 2020.
Net Increases/Decreases in Compression Fleet Horsepower. We measure the net increase (or decrease) in our compression fleet horsepower during a given period by taking the difference between the aggregate horsepower of compressor packages added to the fleet during the period, less the aggregate horsepower of compressor packages removed from the fleet during the period. We measure the net increase (or decrease) in our compression fleet horsepower in service during a given period by taking the difference between the aggregate horsepower of compressor packages placed into service during the period, less the aggregate horsepower of compressor packages removed from service during the period.
New Equipment Sales Backlog. Our new equipment sales business includes the engineering, design, fabrication, assembly, project management, and sale of both standard and custom-designed compressor packages fabricated at authorized packaging facilities in Texas. We recently announced our plan to shutdown our Midland manufacturing facility as a result of a decline in orders for new equipment from third parties, in addition to our expectation that no incremental equipment will be fabricated for our fleet in the second half of 2020. We have entered into an agreement for the sale of the Midland facility, which is subject to numerous conditions. Going forward, we plan to continue to design and engineer compressor packages for our own service fleet while outsourcing the fabrication of our service fleet to third parties with whom we have existing business relationships. New equipment sales backlog was $30.3 million as of March 31, 2020 compared to $35.5 million as of December 31, 2019. Changes in our new equipment sales backlog are a function of additional customer orders less completed orders that result in equipment sales revenues for the period. During the three months ended March 31,
2020, we received cumulative orders of $2.0 million for new equipment. All our March 31, 2020 new equipment sales backlog is expected to be recognized during the second quarter of 2020. Our new equipment sales backlog consists of firm customer orders for which a purchase or work order has been received, satisfactory credit or financing arrangements exist, and target delivery dates have been established based on customer requirements. Following sale of the new equipment orders in our current backlog, we do not plan to design, engineer and sell compressor packages to third parties and the new equipment sales business will not constitute a material part of our business.
Critical Accounting Policies and Estimates
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 2019 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. 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.
Results of Operations
Three months ended March 31, 2020 compared to three months ended March 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
Period-to-Period Change
|
|
Percentage of Total Revenues
|
Period-to-Period Change
|
|
Consolidated Results of Operations
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and related services
|
$
|
65,765
|
|
|
$
|
63,060
|
|
|
$
|
2,705
|
|
|
72.8
|
%
|
|
61.0
|
%
|
|
4.3
|
%
|
|
Aftermarket services
|
17,970
|
|
|
13,614
|
|
|
4,356
|
|
|
19.9
|
%
|
|
13.2
|
%
|
|
32.0
|
%
|
|
Equipment sales
|
6,544
|
|
|
26,762
|
|
|
(20,218
|
)
|
|
7.2
|
%
|
|
25.9
|
%
|
|
(75.5
|
)%
|
|
Total revenues
|
90,280
|
|
|
103,436
|
|
|
(13,157
|
)
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(12.7
|
)%
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and related services
|
31,608
|
|
|
32,621
|
|
|
(1,013
|
)
|
|
35.0
|
%
|
|
31.5
|
%
|
|
(3.1
|
)%
|
|
Cost of aftermarket services
|
16,245
|
|
|
11,260
|
|
|
4,985
|
|
|
18.0
|
%
|
|
10.9
|
%
|
|
44.3
|
%
|
|
Cost of equipment sales
|
6,700
|
|
|
24,219
|
|
|
(17,519
|
)
|
|
7.4
|
%
|
|
23.4
|
%
|
|
(72.3
|
)%
|
|
Total cost of revenues
|
54,553
|
|
|
68,100
|
|
|
(13,547
|
)
|
|
60.4
|
%
|
|
65.8
|
%
|
|
(19.9
|
)%
|
|
Depreciation and amortization
|
19,908
|
|
|
18,532
|
|
|
1,376
|
|
|
22.1
|
%
|
|
17.9
|
%
|
|
7.4
|
%
|
|
Impairments and other charges
|
5,371
|
|
|
—
|
|
|
5,371
|
|
|
5.9
|
%
|
|
—
|
%
|
|
100.0
|
%
|
|
Selling, general, and administrative expense
|
10,256
|
|
|
10,665
|
|
|
(409
|
)
|
|
11.4
|
%
|
|
10.3
|
%
|
|
(3.8
|
)%
|
|
Interest expense, net
|
13,169
|
|
|
13,299
|
|
|
(130
|
)
|
|
14.6
|
%
|
|
12.9
|
%
|
|
(1.0
|
)%
|
|
Series A Preferred fair value adjustment (income) expense
|
—
|
|
|
1,304
|
|
|
(1,304
|
)
|
|
—
|
%
|
|
1.3
|
%
|
|
(100.0
|
)%
|
|
Other (income) expense, net
|
440
|
|
|
(381
|
)
|
|
821
|
|
|
0.5
|
%
|
|
(0.4
|
)%
|
|
(215.5
|
)%
|
|
Loss before income taxes
|
(13,418
|
)
|
|
(8,083
|
)
|
|
(5,335
|
)
|
|
(14.9
|
)%
|
|
(7.8
|
)%
|
|
66.0
|
%
|
|
Provision for income taxes
|
212
|
|
|
4,373
|
|
|
(4,161
|
)
|
|
0.2
|
%
|
|
4.2
|
%
|
|
(95.2
|
)%
|
|
Net loss
|
$
|
(13,630
|
)
|
|
$
|
(12,456
|
)
|
|
$
|
(1,174
|
)
|
|
(15.1
|
)%
|
|
(12.0
|
)%
|
|
9.4
|
%
|
Revenues
Compression and related services revenues increased by $2.7 million, or 4.3%, in the current year period compared to the prior year period due to increases in our high-horsepower fleet during 2019 and resulting increased horsepower in service during the current year period compared to the prior year period and pricing secured in 2019 that was realized during the first quarter of 2020.
Aftermarket services revenues increased $4.4 million, or 32.0%, during the current year period compared to the prior year period resulting from increased customer demand for aftermarket services and parts for maintenance and overhauls of customer-owned compressor equipment.
Equipment sales revenues decreased $20.2 million, or 75.5%, during the current year period compared to the prior year period, primarily due to a decrease in deliveries of new compressors compared to the prior year. Overall, new unit sale booking levels declined in first quarter of 2020 as customers slowed down spending on infrastructure projects. The level of revenues from equipment sales is typically volatile and difficult to forecast, as these revenues are tied to specific customer projects that vary in scope, design, complexity, and customer needs.
Cost of revenues
Cost of compression and related services decreased, compared to the prior year period, even with the increase in corresponding revenues resulting from added horsepower and overall increased utilization of our compression fleet. Cost of compression and related services as a percentage of compression and related services revenues decreased from 51.7% during the prior year period to 48.1% during the current year period due to improved customer contract pricing, higher margins on new compressor equipment, labor efficiencies, and reduced maintenance costs.
Cost of aftermarket services increased compared to the prior year period consistent with the increased activity and lower margins due to a highly competitive landscape.
Cost of equipment sales decreased in accordance with the decrease in associated revenues. Cost of equipment sales as a percentage of equipment sales revenues increased primarily due to pricing on equipment sales orders placed in 2019.
Depreciation and amortization
Depreciation and amortization expense primarily consists of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased compared to the prior year period due to increases in the compression fleet.
Impairments and other charges
During the three month period ended March 31, 2020, we recorded an impairment of $5.4 million associated with our Midland manufacturing facility and related assets.
Selling, general, and administrative expense
Selling, general, and administrative expenses decreased during the current year period compared to the prior year period largely due to decreased employee expenses of $0.6 million and decreased other general expenses of $0.3 million. These decreases were offset by increased professional services of $0.4 million and increased bad debt expense of $0.2 million. Despite decreased expenses, as a percentage of revenues, selling, general, and administrative expense increased due to lower revenues compared to the prior year period.
Series A Preferred fair value adjustment
The Series A Preferred Units fair value adjustment was $1.3 million charged to earnings during the prior year period. All the remaining outstanding Preferred Units were redeemed for cash on August 8, 2019.
Other (income) expense, net
Other (income) expense, net, was $0.4 million of expense during the current year period, compared to $0.4 million of income during the prior year period. The change from income to expense is primarily due to $1.2 million of increased foreign currency losses offset by decreased expense of $0.4 million associated with the redemption premium incurred during the prior year period in connection with the redemption of Preferred Units for cash.
Provision for 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.
Our effective tax rate for the three month period ended March 31, 2020, was negative 1.6% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. 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.
Liquidity and Capital Resources
Our primary cash requirements are for distributions, working capital requirements, debt service payments, normal operating expenses, and capital expenditures. Our potential sources of funds are our existing cash balances, cash generated from our operations, and long-term and short-term borrowings, which we believe will be sufficient to meet our working capital and reduced growth capital requirements during 2020. We are monitoring the spending plans of our customers due to the macroeconomic uncertainties resulting from the recent substantial declines in prices of oil and natural gas and the ongoing COVID-19 pandemic. These uncertainties have negatively impacted our customers' demands for our products and services, which has negatively impacted our businesses. If oil and gas prices remain at current levels or decrease further, our businesses could be further negatively impacted. In addition, current conditions in the market for debt and equity securities in the energy sector have increased the difficulty of obtaining equity and debt financing and we expect this to continue in the near future. Despite these challenges, we remain committed to a long-term growth strategy. Our near-term focus is to maintain our compression fleet, while continuing to preserve and enhance liquidity through strategic operating and financial measures. We periodically evaluate engaging in strategic transactions and may consider divesting non-core assets where our evaluation suggests such transactions are in the best interests of our business, such as the agreement we have entered into with a third party purchaser for the sale of the Midland facility, which is subject to numerous conditions. We are subject to business and operational risks that could materially adversely affect our cash flows and together with risks associated with current debt and equity market conditions, our ability or desire to issue such securities. Please read Part I, Item 1A "Risk Factors" included in our 2019 Annual Report.
We have adjusted our expected capital expenditures in 2020 to range from $28.0 million to $35.0 million. These capital expenditures include approximately $20.0 million to $22.0 million of maintenance capital expenditures and approximately $5.0 million to $8.0 million of capital expenditures primarily associated with the expansion of our compression services fleet, and $3.0 million to $5.0 million of capital expenditures related to investments in technology, primarily software and systems. The foregoing estimates are based on assumptions regarding the ongoing impact of the decline of oil and gas prices and the COVID-19 pandemic. While we will continue to monitor developments in the oil and gas industry, as well as the impact of the COVID-19 pandemic, we expect that the combination of cash on hand and operating cash flows generated during the year will be sufficient to fund capital expenditures without having to incur additional long-term debt and without having to access the equity or debt markets.
On April 20, 2020, our General Partner declared a cash distribution attributable to the quarter ended March 31, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This quarterly distribution will be paid on May 15, 2020 to each of the holders of common units of record as of the close of business on May 1, 2020.
Cash Flows
A summary of our sources (uses) of cash during the three months ended March 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
(In Thousands)
|
|
|
2020
|
|
2019
|
|
Operating activities
|
$
|
13,357
|
|
|
$
|
31,632
|
|
|
Investing activities
|
(6,483
|
)
|
|
(23,152
|
)
|
|
Financing activities
|
(1,863
|
)
|
|
(7,475
|
)
|
Operating Activities
Net cash provided by operating activities decreased by $18.3 million compared to the prior year period. Our cash provided from operating activities is primarily generated from the provision of compression and related services and the sale of new compressor packages. The decrease in cash provided by operating activities was primarily due to working capital movements, particularly related to collections of accounts receivable, and timing of payments of accounts payable.
Cash provided from our foreign operations is subject to various uncertainties, including the volatility associated with interruptions caused by customer budgetary decisions, uncertainties regarding the renewal of our existing customer contracts and other changes in contract arrangements, the timing of collection of our receivables, and the repatriation of cash generated by our international operations.
Investing Activities
Capital expenditures during the three months ended March 31, 2020, decreased by $16.7 million compared to the same period in 2019 primarily due to the reduction in capital expenditures to grow the capacity of our compression fleet compared to the prior year. Maintenance capital expenditures increased during the three months ended March 31, 2020 compared to the prior year period. Total capital expenditures, net of disposals and proceeds, during the current year period of $6.5 million include $6.5 million of maintenance capital expenditures and are net of $1.8 million of non-cash cost of fleet compression units sold and proceeds of $0.2 million from the sale of property, plant and equipment.
The level of growth capital expenditures depends on forecasted demand for compression services. If the forecasted demand for compression services increases or decreases, the amount of planned expenditures on growth and expansion will be adjusted, subject to the availability of funds. We continue to review all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.
Financing Activities
Distributions
Beginning with the distribution to common unitholders during February 2019, we reduced our common unit distributions from $0.75 per unit per year (or $0.1875 per quarter) to $0.04 per unit per year (or $0.01 per quarter). During the three months ended March 31, 2020, we distributed $0.5 million of cash distributions to our common unitholders and General Partner.
Series A Convertible Preferred Units.
In January 2019 we began redeeming Preferred Units for cash, resulting in 2,660,569 Preferred Units being redeemed during the three months ended March 31, 2019 for $9.4 million, which includes approximately $0.4 million of redemption premium that was paid. The last redemption of the remaining Preferred Units, along with a final cash payment made in lieu of paid in kind units occurred on August 8, 2019.
Bank Credit Facilities. The Credit Agreement, as amended, includes a maximum credit commitment of $50.0 million available for loans, letters of credit (with a sublimit of $25.0 million) and swingline loans (with a sublimit of $5.0 million), subject to a borrowing base to be determined by reference to the value of the accounts receivable and certain inventory of the Partnership and certain subsidiaries (collectively, the “Borrowers”). Such maximum credit commitment may be increased by $25.0 million in accordance with the terms and conditions of the Credit Agreement. As of March 31, 2020, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of $20.4 million.
The Borrowers may borrow funds under the Credit Agreement to pay fees and expenses related to the Credit Agreement and for the Borrower's ongoing working capital needs and for general partnership purposes. The revolving loans under the Credit Agreement may be voluntarily prepaid, in whole or in part, without premium or penalty, subject to breakage or similar costs. The maturity date of the Credit Agreement is June 29, 2023. As of March 31, 2020, we had a $3.0 million outstanding balance and had $3.0 million in letters of credit against our Credit Agreement. As of May 5, 2020, we have $6.7 million outstanding under our Credit Agreement and $2.7 million in letters of credit, leaving availability under the CCLP Credit Agreement of $16.1 million. The amounts the Partnership may borrow under the Credit Agreement are based on the amounts of CCLP’s accounts receivables and the value of certain inventory. Decreases in the amount of CCLP’s accounts receivable and the value of its inventory would result in reduced borrowing availability under the Credit Agreement. The Borrowers are in discussions with the lenders under the Credit Agreement regarding a potential amendment that would permit the Borrowers to incur second-priority liens on collateral pledged under our 7.50% Senior Secured Notes. This amendment will be entered into if the exchange offer discussed below is completed. We anticipate the terms of the amendment to the Credit Agreement may include, among other items, the inclusion of a $5.0 million reserve which would result in reduced borrowing availability. We can provide no assurance the amendment will be entered into or what its final terms might be.
7.50% Senior Secured Notes. As of May 5, 2020, $350.0 million in aggregate principal amount of our 7.50% Senior Secured Notes are outstanding. The 7.50% Senior Secured Notes accrue interest at a rate of 7.50% per annum and are scheduled to mature on April 1, 2025.
7.25% Senior Notes. As of May 5, 2020, $295.9 million in aggregate principal amount of our 7.25% Senior Notes are outstanding. The 7.25% Senior Notes accrue interest at a rate of 7.25% per annum and are scheduled to mature on August 15, 2022.
We may from time to time seek to retire or purchase certain amounts of our outstanding 7.25% Senior Notes and 7.50% Senior Secured Notes through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
On April 17, 2020, we announced the commencement of an offer (the "Exchange Offer") to certain eligible noteholders ("Eligible Holders") to exchange any and all of their outstanding 7.25% Senior Notes due 2022 (the “Unsecured Notes”) for newly issued 7.50% Senior Secured First Lien Notes due 2025 and 7.25% Senior Secured Second Lien Notes due 2027. In conjunction with the offer, consents are being solicited from Eligible Holders to eliminate substantially all restrictive covenants and certain of the default provisions in the indenture governing the Unsecured Notes. On May 1, 2020, we extended the early tender time for the Exchange Offer from 5:00 p.m., New York City time, on April 30, 2020 to 11:59 p.m., New York City time, on May 14, 2020 (which is the expiration time of the Exchange Offer), unless extended or earlier terminated by us. Eligible Holders that validly tender and do not validly withdraw their Unsecured Notes in the Exchange Offer prior to the “Expiration Time”) will receive $700 in principal amount of new 7.50% Senior Secured First Lien Notes or, as applicable and subject to proration, $750 principal amount of 7.25% Senior Secured Second Lien Notes for each $1,000 principal amount of Unsecured Notes tendered. We can terminate, withdraw, amend or extend the Exchange Offer at any time, subject to applicable law. In connection with the Exchange Offer, we are negotiating an amendment to the Credit Agreement, which would permit us to incur certain liens required to complete the Exchange Offer. There can be no assurance that the Exchange Offer or amendment to the Credit Agreement will be completed.
Other Financing
In February 2019, we entered into an arrangement with TETRA under which a subsidiary of TETRA entered into an agreement with one of our subsidiaries for the purchase up to $15.0 million of compression services
equipment and to subsequently lease the equipment back to us in exchange for monthly rental fees. As of March 31, 2020, pursuant to this arrangement, $14.8 million has been funded by TETRA for the construction of new compressor services equipment and all compression units were completed and deployed under this agreement.
Off Balance Sheet Arrangements
As of March 31, 2020, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.
Commitments and Contingencies
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.
Contractual Obligations
Our contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and obligations under operating leases.
The table below summarizes our contractual cash obligations as of March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
|
|
(In Thousands)
|
|
Long-term debt
|
|
$
|
649,430
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
295,930
|
|
|
$
|
3,500
|
|
|
$
|
—
|
|
|
$
|
350,000
|
|
|
Interest on debt
|
|
$
|
185,387
|
|
|
$
|
35,779
|
|
|
$
|
47,705
|
|
|
$
|
40,593
|
|
|
$
|
26,310
|
|
|
$
|
26,250
|
|
|
$
|
8,750
|
|
|
Operating leases
|
|
$
|
33,336
|
|
|
7,160
|
|
|
7,622
|
|
|
5,499
|
|
|
3,295
|
|
|
3,257
|
|
|
6,503
|
|
|
Affiliate financing obligation
|
|
$
|
13,618
|
|
|
2,261
|
|
|
3,015
|
|
|
3,015
|
|
|
3,015
|
|
|
2,312
|
|
|
—
|
|
|
Total contractual cash obligations
|
|
$
|
881,771
|
|
|
$
|
45,200
|
|
|
$
|
58,342
|
|
|
$
|
345,037
|
|
|
$
|
36,120
|
|
|
$
|
31,819
|
|
|
$
|
365,253
|
|
Cautionary Statement for Purposes of Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” and information based on our beliefs and those of our general partner. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should, “targets”, “will” and “would”.
Such forward-looking statements reflect our current views with respect to future events and financial performance and are based on assumptions that we believe to be reasonable but such forward-looking statements
are subject to numerous risks, and uncertainties, including, but not limited to:
|
|
|
|
•
|
economic and operating conditions that are outside of our control, including the trading price of our common units;
|
|
|
|
|
•
|
the current significant surplus in the supply of oil and the ability of the OPEC + to agree on and comply with supply limitations; the duration and magnitude of the unprecedented disruption in the oil and gas industry currently, which is negatively impacting our business;
|
|
|
|
|
•
|
the availability of adequate sources of capital to us;
|
|
|
|
|
•
|
our existing debt levels and our flexibility to obtain additional financing;
|
|
|
|
|
•
|
our ability to continue to make cash distributions, or increase cash distributions from current levels, after the establishment of reserves, payment of debt service and other contractual obligations;
|
|
|
|
|
•
|
the restrictions on our business that are imposed under our long-term debt agreements;
|
|
|
|
|
•
|
our dependence upon a limited number of customers and the activity levels of our customers;
|
|
|
|
|
•
|
the levels of competition we encounter;
|
|
|
|
|
•
|
our ability to replace our contracts with customers, which are generally short-term contracts;
|
|
|
|
|
•
|
the availability of raw materials and labor at reasonable prices;
|
|
|
|
|
•
|
risks related to acquisitions and our growth strategy;
|
|
|
|
|
•
|
our operational performance;
|
|
|
|
|
•
|
risks related to our foreign operations;
|
|
|
|
|
•
|
the credit and risk profile of TETRA;
|
|
|
|
|
•
|
the ability of our general partner to retain key personnel;
|
|
|
|
|
•
|
information technology risks including the risk from cyberattack;
|
|
|
|
|
•
|
the severity and duration of the COVID-19 pandemic and related economic repercussions and the resulting negative impact on the demand for oil and gas;
|
|
|
|
|
•
|
operational challenges relating to the COVID-19 pandemic and efforts to mitigate the spread of the virus, including logistical challenges, protecting the health and well-being of our employees, remote work arrangements, performance of contracts, and supply chain disruptions;
|
|
|
|
|
•
|
other global or national health concerns;
|
|
|
|
|
•
|
risks associated with a material weakness in our internal control over financial reporting and the consequences we may encounter if we are unable to remediate the material weakness in our internal control over financial reporting or if we identify other material weaknesses in the future;
|
|
|
|
|
•
|
the effect and results of litigation, regulatory matters, settlements, audits, assessments, and contingencies, and
|
|
|
|
|
•
|
other risks and uncertainties under “Item 1A. Risk Factors” in our 2019 Annual Report, and as included in our other filings with the U.S. Securities and Exchange Commission ("SEC"), which are available free of charge on the SEC website at www.sec.gov.
|
The risks and uncertainties referred to above are generally beyond our ability to control and we cannot predict all the risks and uncertainties that could cause our actual results to differ from those indicated by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may vary from those indicated by the forward-looking statements, and such variances may be material.
All subsequent written and oral forward-looking statements made by or attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements we may make, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.