As filed with the Securities and Exchange Commission on
November 10, 2008
Registration
No.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
COMPRESSCO PARTNERS,
L.P.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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1389
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94-3450907
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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101 Park Avenue, Suite 1200
Oklahoma City, Oklahoma 73102
(405) 677-0221
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Ronald J. Foster
President
101 Park Avenue, Suite 1200
Oklahoma City, Oklahoma 73102
(405) 677-0221
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
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David P. Oelman
Jeffery K. Malonson
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
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Bass C. Wallace, Jr.
TETRA Technologies, Inc.
25025 Interstate 45 North, Suite 600
The Woodlands, Texas 77380
(281) 367-1983
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Laura Tyson
Baker Botts L.L.P.
98 San Jacinto Boulevard
Austin, Texas 78701
(512) 322-2500
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box:
o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
x
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Smaller
reporting
company
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(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of Securities to be Registered
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Aggregate Offering Price
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Registration Fee
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Common units representing limited partner interests
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$55,000,000
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$2,161.50
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(1)
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Includes common units issuable upon exercise of the
underwriters overallotment option.
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(2)
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) of the Securities Act of 1933.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell nor does it seek an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
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Subject
to Completion, dated November 10, 2008
PROSPECTUS
Common
Units
Representing Limited Partner Interests
We are a Delaware limited partnership formed by TETRA
Technologies, Inc., or TETRA, to provide natural gas
wellhead compression-based production enhancement services to
domestic and international customers. This is the initial public
offering of our common units. We currently estimate that the
initial public offering price will be between
$ and
$ per common unit. Prior to this
offering, there has been no public market for our common units.
We intend to apply to list our common units on the NASDAQ Global
Market under the symbol GSJK.
Investing in our common units involves risks. Please read
Risk Factors beginning on page 15.
These risks include, but are not limited to, the
following:
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We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
general partner units at the initial quarterly distribution rate
under our cash distribution policy.
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On a pro forma basis we would not have had sufficient cash
available for distribution to pay the full initial quarterly
distribution on all units for the twelve months ended
December 31, 2007 and June 30, 2008.
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We may be unable to achieve our expected organic growth and
market penetration.
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Our ability to manage and grow our business effectively and
provide adequate production enhancement services to our
customers may be adversely affected if our general partner loses
its management or is unable to retain trained personnel.
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TETRA and Compressco may compete with us in the future, which
could adversely affect our results of operations and cash
available for distribution to our unitholders.
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Our general partner and its affiliates own a controlling
interest in us and will have conflicts of interest with us. Our
partnership agreement limits the fiduciary duties that our
general partner owes to us, which may permit it to favor the
interests of TETRA to our unitholders detriment and limits
the circumstances under which our unitholders may make a claim
relating to conflicts of interest, as well as the remedies
available to our unitholders in that event.
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Holders of our common units have limited voting rights and
are not entitled to elect our general partner or its directors,
which could reduce the price at which the common units will
trade.
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Our unitholders will experience immediate and substantial
dilution of $ in tangible net book
value per common unit.
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Our tax treatment depends on our status as a partnership for
U.S. federal income tax purposes, as well as our not being
subject to a material amount of entity-level taxation by
individual states. If the Internal Revenue Service treats us as
a corporation or we become subject to a material amount of
entity-level taxation for state tax purposes, it would
substantially reduce the amount of cash available for
distribution to our unitholders.
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Unitholders may be required to pay taxes on income from us
even if they do not receive any cash distributions from us.
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Per
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Common Unit
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Total
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Initial public offering price
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$
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$
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Underwriting discount(1)
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$
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$
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Proceeds to Compressco Partners, L.P. (before expenses)
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$
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$
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(1)
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Excludes aggregate fees of
$ million payable to Raymond
James and J.P. Morgan in consideration of advice rendered
by them regarding the structure of this offering and our
partnership.
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We have granted the underwriters a
30-day
option to purchase up to an
additional common units from us on
the same terms and conditions as set forth above, if the
underwriters sell more than common
units in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
Raymond James, on behalf of the underwriters, expects to
deliver the common units on or
about , 2009.
,
2008
TABLE OF
CONTENTS
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1
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1
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3
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4
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5
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5
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7
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8
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8
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12
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14
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15
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15
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27
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32
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47
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48
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51
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52
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56
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60
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62
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63
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64
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67
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67
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67
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68
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70
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71
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79
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80
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81
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82
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82
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84
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102
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102
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107
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110
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110
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110
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110
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111
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111
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111
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111
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111
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111
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121
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122
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123
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ii
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with different information. If
anyone provides you with different or inconsistent information,
you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should
assume that the information appearing in this prospectus is
accurate as of the date on the front cover of this prospectus.
Our business, financial condition, results of operations and
prospects may have changed since that date.
Until , 2009 (25 days after
the date of this prospectus), all dealers that buy, sell or
trade our common units, whether or not participating in this
offering, may be required to deliver a prospectus. This is in
addition to the dealers obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
iii
SUMMARY
This summary provides a brief overview of information
contained elsewhere in this prospectus. This summary does not
contain all of the information that you should consider before
investing in our common units. You should read the entire
prospectus carefully, including the historical and pro forma
financial statements and the notes to those financial statements
included in this prospectus. Unless indicated otherwise, the
information presented in this prospectus assumes an initial
public offering price of $ per
common unit and that the underwriters option to purchase
additional common units is not exercised. You should read
Risk Factors for more information about important
risks that you should consider carefully before buying our
common units. We include a glossary of some of the terms used in
this prospectus as Appendix B.
References in this prospectus to Compressco
Partners, we, our, us,
the Partnership or like terms refer to Compressco
Partners, L.P. and its wholly owned subsidiaries, including
Compressco Partners Operating, LLC, or Compressco Partners
Operating. References to Compressco refer to
Compressco, Inc., a wholly owned subsidiary of TETRA
Technologies, Inc., or TETRA, and Compresscos
subsidiaries. References to Compressco Partners GP
or our general partner refer to our general partner,
Compressco Partners GP Inc., a wholly owned subsidiary of
Compressco. References in this prospectus to Compressco
Partners Predecessor or our predecessor refer
to the predecessor of Compressco Partners for accounting
purposes. As further described elsewhere in this prospectus, our
predecessor consists of (1) all of the historical assets,
liabilities and operations of Compressco, combined with
(2) certain assets, liabilities and operations of the
subsidiaries of TETRA conducting wellhead compression-based
production enhancement services and related well testing and
monitoring services in Mexico.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4. All historical operations, results of
operations, financial statements and notes to the financial
statements presented throughout this prospectus reflect those of
our predecessor and exclude the pro forma adjustments required
to reflect the portion of our predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Items Impacting the Comparability of
Our Financial Results, certain total amounts that will be
presented in our future results of operations may not be
initially comparable to our predecessors historical
results.
Compressco
Partners, L.P.
Overview
We are a leading provider of wellhead compression-based
production enhancement services, or production enhancement
services, to a broad base of natural gas and oil
exploration and production companies operating throughout
14 states that encompass most of the onshore producing
regions of the United States, as well as in Canada and Mexico.
Our production enhancement services improve the value of natural
gas and oil wells by increasing daily production and total
recoverable reserves. Our production enhancement services also
include related liquids separation and gas metering services.
While our services are applied primarily to mature wells with
low formation pressures, our services are also employed on newer
wells that have experienced significant production declines or
are characterized by lower formation pressures. In connection
with the performance of these services, we provide ongoing well
evaluations and, in Mexico, well testing and monitoring
services. In addition, we design and manufacture the
GasJack
tm
units, or
GasJack
tm
units, we use in providing our production enhancement
services.
We believe that we provide a strong value proposition to our
customers. Our
GasJack
tm
units enable us to provide reliable service and their compact
size makes them easy to transport to the customers well
site. We also believe that our 46-horsepower
GasJack
tm
unit is more fuel efficient, produces lower emissions and
handles variable liquids conditions encountered in natural gas
and oil wells more effectively than the higher horsepower screw
and reciprocating compressors utilized by many of our
competitors. Our compact
GasJack
tm
1
unit allows us to perform compression, liquids separation and
optional gas metering services all from one skid, thereby
providing services that otherwise would generally require the
use of multiple, more costly pieces of equipment from our
competitors. Our field services are performed by our highly
trained staffs of regional service supervisors (known as Senior
Gas Production Specialists), optimization specialists and field
mechanics that are located throughout our operating regions. We
monitor the impact of our services on production from wells
where we provide our services and modify those services to
address changing operating conditions. We are currently
implementing our
ePumper
tm
system, a state-of-the-art SCADA satellite telemetry-based
system that allows us to remotely monitor, in real time, whether
our services are being continuously provided at the well site.
We expect this system to reduce the response time of our field
personnel, reduce well downtime and increase production for our
customers. We believe that the value, breadth and quality of
services that we provide to natural gas and oil producers gives
us an advantage over our competitors who primarily provide only
equipment and maintenance services, without ongoing monitoring
and modification.
Central to our marketing and service efforts is our emphasis on
performing well data analyses at our petroleum engineering
office in Houston, Texas. Our engineering staff focuses on
geologic basins with reservoir characteristics that are known to
be responsive to our technology and analyzes publicly available
production data to identify wells within those basins that we
believe could benefit from our production enhancement services.
We proactively market our services to producers in these basins
and provide an inexpensive two-week trial of our production
enhancement services so that a customer can confirm the
effectiveness of our services prior to entering into a service
contract. Historically, a majority of the customers who elect to
participate in this two-week service package ultimately enter
into contracts with us. We believe this proactive strategy of
performing well data analyses and approaching producers with
targeted solutions increases our marketing and application
success rates and allows us to further differentiate ourselves
from our competitors.
We believe that the natural gas production enhancement services
market continues to demonstrate significant growth potential.
According to the Energy Information Administration, or
EIA, while domestic demand for natural gas grew at a
steady rate from 1998 to 2006 and is expected to continue
growing over the long term, domestic production remained
relatively flat from 1998 to 2006, despite significant increases
in natural gas well drilling activity, due in part to
significantly decreased productivity of natural gas wells from
conventional resources. The EIA is forecasting that natural gas
production from onshore conventional resources will decline by
50% from 2006 to 2030. As a result of this expected decline and
the large number of wells drilled over the last few years, we
believe that onshore conventional resources will increasingly be
characterized by mature wells with marginal production that will
benefit from our production enhancement services. In addition,
according to the EIA, the recent growth in overall domestic
natural gas production in 2007 and 2008 is a result of the rapid
ongoing development of unconventional natural gas resources. The
wells from these resources are often characterized by lower
pressures and significant early production declines, which we
believe provide an opportunity to employ our production
enhancement services earlier than on conventional wells. We are
currently providing our services on 50 natural gas wells in the
Barnett Shale, one of the largest unconventional natural gas
resources in the United States.
We primarily target natural gas wells in our operating regions
that produce between 30 thousand and 300 thousand
cubic feet of natural gas per day (Mcf/d) and less
than 50 barrels of water per day. According to EIA,
approximately 197,500 natural gas wells in the United States
produced approximately 24 Mcf/d to 300 Mcf/d in 2006,
an increase of approximately 21% of the number of such wells
since 2002. With the rapid pace of drilling over the last
several years, we believe that the number of wells with daily
production within the range described by the EIA has grown
substantially since 2006, although not all of these wells will
be candidates for our services. We believe that the majority of
the wells we target do not currently utilize production
enhancement services, given that we have fewer than 2,800 active
domestic
GasJack
TM
units as of June 30, 2008, and that most of our competitors
are local and regional companies with smaller fleets. We believe
that the limited penetration of this market to date should
provide us with significant growth opportunities over the long
term. Along with increased domestic opportunities, we continue
to see strong demand for our services in gas producing regions
of Mexico and Canada, and believe that other international
regions may become growth areas in the future.
2
Our predecessors production enhancement services business
experienced substantial organic growth over the past five years.
Our predecessors fleet of
GasJack
tm
units grew from 761 units as of December 31, 2002 to
2,763 units as of December 31, 2007, representing a
263% increase. Our predecessors revenues grew during that
period from approximately $14.9 million during 2002 to
approximately $83.6 million during 2007, representing a
460% increase. During the six months ended June 30, 2008,
our predecessors revenues grew to $46.6 million, as
compared to $38.0 million for the same period in 2007, and
our fleet of
GasJack
tm
units grew from 2,763 units as of December 31, 2007 to
2,954 units as of June 30, 2008. This growth was
generated entirely by organic expansion, with no acquisitions
made during this five-year period.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4.
Production
Enhancement Fundamentals
Demand for our production enhancement services is linked more to
natural gas production and consumption than to natural gas
exploration activities. However, we do not take title to any
natural gas in connection with our services and, accordingly,
have no direct exposure to fluctuating commodity prices.
We believe we will be able to continue growing our business
organically by capitalizing on the following positive, long-term
fundamentals that we believe exist for the production
enhancement services industry:
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Most of the wells that would benefit from our production
enhancement services do not currently utilize those services;
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The aging of producing natural gas fields will require more of
our production enhancement services;
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Natural gas production from unconventional sources, including
tight sands, shales and coalbeds, is expected to continue to
increase, according to the EIA, and production from these
unconventional sources could benefit substantially from our
production enhancement services, due to typically lower
formation pressures; and
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Natural gas producers continue to outsource their requirements
for the production enhancement services we provide.
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Business
Strategies
We intend to grow our business organically by implementing the
following strategies:
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Increase service coverage within our current domestic and
international markets.
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Pursue additional domestic and international growth
opportunities.
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Improve our service offerings.
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Promote our additional service applications, including vapor
recovery services and production enhancement services for use on
pumping oil wells.
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Leverage our relationships with TETRA and its customers.
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Competitive
Strengths
We believe that we are well positioned to successfully execute
our business strategies for the following reasons:
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Our ability to increase the value of natural gas wells.
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The favorable market conditions for substantial growth.
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Our superior customer service and highly trained field personnel.
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Our proactive, engineered approach to marketing and service.
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3
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Our
GasJack
tm
units.
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Our broad geographic presence in domestic markets and growing
international presence.
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Our experienced management team with proven ability to deliver
strong organic growth over the long run.
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Our record of maintaining established customer relationships.
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Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc.
We are a Delaware limited partnership formed by TETRA. TETRA is
an oil and gas services company, with an integrated calcium
chloride and brominated products manufacturing operation that
supplies feedstocks to energy and other markets. As part of its
oil and gas services offerings, TETRA provides wellhead
compression-based and certain other production enhancement
services to the natural gas and oil industry through Compressco
and certain other subsidiaries of TETRA.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of Compresscos businesses,
equipment and other assets, as further described below.
Following the completion of this offering and in consideration
of its contribution to us, TETRA will retain a significant
economic interest in us through its indirect ownership
of common units, representing
a % limited partner interest in us,
and its indirect ownership of our general partner, Compressco
Partners GP, a wholly owned subsidiary of Compressco, which owns
a 0.1% general partner interest in us. For more detail on the
transactions that will occur in connection with this offering,
please read Formation Transactions and Partnership
Structure on page 5.
The following businesses, equipment and other assets of
Compressco will be contributed to us concurrently with the
consummation of this offering:
|
|
|
|
|
all of its domestic production enhancement services contracts
that our counsel has concluded will generate qualifying income
under Section 7704 of the Internal Revenue Code, together with
certain domestic
non-qualifying
income producing operations;
|
|
|
|
all of its Canadian subsidiary and business;
|
|
|
|
all of its Mexican subsidiary and business;
|
|
|
|
all of its equipment and other assets, with the exception of any
equipment and other assets that are necessary for Compressco to
conduct the portion of the business it retains, as further
described below; and
|
|
|
|
all of its
GasJack
tm
unit manufacturing operations.
|
Certain of Compresscos operations in Mexico are provided
to customers on a sub-contracted basis from TETRAs Mexican
subsidiaries. Concurrent with the contributions described above,
TETRA will contribute to us the
GasJack
tm
units and other equipment currently used in our Mexican
business. We will not receive all of the production enhancement
services assets owned and operations conducted by Compressco.
Compressco will retain certain of its customer contracts that
our counsel has not concluded will generate qualifying income
under Section 7704 of the Internal Revenue Code and
approximately
GasJack
tm
units for use in providing production enhancement services for
the business it retains and for sale. TETRA intends, but is not
obligated, to offer us the opportunity over time to purchase the
customer contracts and
GasJack
tm
units retained by Compressco. Likewise, we are not required to
purchase any additional customer contracts or related
GasJack
tm
units from Compressco.
Going forward, our relationship with TETRA and Compressco will
be governed by an omnibus agreement. All of Compresscos
employees will become employees of our general partner and they
will manage our operations and conduct the business contributed
to us, and we will reimburse our general partner for all direct
and indirect expenses incurred on our behalf. TETRA will provide
to us, and we will reimburse TETRA for, certain general and
administrative support services that are necessary to conduct
our business. In addition, our general partner will provide to
Compressco, and Compressco will reimburse our general partner
for, any personnel and services that are necessary to conduct
Compresscos retained business.
4
Under the non-competition provisions of the omnibus agreement:
|
|
|
|
|
TETRA and Compressco will be prohibited from providing
production enhancement services or selling
GasJack
tm
units to our customers without our consent and, likewise, we
will be prohibited from providing production enhancement
services or selling
GasJack
tm
units to customers retained by Compressco without TETRAs
consent;
|
|
|
|
TETRA or Compressco could acquire a company that provides
production enhancement services to a customer of ours, if we are
first given the opportunity to acquire that customers
business from Compressco, but decline to do so, and, likewise,
we could acquire a company that provides production enhancement
services to a customer of Compressco, if Compressco is first
given the opportunity to acquire that customers business
from us, but declines to do so;
|
|
|
|
We will have the first right to provide production enhancement
services or sell
GasJack
tm
units to new customers who are not customers of ours or
Compressco at the time this offering is completed; and
|
|
|
|
Compressco and we will be permitted to sell any
GasJack
tm
units that they or we own following the completion of this
offering.
|
TETRA, Compressco and we will remain subject to the
non-competition provisions of the omnibus agreement until the
earliest to occur of the third anniversary of the completion of
this offering or a change of control of TETRA, Compressco or our
general partner. Thereafter, TETRA and Compressco will not be
prohibited from competing with us in the natural gas production
enhancement services business.
The omnibus agreement will also permit Compressco and us to
transfer idle
GasJack
tm
units to each other for three years under certain circumstances.
Lastly, TETRA and Compressco will indemnify us against certain
potential claims, losses and expenses associated with
environmental, title and tax issues. For a further description
of the omnibus agreement, please read Certain
Relationships and Related Party Transactions Omnibus
Agreement on page 100.
Risk
Factors
An investment in our common units involves risks associated with
our business, our limited partnership structure and the tax
characteristics of our common units. You should read carefully
the risks under the caption Risk Factors beginning
on page 15 of this prospectus.
Formation
Transactions and Partnership Structure
At or prior to the completion of this offering, the following
transactions will occur:
|
|
|
|
|
TETRA will cause Compressco and certain of TETRAs other
subsidiaries to contribute to us or our subsidiaries a portion
of Compresscos business, equipment and other assets, as
further described in Our Relationship with TETRA
Technologies, Inc. and Compressco, Inc.
|
|
|
|
we will issue to Compressco and to TETRA International
Incorporated common units
and common units, respectively,
representing an aggregate % limited
partner interest in us;
|
|
|
|
we will issue to our general partner, Compressco Partners GP, an
indirect, wholly owned subsidiary of
TETRA,
general partner units, representing a 0.1% general partner
interest in us;
|
|
|
|
we will enter into an omnibus agreement with TETRA, Compressco
and their controlled affiliates, as further described in
Our Relationship with TETRA Technologies, Inc. and
Compressco, Inc.
|
|
|
|
we will issue common units to the
public in this offering, representing an
aggregate % limited partner
interest in us, and will use the offering proceeds as described
in Use of Proceeds on page 32; and
|
|
|
|
simultaneously with the completion of this offering, we will
issue restricted units to certain
officers of our general partner and other employees of
Compressco.
|
If the underwriters exercise in full their option to purchase
additional common units, the ownership interest of the public
unitholders will increase to
common units, representing an
aggregate % limited partner
interest in us, the ownership interest of our general partner
will increase to general partner
units,
5
representing a 0.1% general partner interest in us, and the
indirect ownership interest of TETRA will remain
at common units, representing an
aggregate % limited partner
interest in us. We will use any net proceeds from the exercise
of the underwriters option to purchase additional common
units as described in Use of Proceeds on
page 32.
As is common with publicly traded limited partnerships and to
maximize operational flexibility, we will conduct our operations
through our subsidiaries. We will initially have one direct
operating subsidiary, Compressco Partners Operating, LLC, a
limited liability company that will conduct business through
itself and its subsidiaries. The diagram on the following page
depicts our organization and ownership after giving effect to
the offering and the related formation transactions.
6
Organizational
Structure After the Formation Transactions
Ownership
of Compressco Partners, L.P.(1)
|
|
|
|
|
Publicly held Common Units
|
|
|
|
%
|
Common units held by affiliates of TETRA
|
|
|
|
%
|
General partner units held by Compressco Partners GP
|
|
|
0.1
|
%
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
|
(1)
|
|
Assuming no exercise of the underwriters overallotment
option.
|
7
Management
of Compressco Partners, L.P.
We do not have any employees and rely on our general
partners employees to manage our operations and conduct
our business. Our general partner, Compressco Partners GP, is an
indirect, wholly owned subsidiary of TETRA, and its board of
directors and officers will make decisions on our behalf. All of
the directors of our general partner will be elected by TETRA.
For more information about these individuals, please read
Management of Compressco Partners, L.P.
Directors, Executive Officers and other Management on
page 80.
Our general partner will not receive any management fee or other
compensation in connection with the management of our business
or this offering, but it will be entitled to reimbursement of
all direct and indirect expenses incurred on our behalf. Our
general partner will also be entitled to distributions from us,
based on its general partner interest. Please read
Provisions of Our Partnership Agreement Relating to Cash
Distributions on page 47 and Certain
Relationships and Related Party Transactions on
page 99. Unlike shareholders in a publicly traded
corporation, our unitholders will not be entitled to elect our
general partner or its directors.
Principal
Executive Offices and Internet Address
Our principal executive offices are located at 101 Park Avenue,
Suite 1200, Oklahoma City, Oklahoma 73102 and our telephone
number is
(405) 677-0221.
Our website will be located at
www.compresscopartners.com
and will be activated in connection with the completion of
this offering. We will make our periodic reports and other
information filed with or furnished to the Securities and
Exchange Commission, which we refer to as the SEC, available,
free of charge, through our website, as soon as reasonably
practicable after those reports and other information are
electronically filed with or furnished to the SEC. Information
on our website or any other website is not incorporated by
reference into this prospectus and does not constitute a part of
this prospectus.
Summary
of Conflicts of Interest and Fiduciary Duties
Conflicts of Interest.
Our general partner has
a legal duty to manage us in a manner beneficial to our
unitholders. This legal duty originates in statutes and judicial
decisions and is commonly referred to as a fiduciary
duty. However, because our general partner is indirectly
owned by TETRA, the officers and directors of our general
partner also have fiduciary duties to manage our general partner
in a manner beneficial to TETRA. As a result of these
relationships, conflicts of interest may arise in the future
between us and our unitholders, on the one hand, and our general
partner and its affiliates, including TETRA, on the other hand.
For a more detailed description of the conflicts of interest and
fiduciary duties of our general partner, please read Risk
Factors Risks Inherent in an Investment in Us
on page 22.
Partnership Agreement Modifications to Fiduciary
Duties.
Our general partner and its affiliates
own a controlling interest in us and will have conflicts of
interest with us. Our partnership agreement limits the liability
and reduces the fiduciary duties of our general partner to our
unitholders, which may permit it to favor its own interests to
our unitholders detriment. Our partnership agreement also
restricts the remedies available to our unitholders for actions
that might otherwise constitute a breach of our general
partners fiduciary duties owed to our unitholders. By
purchasing a common unit, the purchaser agrees to be bound by
the terms of our partnership agreement and, pursuant to the
terms of our partnership agreement, each unitholder consents to
various actions contemplated in the partnership agreement and
conflicts of interest that might otherwise be considered a
breach of fiduciary or other duties under applicable state law.
For a more detailed description of the conflicts of interest
that may affect us and the fiduciary duties of our general
partner and the relationships we have with our affiliates,
please read Management of Compressco Partners, L.P.
Directors, Executive Officers and other
Management on page 80, Certain Relationships
and Related Party Transactions on page 99 and
Conflicts of Interest and Fiduciary Duties on
page 102.
8
The
Offering
|
|
|
Common units offered to the public
|
|
common units, representing
a % limited partner interest in us
( common units, if the
underwriters exercise in full their option to purchase
additional common units, representing
a % limited partner interest in us).
|
|
General partner units outstanding after this offering
|
|
The general partner will
own general partner units,
or general partner units if the
underwriters exercise in full their option to purchase
additional common units, in either case representing a 0.1%
general partner interest in us.
|
|
Use of proceeds
|
|
We expect to receive net proceeds of approximately
$ million, after deducting
the underwriting discount, fees of approximately
$ million payable to Raymond
James and J.P. Morgan for evaluation, analysis and
structuring of our Partnership, and offering expenses.
|
|
|
|
We will use the majority of the net proceeds received from this
offering and any exercise of the underwriters option to
purchase additional common units to fund the future growth and
expansion of our business, including costs to expand our
GasJack
tm
unit fleet and costs associated with increasing and training our
staffs of service professionals, and the remainder of the net
proceeds will be used to fund our working capital requirements.
We believe that the net proceeds from this offering will be
sufficient to fund our operations for approximately the next
18 months.
|
|
|
|
Please read Use of Proceeds on page 32 of this
prospectus.
|
|
Cash distributions
|
|
We will pay the initial quarterly distribution of
$ per unit
($ per unit on an annualized
basis) to the extent we have sufficient cash from operations
after establishment of cash reserves and payment of fees and
expenses, including payments to our general partner and its
affiliates. We will adjust the initial quarterly distribution
for the period from the completion of this offering
through ,
based on the actual length of the period. Our ability to pay our
initial quarterly distribution is subject to various
restrictions and other factors described in more detail under
the caption Our Cash Distribution Policy and Restrictions
on Distributions.
|
|
|
|
Our partnership agreement requires us to distribute all of our
cash on hand at the end of each quarter, less reserves
established by our general partner. We refer to this cash as
available cash, and we define its meaning in our
partnership agreement and in the glossary of terms attached as
Appendix B. Our partnership agreement also requires that we
distribute all of our available cash from operating surplus each
quarter in the following manner: 99.9% to the holders of common
units and 0.1% to our general partner.
|
|
|
|
Please read Provisions of Our Partnership Agreement
Relating to Cash Distributions on page 47.
|
9
|
|
|
|
|
Our pro forma cash available for distribution for the twelve
months ended December 31, 2007 and June 30, 2008 would
not have been sufficient to pay the full initial quarterly
distribution on all of the common units. The shortfall in
available cash for distributions for the twelve months ended
December 31, 2007 and June 30, 2008 would have
resulted in distributions with respect to our common units
representing approximately %
and %, respectively, of our initial
quarterly distribution.
|
|
|
|
We believe that, based on the estimates contained in and the
assumptions listed under the caption Our Cash Distribution
Policy and Restrictions on Distributions, we will have
sufficient cash available to pay the full initial quarterly
distribution of $ per unit per
quarter on all of our common units and general partner units for
each quarter in the twelve months ending September 30, 2009.
|
|
Issuance of additional partnership units
|
|
We can issue an unlimited number of partnership units in the
future, including units that are senior in right of
distributions, liquidation and voting to the common units,
without the approval of our unitholders. Please read Units
Eligible for Future Sale on page 123 and The
Partnership Agreement Issuance of Additional
Securities on page 114.
|
|
Limited voting rights
|
|
Our general partner will manage and operate us. Unlike the
holders of common stock in a corporation, our unitholders will
have only limited voting rights on matters affecting our
business. Unitholders will have no right to elect our general
partner or its directors. Our general partner may not be removed
except by a vote of the holders of at least
66
2
/
3
%
of the outstanding units, including any units owned by our
general partner and its affiliates, voting together as a single
class. Upon consummation of this offering, our general partner
and its affiliates will own an aggregate
of % of our common units. This will
give our general partner the ability to prevent its involuntary
removal. Please read The Partnership Agreement
Voting Rights on page 112.
|
|
Limited call right
|
|
If at any time our general partner and its affiliates own more
than 90% of the outstanding common units, our general partner
has the right, but not the obligation, to purchase all of the
remaining common units at a price not less than the then-current
market price of the common units.
|
|
Estimated ratio of taxable income to distributions
|
|
We estimate that if our unitholders own the common units they
purchase in this offering through the record date for
distributions for the period beginning on the completion of this
offering and ending on , such
unitholders will be allocated, on a cumulative basis, an amount
of federal taxable income for that period that will
be % or less of the cash
distributed to them with respect to that period. For example, if
our unitholders receive an annual distribution of
$ per unit, we estimate that our
unitholders average allocable federal taxable income per
year will be no more than $ per
unit. Please read Material Tax Consequences
Tax
|
10
|
|
|
|
|
Consequences of Unit Ownership Ratio of Taxable
Income to Distributions on page 126.
|
|
Material tax consequences
|
|
For a discussion of other material federal income tax
consequences that may be relevant to prospective unitholders who
are individual citizens or residents of the United States,
please read Material Tax Consequences on
page 124.
|
|
Exchange listing
|
|
We intend to apply to list our common units on the NASDAQ Global
Market under the symbol GSJK.
|
11
Selected
Historical and Pro Forma Financial and Operating Data
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4. All historical operations, results of
operations, financial statements and notes to the financial
statements presented throughout this prospectus reflect those of
our predecessor and exclude the pro forma adjustments required
to reflect the portion of our predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Items Impacting the Comparability of
Our Financial Results, certain total amounts that will be
presented in our future results of operations may not be
initially comparable to our predecessors historical
results.
The pro forma financial statements presented herein reflect the
results of the portion of our predecessors operations that
will be contributed to us in connection with this offering,
including: (1) the portion of our predecessors domestic
operations that our counsel has concluded will generate
qualifying income under Section 7704 of the Internal
Revenue Code, or qualifying income, as of the date
of the preparation of the pro forma financial statements,
together with certain domestic
non-qualifying
income producing operations, (2) our predecessors
Canadian operations and (3) the portion of our
predecessors Mexican operations that our counsel has
concluded will generate qualifying income as of the date of the
preparation of the pro forma financial statements. Compressco is
continuing to modify the terms of certain existing domestic
customer contracts to provide that, upon their contribution to
us in connection with this offering, the production enhancement
services we perform under those customer contracts will generate
qualifying income. As more contracts are modified in the future
and prior to the completion of this offering, we will
periodically update the pro forma financial statements to
reflect the anticipated contribution of those modified contracts
to us.
The following table shows selected historical combined financial
and operating data of our predecessor and pro forma financial
and operating data of Compressco Partners for the periods and as
of the dates presented.
Selected
Historical and Pro Forma Financial and Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compressco Partners, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Compressco Partners Predecessor
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,756
|
|
|
$
|
35,237
|
|
|
$
|
50,034
|
|
|
$
|
65,323
|
|
|
$
|
83,554
|
|
|
$
|
38,027
|
|
|
$
|
46,606
|
|
|
$
|
48,291
|
|
|
$
|
27,798
|
|
Cost of revenue
|
|
|
9,762
|
|
|
|
16,146
|
|
|
|
23,926
|
|
|
|
29,915
|
|
|
|
37,514
|
|
|
|
16,456
|
|
|
|
21,338
|
|
|
|
22,424
|
|
|
|
13,056
|
|
Selling, general and administrative expenses
|
|
|
4,663
|
|
|
|
5,855
|
|
|
|
8,117
|
|
|
|
10,360
|
|
|
|
12,539
|
|
|
|
5,707
|
|
|
|
6,548
|
|
|
|
8,387
|
|
|
|
4,436
|
|
Depreciation and amortization expense
|
|
|
1,965
|
|
|
|
3,098
|
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
|
|
6,138
|
|
|
|
3,648
|
|
Other (income) expense, net
|
|
|
1,022
|
|
|
|
626
|
|
|
|
(3
|
)
|
|
|
59
|
|
|
|
(31
|
)
|
|
|
(16
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before taxes
|
|
|
5,344
|
|
|
|
9,512
|
|
|
|
13,501
|
|
|
|
18,630
|
|
|
|
24,232
|
|
|
|
11,505
|
|
|
|
13,241
|
|
|
|
11,342
|
|
|
|
6,658
|
|
Provision for income taxes
|
|
|
2,028
|
|
|
|
2,010
|
|
|
|
516
|
|
|
|
1,029
|
|
|
|
660
|
|
|
|
257
|
|
|
|
619
|
|
|
|
532
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,316
|
|
|
$
|
7,502
|
|
|
$
|
12,985
|
|
|
$
|
17,601
|
|
|
$
|
23,572
|
|
|
$
|
11,248
|
|
|
$
|
12,622
|
|
|
$
|
10,810
|
|
|
$
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compressco Partners, L.P.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Compressco Partners Predecessor
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Balance Sheet Data (at Period End):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(1)
|
|
$
|
5,294
|
|
|
$
|
10,527
|
|
|
$
|
14,691
|
|
|
$
|
19,419
|
|
|
$
|
26,584
|
|
|
$
|
22,914
|
|
|
$
|
28,852
|
|
|
|
|
|
|
$
|
|
(2)
|
Total assets
|
|
|
32,722
|
|
|
|
119,861
|
|
|
|
138,634
|
|
|
|
163,354
|
|
|
|
185,357
|
|
|
|
175,132
|
|
|
|
200,192
|
|
|
|
|
|
|
|
|
|
Partners capital/net parent equity
|
|
|
8,180
|
|
|
|
117,498
|
|
|
|
135,354
|
|
|
|
159,961
|
|
|
|
181,654
|
|
|
|
172,219
|
|
|
|
195,587
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA(3)
|
|
|
8,416
|
|
|
|
13,236
|
|
|
|
17,994
|
|
|
|
24,989
|
|
|
|
33,532
|
|
|
|
15,880
|
|
|
|
18,714
|
|
|
|
17,480
|
|
|
|
10,306
|
|
Capital expenditures(4)
|
|
|
9,640
|
|
|
|
15,818
|
|
|
|
18,349
|
|
|
|
25,917
|
|
|
|
23,846
|
|
|
|
13,226
|
|
|
|
16,921
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
5,360
|
|
|
|
10,300
|
|
|
|
13,280
|
|
|
|
20,573
|
|
|
|
27,077
|
|
|
|
12,256
|
|
|
|
16,294
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(9,448
|
)
|
|
|
(15,724
|
)
|
|
|
(18,418
|
)
|
|
|
(25,862
|
)
|
|
|
(23,815
|
)
|
|
|
(13,157
|
)
|
|
|
(17,203
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
4,158
|
|
|
|
(20,817
|
)
|
|
|
4,315
|
|
|
|
6,056
|
|
|
|
(3,464
|
)
|
|
|
291
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
GasJack
tm
units (at period end)
|
|
|
1,166
|
|
|
|
1,542
|
|
|
|
1,990
|
|
|
|
2,595
|
|
|
|
3,108
|
|
|
|
2,913
|
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
Average number
of
GasJack
tm
units in service (during period)
|
|
|
920
|
|
|
|
1,247
|
|
|
|
1,613
|
|
|
|
2,054
|
|
|
|
2,530
|
|
|
|
2,430
|
|
|
|
2,859
|
|
|
|
|
|
|
|
|
|
Average
GasJack
tm
unit utilization (during period)(5)
|
|
|
93.6
|
%
|
|
|
92.0
|
%
|
|
|
90.3
|
%
|
|
|
89.6
|
%
|
|
|
87.6
|
%
|
|
|
87.5
|
%
|
|
|
86.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Working capital is defined as current assets minus current
liabilities.
|
|
(2)
|
|
Includes net proceeds from the offering.
|
|
(3)
|
|
Please read Non-GAAP Financial
Measures for more information regarding EBITDA. We define
EBITDA as earnings before interest, taxes, depreciation and
amortization.
|
|
(4)
|
|
Capital expenditures primarily consist of capital expenditures
to expand the operating capacity or revenue of existing or new
assets.
|
|
(5)
|
|
We define average
GasJack
tm
unit utilization as the number of
GasJack
tm
units being used to provide services on customer well sites
divided by the total number of
GasJack
tm
units in our fleet.
|
The unaudited pro forma financial information should not be
considered as indicative of the historical results we would have
had we been formed at the beginning of each respective pro forma
period or the results we will have after this offering.
13
Non-GAAP Financial
Measures
We include in this prospectus the non-GAAP financial measure of
EBITDA. We define EBITDA as earnings before interest, taxes,
depreciation and amortization. EBITDA is used as a supplemental
financial measure by our management and by external users of our
financial statements, including investors, to assess:
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
those of other companies in the production enhancement business,
without regard to financing or capital structure; and
|
|
|
|
the viability of capital expenditure projects and the overall
rates of return on alternative investment opportunities.
|
We believe disclosure of EBITDA provides useful information to
investors because, when viewed with our GAAP results and the
accompanying reconciliations, it provides a more complete
understanding of our performance than GAAP results alone. We
also believe that investors benefit from having access to the
same financial measures that management uses in evaluating the
results of our business. When using this measure to compare to
other companies, which we believe can be a useful tool to
evaluate us, please note that EBITDA may be calculated
differently between companies. We cannot ensure that this
non-GAAP financial measure is directly comparable to other
companies similarly titled measures.
EBITDA should not be considered an alternative to net income,
operating income, cash flows from operating activities or any
other measure of financial performance presented in accordance
with GAAP. Our EBITDA may not be comparable to EBITDA or
similarly titled measures of other entities, as other entities
may not calculate EBITDA in the same manner as we do.
The following table reconciles net income to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compressco Partners
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Six
|
|
|
|
|
|
|
Year
|
|
|
Months
|
|
|
|
Compressco Partners Predecessor
|
|
|
Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended, June 30
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Net Income
|
|
$
|
3,316
|
|
|
$
|
7,502
|
|
|
$
|
12,985
|
|
|
$
|
17,601
|
|
|
$
|
23,572
|
|
|
$
|
11,248
|
|
|
$
|
12,622
|
|
|
$
|
10,810
|
|
|
$
|
6,172
|
|
Provision for income taxes
|
|
|
2,028
|
|
|
|
2,010
|
|
|
|
516
|
|
|
|
1,029
|
|
|
|
660
|
|
|
|
257
|
|
|
|
619
|
|
|
|
532
|
|
|
|
486
|
|
Depreciation and amortization
|
|
|
1,965
|
|
|
|
3,098
|
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
|
|
6,138
|
|
|
|
3,648
|
|
Interest
|
|
|
1,107
|
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
8,416
|
|
|
$
|
13,236
|
|
|
$
|
17,994
|
|
|
$
|
24,989
|
|
|
$
|
33,532
|
|
|
$
|
15,880
|
|
|
$
|
18,714
|
|
|
$
|
17,480
|
|
|
$
|
10,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
RISK
FACTORS
Limited partnership interests are inherently different from
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in the natural gas wellhead
compression-based production enhancement services business. You
should consider carefully the following risk factors together
with all of the other information included in this prospectus in
evaluating an investment in our common units.
If any of the following risks were to occur, our business,
financial condition or results of operations could be affected
in a materially adverse manner. In that case, we might not be
able to pay the initial quarterly distribution on all of our
common units and general partner units, the trading price of our
common units could decline and our unitholders could lose all or
part of their investment.
Risks
Related to Our Business
We may
not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
general partner units at the initial quarterly distribution rate
under our cash distribution policy.
To make our cash distributions at our initial quarterly
distribution rate of $ per common
unit per quarter, or $ per common
unit per year, and $ per general
partner unit per quarter, or $ per
general partner unit per year, we will require available cash of
approximately $ million per
quarter, or $ million per
year, based on the common units and general partner units
outstanding immediately after completion of this offering
($ million, if the
underwriters exercise in full their over-allotment option). We
may not have sufficient available cash from operating surplus
each quarter to enable us to make cash distributions at the
initial quarterly distribution rate under our cash distribution
policy. The amount of cash we can distribute on our units
principally depends upon the amount of cash we generate from our
operations, which will fluctuate from quarter to quarter based
on, among other things, the risks described in this section and:
|
|
|
|
|
the level of capital expenditures we make;
|
|
|
|
the cost of achieving organic growth in current and new markets;
|
|
|
|
fluctuations in our working capital requirements;
|
|
|
|
our ability to borrow funds and access capital markets;
|
|
|
|
the amount of cash reserves established by our general partner;
|
|
|
|
the fees we charge and the margins we realize from our
production enhancement services operations;
|
|
|
|
the level of our operating costs and expenses;
|
|
|
|
the prices of, levels of production of, and demand for, natural
gas;
|
|
|
|
the level of competition from other companies;
|
|
|
|
prevailing economic conditions; and
|
|
|
|
any future debt service requirements and other liabilities.
|
For a description of additional restrictions and factors that
may affect our ability to make cash distributions, please read
Our Cash Distribution Policy and Restrictions on
Distributions on page 35.
On a
pro forma basis we would not have had sufficient cash available
for distribution to pay the full initial quarterly distribution
on all units for the twelve months ended December 31, 2007
and June 30, 2008.
The amount of cash available for distribution we need to pay the
initial quarterly distribution for four quarters on the common
units and the general partner units to be outstanding
immediately after this offering is
15
approximately $ million. Our
pro forma cash available for distribution generated during the
twelve months ended December 31, 2007 and June 30,
2008 of $ million and
$ million, respectively,
would have been insufficient to allow us to pay the full initial
quarterly distribution on all of the common units. The shortfall
in available cash for distributions for the twelve months ended
December 31, 2007 and June 30, 2008 would have
resulted in distributions with respect to our common units
representing approximately %
and %, respectively, of our initial
quarterly distribution. For a calculation of our ability to make
distributions to our unitholders based on our pro forma results
in the twelve months ended December 31, 2007 and
June 30, 2008, please read Our Cash Distribution
Policy and Restrictions on Distributions Pro Forma
Cash Available for Distribution for the Twelve Months Ended
December 31, 2007 and June 30, 2008 on
page 38.
The
assumptions underlying our estimate of cash available for
distribution we include in Our Cash Distribution Policy
and Restrictions on Distributions are inherently uncertain
and are subject to significant business, economic, financial,
regulatory and competitive risks and uncertainties that could
cause our actual results to differ materially from those
estimated.
Our estimate of cash available for distribution set forth in
Our Cash Distribution Policy and Restrictions on
Distributions is based on assumptions that are inherently
uncertain and are subject to significant business, economic,
financial, regulatory and competitive risks and uncertainties
that could cause actual results to differ materially from those
estimated. If we do not achieve the estimated results, we may
not be able to pay the full initial quarterly distribution or
any amount on our common units, in which event the market price
of our common units will likely decline materially.
We may
be unable to achieve our expected organic growth or market
penetration.
A principal focus of our growth strategy is to continue to grow
organically. Our future growth will depend upon a number of
factors, some of which we cannot control. These factors include
our ability to:
|
|
|
|
|
attract new customers;
|
|
|
|
maintain our existing customers and maintain or expand the level
of production enhancement services we provide to them;
|
|
|
|
recruit and train qualified field services personnel and retain
valued employees;
|
|
|
|
increase our
GasJack
tm
unit manufacturing operations;
|
|
|
|
allocate our human resources optimally;
|
|
|
|
expand our domestic and international presence; and
|
|
|
|
obtain required financing for our future operations.
|
A deficiency in any of these factors could adversely affect our
ability to execute our growth strategy.
Our
ability to manage and grow our business effectively and provide
adequate production enhancement services to our customers may be
adversely affected if our general partner loses its management
or is unable to retain trained personnel.
We depend on the continuing efforts of our executive officers,
all of whom are employees of our general partner. The departure
of any of our executive officers could have a significant
negative effect on our business, operating results, financial
condition and on our ability to compete effectively in the
marketplace. In addition, we do not have any employees, but
rather rely primarily on our general partners employees to
operate our business. Our ability to provide quality production
enhancement services depends upon our general partners
ability to hire, train and retain an adequate number of trained
personnel. We operate in an industry characterized by highly
competitive labor markets and, similar to many of our
competitors, our predecessor has experienced high employee
turnover in certain regions. It is possible that our labor
expenses could increase if there is a shortage in the supply of
skilled Senior Gas Production Specialists and other service
professionals. Our general partner may be unable to improve
employee retention rates or maintain an adequate skilled labor
16
force necessary for us to operate efficiently and to support our
growth strategy without increasing labor expenses. Failure to do
so could impair our ability to operate efficiently and to retain
current customers and attract prospective customers, which could
cause our business to suffer materially. Additionally, increases
in labor expenses may have an adverse impact on our operating
results, and may reduce the amount of cash available for
distribution to our unitholders.
We
depend on domestic and international demand for and production
of natural gas, and a reduction in this demand or production
could adversely affect the demand or the prices we charge for
our services, which could cause our revenue and cash available
for distribution to our unitholders to decrease.
Our production enhancement services operations are significantly
dependent upon the demand for and production of natural gas in
the various domestic and international locations in which we
operate. Demand for natural gas may be affected by, among other
factors, natural gas prices, weather, demand for energy and
availability of alternative energy sources. Any prolonged,
substantial reduction in the demand for natural gas would, in
all likelihood, depress the level of production activity and
result in a decline in the demand for our production enhancement
services, which would reduce our cash available for
distribution. A significant reduction in demand for our
production enhancement services for a substantial period of time
could force us to reduce our pricing substantially.
We
have five customers that collectively accounted for
approximately 51.1% of our pro forma 2007 revenues. Our services
will be provided to these customers pursuant to short-term
contracts, which typically are cancellable with
30 days notice. The loss of any of these significant
customers would result in a decline in our revenue and cash
available to pay distributions to our unitholders.
Our five most significant customers collectively accounted for
approximately 51.1% of our pro forma 2007 revenues. Therefore,
our loss of a single significant customer may have a greater
effect on our financial results than it would on a company with
a more diverse customer base. Our five largest customers for the
twelve months ended December 31, 2007 and the six months
ended June 30, 2008, were BP, PEMEX, Devon Energy
Corporation, Chesapeake Energy, and EXCO Resources. These five
customers accounted for approximately 20.1%, 8.8%, 8.2%, 7.8%
and 6.2% of our pro forma revenues for the twelve months ended
December 31, 2007, respectively, and approximately 21.6%,
10.3%, 8.8%, 11.9% and 6.8% of our pro forma revenues for the
six months ended June 30, 2008, respectively. The loss of
all or even a portion of the production enhancement services we
provide to these customers, as a result of competition or
otherwise, could have a material adverse effect on our business,
results of operations, financial condition and our ability to
make cash distributions to our unitholders.
We
depend on particular suppliers and are vulnerable to product
shortages and price increases, which could have a negative
impact on our results of operations and cash available for
distribution to our unitholders.
We will manufacture all of our
GasJack
tm
units. We obtain some of the components used in those
GasJack
tm
units from a single source or a limited group of suppliers. Our
reliance on these suppliers involves several risks, including an
inability to obtain an adequate supply of required components in
a timely manner. We do not have long-term contracts with these
sources and the partial or complete loss of certain of these
sources could have a negative impact on our results of
operations and could damage our customer relationships. Further,
since any increase in component prices for
GasJack
tm
units manufactured by us could decrease our margins, a
significant increase in the price of one or more of these
components could have a negative impact on our results of
operations and cash available for distribution to our
unitholders.
We
face competition that may cause us to lose market share and harm
our financial performance.
The production enhancement services business is highly
competitive. Primary competition for our production enhancement
services business comes from various local and regional
companies that utilize packages consisting of a screw compressor
with a separate engine driver or a reciprocating compressor with
a separate engine driver. To a lesser extent, we face
competition from large national and multinational companies
17
with greater financial resources than us. While these companies
have traditionally focused on higher-horsepower natural gas
gathering and transportation equipment and services and have
represented limited competition to-date, one or more of these
companies could elect to compete in the wellhead
compression-based production enhancement services business
segment. In addition, our competitors include plunger lift and
other artificial lift service providers and companies engaged in
leasing compressors and other equipment. Our ability to renew or
replace existing contracts with our customers at rates
sufficient to maintain current revenue and cash flows could be
adversely affected by the activities of our competitors and our
customers. Our competitors could substantially increase the
resources they devote to the development and marketing of
competitive services, develop more efficient production
enhancement equipment or substantially decrease the price at
which they offer their services. In addition, our customers that
are significant producers of natural gas may elect to purchase
their own production enhancement equipment in lieu of using our
production enhancement services. Any of these competitive
pressures could have a material adverse effect on our business,
results of operations, financial condition and ability to make
cash distributions to our unitholders.
We are
a restricted subsidiary under the TETRA Credit Facility and
certain other indebtedness and TETRA is subject to various
covenants under that facility and other indebtedness with
respect to its restricted subsidiaries, which may adversely
affect our operations.
Although we are not contractually bound by and are not liable
for amounts outstanding under TETRAs amended and restated
credit facility with J.P. Morgan Chase Bank, N.A. as
Administrative Agent, dated as of June 27, 2006, as amended
and which we refer to as the TETRA Credit Facility,
or under several series of notes which TETRA has issued pursuant
to certain note purchase agreements in September 2004, April
2006 and April 2008 (which included Series A and
Series B notes) and which we collectively refer to as the
TETRA Senior Notes, we are considered a restricted
subsidiary of TETRA for purposes of the TETRA Credit Facility
and TETRA Senior Notes. TETRA controls our general partner and
the officers and directors of our general partner have fiduciary
duties not only to our investors, but also to TETRA, as the
owner of our general partner. Our status as a restricted
subsidiary means that our ability to take certain actions,
including incurring indebtedness, making acquisitions and
capital expenditures, selling assets and issuing equity, will be
indirectly restricted by the TETRA Credit Facility and the TETRA
Senior Notes. The TETRA Credit Facility is scheduled to mature
in 2011. The TETRA Senior Notes will mature on
September 30, 2011, April 30, 2016 and April 30,
2013 (for the 2008 Series A notes) and April 30, 2015
(for the 2008 Series B notes), respectively.
Both the TETRA Credit Facility and the TETRA Senior Notes
contain customary covenants and restrictions on actions by TETRA
and its restricted subsidiaries. These covenants restrict, among
other things the ability of TETRA, considered together with its
restricted subsidiaries, to:
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Incur additional indebtedness;
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Dispose of assets;
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Engage in mergers and consolidations;
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Sell assets;
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Create liens on assets;
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Enter into a new line of business;
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Make investments in unrestricted subsidiaries and foreign
subsidiaries;
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Engage in transactions with affiliates;
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Make investments;
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Make capital expenditures; and
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Issue additional capital.
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Additionally, the TETRA Credit Facility contains a requirement
that TETRA maintain, on a consolidated basis with its restricted
subsidiaries, an interest coverage ratio of at least 3.0 to 1.0
and a leverage ratio no
18
greater than 3.0 to 1.0. TETRA will be able to take advantage of
exceptions to these limitations on our behalf only to the extent
that TETRA does not take advantage of the exceptions for itself
or its other restricted subsidiaries.
TETRA indirectly owns and controls our general partner and has
the ability to prevent us from taking actions that would cause
TETRA to violate these covenants or to be in default under its
debt agreements. The existence of these restrictions and
TETRAs control over the use of the exceptions thereunder
could indirectly adversely affect our ability to finance our
future operations or capital needs or engage in, expand or
pursue our business activities and could prevent us from
engaging in certain transactions that might otherwise be
considered beneficial to us. Additionally, in the future TETRA
may determine that it is in its best interest to agree to more
restrictive covenants or to pledge assets, including its
ownership of our general partner, which may indirectly impede
our business operations or affect our ability to pay the initial
quarterly distribution and could increase the risk that control
over our general partner could be transferred to TETRAs
lenders in the event of a default.
Our
ability to grow in the future is dependent on our ability to
access external expansion capital.
We will distribute all of our available cash after expenses and
prudent operating reserves to our unitholders. We intend to use
the proceeds from this offering to fund our growth and working
capital for approximately the next 18 months. When the
proceeds from this offering have been depleted, we expect that
we will rely primarily upon external financing sources,
including borrowings and the issuance of debt and equity
securities, to fund expansion capital expenditures. Our ability
to borrow may be indirectly limited by our status as a
restricted subsidiary under the TETRA Credit Facility and TETRA
Senior Notes. To the extent we are unable to efficiently finance
growth externally, our cash distribution policy will
significantly impair our ability to grow. In addition, because
we distribute all of our available cash, we may not grow as
quickly as businesses that reinvest their available cash to
expand ongoing operations. To the extent we issue additional
partnership units in connection with other expansion capital
expenditures, the payment of distributions on those additional
partnership units may increase the risk that we will be unable
to maintain or increase our per common unit distribution level.
There are no limitations in our partnership agreement on our
ability to issue additional partnership units, including
partnership units ranking senior to the common units. The
incurrence of borrowings or other debt by us to finance our
growth strategy would result in interest expense, which in turn
would affect the available cash that we have to distribute to
our unitholders.
We
will not have a credit facility at the closing of this offering
and may be unable to obtain financing or enter into a credit
facility on acceptable terms or at all in the
future.
At the closing of this offering, we will not have a credit
facility in place or commitments from any lenders to enter into
future financing agreements. Although we believe the proceeds of
this offering will be sufficient to fund the future growth and
expansion of our business and our working capital requirements
for approximately the next 18 months, when we have depleted
these funds we will need to enter into a credit facility or
secure other financing arrangements. Our ability to enter into a
credit facility or otherwise incur indebtedness may be
indirectly limited by our status as a restricted subsidiary
under TETRAs Credit Facility and the TETRA Senior Notes
and our ability to access funds under that facility will be
subject to TETRAs control. Depending on then prevailing
economic conditions and financial, business, regulatory and
other factors, some of which are beyond our control, our ability
to enter into a credit facility or other debt agreements in the
future may be limited. In some situations, we may be unable to
obtain financing or enter into a credit facility on acceptable
terms or at all.
Our
general partner is a restricted subsidiary and a guarantor under
the TETRA Credit Facility and the TETRA Senior Notes; in the
event TETRA is unable to meet its obligations under the TETRA
Credit Facility and the TETRA Senior Notes, or is declared
bankrupt, our partnership may be dissolved.
Our general partner is a restricted subsidiary and a guarantor
under the TETRA Credit Facility and the TETRA Senior Notes. In
the event TETRA is unable to satisfy its obligations under the
TETRA Credit Facility and the TETRA Senior Notes, our general
partner could be required to satisfy those obligations, which
19
could impair the ability of our general partner to perform its
functions as general partner or cause it to be declared
bankrupt. Additionally, in the event TETRA becomes insolvent or
is declared bankrupt, our general partner may be deemed
insolvent or declared bankrupt as well. Under the terms of our
partnership agreement, the bankruptcy or insolvency of our
general partner will cause a dissolution of our partnership.
The
credit and risk profile of TETRA could adversely affect our
business and our ability to make distributions to our
unitholders.
The credit and business risk profile of TETRA could adversely
affect our ability to incur indebtedness in the future or obtain
a credit rating, as credit rating agencies may consider the
leverage and credit profile of TETRA and its affiliates in
assigning a rating because of their control of us, their
performance of administrative functions for us, our close
operational links and our contractual relationships.
Furthermore, the trading price of our units may be adversely
affected by financial or operational difficulties or leverage at
TETRA.
We may
be unable to negotiate extensions or replacements of our
contracts with our customers, which are generally cancellable on
30 days notice, which could adversely affect our
results of operations and cash available for distribution to our
unitholders.
We generally provide production enhancement services to our
customers under evergreen contracts that are
cancellable on thirty days notice. We may be unable to
negotiate extensions or replacements of these contracts on
favorable terms, if at all, which could adversely affect our
results of operations and cash available for distribution.
We may
be unable to acquire the remainder of our predecessors
production enhancement services business, which could limit our
ability to increase our cash available for distribution to our
unitholders.
TETRA is under no obligation to offer us the opportunity to
purchase the remainder of Compresscos production
enhancement services business, and TETRAs board of
directors owes fiduciary duties to the stockholders of TETRA,
and not our unitholders, in making any decision to offer us this
opportunity. Likewise, we are not required to purchase any
additional portions of Compresscos business. We may never
purchase this business for several reasons, including the
following:
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Compressco may choose not to, or may not be able to, modify its
retained customer contracts to provide that they generate
qualifying income under Section 7704 of the Internal
Revenue Code;
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TETRA may choose not to sell the business retained by Compressco
to us;
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Our conflicts committee may decide not to make an offer for the
business;
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Our conflicts committee may be unable to agree on acceptable
purchase terms with TETRA; and
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We may be unable to obtain financing for the purchase on
acceptable terms or at all.
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Additionally, TETRA may be limited by the terms of its existing
or future credit facilities or indentures in its ability to
consummate a sale to us of any additional portions of the
business it retains. Additionally, we may enter into a credit
facility that includes covenants that limit our ability to make
capital expenditures and/or acquisitions. If a sale of any
additional portion of Compresscos production enhancement
services business would be restricted or prohibited by such
covenants, we or TETRA may be required to seek waivers of such
provisions or refinance those debt instruments in order to
consummate a sale, neither of which may be able to accomplished
timely, if at all. If we are unable to grow through additional
acquisitions of the remainder of Compresscos production
enhancement services business, our ability to increase our cash
available for distribution may be limited.
20
We are
subject to environmental regulation, and changes in these
regulations could increase our costs or
liabilities.
We are subject to federal, state and local laws and regulatory
standards, including laws and regulations regarding the
discharge of materials into the environment, emission controls
and other environmental protection and occupational health and
safety concerns. Environmental laws and regulations may, in
certain circumstances, impose strict liability for environmental
contamination, rendering us liable for remediation costs,
natural resource damages and other damages as a result of our
conduct that was lawful at the time it occurred or the conduct
of, or conditions caused by, prior owners or operators or other
third parties. In addition, where contamination may be present,
it is not uncommon for neighboring land owners and other third
parties to file claims for personal injury, property damage and
recovery of response costs. Remediation costs and other damages
arising as a result of environmental laws and regulations, and
costs associated with new information, changes in existing
environmental laws and regulations or the adoption of new
environmental laws and regulations could be substantial and
could adversely affect our financial condition or results of
operations. Moreover, failure to comply with these environmental
laws and regulations may result in the imposition of
administrative, civil and criminal penalties, and the issuance
of injunctions delaying or prohibiting operations.
We routinely deal with natural gas, oil and other petroleum
products. Hydrocarbons or other hazardous wastes may have been
disposed on wellhead sites used by us to provide production
enhancement services or to store inactive
GasJack
tm
units or on or under other locations where wastes have been
taken for disposal. These properties may be subject to
investigatory, remediation and monitoring requirements under
foreign, federal, state and local environmental laws and
regulations.
The modification or interpretation of existing environmental
laws or regulations, the more vigorous enforcement of existing
environmental laws or regulations, or the adoption of new
environmental laws or regulations may also adversely affect oil
and natural gas exploration and production, which in turn could
have an adverse effect on us.
TETRA
and Compressco may compete with us in the future, which could
adversely affect our results of operations and cash available
for distribution to our unitholders.
Although under the non-competition provisions of the omnibus
agreement TETRA, Compressco and their respective affiliates will
be prohibited from providing production enhancement services to
our customers, Compressco will be permitted to provide
production enhancement services to the customers it retains and,
following the earliest to occur of the third anniversary of the
completion of this offering or a change of control of TETRA,
Compressco or our general partner, neither TETRA nor Compressco
will be prohibited from competing with us in the natural gas
production enhancement services business. Moreover, the omnibus
agreement will permit Compressco to sell
GasJack
tm
units or provide production enhancement services utilizing the
GasJack
tm
units it retains immediately following the completion of this
offering. TETRA and Compressco currently have more financial
resources than we do, and if TETRA or Compressco decide to
compete with us in the future, then our results of operations
and cash available for distribution to our unitholders could be
adversely affected.
We do
not insure against all potential losses and could be seriously
harmed by unexpected liabilities.
Natural gas production enhancement services operations are
subject to inherent risks such as equipment defects, malfunction
and failures, and natural disasters that can result in
uncontrollable flows of gas or well fluids, fires and
explosions. These risks could expose us to substantial liability
for personal injury, death, property damage, pollution and other
environmental damages. Our insurance may be inadequate to cover
our liabilities. Further, insurance covering the risks we face
or in the amounts we desire may not be available in the future
or, if available, the premiums may not be commercially
justifiable. If we were to incur substantial liability and such
damages were not covered by insurance or were in excess of
policy limits, or if we were to incur liability at a time when
we are not able to obtain liability insurance, our business,
results of operations and financial condition could be adversely
affected. In addition, we do not maintain business interruption
21
insurance. Please read Our Operations
Environmental and Safety Regulations on page 75 for a
description of how we are subject to federal, state and local
laws and regulations governing the discharge of materials into
the environment or otherwise relating to protection of human
health and environment.
An
increase in interest rates may cause the market price of our
common units to decline.
Like all equity investments, an investment in our common units
is subject to certain risks. In exchange for accepting these
risks, investors may expect to receive a higher rate of return
than would otherwise be obtainable from lower-risk investments.
Accordingly, as interest rates rise, the ability of investors to
obtain higher risk-adjusted rates of return by purchasing
government-backed debt securities may cause a corresponding
decline in demand for riskier investments generally, including
yield-based equity investments such as publicly traded limited
partnership interests. Reduced demand for our common units
resulting from investors seeking other more favorable investment
opportunities may cause the trading price of our common units to
decline.
Risks
Inherent in an Investment in Us
Compressco
controls our general partner, which has sole responsibility for
conducting our business and managing our operations. Compressco
has conflicts of interest, which may permit it to favor its own
interests to our unitholders detriment.
Following this offering, Compressco will own and control our
general partner. Some of our general partners directors
are directors of Compressco and all of our executive officers
are currently officers of Compressco. Therefore, conflicts of
interest may arise between Compressco and its affiliates,
including TETRA and our general partner, on the one hand, and us
and our unitholders, on the other hand. In resolving these
conflicts of interest, our general partner may favor its own
interests and the interests of its affiliates over the interests
of our unitholders. These conflicts include, among others, the
following situations:
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neither our partnership agreement nor any other agreement
requires Compressco to pursue a business strategy that favors
us. Compresscos directors and officers have a fiduciary
duty to make these decisions in the best interests of TETRA, the
owner of Compressco, which may be contrary to our interests;
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our general partner controls the interpretation and enforcement
of contractual obligations between us and our affiliates, on the
one hand, and TETRA and Compressco, on the other hand, including
provisions governing administrative services, acquisitions and
transfers of
GasJack
tm
units and non-competition provisions;
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Compressco is not required to contribute to us any additional
production enhancement services contracts or related equipment;
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we are considered a restricted subsidiary for purpose of the
TETRA Credit Facility and certain other TETRA indebtedness; our
general partner is controlled by and owes fiduciary duties to
TETRA and may, as a result of that control or those duties,
decline to take actions which may be in our best interest, but
which would also cause TETRA to default under the terms of
TETRAs indebtedness;
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our general partner is allowed to take into account the
interests of parties other than us, including Compressco and its
affiliates, in resolving conflicts of interest;
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Compressco will continue to provide production enhancement
services, as well as third-party sales coupled with aftermarket
services, and our non-competition agreement with TETRA and
Compressco will terminate after three years, or shorter upon a
change of control of TETRA, Compressco or our general partner
(please read Risks Related to Our Business
TETRA and Compressco may compete with us in the future, which
could adversely affect our results of operations and cash
available for distribution to our unitholders on
page 21);
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our general partner has limited its liability and reduced its
fiduciary duties to our unitholders and us, and has also
restricted the remedies available to our unitholders for actions
that, without the limitations, might constitute breaches of
fiduciary duty;
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our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is a
maintenance capital expenditure, which reduces operating
surplus, or an expansion capital expenditure, which does not
reduce operating surplus, and this determination can affect the
amount of cash that is distributed to our unitholders;
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our general partner determines which costs incurred by it and
its affiliates are reimbursable by us and TETRA and Compressco
will determine the allocation of shared overhead expenses;
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our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered to us or entering into additional contractual
arrangements with any of these entities on our behalf;
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our general partner intends to limit its liability regarding our
contractual and other obligations and, in some circumstances, is
entitled to be indemnified by us;
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our general partner may exercise its limited right to call and
purchase common units if it and its affiliates own more than 90%
of the common units; and
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our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
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Please read Conflicts of Interest and Fiduciary
Duties on page 102.
Our
reliance on TETRA for certain general and administrative support
services and our limited ability to control certain costs could
have a material adverse effect on our business, results of
operations, financial condition and ability to make cash
distributions to our unitholders. Cost reimbursements due to our
general partner and its affiliates for services provided, which
will be determined by our general partner, will be substantial
and will reduce our cash available for distribution to our
unitholders.
Pursuant to an omnibus agreement to be entered into between us,
TETRA and Compressco, TETRA will provide to us certain general
and administrative services, including, without limitation,
legal, accounting, treasury, insurance administration and claims
processing and risk management, health, safety and
environmental, information technology, human resources, credit,
payroll, internal audit and tax services. Our ability to execute
our growth strategy will depend significantly upon TETRAs
performance of these services. Our reliance on TETRA could have
a material adverse effect on our business, results of
operations, financial condition and ability to make cash
distributions to our unitholders. Additionally, TETRA will
receive reimbursement for the provision of various general and
administrative services for our benefit. Our general partner
will also be entitled to significant reimbursement for expenses
it incurs on our behalf, including reimbursement for the cost of
its employees who perform services for us. Payments for these
services will be substantial and will reduce the amount of cash
available for distribution to our unitholders. Please read
Certain Relationships and Related Party
Transactions Omnibus Agreement on
page 100. In addition, under Delaware partnership law, our
general partner has unlimited liability for our obligations,
such as our debts and environmental liabilities, except for our
contractual obligations that are expressly made without recourse
to our general partner. To the extent our general partner incurs
obligations on our behalf, we are obligated to reimburse or
indemnify it. If we are unable or unwilling to reimburse or
indemnify our general partner, our general partner may take
actions to cause us to make payments of these obligations and
liabilities. Any such payments could reduce the amount of cash
otherwise available for distribution to our unitholders.
23
Our
partnership agreement limits our general partners
fiduciary duties to holders of our common units and restricts
the remedies available to holders of our common units for
actions taken by our general partner that might otherwise
constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that reduce the
fiduciary standards to which our general partner would otherwise
be held by state fiduciary duty laws. For example, our
partnership agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Examples include the exercise of its limited call right, the
exercise of its rights to transfer or vote the partnership units
it owns, the exercise of its registration rights and its
determination whether or not to consent to any merger or
consolidation of the partnership or amendment to the partnership
agreement;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith, meaning it
believed the decision was in the best interests of our
partnership;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner acting in good
faith and not involving a vote of our unitholders must be on
terms no less favorable to us than those generally being
provided to or available from unrelated third parties or must be
fair and reasonable to us, as determined by our
general partner in good faith and that, in determining whether a
transaction or resolution is fair and reasonable,
our general partner may consider the totality of the
relationships between the parties involved, including other
transactions that may be particularly advantageous or beneficial
to us;
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision the general partner acted
in good faith, and in any proceeding brought by or on behalf of
any limited partner or us, the person bringing or prosecuting
such proceeding will have the burden of overcoming such
presumption.
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By purchasing a common unit, a common unitholder will agree to
become bound by the provisions in the partnership agreement,
including the provisions discussed above. Please read
Conflicts of Interest and Fiduciary Duties
Fiduciary Duties on page 107.
Holders
of our common units have limited voting rights and are not
entitled to elect our general partner or its directors, which
could reduce the price at which the common units will
trade.
Unlike the holders of common stock in a corporation, our
unitholders have only limited voting rights on matters affecting
our business and, therefore, limited ability to influence
managements decisions regarding our business. Unitholders
will have no right to elect our general partner or its board of
directors. The board of directors of our general partner will be
chosen by its sole shareholder, Compressco, which, in turn, is a
wholly owned subsidiary of and controlled by TETRA. Furthermore,
if our unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our
general partner. As a result of these limitations, the price at
which the common units will trade could be diminished because of
the absence or reduction of a takeover premium in the trading
price.
24
Even
if holders of our common units are dissatisfied, they cannot
initially remove our general partner without its
consent.
Our unitholders will be unable initially to remove our general
partner without its consent because our general partner and its
affiliates will own sufficient units upon completion of this
offering to be able to prevent its removal. The vote of the
holders of at least
66
2
/
3
%
of all outstanding common units voting together as a single
class is required to remove the general partner. Following the
completion of this offering, TETRA, which indirectly owns our
general partner, will directly
own % of our aggregate outstanding
common units, giving TETRA the ability to block any attempted
removal of the general partner.
We can
issue an unlimited number of partnership units in the future,
including units that are senior in right of distributions,
liquidation and voting to the common units, without the approval
of our unitholders, which would dilute our unitholders
existing ownership interests.
Our partnership agreement does not limit the number of
additional partnership units that we may issue at any time
without the approval of our unitholders. In addition, we may
issue an unlimited number of partnership units that are senior
to the common units in right of distribution, liquidation or
voting. The issuance by us of additional common units or other
equity securities of equal or senior rank will have the
following effects:
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our previously existing unitholders proportionate
ownership interests in us will decrease;
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the amount of cash available for distribution on each common
unit may decrease;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding
common unit may be diminished; and
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the market price of the common units may decline.
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Control
of our general partner may be transferred to a third party
without unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of our unitholders.
Furthermore, our partnership agreement does not restrict the
ability of Compressco, the owner of our general partner, from
transferring all or a portion of its ownership interest in our
general partner to a third party. The new owners of our general
partner would then be in a position to replace the board of
directors and officers of our general partners with its own
choices and thereby influence the decisions taken by the board
of directors and officers.
Our
unitholders will experience immediate and substantial dilution
of $ in tangible net book value
per common unit.
The assumed initial public offering price of
$ per common unit exceeds our pro
forma net tangible book value of $
per common unit. Based on the assumed initial public offering
price of $ per common unit, our
unitholders will incur immediate and substantial dilution of
$ per common unit. This dilution
results primarily because the assets contributed by our general
partner and its affiliates are recorded in accordance with GAAP
at their historical cost, and not their fair value. Please read
Dilution on page 34.
Our
partnership agreement restricts the voting rights of unitholders
owning 20% or more of our common units, other than our general
partner and its affiliates, including TETRA. Accordingly, our
unitholders voting rights may be limited.
Unitholders voting rights are further restricted by the
partnership agreement provision providing that any partnership
units held by a person that owns 20% or more of any class of
partnership units then outstanding, other than our general
partner, its affiliates, including TETRA, its transferees and
persons who acquired such partnership units with the prior
approval of the board of directors of our general partner,
cannot vote on any matter. Our partnership agreement also
contains provisions limiting the ability of our unitholders to
call meetings or to acquire information about our operations, as
well as other provisions.
25
Affiliates
of our general partner may sell common units in the public
markets, which sales could have an adverse impact on the trading
price of the common units.
After the sale of the common units offered hereby, TETRA will
hold an aggregate of common units.
The sale of these common units in the public markets could have
an adverse impact on the price of the common units or on any
trading market that may develop.
Our
general partner has a limited call right that may require our
unitholders to sell common units at an undesirable time or
price.
If at any time our general partner and its affiliates own more
than 90% of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than the then-current market price. As a result, our
unitholders may be required to sell common units at an
undesirable time or price and may not receive any return on
their investment. Our unitholders may also incur a tax liability
upon a sale of common units. At the completion of this offering
and assuming no exercise of the underwriters
over-allotment option, our general partner and its affiliates
will own approximately % of our
outstanding common units. For additional information about this
right, please read The Partnership Agreement
Limited Call Right on page 119.
Our
unitholders liability may not be limited if a court finds
that unitholder action constitutes control of our
business.
A general partner of a partnership generally has unlimited
liability for the obligations of the partnership, except for
those contractual obligations of the partnership that are
expressly made without recourse to the general partner. Our
partnership is organized under Delaware law and we conduct
business in a number of other states. The limitations on the
liability of holders of limited partner interests for the
obligations of a limited partnership have not been clearly
established in some of the other states in which we do business.
Our unitholders could be liable for any and all of our
obligations as if they were a general partner if:
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a court or government agency determined that we were conducting
business in a state but had not complied with that particular
states partnership statute; or
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our unitholders right to act with other unitholders to
remove or replace the general partner, to approve some
amendments to our partnership agreement or to take other actions
under our partnership agreement constitutes control
of our business.
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For a discussion of the implications of the limitations of
liability on a unitholder, please read The Partnership
Agreement Limited Liability on page 113.
Our
unitholders may have liability to repay distributions that were
wrongfully distributed to them.
Under certain circumstances, our unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to our unitholders if the distribution
would cause our liabilities to exceed the fair value of our
assets. Delaware law provides that for a period of three years
from the date of the impermissible distribution, limited
partners who received the distribution and who knew at the time
of the distribution that it violated Delaware law will be liable
to the limited partnership for the distribution amount.
Substituted limited partners are liable for the obligations of
the assignor to make contributions to the partnership that are
known to the substituted limited partner at the time it became a
limited partner and for unknown obligations if the liabilities
could be determined from the partnership agreement. Liabilities
to partners on account of their partnership interest and
liabilities that are non-recourse to the partnership are not
counted for purposes of determining whether a distribution is
permitted.
26
There
is no existing market for our common units, and a trading market
that will provide our unitholders with adequate liquidity may
not develop. The price of our common units may fluctuate
significantly, and our unitholders could lose all or part of
their investment.
Prior to this offering, there has been no public market for the
common units. After this offering, there will
be publicly traded common units,
assuming the underwriters over-allotment option is not
exercised. We do not know the extent to which investor interest
will lead to the development of a trading market or how liquid
that market might be. Our unitholders may not be able to resell
common units at or above the initial public offering price.
Additionally, the lack of liquidity may contribute to
significant fluctuations in the market price of the common units
and limit the number of investors who are able to buy the common
units.
The initial public offering price for the common units will be
determined by negotiations between us and the representatives of
the underwriters and may not be indicative of the market price
of the common units that will prevail in the trading market. The
market price of our common units may decline below the initial
public offering price. The market price of our common units may
also be influenced by many factors, some of which are beyond our
control, including:
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the level of our distributions and our earnings or those of
other companies in our industry;
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announcements by us or our competitors of significant contracts,
acquisitions or other business developments;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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general economic conditions;
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the failure of securities analysts to cover our common units
after this offering or changes in financial estimates by
analysts; and
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the other factors described in these Risk Factors.
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We
will incur increased costs as a result of being a publicly
traded company.
We have no history operating as a publicly traded company. As a
publicly traded company, we will incur additional selling,
general and administrative and other expenses. In addition, the
Sarbanes-Oxley Act of 2002, as well as rules subsequently
implemented by the SEC and the NASDAQ Global Market, has
required changes in corporate governance practices of publicly
traded companies. We expect these rules and regulations to
increase our legal and financial compliance costs and to make
activities more time-consuming and costly. For example, as a
result of becoming a publicly traded company, we are required to
prepare audited financial statements, comply with periodic
filing requirements, have at least three independent directors,
create additional board committees and adopt policies regarding
internal controls and disclosure controls and procedures,
including the preparation of reports on internal controls over
financial reporting. In addition, we will incur additional costs
associated with our publicly traded company reporting
requirements, including those related to financial audit
services and
Schedule K-1
preparation and distribution. We have included $2.0 million
of estimated incremental costs per year associated with being a
publicly traded limited partnership for purposes of our estimate
of our cash available for distribution for the twelve months
ended September 30, 2009 included elsewhere in this
prospectus; however, it is possible that our actual incremental
costs of being a publicly traded company will be higher than we
currently estimate.
Tax Risks
to Common Unitholders
In addition to reading the following risk factors, you should
read Material Tax Consequences for a more complete
discussion of the expected material federal income tax
consequences of owning and disposing of common units.
Our
tax treatment depends on our status as a partnership for U.S.
federal income tax purposes, as well as our not being subject to
a material amount of entity-level taxation by individual states.
If the Internal
27
Revenue Service treats us as a corporation or we become
subject to a material amount of entity-level taxation for state
tax purposes, it would substantially reduce the amount of cash
available for distribution to our unitholders.
The anticipated after-tax economic benefit of an investment in
the common units depends largely on our being treated as a
partnership for U.S. federal income tax purposes. We have
not received a ruling from the Internal Revenue Service, which
we refer to as the IRS, on this or any other tax matter
affecting us, and we can provide no assurance that the IRS would
provide a favorable ruling even if we requested it. Instead, we
will rely on opinions of counsel as to all material tax issues
affecting us and our unitholders.
Despite the fact that we are a limited partnership under
Delaware law, it is possible in certain circumstances for a
partnership such as ours to be treated as a corporation for
federal income tax purposes. Although we do not believe based
upon our current operations that we are so treated, a change in
our business (or a change in current law) could cause us to be
treated as a corporation for federal income tax purposes or
otherwise subject us to taxation as an entity.
If we were treated as a corporation for U.S. federal income
tax purposes, we would pay U.S. federal income tax on our
taxable income at the corporate tax rate, which is currently a
maximum of 35% and would likely pay state income tax at varying
rates. Distributions to our unitholders would generally be taxed
again as corporate distributions, and no income, gains, losses
or deductions would flow through to our unitholders. Because a
tax would be imposed upon us as a corporation, our cash
available for distribution to our unitholders would be
substantially reduced. Therefore, our treatment as a corporation
would result in a material reduction in the anticipated cash
flow and after-tax return to our unitholders, likely causing a
substantial reduction in the value of our common units.
Current law may change so as to cause us to be treated as a
corporation for U.S. federal income tax purposes or
otherwise subject us to entity-level taxation. At the federal
level, legislation has been proposed that would eliminate
partnership tax treatment for certain publicly traded
partnerships. Although such legislation would not apply to us as
currently proposed, it could be amended prior to enactment in a
manner that does apply to us. We are unable to predict whether
any of these changes, or other proposals will ultimately be
enacted. Any such changes could adversely affect the value of an
investment in our common units. At the state level, because of
widespread state budget deficits and other reasons, several
states are evaluating ways to subject partnerships to
entity-level taxation through the imposition of state income,
franchise and other forms of taxation. For example, we are
required to pay Texas margin tax at a maximum effective rate of
0.7% of our gross income apportioned to Texas in the prior year.
Imposition of such a tax on us by Texas, or any other state,
will reduce the cash available for distribution to our
unitholders.
The partnership agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that
subjects us to taxation as a corporation or otherwise subjects
us to entity-level taxation for U.S. federal, state or
local income tax purposes, the initial quarterly distribution
amount and the target distribution levels may be adjusted to
reflect the impact of that law on us at the option of our
general partner without the consent of our unitholders.
An IRS
contest of the federal income tax positions we take may
adversely affect the market for our common units, and the cost
of any IRS contest will reduce our cash available for
distribution to our unitholders.
We have not requested a ruling from the IRS with respect to our
treatment as a partnership for U.S. federal income tax
purposes or any other matter affecting us. The IRS may adopt
positions that differ from the conclusions of our counsel
expressed in this prospectus or from the positions we take. It
may be necessary to resort to administrative or court
proceedings to sustain some or all of our counsels
conclusions or the positions we take. A court may not agree with
all of our counsels conclusions or positions we take. Any
contest with the IRS may materially and adversely affect the
market for our common units and the price at which they trade.
In addition, our costs of any contest with the IRS will be borne
indirectly by our unitholders and our general partner because
the costs will reduce our cash available for distribution.
28
Our
unitholders may be required to pay taxes on income from us even
if they do not receive any cash distributions from
us.
Because our unitholders will be treated as partners to whom we
will allocate taxable income which could be different in amount
than the cash we distribute, they will be required to pay any
federal income taxes and, in some cases, state and local income
taxes on their share of our taxable income even if they receive
no cash distributions from us. Our unitholders may not receive
cash distributions from us equal to their share of our taxable
income or even equal to the actual tax liability that results
from that income.
Tax
gain or loss on disposition of common units could be more or
less than expected.
If our unitholders sell common units, they will recognize a gain
or loss equal to the difference between the amount realized and
their tax basis in those common units. Because distributions in
excess of their allocable share of our net taxable income
decrease their tax basis in that common unit, the amount, if any
of such prior excess distributions with respect to the units our
unitholders sell will, in effect, become taxable income to our
unitholders if they sell such units at a price greater than
their tax basis in those units, even if the price they receive
is less than their original cost. A substantial portion of the
amount realized, whether or not representing gain, may be taxed
as ordinary income due to potential recapture items, including
depreciation recapture. In addition, because the amount realized
includes a unitholders share of our non-recourse
liabilities, if our unitholders sell their units, they may incur
a tax liability in excess of the amount of cash our unitholders
receive from the sale.
Tax-exempt
entities and foreign persons face unique tax issues from owning
common units that may result in adverse tax consequences to
them.
Investment in common units by tax-exempt entities, such as
employee benefit plans and individual retirement accounts (known
as IRAs), and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal tax returns and
pay tax on their share of our taxable income. If a unitholder is
a tax-exempt entity or a foreign person, it should consult a tax
advisor before investing in our common units.
We
will be subject to foreign tax on income from our international
operations, which will reduce our cash available for
distribution to our unitholders. There are foreign tax risks
associated with the transfer of
GasJack
tm
units to international locations, which could affect the
growth of our operations and the value of the common
units.
Approximately 28.3% of our revenues are generated
internationally, primarily in Canada and Mexico. This percentage
of international revenues is expected to increase in the future,
as we seek to grow our operations in these countries and expand
our operations into additional international locations. Although
we incur no U.S. federal income tax liability, we are
subject to income taxation in the various foreign countries in
which we operate, which will significantly reduce the amount of
distributable cash generated from these countries. In addition,
our operations in countries in which we operate now or in the
future may involve risks associated with the legal structure
used, and the taxation on assets transferred into a particular
country. Tax laws of foreign countries may change in the future,
which may result in additional taxes above the amounts we
currently anticipate. The fact that a large and growing
percentage of our operations is international and subject to
foreign tax reduces the ultimate amount of distributable cash
value of these international operations, and may result in the
reduced value of our common units.
29
Common
unitholders may be subject to income tax in one or more
non-U.S.
countries, including Canada and Mexico, as a result of owning
our common units if, under the laws of any such country, we are
considered to be carrying on business there. Such laws may
require common unitholders to file a tax return with, and pay
taxes to, those countries.
Our common unitholders may be subject to tax in one or more
countries, including Canada and Mexico, as a result of owning
our common units if, under the laws of any such country, we are
considered to be carrying on business there. If common
unitholders are subject to tax in any such country, common
unitholders may be required to file a tax return with, and pay
taxes to, that country based on their allocable share of our
income. We may be required to reduce distributions to common
unitholders on account of any withholding obligations imposed
upon us by that country in respect of such allocation to common
unitholders. In addition, the United States may not allow a tax
credit for any foreign income taxes that common unitholders
directly or indirectly incur.
We
will treat each purchaser of our common units as having the same
tax benefits without regard to the actual common units
purchased. The IRS may challenge this treatment, which could
adversely affect the value of the common units.
Due to a number of factors, including our inability to match
transferors and transferees of common units, we will take
depreciation positions that may not conform to all aspects of
existing Treasury regulations. A successful IRS challenge to
those positions could adversely affect the amount of tax
benefits available to our unitholders. It also could affect the
timing of these tax benefits or the amount of gain from the sale
of common units and could have a negative impact on the value of
our common units or result in audit adjustments to our
unitholders tax returns. For a further discussion of the
effect of the depreciation positions we will adopt, please read
Material Tax Consequences Tax Consequences of
Unit Ownership Section 754 Election on
page 130.
We
prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of the date a particular unit is
transferred. The IRS may challenge this treatment, which could
change the allocation of items of income, gain, loss and
deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between
transferors and transferees of our units each month based upon
the ownership of our units on the first day of each month,
instead of on the basis of the date a particular unit is
transferred. The use of this proration method may not be
permitted under existing Treasury Regulations, and, accordingly,
our counsel is unable to opine as to the validity of this
method. If the IRS were to challenge this method or new Treasury
Regulations were issued, we may be required to change the
allocation of items of income, gain, loss and deduction among
our unitholders. Please read Material Tax
Consequences Disposition of Common Units
Allocations Between Transferors and Transferees.
A
unitholder whose units are loaned to a short seller
to cover a short sale of units may be considered as having
disposed of those units. If so, he would no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan and may recognize gain or loss from the
disposition.
Because a unitholder whose units are loaned to a short
seller to cover a short sale of units may be considered as
having disposed of the loaned units, he may no longer be treated
for tax purposes as a partner with respect to those units during
the period of the loan to the short seller and the unitholder
may recognize gain or loss from such disposition. Moreover,
during the period of the loan to the short seller, any of our
income, gain, loss or deduction with respect to those units may
not be reportable by the unitholder and any cash distributions
received by the unitholder as to those units could be fully
taxable as ordinary income. Vinson & Elkins L.L.P. has
not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short
sale of common units; therefore, unitholders desiring to assure
their status as partners and avoid the risk of gain recognition
from a loan to a short seller are urged to modify any applicable
brokerage account agreements to prohibit their brokers from
borrowing their units.
30
The
sale or exchange of 50% or more of our capital and profits
interests during any twelve-month period will result in the
termination of our partnership for federal income tax
purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve-month
period. Our termination would, among other things, result in the
closing of our taxable year for all unitholders, which would
result in us filing two tax returns (and our unitholders could
receive two Schedules K-1) for one fiscal year and could result
in a significant deferral of depreciation deductions allowable
in computing our taxable income. In the case of a unitholder
reporting on a taxable year other than a fiscal year ending
December 31, the closing of our taxable year may also
result in more than twelve months of our taxable income or loss
being includable in his taxable income for the year of
termination. Our termination currently would not affect our
classification as a partnership for federal income tax purposes,
but instead, we would be treated as a new partnership for tax
purposes. If treated as a new partnership, we must make new tax
elections and could be subject to penalties if we are unable to
determine that a termination occurred. Please read
Material Tax Consequences Disposition of
Common Units Constructive Termination for a
discussion of the consequences of our termination for
U.S. federal income tax purposes.
As a
result of investing in our common units, our unitholders may
become subject to foreign, state and local taxes and return
filing requirements in jurisdictions where we operate or own or
acquire property.
In addition to federal income taxes, our unitholders will likely
be subject to other taxes, including foreign, state and local
taxes, unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we do business or own property, even if a unitholder
does not live in any of those jurisdictions. Our unitholders
will likely be required to file foreign, state and local income
tax returns and pay foreign, state and local income taxes in
some or all of these jurisdictions. Further, our unitholders may
be subject to penalties for failure to comply with those
requirements. We will initially own assets and do business in
the States of Arkansas, California, Colorado, Kansas, Louisiana,
Mississippi, Montana, New Mexico, North Dakota, Oklahoma,
Pennsylvania, Texas, Utah, and Wyoming. Each of these States,
other than Texas and Wyoming, currently imposes a personal
income tax. As we expand our business, we may own assets or do
business in additional jurisdictions that impose a personal
income tax. It is our unitholders responsibility to file
all United States federal, foreign, state and local tax returns.
Our counsel has not rendered an opinion on the foreign, state or
local tax consequences of an investment in the common units.
31
USE OF
PROCEEDS
We expect to receive net proceeds of approximately
$ million from this offering,
after deducting the underwriting discount, structuring fee and
offering expenses. Our estimate assumes an initial public
offering price of $ per common
unit and no exercise of the underwriters option to
purchase additional common units. An increase or decrease in the
initial public offering price of $1.00 per common unit would
cause the net proceeds from the offering, after deducting the
underwriting discount, structuring fee and offering expenses
payable by us, to increase or decrease by approximately
$ million.
We will use the majority of the net proceeds received from this
offering and any exercise of the underwriters option to
purchase additional common units to fund the future growth and
expansion of our business, including costs to expand our
GasJack
tm
unit fleet and costs associated with increasing and training our
Senior Gas Production Specialists, optimization specialists and
field mechanics, and the remainder of the net proceeds will be
used to fund our working capital requirements. We believe that
the net proceeds from this offering will be sufficient to fund
our operations for approximately the next 18 months.
If the underwriters exercise in full their option to purchase
additional common units, the ownership interest of the public
unitholders will increase to common
units representing an aggregate %
limited partner interest in us, the ownership interest of our
general partner will increase
to general partner units,
representing a 0.1% general partner interest in us, and the
indirect ownership interest of TETRA will remain
at common units, representing
a % limited partner interest in us.
32
CAPITALIZATION
The following table shows:
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the cash and the capitalization of our predecessor as of
June 30, 2008; and
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our pro forma cash and capitalization as of June 30, 2008,
as adjusted to reflect this offering, the other transactions
described under Summary Formation Transactions
and Partnership Structure General and the
application of the net proceeds from this offering as described
under Use of Proceeds.
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We derived this table from, and it should be read in conjunction
with and is qualified in its entirety by reference to, our
predecessors historical and pro forma financial statements
and the accompanying notes included elsewhere in this
prospectus. You should also read this table in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
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As of June 30, 2008
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Compressco
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Compressco
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Partners
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Partners
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Predecessor
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Pro Forma
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(In thousands)
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Cash
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$
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1,340
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$
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Long-term debt
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Partners equity/owners equity:
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Partners equity
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195,587
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Common unitholders
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Common unitholders parent interest
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General partner interest
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Total capitalization
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$
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195,587
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$
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An increase or decrease in the initial public offering price of
$1.00 per common unit would cause the net proceeds from the
offering, after deducting the underwriting discount, structuring
fee and offering expenses payable by us, to increase or decrease
by approximately $ million.
The pro forma information set forth above is illustrative only
and, following the completion of this offering, will be adjusted
based on the actual initial public offering price and other
terms of this offering determined at pricing. This table does
not reflect the issuance of up to
common units that may be sold to the underwriters upon exercise
of their option to purchase additional common units.
33
DILUTION
Dilution is the amount by which the offering price paid by the
purchasers of common units sold in this offering will exceed the
pro forma net tangible book value per unit after the offering.
On a pro forma basis as of , after
giving effect to the offering of common units and the
application of the related net proceeds, and assuming the
underwriters option to purchase additional common units is
not exercised, our net tangible book value would be
$ million, or
$ per common unit. Purchasers of
common units in this offering will experience immediate and
substantial dilution in net tangible book value per common unit
for financial accounting purposes, as illustrated in the
following table:
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Assumed initial public offering price per common unit
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$
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Net tangible book value per common unit before the offering(1)
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$
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Increase in net tangible book value per common unit attributable
to purchasers in the offering
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Less: Pro forma net tangible book value per common unit after
the offering(2)
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Immediate dilution in net tangible book value per common unit to
new investors(3)
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$
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(1)
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Determined by dividing the number of common units and general
partner units ( common units
and general partner units) to be
issued to TETRA or its subsidiaries in exchange for the
production enhancement services business being contributed to us
into the net tangible book value of the contributed interests.
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(2)
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Determined by dividing the total number of common units and
general partner units to be outstanding after the offering
( common units
and general partner units) into our
pro forma net tangible book value.
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(3)
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For each increase or decrease in the initial public offering
price of $1.00 per common unit, then dilution in net tangible
book value per common unit would increase or decrease by
$ per common unit.
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The following table sets forth the number of common units and
general partner units that we will issue and the total
consideration contributed to us by our general partner and its
affiliates and by the purchasers of common units in this
offering upon consummation of the transactions contemplated by
this prospectus:
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Units Acquired
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Total Consideration
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Number
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Percent
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Amount
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Percent
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General partner and affiliates(1)(2)
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%
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$
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%
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New investors
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%
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$
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
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|
|
|
|
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|
|
|
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(1)
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The common units and general partner units acquired by our
general partner and its affiliates consist
of common units
and general partner units.
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(2)
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The contribution by TETRA of a portion of Compresscos
businesses, equipment and other assets, was recorded at
historical cost in accordance with GAAP.
|
34
OUR CASH
DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
You should read the following discussion of our cash
distribution policy in conjunction with the specific assumptions
included in this section. For more detailed information
regarding the factors and assumptions upon which our cash
distribution policy is based, please read
Assumptions and Considerations below. In
addition, you should read Forward-Looking Statements
and Risk Factors for information regarding
statements that do not relate strictly to historical or current
facts and certain risks inherent in our business.
All information in this section refers to Compressco Partners
Predecessor and Compressco Partners, L.P. For additional
information regarding our historical and pro forma operating
results, you should refer to the historical financial statements
of our predecessor and the unaudited pro forma financial
statements of Compressco Partners included elsewhere in this
prospectus. The information presented in the following
discussion assumes the underwriters option to purchase
additional common units is not exercised.
General
Our partnership agreement requires us to distribute all of our
available cash quarterly. Because we believe we will generally
finance any expansion capital expenditures with additional
borrowings or issuances of additional partnership units, we
believe that our investors are best served by our distributing
all of our available cash after reserves and expenses, rather
than retaining it. Because we expect to be treated as a
partnership for U.S. federal income tax purposes and are
not subject to entity-level federal income tax, we should have
more cash to distribute to our unitholders than would be the
case if we were treated as a corporation for such purposes.
Definition of Available Cash.
We define
available cash in the partnership agreement, and it generally
means, for each fiscal quarter, the sum of all cash and cash
equivalents on hand at the end of that quarter:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business;
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comply with applicable law, any of our future debt instruments
or other agreements; or
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provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
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less any proceeds received from this offering or any subsequent
equity or debt securities offerings;
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plus, if our general partner so determines, all additional cash
and cash equivalents on hand on the date of determination of
available cash for the quarter.
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Limitations on Cash Distributions.
There is no
guarantee that our unitholders will receive quarterly
distributions from us. We do not have a legal obligation to pay
distributions at the initial quarterly distribution rate or at
any other rate, except as provided in our partnership agreement.
Our distribution policy is subject to certain restrictions and
may be changed at any time. These restrictions include the
following:
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We may lack sufficient cash to pay distributions to our
unitholders due to a number of factors, including reduced demand
for our production enhancement services, loss of a key customer,
increases in our general and administrative expense, principal
and interest payments on any future borrowings, tax expenses,
working capital requirements and anticipated cash needs. Our
cash available for distribution to our unitholders is directly
impacted by our cash expenses necessary to run our business and
will be reduced dollar-for-dollar to the extent that such
expenses increase.
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Our general partner will have the authority to establish
reserves for the prudent conduct of our business and for future
cash distributions to our unitholders. The establishment of
those reserves could result in a reduction in cash distributions
to our unitholders from the levels currently anticipated
pursuant to our stated cash distribution policy.
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Any determination by our general partner of the amount of cash
to be reserved and the amount of cash to be distributed to our
unitholders made in good faith will be binding on all of our
unitholders. Our
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35
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partnership agreement provides that in order for a determination
by our general partner to be made in good faith, our general
partner must believe that such determination is in our best
interests.
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Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to our unitholders if the distribution
would cause our liabilities to exceed the fair value of our
assets.
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Our Ability to Grow in the Future is Dependent on Our Ability
to Access External Expansion Capital.
We will
distribute all of our available cash after reserves and expenses
to our unitholders. We intend to use the proceeds from this
offering to fund our growth in the short term. Once the proceeds
from this offering have been depleted, we expect that we will
rely primarily upon external financing sources, including
borrowings and the issuance of debt and equity securities, to
fund expansion capital expenditures. To the extent we are unable
to finance growth externally, our cash distribution policy will
significantly impair our ability to grow. In addition, because
we distribute all of our available cash, we may not grow as
quickly as businesses that reinvest their available cash to
expand ongoing operations. To the extent we issue additional
partnership units in connection with other expansion capital
expenditures, the payment of distributions on those additional
partnership units may increase the risk that we will be unable
to maintain or increase our per unit distribution level. There
are no limitations in our partnership agreement on our ability
to issue additional partnership units, including partnership
units ranking senior to the common units. The incurrence of
borrowings or other debt by us to finance our growth strategy
would result in interest expense, which in turn would impact the
available cash that we have to distribute to our unitholders.
Our Ability to Change Our Cash Distribution
Policy.
Our cash distribution policy, as
expressed in our partnership agreement, may not be modified or
repealed in a manner materially adverse to our unitholders
without a vote of the holders of a majority of our common units.
Our Cash
Distributions
Upon completion of this offering, the board of directors of our
general partner will adopt a cash distribution policy pursuant
to which it will declare the initial quarterly distribution of
$ per unit per quarter, or
$ per unit per year, to be paid no
later than 45 days after the end of each fiscal quarter to
the extent we have sufficient cash from operations after
establishment of cash reserves and payment of fees and expenses,
including reimbursements to our general partner and its
affiliates. This equates to an aggregate cash distribution of
approximately $ million per
quarter or approximately
$ million per year, in each
case based on the number of common units and general partner
units outstanding immediately after completion of this offering.
If the underwriters exercise in full their option to purchase
additional common units, the ownership interest of the public
unitholders will increase to
common units representing an
aggregate % limited partner
interest in us and our aggregate cash distribution per quarter
would be $ million or
$ million per year. Our
ability to pay our initial quarterly distribution pursuant to
this policy will be subject to the factors described above under
the caption General Limitations on
Cash Distributions and
General Our Ability to
Change Our Cash Distribution Policy.
As of the date of this offering, our general partner will be
entitled to 0.1% of all distributions that we make prior to our
liquidation. The general partners initial 0.1% interest in
these distributions may be reduced if we issue additional
partnership units in the future and our general partner does not
elect to contribute a proportionate amount of capital to us to
maintain its initial 0.1% general partner interest. However, if
the underwriters option is exercised in this offering, and
additional common units are issued, our general partner will
maintain its initial 0.1% interest and will not be required to
make a capital contribution to us. Our general partner is not
obligated to contribute a proportionate amount of capital to us
to maintain its current general partner interest.
The table below sets forth the number of common units (assuming
no exercise and full exercise of the underwriters option
to purchase additional common units) and general partner units
to be outstanding upon the completion of this offering and the
aggregate distribution amounts payable on such units during the
year following the completion of this offering at our initial
quarterly distribution rate of $
per common unit per quarter ($ per
common unit on an annualized basis).
36
If the initial quarterly distribution on our common units is not
paid with respect to any fiscal quarter, then such distributions
will not accrue to subsequent quarters and our unitholders will
not be entitled to receive such payments in future quarters.
Please read Provisions of Our Partnership Agreement
Relating to Cash Distributions on page 47.
We will pay our distributions on or about the 15th of each
of February, May, August and November to holders of record on or
about the 1st of each such month. If the distribution date
does not fall on a business day, we will make the distribution
on the business day immediately preceding the indicated
distribution date. We will prorate the quarterly distribution
for the period from the completion of this offering through
March 31, 2009, based on the actual length of the period.
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No Exercise of the Underwriters Option to Purchase
Additional Units
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Full Exercise of the Underwriters Option to Purchase
Additional Units
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Number
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|
Distributions
|
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|
Number
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|
Distributions
|
|
|
|
of Units
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|
|
One Quarter
|
|
|
Annualized
|
|
|
of Units
|
|
|
One Quarter
|
|
|
Annualized
|
|
|
Publicly held common units
|
|
|
|
|
|
$
|
|
|
|
$
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|
|
|
|
|
|
|
$
|
|
|
|
$
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|
|
Common units held by affiliates of TETRA
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|
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|
|
|
|
|
|
|
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|
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General partner units held by Compressco Partners GP
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Total
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|
|
|
$
|
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|
|
$
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|
$
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$
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|
$
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In the sections that follow, we present in detail the basis for
our belief that we will be able to fully fund our initial
quarterly distributions of $ per
unit each quarter for the four-quarter period ending
September 30, 2009. In those sections, we present two
tables, consisting of:
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Unaudited Pro Forma Cash Available for Distribution,
in which we present the amount of cash we would have had
available for distribution to our unitholders and our general
partner for the twelve months ended December 31, 2007 and
June 30, 2008, respectively, based on our pro forma
financial statements; and
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Estimated Cash Available for Distribution, in which
we present how we calculate the estimated EBITDA necessary for
us to have sufficient cash available for distribution to pay
quarterly distributions on all units for the four-quarter period
ending September 30, 2009. In Assumptions
and Considerations below, we also present the assumptions
underlying our belief that we will generate sufficient EBITDA to
pay quarterly distributions on all of our common units and
general partner units for each quarter in the twelve months
ending September 30, 2009.
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37
Pro Forma
Cash Available for Distribution for the Twelve Months Ended
December 31, 2007 and June 30, 2008
If we had completed the transaction contemplated in this
prospectus on January 1, 2007 and July 1, 2007, our
pro forma cash available for distribution for the twelve months
ended December 31, 2007 and June 30, 2008 would have
been approximately $15.5 million and $17.3 million,
respectively. This amount would have been insufficient to pay
the full initial quarterly distribution on all of the units for
the twelve months ended December 31, 2007 and June 30,
2008 by $ million and $ million,
respectively.
The pro forma financial statements, upon which pro forma cash
available for distribution is based, do not purport to present
our results of operations had the transaction contemplated in
this prospectus actually been completed as of the dates
indicated. Furthermore, cash available for distribution is a
cash accounting concept, while our pro forma financial
statements have been prepared on an accrual basis. We derived
the amounts of pro forma cash available for distribution shown
above in the manner described in the table below. As a result,
the amount of pro forma cash available for distribution should
only be viewed as a general indication of the amount of cash
available for distribution that we might have generated had we
been formed in earlier periods. Please read our unaudited pro
forma financial statements included elsewhere in this prospectus.
The following table illustrates, on a pro forma basis, for the
twelve months ended December 31, 2007 and June 30,
2008, the amount of available cash (without any reserve) that
would have been available for distribution to our unitholders,
assuming that the offering had been consummated on
January 1, 2007 and July 1, 2007, respectively. The
pro forma adjustments presented below are explained in the
footnotes to such adjustments.
38
Compressco
Partners, L.P.
Unaudited
Pro Forma Cash Available for Distribution
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Twelve Months
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|
Ended
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|
December 31,
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June 30,
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|
2007(a)
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|
2008(a)
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|
(In thousands, except per unit amounts)
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|
|
Revenue
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|
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|
|
|
|
|
|
Compression and other services
|
|
$
|
40,022
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|
|
$
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45,492
|
|
Sales of compressors and parts
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|
8,269
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9,263
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Total revenues
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48,291
|
|
|
|
54,755
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|
Cost of revenues (excluding depreciation and amortization
expense)
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Cost of compression and other services(b)
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|
|
17,405
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|
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|
19,892
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|
Cost of sales of compressors and parts
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|
|
5,019
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|
|
|
5,858
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|
|
|
|
|
|
|
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Total cost of revenues
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|
|
22,424
|
|
|
|
25,750
|
|
Selling, general and administrative expense
|
|
|
8,387
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|
|
|
9,008
|
|
Depreciation and amortization
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|
|
6,138
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|
|
|
6,902
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|
|
|
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|
|
Income before income tax expense
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|
|
11,342
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|
|
|
13,096
|
|
Provision for income taxes(c)
|
|
|
532
|
|
|
|
825
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|
|
|
|
|
|
|
|
|
|
Pro forma net income(d)
|
|
$
|
10,810
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|
|
$
|
12,271
|
|
Adjustments to reconcile pro forma net income to pro forma
EBITDA:
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|
Add:
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|
|
|
|
|
|
Provision for income taxes(c)
|
|
|
532
|
|
|
|
825
|
|
Depreciation and amortization
|
|
|
6,138
|
|
|
|
6,902
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|
|
|
|
|
|
|
|
|
|
Pro forma EBITDA
|
|
$
|
17,480
|
|
|
$
|
19,998
|
|
Adjustments to reconcile pro forma EBITDA to pro forma cash
available for distribution:
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|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Income tax expense(c)
|
|
|
532
|
|
|
|
825
|
|
Expansion capital expenditures(e)
|
|
|
13,616
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|
|
|
15,151
|
|
Maintenance capital expenditures(f)
|
|
|
1,568
|
|
|
|
1,827
|
|
Incremental general and administrative expense associated with
being a publicly traded limited partnership(g)
|
|
|
2,000
|
|
|
|
2,000
|
|
Plus:
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|
|
|
|
|
|
Non-cash cost of sales of compressors(h)
|
|
|
1,383
|
|
|
|
1,062
|
|
Equity compensation(i)
|
|
|
759
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|
|
|
905
|
|
Cash from parent to fund expansion capital expenditures(e)
|
|
|
13,616
|
|
|
|
15,151
|
|
|
|
|
|
|
|
|
|
|
Pro forma cash available for distribution by Compressco
Partners, L.P.
|
|
$
|
15,522
|
|
|
$
|
17,313
|
|
|
|
|
|
|
|
|
|
|
|
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|
(a)
|
|
Unaudited pro forma cash available for distribution for the year
ended December 31, 2007 was derived from the unaudited pro
forma financial statements included elsewhere in this
prospectus. Unaudited pro forma cash available for distribution
for the twelve months ended June 30, 2008 was derived by
combining pro forma amounts for the six months ended
December 31, 2007 (not included in this prospectus) and the
six months ended June 30, 2008 (included in this
prospectus).
|
39
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(b)
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|
Includes maintenance, repair and refurbishment expense for our
GasJack
tm
units. These expenses were $9.3 million and
$8.4 million for the twelve months ended December 31,
2007 and June 30, 2008, respectively. These amounts are not
included in maintenance capital expenditures as noted in
(f) below.
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(c)
|
|
Reflects income taxes from our operations in Canada and Mexico,
as well as Texas Margin Tax which, in accordance with
SFAS No. 109, was classified as an income tax for
reporting purposes.
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|
(d)
|
|
Reflects our pro forma net income for the period indicated.
|
|
(e)
|
|
Reflects actual expansion capital expenditures for the periods
presented. Expansion capital expenditures are expenditures that
result in the expansion of our assets and operations. These
expenditures are primarily related to the manufacture of new
GasJack
tm
units added to our service fleet that are not replacements for
sold units, as well as the purchase of vehicles, well monitoring
assets and other related assets that expand our asset base. For
historical periods we have assumed that expansion capital
expenditures were funded by our parent company, TETRA
Technologies, Inc.
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(f)
|
|
Maintenance capital expenditures are generally capital
expenditures that maintain the operating capacity of our
business. Maintenance capital expenditures include capital
expenditures made to replace partially or fully depreciated
assets, disposed and/or sold assets, including our
GasJack
tm
units, vehicles, and well monitoring assets. Maintenance capital
expenditures related to sold
GasJack
tm
units are shown net of the book value of the sold units, which
were previously deducted as a non-cash cost of sales of
compressors. The cost of refurbishing our
GasJack
tm
units is included in our cost of compression and other services
as noted in (b) above.
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(g)
|
|
Reflects an adjustment for estimated incremental cash expenses
associated with being a publicly traded limited partnership,
including costs associated with annual and quarterly reports to
unitholders, financial statement audits, tax return and
Schedule K-1
preparation and distribution, investor relations activities,
registrar and transfer agent fees, incremental director and
officer liability insurance costs and director compensation.
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(h)
|
|
Reflects the non-cash cost of sales of compressors related to
Canadian units sold from our service fleet that were not
replaced, for which capital expenditures were incurred during
prior periods.
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|
(i)
|
|
Reflects non-cash equity compensation in accordance with
TETRAs equity compensation plan within our pro forma
selling, general and administrative expense.
|
Estimated
Cash Available for Distribution for the Twelve Months Ending
September 30, 2009
As a result of the factors described in this section and in
Assumptions and Considerations below, we
believe we will be able to pay the initial quarterly
distribution on all of our common units and general partner
units for each quarter in the twelve months ending
September 30, 2009.
In order to pay the initial quarterly distribution of
$ per unit on all of our common
units and general partner units for each quarter in the twelve
months ending September 30, 2009, we estimate that our
EBITDA for the twelve months ending September 30, 2009 must
be at least $ million. EBITDA
should not be considered an alternative to net income, operating
income, cash flows from operating activities or any other
measure of financial performance calculated in accordance with
GAAP, as those items are used to measure our operating
performance, liquidity or ability to service debt obligations.
Please read Selected Historical and Pro Forma Financial
and Operating Data Non-GAAP Financial
Measures on page 14 for an explanation of EBITDA and
a reconciliation of EBITDA to net income, its most directly
comparable financial measure calculated in and presented in
accordance with GAAP.
We believe we will generate estimated EBITDA of
$28.8 million for the twelve months ending
September 30, 2009. You should read
Assumptions and Considerations below for
a discussion of the material assumptions underlying this belief,
which reflect our judgment of conditions we expect to exist and
the course of action we expect to take. If our estimate is not
achieved, we may not be able to pay the initial quarterly
distribution on all of our common units and general partner
units for each quarter in the twelve months ending
September 30, 2009. We can give you no assurance that our
assumptions will be realized or
40
that we will generate the
$ million in EBITDA required
to pay the initial quarterly distribution on all of our common
units and general partner units for each quarter in the twelve
months ending September 30, 2009. There will likely be
differences between our estimates and the actual results we will
achieve, and those differences could be material. If we do not
generate the estimated EBITDA or if our maintenance capital
expenditures or interest expense are higher than estimated, we
may not be able to pay the initial quarterly distribution on all
of our common units and general partner units for each quarter
in the twelve months ending September 30, 2009.
When considering our ability to generate our estimated EBITDA of
$28.8 million, you should keep in mind the risk factors and
other cautionary statements under the heading Risk
Factors and elsewhere in this prospectus. Any of these
factors or the other risks discussed in this prospectus could
cause our results of operations and cash available for
distribution to our unitholders to vary significantly from those
set forth below.
We do not as a matter of course make public projections as to
future revenues, earnings, or other results of operations.
However, our management has prepared the prospective financial
information set forth below to present the estimated cash
available for distribution for the twelve months ending
September 30, 2009. The accompanying prospective financial
information was not prepared with a view toward public
disclosure or with a view toward complying with the guidelines
established by the American Institute of Certified Public
Accountants with respect to prospective financial information,
but, in the view of our management, was prepared on a reasonable
basis, reflects the best currently available estimates and
judgments, and presents, to the best of our managements
knowledge and belief, the expected course of action and our
expected future financial performance. However, this information
is not fact and should not be relied upon as being necessarily
indicative of future results, and readers of this prospectus are
cautioned not to place undue reliance on the prospective
financial information.
Neither our independent auditors, nor any other independent
accountants, have compiled, examined, or performed any
procedures with respect to the prospective financial information
contained herein, nor have they expressed any opinion or any
other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim
any association with, the prospective financial information.
We do not undertake any obligation to release publicly the
results of any future revisions we may make to the financial
forecast or to update this financial forecast to reflect events
or circumstances after the date of this prospectus. In light of
the above, the statement that we believe that we will have
sufficient cash available for distribution to allow us to make
the full initial quarterly distribution on all our outstanding
common units and general partner units for the four-quarter
period ending September 30, 2009 should not be regarded as
a representation by us or the underwriters or any other person
that we will make such distributions.
The following table shows how we calculate the estimated EBITDA
necessary to pay the initial quarterly distribution on all of
our common units and general partner units for each quarter in
the twelve months ending September 30, 2009. Our estimated
EBITDA presents the forecasted results of operations of
Compressco Partners for the twelve months ending
September 30, 2009. Our assumptions that we believe are
relevant to particular line items in the table below are
explained in the corresponding footnotes set forth in
Assumptions and Considerations.
41
Compressco
Partners, L.P.
Estimated Cash Available for Distribution
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|
|
|
|
Twelve Months
|
|
|
|
Ending
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
|
(In thousands, except
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|
|
|
per unit amounts)
|
|
|
Revenue
|
|
|
|
|
Compression and other services
|
|
$
|
66,992
|
|
Sales of compressors and parts
|
|
|
11,709
|
|
|
|
|
|
|
Total revenues
|
|
|
78,701
|
|
Cost of revenues (excluding depreciation and amortization
expense)
|
|
|
|
|
Cost of compression and other services(a)
|
|
|
27,961
|
|
Cost of sales of compressors and parts
|
|
|
8,098
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
36,059
|
|
Selling, general and administrative expense(b)
|
|
|
13,817
|
|
Depreciation and amortization
|
|
|
8,900
|
|
Interest expense (income)(c)
|
|
|
(681
|
)
|
|
|
|
|
|
Income before income tax expense
|
|
|
20,606
|
|
Provision for income taxes(d)
|
|
|
1,061
|
|
|
|
|
|
|
Estimated net income
|
|
$
|
19,545
|
|
Adjustments to reconcile estimated net income to estimated
EBITDA:
|
|
|
|
|
Add:
|
|
|
|
|
Interest expense (income)(c)
|
|
$
|
(681
|
)
|
Provision for income taxes(d)
|
|
|
1,061
|
|
Depreciation and amortization
|
|
|
8,900
|
|
|
|
|
|
|
Estimated EBITDA
|
|
$
|
28,825
|
|
Adjustments to reconcile estimated EBITDA to estimated cash
available for distribution:
|
|
|
|
|
Less:
|
|
|
|
|
Interest expense (income)(c)
|
|
$
|
(681
|
)
|
Current income tax expense and withholding(d)
|
|
|
1,880
|
|
Expansion capital expenditures(e)
|
|
|
26,793
|
|
Maintenance capital expenditures(f)
|
|
|
2,723
|
|
Plus:
|
|
|
|
|
Equity compensation(g)
|
|
|
2,075
|
|
Use of offering proceeds to fund expansion capital
expenditures(e)
|
|
|
26,793
|
|
|
|
|
|
|
Estimated cash available for distribution by Compressco
Partners, L.P.
|
|
$
|
26,977
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes maintenance, repair and refurbishment expense for our
GasJack
tm
units. We estimate these expenses to be $8.5 million for
the twelve months ending September 30, 2009. This amount is
not including in estimated maintenance capital expenditures as
noted in (e) below. This amount also includes incremental sales
and use tax to be paid by us associated with the conversion of
our service contracts to generate qualifying income under
Section 7704 of the Internal Revenue Code.
|
|
(b)
|
|
Includes estimated incremental expenses of approximately
$2.0 million associated with being a publicly traded
limited partnership, including costs associated with annual and
quarterly reports to unitholders, financial statement audits,
tax return and
Schedule K-1
preparation and distribution, investor relations
|
42
|
|
|
|
|
activities, registrar and transfer agent fees, incremental
director and officer liability insurance costs and director
compensation.
|
|
(c)
|
|
We estimate that interest income will be earned on the net
proceeds of the offering at a 2.5% interest rate. Net proceeds
from the offering will be used, over time, to fund expansion
capital expenditures and working capital needs. At the time of
the offering, we will not have an outstanding credit agreement
due to the fact that we will retain all of the net proceeds of
the offering. We may enter into a credit agreement to satisfy
future liquidity needs at a later date.
|
|
(d)
|
|
While we will not be subject to U.S. federal income tax, we will
incur income taxes and will be subject to withholding
requirements related to our operations in Canada and Mexico.
Furthermore, we will also incur Texas Margin Tax which, in
accordance with SFAS No. 109, is classified as an
income tax for reporting purposes. The current income tax shown
in the calculation of cash available for distribution includes
only the cash portion of such taxes and is net of any deferred
income tax expense.
|
|
(e)
|
|
Reflects estimated expansion capital expenditures for the period
presented. Expansion capital expenditures are expenditures that
result in the expansion of our assets and operations. These
expenditures are primarily related to the manufacture of new
GasJack
tm
units that we expect to add to our service fleet that are not
replacements for sold units, as well as our expected purchase of
vehicles, well monitoring assets and other related assets to
expand our asset base.
|
|
(f)
|
|
Maintenance capital expenditures are generally capital
expenditures that maintain the operating capacity of our
business. Maintenance capital expenditures include capital
expenditures made to replace partially or fully depreciated
assets, disposed and/or sold assets, including our
GasJack
tm
units, vehicles, and well monitoring assets. The cost of
refurbishing our
GasJack
tm
units is included in our estimated cost of compression and other
services, as noted in (a) above.
|
|
(g)
|
|
Reflects non-cash equity compensation in accordance with
TETRAs and the Partnerships equity compensation
plans within our estimated selling, general and administrative
expense.
|
Assumptions
and Considerations
Based on a number of specific assumptions, we believe that,
following the completion of this offering, we will have
sufficient cash available for distribution to allow us to make
the full initial quarterly distribution on all our outstanding
common units and general partner units for the four-quarter
period ending September 30, 2009. We believe that our
assumptions, which include the following, are reasonable.
Revenue
|
|
|
|
|
Revenue is estimated to be $78.7 million for the twelve
months ending September 30, 2009, as compared to
$54.8 million for the twelve months ended June 30,
2008 on a pro forma basis. The reasons for the anticipated
increase in our revenue are presented below.
|
|
|
|
The Partnerships revenue from compression and other
services is estimated to be $67.0 million for the twelve
months ending September 30, 2009, as compared to pro forma
revenue of $45.5 million for the twelve months ended
June 30, 2008. The main component of this category is pro
forma revenue from production enhancement (including
compression) and related services of approximately
$58.0 million for the twelve months ending
September 30, 2009, as compared to pro forma revenue of
$42.2 million for the twelve months ended June 30,
2008. This increase in revenue is driven primarily by a pro
forma year-over-year growth rate of 28% in average number of
GasJack
tm
units for the quarter ended September 30, 2009, growing
from approximately 1,650 units to approximately
2,100 units, as well as an estimated 5% increase in our
service fees. Average
GasJack
tm
utilization rates are forecasted to remain relatively constant
at approximately 87%. This estimated increase in the number of
average units is projected to result from organic growth
opportunities and substantial growth capital expenditures in our
GasJack
tm
units. We believe these anticipated growth rates are reasonable
based on historic growth rates as described below, current
demand for our services, and the significant opportunities
described in Competitive Strengths in the
Business section of this prospectus, starting on
page 57.
|
43
|
|
|
|
|
Our initial fleet of domestic service units will contain, on a
pro forma basis, units that generated approximately 51% of our
predecessors 2007 domestic compression and other services
revenues. Because we expect substantially all new business
following the offering to be conducted by the Partnership and
not by Compressco, and our pro forma revenues and average number
of units will be smaller than those of our predecessor due to
the pro forma allocations (resulting in a lower denominator in
our growth calculation), our resulting anticipated growth rate
will be higher for the Partnership than what it would have been
for our predecessor. Our predecessor experienced year-over-year
growth rates in average units in service of approximately 27% in
2006 and 23% in 2007, and is forecasting, without considering
the effects of this offering, 17% growth in 2008. For the
quarter ended September 30, 2009, our predecessor is
projecting year-over-year growth for average units in service,
without regards to the proposed offering, of approximately 17%,
with average units in service growing from approximately 3,000
to approximately 3,500.
|
|
|
|
Other services revenue that is estimated to increase
significantly is our maintenance contract income, which is
income from maintenance contracts associated with
GasJack
tm
units that have been sold, as well as our revenue from our well
monitoring business in Mexico. We are estimating maintenance
contract income to increase from $1.0 million for the
twelve months ended June 30, 2008 on a pro forma basis to
$2.2 million for the twelve months ending
September 30, 2009, based on the significant number of
units that have been sold in recent years. In addition, our well
monitoring business in Mexico is forecasted to grow from
$3.9 million for the twelve months ended June 30, 2008
on a pro forma basis to $6.0 million for the twelve months
ending September 30, 2009, based on our organic growth
plans that include expanding from twelve well monitoring
packages at June 30, 2008 to 20 well monitoring packages at
September 30, 2009, as well as a 7% increase in our well
monitoring service fees.
|
|
|
|
Revenue from sales of our
GasJack
tm
units and parts are estimated to increase from $9.3 million
for the twelve months ended June 30, 2008 on a pro forma
basis to $11.7 million for the twelve months ending
September 30, 2009. The increase in number of units sold is
primarily due to a pro forma adjustment in which only sales of
GasJack
tm
units to customers whose service contracts are being contributed
to us are included, resulting in 52% of compressor sales being
included in pro forma revenues for the twelve months ended
June 30, 2008. Our predecessor sold approximately 210
GasJack
tm
units during the twelve months ended June 30, 2008 (102
GasJack
tm
units after pro forma allocation), while we are projecting to
sell approximately 160
GasJack
tm
units during the twelve months ending September 30, 2009.
Parts sales are estimated to stay relatively flat from
approximately $2.3 million during the twelve months ended
June 30, 2008 to approximately $2.5 million for the
twelve months ending September 30, 2009.
|
Cost
of revenues (excluding depreciation and amortization
expenses)
|
|
|
|
|
Cost of revenues (excluding depreciation and amortization
expenses) is projected to be $36.1 million for the twelve
months ending September 30, 2009, as compared to
$25.8 million for the twelve months ended June 30,
2008 on a pro forma basis. The reasons for the anticipated
increase in our cost of revenues are presented below.
|
|
|
|
Cost of compression and other service is estimated to be
$28.0 million for the twelve months ending
September 30, 2009, as compared to $19.9 million for
the twelve months ended June 30, 2008 on a pro forma basis.
These costs include personnel and various other field service
costs that are added mostly in proportion to the addition of
GasJack
tm
units in the U.S., Canada and Mexico and well monitoring
packages in Mexico. This increase in expense is primarily
attributable to the growth of compression and other service
revenue described above. Our costs of adding field personnel in
anticipation of further growth, as well as call center personnel
and other costs with the startup of our
ePumper
tm
SCADA satellite telemetry-based system, results in our service
gross margin being slightly lower at 56% during the twelve
months ended June 30, 2008 when compared to our estimated
service gross margin of 58% for the twelve months ending
September 30, 2009. Our ongoing cost of refurbishing our
units is reflected within our maintenance and repair expense
within cost of compression and other services.
|
44
|
|
|
|
|
Maintenance and repair expense is estimated to be
$8.5 million for the twelve months ending
September 30, 2009, compared to $8.4 million for the
twelve months ended June 30, 2008.
|
|
|
|
|
|
We are estimating that cost of sales of compressors and parts
will increase from $5.9 million for the twelve months ended
June 30, 2008 on a pro forma basis to $8.1 million for
the twelve months ending September 30, 2009, as a result of
the anticipated growth of compressor sales described above.
While we have sold some used
GasJack
tm
units in the prior years, we assume that we are selling
primarily new units on a going forward basis. As such, our gross
margin on sales of compressors and parts was 37% for the twelve
months ended June 30, 2008, while we are estimating it to
be 31% for the twelve months ending September 30, 2009.
|
Selling,
general and administrative expense
|
|
|
|
|
We estimate that selling, general and administrative expense
will be $13.8 million for the twelve months ending
September 30, 2009 as compared to $9.0 million for the
twelve months ended June 30, 2008 on a pro forma basis.
This increase in selling, general and administrative expense is
partially attributable to estimated incremental expenses
associated with being a publicly traded limited partnership of
approximately $2.0 million. The increase in selling,
general and administrative expense is also associated with the
increased number of sales people and various other general and
administrative personnel to support our organic growth
initiatives. Furthermore, this expense includes the costs
associated with TETRAs prior year equity compensation
grants of approximately $0.9 million during the twelve
months ended June 30, 2008 and our estimate of
$0.6 million during the twelve months ending
September 30, 2009. The Partnership will also have an
equity incentive plan that is estimated at $1.5 million
during the twelve months ending September 30, 2009. We are
required to repay costs borne by TETRA on our behalf under the
omnibus agreement. These costs from TETRA were approximately
$1.8 million during the twelve months ended June 30,
2008, and are expected to be approximately $1.2 million
during the twelve months ending September 30, 2009.
|
Depreciation
and amortization expense
|
|
|
|
|
We estimate that depreciation and amortization expense will be
$8.9 million for the twelve months ending
September 30, 2009, as compared to $6.9 million for
the twelve months ended June 30, 2008 on a pro forma
basis. Depreciation expense is assumed to continue to be based
on consistent average depreciable asset lives and depreciation
methodologies, taking into account estimated capital
expenditures primarily for our expanded fleet of
GasJack
tm
units and other assets as described below.
|
Interest
expense (income)
|
|
|
|
|
Interest income will be earned on the net proceeds of the
offering at an assumed 2.5% interest rate. Net proceeds from the
offering will be used, over time, to fund expansion capital
expenditures. At the time of this offering, we will not have an
outstanding line of credit due to the fact that we will retain
all of the net proceeds of this offering. We will enter into a
credit agreement to satisfy future liquidity needs at a later
date.
|
Provision
for income taxes
|
|
|
|
|
While we will not be subject to U.S. federal income tax, we
will incur income taxes and will be subject to withholding
requirements related to our operations in Canada and Mexico.
Furthermore, we will also incur Texas Margin Tax which, in
accordance with SFAS No. 109, is classified as an
income tax for reporting purposes. The current income tax shown
in the calculation of cash available for distribution includes
only the cash portion of such taxes and is net of any deferred
income tax expense.
|
Capital
expenditures
|
|
|
|
|
We project that maintenance capital expenditures will be
$2.7 million for the twelve months ending
September 30, 2009 compared to $1.8 million for the
twelve months ended June 30, 2008 on a pro
|
45
|
|
|
|
|
forma basis. Maintenance capital expenditures for the twelve
months ended June 30, 2008 primarily reflect the cost of
newly manufactured units to replace sold service units in excess
of the book value of the service units that were sold. Estimated
maintenance capital expenditures for the twelve months ending
September 30, 2009 primarily reflect periodic replacement
costs of our vehicles that are used by our sales and field
service personnel. We estimate that future sales of
GasJack
tm
units will be primarily of newly manufactured units, rather than
previously used units, eliminating the need for maintenance
capital expenditures for replacement of units sold from our
service fleet. It should be noted that the ongoing cost of
refurbishing our units is captured within our maintenance and
repair expense within cost of compression and other services.
Maintenance and repair expense is estimated to be
$8.5 million for the twelve months ending
September 30, 2009, compared to $8.4 million for the
twelve months ended June 30, 2008.
|
|
|
|
|
|
We project that expansion capital expenditures will be
$26.8 million for the twelve months ending
September 30, 2009 compared to $15.2 million for the
twelve months ended June 30, 2008 on a pro forma basis.
This difference is primarily caused by the anticipated
allocation to us rather than Compressco of substantially all
future growth of our business, while the twelve month period
ended June 30, 2008 reflects a pro forma allocation of only
51% of our predecessors domestic expansion capital
expenditures. Excluding the effects of this pro forma
allocation, our growth capital expenditures would have been
approximately $25.2 million for the twelve months ended
June 30, 2008. Expansion capital expenditures are primarily
the cost of new
GasJack
tm
units and, to a lesser extent, vehicles and other assets that
are added as our production enhancement and other businesses
grow organically.
|
While we believe that our assumptions supporting our estimated
EBITDA and cash available for distribution for the twelve months
ending September 30, 2009 are reasonable in light of
managements current beliefs concerning future events, the
assumptions are inherently uncertain and are subject to
significant business, economic, regulatory and competitive risks
and uncertainties that could cause actual results to differ
materially from those we anticipate. If our assumptions are not
realized, the actual EBITDA and cash available for distribution
that we generate could be substantially less than that currently
expected and could, therefore, be insufficient to permit us to
make the full initial quarterly distribution on all of our units
for the four-quarter period ending September 30, 2009, in
which event the market price of the common units may decline
materially.
46
PROVISIONS
OF OUR PARTNERSHIP AGREEMENT
RELATING TO CASH DISTRIBUTIONS
Distributions
of Available Cash
General.
Our partnership agreement requires
that, within 45 days after the end of each quarter,
beginning with the quarter ending December 31, 2008, we
distribute all of our available cash to our unitholders of
record on the applicable record date and to our general partner.
We will distribute 99.9% of our available cash to our common
unitholders, pro rata, and 0.1% of our available cash to our
general partner.
Definition of Available Cash.
Available cash,
for each fiscal quarter, means all cash on hand at the end of
the quarter:
|
|
|
|
|
less the amount of cash reserves established by our general
partner to:
|
|
|
|
|
|
provide for the proper conduct of our business;
|
|
|
|
comply with applicable law, any of our future debt instruments
or other agreements; or
|
|
|
|
provide funds for distributions to our unitholders and to our
general partner for any one or more of the next four quarters;
|
|
|
|
|
|
less any proceeds received from this offering or any subsequent
equity or debt securities offerings;
|
|
|
|
plus, if our general partner so determines, all additional cash
and cash equivalents on hand on the date of determination of
available cash for the quarter.
|
Distributions
of Cash Upon Liquidation
If we dissolve in accordance with our partnership agreement, we
will sell or otherwise dispose of our assets in a process called
liquidation. We will first apply the proceeds of liquidation to
the payment of our creditors. We will distribute any remaining
proceeds to our unitholders and our general partner, in
accordance with their capital account balances, as adjusted to
reflect any gain or loss upon the sale or other disposition of
our assets in liquidation.
Adjustments
to Capital Accounts
We will make adjustments to capital accounts upon the issuance
of additional partnership units. In doing so, we will allocate
any unrealized and, for tax purposes, unrecognized gain or loss
resulting from the adjustments to our unitholders and our
general partner in the same manner as we allocate gain or loss
upon liquidation. In the event that we make positive adjustments
to the capital accounts upon the issuance of additional
partnership units, we will allocate any later negative
adjustments to the capital accounts resulting from the issuance
of additional partnership units or upon our liquidation in a
manner which results, to the extent possible, in our general
partners capital account balances equaling the amount
which they would have been if no earlier positive adjustments to
the capital accounts had been made.
47
SELECTED
HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4. All historical operations, results of
operations, financial statements and notes to the financial
statements presented throughout this prospectus reflect those of
our predecessor and exclude the pro forma adjustments required
to reflect the portion of our predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Items Impacting the Comparability of
Our Financial Results, certain total amounts that will be
presented in our future results of operations may not be
initially comparable to our predecessors historical
results.
The pro forma financial statements presented herein reflect the
results of the portion of our predecessors operations that
will be contributed to us in connection with this offering,
including: (1) the portion of our predecessors domestic
operations that our counsel has concluded will generate
qualifying income under Section 7704 of the Internal
Revenue Code, or qualifying income, as of the date
of the preparation of the pro forma financial statements,
together with certain domestic non-qualifying income producing
operations, (2) our predecessors Canadian operations
and (3) the portion of predecessors Mexican
operations that our counsel has concluded will generate
qualifying income as of the date of the preparation of the pro
forma financial statements. Compressco is continuing to modify
the terms of certain existing domestic customer contracts to
provide that, upon their contribution to us in connection with
this offering, the production enhancement services we perform
under those customer contracts will generate qualifying income.
As more contracts are modified in the future and prior to the
completion of this offering, we will periodically update the pro
forma financial statements to reflect the anticipated
contribution of those modified contracts to us.
The following table shows selected historical combined financial
and operating data of our predecessor and pro forma financial
data of Compressco Partners for the periods and as of the dates
presented. The selected historical financial data as of
December 31, 2007, 2006, and 2003, as well as the selected
historical financial data for the three-year period ended
December 31, 2007 and year ended December 31, 2003,
have been derived from the audited consolidated financial
statements of our predecessor. The selected historical financial
data as of December 31, 2005 and 2004, as well as the
selected historical financial data for the year ended
December 31, 2004 and six months ended June 30, 2008
and 2007, have been derived from the unaudited consolidated
financial statements of our predecessor. The selected pro forma
financial data for the year ended December 31, 2007 and six
months ended June 30, 2008 are derived from the unaudited
pro forma financial statements of Compressco Partners included
elsewhere in this prospectus. The pro forma adjustments have
been prepared as if certain transactions to be effected at the
completion of this offering had taken place on June 30,
2008, in the case of the pro forma balance sheet, or as of
January 1, 2007, in the case of the pro forma statements of
operations for the year ended December 31, 2007 and the
six months ended June 30, 2008. These transactions
include:
|
|
|
|
|
the issuance by us of common units to the public, Compressco,
Inc. and TETRA International Incorporated, general partner units
to Compressco Partners GP and the use of the net proceeds
therefrom; and
|
|
|
|
the contribution to us of a portion of Compresscos
businesses, equipment and other assets, as further described in
Our Relationship with TETRA Technologies, Inc. and
Compressco, Inc. on page 4.
|
We derived the information in the following table from, and that
information should be read together with and is qualified in its
entirety by reference to, the historical combined and pro forma
financial statements and the accompanying notes included
elsewhere in this prospectus. The table should be read together
with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
historical and pro forma financial statements and accompanying
notes included elsewhere in this prospectus
In July 2004, Compressco was acquired by TETRA for approximately
$94 million cash and, as a result of this acquisition,
Compressco became a wholly owned subsidiary of TETRA. In
addition, TETRA repaid Compresscos outstanding bank debt
of approximately $15.8 million. As a result of the
acquisition, Compresscos balance sheet reflected the
allocation of the acquisition consideration to the fair value of
the
48
assets acquired and liabilities assumed by TETRA, including the
allocation of goodwill. As a result, the selected financial
information presented below for periods prior to the acquisition
by TETRA may not be comparable to subsequent periods, including
the provision of U.S. Federal income taxes prior to being
included in the consolidated income tax return of TETRA.
The following table includes the non-GAAP financial measure of
EBITDA. We define EBITDA as earnings before interest expense,
income taxes, depreciation and amortization. For a
reconciliation of EBITDA to its most directly comparable
financial measures calculated and presented in accordance with
GAAP, please read Non-GAAP Financial
Measures on page 14.
Selected
Historical and Pro Forma Financial and Operating Data
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Compressco Partners, L.P.
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Pro Forma
|
|
|
Six Months
|
|
|
|
Compressco Partners Predecessor
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,756
|
|
|
$
|
35,237
|
|
|
$
|
50,034
|
|
|
$
|
65,323
|
|
|
$
|
83,554
|
|
|
$
|
38,027
|
|
|
$
|
46,606
|
|
|
$
|
48,291
|
|
|
$
|
27,798
|
|
Cost of revenue
|
|
|
9,762
|
|
|
|
16,146
|
|
|
|
23,926
|
|
|
|
29,915
|
|
|
|
37,514
|
|
|
|
16,456
|
|
|
|
21,338
|
|
|
|
22,424
|
|
|
|
13,056
|
|
Selling, general and administrative expenses
|
|
|
4,663
|
|
|
|
5,855
|
|
|
|
8,117
|
|
|
|
10,360
|
|
|
|
12,539
|
|
|
|
5,707
|
|
|
|
6,548
|
|
|
|
8,387
|
|
|
|
4,436
|
|
Depreciation and amortization expense
|
|
|
1,965
|
|
|
|
3,098
|
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
|
|
6,138
|
|
|
|
3,648
|
|
Other (income) expense, net
|
|
|
1,022
|
|
|
|
626
|
|
|
|
(3
|
)
|
|
|
59
|
|
|
|
(31
|
)
|
|
|
(16
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before taxes
|
|
|
5,344
|
|
|
|
9,512
|
|
|
|
13,501
|
|
|
|
18,630
|
|
|
|
24,232
|
|
|
|
11,505
|
|
|
|
13,241
|
|
|
|
11,342
|
|
|
|
6,658
|
|
Provision for income taxes
|
|
|
2,028
|
|
|
|
2,010
|
|
|
|
516
|
|
|
|
1,029
|
|
|
|
660
|
|
|
|
257
|
|
|
|
619
|
|
|
|
532
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,316
|
|
|
$
|
7,502
|
|
|
$
|
12,985
|
|
|
$
|
17,601
|
|
|
$
|
23,572
|
|
|
$
|
11,248
|
|
|
$
|
12,622
|
|
|
$
|
10,810
|
|
|
$
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at Period End):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(1)
|
|
$
|
5,294
|
|
|
$
|
10,527
|
|
|
$
|
14,691
|
|
|
$
|
19,419
|
|
|
$
|
26,584
|
|
|
$
|
22,914
|
|
|
$
|
28,852
|
|
|
|
|
|
|
$
|
(2
|
)
|
Total assets
|
|
|
32,722
|
|
|
|
119,861
|
|
|
|
138,634
|
|
|
|
163,354
|
|
|
|
185,357
|
|
|
|
175,132
|
|
|
|
200,192
|
|
|
|
|
|
|
|
|
|
Partners capital/net parent equity
|
|
|
8,180
|
|
|
|
117,498
|
|
|
|
135,354
|
|
|
|
159,961
|
|
|
|
181,654
|
|
|
|
172,219
|
|
|
|
195,587
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
8,416
|
|
|
|
13,236
|
|
|
|
17,994
|
|
|
|
24,989
|
|
|
|
33,532
|
|
|
|
15,880
|
|
|
|
18,714
|
|
|
|
17,480
|
|
|
|
10,306
|
|
Capital expenditures
|
|
|
9,640
|
|
|
|
15,818
|
|
|
|
18,349
|
|
|
|
25,917
|
|
|
|
23,846
|
|
|
|
13,226
|
|
|
|
16,921
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
5,360
|
|
|
|
10,300
|
|
|
|
13,280
|
|
|
|
20,573
|
|
|
|
27,077
|
|
|
|
12,256
|
|
|
|
16,294
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
(9,448
|
)
|
|
|
(15,724
|
)
|
|
|
(18,418
|
)
|
|
|
(25,862
|
)
|
|
|
(23,815
|
)
|
|
|
(13,157
|
)
|
|
|
(17,203
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
4,158
|
|
|
|
(20,817
|
)
|
|
|
4,315
|
|
|
|
6,056
|
|
|
|
(3,464
|
)
|
|
|
291
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
GasJack
tm
units (at period end)
|
|
|
1,166
|
|
|
|
1,542
|
|
|
|
1,990
|
|
|
|
2,595
|
|
|
|
3,108
|
|
|
|
2,913
|
|
|
|
3,442
|
|
|
|
|
|
|
|
|
|
Average number
of
GasJack
tm
units in service (during period)
|
|
|
920
|
|
|
|
1,247
|
|
|
|
1,613
|
|
|
|
2,054
|
|
|
|
2,530
|
|
|
|
2,430
|
|
|
|
2,859
|
|
|
|
|
|
|
|
|
|
Average
GasJack
tm
unit utilization (during period)(3)
|
|
|
93.6
|
%
|
|
|
92.0
|
%
|
|
|
90.3
|
%
|
|
|
89.6
|
%
|
|
|
87.6
|
%
|
|
|
87.5
|
%
|
|
|
86.8
|
%
|
|
|
|
|
|
|
|
|
49
|
|
|
(1)
|
|
Working capital is defined as current assets minus current
liabilities.
|
|
(2)
|
|
Includes net proceeds from the offering.
|
|
(3)
|
|
We define average
GasJack
tm
unit utilization as the number of
GasJack
tm
units being used to provide services on customer well sites
divided by the total number of
GasJack
tm
units in our fleet.
|
50
MANAGEMENTS
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 the
combined financial statements of our predecessor and the notes
thereto, and the other financial information appearing elsewhere
in this prospectus. The following discussion includes
forward-looking statements that involve certain risks and
uncertainties. See Forward-Looking Statements on
page 144 and Risk Factors on page 15.
References in this prospectus to Compressco
Partners, we, our, us,
the Partnership or like terms refer to Compressco
Partners, L.P. and its wholly owned subsidiaries, including
Compressco Partners Operating, LLC, or Compressco Partners
Operating. References to Compressco refer to
Compressco, Inc., a wholly owned subsidiary of TETRA
Technologies, Inc., or TETRA, and Compresscos
subsidiaries. References to Compressco Partners GP
or our general partner refer to our general partner,
Compressco Partners GP Inc., a wholly owned subsidiary of
Compressco. References in this prospectus to Compressco
Partners Predecessor or our predecessor refer
to the predecessor of Compressco Partners for accounting
purposes. As further described elsewhere in this prospectus, our
predecessor consists of (1) all of the historical assets,
liabilities and operations of Compressco, combined with
(2) certain assets, liabilities and operations of the
subsidiaries of TETRA conducting wellhead compression-based
production enhancement services and related well testing and
monitoring services in Mexico.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4. All historical operations, results of
operations, financial statements and notes to the financial
statements presented throughout this prospectus reflect those of
our predecessor and exclude the pro forma adjustments required
to reflect the portion of our predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements Discussion and Analysis of Financial
Condition and Results of Operations
Overview Items Impacting the Comparability of
Our Financial Results, certain total amounts that will be
presented in our future results of operations may not be
initially comparable to our predecessors historical
results.
Overview
We are a leading provider of wellhead compression-based
production enhancement services, or production enhancement
services, to a broad base of natural gas and oil
exploration and production companies operating throughout
14 states that encompass most of the onshore producing
regions of the United States, as well as in Canada and
Mexico. Our production enhancement services improve the value of
natural gas and oil wells by increasing daily production and
total recoverable reserves. Our production enhancement services
also include related liquids separation and gas metering
services. While our services are applied primarily to mature,
wells with low formation pressures, our services are also
employed on newer wells that have experienced significant
production declines or are characterized by lower formation
pressures. In connection with the performance of these services,
we provide ongoing well evaluations and, in Mexico, well testing
and monitoring services. In addition, we design and manufacture
the
GasJack
tm
units, or
GasJack
tm
units, we use in providing our production enhancement
services.
Our predecessors production enhancement services business
experienced substantial organic growth over the past five years.
Our predecessors fleet of
GasJack
tm
units grew from 761 units as of December 31, 2002 to
2,763 units as of December 31, 2007, representing a
263% increase. Our predecessors revenues grew during that
period from approximately $14.9 million during 2002 to
approximately $83.6 million during 2007, representing a
460% increase. During the six months ended June 30, 2008,
our predecessors revenues grew to $46.6 million, as
compared to $38.0 million for the same period in 2007, and
our fleet of
GasJack
tm
units grew from 2,763 units as of December 31, 2007 to
2,954 units as of June 30, 2008. This growth was generated
entirely by organic expansion, with no acquisitions made during
this five-year period.
51
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4.
How We
Evaluate Our Operations
|
|
|
|
|
Operating Expenses.
We define operating
expenses as costs associated with providing production
enhancement services. The most significant portion of our
operating expenses include the labor costs of our field
personnel, repair and maintenance of our equipment, and the fuel
and other utilities consumed by us while providing our services.
Other materials consumed while performing our services, ad
valorem taxes, sales taxes and insurance expenses compose the
significant remainder of our operating expenses. Our operating
expenses generally fluctuate depending on the scope of the
activities performed during a specific period. Our labor costs
consist primarily of wages for our field personnel, as well as
expenses related to their training and safety. We use operating
expenses as a performance measure for each of our
customers work sites. We also track our operating expenses
on a company-wide basis, using month-to-month, year-to-date and
year-to-year comparisons, and as compared to budget. This
analysis is useful in identifying adverse, company-wide cost
trends and allows us to investigate the cause of any adverse
trends and implement remedial measures if the cause or cure is
within our control.
|
|
|
|
EBITDA.
We view EBITDA as one of our primary
management tools, and we track this item on a monthly basis both
in dollars and as a percentage of revenue (compared to the prior
month, prior year-to-date period and prior year) and to budget.
We define EBITDA as earnings before interest, taxes,
depreciation and amortization. EBITDA is used as a supplemental
financial measure by our management and by external users of our
financial statements, including investors, to assess:
|
|
|
|
|
|
the financial performance of our assets without regard to
financing methods, capital structure or historical cost basis;
|
|
|
|
our operating performance and return on capital as compared to
those of other companies in the production enhancement business,
without regard to financing or capital structure; and
|
|
|
|
the viability of capital expenditure projects and the overall
rates of return on alternative investment opportunities.
|
EBITDA should not be considered an alternative to net income,
operating income, cash flows from operating activities or any
other measure of financial performance presented in accordance
with GAAP. Our EBITDA may not be comparable to EBITDA or
similarly titled measures of other entities, as other entities
may not calculate EBITDA in the same manner as we do. Management
compensates for the limitations of EBITDA as an analytical tool
by reviewing the comparable GAAP measures, understanding the
differences between the measures and incorporating this
knowledge into managements decision-making processes.
|
|
|
|
|
Average Utilization Rate of
GasJack
tm
Units.
We measure the average
GasJack
tm
unit utilization rate of our fleet of
GasJack
tm
units as the number of units currently used to provide services
on customer well sites divided by the total number of
GasJack
tm
units in our fleet. Our management primarily uses this metric to
manage the number of idle units in our fleet and to determine
future production of
GasJack
tm
units by our manufacturing operations. We believe that keeping
the average utilization rate of our
GasJack
tm
units between 80% and 90% provides us with the optimal balance
of limiting idle units, which tie up capital investments, and
having additional units available for customer well sites on
relatively short notice. We track our average utilization rates
on a monthly basis and make adjustments to our
GasJack
tm
unit production accordingly each month.
|
The table below sets forth our predecessors historical
average number of
GasJack
tm
units being utilized to provide services during the periods
shown and the average utilization rate of its
GasJack
tm
units during those periods.
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
June 30, 2008
|
|
|
Average number of units in service during period
|
|
|
920
|
|
|
|
1,247
|
|
|
|
1,613
|
|
|
|
2,054
|
|
|
|
2,530
|
|
|
|
2,859
|
|
Average utilization rate during period
|
|
|
93.6
|
%
|
|
|
92.0
|
%
|
|
|
90.3
|
%
|
|
|
89.6
|
%
|
|
|
87.6
|
%
|
|
|
86.8
|
%
|
While our utilization rate has been declining marginally over
time, this decrease reflects the managed growth of our
GasJack
tm
unit fleet to achieve utilization rates within our targeted
optimization rate.
|
|
|
|
|
Net Increase in
GasJack
tm
Fleet Size.
We define the net increase in our
fleet size during a given period of time as the difference
between the number of
GasJack
tm
units we placed into service less the number of
GasJack
tm
units we removed from service. Management uses this metric to
evaluate our operating performance and specifically the
effectiveness of our marketing efforts to grow our overall base
of business.
|
Risks
that Impact Our Business
We believe the key risks that impact our business are:
|
|
|
|
|
We may not have sufficient cash from operations following the
establishment of cash reserves and payment of fees and expenses,
including cost reimbursements to our general partner, to enable
us to make cash distributions to holders of our common units and
general partner units at the initial quarterly distribution rate
under our cash distribution policy.
|
|
|
|
On a pro forma basis we would not have had sufficient cash
available for distribution to pay the full initial quarterly
distribution on all units for the twelve months ended
December 31, 2007 and June 30, 2008.
|
|
|
|
The assumptions underlying our estimate of cash available for
distribution we include in Our Cash Distribution Policy
and Restrictions on Distributions are inherently uncertain
and are subject to significant business, economic, financial,
regulatory and competitive risks and uncertainties that could
cause our actual results to differ materially from those
estimated.
|
|
|
|
We may be unable to achieve our expected organic growth or
market penetration.
|
|
|
|
Our ability to manage and grow our business effectively and
provide adequate production enhancement services to our
customers may be adversely affected if our general partner loses
its management or is unable to retain trained personnel.
|
|
|
|
We depend on domestic and international demand for and
production of natural gas, and a reduction in this demand or
production could adversely affect the demand or the prices we
charge for our services, which could cause our revenue and cash
available for distribution to our unitholders to decrease.
|
|
|
|
We have five customers that collectively accounted for
approximately 51.1% of our pro forma 2007 revenues. Our services
will be provided to these customers pursuant to short-term
contracts, which typically are cancellable with
30 days notice. The loss of any of these significant
customers would result in a decline in our revenue and cash
available to pay distributions to our unitholders.
|
|
|
|
We depend on particular suppliers and are vulnerable to product
shortages and price increases, which could have a negative
impact on our results of operations and cash available for
distribution to our unitholders.
|
|
|
|
We face competition that may cause us to lose market share and
harm our financial performance.
|
|
|
|
Our ability to grow in the future is dependent on our ability to
access external expansion capital.
|
|
|
|
We will not have a credit facility at the closing of this
offering and may be unable to obtain financing or enter into a
credit facility on acceptable terms or at all in the future.
|
53
|
|
|
|
|
We are a restricted subsidiary under the TETRA Credit Facility
and certain other indebtedness and TETRA is subject to various
covenants under that facility and other indebtedness with
respect to its restricted subsidiaries, which may adversely
affect our operations.
|
|
|
|
Our general partner is a restricted subsidiary and a guarantor
under the TETRA Credit Facility and the TETRA Senior Notes; in
the event TETRA is unable to meet its obligations under the
TETRA Credit Facility and the TETRA Senior Notes, or is declared
bankrupt, our partnership may be dissolved.
|
|
|
|
The credit and risk profile of TETRA could adversely affect our
business and our ability to make distributions to our
unitholders.
|
|
|
|
We may be unable to negotiate extensions or replacements of our
contracts with our customers, which are generally cancellable on
30 days notice, which could adversely affect our
results of operations and cash available for distribution to our
unitholders.
|
|
|
|
We may be unable to acquire the remainder of our
predecessors production enhancement services business,
which could limit our ability to increase our cash available for
distribution to our unitholders.
|
|
|
|
Our reliance on TETRA for certain general and administrative
support services and our limited ability to control certain
costs could have a material adverse effect on our business,
results of operations, financial condition and ability to make
cash distributions to our unitholders.
|
|
|
|
We are subject to environmental regulation, and changes in these
regulations could increase our costs or liabilities.
|
|
|
|
TETRA and Compressco may compete with us in the future, which
could adversely affect our results of operations and cash
available for distribution to our unitholders.
|
|
|
|
We do not insure against all potential losses and could be
seriously harmed by unexpected liabilities.
|
|
|
|
Debt we incur in the future may limit our flexibility to obtain
financing and to pursue other business opportunities.
|
|
|
|
Any future credit facility could have substantial restrictions
and financial covenants that may restrict our business and
financing activities and our ability to pay distributions.
|
|
|
|
An increase in interest rates may cause the market price of our
common units to decline.
|
|
|
|
An increase in interest rates will cause any future debt service
obligations to increase.
|
For a more complete description of the risks associated with our
business, please read Risk Factors on page 15.
Industry
Trends
We believe we will be able to continue growing our business
organically by capitalizing on the following positive, long-term
fundamentals, which we believe exist for the production
enhancement services industry:
|
|
|
|
|
Most of the wells that would benefit from our production
enhancement services do not currently utilize those services;
|
|
|
|
The aging of producing natural gas fields will require more of
our production enhancement services;
|
|
|
|
Natural gas production from unconventional sources, including
tight sands, shales and coalbeds, is expected to continue to
increase, according to the Energy Information Administration,
and production from these unconventional sources could benefit
from our production enhancement services due to typically lower
formation pressures; and
|
|
|
|
Natural gas producers continue to outsource their requirements
for the production enhancement services we provide.
|
54
Given the current demand for and pricing of natural gas, we
expect our services revenues to continue to grow. We intend to
increase our coverage within our current domestic and
international markets, pursue additional domestic and
international growth opportunities, improve our service
offerings, promote our additional service applications,
including vapor recovery services and production enhancement
services on pumping oil wells, and continue to leverage our
relationships with TETRA and its customers, as further described
in Business Strategies on page 67. Such growth
is expected to be funded by cash provided by operations, from
the proceeds received from this offering, from issuances of
additional common units and from future borrowings.
Items Impacting
the Comparability of Our Historical Financial Results to our
Future Results of Operations
The future results of our operations may initially not be
comparable to our predecessors historical results of
operations for the periods presented below, for the reasons
described below:
|
|
|
|
|
We will not receive all of the customer contracts, equipment and
other assets of our predecessor. The financial reporting impact
of the difference between the business previously conducted by
our predecessor and the business to be conducted by us is
material and reflected in the pro forma financial statements
presented in this prospectus.
|
|
|
|
Our domestic services contracts, many of which were modified to
provide that the services we provide under those services
contracts will generate qualifying income, require us to pay
certain ad valorem taxes, sales taxes and insurance expenses
that were not paid by our predecessor under the pre-existing
form of those services contracts.
|
|
|
|
The results of our predecessors operations include an
allocation of certain selling, general and administrative
expenses from TETRA. Upon completion of this offering, we will
be charged for certain selling, general and administrative costs
in accordance with an omnibus agreement between TETRA,
Compressco and us, and the amount of such charges could vary
from the amounts presented in our predecessors results of
operations.
|
|
|
|
Upon completion of this offering, we anticipate that we will
incur additional selling, general and administrative expenses of
approximately $2.0 million per year as a result of being a
publicly traded limited partnership, including costs associated
with annual and quarterly reports to our unitholders, annual
financial audits,
Schedule K-1
preparation and distribution, investor relations activities,
registrar and transfer agent fees, attorney fees, incremental
director and officer liability insurance costs and director
compensation.
|
|
|
|
The offering proceeds, net of underwriting discounts and
commissions and expenses associated with the offering, will be
used to fund our working capital requirements and the future
growth and expansion of our business, including costs to expand
our
GasJack
tm
unit fleet and costs associated with increasing and training our
Senior Gas Production Specialists, optimization specialists and
field mechanics.
|
55
Results
of Operations
The following data should be read in conjunction with the
Combined Financial Statements and the associated Notes contained
elsewhere in this prospectus.
Compressco
Partners Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
June 30,
|
|
|
2006
|
|
|
2007
|
|
|
June 2008
|
|
Combined Results of Operations
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
vs. 2005
|
|
|
vs. 2006
|
|
|
vs. June 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
|
$
|
38,575
|
|
|
$
|
54,442
|
|
|
$
|
70,914
|
|
|
$
|
33,186
|
|
|
$
|
41,288
|
|
|
$
|
15,867
|
|
|
$
|
16,472
|
|
|
$
|
8,102
|
|
Sales of compressors and parts
|
|
|
11,459
|
|
|
|
10,881
|
|
|
|
12,640
|
|
|
|
4,841
|
|
|
|
5,318
|
|
|
|
(578
|
)
|
|
|
1,759
|
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
50,034
|
|
|
$
|
65,323
|
|
|
$
|
83,554
|
|
|
$
|
38,027
|
|
|
$
|
46,606
|
|
|
$
|
15,289
|
|
|
$
|
18,231
|
|
|
$
|
8,579
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
|
|
16,365
|
|
|
|
22,420
|
|
|
|
29,849
|
|
|
|
13,612
|
|
|
|
17,717
|
|
|
|
6,055
|
|
|
|
7,429
|
|
|
|
4,105
|
|
Cost of compressors and parts sales
|
|
|
7,561
|
|
|
|
7,495
|
|
|
|
7,665
|
|
|
|
2,844
|
|
|
|
3,621
|
|
|
|
(66
|
)
|
|
|
170
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
23,926
|
|
|
$
|
29,915
|
|
|
$
|
37,514
|
|
|
$
|
16,456
|
|
|
$
|
21,338
|
|
|
$
|
5,989
|
|
|
$
|
7,599
|
|
|
$
|
4,882
|
|
Selling, general and administrative expense
|
|
|
8,117
|
|
|
|
10,360
|
|
|
|
12,539
|
|
|
|
5,707
|
|
|
|
6,548
|
|
|
|
2,243
|
|
|
|
2,179
|
|
|
|
841
|
|
Depreciation and amortization
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
|
|
1,866
|
|
|
|
2,941
|
|
|
|
1,098
|
|
Other (income) expense, net
|
|
|
(3
|
)
|
|
|
59
|
|
|
|
(31
|
)
|
|
|
(16
|
)
|
|
|
6
|
|
|
|
62
|
|
|
|
(90
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
13,501
|
|
|
$
|
18,630
|
|
|
$
|
24,232
|
|
|
$
|
11,505
|
|
|
$
|
13,241
|
|
|
$
|
5,129
|
|
|
$
|
5,602
|
|
|
$
|
1,736
|
|
Provision for income taxes
|
|
|
516
|
|
|
|
1,029
|
|
|
|
660
|
|
|
|
257
|
|
|
|
619
|
|
|
|
513
|
|
|
|
(369
|
)
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,985
|
|
|
$
|
17,601
|
|
|
$
|
23,572
|
|
|
$
|
11,248
|
|
|
$
|
12,622
|
|
|
$
|
4,616
|
|
|
$
|
5,971
|
|
|
$
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period Change
|
|
|
|
Percentage of Total Revenues
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
2006
|
|
|
2007
|
|
|
June 2008
|
|
Combined Results of Operations
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
vs. 2005
|
|
|
vs. 2006
|
|
|
vs. June 2007
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
|
|
77.1
|
%
|
|
|
83.3
|
%
|
|
|
84.9
|
%
|
|
|
87.3
|
%
|
|
|
88.6
|
%
|
|
|
41.1
|
%
|
|
|
30.3
|
%
|
|
|
24.4
|
%
|
Sales of compressors and parts
|
|
|
22.9
|
%
|
|
|
16.7
|
%
|
|
|
15.1
|
%
|
|
|
12.7
|
%
|
|
|
11.4
|
%
|
|
|
(5.0
|
)%
|
|
|
16.2
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
30.6
|
%
|
|
|
27.9
|
%
|
|
|
22.6
|
%
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
|
|
32.7
|
%
|
|
|
34.3
|
%
|
|
|
35.7
|
%
|
|
|
35.8
|
%
|
|
|
38.0
|
%
|
|
|
37.0
|
%
|
|
|
33.1
|
%
|
|
|
36.7
|
%
|
Cost of compressors and parts sales
|
|
|
15.1
|
%
|
|
|
11.5
|
%
|
|
|
9.2
|
%
|
|
|
7.5
|
%
|
|
|
7.8
|
%
|
|
|
(0.9
|
)%
|
|
|
2.3
|
%
|
|
|
(3.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
47.8
|
%
|
|
|
45.8
|
%
|
|
|
44.9
|
%
|
|
|
43.3
|
%
|
|
|
45.8
|
%
|
|
|
25.0
|
%
|
|
|
25.4
|
%
|
|
|
29.7
|
%
|
Selling, general and administrative expense
|
|
|
16.2
|
%
|
|
|
15.9
|
%
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
|
|
14.0
|
%
|
|
|
27.6
|
%
|
|
|
21.0
|
%
|
|
|
14.7
|
%
|
Depreciation and amortization
|
|
|
9.0
|
%
|
|
|
9.7
|
%
|
|
|
11.1
|
%
|
|
|
11.5
|
%
|
|
|
11.7
|
%
|
|
|
41.5
|
%
|
|
|
46.2
|
%
|
|
|
25.1
|
%
|
Other (income) expense, net
|
|
|
0.0
|
%
|
|
|
0.1
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
N/
|
M
|
|
|
(152.5
|
)%
|
|
|
(137.5
|
)%
|
Income before income taxes
|
|
|
27.0
|
%
|
|
|
28.5
|
%
|
|
|
29.0
|
%
|
|
|
30.3
|
%
|
|
|
28.4
|
%
|
|
|
38.0
|
%
|
|
|
30.1
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
26.0
|
%
|
|
|
26.9
|
%
|
|
|
28.2
|
%
|
|
|
29.6
|
%
|
|
|
27.1
|
%
|
|
|
35.5
|
%
|
|
|
33.9
|
%
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008 Compared to Six Months Ended
June 30, 2007
Revenue.
Our predecessors combined
revenues for the six months ended June 30, 2008 increased
$8.6 million to $46.6 million, compared to
$38.0 million for the six months ended June 30, 2007,
an increase of 22.6%. This change was primarily associated with
a 24.4% increase in services revenues, as our predecessor
utilized an average of 2,859
GasJack
tm
units to provide services during the six months ended
June 30, 2008 compared to an average of 2,425
GasJack
tm
units during the six months ended June 30, 2007. In
addition, average
GasJack
tm
utilization rates increased 6% during the six months ended
June 30, 2008 over the prior years period. Domestic
revenues increased $5.9 million during the six months ended
June 30, 2008 to $37.3 million, an 18.9% increase over
the prior years period. Mexican revenues for the six
months ended June 30, 2008 almost doubled from the prior
years period, increasing 96.7% to $5.7 million, due
to a significant increase in our predecessors business in
Mexico. Canadian revenues declined from $3.7 million for
the six months ended June 30, 2007 to $3.6 million for
the six months ended June 30, 2008, primarily as a result
of lower capital spending by Canadian exploration and production
companies caused by decreased prices for natural gas from Canada
and increased production costs. Revenues from sales of
GasJack
tm
units and parts also increased to $5.3 million for the six
months ended June 30, 2008 compared to $4.8 million
for the prior years period.
Cost of revenue.
Combined cost of revenues
increased from $16.5 million for the six months ended
June 30, 2007 to $21.3 million for the same period in
2008, an increase of $4.9 million or 29.7%. This change
reflects the increased number of
GasJack
tm
units being utilized to provide services, with cost of
compression and other services increasing $5.0 million
during the six months ended June 30, 2008 over the prior
years period. Domestic cost of revenues made up the
greatest portion of this change, commensurate with an increase
in domestic services revenues. This increase in cost of revenues
more than offset the slight decrease in cost of
GasJack
tm
units sold. As a percentage of combined revenues, cost of
revenues increased from 43.3% for the six months ended
June 30, 2007 to 45.8% for the six months ended
June 30, 2008, due to increased operating expenses,
including the hiring of additional field services and call
center personnel, and increased fuel and fleet maintenance costs.
57
Selling, general and administrative
expense.
Selling general and administrative
expenses increased from $5.7 million for the six months
ended June 30, 2007 to $6.5 million for the current
years period, an increase of $0.8 million or 14.7%.
This increase was consistent with the overall growth of our
predecessors operations. As a percentage of combined
revenues, our predecessors selling, general and
administrative expense decreased during the six months ended
June 30, 2008 to 14.0% compared to 15.0% for the prior
years period. Selling, general and administrative expense
includes costs allocated by TETRA for administrative costs
incurred by TETRA.
Depreciation and amortization.
Depreciation
and amortization expense primarily consists of the depreciation
of
GasJack
tm
units. In addition, depreciation and amortization expense also
includes the depreciation of other operating equipment and
facilities locations, as well as the amortization of certain
intangible assets. Depreciation and amortization expense
increased $1.1 million during the six months ended
June 30, 2008 over the six months ended June 30, 2007,
an increase of approximately 25.1%. This change was primarily
due to the increased size and cost of the
GasJack
tm
unit fleet.
Income before taxes and net income.
Income
before taxes for the six months ended June 30, 2008 was
$13.2 million, compared to $11.5 million for the six
months ended June 30, 2007, an increase of
$1.7 million or 15.1%. As a percentage of combined total
revenues, income before taxes decreased to 28.4% for the six
months ended June 30, 2008, compared to 30.3% for the prior
years period. Provision for income taxes relates to
international operations in Canada and Mexico and certain
domestic state taxes. No amount of domestic Federal income taxes
has been included, as our predecessors operations are
included as part of the consolidated tax return of TETRA and the
Partnership will be exempt from U.S. taxation. Net income
for the six months ended June 30, 2008 was
$12.6 million, compared to $11.2 million for the prior
years period, an increase of $1.4 million or 12.2%.
As described above, our predecessors profitability
increased as a result of growth domestically and in Mexico,
despite decreased profitability during 2008 in Canada.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Revenue.
Our predecessors combined
revenues increased from $65.3 million for 2006 to
$83.6 million for 2007, an increase of $18.2 million
or 27.9%. This change was primarily associated with a 30.3%
increase in services revenues, as our predecessor utilized an
average of 2,530
GasJack
tm
units to provide services during 2007, compared to an average of
2,054
GasJack
tm
units during 2006. In addition, average
GasJack
tm
utilization rates increased approximately 3% during 2007.
Domestic revenues increased 37.4% during 2007 from
$49.7 million for 2006 to $68.3 million for 2007. In
addition, Mexican revenues increased $3.3 million during
2007, with $6.9 million of revenue for 2007 compared to
$3.5 million for 2006. Canadian revenues declined
$3.7 million, or 30.5%, from $12.1 million for 2006 to
$8.4 million for 2007, primarily as a result of lower
capital spending by Canadian exploration and production
companies caused by decreased prices for natural gas from Canada
and increased production costs. Approximately $1.8 million
of the increase in combined revenues was also due to increased
sales of
GasJack
tm
units during 2007 compared to 2006, as the number of
GasJack
tm
units sold increased from 146 for 2006 to 201 for 2007, and due
to higher margins on sales of
GasJack
tm
units during 2007 compared to 2006.
Cost of revenue.
Combined cost of revenues
increased from $29.9 million for 2006 to $37.5 million
for 2007, an increase of $7.6 million or 25.4%. This change
reflects the increased number of
GasJack
tm
units in service, with cost of services increasing
$7.4 million during 2007 compared to 2006. Domestic cost of
revenues made up the greatest portion of this change,
commensurate with the increase in domestic services revenues. To
a lesser extent, cost of compressors and parts sales increased
$0.2 million as a result of increased sales of
GasJack
tm
units and parts. As a percentage of combined revenues, however,
cost of revenues decreased from 45.8% for 2006 to 44.9% for 2007
primarily due to higher margins on sales of units during 2007
compared to 2006.
Selling, general and administrative
expense.
As a percentage of combined revenues,
our predecessors selling, general and administrative
expense decreased during 2007 to approximately 15.0%, compared
to 15.9% for 2006. Selling, general and administrative expense
increased by $2.2 million from $10.4 million to
$12.5 million, consistent with the overall growth of our
predecessors operations.
58
Depreciation and amortization.
Depreciation
and amortization expense primarily consists of the depreciation
of
GasJack
tm
units. In addition, depreciation and amortization expense also
includes the depreciation of other operating equipment and
facilities locations, as well as the amortization of certain
intangible assets. Depreciation and amortization expense
increased $2.9 million during 2007, or approximately 46.2%,
primarily due to the increased size of the
GasJack
tm
unit fleet.
Income before taxes and net income.
Income
before taxes for 2007 was $24.2 million, compared to
$18.6 million for 2006, an increase of $5.6 million or
30.1%. As a percentage of combined total revenues, income before
taxes was 29.0% for 2007, compared to 28.5% for 2006. Provision
for income taxes relates to international operations in Canada
and Mexico and, beginning in 2007, certain domestic state taxes.
No amount of domestic Federal income taxes has been included, as
our predecessors operations are included as part of the
consolidated tax return of TETRA and as a partnership we will be
exempt from U.S. taxation. Net income for 2007 was
$23.6 million, compared to $17.6 million for 2006, an
increase of $6.0 million or 33.9%. As described above, our
predecessors profitability increased as a result of growth
domestically and in Mexico, despite decreased profitability
during 2007 in Canada.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Revenue.
Combined revenues increased from
$50.0 million for 2005 to $65.3 million for 2006, an
increase of $15.3 million or 30.6%. This change was due to
a 41.1% increase in services revenues, as our predecessor
utilized an average of 2,054
GasJack
tm
units during 2006 compared to an average of 1,613
GasJack
tm
units to provide services during 2005. Domestic revenues
increased 24.8% during 2006 from $39.8 million for 2005 to
$49.7 million for 2006. Canadian revenues increased 23.1%
during 2006 from $9.8 million for 2005 to
$12.1 million for 2006. In late 2005, our predecessor began
operations in Mexico, which resulted in increased services
revenues of $3.1 million for 2006 compared to 2005.
Revenues from the sales of
GasJack
tm
units and parts decreased by $0.6 million during 2006, as
the number of
GasJack
tm
units sold declined from 197 for 2005 to 146 for 2006.
Cost of revenue.
Combined cost of revenues
increased from $23.9 million for 2005 to $29.9 million
for 2006, an increase of $6.0 million or 25.0%. This change
reflects the increased number of
GasJack
tm
units being utilized to provide services, with cost of services
increasing $6.1 million during 2006 compared to 2005.
Domestic cost of revenues made up the greatest portion of this
change, commensurate with domestic services revenues. The
increased cost of revenues was partially offset by
$0.1 million of decreased cost of
GasJack
tm
unit and parts sales, due to the decreased sales of
GasJack
tm
units discussed above. As a percentage of combined revenues,
cost of revenue decreased from 47.8% for 2005 to 45.8% for 2006.
Selling, general and administrative
expense.
Selling, general and administrative
expenses increased from $8.1 million for 2005 to
$10.4 million for 2006, an increase of $2.2 million.
As a percentage of combined revenues, however, selling, general
and administrative expense decreased slightly during 2006, at
approximately 15.9% compared to 16.2% for 2005.
Depreciation and amortization.
Depreciation
and amortization expense primarily consists of the depreciation
of
GasJack
tm
units. In addition, depreciation and amortization expense also
includes the depreciation of other operating equipment and
facilities locations, as well as the amortization of certain
intangible assets. Depreciation and amortization expense
increased $1.9 million during 2006, or approximately 41.5%,
primarily due to the increased size of our predecessors
GasJack
tm
unit fleet.
Income before taxes and net income.
Income
before taxes for 2006 was $18.6 million, compared to
$13.5 million for 2005, an increase of $5.1 million or
38.0%. As a percentage of combined total revenues, income before
taxes was 28.5% for 2006, compared to 27.0% for 2005. Provision
for income taxes relates to international operations in Canada
and Mexico. No amount of domestic Federal income taxes has been
included, as our predecessors operations are included as
part of the consolidated tax return of TETRA and the Partnership
will be exempt from U.S. taxation. Net income for 2006 was
$17.6 million, compared to $13.0 million for 2005, an
increase of $4.6 million or 35.5%, largely as a result of
our growth and deployment of our
GasJack
tm
unit fleet. As described above, our predecessors
profitability increased as a result of our overall growth and
increased activity in Mexico.
59
Liquidity
and Capital Resources
Our
Predecessors Liquidity and Capital Resources
Operating Activities.
Net cash from operating
activities increased by $6.5 million during 2007 to
$27.1 million compared to $20.6 million for 2006,
primarily due to increased earnings and depreciation expense,
and despite an increase in accounts receivable. Net cash from
operating activities increased by $7.3 million during 2006
to $20.6 million compared to $13.3 million for 2005
due to increased earnings and depreciation expense. During the
six months ended June 30, 2008, our predecessor generated
an additional $16.3 million of net cash from operating
activities.
Investing Activities.
Capital expenditures for
2007 decreased by $2.1 million to $23.8 million
compared to $25.9 million for 2006 due to a reduction in
the number of
GasJack
tm
units manufactured during the year. In particular, our
predecessor significantly decreased the number of
GasJack
tm
units manufactured for our operations in Canada, where activity
during the year has been slow. Total
GasJack
tm
units manufactured in 2007 decreased to 726, compared to 751
GasJack
tm
units completed in the prior year. Capital expenditures for 2006
increased by $7.6 million to $25.9 million compared to
$18.3 million for 2005, as the number of
GasJack
tm
units manufactured increased to 751
GasJack
tm
units from 660
GasJack
tm
units manufactured during 2005. Through the six months ended
June 30, 2008, our predecessor has expended an additional
$16.9 million, primarily to fund the further increase of
its
GasJack
tm
unit fleet by an additional 411
GasJack
tm
units.
Financing Activities.
Historically, our
predecessors sources of liquidity included cash generated
from operations and funding from TETRA. Our predecessors
cash receipts were deposited in TETRAs bank accounts and
all cash disbursements were made from these accounts.
Accordingly, the amount of cash reflected in our
predecessors historical financial statements is not
indicative of its actual cash position, as TETRA retains any
cash surplus, shortfalls and debt borrowings on its balance
sheet. Cash transactions handled by TETRA were reflected in net
parent equity. Net cash provided by and used in financing
activities represents the pass through of our predecessors
net cash flows to TETRA, pursuant to its cash management program.
Our
Liquidity and Capital Resources
Liquidity.
The amount of available cash we
need to pay the initial quarterly distributions for four
quarters on our common units and general partner units
outstanding immediately after this offering is approximately
$ million. Our pro forma
available cash to make distributions during the four-quarter
period ended December 31, 2007 and the twelve month period
ended June 30, 2008 would not have been sufficient to allow
us to fully pay the initial quarterly distribution on our common
units during these periods. The shortfall in available cash for
distributions for the twelve months ended December 31, 2007
and June 30, 2008 would have resulted in distributions with
respect to our common units representing
approximately %
and %, respectively, of our initial
quarterly distribution. Following this offering, we plan to
maintain our own bank accounts, although TETRAs personnel
will manage our cash and investments.
In addition to distributions on our partnership units, our
primary short-term liquidity needs are to fund future growth and
expansion of our business. We anticipate that our primary source
of funds for our short-term liquidity needs will be the net
proceeds from this offering, the majority of which will be
retained by us to fund the future growth and expansion of our
business, including costs to expand our
GasJack
tm
unit fleet and costs associated with increasing and training our
Senior Gas Production Specialists, optimization specialists and
field mechanics, and the remainder of the net proceeds will be
used to fund our working capital requirements, while our
long-term liquidity needs primarily relate to further expansion
of our
GasJack
tm
unit fleet. We believe that the net proceeds from this offering
will be sufficient to meet our existing short-term liquidity
needs.
Our long-term liquidity needs will generally be funded from the
net proceeds from this offering (which we expect will fund our
operations for approximately the next 18 months) and cash
generated from our operations, borrowings and the issuance of
additional partnership units. Because we will distribute all of
our available cash, we expect that we will rely upon external
financing sources, including borrowings and issuance
60
of additional partnership units, to fund capital expenditures.
We cannot assure you that we will be able to raise additional
funds on favorable terms. For more information, please read
Capital Requirements below.
Capital Requirements.
The natural gas
production enhancement services business is capital intensive,
requiring significant investment to maintain, expand and upgrade
existing operations. Our predecessors capital requirements
historically have been primarily for the expansion of our
GasJack
tm
unit fleet and this will continue to be our primary capital
requirement following this offering. Given our objective of
growth through the expansion of our operations, both
domestically and internationally, we anticipate that we will
continue to invest significant amounts of capital to manufacture
additional
GasJack
tm
units. As more completely discussed in Our Cash
Distribution Policy and Restrictions on
Distributions Assumptions and Considerations,
for the twelve months ending September 30, 2009, we
estimate that our capital expenditures will be approximately
$29.5 million, based on an analysis of the anticipated
expansion of our
GasJack
tm
unit fleet.
Our Long-Term Ability to Grow will Depend on Our Ability to
Access External Expansion Capital.
The amount of
cash we have to distribute to our unitholders will be reduced by
cash reserves established by our general partner to provide for
the proper conduct of our business (including for future capital
expenditures). Although we believe the proceeds of this offering
will be sufficient to fund the future growth and expansion of
our business and our working capital requirements for
approximately the next 18 months, when we have depleted
these funds we will need to enter into a credit facility, which
we will not have at the closing of this offering, or secure
other financing arrangements. Over the long term, we expect that
we will rely primarily upon external financial sources,
including borrowings and the issuance of debt and equity
securities, rather than depleting the remaining cash reserves
established by the general partner to fund our expansion capital
expenditures. Although we are not a party to, or a borrower or
guarantor under, and are not liable for amounts outstanding
under the TETRA Credit Facility or the TETRA Senior Notes, we
are considered a restricted subsidiary of TETRA for purposes of
the TETRA Credit Facility and TETRA Senior Notes. TETRA controls
our general partner and the officers and directors of our
general partner have fiduciary duties not only to our investors,
but also to TETRA, as the owner of our general partner. Our
status as a restricted subsidiary means that our ability to take
certain actions, including incurring indebtedness, making
acquisitions and capital expenditures, selling assets and
issuing equity, will be indirectly restricted by the TETRA
Credit Facility and the TETRA Senior Notes. For as long as we
remain a restricted subsidiary, these covenants may also
indirectly preclude our ability to obtain a credit facility. See
also Risk Factors with respect to the implications
of our status as a restricted subsidiary under the TETRA Credit
Facility and the TETRA Senior Notes. To the extent we are unable
to finance our long-term growth externally, our cash
distribution policy may significantly impair our ability to
grow. In addition, because we will distribute all or a portion
of our distributable cash, we may not grow as quickly as
businesses that reinvest their available cash to expand ongoing
operations. To the extent we issue additional partnership units
in connection with any expansion capital expenditures, the
payment of distributions on those additional partnership units
may increase the risk that we will be unable to maintain or
increase our per unit distribution level. There are no
limitations in our partnership agreement on our ability to issue
additional partnership units, including units ranking senior to
the common units.
Contractual Obligations.
The following table
summarizes our predecessors total contractual cash
obligations as of December 31, 2007:
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Payments Due
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More than
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Less than
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5 Years
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1 Year
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2 Years
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3 Years
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4 Years
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5 Years
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(Beyond
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Total
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(2008)
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(2009)
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(2010)
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(2011)
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(2012)
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2012)
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(In thousands)
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Operating leases obligations
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$
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131
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$
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113
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$
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10
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$
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8
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Total contractual cash obligations
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$
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131
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$
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113
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$
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10
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$
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8
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61
Critical
Accounting Policies and Estimates
This discussion and analysis of our predecessors financial
condition and results of operations is based upon our
predecessors combined financial statements. Our
predecessors management prepared these financial
statements in conformity with United States generally accepted
accounting principles. In preparing our predecessors
combined financial statements, management makes assumptions,
estimates, and judgments that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the
periods presented. Management bases these estimates on
historical experience, available information and various other
assumptions it believes to be reasonable under the
circumstances. Management periodically evaluates these estimates
and judgments, including those related to potential impairments
of long-lived assets, the useful life of long-lived assets, the
collectability of accounts receivable, and the allocation of
certain parent company administrative costs. These judgments and
estimates may change as new events occur, as new information is
acquired, and with changes in our operating environment. Actual
results are likely to differ from current estimates, and those
differences may be material. The following critical accounting
policies reflect the most significant judgments and estimates
used in the preparation of our predecessors and our
financial statements.
Impairment of Long-Lived Assets
The
determination of impairment of long-lived assets, including
goodwill, is conducted periodically whenever indicators of
impairment are present. Goodwill is assessed for potential
impairment at least annually. If such indicators are present,
the determination of the amount of impairment is based on our
judgments as to the future operating cash flows to be generated
from these assets throughout their estimated useful lives. The
oil and gas industry is cyclical, and estimates of the period
over which future cash flows will be generated, as well as the
predictability of these cash flows, can have a significant
impact on the carrying value of these assets and, particularly
in periods of prolonged down cycles, may result in impairment
charges.
Bad Debt Reserves
Reserves for bad debts are
calculated on a specific identification basis, whereby we
estimate whether or not specific accounts receivable will be
collected. A significant portion of our revenues come from oil
and gas exploration and production companies. If, due to adverse
circumstances, certain customers are unable to repay some or all
of the amounts owed, an additional bad debt allowance may be
required.
Depreciation
Property and equipment are
carried at cost. Depreciation for financial reporting purposes
is computed on the straight-line basis using estimated useful
lives and salvage values. If the actual useful life of property
and equipment is less than the estimate used for purposes of
computing depreciation expense, we could experience an
acceleration in depreciation expense.
Stock-Based Compensation
In the past, TETRA
granted to certain of Compresscos employees stock options
and restricted shares of TETRA common stock that remain
outstanding. Effective January 1, 2006, TETRA and its
subsidiaries adopted the fair value recognition provisions of
Statement of Financial Accounting Standard 123(R),
Share-Based Payment (SFAS No. 123R) using
the modified prospective transition method. Under the modified
prospective transition method, compensation cost recognized
during 2006 and 2007 includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123 (as amended), Accounting for
Share-Based Compensation (SFAS No. 123), and
(b) compensation cost for all share-based payments granted
beginning January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of
SFAS No. 123R. Such compensation cost associated with
Compressco employees has been included in our predecessors
financial statements beginning in 2006. Prior to the adoption of
SFAS 123R, TETRA and its subsidiaries accounted for
stock-based compensation using the intrinsic value method,
whereby the compensation cost for stock options was measured as
the excess, if any, of the quoted market price of our stock at
the date of the grant over the amount an employee was to pay to
acquire the stock. In accordance with the modified prospective
transition method, results for prior periods have not been
restated. In addition to the grants of employee options and
restricted stock grants of TETRA common stock, our general
partner intends to adopt the 2008 Long-Term Incentive Plan,
which will provide for the granting of options, restricted
units, and other unit-based awards. The compensation cost for
all unit-based
62
payments granted pursuant to the 2008 Long-Term Incentive Plan
will also be based on the grant date fair value estimated in
accordance with SFAS 123R.
TETRA estimates the fair value of share-based payments of stock
options using the Black-Scholes option-pricing model. This
option-pricing model requires a number of assumptions, of which
the most significant are: expected stock price volatility, the
expected pre-vesting forfeiture rate, and the expected option
term (the amount of time from the grant date until the options
are exercised or expire). Expected volatility is calculated
based upon actual historical stock price movements over the most
recent periods equal to the expected option term. Expected
pre-vesting forfeitures are estimated based on actual historical
pre-vesting forfeitures over the most recent periods for the
expected option term.
Methodologies Used by Our Predecessor to Allocate Parent
Company Administrative Costs
TETRA and
Compressco employed various allocation methodologies to separate
certain general and administrative costs incurred by TETRA and
recorded in our predecessors financial statements
presented herein. TETRA provides Compressco with centralized
corporate functions such as legal, accounting and financial
reporting, treasury, insurance administration, claims
processing, risk management, health, safety and environmental,
information technology, human resources, credit, payroll,
internal audit, taxes and other corporate services and the use
of facilities that support these functions. The allocation
methodologies are based on an estimate by each parent company
function of the time spent on behalf of our business. We believe
that the methodology used to allocate indirect costs is
reasonable. If certain selling, general and administrative
expenses were allocated using different methodologies, our
predecessors results of operations could have been
significantly different from those presented herein.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB published SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS No. 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. We
are currently evaluating the impact, if any, the adoption of
SFAS No. 160 will have on our financial position and
results of operations.
In September 2006, the FASB published SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair
value measurements. SFAS No. 157 establishes a fair
value hierarchy and requires disclosure of fair value
measurements within that hierarchy. SFAS No. 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The adoption of
SFAS No. 157 did not have a material impact on our
financial statements, but will result in additional disclosures
related to the use of fair values in the financial statements.
63
U.S.
NATURAL GAS PRODUCTION ENHANCEMENT SERVICES INDUSTRY
Natural gas compression is used by oil and natural gas
exploration and production companies, or producers,
to assist with the production of oil and natural gas, for
transportation of natural gas from one point to another and for
enhancing the recovery of crude oil from reservoirs. Most
natural gas compression applications involve compressing natural
gas for its delivery from one point to another. Low pressure or
aging natural gas wells require compression for transportation
of produced natural gas into higher pressured natural gas
gathering or pipeline systems. Compression at the wellhead is
often required because, over the life of a crude oil or natural
gas well, reservoir pressure typically declines as reserves are
produced. Our
GasJack
tm
unit provides an effective means of performing this required
compression.
Along with compression at the wellhead, the production
enhancement services that we provide with our
GasJack
tm
units include the following:
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removal of liquids in natural gas well tubing, which reduces
surface pressure and allows natural gas to flow more freely,
resulting in increased production and total recoverable reserves;
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separation of fluids from natural gas flows in the
GasJack
tm
unit prior to compression of the liquid-free natural gas;
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metering of natural gas and liquids; and
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various other applications, including the capture of vapors and
corresponding reduction of pressures in natural gas condensate
holding tanks, as well as the reduction of pressures caused by
well casing head gas in oil wells with pumping units that
results in an increased flowing bottom hole pressure and
typically results in increased oil and natural gas production.
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We believe that our production enhancement services offer
customers:
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increased cash flow from producing a higher volume of natural
gas;
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reduced operating, maintenance and equipment costs by allowing
us to efficiently manage their changing wellhead compression
needs;
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the ability to more efficiently meet their changing wellhead
compression needs over time, while limiting their capital
investments in wellhead compression equipment;
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access to our specialized personnel and technical skills,
including engineers and field service and maintenance employees,
which generally leads to improved production rates; and
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the flexibility to deploy their capital on projects more
directly related to their primary business by reducing their
wellhead compression equipment and maintenance capital
requirements.
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We believe that the natural gas production enhancement services
market continues to demonstrate significant growth potential.
According to the Energy Information Administration, or
EIA, natural gas demand in the U.S. grew at a
steady rate from 1998 to 2006 and, according to the EIAs
Annual Energy Outlook 2008, or AEO2008, natural gas
demand is expected to continue growing over the long term,
thereby causing pressure on producers to increase natural gas
production to satisfy growing demand. However, until recently,
increases in natural gas supply have not corresponded with
increases in natural gas well drilling activity. As shown on the
following chart, prepared with data made available by the EIA,
natural gas production in the lower 48 United States (including
the Gulf of Mexico) remained relatively flat from 1998 through
2006, despite significant increases in the number of natural gas
wells drilled per year.
U.S.
Lower 48 Natural Gas Wells Drilled and Production
Source: EIA.
According to the AEO2008, the cause of this relatively flat
natural gas production can be traced to rapidly declining
natural gas production from offshore and conventional onshore
resources over the last several years. According to the AEO2008,
a large portion of the conventional natural gas resource base
available in the onshore lower 48 United States has already been
discovered. Going forward, newly discovered onshore conventional
natural gas resources are expected to have accelerated decline
rates, smaller reserves from deeper reservoirs and be more
expensive and riskier to drill. Therefore, the EIA forecasts in
its AEO2008 reference case that natural gas production in the
lower 48 United States from onshore conventional resources will
decline by approximately 50% from 2006 through 2030. We believe
that these onshore conventional resources will provide
additional wells with marginal production that will benefit from
our production enhancement services.
According to the EIA, natural gas production in the lower 48
United States from March 31, 2007 to March 31, 2008
increased by 9%, primarily due to the continuing and extensive
development of unconventional natural gas resources, including
tight sands, shales and coalbeds. Advances in drilling and
completion techniques, including horizontal drilling, have
improved the productivity of these unconventional resource wells
and many more of these types of wells are being drilled, as
evidenced by the 519 rigs being utilized to drill horizontal
wells at month-end May 2008 (or 28% of the total domestic
onshore rig fleet) compared to an average of approximately 40
rigs per month (about 6% of total) in the late 1990s. The wells
from these unconventional resources are also characterized by
lower formation pressures and significant early production
declines, which we believe provide an opportunity to employ our
production enhancement services earlier than on conventional
wells. We are currently providing our services on 50 natural gas
wells in the Barnett Shale, one of the largest unconventional
natural gas resources in the United States. We anticipate that
we will provide our production enhancement services to a growing
number of newer wells producing from unconventional resources.
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We primarily target natural gas wells in our operating regions
that produce between 30 thousand and 300 thousand cubic
feet of natural gas per day (Mcf/d) and, to ensure
that our
GasJack
tm
units ability to separate fluids is effective, we only
target wells that produce less than 50 barrels of water per
day. According to EIA, approximately 197,500 natural gas wells
in the United States produced approximately 24 Mcf/d to
300 Mcf/d in 2006, an increase of approximately 21% of the
number of such wells since 2002. With the rapid pace of drilling
over the last several years, we believe that the number of wells
with daily production within the range described by the EIA has
grown substantially since 2006, although not all of these wells
will be candidates for our services. We believe that the
majority of the wells we target do not currently utilize
production enhancement services, given that we have fewer than
2,800 active domestic
GasJack
tm
units as of June 30, 2008, and that most of our competitors
are local and regional companies with smaller fleets. We believe
that the limited penetration of this market to date should
provide us with significant growth opportunities over the long
term.
U.S.
Lower 48 Natural Gas Wells by Production Rate
(Mcf/Day)
Source: EIA.
Well information from Pennsylvania, Illinois and Indiana is
unavailable.
Along with increased domestic opportunities, we continue to see
strong demand for our services in gas producing regions of
Mexico and Canada, and believe that other international regions
may become growth areas in the future.
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BUSINESS
Overview
We are a leading provider of wellhead compression-based
production enhancement services, or production enhancement
services, to a broad base of natural gas and oil
exploration and production companies operating throughout
14 states that encompass most of the onshore producing
regions of the United States, as well as in Canada and Mexico.
Production enhancement services include compression,
liquids separation and gas metering services. Our production
enhancement services improve the value of natural gas and oil
wells by increasing daily production and total recoverable
reserves. Our production enhancement services also include
related liquids separation and gas metering services. While our
services are applied primarily to mature, wells with low
formation pressures, our services are also employed on newer
wells that have experienced significant production declines or
are characterized by lower formation pressures. In connection
with the performance of these services, we provide ongoing well
evaluations and, in Mexico, well testing and monitoring
services. In addition, we design and manufacture the
GasJack
tm
units, or
GasJack
tm
units, we use in providing our production enhancement
services.
Our predecessors production enhancement services business
experienced substantial organic growth over the past five years.
Our predecessors fleet of
GasJack
tm
units grew from 761 units as of December 31, 2002 to
2,763 units as of December 31, 2007, representing a
263% increase. Our predecessors revenues grew during that
period from approximately $14.9 million during 2002 to
approximately $83.6 million during 2007, representing a
460% increase. During the six months ended June 30, 2008,
our predecessors revenues grew to $46.6 million, as
compared to $38.0 million for the same period in 2007, and
our fleet of
GasJack
tm
units grew from 2,763 units as of December 31, 2007 to
2,954 units as of June 30, 2008. This growth was generated
entirely by organic expansion, with no acquisitions made during
this five-year period.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of our predecessors business,
equipment and other assets, as further described in Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc. on page 4.
Business
Strategies
We intend to grow our business organically by executing the
following strategies:
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Increase service coverage within our current domestic and
international markets.
We provide services to
more than 400 natural gas and oil exploration and production
companies operating throughout 14 states that encompass
most of the onshore producing regions of the United States, as
well as Canada and Mexico. Most of our services are performed in
the Ark-La-Tex (encompassing east Texas, north Louisiana and
southwest Arkansas), San Juan Basin and Mid-Continent
regions of the United States. We believe that the majority of
the wells we target do not currently utilize our production
enhancement services. To realize the potential of this market
opportunity, we intend to expand our highly trained service
staffs as well as utilize our in-house manufacturing
capabilities to increase our fleet of
GasJack
tm
units that we use to provide our services.
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Pursue additional domestic and international growth
opportunities.
Along with focusing on our
existing markets, we also intend to expand our service coverage
into other natural gas producing areas of the United States,
Mexico and Canada, as well as other select international markets.
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Improve our service offerings.
We are
constantly seeking to improve our services by increasing the
efficiency and capabilities of our
GasJack
tm
units, as well as expanding the expertise of our field service
personnel through enhanced training and education. We are
currently implementing our
ePumper
tm
system, a state-of-the-art SCADA satellite telemetry-based
system that allows us to remotely monitor, in real time, whether
our services are being continuously provided at the well site.
We expect this system to reduce the response time of our field
personnel and, consequently, reduce well downtime and increase
production for our customers.
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Promote our additional service
applications.
While our services improve the
value of customers natural gas wells by increasing daily
production and total recoverable reserves, they also have other
applications, such as vapor recovery. Certain types of natural
gas wells produce substantial amounts of condensate, which are
mostly stored in closed tanks after production. Due to
evaporation and other changes in atmospheric pressure, the
condensate in these tanks emit vapors, resulting in a loss of
condensate and the creation of undue pressure within these
tanks. Our
GasJack
tm
units capture such vapors and reduce tank pressures. Our
services are further being used in conjunction with oil well
pumping units. Our services can reduce pressures caused by
casing head gas in oil wells with pumping units, which results
in an increased flowing bottom hole pressure and typically
results in increased oil and natural gas production for our
customers.
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Leverage our relationships with TETRA and its
customers.
We intend to leverage our
relationships with TETRA and its customers in the natural gas
industry to grow our production enhancement services business.
As our coverage grows, we believe that we will have
opportunities to offer our production enhancement services to
some of TETRAs customers that are not currently using
them. For example, the production enhancement services that we
provide in Mexico resulted, in large part, from TETRAs
relationship with PEMEX. We expect to continue to work with
TETRA to identify opportunities for us to provide our production
enhancement services to TETRAs existing and future
customers.
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Competitive
Strengths
We believe that we are well positioned to successfully execute
our business strategies for the following reasons:
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Our ability to increase the value of natural gas
wells.
Our customers retain our services because
of our ability to identify their underperforming natural gas
wells and, through our production enhancement services, increase
their production rates. We typically increase hydrocarbon
production by more than 125 Mcfd of natural gas, while
consuming approximately only 8 to 10 Mcfd of natural gas as
fuel. This increase in production extends the wells
productive life and, ultimately, increases total recoverable
reserves and cash flows.
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The favorable market conditions for substantial
growth.
We believe that the natural gas
production enhancement services market continues to demonstrate
significant growth potential. The EIA is forecasting that
natural gas production from onshore conventional resources will
decline by 50% from 2006 to 2030. As a result of this expected
decline and the large number of wells drilled from 1998 to 2006,
according to the EIA, we believe that onshore conventional
resources will provide more mature wells with marginal
production that will benefit from our production enhancement
services. In addition, according to the EIA, the recent growth
in overall domestic natural gas production in 2007 and 2008 is a
result of the rapid ongoing development of unconventional
natural gas resources, which are characterized by lower
pressures and significant early production declines and provide
an opportunity to employ our production enhancement services
earlier than on conventional wells. We primarily target natural
gas wells in our operating regions that produce between 30
thousand and 300 thousand cubic feet of natural gas per day
(Mcf/d) and less than 50 barrels of water per
day. According to EIA, approximately 197,500 natural gas wells
in the United States produced approximately 24 Mcf/d to
300 Mcf/d in 2006, an increase of approximately 21% of the
number of such wells since 2002. With the rapid pace of drilling
over the last several years, we believe that the number of wells
with daily production the range described by the EIA has grown
substantially since 2006, although not all of these wells will
be candidates for our services. We believe that the majority of
the wells we target do not currently utilize production
enhancement services, given that we have fewer than 2,800 active
domestic
GasJack
tm
units as of June 30, 2008, and that most of our competitors
are local and regional companies with smaller fleets. We believe
that the limited penetration of this market to date should
provide us with significant growth opportunities over the long
term. Along with domestic opportunities, we continue to see
strong demand for our services in gas producing regions of
Mexico and Canada and believe that other international gas
producing regions may become growth areas in the future. For a
more complete description of the data and market
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conditions driving our growth potential, please read U.S.
Natural Gas Production Enhancement Services Industry on
page 64.
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Our superior customer service and highly trained field
personnel.
We provide our field services through
our staffs of Senior Gas Production Specialists, optimization
specialists and field mechanics. Senior Gas Production
Specialists supervise the field mechanics that install, operate,
monitor and maintain the
GasJack
tm
units we use to provide our standard production enhancement
services, while optimization specialists spend extra time on
particular wells to optimize their production, thereby providing
an additional level of service at no further cost to the
customer. Each member of our staffs has completed a rigorous,
customer-focused training program and continues to receive
ongoing technical and safety training.
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Our proactive, engineered approach to marketing and
service.
Central to our marketing and service
efforts is our emphasis on performing well data analyses at our
petroleum engineering office in Houston, Texas. Our engineering
staff focuses on geologic basins with reservoir characteristics
that are known to be responsive to our technology and analyzes
publicly available production data to identify wells within
those basins that we believe could benefit from our production
enhancement services. We proactively market our services to
producers in these basins and provide an inexpensive two-week
trial of our production enhancement services so that a customer
can confirm the effectiveness of our services prior to entering
into a service contract. Historically, a majority of the
customers who elect to participate in this two-week service
package ultimately enter into contracts with us. We believe this
proactive strategy of performing well data analyses and
approaching producers with targeted solutions increases our
marketing and application success rates and allows us to further
differentiate ourselves from our competitors.
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Our
GasJack
tm
units.
Our
GasJack
tm
units, which we manufacture based on our own design, enable us
to provide reliable service and their compact size makes them
easy to transport to the customers well site. We also
believe that our 46-horsepower
GasJack
tm
unit is more fuel efficient, produces lower emissions and
handles variable liquids conditions encountered in natural gas
and oil wells more effectively than the higher horsepower screw
and reciprocating compressors utilized by many of our
competitors. Our compact
GasJack
tm
unit allows us to perform compression, liquids separation and
optional gas metering services all from one skid, thereby
providing services that otherwise would generally require the
use of multiple, more costly pieces of equipment from our
competitors. Domestically, we are currently capable of producing
up to 80 new
GasJack
tm
units per month and, if necessary, we could expand our domestic
production capabilities to up to 160 units per month
without, we believe, a significant increase in capital
expenditures. Because only a small number of the
GasJack
tm
units we use require a high level of customization, we are able
to execute the manufacturing process in a highly efficient
production flow process.
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Our broad geographic presence in domestic markets and growing
international presence.
Our domestic service area
covers 14 states that encompass most of the onshore
producing regions of the United States. While most of our
services are performed in the Ark-La-Tex, San Juan Basin
and Mid-Continent regions of the United States, we have a
substantial presence in other U.S. producing regions,
including the Permian Basin, North Texas, Gulf Coast, Central
and Northern Rockies, and California. Our services have
historically focused on customers with conventional production
in mature fields, but we also service customers in some of the
largest and fastest growing unconventional gas resource markets
in the United States, including the Cotton Valley Trend, Barnett
Shale, Fayetteville Shale, Woodford Shale, Piceance Basin, and
Marcellus Shale. We are also well positioned to eventually serve
the Jonah Field/Pinedale Anticline and emerging Haynesville
Shale. Our international service areas include operations in
Western Canada and in Northern and Southern Mexico, and revenues
from these countries represented approximately 10.1% and 8.2% of
our predecessors 2007 revenues, respectively.
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Our experienced management team with proven ability to
deliver strong organic growth.
The management
team of our general partner, which averages over 25 years
of oil and gas industry and financial experience, is led by
Ronald J. Foster (President), who has over 30 years of
experience in the
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oil and gas industry, Gary L. McBride (Chief Financial Officer
and Corporate Secretary), Larry W. Brickman (Vice President of
Field Services), Kevin W. Book (Vice President of International
Operations), Mark E. Ford (Vice President of Manufacturing), Ted
D. Garner (Vice President of Engineering) and Sheri J. Vanhooser
(Vice President of Marketing and Development). Most of this team
has been involved in the management of our predecessor over the
past five years and was integral to its strong organic growth
during that period.
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Our record of maintaining established customer
relationships.
We currently have over 400
customers, including BP, Chesapeake Energy, Devon Energy, PEMEX
and EXCO Resources. Although we enter into short-term contracts
and have added a significant number of new customers over the
last few years, many of our customers have been with us for over
10 years. Because of the value, quality and breadth of our
services, we typically have enjoyed long-term relationships with
our customers, despite the short-term nature of our contracts.
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While we have set forth our strategies and competitive strengths
above, our business involves numerous risks and uncertainties,
which may prevent us from executing our strategies. These risks
include a long-term reduction in the demand for or production of
natural gas in the locations where we operate, the loss of key
customers, the short-term nature of our contracts and the
inability to grow our business organically. We operate in a
highly competitive environment and face competition primarily
from various local and regional packagers that companies that
utilize packages consisting of a screw compressor with a
separate engine driver or a reciprocating compressor with a
separate engine driver. In addition, large national and
multinational companies, which have traditionally focused on
higher-horsepower gathering and transportation equipment and
services, but which have greater financial resources than are
available to us could elect to compete in the wellhead
compression-based production enhancement business. For a more
complete description of the risks associated with an investment
in us, please read Risk Factors on page 15.
Our
Relationship with TETRA Technologies, Inc. and Compressco,
Inc.
We are a Delaware limited partnership formed by TETRA. TETRA is
an oil and gas services company, with an integrated calcium
chloride and brominated products manufacturing operation that
supplies feedstocks to energy and other markets. As part of its
oil and gas services offerings, TETRA provides wellhead
compression-based and certain other production enhancement
services to the natural gas and oil industry through Compressco
and certain other subsidiaries of TETRA.
At or prior to the completion of this offering, TETRA will
contribute to us a portion of Compresscos businesses,
equipment and other assets, as further described below.
Following the completion of this offering and in consideration
of its contribution to us, TETRA will retain a significant
economic interest in us through its indirect ownership
of common units, representing
a % limited partner interest in us,
and its indirect ownership of our general partner, Compressco
Partners GP, a wholly owned subsidiary of Compressco, which owns
a 0.1% general partner interest in us. For more detail on the
transactions that will occur in connection with this offering,
please read Formation Transactions and Partnership
Structure on page 5.
The following businesses, equipment and other assets of
Compressco will be contributed to us concurrently with the
consummation of this offering:
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all of its domestic production enhancement services contracts
that our counsel has concluded will generate qualifying income
under Section 7704 of the Internal Revenue Code, together with
certain domestic non-qualifying income producing operations;
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all of its Canadian subsidiary and business;
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all of its Mexican subsidiary and business;
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all of its equipment and other assets, with the exception of any
equipment and other assets that are necessary for Compressco to
conduct the portion of the business it retains, as further
described below; and
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all of its
GasJack
tm
unit manufacturing operations.
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70
Certain of Compresscos operations in Mexico are provided
to customers on a sub-contracted basis from TETRAs Mexican
subsidiaries. Concurrent with the contributions described above,
TETRA will contribute to us the
GasJack
tm
units and other equipment currently used in our Mexican
business. We will not receive all of the production enhancement
services assets owned and operations conducted by Compressco.
Compressco will retain certain of its customer contracts that
our counsel has not concluded will generate qualifying income
under Section 7704 of the Internal Revenue Code and
approximately
GasJack
tm
units for use in providing production enhancement services for
the business it retains and for sale. TETRA intends, but is not
obligated, to offer us the opportunity over time to purchase the
customer contracts and
GasJack
tm
units retained by Compressco. Likewise, we are not required to
purchase any additional customer contracts or related
GasJack
tm
units from Compressco.
Going forward, our relationship with TETRA and Compressco will
be governed by an omnibus agreement. All of Compresscos
employees will become employees of our general partner and they
will manage our operations and conduct the business contributed
to us, and we will reimburse our general partner for all direct
and indirect expenses incurred on our behalf. TETRA will provide
to us, and we will reimburse TETRA for, certain general and
administrative support services that are necessary to conduct
our business. In addition, our general partner will provide to
Compressco, and Compressco will reimburse our general partner
for, any personnel and services that are necessary to conduct
Compresscos retained business.
Under the non-competition provisions of the omnibus agreement:
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TETRA and Compressco will be prohibited from providing
production enhancement services or selling
GasJack
tm
units to our customers without our consent and, likewise, we
will be prohibited from providing production enhancement
services or selling
GasJack
tm
units to customers retained by Compressco without TETRAs
consent;
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TETRA or Compressco could acquire a company that provides
production enhancement services to a customer of ours, if we are
first given the opportunity to acquire that customers
business from Compressco, but decline to do so, and, likewise,
we could acquire a company that provides production enhancement
services to a customer of Compressco, if Compressco is first
given the opportunity to acquire that customers business
from us, but declines to do so;
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We will have the first right to provide production enhancement
services or sell
GasJack
tm
units to new customers who are not customers of ours or
Compressco at the time this offering is completed; and
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Compressco and we will be permitted to sell any
GasJack
tm
units that they or we own following the completion of this
offering.
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TETRA, Compressco and we will remain subject to the
non-competition provisions of the omnibus agreement until the
earliest to occur of the third anniversary of the completion of
this offering or a change of control of TETRA, Compressco or our
general partner. Thereafter, TETRA and Compressco will not be
prohibited from competing with us in the natural gas production
enhancement services business.
The omnibus agreement will also permit Compressco and us to
transfer idle
GasJack
tm
units to each other for three years under certain circumstances.
Lastly, TETRA and Compressco will indemnify us against certain
potential claims, losses and expenses associated with
environmental, title and tax issues. For a further description
of the omnibus agreement, please read Certain
Relationships and Related Party Transactions Omnibus
Agreement on page 100.
Our
Operations
GasJack
tm
unit fleet
We utilize our
GasJack
tm
units to assist us in providing production enhancement services.
Our
GasJack
tm
units increase gas production by reducing surface pressure to
allow wellbore liquids that would normally block gas flow to
produce up the well. The fluids are separated from the gas and
liquid-free gas flows into the
GasJack
tm
unit, where the gas is compressed. That gas is then cooled
before being sent to the gas sales line.
71
The separated fluids are either stored in an
on-site
customer-provided tank or injected into the gas sales line for
separation downstream.
The 46-horsepower
GasJack
tm
is an integrated power/compressor unit equipped with an
industrial
460-cubic
inch, V-8 engine that uses natural gas from the well to power
one bank of cylinders that, in turn, powers the other bank of
cylinders, which provide compression. This configuration is
capable of creating vacuum conditions of up to 12 in/hg
(inches of mercury) and discharge pressures of up to 450 PSIG
(Pounds per Square Inch Gauge).
Our
GasJack
tm
units enable us to provide reliable service and their compact
size makes them easy to transport to the customers well
site. We also believe that our
GasJack
tm
unit is more fuel efficient, produces lower emissions and
handles variable liquids conditions encountered in natural gas
and oil wells more effectively than the higher horsepower screw
and reciprocating compressors utilized by many of our
competitors. Our compact
GasJack
tm
unit allows us to perform compression, liquids separation and
optional gas metering services all from one skid, thereby
providing services that otherwise would generally require the
use of multiple, more costly pieces of equipment from our
competitors.
We are currently implementing our
ePumper
tm
system, a state-of-the-art SCADA satellite telemetry-based
reporting system that allows us to remotely monitor, in real
time, whether our services are being continuously provided at
the well site. We expect this system to reduce the response time
of our field personnel and, consequently, reduce well downtime
and increase production for our customers.
Our cold-weather
GasJack
tm
unit includes a fully enclosed, insulated and heated building
that is fully compliant with all Canadian safety and regulatory
codes. This fuel-efficient unit offers metering, separation, and
compression, all from one skid. The building has an adequately
lit workspace, allowing us to operate and provide routine
maintenance to be performed inside the enclosure in relative
comfort.
Our offshore
GasJack
tm
unit utilizes all the production enhancement features of the
standard
GasJack
tm
unit and is designed and engineered for the harshest of offshore
environments. From flanged connections to emergency shutoff
valves, the offshore
GasJack
tm
unit meets or exceeds all current Mineral Management Services
requirements. With a small footprint, it can be transported and
set on an offshore platform where space is limited. Electric or
pneumatic controls allow it to be connected into a
platforms existing control system, including warning horn,
remote operation and remote retrieval of operating parameters.
The offshore
GasJack
tm
unit can be a simple, cost efficient and reliable alternative to
premature abandonment of offshore wells and platforms.
General
Production Enhancement Services Contract Terms
The following discussion describes the material terms generally
common to the production enhancement services contracts used in
connection with our customers.
Term and Termination.
Our domestic production
enhancement services contracts typically have an initial term of
one month and, unless terminated by us or our customers with
30-days
notice, our production enhancement services contracts continue
on a month-to-month basis thereafter.
Fees and Expenses.
We charge our customers a
fixed monthly fee for the production enhancement services
specified in each service order. The fees we charge are based,
in large part, on the operating conditions at the particular
service site.
Service Availability.
If the production
enhancement services we provide fall below certain contractually
specified percentages, other than as a result of factors beyond
our control, our customers are generally entitled, upon request,
to limited credits against our service fees. To date, we have
not issued material credits as a result of these provisions.
Service Standards and Specifications.
Under
our service agreements, we are responsible for providing
production enhancement services in accordance with the
particular specifications of a job.
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Title; Risk of Loss.
We retain title to the
equipment used to provide services to our customers, and we bear
the risk of loss for our equipment to the extent not caused by
(i) a breach of certain customer obligations primarily
involving the service site and the fuel gas being supplied to
us, (ii) an uncontrollable well condition or (iii) in
the case of a service site located offshore, the failure of a
platform on which our equipment is located.
Manufacturing
We design and manufacture most of our
GasJack
tm
units in a manufacturing facility located in Oklahoma City,
Oklahoma, which we own. Our manufacturing facility is currently
capable of producing up to 80 new
GasJack
tm
units per month. If necessary, we believe we could expand our
domestic production to as many as 160 units per month.
Additionally, we lease a smaller manufacturing facility in
Alberta, Canada, where we manufacture
GasJack
tm
units for use in serving our Canadian customers. The
GasJack
tm
units that we use to provide services in Canada are assembled in
Oklahoma City first and are then sent to Canada, where we
complete the manufacturing process that is specifically designed
to meet the needs of our Canadian customers. The
GasJack
tm
unit production output at our Canadian facility varies, but we
expect it to produce only a small number of units (approximately
three to four) each month going forward.
We are able to manufacture our
GasJack
tm
units in what we believe is an efficient process because only a
small percentage of the
GasJack
tm
units we produce requires a high level of customization.
Additionally, the majority of the components we use to
manufacture
GasJack
tm
units are obtained from third-party suppliers, which makes our
manufacturing process primarily an assembly operation. We are
can hire and train new employees on the manufacturing and
assembly processes quickly and without any significant training
costs. As a result, we believe that we could increase the scale
of our manufacturing operations, if necessary, without requiring
a significant increase in capital expenditures.
Minor refurbishing of
GasJack
tm
units that are already in use occurs at our customers
field locations, while major reconditioning of
GasJack
tm
units that are already in use occurs at our manufacturing
facilities and separate service facilities.
Inventories
We take quarterly physical inventories of our parts and
equipment at our manufacturing facilities, all warehouses and on
all of our field mechanics trucks. We adjust all variances
in our inventories during the following month and none of our
net adjustments has ever exceeded 1.5% of our inventory.
Additionally, we maintain and track all of our physical
inventories centrally in a database at our Oklahoma City
manufacturing facility, while our field mechanics also maintain
and track the inventories stored on their own trucks using a
laptop computer.
Marketing
We utilize various marketing strategies to promote our
production enhancement services. We believe that all of our
personnel, from our engineers and marketing representatives to
our field service and support staff, are key components of our
overall marketing program.
Central to our marketing and service efforts is our emphasis on
performing well data analyses at our petroleum engineering
office in Houston, Texas. Our engineering staff focuses on
geologic basins with reservoir characteristics that are known to
be responsive to our technology and analyzes publicly available
production data to identify wells within those basins that we
believe could benefit from our production enhancement services.
We proactively market our services to producers in these basins.
We believe this proactive strategy of performing well data
analyses and approaching producers with targeted solutions
increases our marketing and application success rates and allows
us to further differentiate ourselves from our competitors.
We deploy 17 marketing representatives across our target
geographic markets. Our marketing representatives attempt to
build close working relationships with our existing and
potential customers and educate them
73
about our services by scheduling personal visits and
consultations, hosting and attending various production
enhancement-focused tradeshows and conferences and participating
in industry organizations, such as the Independent Petroleum
Association and the Society of Petroleum Engineers. We often
sponsor and make presentations at industry events that are
targeted to production managers, compression specialists and
other related decision makers. Our marketing representatives
also use these marketing opportunities to promote our
value-added service initiatives, such as the use of our
ePumper
tm
SCADA satellite telemetry-based system, our well site
optimization program, and our call center, which we believe give
us a competitive edge.
We stay informed of new technologies and growth markets, such as
unconventional gas resources in the Marcellus Shale and the
Fayetteville Shale, and position ourselves to take advantage of
marketing opportunities that are available in those new growth
markets. We continue to hire additional marketing
representatives for new growth markets.
Customers
We provide our production enhancement services to over 400
natural gas and oil producers throughout 14 states that
encompass most of the onshore producing regions of the United
States, as well as Canada and Mexico. Our customers primarily
use our services to extend production on mature wells prior to
being plugged and abandoned after production is no longer
economic. To provide our customers with flexibility, our
agreements may be terminated upon thirty days, or
sometimes less, notice. We charge a monthly fee for all of our
services under our service agreements and offer an inexpensive
two-week trial of our production enhancement services so that a
customer can confirm the effectiveness of our services prior to
entering into a service contract. Historically, a majority of
the customers who elect to participate in this two-week service
package ultimately enter into contracts with us. Because of the
value, quality and breadth of our services, we typically have
enjoyed long-term relationships with our customers, despite the
short-term nature of our contracts. Although we enter into
short-term contracts and have added a significant number of new
customers over the last few years, many of our customers have
been with us for over 10 years. For a more complete
description of the terms of our production enhancement
agreements, please read Our Operations General
Production Enhancement Services Contract Terms on
page 72.
Our top five customers include BP, PEMEX, Devon Energy
Corporation, Chesapeake Energy, and EXCO Resources, who
generated approximately 20.1%, 8.8%, 8.2%, 7.8% and 6.2% of our
pro forma revenues for the twelve months ended December 31,
2007, respectively, and approximately 21.6%, 10.3%, 8.8%, 11.9%
and 6.8% of our pro forma revenues for the six months ended
June 30, 2008, respectively. The loss of all or even a
portion of the production enhancement services we provide to
these customers, as a result of competition or otherwise, could
have a material adverse effect on our business, results of
operations, financial condition and our ability to make cash
distributions to our unitholders.
Suppliers
and Service Providers
Some of the components used in our
GasJack
tm
units are obtained from a single supplier or a limited group of
suppliers. Our reliance on these suppliers involves several
risks, including a potential inability to obtain an adequate
supply of required components in a timely manner. We do not have
long-term contracts with these suppliers, and partial or
complete loss of certain of them could have a negative impact on
our results of operations and could damage our customer
relationships. Further, since any increase in component prices
for
GasJack
tm
units manufactured by us could decrease our margins, a
significant increase in the price of one or more of these
components could have a negative impact on our results of
operations. Nonetheless, should we experience unexpected
unavailability of the components we use to manufacture our
GasJack
tm
units or permanently lose one of the major suppliers of the
components used to manufacture our
GasJack
tm
units, we believe there are adequate, alternative suppliers of
these components and that we would not experience a material
adverse effect on our business, results of operations, financial
condition or ability to make cash distributions to our
unitholders.
74
Competition
The production enhancement services business is highly
competitive. Primary competition for our production enhancement
services business comes from various local and regional
companies that utilize packages consisting of a screw compressor
with a separate engine driver or a reciprocating compressor with
a separate engine driver. To a lesser extent, we face
competition from large national and multinational companies with
greater financial resources than ours. While these large
companies have traditionally focused on higher-horsepower
natural gas gathering and transportation equipment and services
and have represented limited competition to-date, one or more of
these companies could elect to compete in the wellhead
compression-based production enhancement services business
segment. In addition, our competitors include plunger lift and
other artificial lift service providers and companies engaged in
leasing compressors and other equipment.
Many of our competitors attempt to compete on the basis of
price. We believe our pricing has proven to be competitive
because of the significant increases in the value of natural gas
wells that result from use of our services, our superior
customer service and highly trained field personnel and the
quality of the
GasJack
tm
units we use to provide the services. In addition, because of
the value, quality and breadth of our services, we typically
have enjoyed long-term relationships with our customers, despite
the short-term nature of our contracts.
Seasonality
Our results of operations have not historically reflected any
material seasonal tendencies, nor do we currently have reason to
believe seasonal fluctuations will have a material impact in the
near future.
Insurance
We believe that our insurance coverage is customary for the
industry and adequate for our business. As is customary in the
natural gas services industry, we review our safety equipment
and procedures and carry insurance against most, but not all,
risks of our business. Losses and liabilities not covered by
insurance would increase our costs. The natural gas production
enhancement services operations can be hazardous, involving
unforeseen circumstances such as uncontrollable flows of gas or
well fluids, fires and explosions or environmental damage. To
address the hazards inherent in our business, we maintain
insurance coverage that includes physical damage coverage,
third-party general liability insurance, employers
liability, environmental and pollution and other coverage,
although coverage for environmental and pollution-related losses
is subject to significant limitations. Under the terms of our
standard natural gas production enhancement services contract,
we are responsible for the maintenance of insurance coverage on
our
GasJack
tm
units.
Environmental
and Safety Regulations
We are subject to federal, state and local laws and regulations
governing the discharge of materials into the environment or
otherwise relating to protection of human health and the
environment. Compliance with these environmental laws and
regulations may expose us to significant costs and liabilities
and cause us to incur significant capital expenditures in our
operations. Moreover, failure to comply with these laws and
regulations may result in the assessment of administrative,
civil, and criminal penalties, imposition of remedial
obligations, and the issuance of injunctions delaying or
prohibiting operations. While we believe that our operations are
in substantial compliance with applicable environmental laws and
regulations and that continued compliance with current
requirements would not have a material adverse effect on us,
there is no assurance that this trend will continue in the
future. In addition, the clear trend in environmental regulation
is to place more restrictions on activities that may affect the
environment, and thus, any changes in these laws and regulations
that result in more stringent and costly waste handling,
storage, transport, disposal or remediation requirements could
have a material adverse effect on our operations and financial
position.
The primary environmental laws that impact our operations
include:
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the Clean Air Act and comparable state laws, and regulations
thereunder, which regulate air emissions;
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75
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the Clean Water Act and comparable state laws, and regulations
thereunder, which regulate the discharge of pollutants in into
regulated waters, including industrial wastewater discharges and
storm water runoff;
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the Resource Conservation and Recovery Act, or RCRA,
and comparable state laws, and regulations, thereunder, which
regulate the management and disposal of solid and hazardous
waste; and
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the federal Comprehensive Environmental Response, Compensation,
and Liability Act, or CERCLA, and regulations
thereunder, known more commonly as Superfund, which
impose liability for the cleanup of releases of hazardous
substances in the environment.
|
Our operations are also subject to regulation under the
Occupational Safety and Health Act, or OSHA, and
comparable state laws, and regulations thereunder, which
regulate the protection of the health and safety of workers.
The Clean Air Act and implementing regulations and comparable
state laws and regulations regulate emissions of air pollutants
from various industrial sources and also impose various
monitoring and reporting requirements, including requirements
related to emissions from certain stationary engines. These laws
and regulations impose limits on the levels of various
substances that may be emitted into the atmosphere during the
operation of our
GasJack
tm
units built after July 1, 2008. The U.S. Environmental
Protection Agency, or EPA, recently adopted rules
that were effective July 1, 2008 that establish emission
standards for new spark ignition engines and require emission
controls of certain new and existing stationary reciprocating
engines that previously were excluded from regulation. As a
result, we will be required to install new emission control
equipment on all of our future manufactured
GasJack
tm
units and could be required to retrofit existing
GasJack
tm
units with emissions control equipment if the EPA decides to
mandate these requirements on existing engines. We do not expect
these recently adopted rules and new requirements to have a
material adverse effect on our operations or financial
condition. We have developed a cost effective emission control
device to meet the more stringent air standards promulgated
under the Clean Air Acts New Source Performance Standards,
or NSPS, and New Emission Standards for Hazardous
Air Pollutants, or NESHAP, both effective on
July 1, 2008. Nevertheless, there can be no assurance that
these rules or any other new regulations requiring the
installation of more sophisticated emission control equipment or
the retrofitting of emission control equipment on existing
GasJack
tm
units would not have a material adverse impact. In any event, we
believe that, in most cases, costs and responsibilities
associated with these obligations would be allocated to our
customers under our standard service contracts, as discussed
below. Moreover, we expect that such requirements would not have
any more significant effect on our operations or financial
condition than on any similarly situated company providing
production enhancement services. In some instances, permits for
emissions from our
GasJack
tm
units must be obtained from either state or federal agencies,
depending on the level of emissions. Our standard service
contracts provide that our customers are responsible for
obtaining permits required for the operation of our equipment at
the customer site and maintaining compliance with all permits.
In addition, these agreements require our customers to indemnify
us for certain environmental liabilities, including liabilities
arising from their failure to comply with environmental laws and
certain releases of contaminants into the environment.
Recent scientific studies have suggested that emissions of
certain gases, commonly referred to as greenhouse
gases and including carbon dioxide and methane, may be
contributing to warming of the Earths atmosphere. In
response to such studies, the U.S. Congress has been
actively considering legislation to reduce emissions of
greenhouse gases. In addition, more than one-third of the states
already have begun implementing legal measures to reduce
emissions of greenhouse gases, primarily through the development
of greenhouse gas emission inventories
and/or
regional greenhouse gas cap and trade programs. Moreover, on
April 2, 2007, the U.S. Supreme Court in
Massachusetts, et al. v. EPA
held that carbon
dioxide may be regulated as an air pollutant under
the federal Clean Air Act and that the EPA must consider whether
it is required to regulate greenhouse gas emissions from mobile
sources such as cars and trucks. Moreover, the Courts
holding in Massachusetts that greenhouse gases fall under the
federal Clean Air Acts definition of air
pollutant also may result in future regulation of
greenhouse gas emissions from stationary sources such as
refineries and power plants. In July 2008, the EPA released an
Advance Notice of Proposed Rulemaking regarding possible
76
future regulation of greenhouse gas emissions under the Clean
Air Act, in response to the Supreme Courts decision in
Massachusetts
. In the notice, the EPA evaluated the
potential regulation of greenhouse gases under the Clean Air Act
and other potential methods of regulating greenhouse gases.
Although the notice did not propose any specific, new regulatory
requirements for greenhouse gases, it indicates that federal
regulation of greenhouse gas emissions could occur in the near
future. Thus, there may be restrictions imposed on the emission
of greenhouse gases even if Congress does not adopt new
legislation specifically addressing emissions of greenhouse
gases. Although it is not possible at this time to predict how
legislation or new regulations that may be adopted to address
greenhouse gas emissions would impact our business, any such
future laws and regulations could result in increased compliance
costs or additional operating restrictions, and could have a
material adverse effect on our business, financial condition,
demand for our services, results of operations, and cash flows.
The Clean Water Act and implementing regulations and comparable
state laws and regulations prohibit the discharge of pollutants
into regulated waters without a permit and establish limits on
the levels of pollutants contained in these discharges. In
addition, the Clean Water Act regulates storm water discharges
associated with industrial activities depending on a
facilitys primary standard industrial classification. We
have applied for and obtained industrial wastewater discharge
permits and sought coverage under local wastewater ordinances at
our Oklahoma City manufacturing facility. In addition, our
manufacturing facility has filed a notice of intent for coverage
under the applicable Oklahoma stormwater general permit, and we
have implemented stormwater pollution prevention plans, as
required. Federal laws also mandate the implementation of spill
prevention, control, and countermeasure requirements for the
storage of oil, including appropriate containment berms and
similar structures to help prevent the contamination of
navigable waters in the event of a petroleum hydrocarbon tank
spill, rupture, or leak at such facilities. Our facilities are
in compliance with these requirements, as necessary.
RCRA and implementing regulations and state laws and regulations
control the management and disposal of solid and hazardous
waste. These laws and regulations govern the generation,
storage, treatment, transfer and disposal of wastes that we
generate including, but not limited to, used oil, antifreeze,
filters, sludges, paint, solvents and sandblast materials. The
EPA and various state agencies have limited the approved methods
of disposal for these types of wastes. We believe we are in
substantial compliance with these requirements, as applicable.
We are considered a conditionally exempt small quantity
generator under the RCRA.
In the United States, CERCLA and comparable state laws and
regulations impose strict, joint and several liability without
regard to fault or the legality of the original conduct on
certain classes of persons that contributed to the release of a
hazardous substance into the environment. These persons include
the owner or operator of a disposal site where a hazardous
substance release occurred and any company that transported,
disposed of, or arranged for the transport or disposal of
hazardous substances released at a site. Under CERCLA, such
persons may be liable for the costs of remediating the hazardous
substances that have been released into the environment, for
damages to natural resources, and for the costs of certain
health studies. In addition, where contamination may be present,
it is not uncommon for the neighboring landowners and other
third parties to file claims for personal injury, property
damage and recovery of response costs.
Many of the sites where we provide our services have been
utilized for many years by Compressco and third parties over
whom we have no control, in support of natural gas production
enhancement services or other industrial operations. Our
standard service contracts allocate liability for releases of
contaminants at the service sites between us and our customers,
such that we may be responsible only for small superficial
releases and our customers are responsible for larger, more
extensive releases. We are not currently responsible for any
remedial activities at these service sites. There is, however,
always the possibility that our current or future use of such
properties, or of other properties where we provide production
enhancement services, may result in spills or releases of
petroleum hydrocarbons, wastes, or other regulated substances
into the environment or otherwise result in liability, although
limited, that may cause us to become subject to remediation
costs and liabilities under CERCLA, RCRA or other environmental
laws. We cannot provide any assurance that the costs and
liabilities associated with the future imposition of such
remedial obligations upon us would not have a material adverse
effect on our operations or financial position.
77
We are subject to the requirements of OSHA and comparable state
statutes. These laws and the implementing regulations strictly
govern the protection of the health and safety of employees. The
OSHA hazard communication standard, the EPA community
right-to-know regulations under the Title III of CERCLA and
similar state statutes require that we organize
and/or
disclose information about hazardous materials used or produced
in our operations. We believe that we are in substantial
compliance with these applicable requirements and with other
comparable laws.
Properties
Our facilities include an owned manufacturing facility, leased
rebuild facility and leased executive headquarters facility in
Oklahoma, a leased manufacturing facility in Alberta, Canada,
leased service facilities in New Mexico and Mexico, six sales
offices in Oklahoma, Texas, Colorado, New Mexico, Louisiana, and
Canada and approximately sixty storage facilities located across
the geographic markets we serve.
Employees
We do not have any employees. We will be managed and operated by
the officers and directors of our general partner. As of
September 30, 2008, our predecessor utilized a total of
359 employees who will provide direct and indirect support
for our operations. Our employees in the United States and
Canada are not subject to a collective bargaining agreement. The
employees who provide services to us in Mexico are subject to a
collective bargaining agreement that expires on
September 20, 2009.
Legal
Proceedings
Compressco is a named defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of lawsuits
against Compressco cannot be predicted with certainty,
management does not expect these matters to have a material
adverse impact on Compresscos financial statements.
78
MANAGEMENT
OF COMPRESSCO PARTNERS, L.P.
Our general partner, Compressco Partners GP, is an indirect,
wholly owned subsidiary of TETRA and has sole responsibility for
conducting our business and managing our operations and
activities. Our general partner is not elected by our
unitholders and will not be subject to re-election on a regular
basis in the future. All of the directors of our general partner
will be elected by TETRA. Unitholders will not be entitled to
elect the directors of our general partner or directly or
indirectly participate in our management or operation.
Upon the completion of this offering, our general partner will
have four directors, one of whom,
William D. Sullivan, will be independent as defined under the
independence standards established by the NASDAQ Global Market.
In compliance with the rules of the NASDAQ Global Market, a
second independent director will be appointed within
90 days of listing and a third independent director will be
appointed within twelve months of listing. The NASDAQ Global
Market does not require a listed limited partnership like us to
have a majority of independent directors on the board of
directors of our general partner or to establish a compensation
committee or a nominating committee.
Our general partner will have a conflicts committee to which it
will appoint at least two independent directors to review
specific matters that the board believes may involve conflicts
of interest between us, TETRA and Compressco. Mr. Sullivan
will serve as the initial member of the conflicts committee and
two additional independent directors will be appointed to the
conflicts committee when additional independent directors are
appointed to the board of directors of our general partner. The
conflicts committee will determine if the resolution of the
conflict of interest is fair and reasonable to us. The members
of the conflicts committee may not be officers or employees of
our general partner or directors, officers, or employees of its
affiliates, including TETRA or Compressco, and must meet the
independence and experience standards established by the NASDAQ
Global Market and the Exchange Act to serve on an audit
committee of a board of directors, and certain other
requirements. Any matters approved by the conflicts committee in
good faith will be conclusively deemed to be fair and reasonable
to us, approved by all of our partners and not a breach by our
general partner of any duties it may owe us or our unitholders.
In addition, our general partner will have an audit committee of
at least three directors who meet the independence and
experience standards established by the NASDAQ Global Market and
the Exchange Act. Mr. Sullivan will serve as the initial
independent member of the audit committee and
Messrs. Hertel and Brightman will serve as initial members
of the audit committee until additional independent directors
are appointed to the board of directors of our general partner.
The audit committee will assist the board of directors in its
oversight of the integrity of our financial statements and our
compliance with legal and regulatory requirements and corporate
policies and controls. The audit committee will have the sole
authority to retain and terminate our independent registered
public accounting firm, approve all auditing services and
related fees and the terms thereof, and pre-approve any
non-audit services to be rendered by our independent registered
public accounting firm. The audit committee will also be
responsible for confirming the independence and objectivity of
our independent registered public accounting firm. Our
independent registered public accounting firm will be given
unrestricted access to the audit committee.
All of the executive officers of our general partner listed
below will allocate their time between managing our business and
affairs and the business and affairs of TETRA
and/or
Compressco, as applicable. The executive officers of our general
partner may face a conflict regarding the allocation of their
time between our business and the other business interests of
TETRA and Compressco. TETRA and Compressco intend to cause the
executive officers to devote as much time to the management of
our business and affairs as is necessary for the proper conduct
of our business and affairs. We will utilize employees of our
general partner to manage and operate our business and employees
of TETRA to provide us with general and administrative services.
We will reimburse our general partner for allocated expenses of
personnel who manage our operations and perform services for our
benefit, and we will reimburse TETRA for allocated general and
administrative expenses. Please read
Reimbursement of Expenses of Our General
Partner on page 81.
79
Directors,
Executive Officers and Other Management
The following table shows information regarding the current
directors, director nominees, executive officers and other
management of our general partner, Compressco Partners GP.
Directors are elected for one-year terms.
Directors,
Director Nominees and Executive Officers
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Name
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Age
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Position with Compressco Partners GP
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Geoffrey M. Hertel
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63
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Chairman of the Board of Directors
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Stuart M. Brightman
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52
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Director
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William D. Sullivan
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52
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Independent Director
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Ronald J. Foster
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52
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President and Director
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Gary L. McBride
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Chief Financial Officer and Corporate Secretary
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Larry W. Brickman
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Vice President of Field Services
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Kevin W. Book
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Vice President of International Operations
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Other
Management
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Name
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Age
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Position with Compressco Partners GP
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Ted D. Garner
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63
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Vice President of Engineering
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Sheri J. Vanhooser
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49
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Vice President of Marketing Development
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Mark E. Ford
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57
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Vice President of Manufacturing
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Directors
and Executive Officers
Our directors hold office until the earlier of their death,
resignation, removal or disqualification or until their
successors have been elected and qualified. Executive officers
serve at the discretion of the board of directors. There are no
family relationships among any of our directors or executive
officers.
Geoffrey M. Hertel
has served as Chairman of the Board of
Compressco Partners GP since October 31, 2008.
Mr. Hertel also serves as TETRAs President (since May
2000) and Chief Executive Officer (since May 2001) and
as a member of TETRAs Board of Directors (since 1984).
Mr. Hertel received his B.A. and M.B.A. degrees from
Michigan State University.
Stuart M. Brightman
has served as an Director of
Compressco Partners GP since October 31, 2008.
Mr. Brightman also serves as TETRAs Executive Vice
President and Chief Operating Officer (since April 2005).
Mr. Brightman served as President of the Dresser Flow
Control division of Dresser, Inc. from April 2002 until April
2004. Mr. Brightman received his B.S. degree from the
University of Pennsylvania and his M.B.A. degree from the
Wharton School of Business.
William D. Sullivan
is an Independent Director of
Compressco Partners GP and has served as a Director of TETRA
since August 2007. Mr. Sullivan currently serves on
TETRAs Reserves Committee. Mr. Sullivan is a Director
and serves on the Nominating and Corporate Governance and
Compensation Committees of St. Mary Land &
Exploration Company, a publicly traded exploration and
production company. Mr. Sullivan is also a Director, serves
on the Compensation and Audit Committees, and is Chairman of the
Nominating, Governance & Conflicts Committee of Legacy
Reserves GP, LLC, the general partner of Legacy Reserves, LP, a
publicly traded limited partnership holding oil and gas
producing assets, primarily in the Permian Basin.
Mr. Sullivan is a Director, and serves on the Conflicts and
Audit Committees of Targa Resources GP, LLC, the general partner
of Targa Resources LP, a publicly traded limited partnership
focused on mid-stream gas gathering, processing, liquids
fractionation, and transportation business. From 1981 through
August 2003, Mr. Sullivan was employed in various
capacities by Anadarko Petroleum Corporation, most recently as
Executive Vice President, Exploration and Production. From June
2005 through August 2005, Mr. Sullivan served as President
and Chief Executive Officer of Leor Energy LP. Mr. Sullivan
received his B.S. in Mechanical Engineering from Texas A&M
University.
80
Ronald J. Foster
has served as President and a Director
of Compressco Partners GP since October 31, 2008.
Mr. Foster also serves as President and a Director of
Compressco. From August 2002 to September 30, 2008
Mr. Foster served as Senior Vice President of Sales and
Marketing of Compressco. He has served as President of
Compressco since October 1, 2008. Mr. Foster attended
Oklahoma State University earning a B.S. degree in Economics in
1978.
Gary L. McBride
has served as Chief Financial Officer and
Corporate Secretary of Compressco Partners GP since
October 31, 2008. Mr. McBride also serves as Chief
Financial Officer and Corporate Secretary of Compressco.
Mr. McBride joined Compressco in November 2000 and,
effective January 1, 2001, replaced Jerry W. Jarrell as
Compresscos Chief Financial Officer. Mr. McBride
attended the University of Central Oklahoma earning a B. S.
degree in accounting and is a certified public accountant.
Larry W. Brickman
has served as Vice President of Field
Services of Compressco Partners GP since October 31, 2008.
Mr. Brickman also serves as Vice President of Field
Services of Compressco (since February 2006). Mr. Brickman
was employed with Compressor Systems, Inc. from December 1993
until December 1997 and October 1998 until February 2006.
Mr. Brickman earned his Associates Degree in Automotive
Technology from Oklahoma State University Okmulgee.
Kevin W. Book
has served as Vice President of
International Operations of Compressco Partners GP since
October 31, 2008. Mr. Book served as Vice President of
Canada for Compressco since October 2001. Mr. Book holds a
degree in Petroleum Engineering with special distinction from
the University of Oklahoma and a Bachelor of
Sciences Mathematics degree with distinction from
the University of Alberta.
Other
Management
The following key managers serve at the discretion of the board
of directors. There are no family relationships among any of
these key managers.
Ted D. Garner
has served as Vice President of Engineering
of Compressco Partners GP since October 31, 2008.
Mr. Garner also serves as Vice President of Engineering of
Compressco (since September 2003). He earned a B.S. Degree in
Petroleum Engineering from Mississippi State University and
studied Economics at Louisiana State University in New Orleans,
Louisiana.
Sheri J. Vanhooser
has served as Vice President of
Marketing Development of Compressco Partners GP since
October 31, 2008. Ms. Vanhooser also serves as Vice
President Marketing Development of Compressco (since July 2007).
From 1993 until 2005, Ms. Vanhooser served as President of
DRV Energy, an EPA small volume manufacturer/converter of
vehicles to natural gas and propane. Ms Vanhooser received her
BS in Biology/Chemistry and General Physical Science from
Oklahoma Christian University.
Mark E. Ford
has served as Vice President of
Manufacturing of Compressco Partners GP since October 31,
2008. Mr. Ford also serves as Vice President of
Manufacturing of Compressco (since October 2001). Mr. Ford
earned his B.A. Degree at the University of Science and Arts of
Oklahoma.
Reimbursement
of Expenses of Our General Partner
Our general partner will not receive any management fee or other
compensation for its management of us. Under the terms of the
omnibus agreement, our general partner and its affiliates will
be reimbursed for all expenses incurred on our behalf, including
the compensation of employees of our general partner or its
affiliates that perform services on our behalf. These expenses
include all expenses necessary or appropriate to the conduct of
our business and that are allocable to us. Our partnership
agreement provides that our general partner will determine in
good faith the expenses that are allocable to us. There is no
cap on the amount that may be paid or reimbursed to our general
partner or its affiliates for compensation or expenses incurred
on our behalf. Please read Certain Relationships and
Related Party Transactions Omnibus
Agreement Provision of Services Necessary to Operate
Our Business on page 100.
81
EXECUTIVE
COMPENSATION AND DIRECTOR COMPENSATION
Compensation
Discussion and Analysis
Introduction
Our general partner has sole responsibility for conducting our
business and for managing our operations and its board of
directors and officers make decisions on our behalf. We have no
employees, and we will reimburse our general partner for the
expense of the services its employees provide to us, including
compensation expenses for executive officers and directors of
our general partner. Please read Reimbursement
of Expenses of Our General Partner on page 81.
Similarly, we have not formed, and will not form, a compensation
committee, but the board of directors of our general partner
will form a compensation committee that will determine the
future compensation of the directors and officers of our general
partner, including its named executive officers.
Historically, including the year ended December 31, 2007,
the compensation committee of TETRA made all decisions regarding
the compensation of the president and chief executive officer of
Compressco. Compresscos president and chief executive
officer then made compensation recommendations regarding the
remaining Compressco executive officers to TETRAs chief
executive officer and chief operating officer, who then made the
final compensation decisions for these remaining executive
officers. In 2007, the named executive officers of Compressco
were:
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Brooks Mims Talton, III President and Chief
Executive Officer
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Ken Reagan Chief Operating Officer
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Gary L. McBride Chief Financial Officer
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Ronald J. Foster Senior Vice President of Sales and
Marketing
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Kevin W. Book Vice President of Canada
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For purposes of the Compensation Discussion and Analysis and the
tables that follow, these individuals are referred to as the
Named Executive Officers. The historical
compensation discussion of the Named Executive Officers that
follows reflects the total compensation those individuals
received for services provided to Compressco for the year ended
December 31, 2007, and the philosophy and policies of TETRA
that drove the compensation decisions for these Named Executive
Officers, whether implemented by the compensation committee,
TETRA or the principle executive officers of TETRA and
Compressco. Our general partners compensation philosophy,
policy, and practices initially will be largely a continuation
of the compensation practices employed by TETRA.
Compensation
Philosophy and Objectives
TETRA employs a compensation philosophy that emphasizes pay for
performance. TETRA designed the executive compensation program
applicable to the Named Executive Officers to provide a total
compensation package that allowed Compressco to attract, retain
and motivate executives necessary to manage its business. The
general philosophy and program established by TETRA initially
will be adopted by our general partner. This program is guided
by several key principles:
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designing competitive total compensation programs to enhance our
general partners ability to attract and retain
knowledgeable and experienced senior management employees;
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motivating employees to deliver outstanding financial
performance and meet or exceed general and specific business,
operational, and individual objectives;
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setting compensation and incentive levels that reflect
competitive market practices and that are generally within the
median range for the relevant peer group;
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providing a significant percentage of total compensation that is
based on predetermined performance criteria; and
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82
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ensuring that a significant portion of the total compensation
package for employees is determined by increases in equity
value, thus assuring an alignment of senior management level
employees and equity interests.
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By accomplishing these objectives, our general partner hopes to
optimize long-term unit holder value.
Compensation
Setting Process
Role
of the Compensation Committee and Independent
Consultants
While TETRAs compensation committee determined the overall
compensation philosophy and set the final compensation of the
principal executive officer at Compressco, it also considered
the recommendations of the compensation consultant engaged by
the compensation committee, if any for that year, when making
decisions with respect to specific compensation matters. The
compensation committee retained the final decision-making
authority as to compensation decisions, however, in order to
ensure such recommendations were consistent with the overall
good of the company and its equity holders. In 2007 TETRAs
compensation committee selected and directly retained the
services of Longnecker & Associates, an executive
compensation consulting firm, to provide additional benchmarking
data with respect to a range of external compensation factors,
including evolving compensation trends, appropriate peer
comparisons, and industry based market survey data. The data
provided by Longnecker & Associates, together with
data that was obtained through TETRAs participation in an
annual, industry based compensation survey and other similar
data, was evaluated in determining compensation levels for its
senior management level employees, as well as Compresscos
principal executive officer. The following companies were
included in the peer group for TETRAs 2007 benchmark
analysis: ATP Oil & Gas Corporation, Basic Energy
Services, Inc., Cal Dive International, Inc., Complete
Production Services, Inc., ENSCO International Incorporated,
Global Industries, Ltd., Grey Wolf, Inc., Helix Energy Solutions
Group Inc., Helmerich & Payne, Inc., Mariner Energy,
Inc., Newpark Resources, Inc., Oceaneering International, Parker
Drilling Company, Rowan Companies, Inc., RPC, Inc., Superior
Energy Services, Inc., Tidewater, Inc., and W&T Offshore,
Inc.
The principal executive officer at Compressco made
recommendations concerning the compensation packages of the
remaining Named Executive Officers to TETRAs chief
executive officer and chief operating officer, and not to the
full compensation committee. After receiving these
recommendations (described in greater detail below), these two
officers then made final decisions concerning the compensation
packages for the remaining Named Executive Officers.
The compensation committee of our general partner will make all
compensation decisions for each of the Named Executive Officers,
including the principal executive officer. The compensation
committee of our general partner will seek recommendations from
the principal executive officer regarding the remaining Named
Executive Officers compensation packages. The committee
will also have the authority to engage a compensation consultant
to assist it in making compensation decisions. Although it will
have the ability to engage a compensation consultant at any
time, we anticipate that for the 2008 year, the
compensation committee will utilize a combination of internal
evaluations conducted by our general partners accountants
and the legal and human resource departments, and publicly
available information regarding the compensation packages of
executive officers at companies we consider to be an appropriate
comparison for this type of compensation analysis. Our general
partners compensation committee initially will not use a
specific formula or benchmarking, and will reserve the final
decision-making authority on any compensation decisions to
ensure that all compensation packages are in the best interest
of our unitholders and are consistent with the long-term
objectives of the company.
83
Role
of the Named Executive Officers
TETRAs principal executive officer made non-chief
executive officer compensation recommendations, including
Mr. Taltons, to TETRAs compensation committee
by providing a detailed annual report that included the
following items:
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a summary of the senior management employees historical
compensation, including base salaries, cash incentive bonuses
and equity awards;
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the current equity ownership position of the senior management
employees;
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an analysis of the companys annual performance relative to
its budgeted expectations for the year;
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an assessment of the senior management employees
performance for the year; and
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proposed compensation changes and the aggregate amount of
performance-based cash bonuses proposed to be paid for the
upcoming year to each of the senior management employees, based
on a forecast of current year performance.
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Historically, Compresscos principal executive officer has
made recommendations to TETRAs chief executive officer and
chief operating officer with respect to recommendations
regarding non-chief executive officer executive compensation.
Although Compresscos principal executive officer did not
prepare a report supporting his recommendations for
Compresscos non-chief executive officer compensation,
information similar to that contained in TETRAs
compensation report was available to TETRAs chief
executive officer and chief operating officer and was considered
during the decision-making process for the remaining Compressco
Named Executive Officers.
It is anticipated that our general partners compensation
committee will consider recommendations made by our principal
executive officer with regard to the compensation of Named
Executive Officers other than himself. We anticipate that such
recommendations will include a report similar in form and
substance to the report the TETRA principal executive officer
typically provides to the compensation committee. This report
will gather information based on historical compensation of the
Named Executive Officers, along with relevant publicly available
data and information contained in compensation surveys purchased
from our industrys compensation consultants. The remaining
Named Executive Officers have not historically provided
TETRAs compensation committee with recommendations as to
compensation decisions, and it is not anticipated that any other
executive officer, outside of the principal executive officer,
shall provide recommendations to our general partners
compensation committee in the future.
Timing
of Compensation Decisions
TETRAs principal executive officer typically distributed a
year-end compensation review study and specific compensation
recommendations to TETRAs compensation committee prior to
the December committee meetings. At its December meeting,
TETRAs compensation committee reviewed and approved an
aggregate amount of incentive compensation, which was finalized,
individually allocated to employees, and approved by the
compensation committee at a meeting early in the following year
prior to payment, based upon the determination of the
companys full year financial results. Our general partner,
and its compensation committee once formed, intends to continue
TETRAs timing and administrative guidelines for
determining compensation, which shall include the year-end
compensation review from the principal executive officer prior
to the December meetings.
Elements
of Compensation
The following discussion on the elements of compensation
provided to the Named Executive Officers reflects TETRAs
historical philosophy concerning the division of the elements of
senior management employees compensation packages, which
our general partner continues to employ. The principal elements
of compensation for the Named Executive Officers include base
salary, non-equity incentive (cash bonus) awards and long-term
equity incentive compensation. We believe a material amount of
executive compensation should be tied to our performance, and a
significant portion of the total prospective compensation of
each Named
84
Executive Officer should be tied to measurable financial and
operational objectives. These objectives may include absolute
performance or performance relative to a peer group. During
periods when performance meets or exceeds established
objectives, the Named Executive Officers should be compensated
at or above targeted levels, respectively. When our performance
does not meet key objectives, incentive award payments, if any,
should be less than such targeted levels. TETRAs
compensation committee has historically sought to structure a
balance between achieving strong short-term annual results and
ensuring long-term viability and success. To reinforce the
importance of balancing these perspectives, each Named Executive
Officer is regularly provided with both short and long-term
incentives. Currently, the preponderance of short-term
incentives are in the form of discretionary cash bonuses that
are based on both objective performance criteria and subjective
criteria, and long-term incentives in the form of equity awards.
To align the interests of the Named Executive Officers with our
unitholders, a substantial portion of the value of the long-term
equity incentives is tied to share price appreciation.
While the mix of salary, cash bonus, and equity incentives given
to Named Executive Officers can vary from year-to-year
(depending on individual performance and on company results),
TETRAs compensation committee believes that a significant
component of potential compensation in any one year should be
long-term equity incentives, and our general partner has
currently adopted this policy. In connection with this initial
public offering, the board of directors of our general partner
intends to continue providing equity-based awards by
implementing a long-term incentive plan, which our general
partner believes will further incentivize its executive officers
to perform their duties in a way that will enhance our long-term
success.
Base
Salary
Base salary is designed to compensate executives for the
responsibility associated with the position they hold and to
sustain superior individual performance (including experience,
scope of responsibility, and results). We agree with
TETRAs compensation committee that a competitive salary
program is an important factor in a companys ability to
attract and retain talented senior management employees.
TETRAs compensation committee generally targets the
25
th
to
75
th
percentiles as the median range for base salaries in the survey
data for salaries in its industry. We agree that identifying a
median salary is helpful to providing competitive compensation
packages, though publicly available data for our peer companies
is not readily available. To the extent that relevant
compensation information is available for analysis, the
compensation offered by peer companies will be considered in
establishing a target level of base salary. Salaries may be
adjusted for performance, which may include individual and
company-wide performance, experience, and competitive
conditions. In considering salary adjustments, the compensation
committee will give weight to the foregoing factors with
particular emphasis on corporate performance goals, the
principal executive officers analysis of the
individuals performance and the principal executive
officers specific compensation recommendations. However,
the compensation committee does not rely on formulas and
considers all factors when evaluating salary adjustments.
As of December 31, 2007, the Named Executive Officers were
eligible to receive base salaries of $300,000, $137,376,
$131,690, $135,000 and $160,852, for Mr. Talton,
Mr. Reagan, Mr. McBride, Mr. Foster, and
Mr. Book, respectively. These salaries were determined by
reviewing the level of responsibility of the Named Executive
Officers, the sustained individual performance of the Named
Executive Officers, and the financial results that Compressco
achieved for the 2006 year as well as the projected
financial results for the 2007 year. Current salaries for
the Named Executive Officers are: $225,000 (effective
September 27, 2008), $162,700 (effective October 27,
2008), and $191,000 (effective July 7, 2008) for
Mr. Foster, Mr. McBride and Mr. Book,
respectively. The increase in salaries from the 2007 year
are attributable to our new management structure, as well as the
increased duties and responsibilities that we expect our
executive officers to execute both in anticipation of and
following our initial public offering. Mr. Foster received
the largest salary increase because his new position as the
principal executive officer will require a significant increase
in his job functions and responsibilities.
As of August 8, 2008, Mr. Talton no longer serves as
our chief executive officer, president or a director.
Mr. Reagans role as our chief operating officer was
terminated on August 29, 2008. The potential severance
85
benefit available to Mr. Reagan is discussed in greater
detail in Other Compensation Related Matters
Actions Taken following Fiscal Year End on page 88.
Non-Equity
Incentive Awards (Cash Bonus Awards)
The Named Executive Officers and other key employees of
Compressco have been eligible to receive cash bonus awards
pursuant to a bonus program maintained by TETRA (the TETRA
Bonus Plan). The performance-based cash bonus program is
intended to provide incentive compensation relating to annual
performance. TETRAs performance-based cash bonus program
is benchmarked against its survey peer group by averaging the
target bonuses among the companies contained in the survey data
for that year. Although performance objectives are established
to assist TETRAs compensation committee in determining the
merit of each Named Executive Officers potential cash
bonus award such as our pre-tax profits or safety statistics,
the amount of the cash bonus ultimately received by a Named
Executive Officer is subject to the sole discretion of
TETRAs compensation committee and may be based solely on
subjective individual performance criteria. If Compresscos
performance meets, but does not exceed, its targeted financial
performance for a given year and the subjective criteria of the
individual officer are satisfied, a cash incentive bonus is
generally paid at a specified target level (as detailed below).
If Compresscos performance significantly exceeds targeted
performance objectives and an individuals subject criteria
are met or exceeded, then the cash bonus may exceed the target
level, but in no event will the bonus exceed a
maximum percentage of base salary for any given year.
Although specific incentive bonus targets for each Named
Executive Officer are set at the beginning of the year by
determining a percentage of an executives salary that may
be considered his or her target bonus, the amount of
bonus ultimately payable is discretionary and is heavily
influenced by the recommendations of the principal executive
officer and the evaluation of TETRAs compensation
committee. Participants that are eligible for cash bonus awards
are informed that the target salary percentages and individual
performance goals are solely guidelines that the compensation
committee has established to assist them in measuring a
potential bonus, and the satisfaction of these goals will not
guarantee the receipt of a cash bonus in any particular amount,
if any.
Each of the Named Executive Officers was eligible to receive a
cash bonus for the 2007 year pursuant to the TETRA Bonus
Plan, and their target and maximum bonuses were set according to
the salary percentages disclosed in the table below. The actual
payouts for 2007 with regard to Mr. Talton were determined
by TETRAs compensation committee based on recommendations
by TETRAs chief executive officer and chief operating
officer, and with regard to Messrs. Reagan, McBride, Foster
and Book were determined by TETRAs chief executive officer
and chief operating officer based on recommendations by
Mr. Talton.
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Target
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Maximum
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Actual Payout
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Actual Payout
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Percentage of
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Percentage of
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Percentage of
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Amount for
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Executive
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Salary
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Salary
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Salary for 2007
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2007
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Mr. Talton
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32
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%
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52
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%
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20.9
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%
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$50,000
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Mr. Reagan
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25
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%
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40
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%
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25.4
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%
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$34,444
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Mr. McBride
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25
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%
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40
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%
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15.3
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%
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$20,156
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Mr. Foster
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25
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%
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40
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%
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25.5
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%
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$33,750
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Mr. Book
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25
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%
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40
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%
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0
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%
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$0
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Our general partner has adopted an annual incentive program
identical to the TETRA Bonus Plan and the target objectives
established by the compensation committee of TETRA in 2008 with
respect to the Named Executive Officers will remain in place
through December 31, 2008. The target bonus levels for 2008
are 32% for Mr. Foster, and 25% for the remaining Named
Executive Officers, with the maximum overachievement percentages
capped at 52% for Mr. Foster, and 40% for the remaining
Named Executive Officers, while the Compensation Committee will
retain sole discretion as to the amount, if any, that any Named
Executive Officer may receive pursuant to the bonus plan.
86
Equity
Incentive Awards
Equity incentives, primarily long-term equity incentives,
comprise a large portion of the Named Executive Officers
total direct compensation packages. These equity incentives are
designed to be consistent with TETRAs at-risk pay
philosophy, and our general partner has adopted this
compensation philosophy for making future grants of equity
compensation awards. The objective is to provide the Named
Executive Officers with equity incentive award opportunities
that (i) are consistent with the industry based survey
data, (ii) are based on individual performance, and
(iii) reflect our predecessors historic performance.
TETRAs compensation committee generally identifies the
25
th
to
75
th
percentile as the median range in survey data for equity
incentive compensation, awarded by peer companies identified in
available survey data for that year. Historically, most equity
incentives have been awarded on the same date to each of the
Named Executive Officers, and the timing of these equity-based
grants are designed so that they are not made in proximity to
our release of material non-public information. To formalize
this practice, TETRAs compensation committee has adopted
Procedures for Grants of Awards under the TETRA Technologies,
Inc. Equity Compensation Plans (the Grant
Procedures) for annual and other awards to be made under
the plans. With respect to annual awards to employees, under the
Grant Procedures, TETRAs compensation committee determines
the number of shares available for awards after consultation
with its chief executive officer, who then makes a
recommendation to TETRAs compensation committee as to the
number and type of awards for senior management employees.
TETRAs compensation committee considers such
recommendations and, after considering such factors and
information as it deems appropriate, the committee makes any
adjustments it feels appropriate and approves the individual
awards at a meeting of the compensation committee held in
conjunction with its annual meeting of its stockholders. To
avoid timing of equity-based awards ahead of the release of its
quarterly earnings and other material non-public information,
the annual awards to senior management level employees under the
Grant Procedures typically have a grant date of May 20.
With respect to newly hired employees, however, the Grant
Procedures provide that awards made to new hires may be made on
the 15th day of the month following such individuals
hire date, or such other date as the compensation committee
deems appropriate for the circumstances. The Grant Procedures
provide that TETRAs compensation committee may refrain
from or delay regularly scheduled awards if it or the senior
management level employees themselves are aware of any material
non-public information. Our general partner also intends to
adopt formal procedures similar to the Grant Procedures to
govern the grant of equity incentive awards to our general
partners employees that provide services to us.
TETRAs compensation committee seeks to strike a balance
between achieving strong short-term annual results and ensuring
strong long-term success. The equity incentive portion of the
Named Executive Officers compensation packages primarily
addresses TETRAs goal for longer-term success. Two forms
of equity compensation, stock options and restricted stock, are
currently utilized when providing long-term incentives to the
Named Executive Officers, although additional forms of equity
compensation are authorized under the TETRA equity compensation
plans described below. Both forms of equity incentives are
geared toward longer-term performance, as both generally,
although not always, require a period of vesting, and are
materially affected by share price appreciation. As stockholder
value increases, so to does the value of the equity incentive
compensation increase to the Named Executive Officers.
Historically, the vast preponderance of equity incentives
granted to the Named Executive Officers has been in the form of
stock options. During 2007, equity incentives were also awarded
to the Named Executive Officers and other employees in the form
of grants of restricted stock. Equity awards have been granted
to the Named Executive Officers under various long-term equity
compensation plans maintained by TETRA: the Amended and Restated
2006 Equity Incentive Compensation Plan or, the
2006 Plan, the 1996 Stock Option Plan for
Nonexecutive Employees and Consultants or, the
1996 Plan, and the 1990 Stock Option Plan or,
the 1990 Plan. The Named Executive Officers
have received awards of incentive stock options, non-qualified
stock options and restricted stock pursuant to these plans as
summarized in the Outstanding Equity Awards at Fiscal Year End
table below. On May 20, 2007, TETRA awarded restricted
stock to the Named Executive Officers pursuant to the 2006 Plan,
on the terms and vesting schedules described in the narrative to
the Summary Compensation Table. In the future, long-term equity
compensation for employees of our general partner will be
awarded pursuant to the Compressco Partners, L.P. 2008 Long-Term
Incentive Plan or, the
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Long-Term Incentive Plan discussed below primarily
in the form of phantom units and associated distribution
equivalent rights.
Other
Compensation Related Matters
Retirement
and Health Benefits
Compressco offered (and our general partner will continue to
offer) a variety of health and welfare and retirement programs
to all eligible employees. Compressco maintains a 401(k)
retirement plan that provides eligible employees with an
opportunity to save for retirement on a tax-advantaged basis.
Compressco retained the discretion to make matching
contributions on behalf of 401(k) plan participants, either
annually or on a more frequent basis, in such amounts (or
according to a formula) which was also determined at
Compresscos discretion. The Named Executive Officers were
also eligible to participate in additional employee benefits
available generally to the full time employees of Compressco,
such as medical and dental benefit plans. Our general partner
has adopted arrangements for our full time employees that
generally mirror the benefits previously made available to full
time employees of Compressco. The Named Executive Officers will
continue to be eligible to participate in these arrangements on
the same terms and conditions as all other eligible employees.
Perquisites
and Other Compensation
The Named Executive Officers received fringe benefits and
perquisites on the same basis as other similarly situated
employees of Compressco pursuant to the company policies that
were then in effect. These perquisites include paid holiday and
vacation time, provided that no earned but unused compensated
absences were carried over for use in a subsequent year. These
same fringe benefits and perquisites have been continued by our
general partner for the employees providing services to us.
Employment
Agreements
Compressco previously entered into employment agreements with
Messrs. Talton, Reagan, Foster and McBride, although the
three-year term of these agreements ended on June 22, 2007
for Mr. Talton, and on June 21, 2007 for
Messrs. Reagan, Foster and McBride. For a summary of these
agreements, please read Summary of
Compensation Narrative Description to Summary
Compensation Table; Employment Agreements with Named Executive
Officers During Fiscal Year 2007.
Severance
Benefits
The Named Executive Officers are not currently eligible to
receive severance benefits pursuant to their employment
agreements or any other formal company policy. The employment
agreements of Messrs. Talton, Reagan, Foster and McBride
with Compressco initially provided for potential severance
benefits during the first three years of their employment with
Compressco in the event that they were terminated without cause,
but this period has since lapsed and neither Compressco nor our
general partner is now under an obligation to provide severance
to the executives pursuant to these agreements.
Tax
Deductibility of Compensation.
With respect to the deduction limitations under
Section 162(m) of the Internal Revenue Code, we are a
limited partnership and do not meet the definition of a
corporation under Section 162(m). Nonetheless,
the taxable compensation paid to each of the Named Executive
Officers in 2007 was substantially less than the
Section 162(m) threshold of $1,000,000.
Actions
Taken following Fiscal Year End
Messrs. Foster, McBride and Book have entered into
employment agreements with Compressco following the end of the
2007 year. Each of these employment agreements provide that
the executives shall be employed on an at will
basis, and for an indefinite period of time. Both Compressco and
the executive may terminate
88
the agreement at any time. The agreements prohibit the
executives from competing either directly or indirectly with us
or any of our affiliates, and from disclosing our confidential
information or our affiliates confidential information
during the employment relationship period. The agreements to do
not provide for severance or change of control payments, nor do
they govern specific compensation elements such as salary or
bonus.
Mr. Reagans departure as of August 28, 2008 was
pursuant to an agreement whereby Mr. Reagan agreed to
release TETRA and Compressco from all liabilities relating his
employment, and confirmed his duty to retain all confidential
information regarding TETRA and Compressco. In exchange,
Mr. Reagans outstanding equity compensation will
continue to vest, and he will continue to receive his salary and
company health and dental insurance protection, until
December 31, 2008, at which date he will be deemed to be
fully retired from his employment with Compressco.
Our general partner also intends to adopt an equity compensation
plan, as described below.
Long-Term
Incentive Plan
Equity compensation awards have historically been awarded
pursuant to plans maintained by TETRA. Our general partner
intends to adopt the Compressco Partners, L.P. 2008 Long-Term
Incentive Plan, or the Long-Term Incentive Plan, for
the employees, consultants and the directors of our general
partner and its affiliates who perform services for us. To date,
no awards have been made under the Long-Term Incentive Plan,
although it is contemplated that our general partners
employees will receive an initial grant of phantom units
immediately following the initial public offering and annual
grants of phantom units under this plan. The description of the
Long-Term Incentive Plan set forth below is a summary of the
material features of the plan. This summary, however, does not
purport to be a complete description of all the provisions of
the Long-Term Incentive Plan. This summary is qualified in its
entirety by reference to the Long-Term Incentive Plan, a copy of
which has been filed as an exhibit to the registration
statement. The purpose of the Long-Term Incentive Plan is to
provide a means to enhance our profitable growth by attracting
and retaining individuals to serve as directors of our general
partner as well as the employees and consultants of our general
partner and its affiliates who will provide services to us
through affording such individuals a means to acquire and
maintain ownership or awards the value of which is tied to the
performance of common units. The Long-Term Incentive Plan seeks
to achieve this purpose by providing for grants of restricted
units, phantom units, unit awards and other unit-based awards.
Securities
to be Offered
The Long-Term Incentive Plan will limit the number of units that
may be delivered pursuant to awards granted under the plan
to common units. Units
withheld to satisfy exercise prices or tax withholding
obligations will again be available for delivery pursuant to
other awards. In addition, if an award is forfeited, cancelled
or otherwise terminates, expires or is settled without the
delivery of units, the units subject to such award will again be
available for new awards under the plan. The units delivered
pursuant to awards may be units acquired in the open market or
acquired from any person including us, units issued by us, or
any combination of the foregoing, as determined in the
discretion of the plan administrator (as defined below).
Administration
of the Plan
The plan will be administered by the board of directors of our
general partner or a committee thereof, which we refer to as the
plan administrator. The plan administrator may terminate or
amend the Long-Term Incentive Plan or any part of the plan at
any time with respect to any units for which a grant has not yet
been made, including increasing the number of units that may be
granted, subject to the requirements of the exchange upon which
the common units are listed at that time, of the Internal
Revenue Code of 1986, as amended, and of the Securities Exchange
Act of 1934, as amended. However, no change in any outstanding
grant may be made that would materially reduce the rights or
benefits of the participant without the consent of the
participant. The plan will expire upon the earlier of
(i) the date units are no longer available under the plan
for grants, (ii) its termination by the board, or
(iii) the tenth anniversary of the date approved by our
general partner.
89
Awards
In General.
The plan administrator may make
grants of restricted units, and unit awards and other unit-based
awards, which grants shall contain such terms as the plan
administrator shall determine, including terms governing the
service period
and/or
other
performance conditions pursuant to which any such awards will
vest
and/or
be settled, as applicable.
The availability and grant of unit and other unit-based awards
are intended to furnish additional compensation to plan
participants and to align their economic interests with those of
common unitholders. In addition, the grant of restricted units
and phantom units under the plan is intended to serve as a means
of incentive compensation for performance and, to a lesser
extent, to provide an opportunity for plan participants to
participate in the equity appreciation of our common units. Plan
participants will not pay any consideration for the common units
they receive pursuant to an award of restricted units, or in
connection with the settlement of an award of phantom units, and
we will receive no remuneration for such units. The number of
units subject to awards will be determined by the board of
directors (or a committee thereof) of our general partner. Grant
levels in any given year may deviate on a discretionary basis
based on measuring our financial, operational, strategic or
other appropriate performance, as well as the individual
performance of plan participants. Since no awards have been made
under the plan to date, no such performance objectives have been
established at this time, although the board of directors (or a
committee thereof) of our general partner will consider its
general compensation policies and philosophies in making such
determinations.
Restricted Units.
A restricted unit is a
common unit that vests over a period of time and during that
time is subject to forfeiture. The plan administrator may, in
its discretion, provide that the restricted units will vest upon
a change of control, as defined in the plan or an
applicable award agreement. Distributions made on restricted
units may be subjected to the same or different vesting
provisions as the restricted unit. In addition, the plan
administrator may provide that such distributions be used to
acquire additional restricted units. If a grantees
employment, consulting arrangement or membership on the board of
directors terminates for any reason, the grantees
restricted units will be automatically forfeited unless, and to
the extent, the plan administrator or the terms of the award
agreement provide otherwise.
Phantom Units.
A phantom unit entitles the
grantee to receive a common unit upon or as soon as reasonably
practicable following the phantom units settlement date
or, in the discretion of the plan administrator, a cash payment
equivalent to the fair market value of a common unit. The plan
administrator may, in its discretion, provide that phantom units
will vest upon a change of control as defined in the
plan or an applicable award agreement. If a grantees
employment, consulting arrangement or membership on the board of
directors of our general partner terminates for any reason, the
grantees unvested phantom units will be automatically
forfeited unless, and to the extent, the plan administrator or
the terms of the award agreement provide otherwise.
The plan administrator may, in its discretion, grant
distribution equivalent rights, or DERs, with
respect to phantom unit awards. DERs entitle the participant to
receive cash or additional awards equal to the amount of any
cash distributions made by us during the period the phantom unit
is outstanding. Payment of a DER may be subject to the same
vesting terms
and/or
settlement terms as the award to which it relates or different
vesting terms
and/or
settlement terms, in the discretion of the plan administrator.
Other Unit-Based Awards.
The Long-Term
Incentive Plan will permit the grant of other unit-based awards,
which are awards that are based, in whole or in part, on the
value or performance of a common unit or are denominated or
payable in common units. Upon settlement, the award may be paid
in common units, cash or a combination thereof, as provided in
the award agreement.
Unit Awards.
The Long-Term Incentive Plan will
permit the grant of units that are not subject to vesting
restrictions. Unit awards may be in lieu of or in addition to
other compensation payable to the individual. The availability
of unit awards is intended to furnish additional compensation to
plan participants and to align their economic interests with
those of common unitholders.
90
Other
Provisions
Tax Withholding.
Unless other arrangements are
made, the plan administrator is authorized to withhold from any
award, from any payment due under any award or from any
compensation or other amount owing to a participant the amount
(in cash, units, units that would otherwise be issued pursuant
to such award, or other property) of any applicable taxes
payable with respect to the grant of an award, its settlement,
its exercise, the lapse of restrictions applicable to an award
or in connection with any payment relating to an award or the
transfer of an award and to take such other actions as may be
necessary to satisfy the withholding obligations with respect to
an award.
Anti-Dilution Adjustments.
If any equity
restructuring event occurs that could result in an
additional compensation expense under SFAS 123R if
adjustments to awards with respect to such event were
discretionary, the plan administrator will equitably adjust the
number and type of units covered by each outstanding award and
the terms and conditions of such award to equitably reflect the
restructuring event, and the plan administrator will adjust the
number and type of units with respect to which future awards may
be granted. With respect to a similar event that would not
result in a SFAS 123R accounting charge if adjustment to
awards were discretionary, the plan administrator shall have
complete discretion to adjust awards in the manner it deems
appropriate. In the event the plan administrator makes any
adjustment in accordance with the foregoing provisions, a
corresponding and proportionate adjustment shall be made with
respect to the maximum number of units available under the plan
and the kind of units or other securities available for grant
under the plan.
91
Summary
of Compensation
Executive
Compensation Table
A discussion of the fiscal 2007 base salaries paid by Compressco
is included above in Compensation Discussion and
Analysis. The following table sets forth the cash and
non-cash compensation earned and actually paid for the year
ended December 31, 2007 by each of the individuals who
served as the chief executive officer, chief financial officer
and the three other highest paid executive officers of
Compressco during fiscal 2007 (
i.e.
, the Named Executive
Officers).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and Principal
|
|
Fiscal
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Position
|
|
Year
|
|
|
Salary
|
|
|
Bonus(3)
|
|
|
Awards(4)
|
|
|
Awards(4)
|
|
|
Compensation
|
|
|
Total
|
|
|
Brooks Mims Talton, III
President and Chief Executive Officer(1)
|
|
|
2007
|
|
|
|
239,462
|
|
|
|
50,000
|
|
|
|
30,356
|
|
|
|
145,012
|
|
|
|
692
(5
|
)
|
|
|
465,522
|
|
Ken Reagan
Chief Operating Officer(2)
|
|
|
2007
|
|
|
|
135,283
|
|
|
|
34,344
|
|
|
|
15,220
|
|
|
|
62,973
|
|
|
|
3,107
(5
|
)
|
|
|
250,927
|
|
Gary L. McBride
Chief Financial Officer
|
|
|
2007
|
|
|
|
131,690
|
|
|
|
20,156
|
|
|
|
11,012
|
|
|
|
27,646
|
|
|
|
3,331
(5
|
)
|
|
|
193,835
|
|
Ronald J. Foster
Senior VP of Sales and Marketing
|
|
|
2007
|
|
|
|
132,383
|
|
|
|
33,750
|
|
|
|
6,071
|
|
|
|
59,781
|
|
|
|
3,972
(5
|
)
|
|
|
235,957
|
|
Kevin W. Book
Vice President of Canada
|
|
|
2007
|
|
|
|
160,936
(6
|
)
|
|
|
0
|
|
|
|
3,036
|
|
|
|
13,865
|
|
|
|
12,914
(6
|
)(7)
|
|
|
190,751
|
|
|
|
|
1)
|
|
As of August 8, 2008, Mr. Talton no longer serves in
the capacity of president, chief executive officer or director;
Mr. Foster will serve as president on a going-forward
basis. Mr. Talton was also a director of Compressco during
the 2007 year, but was not compensated for his services as a
director.
|
|
2)
|
|
As of August 28, 2008, Mr. Reagan no longer serves in
the capacity of chief operating officer.
|
|
3)
|
|
Amounts listed represent discretionary bonuses awarded after
fiscal year end and paid in 2008 to reward certain executives
for exceptional provision of services.
|
|
4)
|
|
TETRA accounts for the cost of stock-based compensation awarded
under the 2006 Plan in accordance with the Financial Accounting
Standards Board Statement of Financial Accounting Standards
No. 123 (revised 2004) Share Based Payment
(SFAS), under which the cost of equity awards to
employees is measured by the fair value of the awards on their
grant date and is recognized over the vesting periods of the
awards, whether or not the awards had any intrinsic value during
the period. Amounts shown in the table above reflect the dollar
amount recognized for financial statement reporting purposes for
2007 in accordance with SFAS 123R with respect to awards granted
under the TETRA equity plan summarized above under Equity
Incentive Awards and thus may include amounts from awards
granted in and prior to 2007. Assumptions used in calculation of
these amounts are included in Notes B and L to TETRAs
consolidated audited financial statements for the fiscal year
ended December 31, 2007, included in its Annual Report on
Form 10-K
filed with the Securities and Exchange Commission
(SEC) on February 29, 2008. There were no
forfeitures during 2007.
|
|
5)
|
|
These amounts represent amounts contributed by Compressco as
employer matching contributions under Compresscos 401(k)
plan.
|
|
6)
|
|
Mr. Books compensation is paid in Canadian dollars.
These amounts have been converted from Canadian dollars to
United States dollars at a rate of 1.0 Canadian dollar to
0.842155 United States dollar.
|
|
7)
|
|
This amount represents Mr. Books car allowance of
$8,085 and $4,829 contributed as employer matching contributions
under the Group Retirement Savings Plan for Compressco Canada
Inc. on Mr. Books behalf.
|
92
Grants of
Plan-Based Awards
The following table and accompanying narrative disclosure
provide information related to grants of plan-based awards to
our named executive officers during the 2007 fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Stock Awards;
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Grant
|
|
|
Shares of Stock
|
|
|
Fair Value of
|
|
Name
|
|
Date
|
|
|
or Units(1)
|
|
|
Stock Awards(2)
|
|
|
Brooks Mims Talton
|
|
|
5/20/2007
|
|
|
|
10,000
|
|
|
$
|
279,800
|
|
Kenneth R. Reagan
|
|
|
5/20/2007
|
|
|
|
1,500
|
|
|
$
|
41,970
|
|
Gary L. McBride
|
|
|
5/20/2007
|
|
|
|
2,000
|
|
|
$
|
55,960
|
|
Ronald J. Foster
|
|
|
5/20/2007
|
|
|
|
2,000
|
|
|
$
|
55,960
|
|
Kevin W. Book
|
|
|
5/20/2007
|
|
|
|
1,000
|
|
|
$
|
27,980
|
|
|
|
|
(1)
|
|
Represents a grant of restricted shares to the named executive
officers in the amounts specified. The terms of these restricted
share awards, please read Equity Incentive
Plan Compensation.
|
|
(2)
|
|
Value based on the per share fair market value of $27.98.
|
Narrative
Description to Summary Compensation Table; Employment Agreements
with Named Executive Officers During Fiscal Year 2007
Explanation
of Salary and Bonus in Proportion to Total
Compensation
The following table shows the amount of salary and bonus
actually paid for each Named Executive Officer in proportion to
their total compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage to
|
|
|
|
Salary and Bonus
|
|
|
Total Compensation
|
|
Name
|
|
($)
|
|
|
(%)
|
|
|
Brooks Mims Talton
|
|
|
289,462
|
|
|
|
62
|
|
Kenneth R. Reagan
|
|
|
169,627
|
|
|
|
68
|
|
Gary L. McBride
|
|
|
151,846
|
|
|
|
78
|
|
Ronald J. Foster
|
|
|
166,133
|
|
|
|
70
|
|
Kevin W. Book
|
|
|
160,936
|
|
|
|
84
|
|
Employment
Agreement of Brooks Mims Talton, III
Compressco entered into an employment agreement with
Mr. Talton effective June 22, 2004, which expired on
June 22, 2007. Under this agreement, along with his base
salary, Mr. Talton was eligible for an annual bonus
pursuant to the TETRA Bonus Plan. Mr. Talton was eligible
to receive all fringe benefits and other perquisites that are
provided to other similarly situated employees, and was eligible
to participate in all employee benefit plans.
Mr. Taltons employment agreement prohibited his
disclosure of confidential information, established a
non-competition period of three years following a termination of
his employment, and prevented the solicitation of either
Compressco employees or customers during the term of his
employment or for a period of three years following his
termination. After June 22, 2007, Mr. Taltons
employment was governed solely on an at will basis.
Employment
Agreements with Other Named Executive Officers
Compressco entered into employment agreements with Kenneth R.
Reagan, Gary L. McBride and Ronald J. Foster
effective as of June 21, 2004, with substantially the same
terms as noted above in Mr. Taltons employment
agreement, and which expired on June 21, 2007. Following
June 21, 2007, the executives employment was governed
solely on an at will basis. Mr. Books
employment relationship was not governed by a formal employment
agreement.
93
Equity
Incentive Plan Compensation
The restricted stock awards made to the named executive officers
on May 20, 2007, were granted under the 2006 Plan. Under
the terms of the restricted stock awards for each Named
Executive Officer other than Mr. Reagan, 20% of the award
vested on the first anniversary of the grant date (May 20,
2008), and 10% of the restricted shares will continue to vest
every six months, becoming fully vested on the fifth anniversary
of the grant date (May 20, 2012). Mr. Reagans
vesting schedule provided that his grant would fully vest over a
period of 18 months: 33.33% vested on November 20,
2007, 33.33% vested on May 20, 2008, and the final 33.34%
is scheduled to vest on November 27, 2008. Full vesting of
the awards typically require the recipients continued
employment with us through the applicable vesting dates,
although as with Messrs. Talton and Reagan, the committee
acting as plan administrator for the applicable plan retains the
authority to amend the vesting schedules in appropriate
situations.
Other items that could affect the continued vesting of the
restricted stock awards under the 2006 Plan are that in the
event of a recipients death, disability or retirement, all
nonvested awards will be forfeited without payment. Disability
is defined for these purposes as the inability to perform
services for a period of 90 consecutive days or a total of
180 days during any
365-day
period, as a result of either a mental or physical illness.
TETRAs compensation committee also has the authority, but
not the obligation, to accelerate the time of vesting in the
event of a change in control, to be determined at its sole
discretion. A change of control under the plan is generally
defined as: (1) any person other than TETRA, its
subsidiaries or any employee benefit plan of TETRA or its
subsidiaries, becomes the beneficial owner of more than 50% of
the voting stock of TETRA; (2) the consummation of a merger
or similar business combination or consolidation which results
in TETRAs equity holders owning less than 50% of the
voting securities of the surviving entity; (3) TETRAs
complete liquidation or dissolution; or (4) individuals who
constitute TETRAs board of directors cease to constitute
at least a majority of the board of directors. Holders of
restricted stock are stockholders entitled to vote and receive
dividends prior to vesting.
94
Outstanding
Equity Awards at Fiscal Year End
The following table provides information on the outstanding
share option and restricted share awards held by the named
executive officers as of December 31, 2007. Each equity
grant is shown separately for each named executive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Shares of
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Shares of Stock
|
|
|
Stock That
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
That Have Not
|
|
|
Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested(1)
|
|
|
Brooks Mims Talton
|
|
|
105,000
|
|
|
|
0
|
(2)
|
|
$
|
8.3000
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
18,000
|
|
|
|
12,000
|
(3)
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
11,094
|
|
|
|
23,946
|
(4)
|
|
$
|
29.9950
|
|
|
|
5/8/2016
|
|
|
|
10,000
|
(5)
|
|
$
|
155,700
|
|
Kenneth R. Reagan
|
|
|
60,000
|
|
|
|
0
|
(2)
|
|
$
|
8.3000
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
|
|
0
|
(6)
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,111
|
|
|
|
889
|
(7)
|
|
$
|
23.0550
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
2,111
|
|
|
|
1,889
|
(8)
|
|
$
|
28.0750
|
|
|
|
5/12/2016
|
|
|
|
990
|
(9)
|
|
$
|
15,414
|
|
Gary L. McBride
|
|
|
30,000
|
|
|
|
0
|
(2)
|
|
$
|
8.3000
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
6,300
|
|
|
|
4,200
|
(3)
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
666
|
|
|
|
1,334
|
(10)
|
|
$
|
23.0550
|
|
|
|
4/12/2016
|
|
|
|
700
|
(11)
|
|
$
|
10,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
(5)
|
|
$
|
31,140
|
|
Ronald J. Foster
|
|
|
8,334
|
|
|
|
0
|
(2)
|
|
$
|
8.3000
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
3,001
|
|
|
|
7,200
|
(3)
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333
|
|
|
|
2,667
|
(10)
|
|
$
|
23.0550
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
1,266
|
|
|
|
2,734
|
(12)
|
|
$
|
28.0750
|
|
|
|
5/12/2016
|
|
|
|
2,000
|
(5)
|
|
$
|
31,140
|
|
Kevin W. Book
|
|
|
6,300
|
|
|
|
4,200
|
(13)
|
|
$
|
9.2667
|
|
|
|
12/9/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
666
|
|
|
|
1,334
|
(10)
|
|
$
|
23.0550
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
633
|
|
|
|
1,367
|
(12)
|
|
$
|
28.0750
|
|
|
|
5/12/2016
|
|
|
|
1,000
|
(5)
|
|
$
|
15,570
|
|
|
|
|
(1)
|
|
Based on the per share closing market price of $15.57 of our
shares on December 31, 2007.
|
|
(2)
|
|
This stock option award was granted under the 1996 Plan on
July 15, 2004. It vested 33.3333% on July 15, 2005,
vested an additional 2.7778% each month thereafter and became
fully vested on July 15, 2007.
|
|
(3)
|
|
This stock option award was granted under the 1990 Plan on
December 28, 2004. It vested 20% on December 28, 2005,
and was designed to vest an additional 1.6667% each month
thereafter to become fully vested on December 28, 2009;
however, as noted above, Mr. Reagans will cease to
vest following December 31, 2008.
|
|
(4)
|
|
This stock option award was granted under the 2006 Plan on
May 8, 2006. It vested 20% on May 8, 2007, and was
designed to vest an additional 1.6667% each month thereafter to
become fully vested on May 8, 2011.
|
|
(5)
|
|
This restricted stock award was granted under the 2006 Plan on
May 20, 2007. It vested 20% on May 20, 2008, and was
designed to vest an additional 10% once every six months
thereafter, to become fully vested on May 20, 2013.
|
|
(6)
|
|
This stock option was granted under the 1990 Plan on
December 28, 2004. It vested 33.3333% on December 28,
2005, vested an additional 2.7778% each month thereafter and
became fully vested on December 28, 2007.
|
95
|
|
|
(7)
|
|
This stock option award was granted under the 1996 Plan on
April 12, 2006. It vested 33.3333% on April 12, 2007,
and will vest an additional 2.7778% each month until
December 31, 2008, at which time all of
Mr. Reagans equity awards will cease to vest further.
|
|
(8)
|
|
This stock option award was granted under the 2006 Plan on
May 12, 2006. It vested 33.3333% on May 12, 2007, and
will vest an additional 2.7778% each month until
December 31, 2008, at which time all of
Mr. Reagans equity awards will cease to vest further.
|
|
(9)
|
|
This restricted stock award was granted under the 2006 Plan on
May 20, 2007. It vested 33.3334% on November 20, 2007,
vested an additional 33.3333% on May 20, 2008 and will
become fully vested on November 20, 2008.
|
|
(10)
|
|
This stock option award was granted under the 1996 Plan on
April 12, 2006. It vested 20% on April 12, 2007, and
vests an additional 1.6667% each month thereafter, to become
fully vested on April 12, 2011.
|
|
(11)
|
|
This restricted stock award was granted under the 2006 Plan on
May 12, 2006. It vested 20% on May 12, 2007, vests an
additional 10% once every six months thereafter and will become
fully vested on May 12, 2012.
|
|
(12)
|
|
This stock option award was granted under the 2006 Plan on
May 12, 2006. It vested 20% on May 12, 2007, vests an
additional 1.6667% each month thereafter and will become fully
vested on May 12, 2012.
|
|
(13)
|
|
This stock option award was granted under the 1996 Plan on
December 9, 2004. It vested 20% on December 9, 2005,
and vests an additional 1.6667% each month thereafter to become
fully vested December 9, 2010.
|
Option
Exercises and Stock Vested in 2007
The following table sets forth, for each of the named executive
officers, information regarding the value of restricted share
awards that vested during the fiscal year ended
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
Value Realized
|
|
|
Shares
|
|
|
Value Realized
|
|
|
|
Acquired on
|
|
|
on Exercise
|
|
|
Acquired on
|
|
|
on Vesting
|
|
Name
|
|
Exercise
|
|
|
$ (1)
|
|
|
Vesting
|
|
|
$ (2)
|
|
|
Brooks Mims Talton
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Kenneth R. Reagan
|
|
|
0
|
|
|
|
0
|
|
|
|
510
|
|
|
|
5,209
|
|
Gary L. McBride
|
|
|
0
|
|
|
|
0
|
|
|
|
300
|
|
|
|
4,353
|
|
Ronald J. Foster
|
|
|
19,667
|
|
|
|
205,077
|
|
|
|
0
|
|
|
|
0
|
|
Kevin W. Book
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
(1)
|
|
Calculated by determining the difference between the market
price of the underlying securities at exercise and the exercise
price of the options, net of required tax withholding.
|
|
(2)
|
|
Calculated by multiplying the number of restricted shares by the
market value of the underlying shares on the vesting date.
|
Pension
Benefits
We do not intend to provide pension benefits to the employees of
our general partner that provide services to us, nor did
Compressco provide such benefits.
Nonqualified
Deferred Compensation Table for 2007
TETRA maintains the TETRA Technologies, Inc. Nonqualified
Deferred Compensation Plan, an unfunded, nonqualified deferred
compensation plan, which allows participants to defer a portion
of their base salaries, and performance-based compensation. The
Named Executive Officers do not currently participate in this
plan. We will not assume this arrangement and the employees of
our general partner (including the Named Executive Officers) are
not eligible to participate in this plan. At this time, we do
not intend to adopt a nonqualified deferred compensation plan.
96
Potential
Payments upon a Change in Control or Termination
As of December 31, 2007, none of the Named Executive
Officers were entitled to payments upon a change in control or a
termination of employment.
Director
Compensation Table
The following table sets forth each person who served as a
director of Compressco during the 2007 year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
Unit
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
Name
|
|
or Paid in Cash
|
|
|
Awards
|
|
|
Awards
|
|
|
Compensation
|
|
|
Total
|
|
|
Brooks Mims Talton
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Geoffrey M. Hertel
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Stuart M. Brightman
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mr. Talton was compensated for his services as the
president and chief executive officer of Compressco as noted
above in the Summary Compensation Table, and he did not receive
additional compensation for his services as a director of
Compressco. Messrs. Hertel and Brightman are not employed
by Compressco, but are named executive officers of TETRA. While
Messrs. Hertel and Brightman were compensated for their
positions as president and chief executive officer, and chief
operating officer, respectively, neither executive received
additional compensation for their services as directors of
Compressco.
On a going-forward basis, we anticipate that each non-employee
director will receive cash compensation of $25,000 per year for
attending regularly scheduled quarterly board meetings, and
following the adoption of the 2008 Long Term Incentive Plan,
will be eligible to receive equity compensation awards. Each
non-employee director will be reimbursed for out-of-pocket
expenses in connection with attending meetings of the board of
directors or committees. Each non-employee director will also be
fully indemnified for actions associated with being a director
to the extent permitted under Delaware law.
97
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our
common units that will be issued upon the consummation of this
offering and the related transactions and held by:
|
|
|
|
|
each person who then will beneficially own 5% or more of the
then outstanding common units;
|
|
|
|
all of the directors and director nominees of our general
partner;
|
|
|
|
each executive officer of our general partner; and
|
|
|
|
all directors and officers of our general partner as a group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
Common
|
|
|
Common
|
|
|
|
Units to be
|
|
|
Units to be
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
Owned
|
|
|
Owned
|
|
|
Compressco, Inc.
|
|
|
|
|
|
|
%
|
|
TETRA International Incorporated
|
|
|
|
|
|
|
%
|
|
Ronald J. Foster
|
|
|
|
|
|
|
%
|
|
Gary L. McBride
|
|
|
|
|
|
|
%
|
|
Larry W. Brickman
|
|
|
|
|
|
|
%
|
|
Kevin W. Book
|
|
|
|
|
|
|
%
|
|
Geoffrey M. Hertel
|
|
|
|
|
|
|
%
|
|
Stuart M. Brightman
|
|
|
|
|
|
|
%
|
|
William D. Sullivan
|
|
|
|
|
|
|
%
|
|
All directors and officers as a group
( persons)
|
|
|
|
|
|
|
%
|
|
Total
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
98
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
After this offering, our general partner and its affiliates will
own common units, representing an
aggregate % limited partner
interest in us. In addition, our general partner will own a 0.1%
general partner interest in us.
Distributions
and Payments to Our General Partner and its Affiliates
The following table summarizes the distributions and payments to
be made by us to our general partner and its affiliates in
connection with the formation, ongoing operation and any
liquidation of Compressco Partners These distributions and
payments were determined by and among affiliated entities and,
consequently, are not the result of arms-length
negotiations.
Formation
Stage
|
|
|
The consideration received by TETRA and its subsidiaries for the
contribution to us a portion of our predecessors business,
equipment and other assets
|
|
common units; and
|
|
|
|
general partner units.
|
Operational
Stage
|
|
|
Distributions of available cash to our general partner and its
affiliates
|
|
We will generally make cash distributions 99.9% to our
unitholders pro rata, including our general partner and its
affiliates, as the holders of an
aggregate common units, and 0.1%
to our general partner.
|
|
|
|
Assuming we have sufficient available cash to pay the full
initial quarterly distribution on all of our outstanding units
for four quarters, our general partner and its affiliates would
receive an annual distribution of approximately
$ million on their general
partner units and $ million
on their common units.
|
|
Payments to our general partner and its affiliates
|
|
We will reimburse our general partner and its affiliates for the
payment of all direct and indirect expenses incurred on our
behalf. For further information regarding the reimbursement of
these expenses, please read Omnibus
Agreement on page 100.
|
|
Withdrawal or removal of our general partner
|
|
If our general partner withdraws or is removed, its general
partner interest will either be sold to the new general partner
for cash or converted into common units, in either case for an
amount equal to the fair market value of those interests. Please
read The Partnership Agreement Withdrawal or
Removal of the General Partner on page 117.
|
99
Liquidation
Stage
|
|
|
Liquidation
|
|
Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
according to their respective capital account balances.
|
Agreements
Governing the Transactions
We and other parties have entered into or will enter into the
various documents and agreements that will effect the
transactions relating to our formation and this offering,
including our acquisition of interests in Compressco Partners
Operating, the vesting of assets in, and the assumption of
liabilities by, us and Compressco Partners Operating, and the
application of the proceeds of this offering. These agreements
will not be the result of arms-length negotiations, and
they, or any of the transactions that they provide for, may not
be effected on terms as favorable to the parties to these
agreements as could have been obtained from unaffiliated third
parties. All of the transaction expenses incurred in connection
with these transactions will be paid from the proceeds of this
offering.
Omnibus
Agreement
Upon the completion of this offering, we will enter into an
omnibus agreement with Compressco, TETRA and their controlled
affiliates. The following discussion describes provisions of the
omnibus agreement. The omnibus agreement (other than the
indemnification obligations described below under
Indemnification for Environmental and Related
Liabilities) will terminate on a change of control of our
general partner.
Non-competition
All future growth of TETRAs production enhancement
services business will occur in Compressco Partners, rather than
in Compressco. Under the non-competition provisions of the
omnibus agreement:
|
|
|
|
|
TETRA and Compressco will be prohibited from providing
production enhancement services or selling
GasJack
tm
units to our customers without our consent and, likewise, we
will be prohibited from providing production enhancement
services or selling
GasJack
tm
units to customers retained by Compressco without TETRAs
consent;
|
|
|
|
TETRA or Compressco could acquire a company that provides
production enhancement services to a customer of ours, if we are
first given the opportunity to acquire that customers
business from Compressco, but decline to do so, and, likewise,
we could acquire a company that provides production enhancement
services to a customer of Compressco, if Compressco is first
given the opportunity to acquire that customers business
from us, but declines to do so;
|
|
|
|
We will have the first right to provide production enhancement
services or sell
GasJack
tm
units to new customers who are not customers of ours or
Compressco at the time this offering is completed; and
|
|
|
|
Compressco and we will be permitted to sell any
GasJack
tm
units that they or we own following the completion of this
offering.
|
Compressco, its affiliates and we will remain subject to the
non-competition provisions of the omnibus agreement until the
earliest to occur of the third anniversary of the completion of
this offering or a change of control of TETRA, Compressco or our
general partner. Thereafter, Compressco and its affiliates will
not be prohibited from competing with us in the natural gas
production enhancement services business.
Provision
of Services Necessary to Operate Our Business
All of Compresscos employees will become employees of our
general partner and will manage our operations and conduct the
business contributed to us, and we will reimburse our general
partner for all direct and indirect expenses incurred on our
behalf. TETRA will provide certain corporate staff and general
and administrative support services that are necessary to
conduct our business. These services will be provided to us in a
manner that is, in the good faith judgment of TETRA,
commercially reasonable and upon the
100
reasonable request of our general partner and may include,
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. TETRA will be entitled to be reimbursed by us for
all of the services they provide us at their cost to provide
such services. We expect that any of such costs associated with
both Compresscos and our production enhancement services
business, including general and administrative costs, will be
allocated to us on a pro rata basis. In addition, our general
partner will provide to Compressco, and Compressco will
reimburse our general partner for, any personnel and services
that are necessary to conduct Compresscos retained
business. Employees of TETRA or its affiliates that provide
support services to us pursuant to the omnibus agreement will be
eligible to participate in our compensation plans, subject to
the eligibility provisions and other employment restrictions
contained in such plans.
Indemnification
for Environmental and Related Liabilities
Under the omnibus agreement, TETRA and Compressco will indemnify
us for three years after the completion of this offering against
certain potential environmental claims, losses and expenses
associated with operation of our predecessor prior to the
completion of this offering. TETRAs and Compresscos
maximum liability for this indemnification obligation will not
exceed $5.0 million and TETRA and Compressco will not have
any obligation under this indemnification until our aggregate
losses exceed $250,000. TETRA and Compressco will have no
indemnification obligations with respect to environmental claims
made as a result of additions to or modifications of
environmental laws promulgated after the closing date of this
offering. We will also indemnify TETRA and Compressco for
environmental claims arising following the completion of this
offering regarding the business, equipment and other assets
contributed to us.
TETRA and Compressco will also indemnify us for liabilities
related to:
|
|
|
|
|
certain defects in title to our assets as of the completion of
this offering and any failure to obtain, prior to the completion
of this offering, certain consents and permits necessary to own
and operate such assets, to the extent we notify TETRA and
Compressco within three years after the completion of this
offering;
|
|
|
|
the business, equipment and other assets that are retained by
TETRA and Compressco; and
|
|
|
|
tax liabilities attributable to the operation of our assets
prior to the completion of this offering.
|
Transfer
of Idle
GasJack
tm
Units to and from Compressco
Pursuant to the omnibus agreement, in the event that our general
partner determines in good faith that there exists a need on the
part of Compresscos production enhancement services
business or on our part to transfer
GasJack
tm
units between Compressco and us, so as to fulfill the production
enhancement services obligations of either of Compressco or us,
then
GasJack
tm
units may be so transferred if it will not cause Compressco or
us to breach any of existing customer contracts or to suffer a
loss of revenue under an existing customer contract or incur any
unreimbursed costs (other than as described below).
In consideration for such transfer of
GasJack
tm
units, the transferee will either transfer to the transferor
GasJack
tm
units equal in value to the appraised value of the
GasJack
tm
units transferred to it or such other consideration as may be
approved by our Conflicts Committee.
Unless the omnibus agreement is terminated earlier as discussed
above, the provisions of the omnibus agreement described above
will terminate on the first to occur of the third anniversary of
the completion of this offering or a change of control of TETRA,
Compressco or our general partner.
101
CONFLICTS
OF INTEREST AND FIDUCIARY DUTIES
Conflicts
of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates (including TETRA and Compressco) on the one hand, and
our partnership and our limited partners, on the other hand. The
directors and officers of our general partner have fiduciary
duties to manage our general partner and our general partner in
a manner beneficial to its owners. At the same time, our general
partner has a fiduciary duty to manage our partnership in a
manner beneficial to us and our unitholders.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the
other hand, our general partner will resolve that conflict. Our
partnership agreement contains provisions that modify and limit
our general partners fiduciary duties to our unitholders.
Our partnership agreement also restricts the remedies available
to our unitholders for actions taken that, without those
limitations, might constitute breaches of fiduciary duty.
While our general partner will use reasonable efforts to prevent
the occurrence of a conflict of interest, it may not always be
able to do so. Our general partner is responsible for
identifying any such conflict of interest and our general
partner may choose to resolve the conflict of interest by any
one of the methods described in the following sentence. Our
general partner will not be in breach of its obligations under
the partnership agreement or its duties to us or our unitholders
if the resolution of the conflict is:
|
|
|
|
|
approved by the conflicts committee in good faith although our
general partner is not obligated to seek such approval;
|
|
|
|
approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
or any of its affiliates;
|
|
|
|
on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
|
|
|
|
fair and reasonable to us, taking into account the totality of
the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
|
As required by our partnership agreement, the board of directors
of our general partner will maintain a conflicts committee
consisting of at least two independent directors. Our general
partner may, but is not required to, seek the approval of such
resolution from the conflicts committee of its board of
directors. If our general partner does not seek approval from
the conflicts committee and its board of directors determines
that the resolution or course of action taken with respect to
the conflict of interest satisfies either of the standards set
forth in the third and fourth bullet points above, then it will
be presumed that, in making its decision, the board of directors
acted in good faith, and in any proceeding brought by or on
behalf of any limited partner or the partnership, the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption. Unless the resolution of a conflict
is specifically provided for in our partnership agreement, our
general partner or the conflicts committee may consider any
factors it determines in good faith to consider when resolving a
conflict. When our partnership agreement provides that someone
act in good faith, it requires that person to believe he is
acting in the best interests of the partnership.
Conflicts of interest could arise in the situations described
below, among others.
TETRA
and Compressco may engage in competition with us under certain
circumstances and may conduct its own businesses in a manner
detrimental to our own.
Compressco will own and control our general
partner.
Compressco, in turn, is a wholly owned
subsidiary of TETRA. Our partnership agreement provides that our
general partner will be restricted from engaging in any business
activities other than those incidental to its ownership of
interests in us. In addition, pursuant to the omnibus agreement,
we, TETRA and Compressco will enter into certain non-competition
agreements with respect to production enhancement services.
Please read Certain Relationships and Related
102
Party Transactions Omnibus Agreement
Non-competition on page 100. Similarly, under the
omnibus agreement, TETRA and Compressco will agree until the
earliest to occur of the third anniversary of the completion of
this offering or a change of control of TETRA, Compressco or our
general partner, and subject to other limitations, not to engage
in the business described above under the caption Certain
Relationships and Related Party Transactions Omnibus
Agreement Non-competition. Except as provided
in our partnership agreement and the omnibus agreement,
affiliates of our general partner are not prohibited from
engaging in other businesses or activities, including those that
might be in direct competition with us.
Neither
our partnership agreement nor any other agreement requires TETRA
or Compressco to pursue a business strategy that favors us or
utilizes our assets or dictates what markets to pursue or grow.
TETRAs directors have a fiduciary duty to make these
decisions in the best interests of the holders of TETRAs
common stock, which may be contrary to our interests. In
addition, Compresscos officers and directors owe fiduciary
duties to TETRA as Compresscos sole stockholder, and those
duties may be similarly adverse to ours.
Because certain of the directors of our general partner are also
directors
and/or
officers of Compressco, such directors have fiduciary duties to
Compressco that may cause them to pursue business strategies
that disproportionately benefit Compressco or which otherwise
are not in our best interests.
Our
general partner is allowed to take into account the interests of
parties other than us, such as TETRA and Compressco, in
resolving conflicts of interest.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement permits our general partner to make a number of
decisions in its individual capacity, as opposed to in its
capacity as our general partner. This entitles our general
partner to consider only the interests and factors that it
desires, and it has no duty or obligation to give any
consideration to any interest of, or factors affecting, us, our
affiliates or any limited partner. Examples include the exercise
of its limited call right, the exercise of its rights to
transfer or vote the units it owns, the exercise of its
registration rights and its determination whether or not to
consent to any sale, merger or consolidation of the partnership
or amendment to the partnership agreement.
We
will rely on officers of our general partner and its affiliates,
including TETRA and Compressco.
We will not have any officers or employees and will rely on
officers and employees of our general partner and its
affiliates, including TETRA and Compressco. TETRA, Compressco
and their controlled affiliates will conduct businesses and
activities of their own in which we will have no economic
interest. If these separate activities are significantly greater
than our activities, there could be material competition for the
time and effort of these officers and employees. Each of the
officers is also an officer of Compressco. These officers will
devote time to the affairs of Compressco or its affiliates and
will be compensated by these affiliates for the services
rendered to them. In addition, TETRA and Compressco will
allocate expenses of operational personnel who perform general
and administrative services for our benefit to us and we will
reimburse Compressco, TETRA and any of their controlled
affiliates for those expenses.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our common units and restricts
the remedies available to holders of our common units for
actions taken by our general partner that might otherwise
constitute breaches of fiduciary duty.
Our partnership agreement contains provisions that reduce the
fiduciary standards to which our general partner would otherwise
be held by state fiduciary duty laws. For example, our
partnership agreement:
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permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Actions of our general partner, which are made in its individual
capacity, will be made by its sole shareholder, Compressco,
which, in turn, is a
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wholly owned subsidiary of and controlled by TETRA. Examples
include the exercise of its limited call right, the exercise of
its rights to transfer or vote the units it owns, the exercise
of its registration rights and its determination whether or not
to consent to any sale, merger or consolidation of the
partnership or amendment to the partnership agreement;
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provides that our general partner will not have any liability to
us or our unitholders for decisions made in its capacity as a
general partner so long as it acted in good faith;
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generally provides that affiliated transactions and resolutions
of conflicts of interest not approved by the conflicts committee
of the board of directors of our general partner acting in good
faith and not involving a vote of unitholders must be on terms
no less favorable to us than those generally being provided to
or available from unrelated third parties or must be fair
and reasonable to us, as determined by our general partner
in good faith and that, in determining whether a transaction or
resolution is fair and reasonable, our general
partner may consider the totality of the relationships between
the parties involved, including other transactions that may be
particularly advantageous or beneficial to us;
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provides that our general partner and its officers and directors
will not be liable for monetary damages to us, our limited
partners or assignees for any acts or omissions unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that the general partner or
those other persons acted in bad faith or engaged in fraud or
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the conduct was criminal; and
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision the general partner or its
conflicts committee acted in good faith, and in any proceeding
brought by or on behalf of any limited partner or us, the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption.
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By purchasing a common unit, a common unitholder will agree to
become bound by the provisions in our partnership agreement,
including the provisions discussed above. Please read
Conflicts of Interest and Fiduciary Duties
Fiduciary Duties on page 107.
Except
in limited circumstances, our general partner has the power and
authority to conduct our business without unitholder
approval.
Under our partnership agreement, our general partner has full
power and authority to do all things, other than those items
that require unitholder approval or with respect to which our
general partner has sought conflicts committee approval, on such
terms as it determines to be necessary or appropriate to conduct
our business including, but not limited to, the following:
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the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into
our securities, and the incurring of any other obligations;
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the purchase, sale or other acquisition or disposition of our
securities, or the issuance of additional options, rights,
warrants and appreciation rights relating to our securities;
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the mortgage, pledge, encumbrance, hypothecation or exchange of
any or all of our assets;
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the negotiation, execution and performance of any contracts,
conveyances or other instruments;
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the distribution of our cash;
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the selection and dismissal of employees and agents, outside
attorneys, accountants, consultants and contractors and the
determination of their compensation and other terms of
employment or hiring;
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the maintenance of insurance for our benefit and the benefit of
our partners;
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the formation of, or acquisition of an interest in, the
contribution of property to, and the making of loans to, any
limited or general partnerships, joint ventures, corporations,
limited liability companies or other relationships;
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the control of any matters affecting our rights and obligations,
including the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation,
arbitration or mediation and the incurring of legal expense and
the settlement of claims and litigation;
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the indemnification of any person against liabilities and
contingencies to the extent permitted by law;
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the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies
having jurisdiction over our business or assets; and
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the entering into of agreements with any of its affiliates to
render services to us or to itself in the discharge of its
duties as our general partner.
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Our partnership agreement provides that our general partner must
act in good faith when making decisions on our
behalf, and our partnership agreement further provides that in
order for a determination by our general partner to be made in
good faith, our general partner must believe that
the determination is in our best interests. Please read
The Partnership Agreement Voting Rights
on page 112 for information regarding matters that require
unitholder approval.
Our
partnership agreement limits our business purpose to providing
natural gas production enhancement services.
Our partnership agreement limits our business purpose to
providing natural gas production enhancement services to others
and engaging in any other lawful act or activity customarily
conducted in connection with providing natural gas production
enhancement services to others. Our general partner may modify
our business purpose in its sole discretion, but has no
obligation to do so. Due to this limitation of our business
purpose, an adverse development in the natural gas production
enhancement services business might have a significantly greater
impact on our financial conditions and results of operations
than if our business purpose was not so limited.
Our
general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuances
of additional partnership securities and the creation, reduction
or increase of reserves, each of which can affect the amount of
cash that is distributed to our unitholders.
The amount of cash that is available for distribution to our
unitholders is affected by decisions of our general partner
regarding such matters as:
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the manner in which our business is operated;
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the amount of our borrowings;
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the amount, nature and timing of our capital expenditures;
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our issuance of additional partnership units;
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asset purchases, transfers and sales and other acquisitions and
dispositions; and
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the amount of cash reserves necessary or appropriate to satisfy
general, administrative and other expenses and debt service
requirements, and otherwise provide for the proper conduct of
our business.
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In addition, our general partner may use an amount equal to
$ million that would not
otherwise constitute available cash from operating surplus, in
order to permit the payment of cash distributions on its units.
All of these actions may affect the amount of cash distributed
to our unitholders and the general partner. Please read
Provisions of Our Partnership Agreement Relating to Cash
Distributions on page 47.
In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owned by the general partner to
our unitholders. For example, in the event we have not generated
sufficient cash from our
105
operations to pay the initial quarterly distribution on all of
our common units and general partner units for each quarter in
the twelve months ending September 30, 2009, our
partnership agreement permits us to borrow funds, which may
enable us to make this distribution on all outstanding units.
Please read Provisions of Our Partnership Agreement
Relating to Cash Distributions on page 47.
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, our operating company, or its operating subsidiaries.
Our
general partner determines which costs incurred by TETRA,
Compressco and their controlled affiliates are reimbursable by
us.
We will reimburse our general partner and its affiliates for all
direct and indirect costs incurred in managing and operating us.
These expenses include salary, bonus, incentive compensation and
other amounts paid to persons who perform services for us or on
our behalf, and expenses allocated to our general partner by its
affiliates. The partnership agreement provides that our general
partner will determine the expenses that are allocable to us in
good faith.
Our
partnership agreement does not restrict our general partner from
causing us to pay it or its affiliates for any services rendered
to us or entering into additional contractual arrangements with
any of these entities on our behalf.
Our partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. Neither our partnership
agreement nor any of the other agreements, contracts or
arrangements between us, on the one hand, and our general
partner and its affiliates, on the other hand, that will be in
effect as of the completion of this offering will be the result
of arms-length negotiations. Similarly, agreements,
contracts or arrangements between us and our general partner and
its affiliates that are entered into following the completion of
this offering will not be required to be negotiated on an
arms-length basis, although, in some circumstances, our
general partner may determine that the conflicts committee of
our general partner may make a determination on our behalf with
respect to one or more of these types of situations. Our general
partner will determine, in good faith, the terms of any of these
transactions entered into after the completion of this offering.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of our general
partner or its affiliates, except as may be provided in
contracts entered into specifically dealing with that use. There
is no obligation of our general partner or its affiliates to
enter into any contracts of this kind.
Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets, and not against our general partner or its
assets. Our partnership agreement provides that any action taken
by our general partner to limit its liability is not a breach of
our general partners fiduciary duties, even if we could
have obtained more favorable terms without the limitation on
liability.
Our
general partner may exercise its right to call and purchase
common units if it and its affiliates own more than 90% of the
common units.
Our general partner may exercise its right to call and purchase
common units as provided in the partnership agreement or assign
this right to one of its affiliates or to us. Our general
partner is not bound by fiduciary duty restrictions in
determining whether to exercise this right. As a result, a
common unitholder may have his common units purchased from him
at an undesirable time or price. Please read The
Partnership Agreement Limited Call Right on
page 119.
106
Common
unitholders will have no right to enforce obligations of our
general partner and its affiliates under agreements with
us.
Any agreements between us on the one hand, and our general
partner and its affiliates, on the other, will not grant to our
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
Our
general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
The attorneys, independent accountants and others who have
performed services for us regarding this offering have been
retained by our general partner. Attorneys, independent
accountants and others who perform services for us are selected
by our general partner or the conflicts committee and may
perform services for our general partner and its affiliates. We
may retain separate counsel for ourselves or the holders of
common units in the event of a conflict of interest between our
general partner and its affiliates, on the one hand, and us or
the holders of common units, on the other, depending on the
nature of the conflict. We do not intend to do so in most cases.
We are
considered a restricted subsidiary under the TETRA Credit
Facility and the TETRA Senior Notes.
We are a restricted subsidiary under both the TETRA Credit
Facility and the TETRA Senior Notes. Both the TETRA Credit
Facility and the TETRA Senior Notes contain customary covenants
and restrictions on actions by TETRA and its restricted
subsidiaries, including incurring additional indebtedness,
making acquisitions and capital expenditures, selling assets and
equity issuances.
We are not directly restricted by these provisions and are not
liable for such indebtedness, but TETRA indirectly owns and
controls our general partner and has the ability to prevent us
from taking actions that would cause TETRA to violate these
covenants or to be in default under its debt agreements.
Additionally, in the future TETRA may determine that it is in
its best interest to agree to more restrictive covenants or to
pledge assets, including its ownership of our general partner.
TETRA would not owe us or our unitholders any fiduciary duty in
requiring us to comply with the restrictions contained in its
debt agreements, whether existing or entered into in the future,
in allocating exceptions to covenants and financial ratios among
itself and its restricted subsidiaries, or in amending its debt
agreements to include provisions more burdensome to our
operations and financing capabilities.
Fiduciary
Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to our unitholders by our
general partner are prescribed by law and the partnership
agreement. The Delaware Revised Uniform Limited Partnership Act,
which we refer to as the Delaware Act, provides that Delaware
limited partnerships may, in their partnership agreements,
modify, restrict or expand the fiduciary duties otherwise owed
by a general partner to limited partners and the partnership.
Our partnership agreement contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner. We have adopted these restrictions
to allow our general partner or its affiliates to engage in
transactions with us that might otherwise be prohibited by
state-law fiduciary duty standards and to take into account the
interests of other parties in addition to our interests when
resolving conflicts of interest. We believe this is appropriate
and necessary because our general partners board of
directors will have fiduciary duties to manage our general
partner in a manner beneficial to its owners, as well as to our
unitholders. Without these modifications, the general
partners ability to make decisions involving conflicts of
interest would be restricted. The modifications to the fiduciary
standards enable the general partner to take into consideration
all parties involved in the proposed action, so long as the
resolution is fair and reasonable to us. These modifications
also enable our general partner to attract and retain
experienced and capable directors. These modifications are
detrimental to our unitholders because they restrict the
remedies available to our unitholders for actions that, without
those limitations, might constitute breaches of fiduciary duty,
as described below, and permit our general partner to take into
account the interests of third
107
parties in addition to our interests when resolving conflicts of
interest. The following is a summary of the material
restrictions of the fiduciary duties owed by our general partner
to the limited partners:
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State-law fiduciary duty standards
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Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would require a general partner to act in
good faith and would generally prohibit a general partner of a
Delaware limited partnership from taking any action or engaging
in any transaction where a conflict of interest is present.
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The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
the limited partners.
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Partnership agreement modified standards
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Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in good faith and
will not be subject to any other standard under applicable law.
Good Faith requires that the person or persons
making such determination or taking or declining to take such
other action believe that the determination or other action is
in the best interests of the Partnership or the holders of the
common units, as the case may be. In addition, when our general
partner is acting in its individual capacity, as opposed to in
its capacity as our general partner, it may act without any
fiduciary obligation to us or our unitholders whatsoever. These
standards reduce the obligations to which our general partner
would otherwise be held.
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In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner and its officers and
directors will not be liable for monetary damages to us, our
limited partners or assignees for errors of judgment or for any
acts or omissions unless there has been a final and
non-appealable judgment by a court of competent jurisdiction
determining that the general partner or its officers and
directors acted in bad faith or engaged in fraud or willful
misconduct.
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Special provisions regarding affiliated transactions
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Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a vote of our unitholders and that are not approved by
the conflicts committee of the board of directors of our general
partner must be:
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on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
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fair and reasonable to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us).
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If our general partner does not seek approval from the conflicts
committee and its board of directors determines that the
resolution or course of action taken with respect to the
conflict of interest satisfies either of the standards set forth
in the bullet points above, then it will be presumed that, in
making its decision, the board of directors, which may include
board members affected by the conflict of interest, acted in
good faith and in any proceeding brought by or on behalf of any
limited partner or the partnership, the person bringing or
prosecuting such proceeding will have the burden of overcoming
such presumption. These standards reduce the obligations to
which our general partner would otherwise be held.
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Our partnership agreement provides for the allocation of
overhead costs to us by our general partner and its affiliates
in such amounts deemed to be fair and reasonable to us.
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By purchasing our common units, each common unitholder
automatically agrees to be bound by the provisions in our
partnership agreement, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that
person.
We must indemnify our general partner and its officers,
directors, managers and certain other specified persons, to the
fullest extent permitted by law, against liabilities, costs and
expenses incurred by our general partner or these other persons.
We must provide this indemnification unless there has been a
final and non-appealable judgment by a court of competent
jurisdiction determining that these persons acted in bad faith
or engaged in fraud or willful misconduct. We must also provide
this indemnification for criminal proceedings unless our general
partner or these other persons acted with knowledge that their
conduct was unlawful. Thus, our general partner could be
indemnified for its negligent acts if it meets the requirements
set forth above. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted
to our directors, officers or persons pursuant to the such
indemnification provisions, we have been informed that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
Securities Act of 1933 and is therefore unenforceable. Please
read The Partnership Agreement
Indemnification on page 120.
109
DESCRIPTION
OF THE COMMON UNITS
The
Units
The holders of common units are entitled to participate in
partnership distributions and exercise the rights or privileges
available to limited partners under our partnership agreement.
For a description of the rights and privileges of limited
partners under our partnership agreement, including voting
rights, please read The Partnership Agreement on
page 111.
Transfer
Agent and Registrar
Duties.
Computershare will serve as registrar
and transfer agent for the common units. We will pay all fees
charged by the transfer agent for transfers of common units
except the following that must be paid by our unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
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special charges for services requested by a common
unitholder; and
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other similar fees or charges.
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There will be no charge to our unitholders for disbursements of
our cash distributions. We will indemnify the transfer agent,
its agents and each of their stockholders, directors, officers
and employees against all claims and losses that may arise out
of acts performed or omitted for its activities in that
capacity, except for any liability due to any gross negligence
or intentional misconduct of the indemnified person or entity.
Resignation or Removal.
The transfer agent may
resign, by notice to us, or be removed by us. The resignation or
removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its
acceptance of the appointment. If no successor has been
appointed and has accepted the appointment within 30 days
after notice of the resignation or removal, our general partner
may act as the transfer agent and registrar until a successor is
appointed.
Transfer
of Common Units
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the common units transferred
when such transfer and admission is reflected in our books and
records. Each transferee:
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
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automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership
agreement; and
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gives the consents and approvals contained in our partnership
agreement, such as the approval of all transactions and
agreements that we are entering into in connection with our
formation and this offering.
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A transferee will become a substituted limited partner of our
partnership for the transferred common units automatically upon
the recording of the transfer on our books and records. Our
general partner will cause any transfers to be recorded on our
books and records no less frequently than quarterly.
We may, at our discretion, treat the nominee unitholder as the
absolute owner. In that case, the beneficial holders
rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the
beneficial owner and the nominee holder.
Common units are securities and are transferable according to
the laws governing transfers of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record unitholder as the
absolute owner for all purposes, except as otherwise required by
law or stock exchange regulations.
110
THE
PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. The form of our partnership agreement is
included in this prospectus as Appendix A. We will provide
prospective investors with a copy of our partnership agreement
upon request at no charge.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
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with regard to distributions of available cash, please read
Provisions of Our Partnership Agreement Relating to Cash
Distributions on page 47;
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with regard to the fiduciary duties of our general partner,
please read Conflicts of Interest and Fiduciary
Duties on page 102;
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with regard to the transfer of common units, please read
Description of the Common Units Transfer of
Common Units on page 110; and
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with regard to allocations of taxable income and taxable loss,
please read Material Tax Consequences on page
124.
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Organization
and Duration
Our partnership was organized on October 31, 2008 and will
have a perpetual existence.
Purpose
Our purpose under the partnership agreement is to provide
natural gas production enhancement services to others and to
engage in any other lawful act or activity customarily conducted
in connection with providing natural gas production enhancement
services to others. Our general partner may modify our business
purpose in its sole discretion, but has no obligation to do so.
Our general partner, however, may not cause us to engage in any
business activities that the general partner determines would
cause us to be treated as a corporation for U.S. federal
income tax purposes.
Although our general partner has the ability to cause us and our
subsidiaries to engage in activities other than the business of
providing natural gas production enhancement services, our
general partner has no current plans to do so and may decline to
do so free of any fiduciary duty or obligation whatsoever to us
or the limited partners, including any duty to act in good faith
or in the best interests of us or the limited partners. Our
general partner is authorized in general to perform all acts it
determines to be necessary or appropriate to carry out our
purposes and to conduct our business.
Power of
Attorney
Each limited partner, and each person who acquires a unit from a
unitholder, by accepting the common unit, automatically grants
to our general partner and, if appointed, a liquidator, a power
of attorney to, among other things, execute and file documents
required for our qualification, continuance or dissolution. The
power of attorney also grants our general partner the authority
to amend, and to grant consents and waivers on behalf of the
limited partners under, our partnership agreement.
Cash
Distributions
Our partnership agreement specifies the manner in which we will
make cash distributions to holders of our common units and other
partnership securities as well as to our general partner in
respect of its general partner interest. For a description of
these cash distribution provisions, please read Provisions
of Our Partnership Agreement Relating to Cash
Distributions on page 47.
Capital
Contributions
Our unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
111
Our general partner has the right, but not the obligation, to
contribute a proportionate amount of capital to us to maintain
its 0.1% general partner interest if we issue additional common
units. Our general partners 0.1% interest, and the
percentage of our cash distributions to which it is entitled,
will be proportionately reduced if we issue additional common
units in the future and our general partner does not contribute
a proportionate amount of capital to us to maintain its 0.1%
general partner interest. Our general partner will be entitled
to make a capital contribution in order to maintain its 0.1%
general partner interest in the form of the contribution to us
of common units it owns based on the current market value of the
contributed common units.
Voting
Rights
The following is a summary of the unitholder vote required for
the matters specified below. Matters requiring the approval of a
unit majority require the approval of a majority of
the common units.
In voting their common units, our general partner and its
affiliates may vote their units however they decide and will
have no fiduciary duty or obligation whatsoever to us or the
limited partners in so voting, including any duty to act in good
faith or in the best interests of us or the limited partners.
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Issuance of additional partnership units
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No approval right.
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Amendment of the partnership agreement
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Certain amendments may be made by the general partner without
the approval of our unitholders. Other amendments generally
require the approval of a unit majority. Please read
Amendment of the Partnership Agreement
on page 114.
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Merger of our partnership or the sale of all or substantially
all of our assets
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Unit majority in certain circumstances. Please read
Merger, Consolidation, Conversion, Sale or
Other Disposition of Assets on page 116.
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Dissolution of our partnership
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Unit majority. Please read Termination and
Dissolution on page 117.
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Continuation of our business upon dissolution
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Unit majority. Please read Termination and
Dissolution on page 117.
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Withdrawal of the general partner
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Under most circumstances, the approval of a majority of the
common units, excluding common units held by our general partner
and its affiliates, is required for the withdrawal of our
general partner prior to , 2019 in
a manner that would cause a dissolution of our partnership.
Please read Withdrawal or Removal of the
General Partner on page 117.
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Removal of the general partner
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Not less than
66
2
/
3
%
of the outstanding partnership units, including partnership
units held by our general partner and its affiliates. Please
read Withdrawal or Removal of the General
Partner on page 117.
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Transfer of the general partner interest
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets, to such person. The approval of
a majority of the common units, excluding common units held by
the general partner and its affiliates, is required in other
circumstances for a transfer of the
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general partner interest to a third party prior
to , 2019. Please read
Transfer of General Partner Units on
page 118.
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Transfer of ownership interests in our general partner
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No approval required at any time. Please read
Transfer of Ownership Interests in the General
Partner on page 119.
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Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace the general partner;
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to approve some amendments to the partnership agreement; or
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to take other action under the partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither the partnership agreement nor the
Delaware Act specifically provides for legal recourse against
the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a
limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except that
such person is not obligated for liabilities unknown to him at
the time he became a limited partner and that could not be
ascertained from the partnership agreement.
Following the offering we will conduct business in three states
and we may have subsidiaries that conduct business in other
states in the future. Maintenance of our limited liability as a
member of the operating company may require compliance with
legal requirements in the jurisdictions in which the operating
company conducts business, including qualifying our subsidiaries
to do business there.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If, by virtue of our
membership interest in our operating limited liability company
or otherwise, it were determined that we were conducting
business in any state without compliance with the applicable
limited partnership or limited liability company statute, or
that the right or exercise of the right by the limited partners
as a group to remove or replace the general partner, to approve
some amendments to the partnership agreement, or to take other
action under the partnership agreement constituted
participation in the control of our business for
purposes of the statutes of any relevant jurisdiction, then the
limited partners could be held personally liable for our
obligations under the law of that jurisdiction to the same
extent as the general partner under the circumstances. We will
operate in a manner
113
that the general partner considers reasonable and necessary or
appropriate to preserve the limited liability of the limited
partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of our unitholders.
Holders of any additional common units we issue will be entitled
to share equally with the then-existing holders of common units
in our distributions of available cash. In addition, the
issuance of additional common units or other partnership
securities may dilute the value of the interests of the
then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Upon issuance of additional partnership securities, our general
partner will be entitled, but not required, to make additional
capital contributions to the extent necessary to maintain its
0.1% general partner interest in us. Our general partners
0.1% interest in us will be reduced if we issue additional
common units in the future (other than the issuance of common
units upon exercise by the underwriters of the option to
purchase additional common units) and our general partner does
not contribute a proportionate amount of capital to us to
maintain its 0.1% general partner interest. Moreover, our
general partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to
purchase common units or other partnership securities whenever,
and on the same terms that, we issue those securities to persons
other than our general partner and its affiliates, to the extent
necessary to maintain the percentage interest of the general
partner and its affiliates, including such interest represented
by common units, that existed immediately prior to each
issuance. The holders of common units will not have preemptive
rights to acquire additional common units or other partnership
securities.
Amendment
of the Partnership Agreement
General.
Amendments to our partnership
agreement may be proposed only by or with the consent of our
general partner. However, our general partner will have no duty
or obligation to propose any amendment and may decline to do so
free of any fiduciary duty or obligation whatsoever to us or the
limited partners, including any duty to act in good faith or in
the best interests of us or the limited partners. In order to
adopt a proposed amendment, other than the amendments discussed
below, our general partner is required to seek written approval
of the holders of the number of partnership units required to
approve the amendment or to call a meeting of the limited
partners to consider and vote upon the proposed amendment.
Except as described below, an amendment must be approved by a
unit majority.
Prohibited Amendments.
No amendment may be
made that would:
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enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected; or
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enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner
or any of its affiliates without the consent of our general
partner, which consent may be given or withheld at its option.
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The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding partnership units voting together
as a single class (including partnership units owned by our
general partner
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and its affiliates). Upon completion of the offering, our
general partner and its affiliates will own
approximately % of the outstanding
common units.
No Unitholder Approval.
Our general partner
may generally make amendments to our partnership agreement
without the approval of any limited partner or assignee to
reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of partners
in accordance with our partnership agreement;
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a change that our general partner determines to be necessary or
appropriate to qualify or continue our qualification as a
limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or
to ensure that neither we nor the operating limited liability
company nor any of its subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an
entity for U.S. federal income tax purposes;
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an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or its directors, officers,
agents or trustees from in any manner being subjected to the
provisions of the Investment Company Act of 1940, the Investment
Advisors Act of 1940, or plan asset regulations
adopted under the Employee Retirement Income Security Act of
1974, or ERISA, whether or not substantially similar to plan
asset regulations currently applied or proposed;
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an amendment that our general partner determines to be necessary
or appropriate for the authorization of additional partnership
securities or rights to acquire partnership securities;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
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any amendment that our general partner determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our partnership agreement;
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a change in our fiscal year or taxable year and related changes;
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an amendment necessary to require limited partners to provide a
statement, certification or other evidence to us regarding
whether such limited partner is subject to United States federal
income taxation on the income generated by us;
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conversions into, mergers with or conveyances to another limited
liability entity that is newly formed and has no assets,
liabilities or operations at the time of the conversion, merger
or conveyance other than those it receives by way of the
conversion, merger or conveyance; or
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner if our general partner determines that those amendments:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
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are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
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are necessary or appropriate to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
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are necessary or appropriate for any action taken by our general
partner relating to splits or combinations of partnership units
under the provisions of our partnership agreement; or
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of our partnership agreement or
are otherwise contemplated by our partnership agreement.
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Opinion of Counsel and Unitholder
Approval.
Our general partner will not be
required to obtain an opinion of counsel that an amendment will
not result in a loss of limited liability to the limited
partners or result in our being treated as an entity for
U.S. federal income tax purposes in connection with any of
the amendments described under No Unitholder
Approval. No other amendments to our partnership agreement
will become effective without the approval of holders of at
least 90% of the outstanding partnership units voting as a
single class unless we first obtain an opinion of counsel to the
effect that the amendment will not affect the limited liability
under applicable law of any of our limited partners.
In addition to the above restrictions, any amendment that would
have a material adverse effect on the rights or preferences of
any type or class of outstanding partnership units in relation
to other classes of partnership units will require the approval
of at least a majority of the type or class of partnership units
so affected. Any amendment that reduces the voting percentage
required to take any action is required to be approved by the
affirmative vote of limited partners whose aggregate outstanding
partnership units constitute not less than the voting
requirement sought to be reduced.
Merger,
Consolidation, Conversion, Sale or Other Disposition of
Assets
A merger, consolidation or conversion of us requires the prior
consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger,
consolidation or conversion and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interest of us or the limited partners.
In addition, the partnership agreement generally prohibits our
general partner without the prior approval of the holders of a
unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of the assets of
our subsidiaries. Our general partner may, however, mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. Our
general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner
may consummate any merger without the prior approval of our
unitholders if we are the surviving entity in the transaction,
our general partner has received an opinion of counsel regarding
limited liability and tax matters, the transaction would not
result in a material amendment to the partnership agreement,
each of our partnership units will be an identical unit of our
partnership following the transaction, and the partnership
securities to be issued do not exceed 20% of our outstanding
partnership securities immediately prior to the transaction.
If the conditions specified in the partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that conversion,
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity, our general partner
has received an opinion of counsel regarding limited liability
and tax matters, and the governing instruments of the new entity
provide the limited partners and the general partner with the
same rights and obligations as contained in the partnership
agreement. Our unitholders are not entitled to dissenters
rights of appraisal under the partnership agreement or
applicable Delaware law in the event of a conversion, merger or
consolidation, a sale of substantially all of our assets or any
other similar transaction or event.
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Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
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the election of our general partner to dissolve us, if approved
by the holders of partnership units representing a unit majority;
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there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
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the entry of a decree of judicial dissolution of our
partnership; or
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the withdrawal or removal of our general partner or any other
event that results in it ceasing to be our general partner other
than by reason of a transfer of its general partner interest in
accordance with our partnership agreement or withdrawal or
removal following approval and admission of a successor.
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Upon a dissolution under the last clause above, the holders of a
unit majority may also elect, within specific time limitations,
to continue our business on the same terms and conditions
described in our partnership agreement by appointing as a
successor general partner an entity approved by the holders of
partnership units representing a unit majority, subject to our
receipt of an opinion of counsel to the effect that:
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the action would not result in the loss of limited liability of
any limited partner; and
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neither our partnership, our operating limited liability company
nor any of our other subsidiaries would be treated as an
association taxable as a corporation or otherwise be taxable as
an entity for U.S. federal income tax purposes upon the
exercise of that right to continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are continued as a new limited
partnership, the liquidator authorized to wind up our affairs
will, acting with all of the powers of our general partner that
are necessary or appropriate to liquidate our assets and apply
the proceeds of the liquidation as described in Provisions
of Our Partnership Agreement Relating to Cash
Distributions Distributions of Cash Upon
Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to our
partners.
Withdrawal
or Removal of the General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior
to , 2019 without obtaining the
approval of the holders of at least a majority of the
outstanding common units, excluding common units held by the
general partner and its affiliates, and furnishing an opinion of
counsel regarding limited liability and tax matters. On or
after , 2019, our general partner
may withdraw as general partner without first obtaining approval
of any unitholder by giving 90 days written notice,
and that withdrawal will not constitute a violation of our
partnership agreement. Notwithstanding the information above,
our general partner may withdraw without unitholder approval
upon 90 days notice to the limited partners if at
least 50% of the outstanding common units are held or controlled
by one person and its affiliates other than the general partner
and its affiliates. In addition, the partnership agreement
permits our general partner in some instances to sell or
otherwise transfer all of its general partner interest in us
without the approval of our unitholders. Please read
Transfer of General Partner Units on
page 118.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, we will be
dissolved, wound up and liquidated, unless within a specified
period after that withdrawal, the holders of a
117
unit majority agree in writing to continue our business and to
appoint a successor general partner. Please read
Termination and Dissolution on
page 117.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
66
2
/
3
%
of the outstanding partnership units, voting together as a
single class, including partnership units held by our general
partner and its affiliates, and we receive an opinion of counsel
regarding limited liability and tax matters. Any removal of our
general partner is also subject to the approval of a successor
general partner by the vote of the holders of a majority of the
outstanding common units. The ownership of more than
33
1
/
3
%
of the outstanding partnership units by our general partner and
its affiliates would give them the practical ability to prevent
our general partners removal. At the completion of this
offering, our general partner and its affiliates will
own % of the outstanding common
units.
Our partnership agreement also provides that, if our general
partner is removed as our general partner under circumstances
where cause does not exist and general partner units held by the
general partner and its affiliates are not voted in favor of
that removal, our general partner will have the right to convert
its general partner interest into common units or to receive
cash in exchange for those interests based on the fair market
value of those interests at that time.
In the event of removal of our general partner under
circumstances where cause exists or withdrawal of our general
partner where that withdrawal violates our partnership
agreement, a successor general partner will have the option to
purchase the general partner interest of the departing general
partner for a cash payment equal to the fair market value of
those interests. Under all other circumstances where our general
partner withdraws or is removed by the limited partners, the
departing general partner will have the option to require the
successor general partner to purchase the general partner
interest of the departing general partner for fair market value.
In either case, fair market value will be determined by
agreement between the departing general partner and the
successor general partner. If no agreement is reached, an
independent investment banking firm or other independent expert
selected by the departing general partner and the successor
general partner will determine the fair market value.
Alternatively, if the departing general partner and the
successor general partner cannot agree upon an expert, then an
expert chosen by agreement of the experts selected by each of
them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest will
automatically convert into common units equal to the fair market
value of that interest as determined by an investment banking
firm or other independent expert selected in the manner
described in the preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer
of General Partner Units
Except for a transfer by our general partner of all, but not
less than all, of its general partner units to:
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an affiliate of our general partner (other than an
individual); or
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another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
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our general partner may not transfer all or any of its general
partner units to another person prior
to , 2019 without the approval of
the holders of at least a majority of the outstanding common
units, excluding common units held by our general partner and
its affiliates. As a condition of this transfer, the transferee
must assume, among other things, the rights and duties of our
general partner, agree to be bound by the provisions of our
partnership agreement, and furnish an opinion of counsel
regarding limited liability and tax matters.
Our general partner and its affiliates may at any time, transfer
common to one or more persons, without unitholder approval.
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Transfer
of Ownership Interests in the General Partner
At any time, Compressco and its affiliates may sell or transfer
all or part of their shares in our general partner to an
affiliate or third party without the approval of our unitholders.
Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove our general partner or otherwise change our management.
If any person or group other than our general partner and its
affiliates acquires beneficial ownership of 20% or more of any
class of partnership units, that person or group loses voting
rights on all of its partnership units. This loss of voting
rights does not apply to any person or group that acquires the
partnership units from our general partner or its affiliates and
any transferees of that person or group approved by our general
partner or to any person or group who acquires the partnership
units with the prior approval of our general partner.
Our partnership agreement also provides that, if our general
partner is removed under circumstances where cause does not
exist and general partner units held by our general partner and
its affiliates are not voted in favor of that removal, our
general partner will have the right to convert its general
partner units into common units or to receive cash in exchange
for those interests based on the fair market value of those
interests at that time.
Limited
Call Right
If at any time our general partner and its affiliates own more
than 90% of the then-issued and outstanding limited partner
interests of any class, our general partner will have the right,
which it may assign in whole or in part to any of its affiliates
or to us, to acquire all, but not less than all, of the limited
partner interests of the class held by unaffiliated persons as
of a record date to be selected by our general partner, on at
least 10 but not more than 60 days notice. The purchase
price in the event of this purchase is the greater of:
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the highest cash price paid by either of our general partner or
any of its affiliates for any limited partner interests of the
class purchased within the 90 days preceding the date on
which our general partner first mails notice of its election to
purchase those limited partner interests; and
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the current market price as of the date three days before the
date the notice is mailed.
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As a result of our general partners right to purchase
outstanding limited partner interests, a unitholder may have his
common units purchased at a price that may be lower than market
prices at various times prior to such purchase or lower than a
unitholder may anticipate the market price to be in the future.
The federal income tax consequences to a unitholder of the
exercise of this call right are the same as a sale by that
unitholder of his common units in the market. Please read
Material Tax Consequences Disposition of
Common Units on page 132.
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of partnership units then outstanding,
record holders of partnership units on the record date will be
entitled to notice of, and to vote at, meetings of our limited
partners and to act upon matters for which approvals may be
solicited. In the case of common units held by our general
partner on behalf of non-citizen assignees, our general partner
will distribute the votes on those common units in the same
ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of our
unitholders will be called in the near future. Any action that
is required or permitted to be taken by our unitholders may be
taken either at a meeting of our unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of partnership units
necessary to authorize or take that action at a meeting.
Meetings of our unitholders may be called by our general partner
or by unitholders owning at least 20% of the outstanding
partnership units of the class for which a meeting is proposed.
Unitholders may vote either in
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person or by proxy at meetings. The holders of a majority of the
outstanding partnership units of the class or classes for which
a meeting has been called represented in person or by proxy will
constitute a quorum unless any action by our unitholders
requires approval by holders of a greater percentage of the
partnership units, in which case the quorum will be the greater
percentage.
Each record unitholder has a vote according to his percentage
interest in us, although additional limited partner interests
having special voting rights could be issued. Please read
Issuance of Additional Securities on
page 114. However, if at any time any person or group,
other than our general partner and its affiliates, or a direct
or subsequently approved transferee of our general partner or
its affiliates, acquires, in the aggregate, beneficial ownership
of 20% or more of any class of partnership units then
outstanding, that person or group will lose voting rights on all
of its partnership units and the partnership units may not be
voted on any matter and will not be considered to be outstanding
when sending notices of a meeting of unitholders, calculating
required votes, determining the presence of a quorum or for
other similar purposes. Common units held in nominee or street
name account will be voted by the broker or other nominee in
accordance with the instruction of the beneficial owner unless
the arrangement between the beneficial owner and his nominee
provides otherwise.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Status as
Limited Partner
By the transfer of common units in accordance with our
partnership agreement, each transferee of common units shall be
admitted as a limited partner with respect to the common units
transferred when such transfer and admission is reflected in our
books and records. Except as described under
Limited Liability, the common
units will be fully paid, and unitholders will not be required
to make additional contributions.
Non-Citizen
Assignees; Redemption
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create a substantial risk of cancellation or forfeiture
of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, we may redeem the common units held by the limited
partner at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each
limited partner to furnish information about his nationality,
citizenship or related status. If a limited partner fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or our general partner determines after receipt of
the information that the limited partner is not an eligible
citizen, the limited partner may be treated as a non-citizen
assignee. A non-citizen assignee, is entitled to an interest
equivalent to that of a limited partner for the right to share
in allocations and distributions from us, including liquidating
distributions. A non-citizen assignee does not have the right to
direct the voting of his common units and may not receive
distributions in-kind upon our liquidation.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
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our general partner;
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any departing general partner;
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any person who is or was an affiliate of our general partner or
any departing general partner;
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any person who is or was a director, officer, member, partner,
fiduciary or trustee of any entity set forth in the preceding
three bullet points;
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any person who is or was serving as director, officer, member,
partner, fiduciary or trustee of another person at the request
of our general partner or any departing general partner; and
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or lend funds or assets to us to enable us to
effectuate, indemnification. We may purchase insurance against
liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the
power to indemnify the person against liabilities under our
partnership agreement. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be
permitted to our directors, officers or persons pursuant to the
such indemnification provisions, we have been informed that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
Securities Act of 1933 and is therefore unenforceable.
Reimbursement
of Expenses
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. These expenses include salary,
bonus, incentive compensation and other amounts paid to persons
who perform services for us or on our behalf and expenses
allocated to our general partner by its affiliates. Our general
partner will determine in good faith the expenses that are
allocable to us.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and financial reporting purposes, our fiscal year
is the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record unitholder with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to our
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
Right to
Inspect Our Books and Records
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable written demand stating the purpose of
such demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each partner became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, related amendments and powers of attorney under
which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep trade secrets or
other information, the disclosure of which our general partner
believes in good faith is not in our best interests or that we
are required by law or by agreements with third parties to keep,
confidential from the limited partners.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units or other partnership securities proposed
to be sold by our general partner or any of its affiliates or
their assignees if an exemption from the registration
requirements is not otherwise available. These registration
rights continue for two years following any withdrawal or
removal of our general partner. We are obligated to pay all
expenses incidental to the registration, excluding underwriting
discounts, commissions and structuring fees. Please read
Units Eligible for Future Sale on page 123.
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UNITS
ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, TETRAs
affiliates will hold an aggregate
of common units.
The common units sold in the offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units owned by an
affiliate of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
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1% of the total number of the securities outstanding; or
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the average weekly reported trading volume of the common units
for the four calendar weeks prior to the sale.
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Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned his common units for at least two
years, would be entitled to sell common units under
Rule 144 without regard to the public information
requirements, volume limitations, manner of sale provisions and
notice requirements of Rule 144.
The partnership agreement does not restrict our ability to issue
any partnership securities at any time. Any issuance of
additional common units or other equity securities would result
in a corresponding decrease in the proportionate ownership
interest in us represented by, and could adversely affect the
cash distributions to and market price of, common units then
outstanding. Please read The Partnership
Agreement Issuance of Additional Securities on
page 114.
Under our partnership agreement, our general partner and its
affiliates have the right, subject to certain limitations, to
cause us to register under the Securities Act and state
securities laws the offer and sale of any common units or other
partnership securities that they hold. Subject to the terms and
conditions of our partnership agreement, these registration
rights allow our general partner and its affiliates or their
assignees holding any partnership units or other partnership
securities to require registration of any of these partnership
units or other partnership securities and to include them in a
registration by us of other partnership units, including
partnership units offered by us or by any unitholder. Our
general partner will continue to have these registration rights
for two years following its withdrawal or removal as our general
partner. In connection with any registration of this kind, we
will indemnify each unitholder participating in the registration
and its officers, directors and controlling persons from and
against any liabilities under the Securities Act or any state
securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to
any registration, excluding any underwriting discounts,
commissions and structuring fees. Except as described below, our
general partner and its affiliates may sell their partnership
units or other partnership interests in private transactions at
any time, subject to compliance with applicable laws.
We, our subsidiaries, our general partner and its affiliates,
including the executive officers and directors of our general
partner, have agreed, with exceptions, not to sell or transfer
any of our common units for 180 days after the date of this
prospectus. For a description of these
lock-up
provisions, please read Underwriting on
page 140.
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MATERIAL
TAX CONSEQUENCES
This section is a discussion of the material tax considerations
that may be relevant to prospective unitholders who are
individual citizens or residents of the United States and,
unless otherwise noted in the following discussion, is the
opinion of Vinson & Elkins L.L.P., counsel to the
general partner and us, insofar as it relates to legal
conclusions with respect to matters of United States federal
income tax law. This section is based upon current provisions of
the Internal Revenue Code, existing and proposed regulations and
current administrative rulings and court decisions, all of which
are subject to change. Later changes in these authorities may
cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise
requires, references in this section to us or
we are references to Compressco Partners, L.P. and
our operating company.
The following discussion does not comment on all federal income
tax matters affecting us or our unitholders. Moreover, the
discussion focuses on unitholders who are individual citizens or
residents of the United States and has only limited application
to corporations, estates, trusts, nonresident aliens or other
unitholders subject to specialized tax treatment, such as
tax-exempt institutions, foreign persons, individual retirement
accounts (IRAs), real estate investment trusts (REITs) or mutual
funds. Accordingly, we encourage each prospective unitholder to
consult, and depend on, his own tax advisor in analyzing the
federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are, to the extent noted herein, based on the
accuracy of the representations made by us.
No ruling has been or will be requested from the IRS regarding
any matter affecting us or prospective unitholders. Instead, we
will rely on opinions of Vinson & Elkins L.L.P. Unlike
a ruling, an opinion of counsel represents only that
counsels best legal judgment and does not bind the IRS or
the courts. Accordingly, the positions we take based on the
opinions and statements made herein may not be sustained by a
court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely affect the market for the
common units and the prices at which common units trade. In
addition, the costs of any contest with the IRS, principally
legal, accounting and related fees, will result in a reduction
in cash available for distribution to our unitholders and our
general partner and thus will be borne indirectly by our
unitholders and our general partner. Furthermore, the tax
treatment of us, or of an investment in us, may be significantly
modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be
retroactively applied.
For the reasons described below, Vinson & Elkins
L.L.P. has not rendered an opinion with respect to the following
specific federal income tax issues: (1) the treatment of a
unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read
Tax Consequences of Unit Ownership
Treatment of Short Sales); (2) whether our monthly
convention for allocating taxable income and losses is permitted
by existing Treasury Regulations (please read
Disposition of Common Units
Allocations Between Transferors and Transferees); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please read
Tax Consequences of Unit Ownership
Section 754 Election).
Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable unless
the amount of cash distributed is in excess of the
partners adjusted basis in his partnership interest.
Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year
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consists of qualifying income. Qualifying income
includes income and gains derived from the production,
transportation, storage, processing and marketing of crude oil,
natural gas and products thereof. Other types of qualifying
income include interest (other than from a financial business),
dividends, gains from the sale of real property and gains from
the sale or other disposition of capital assets held for the
production of income that otherwise constitutes qualifying
income. We estimate that less
than % of our current gross income
is not qualifying income; however, this estimate could change
from time to time. Based upon and subject to this estimate, the
factual representations made by us and the general partner and a
review of the applicable legal authorities, Vinson &
Elkins L.L.P. is of the opinion that at least 90% of our current
gross income constitutes qualifying income.
No ruling has been obtained or will be sought from the IRS and
the IRS has made no determination as to our status for
U.S. federal income tax purposes or whether our operations
generate qualifying income under Section 7704
of the Internal Revenue Code. Instead, we will rely on the
opinion of Vinson & Elkins L.L.P. on such matters. It
is the opinion of Vinson & Elkins L.L.P. that, based
upon the Internal Revenue Code, its regulations, published
revenue rulings and court decisions and the representations
described below, we will be classified as a partnership and the
operating company will be disregarded as an entity separate from
us for U.S. federal income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on the following factual representations made by us and
the general partner:
(a) Other than our Canadian subsidiary and potential future
international subsidiaries, we have not, and will not, elect to
be treated as a corporation; and
(b) For each taxable year, more than 90% of our gross
income has been and will be income that Vinson &
Elkins L.L.P. has opined or will opine is qualifying
income within the meaning of Section 7704(d) of the
Internal Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery, in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts, we will be treated as if
we had transferred all of our assets, subject to liabilities, to
a newly formed corporation, on the first day of the year in
which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock
to our unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to our
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for
U.S. federal income tax purposes.
If we were taxable as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to our unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution
made to a unitholder would be treated as either taxable dividend
income, to the extent of our current or accumulated earnings and
profits, or, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The discussion below is based on Vinson & Elkins
L.L.P.s opinion that we will be classified as a
partnership for U.S. federal income tax purposes.
Limited
Partner Status
Unitholders who have become limited partners of Compressco
Partners will be treated as partners of Compressco Partners for
U.S. federal income tax purposes. Also, unitholders whose
common units are held in street name or by a nominee and who
have the right to direct the nominee in the exercise of all
substantive
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rights attendant to the ownership of their common units will be
treated as partners of Compressco Partners for U.S. federal
income tax purposes.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for U.S. federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales.
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for
U.S. federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for
U.S. federal income tax purposes would therefore appear to
be fully taxable as ordinary income. These holders are urged to
consult their own tax advisors with respect to their tax
consequences of holding common units in Compressco Partners.
The references to unitholders in the discussion that
follows are to persons who are treated as partners in Compressco
Partners for U.S. federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income.
We will not
pay any federal income tax. Instead, each unitholder will be
required to report on his income tax return his share of our
income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him.
Consequently, we may allocate income to a unitholder even if he
has not received a cash distribution. Each unitholder will be
required to include in income his allocable share of our income,
gains, losses and deductions for our taxable year ending with or
within his taxable year. Our taxable year ends on
December 31.
Treatment of Distributions.
Distributions by
us to a unitholder generally will not be taxable to the
unitholder for U.S. federal income tax purposes, except to
the extent the amount of any such cash distribution exceeds his
tax basis in his common units immediately before the
distribution. Please read Basis of
Common Units. Our cash distributions in excess of a
unitholders tax basis generally will be considered to be
gain from the sale or exchange of the common units, taxable in
accordance with the rules described under
Disposition of Common Units. Any
reduction in a unitholders share of our liabilities for
which no partner, including the general partner, bears the
economic risk of loss, known as nonrecourse
liabilities, will be treated as a distribution of cash to
that unitholder. To the extent our distributions cause a
unitholders at risk amount to be less than
zero at the end of any taxable year, he must recapture any
losses deducted in previous years. Please read
Limitations on Deductibility of
Losses.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute non-pro rata distribution. A non-pro
rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his
common units, if the distribution reduces the unitholders
share of our unrealized receivables, including
depreciation recapture,
and/or
substantially appreciated inventory items, both as
defined in the Internal Revenue Code, and collectively,
Section 751 Assets. To that extent, he will be
treated as having been distributed his proportionate share of
the Section 751 Assets and then having exchanged those
assets with us in return for the non-pro rata portion of the
actual distribution made to him. This latter deemed exchange
will generally result in the unitholders realization of
ordinary income, which will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the
unitholders tax basis (generally zero) for the share of
Section 751 Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions.
We
estimate that a purchaser of common units in this offering who
owns those common units from the date of completion of this
offering through the record date for distributions for the
period ending , will be allocated,
on a cumulative basis, an amount of federal taxable income for
that period that will be % or less
of the cash distributed with respect to that period. Thereafter,
we anticipate that the ratio of allocable taxable income to cash
distributions to our unitholders will increase. These estimates
are based upon the assumption that gross income from operations
will approximate the amount required to make the initial
quarterly distribution on all units and other assumptions with
respect to
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capital expenditures, cash flow, net working capital and
anticipated cash distributions. These estimates and assumptions
are subject to, among other things, numerous business, economic,
regulatory, competitive and political uncertainties beyond our
control. Further, the estimates are based on current tax law and
tax reporting positions that we will adopt and with which the
IRS could disagree. Accordingly, we cannot assure unitholders
that these estimates will prove to be correct. The actual
percentage of distributions that will constitute taxable income
could be higher or lower than expected, and any differences
could be material and could materially affect the value of the
common units. For example, the ratio of allocable taxable income
to cash distributions to a purchaser of common units in this
offering will be greater, and perhaps substantially greater,
than our estimate with respect to the period described above if:
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gross income from operations exceeds the amount required to make
the initial quarterly distributions on all units, yet we only
distribute the initial quarterly distribution on all
units; or
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we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of this offering
or to acquire property that is not eligible for depreciation or
amortization for U.S. federal income tax purposes or that
is depreciable or amortizable at a rate significantly slower
than the rate applicable to our assets at the time of this
offering.
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Basis of Common Units.
A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities. That basis will be increased by his share of our
income and by any increases in his share of our nonrecourse
liabilities. That basis will be decreased, but not below zero,
by distributions from us, by the unitholders share of our
losses, by any decreases in his share of our nonrecourse
liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to
be capitalized. A unitholder will have no share of our debt that
is recourse to the general partner, but will have a share,
generally based on his share of profits, of our nonrecourse
liabilities. Please read Disposition of Common
Units Recognition of Gain or Loss.
Limitations on Deductibility of Losses.
The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder or a corporate unitholder (if more than
50% of the value of the corporate unitholders stock is
owned directly or indirectly by or for five or fewer individuals
or some tax-exempt organizations) to the amount for which the
unitholder is considered to be at risk with respect
to our activities, if that is less than his tax basis. A
unitholder, subject to these limitations, must recapture losses
deducted in previous years to the extent that distributions
cause his at-risk amount to be less than zero at the end of any
taxable year. Losses disallowed to a unitholder or recaptured as
a result of these limitations will carry forward and will be
allowable as a deduction to the extent that his at-risk amount
is subsequently increased, provided such losses do not exceed
such common unitholders tax basis in his common units.
Upon the taxable disposition of a unit, any gain recognized by a
unitholder can be offset by losses that were previously
suspended by the at-risk limitation but may not be offset by
losses suspended by the basis limitation. Any loss previously
suspended by the at-risk limitation in excess of that gain would
no longer be utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by (i) any portion of that basis representing
amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and
(ii) any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to the unitholder or can look only to the units
for repayment. A unitholders at risk amount will increase
or decrease as the tax basis of the unitholders units
increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of
our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely held
corporations and personal service corporations can deduct losses
from passive activities, which are generally trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership.
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Consequently, any passive losses we generate will only be
available to offset our passive income generated in the future
and will not be available to offset income from other passive
activities or investments, including our investments or a
unitholders investments in other publicly traded
partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a
unitholders share of income we generate may be deducted in
full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive loss
limitations are applied after other applicable limitations on
deductions, including the at risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on Interest Deductions.
The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment. The IRS has
indicated that net passive income earned by a publicly traded
partnership will be treated as investment income to its
unitholders. In addition, the unitholders share of our
portfolio income will be treated as investment income.
Entity-Level Collections.
If we are
required or elect under applicable law to pay any federal,
state, local or foreign income tax on behalf of any unitholder
or the general partner or any former unitholder, we are
authorized to pay those taxes from our funds. That payment, if
made, will be treated as a distribution of cash to the partner
on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current
unitholders. We are authorized to amend the partnership
agreement in the manner necessary to maintain uniformity of
intrinsic tax characteristics of units and to adjust later
distributions, so that after giving effect to these
distributions, the priority and characterization of
distributions otherwise applicable under the partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner
would be required to file a claim in order to obtain a credit or
refund.
Allocation of Income, Gain, Loss and
Deduction.
In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among the general partner and our unitholders in accordance with
their percentage interests in us. If we have a net loss, that
loss will be allocated first to the general partner and our
unitholders in accordance with their percentage interests in us
to the extent of their positive capital accounts and, second, to
the general partner.
Specified items of our income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
and fair market value of property contributed to us by the
general partner and its affiliates, referred to in this
discussion as Contributed Property. The effect of
these allocations, referred to as Section 704(c)
Allocations, to a unitholder purchasing common units in this
offering will be essentially the same as if the tax basis of our
assets were equal to their fair market value at the time of this
offering. In the event we issue additional common units or
engage in certain other transactions in the future reverse
Section 704(c) Allocations, similar to the
Section 704(c) Allocations described above, will be made to
holders
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of partnership interests immediately prior to such other
transactions to account for the difference between the
book basis for purposes of maintaining capital
accounts and the fair market value of all property held by us at
the time of the future transaction. In addition, items of
recapture income will be allocated to the extent possible to the
partner who was allocated the deduction giving rise to the
treatment of that gain as recapture income in order to minimize
the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the
creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will
be allocated in such amount and manner as is needed to eliminate
the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by the Internal Revenue Code
to eliminate the difference between a partners
book capital account, credited with the fair market
value of Contributed Property, and tax capital
account, credited with the tax basis of Contributed Property,
referred to in this discussion as the Book-Tax
Disparity, will generally be given effect for
U.S. federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction only if the allocation has substantial economic
effect. In any other case, a partners share of an item
will be determined on the basis of his interest in us, which
will be determined by taking into account all the facts and
circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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With the exception of the issues described in
Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and Transferees,
Vinson & Elkins L.L.P. is of the opinion that
allocations under our partnership agreement will be given effect
for U.S. federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction.
Treatment of Short Sales.
A unitholder whose
units are loaned to a short seller to cover a short
sale of units may be considered as having disposed of those
units. If so, he would no longer be treated for tax purposes as
a partner with respect to those units during the period of the
loan and may recognize gain or loss from the disposition. As a
result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. has not rendered an opinion
regarding the treatment of a unitholder where common units are
loaned to a short seller to cover a short sale of common units;
therefore, unitholders desiring to assure their status as
partners and avoid the risk of gain recognition from a loan to a
short seller are urged to modify any applicable brokerage
account agreements to prohibit their brokers from loaning their
units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership
interests. Please also read Disposition of
Common Units Recognition of Gain or Loss.
Alternative Minimum Tax.
Each unitholder will
be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates.
In general, the highest effective
United States federal income tax rate for individuals is
currently 35.0%, and the maximum United States federal income
tax rate for net capital gains of an individual
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where the asset disposed of was held for more than twelve months
at the time of disposition is currently 15%. The maximum United
States federal income tax rate for such long-term net capital
gains is scheduled to remain at 15.0% for years 2008 through
2010 and then increase to 20% beginning January 1, 2011.
Section 754 Election.
We will make the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS. The election will generally permit us to adjust a common
unit purchasers tax basis in our assets, or inside
basis, under Section 743(b) of the Internal Revenue
Code to reflect his purchase price. This election does not apply
to a person who purchases common units directly from us. The
Section 743(b) adjustment belongs to the purchaser and not
to other unitholders. For purposes of this discussion, a
unitholders inside basis in our assets will be considered
to have two components: (1) his share of our tax basis in
our assets, or common basis, and (2) his
Section 743(b) adjustment to that basis.
We will adopt the remedial allocation method as to all our
properties. When the remedial allocation method is adopted, the
Treasury Regulations under Section 743 of the Internal
Revenue Code require a portion of the Section 743(b)
adjustment that is attributable to recovery property under
Section 168 of the Internal Revenue Code whose book basis
is in excess of its tax basis to be depreciated over the
remaining cost recovery period for the propertys
unamortized Book-Tax Disparity. Under Treasury Regulation
Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these and any
other Treasury Regulations. Please read
Uniformity of Units.
Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no direct or
indirect controlling authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of
Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived
from the depreciation or amortization method and useful life
applied to the propertys unamortized book-tax disparity,
or treat that portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Uniformity of Units. A unitholders
tax basis for his common units is reduced by his share of our
deductions (whether or not such deductions were claimed on an
individuals income tax return) so that any position we
take that understates deductions will overstate the common
unitholders basis in his common units, which may cause the
unitholder to understate gain or overstate loss on any sale of
such units. Please read Disposition of Common
Units Recognition of Gain or Loss. The IRS may
challenge our position with respect to depreciating or
amortizing the Section 743(b) adjustment we take to
preserve the uniformity of the units. If such a challenge were
sustained, the gain from the sale of units might be increased
without the benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may
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be affected either favorably or unfavorably by the election. A
basis adjustment is required regardless of whether a
Section 754 election is made in the case of a transfer of
an interest in us if we have a substantial built-in loss
immediately after the transfer, or if we distribute property and
have a substantial basis reduction. Generally a built-in loss or
a basis reduction is substantial if it exceeds $250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally
non-amortizable
or amortizable over a longer period of time or under a less
accelerated method than our tangible assets. We cannot assure
unitholders that the determinations we make will not be
successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed
altogether. Should the IRS require a different basis adjustment
to be made, and should, in our opinion, the expense of
compliance exceed the benefit of the election, we may seek
permission from the IRS to revoke our Section 754 election.
If permission is granted, a subsequent purchaser of units may be
allocated more income than he would have been allocated had the
election not been revoked.
Tax
Treatment of Operations
Accounting Method and Taxable Year.
We use the
year ending December 31 as our taxable year and the accrual
method of accounting for U.S. federal income tax purposes.
Each unitholder will be required to include in income his share
of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his units following the
close of our taxable year but before the close of his taxable
year must include his share of our income, gain, loss and
deduction in income for his taxable year, with the result that
he will be required to include in income for his taxable year
his share of more than one year of our income, gain, loss and
deduction. Please read Disposition of Common
Units Allocations Between Transferors and
Transferees.
Initial Tax Basis, Depreciation and
Amortization.
The tax basis of our assets will be
used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of
these assets. The federal income tax burden associated with the
difference between the fair market value of our assets and their
tax basis immediately prior to (i) this offering will be
borne by the general partner, and (ii) any other offering
will be borne by the general partner and our common unitholders
as of that time. Please read Tax Consequences
of Unit Ownership Allocation of Income, Gain, Loss
and Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets subject
to these allowances are placed in service. Please read
Uniformity of Units. Property we
subsequently acquire or construct may be depreciated using
accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs we incur in selling our units, which we refer to as
syndication expenses, must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts we incur will be treated as syndication
expenses.
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Valuation and Tax Basis of Our Properties.
The
federal income tax consequences of the ownership and disposition
of units will depend in part on our estimates of the relative
fair market values, and the initial tax bases, of our assets.
Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the
relative fair market value estimates ourselves. These estimates
and determinations of basis are subject to challenge and will
not be binding on the IRS or the courts. If the estimates of
fair market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or
deductions previously reported by unitholders might change, and
unitholders might be required to adjust their tax liability for
prior years and incur interest and penalties with respect to
those adjustments.
Disposition
of Common Units
Recognition of Gain or Loss.
Gain or loss will
be recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized will be measured
by the sum of the cash or the fair market value of other
property received by him plus his share of our nonrecourse
liabilities. Because the amount realized includes a
unitholders share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized by an
individual on the sale of units held more than 12 months
will generally be taxed at a maximum rate of 15%. However, a
portion, which will likely be substantial, of this gain or loss
will be separately computed and taxed as ordinary income or loss
under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation
recapture or other unrealized receivables or to
inventory items we own. The term unrealized
receivables includes potential recapture items, including
depreciation recapture. Ordinary income attributable to
unrealized receivables, substantially appreciated inventory
items and depreciation recapture may exceed net taxable gain
realized upon the sale of a unit and may be recognized even if
there is a net taxable loss realized on the sale of a unit.
Thus, a unitholder may recognize both ordinary income and a
capital loss upon a sale of units. Net capital losses may offset
capital gains and no more than $3,000 of ordinary income, in the
case of individuals, and may only be used to offset capital
gains in the case of corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling, a common
unitholder will be unable to select high or low basis common
units to sell as would be the case with corporate stock, but,
according to the regulations, may designate specific common
units sold for purposes of determining the holding period of
units transferred. A unitholder electing to use the actual
holding period of common units transferred must consistently use
that identification method for all subsequent sales or exchanges
of common units. A unitholder considering the purchase of
additional partnership units or a sale of common units purchased
in separate transactions is urged to consult his tax advisor as
to the possible consequences of this ruling and application of
the regulations.
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Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees.
In general, our taxable income and
losses will be determined annually, will be prorated on a
monthly basis and will be subsequently apportioned among our
unitholders in proportion to the number of units owned by each
of them as of the opening of the applicable exchange on the
first business day of the month, which we refer to in this
prospectus as the Allocation Date. However, gain or
loss realized on a sale or other disposition of our assets other
than in the ordinary course of business will be allocated among
our unitholders on the Allocation Date in the month in which
that gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
similar simplifying conventions, the use of this method may not
be permitted under existing Treasury Regulations as there is no
controlling authority on the issue. Accordingly,
Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions
between transferee and transferor unitholders. If this method is
not allowed under the Treasury Regulations, or only applies to
transfers of less than all of the unitholders interest,
our taxable income or losses might be reallocated among our
unitholders. We are authorized to revise our method of
allocation between transferee and transferor unitholders, as
well as unitholders whose interests vary during a taxable year,
to conform to a method permitted under future Treasury
Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements.
A unitholder who
sells any of his units is generally required to notify us in
writing of that sale within 30 days after the sale, or if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder is also
generally required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may lead to the imposition of substantial penalties. However,
these reporting requirements do not apply to a sale by an
individual who is a citizen of the United States and who effects
the sale or exchange through a broker who will satisfy such
requirements.
Constructive Termination.
We will be
considered to have been terminated for tax purposes if there are
sales or exchanges that, in the aggregate, constitute 50% or
more of the total interests in our capital and profits within a
twelve-month period. For purposes of measuring whether the 50%
threshold is reached, multiple sales of the same interest are
counted only once. A constructive termination results in the
closing of our taxable year for all unitholders. In the case of
a unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of our taxable year
may result in more than twelve months of our taxable income or
loss being includable in his taxable income for the year of
termination. A constructive termination occurring
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on a date other than December 31 will result in us filing two
tax returns (and unitholders receiving two Schedules K-1) for
one fiscal year and the cost of the preparation of these returns
will be borne by all common unitholders. We would be required to
make new tax elections after a termination, including a new
election under Section 754 of the Internal Revenue Code,
and a termination would result in a deferral of our deductions
for depreciation. A termination could also result in penalties
if we were unable to determine that the termination had
occurred. Moreover, a termination might either accelerate the
application of, or subject us to, any tax legislation enacted
before the termination.
Uniformity
of Units
Because we cannot match transferors and transferees of units
that are publicly sold, we must maintain uniformity of the
economic and tax characteristics of the units to a purchaser of
these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax
requirements, both statutory and regulatory. A lack of
uniformity can result from a literal application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as
non-amortizable
to the extent attributable to property the common basis of which
is not amortizable, consistent with the Regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. Please read Tax Consequences of
Unit Ownership Section 754 Election. To
the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may adopt a depreciation and amortization position under
which all purchasers acquiring units in the same month would
receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had
purchased a direct interest in our property. If this position is
adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that these
deductions are otherwise allowable. This position will not be
adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
our unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on our unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of
additional deductions. Please read Disposition
of Common Units Recognition of Gain or Loss.
Foreign
Tax Credit Considerations
Subject to detailed limitations set forth in the Internal
Revenue Code, a unitholder may be able to claim a credit against
his liability for U.S. federal income tax for his share of
foreign income taxes (and certain foreign taxes imposed in lieu
of a tax based upon income) treated as paid by us. A portion of
the income allocated to our unitholders likely will constitute
foreign source income falling in the general foreign tax credit
category for purposes of the U.S. foreign tax credit
limitation. Unitholders who do not elect to claim foreign tax
credits may instead claim a deduction for their shares of
foreign taxes paid by us. The rules relating to the
determination of the foreign tax credit are complex and
prospective unitholders are urged to consult their own tax
advisors to determine whether or to what extent they would be
entitled to claim such credit or deduction.
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Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations and
other foreign persons raises issues unique to those investors
and, as described below, may have substantially adverse tax
consequences to them. If a unitholder is a tax-exempt entity or
a
non-U.S. person,
it should consult a tax advisor before investing in our common
units.
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income. Virtually all of our income
allocated to a unitholder that is a tax-exempt organization will
be unrelated business taxable income and will be taxable to them.
Non-resident aliens and foreign corporations, trusts or estates
that own units will be considered to be engaged in business in
the United States because of the ownership of units. As a
consequence, they will be required to file federal tax returns
to report their share of our income, gain, loss or deduction and
pay federal income tax at regular rates on their share of our
net income or gain. Moreover, under rules applicable to publicly
traded partnerships, we will withhold at the highest applicable
effective tax rate from cash distributions made quarterly to
foreign unitholders. Each foreign unitholder must obtain a
taxpayer identification number from the IRS and submit that
number to our transfer agent on a
Form W-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
In addition, because a foreign corporation that owns units will
be treated as engaged in a United States trade or business, that
corporation may be subject to the United States branch profits
tax at a rate of 30%, in addition to regular federal income tax,
on its share of our income and gain, as adjusted for changes in
the foreign corporations U.S. net equity,
which are effectively connected with the conduct of a United
States trade or business. That tax may be reduced or eliminated
by an income tax treaty between the United States and the
country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of
unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue
Code.
A foreign unitholder who sells or otherwise disposes of a unit
will be subject to U.S. federal income tax on gain realized
from the sale or disposition of that unit to the extent the gain
is effectively connected with a U.S. trade or business of
the foreign unitholder. Under a ruling published by the IRS,
interpreting the scope of effectively connected
income, a foreign unitholder would be considered to be
engaged in a trade or business in the United States by virtue of
the U.S. activities of the partnership, and part or all of
that unitholders gain would be effectively connected with
that unitholders indirect U.S. trade or business.
Moreover, under the Foreign Investment in Real Property Tax Act,
a foreign unitholder of a publicly traded partnership would be
subject to U.S. federal income tax or withholding tax upon
the sale or disposition of a unit to the extent of the
unitholders share of the partnerships U.S. real
property holdings if he owns 5% or more of the units at any
point during the five-year period ending on the date of such
disposition. Therefore, foreign unitholders may be subject to
federal income tax on gain from the sale or disposition of their
units.
Administrative
Matters
Information Returns and Audit Procedures.
We
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders
share of income, gain, loss and deduction. We cannot assure
unitholders that those positions will in all cases yield a
result that conforms to the requirements of the Internal Revenue
Code, Treasury Regulations or administrative interpretations of
the IRS. Neither we nor Vinson & Elkins L.L.P. can
assure prospective unitholders that the IRS will not
successfully contend in court that those positions are
impermissible. Any challenge by the IRS could negatively affect
the value of the units.
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The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. The partnership agreement names our general partner,
Compressco Partners GP, as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf
and on behalf of unitholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of
tax deficiencies against unitholders for items in our returns.
The Tax Matters Partner may bind a unitholder with less than a
1% profits interest in us to a settlement with the IRS unless
that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all our
unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of our
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
A unitholder must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is
not consistent with the treatment of the item on our return.
Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee Reporting.
Persons who hold an
interest in us as a nominee for another person are required to
furnish to us:
(a) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(b) whether the beneficial owner is:
1. a person that is not a United States person;
2. a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
3. a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are United States
persons and specific information on units they acquire, hold or
transfer for their own account. A penalty of $50 per failure, up
to a maximum of $100,000 per calendar year, is imposed by the
Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of
the units with the information furnished to us.
Accuracy-Related Penalties.
An additional tax
equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Internal Revenue
Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
136
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to
penalty generally is reduced if any portion is attributable to a
position adopted on the return:
(1) for which there is, or was, substantial
authority; or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of our unitholders might result in that kind
of an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for our
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit our
unitholders to avoid liability for this penalty. More stringent
rules would apply to tax shelters, which we do not
believe includes us, or any of our investments, plans or
arrangements.
For individuals, a substantial valuation misstatement exists if
the value of any property, or the adjusted basis of any
property, claimed on a tax return is 150% or more of the amount
determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the
underpayment attributable to a substantial valuation
misstatement exceeds $5,000 ($10,000 for most corporations). If
the valuation claimed on a return is 200% or more than the
correct valuation, the penalty imposed increases to 40%. We do
not anticipate making any valuation misstatements.
Reportable Transactions.
If we were to engage
in a reportable transaction, we (and possibly our
unitholders and others) would be required to make a detailed
disclosure of the transaction to the IRS. A transaction may be a
reportable transaction based upon any of several factors,
including the fact that it is a type of tax avoidance
transaction publicly identified by the IRS as a listed
transaction or that it produces certain kinds of losses
for partnerships, individuals, S corporations, and trusts
in excess of $2 million in any single year or
$4 million in any combination of 6 successive tax years.
Our participation in a reportable transaction could increase the
likelihood that our federal income tax information return (and
possibly our unitholders tax returns) would be audited by
the IRS. Please read Information Returns and
Audit Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, our unitholders may be subject to the
following provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties;
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability; and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local, Foreign and Other Tax Considerations
In addition to federal income taxes, our unitholders likely will
be subject to other taxes, such as state, local and foreign
income taxes, unincorporated business taxes, and estate,
inheritance or intangible taxes that may be imposed by the
various jurisdictions in which we do business or own property or
in which a unitholder is a resident. Although an analysis of
those various taxes is not presented here, each prospective
unitholder should consider their potential impact on his
investment in us. We will initially own property or do business
in the States of Arkansas, California, Colorado, Kansas,
Louisiana, Mississippi, Montana, New Mexico, North Dakota,
Oklahoma, Pennsylvania, Texas, Utah and Wyoming. Each of these
states, other than Texas and Wyoming, imposes a personal income
tax on individuals and each of these states also imposes an
income tax
137
or other entity-level tax on corporations and other entities. We
may also own property or do business in other jurisdictions in
the future. Although our unitholders may not be required to file
a return and pay taxes in some jurisdictions if a
unitholders income from that jurisdiction falls below the
filing and payment requirement, our unitholders will be required
to file income tax returns and to pay income taxes in many of
these jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those
requirements. In some jurisdictions, tax losses may not produce
a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. Some of the
jurisdictions may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a
unitholder who is not a resident of the jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholders income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will be treated as if distributed to our
unitholders for purposes of determining the amounts distributed
by us. Please read Tax Consequences of Unit
Ownership Entity-Level Collections. Based
on current law and our estimate of our future operations, our
general partner anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each unitholder to investigate the
legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and foreign, as well as United States federal tax
returns that may be required of him. Vinson & Elkins
L.L.P. has not rendered an opinion on the state, local or
foreign tax consequences of an investment in us.
138
INVESTMENT
IN COMPRESSCO PARTNERS, L.P.
BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and restrictions imposed by
Section 4975 of the Internal Revenue Code. For these
purposes the term employee benefit plan includes,
but is not limited to, qualified pension, profit-sharing and
stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to:
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whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
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whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of
ERISA; and
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whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return. Please read Material Tax
Consequences Tax-Exempt Organizations and Other
Investors.
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The person with investment discretion with respect to the assets
of an employee benefit plan, often called a fiduciary, should
determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for
the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and also IRAs that
are not considered part of an employee benefit plan, from
engaging in specified transactions involving plan
assets with parties that are parties in
interest under ERISA or disqualified persons
under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units
is a prohibited transaction, a fiduciary of an employee benefit
plan should consider whether the plan will, by investing in us,
be deemed to own an undivided interest in our assets, with the
result that our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction
rules, as well as the prohibited transaction rules of the
Internal Revenue Code.
The Department of Labor regulations provide guidance with
respect to whether the assets of an entity in which employee
benefit plans acquire equity interests would be deemed
plan assets under some circumstances. Under these
regulations, an entitys assets would not be considered to
be plan assets if, among other things:
(a) The equity interests acquired by employee benefit plans
are publicly offered securities i.e., the equity
interests are widely held by 100 or more investors independent
of the issuer and each other, freely transferable and registered
under some provisions of the federal securities laws;
(b) the entity is an operating
company, i.e., it is primarily engaged in the
production or sale of a product or service other than the
investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
(c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the
value of each class of equity interest is held by the employee
benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA, including governmental plans.
Our assets should not be considered plan assets
under these regulations because it is expected that the
investment will satisfy the requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units should
consult with their own counsel regarding the consequences under
ERISA and the Internal Revenue Code in light of the serious
penalties imposed on persons who engage in prohibited
transactions or other violations.
139
UNDERWRITING
Subject to the terms and conditions contained in an underwriting
agreement dated , 2009, the
underwriters named below, for whom Raymond James &
Associates, Inc. and J.P. Morgan Securities Inc. are acting
as representatives, have severally agreed to purchase from us
the respective number of common units set forth opposite their
names:
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Underwriter
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Number of Units
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Raymond James & Associates, Inc.
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J.P. Morgan Securities Inc.
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The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the common units
offered by this prospectus are subject to approval by their
counsel of legal matters and to other conditions set forth in
the underwriting agreement. The underwriters are obligated to
purchase and accept delivery of all our common units offered by
this prospectus if any of the units are purchased, other than
those covered by the over-allotment option described below.
The underwriters propose to offer our common units directly to
the public at the public offering price indicated on the cover
page of this prospectus and to various dealers at that price
less a concession not in excess of
$ per unit. The underwriters may
allow, and the dealers may re-allow, a concession not in excess
of $ per unit to other dealers. If
not all the common units are sold at the public offering price,
the representatives may change the public offering price and
other selling terms. Our common units are offered by the
underwriters as stated in this prospectus, subject to receipt
and acceptance by them. The underwriters reserve the right to
reject any order for the purchase of our common units in whole
or in part.
Over-Allotment
Option
We have granted the underwriters an option, exercisable for
30 days after the date of this prospectus, to purchase from
time to time, in whole or in part, up to an aggregate
of additional common units to
cover over-allotments, if any, at the public offering price less
the underwriting discounts set forth on the cover page of this
prospectus. If the underwriters exercise this option, each
underwriter, subject to certain conditions, will become
obligated to purchase its pro rata portion of these additional
common units based on the underwriters percentage purchase
commitment in this offering as indicated in the table above. The
underwriters may exercise the over-allotment option only to
cover over-allotments made in connection with the sale of the
common units offered in this offering.
Discounts
and Expenses
The following table shows the amount per unit and total
underwriting discounts we will pay to the underwriters (dollars
in thousands, except per unit). The amounts are shown assuming
both no exercise and full exercise of the underwriters
over-allotment option.
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Total
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Per Unit
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No Exercise
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Full Exercise
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Public Offering Price
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$
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$
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$
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Underwriting discounts to be paid by us
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$
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$
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$
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Proceeds, before expenses, to us
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$
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$
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$
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In addition, we will pay an aggregate fee of
$ million to the
representatives in consideration of advice rendered regarding
the structure of this offering and our partnership. The expenses
of the offering that are payable by us are estimated to be
$ (exclusive of underwriting
discounts and commissions and structuring fee).
140
Indemnification
We, and our general partner, and TETRA have agreed to indemnify
the underwriters against various liabilities that may arise in
connection with this offering, including liabilities under the
Securities Act for untrue statements or omissions in this
prospectus or the registration statement of which this
prospectus is a part. However, we will not indemnify the
underwriters if the untrue statement or omission was the result
of information the underwriters supplied to us in writing for
inclusion in this prospectus or the registration statement. If
we cannot indemnify the underwriters, our general partner and we
have agreed to contribute to payments the underwriters may be
required to make in respect of those liabilities. Our respective
contribution would be in the proportion that the proceeds (after
underwriting discounts and commissions) that we receive from
this offering bear to the proceeds (from underwriting discounts
and commissions) that the underwriters receive. If we cannot
contribute in this proportion, we will contribute based on
respective faults and benefits, as set forth in the underwriting
agreement.
Lock-up
Agreements
Subject to specified exceptions, our general partner and its
affiliates and the executive officers and directors of our
general partner have agreed with the underwriters, for a period
of 180 days after the date of this prospectus, not to
offer, sell, contract to sell, or otherwise dispose of or
transfer any of our common units or any securities convertible
into or exchangeable for our common units without the prior
written consent of Raymond James & Associates, Inc.
and J.P. Morgan Securities Inc. This agreement also
precludes any hedging collar or other transaction designed or
reasonably expected to result in a disposition of our common
units or securities convertible into, or exercisable or
exchangeable for, our common units.
In addition, we have agreed with the underwriters, for a period
of 180 days after the date of this prospectus, not to
issue, sell, offer or contract to sell, or otherwise dispose of
or transfer, any of our common units or any securities
convertible into or exchangeable for our common units, or file
any registration statement with the Securities and Exchange
Commission (except a registration statement on
Form S-8
relating to our long-term incentive plan), without the prior
written consent of Raymond James & Associates, Inc.
and J.P. Morgan Securities Inc., except that we may make
grants of options or awards under our long-term incentive plan
and issue units upon exercise of those options. However, Raymond
James & Associates, Inc. and J.P. Morgan
Securities Inc. may, in their discretion and at any time without
notice, release all or any portion of the securities subject to
this agreement. The underwriters have informed us that they have
no present intent or arrangement to release any of the
securities subject to these
lock-up
agreements.
The
180-day
period described in the preceding paragraphs will be extended if:
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during the last 17 days of the
180-day
period, we issue a release concerning earnings or announce
material news or a material event relating to us occurs; or
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prior to the expiration of the
180-day
period, we announce that we will release earnings results during
the
16-day
period beginning on the last day of the
180-day
period,
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in which case the restrictions described in the preceding
paragraphs will continue to apply until the expiration of the
18-day
period beginning on the date of issuance of the earnings
release, the announcement of the material news or the occurrence
of the material event.
Directed
Units Program
At our request, the underwriters have reserved up
to % of the common units being
offered by this prospectus for sale at the initial public
offering price to persons who are directors, officers or
employees of our general partner, or are otherwise associated
with us, through a directed unit program. We do not know if
these persons will choose to purchase all or any portion of
these reserved common units, but any purchases they do make will
reduce the number of units available to the public. To the
extent the allotted units are not purchased in the directed
units program, we will offer these units to the public. Our
officers and directors, as well as purchasers of in excess of
1,000 common units, under the directed unit program, will be
subject to a
180-day
lock-up,
subject to extension as described above in the event of earnings
releases or material
141
announcements. The common units issued in connection with the
directed units program will be issued as part of the
underwritten offer. We have agreed to indemnify the underwriters
against certain liabilities and expenses, including liabilities
under the Securities Act, in connection with the sales of the
directed units.
Stabilization
Until the offering is completed, rules of the SEC may limit the
ability of the underwriters and various selling group members to
bid for and purchase our common units. As an exception to these
rules, the underwriters may engage in activities that stabilize,
maintain or otherwise affect the price of our common units,
including:
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short sales,
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syndicate covering transactions,
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imposition of penalty bids, and
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purchases to cover positions created by short sales.
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Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of our common units while the offering is in progress.
Stabilizing transactions may include making short sales of our
common units, which involve the sale by the underwriters of a
greater number of common units than they are required to
purchase in the offering, and purchasing common units from us or
in the open market to cover positions created by short sales.
Short sales may be covered shorts, which are short
positions in an amount not greater than the underwriters
over-allotment option referred to above, or may be
naked shorts, which are short positions in excess of
that amount.
The underwriters may close out any covered short position either
by exercising the over-allotment option, in whole or in part, or
by purchasing units in the open market. In making this
determination, the underwriters will consider, among other
things, the price of units available for purchase in the open
market compared to the price at which the underwriters may
purchase units pursuant to the over-allotment option.
A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the price of the common units in the open market that could
adversely affect investors who purchased in the offering. To the
extent that the underwriters create a naked short position, they
will purchase units in the open market to cover the position.
The underwriters also may impose a penalty bid on selling group
members. This means that if the underwriters purchase units in
the open market in stabilizing transactions or to cover short
sales, the underwriters can require the selling group members
that sold those units as part of the offering to repay the
selling concession received by them.
Because of these activities, the price of our common units may
be higher than the price that otherwise might exist in the open
market. If the underwriters commence these activities, they may
discontinue them without notice at any time. The underwriters
may carry out these transactions on the NASDAQ Global Market or
otherwise.
Conflicts/Affiliates
Certain of the underwriters and their controlled affiliates have
performed investment banking, commercial banking and advisory
services for our affiliates from time to time, for which they
have received customary fees and expenses. The underwriters and
their controlled affiliates may provide in the future investment
banking, financial advisory or other financial services for us
and our affiliates, for which they may receive advisory or
transaction fees, as applicable, plus out-of-pocket expenses, of
the nature and in amounts customary in the industry for these
financial services.
Because the Financial Industry Regulatory Authority views the
common units offered under this prospectus as interests in a
direct participation program, the offering is being made in
compliance with Rule 2810 of the NASD Conduct Rules.
Investor suitability with respect to the common units should be
142
judged similarly to the suitability with respect to other
securities that are listed on a national securities exchange.
Discretionary
Accounts
The underwriters may confirm sales of the common units offered
by this prospectus to accounts over which they exercise
discretionary authority but do not expect those sales to exceed
5% of the total common units offered by this prospectus.
Listing
We intend to apply to list our common units on the NASDAQ Global
Market under the symbol GSJK.
IPO
Pricing
Prior to the offering, there has been no public market for our
common units. Consequently, the initial public offering price
for our common units will be determined by negotiations among
the underwriters and us. The primary factors to be considered in
determining the initial public offering price will be:
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prevailing market conditions,
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the ability of our management,
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our capital structure,
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the present stage of our development,
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the value and historical performance of our properties,
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the market capitalization and stage of development of other
companies that we and the representatives believe to be
comparable to us, and
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estimates of our business potential and earning prospects.
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Electronic
Prospectus
A prospectus in electronic format may be available on the
Internet sites or through other online services maintained by
one or more of the underwriters and selling group members
participating in the offering, or by their controlled
affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the underwriter or the
selling group member, prospective investors may be allowed to
place orders online. The underwriters may agree with us to
allocate a specific number of units for sale to online brokerage
account holders. Any such allocation for online distributions
will be made by the underwriters on the same basis as other
allocations.
Other than the prospectus in electronic format, the information
on any underwriters or any selling group members
website and any information contained in any other website
maintained by the underwriters or any selling group member is
not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved or
endorsed by us or any underwriters or any selling group member
in its capacity as underwriter or selling group member and
should not be relied upon by investors.
VALIDITY
OF THE COMMON UNITS
The validity of the common units will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas. The validity
of the common units offered hereby will be passed upon for the
underwriters by Baker Botts L.L.P., Austin, Texas.
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EXPERTS
The combined financial statements of Compressco Partners
Predecessor at December 31, 2007 and 2006, and for each of
the three years in the period ended December 31, 2007,
appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
The balance sheets of Compressco Partners, L.P. and Compressco
Partners GP Inc. at October 31, 2008, appearing in this
Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such report
given on the authority of such firm as experts in accounting and
auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or
the SEC, a registration statement on
Form S-1
regarding the common units. This prospectus does not contain all
of the information found in the registration statement. For
further information regarding us and the common units offered by
this prospectus, you may desire to review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of the
materials may also be obtained from the SEC at prescribed rates
by writing to the public reference room maintained by the SEC at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site on the Internet at
http://www.sec.gov.
Our registration statement, of which this prospectus constitutes
a part, can be downloaded from the SECs web site.
We intend to furnish our unitholders annual reports containing
our audited financial statements and furnish or make available
quarterly reports containing our unaudited interim financial
information for the first three fiscal quarters of each of our
fiscal years.
FORWARD-LOOKING
STATEMENTS
Some of the information in this prospectus may contain
forward-looking statements. These statements can be identified
by the use of forward-looking terminology including
may, believe, expect,
intend, anticipate,
estimate, continue, or other similar
words. These statements discuss future expectations, contain
projections of results of operations or of financial condition,
or state other forward-looking information. These
forward-looking statements involve risks and uncertainties. When
considering these forward-looking statements, you should keep in
mind the risk factors and other cautionary statements in this
prospectus. The risk factors and other factors noted throughout
this prospectus could cause our actual results to differ
materially from those contained in any forward-looking statement.
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INDEX TO
FINANCIAL STATEMENTS
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COMPRESSCO PARTNERS PREDECESSOR COMBINED FINANCIAL
STATEMENTS:
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|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
COMPRESSCO PARTNERS, L.P. UNAUDITED PRO FORMA FINANCIAL
STATEMENTS:
|
|
|
|
|
Introduction
|
|
|
F-14
|
|
|
|
|
F-15
|
|
|
|
|
F-16
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
COMPRESSCO PARTNERS, L.P. FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-20
|
|
|
|
|
F-21
|
|
|
|
|
F-22
|
|
COMPRESSCO PARTNERS GP INC. FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-23
|
|
|
|
|
F-24
|
|
|
|
|
F-25
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of TETRA
Technologies, Inc.:
We have audited the accompanying combined balance sheets of
Compressco Partners Predecessor, or Predecessor, as
of December 31, 2007 and 2006, and the related combined
statements of operations, comprehensive income and changes in
net parent equity and cash flows for each of the three years in
the period ended December 31, 2007. These financial
statements are the responsibility of the Predecessors
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of Predecessors internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness
of Predecessors internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of Compressco Partners Predecessor as of
December 31, 2007 and 2006, and the combined results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2007, in conformity with
U.S. generally accepted accounting principles.
Houston, Texas
November 7, 2008
F-2
COMPRESSCO
PARTNERS PREDECESSOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,108
|
|
|
$
|
1,276
|
|
|
$
|
1,340
|
|
Accounts receivable, net of allowance for doubtful accounts of
$109, $168, and $174 as of December 31, 2006, 2007, and
June 30, 2008
|
|
|
8,391
|
|
|
|
12,071
|
|
|
|
12,166
|
|
Inventories
|
|
|
12,851
|
|
|
|
16,395
|
|
|
|
19,526
|
|
Prepaid expenses and other current assets
|
|
|
418
|
|
|
|
458
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
22,768
|
|
|
|
30,200
|
|
|
|
33,369
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
|
1,572
|
|
|
|
1,602
|
|
|
|
1,622
|
|
Compressors and other equipment
|
|
|
71,019
|
|
|
|
91,416
|
|
|
|
105,974
|
|
Vehicles
|
|
|
6,834
|
|
|
|
9,561
|
|
|
|
11,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,425
|
|
|
|
102,579
|
|
|
|
119,143
|
|
Less accumulated depreciation
|
|
|
(11,522
|
)
|
|
|
(19,909
|
)
|
|
|
(25,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
67,903
|
|
|
|
82,670
|
|
|
|
94,029
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
72,107
|
|
|
|
72,107
|
|
|
|
72,107
|
|
Patents, trademarks and other intangible assets, net of
accumulated amortization of $1,061, $1,335, and $347 as of
December 31, 2006, 2007 and June 30, 2008
|
|
|
538
|
|
|
|
265
|
|
|
|
379
|
|
Other assets
|
|
|
38
|
|
|
|
115
|
|
|
|
308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
72,683
|
|
|
|
72,487
|
|
|
|
72,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
163,354
|
|
|
$
|
185,357
|
|
|
$
|
200,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND NET PARENT EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,866
|
|
|
$
|
1,860
|
|
|
$
|
3,105
|
|
Accrued liabilities
|
|
|
1,483
|
|
|
|
1,756
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,349
|
|
|
|
3,616
|
|
|
|
4,517
|
|
Other long-term liabilities
|
|
|
44
|
|
|
|
87
|
|
|
|
88
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
Net parent equity
|
|
|
159,961
|
|
|
|
181,654
|
|
|
|
195,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND NET PARENT EQUITY
|
|
$
|
163,354
|
|
|
$
|
185,357
|
|
|
$
|
200,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-3
COMPRESSCO
PARTNERS PREDECESSOR
AND
CHANGES IN NET PARENT EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
|
$
|
38,575
|
|
|
$
|
54,442
|
|
|
$
|
70,914
|
|
|
$
|
33,186
|
|
|
$
|
41,288
|
|
Sales of compressors and parts
|
|
|
11,459
|
|
|
|
10,881
|
|
|
|
12,640
|
|
|
|
4,841
|
|
|
|
5,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
50,034
|
|
|
|
65,323
|
|
|
|
83,554
|
|
|
|
38,027
|
|
|
|
46,606
|
|
Cost of revenues (excluding depreciation and amortization
expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
|
|
16,365
|
|
|
|
22,420
|
|
|
|
29,849
|
|
|
|
13,612
|
|
|
|
17,717
|
|
Cost of compressors and parts sales
|
|
|
7,561
|
|
|
|
7,495
|
|
|
|
7,665
|
|
|
|
2,844
|
|
|
|
3,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
23,926
|
|
|
|
29,915
|
|
|
|
37,514
|
|
|
|
16,456
|
|
|
|
21,338
|
|
Selling, general and administrative expense
|
|
|
8,117
|
|
|
|
10,360
|
|
|
|
12,539
|
|
|
|
5,707
|
|
|
|
6,548
|
|
Depreciation and amortization
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
Other (income) expense, net
|
|
|
(3
|
)
|
|
|
59
|
|
|
|
(31
|
)
|
|
|
(16
|
)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
13,501
|
|
|
|
18,630
|
|
|
|
24,232
|
|
|
|
11,505
|
|
|
|
13,241
|
|
Provision for income taxes
|
|
|
516
|
|
|
|
1,029
|
|
|
|
660
|
|
|
|
257
|
|
|
|
619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12,985
|
|
|
|
17,601
|
|
|
|
23,572
|
|
|
|
11,248
|
|
|
|
12,622
|
|
Foreign currency translation adjustment
|
|
|
174
|
|
|
|
(23
|
)
|
|
|
825
|
|
|
|
413
|
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
13,159
|
|
|
$
|
17,578
|
|
|
$
|
24,397
|
|
|
$
|
11,661
|
|
|
$
|
12,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined changes in net parent equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
117,498
|
|
|
$
|
135,354
|
|
|
$
|
159,961
|
|
|
$
|
159,961
|
|
|
$
|
181,654
|
|
Comprehensive income
|
|
|
13,159
|
|
|
|
17,578
|
|
|
|
24,397
|
|
|
|
11,661
|
|
|
|
12,422
|
|
Net contributions from (distributions to) parent
|
|
|
4,697
|
|
|
|
7,029
|
|
|
|
(2,704
|
)
|
|
|
597
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
135,354
|
|
|
$
|
159,961
|
|
|
$
|
181,654
|
|
|
$
|
172,219
|
|
|
$
|
195,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-4
COMPRESSCO
PARTNERS PREDECESSOR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,985
|
|
|
$
|
17,601
|
|
|
$
|
23,572
|
|
|
$
|
11,248
|
|
|
$
|
12,622
|
|
Reconciliation of net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion
|
|
|
4,493
|
|
|
|
6,359
|
|
|
|
9,300
|
|
|
|
4,375
|
|
|
|
5,473
|
|
Stock compensation expense
|
|
|
384
|
|
|
|
485
|
|
|
|
759
|
|
|
|
307
|
|
|
|
453
|
|
Other non-cash charges and credits
|
|
|
196
|
|
|
|
57
|
|
|
|
114
|
|
|
|
10
|
|
|
|
65
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,257
|
)
|
|
|
479
|
|
|
|
(3,482
|
)
|
|
|
(1,562
|
)
|
|
|
(174
|
)
|
Inventories
|
|
|
(2,456
|
)
|
|
|
(4,497
|
)
|
|
|
(3,402
|
)
|
|
|
(1,526
|
)
|
|
|
(3,162
|
)
|
Prepaid expenses and other current assets
|
|
|
(118
|
)
|
|
|
(127
|
)
|
|
|
(22
|
)
|
|
|
(74
|
)
|
|
|
120
|
|
Trade accounts payable and accrued expenses
|
|
|
1,053
|
|
|
|
127
|
|
|
|
314
|
|
|
|
(518
|
)
|
|
|
897
|
|
Other
|
|
|
|
|
|
|
89
|
|
|
|
(76
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
13,280
|
|
|
|
20,573
|
|
|
|
27,077
|
|
|
|
12,256
|
|
|
|
16,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(18,349
|
)
|
|
|
(25,917
|
)
|
|
|
(23,846
|
)
|
|
|
(13,226
|
)
|
|
|
(16,921
|
)
|
Other investing activities
|
|
|
(69
|
)
|
|
|
55
|
|
|
|
31
|
|
|
|
69
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(18,418
|
)
|
|
|
(25,862
|
)
|
|
|
(23,815
|
)
|
|
|
(13,157
|
)
|
|
|
(17,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contributions from (distributions to) parent
|
|
|
4,315
|
|
|
|
6,056
|
|
|
|
(3,464
|
)
|
|
|
291
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
4,315
|
|
|
|
6,056
|
|
|
|
(3,464
|
)
|
|
|
291
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
31
|
|
|
|
(115
|
)
|
|
|
370
|
|
|
|
193
|
|
|
|
(66
|
)
|
Increase (decrease) in cash and cash equivalents
|
|
|
(792
|
)
|
|
|
652
|
|
|
|
168
|
|
|
|
(417
|
)
|
|
|
64
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,248
|
|
|
|
456
|
|
|
|
1,108
|
|
|
|
1,108
|
|
|
|
1,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
456
|
|
|
$
|
1,108
|
|
|
$
|
1,276
|
|
|
$
|
691
|
|
|
$
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-5
COMPRESSCO
PARTNERS PREDECESSOR
|
|
NOTE A
|
BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
|
Organization
These notes apply to the combined financial statements of the
natural gas wellhead compression-based production enhancement
services business of our predecessor, Compressco Partners
Predecessor. The combined financial statements of our
predecessor consist of the assets and operations of Compressco,
Inc. and its subsidiaries (Compressco) and certain assets,
liabilities and operations of subsidiaries of TETRA conducting
business in Mexico. These combined financial statements are
prepared in connection with the proposed initial public offering
of limited partner units in Compressco Partners, L.P., or the
Partnership, which was formed on October 31,
2008 and will initially own a portion of our predecessors
business.
Compressco is a wholly owned subsidiary of TETRA Technologies,
Inc. (TETRA), and was acquired by TETRA in July 2004. Compressco
designs and manufactures its
GasJack
tm
units and uses these
GasJack
tm
units in conjunction with its personnel to provide
compression-based services to its customers. Compresscos
operations are located principally in the mid-continent,
mid-western, Rocky Mountain, and Gulf Coast regions of the
United States as well as in Canada.
Basis
of Presentation
The accompanying combined financial statements include the
accounts and operations of our predecessors wholly owned
subsidiaries transferred from TETRA at historical costs, and
have been prepared in accordance with generally accepted
accounting principles. All significant intercompany accounts and
transactions have been eliminated in the combined financial
statements. The combined statements of operations include all
revenue worldwide and costs directly attributable to our
predecessors operations. A portion of these revenues and
costs relate to contracts and assets that have not been
contributed to the Partnership, or include types of transactions
that will not be reflected by the Partnership in the future.
In addition, selling, general and administrative expenses
include costs incurred by TETRA, and allocated to Compressco
based on allocation factors that our predecessors
management believes are reasonable. These costs include, among
other things, centralized corporate functions such as legal,
accounting and financial reporting, treasury, insurance
administration, claims processing, risk management, health,
safety, and environmental, information technology, human
resources, credit, payroll, taxes and other corporate services
and the use of facilities that support these functions. These
allocations may not be necessarily indicative of the costs and
expenses that would result if our predecessor was an independent
entity.
The accompanying unaudited combined financial statements as of
June 30, 2008 and for the six months ended June 30,
2008 contain all appropriate adjustments, all of which are
normal recurring adjustments unless otherwise noted, considered
necessary to present fairly the financial position of our
predecessor and its results of operations, changes in net parent
equity and cash flows for the respective periods. Operating
results for the six months ended June 30, 2008 and 2007 are
not necessarily indicative of the results that may be expected
for the twelve months ended December 31, 2008.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires our
predecessors management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclose contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
F-6
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Cash
Equivalents
Compressco considers all highly liquid investments, with
maturities of three months or less when purchased, to be cash
equivalents.
Financial
Instruments
The fair values of our predecessors financial instruments,
which may include cash, accounts receivable, and accounts
payable, approximate their carrying amounts. Financial
instruments that subject our predecessor to concentrations of
credit risk consist principally of trade accounts receivable,
which are primarily due from companies of varying size engaged
in oil and gas activities in the United States, Canada and
Mexico. Our predecessors policy is to review the financial
condition of customers before extending credit and periodically
update customer credit information. Payment terms are on a
short-term basis. During 2007, one customer accounted for 11.6%
of our predecessors combined revenues. No single customer
accounted for 10% or more of our predecessors revenues for
the years ended December 31, 2005 and 2006.
Our predecessor is exposed to fluctuations between the
U.S. dollar and certain foreign currencies, including the
Canadian dollar and the Mexican peso, because of its
international operations.
Allowances
for Doubtful Accounts
Allowances for doubtful accounts are determined on a specific
identification basis when Compressco believes that the
collection of specific amounts owed to it is not probable.
Inventories
Inventories consist primarily of
GasJack
tm
unit components and parts, and
work-in-progress,
and are stated at the lower of cost or market. Inventories are
accounted for using the average cost method.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures
that increase the useful lives of assets are capitalized. The
cost of repairs and maintenance (including
GasJack
tm
unit overhaul cost) is charged to operations as incurred.
Compressors include
GasJack
tm
units currently placed in service and available for service.
Depreciation is computed using the straight-line method based on
the following estimated useful lives:
|
|
|
Compressors
|
|
12 years
|
Equipment and other property
|
|
7 years
|
Vehicles
|
|
3 years
|
Information systems
|
|
3 years
|
Leasehold improvements are depreciated over the shorter of the
remaining term of the associated building lease or their useful
lives. Depreciation expense for the years ended
December 31, 2005, 2006, and 2007 was $4,061,000,
$5,927,000, and $8,946,000, respectively.
Intangible
Assets
Patents, customer relationships, and other intangible assets are
recorded on the basis of the allocated fair value when we were
acquired by TETRA and are amortized on a straight-line basis
over their estimated useful lives, ranging from 3 to
7 years. Amortization expense related to intangible assets
was $432,000, $432,000, and $354,000 for the twelve months ended
December 31, 2005, 2006, and 2007, respectively, and is
included
F-7
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
in depreciation and amortization. The estimated future annual
amortization expense of patents, trademarks, and other
intangible assets is as follows:
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
88
|
|
2009
|
|
|
88
|
|
2010
|
|
|
87
|
|
2011
|
|
|
2
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
265
|
|
|
|
|
|
|
Goodwill represents the excess of TETRAs acquisition cost
over the fair value of our predecessors net assets at the
time it was acquired. Compressco performs a goodwill impairment
test on an annual basis or whenever indicators of impairment are
present. Compressco has determined that there is no impairment
of the goodwill recorded as of December 31, 2007 or
December 31, 2006.
Revenue
Recognition
Our predecessor recognizes revenue using the following criteria:
(a) persuasive evidence of an exchange arrangement exists;
(b) delivery has occurred or services have been rendered;
(c) the buyers price is fixed or determinable; and
(d) collectability is reasonably assured. Our
predecessors
GasJack
tm
units and services are provided pursuant to contract terms
ranging from two weeks to one month. As of December 31,
2007, all monthly agreements are cancellable with 30 days
written notice by the customer.
Income
Taxes
Our predecessors operations are currently included in
TETRAs consolidated U.S. federal tax return.
Following the initial public offering of the Partnership, its
operations will be treated as a partnership for
U.S. federal tax purposes with each partner being
separately taxed on its share of taxable income. As a result,
U.S. federal income taxes have been excluded from these
combined financial statements. Certain of our predecessors
operations are located outside of the United States, including
operations in Canada and Mexico, and the Partnership will be
responsible for income taxes in these countries. Accordingly,
Compressco has included the provision for these international
income taxes, along with certain U.S. state income taxes,
in the accompanying combined financial statements.
Environmental
Liabilities
The costs to remediate and monitor environmental matters are
accrued when such liabilities are considered probable and a
reasonable estimate of such costs is determinable.
Foreign
Currency Translation
Our predecessors Canadian operation maintains its
accounting records in its local currency, Canadian Dollars,
which is also its functional currency. The functional currency
financial statements are converted to United States Dollar
equivalents with the effect of the foreign currency translation
adjustment reflected as a component of accumulated other
comprehensive income. As of December 31, 2006 and 2007 the
cumulative currency transaction adjustment included in
accumulated other comprehensive income was $311,000 and
F-8
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
$1,136,000, respectively, and such amount is included in Net
Parent Equity in the accompanying combined balance sheets.
Recently
Issued Accounting Pronouncements
In December 2007, the FASB published SFAS No. 141R,
Business Combinations, which established principles
and requirements for how an acquirer of a business
(1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; (2) recognizes and
measures the goodwill acquired in the business combination or a
gain from a bargain purchase; and (3) determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141R changes many
aspects of the accounting for business combinations, and is
expected to significantly impact how we account for and disclose
any future acquisition transactions. SFAS No. 141R
applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008.
In December 2007, the FASB published SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51,
which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS No. 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008.
Compressco is currently evaluating the impact, if any, the
adoption of SFAS No. 160 will have on its financial
position and results of operations.
In September 2006, the FASB published SFAS No. 157,
Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands
disclosures about fair value measurements.
SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements.
SFAS No. 157 establishes a fair value hierarchy and
requires disclosure of fair value measurements within that
hierarchy. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The adoption of SFAS No. 157 did not have a
material impact on our predecessors financial statements,
but will result in additional disclosures related to the use of
fair values in the financial statements.
|
|
NOTE B
|
RELATED
PARTY TRANSACTIONS
|
Our predecessors parent company, TETRA, provides
centralized corporate functions such as legal, accounting and
financial reporting, treasury, insurance administration, claims
processing, risk management, health, safety and environmental,
information technology, human resources, credit, payroll, taxes
and other corporate services and the use of facilities that
support these functions. The portion of TETRAs cost of
providing these services that can be directly or indirectly
attributable to our operations has been allocated to our
predecessor and is included in the accompanying combined
financial statements. Such allocation is calculated based on
allocation factors, such as the estimated percentage of time and
costs spent by TETRA to perform these administrative services on
our predecessors behalf, which our predecessors
management believes are reasonable.
Our predecessors consolidated balance sheets contain
minimal amounts of cash, as all payments made on our behalf,
such as direct costs, indirect costs, and capital expenditures,
are paid by TETRA and have been recorded as increases in net
parent equity. All payments received on our predecessors
behalf by TETRA, such as receipts for revenue earned or sales of
assets, are received by TETRA and have been recorded as
decreases in net parent equity.
F-9
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE C
|
TETRA
LONG-TERM DEBT
|
TETRA has entered into certain debt agreements that contain
customary covenants and other restrictions limiting TETRA and
its subsidiaries ability to buy, sell, or dispose of
assets. TETRAs debt agreements are unsecured. The
accompanying combined financial statements include no provision
for allocated debt service costs incurred on TETRAs debt
agreements.
Certain of our predecessors operations are currently
included in TETRAs consolidated U.S. federal tax
return, and no intercompany tax sharing arrangements exist
between TETRA and its subsidiaries, including those included in
our predecessor. Accordingly, our predecessors
U.S. tax basis of its assets and liabilities are not
separately identified. Following the initial public offering of
the Partnership, its operations will be treated as a partnership
for federal tax purposes with each partner being separately
taxed on its share of taxable income. As a result,
U.S. federal income taxes have been excluded from these
combined financial statements. Certain state income taxes for
which the Partnership will be responsible have been included in
the income tax provision. Certain of our predecessors
operations are located outside of the U.S., including operations
in Canada and Mexico, and the Partnership will be responsible
for income taxes in these countries. Accordingly, our
predecessor has included the provision for these international
income taxes, calculated on a separate return basis, in the
accompanying combined financial statements.
Income before income tax provision includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Domestic
|
|
$
|
12,266
|
|
|
$
|
16,765
|
|
|
$
|
24,420
|
|
International
|
|
|
1,235
|
|
|
|
1,865
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,501
|
|
|
$
|
18,630
|
|
|
$
|
24,232
|
|
The following unaudited pro forma presentation includes, for
each of the periods presented, a reconciliation of our
predecessors income before income tax provision to pro
forma unaudited U.S. federal taxable income:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
December 31,
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
Income before income tax provision, as reported
|
|
$
|
24,232
|
|
|
$
|
13,241
|
|
Nondeductible expenses
|
|
|
351
|
|
|
|
170
|
|
Excess depreciation
|
|
|
(6,288
|
)
|
|
|
(1,248
|
)
|
Stock option deductions in excess of book
|
|
|
(302
|
)
|
|
|
|
|
Utilization of net operating loss carryfoward
|
|
|
(2,290
|
)
|
|
|
|
|
Other temporary differences
|
|
|
1,157
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
Pro forma U.S. federal taxable income
|
|
$
|
16,860
|
|
|
$
|
12,812
|
|
|
|
|
|
|
|
|
|
|
In addition, unaudited pro forma information has been prepared
to reflect the income tax provision that our predecessor would
have reported had it been a separate tax paying entity for U.S.
federal, state and international income tax purposes. On an
unaudited pro forma basis, our predecessors total income
tax provision for the year ended December 31, 2007 and for
the six months ended June 30, 2008 would have been
$9,285,000 and $5,065,000, respectively, which would have
resulted in pro forma net income of $14,947,000 and $8,176,000,
respectively.
F-10
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
The following reconciles our predecessors tax provision as
calculated using the statutory rates to the tax provision
included in the accompanying combined statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Income tax provision computed at statutory income tax rates
|
|
$
|
4,725
|
|
|
$
|
6,521
|
|
|
$
|
8,481
|
|
State income taxes
|
|
|
|
|
|
|
|
|
|
|
155
|
|
Nondeductible expenses
|
|
|
85
|
|
|
|
102
|
|
|
|
123
|
|
Income not subject to Federal income tax at the partnership level
|
|
|
(4,810
|
)
|
|
|
(6,623
|
)
|
|
|
(8,604
|
)
|
International income taxes
|
|
|
516
|
|
|
|
1,029
|
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
516
|
|
|
$
|
1,029
|
|
|
$
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our predecessor leases various warehouse and office facility
locations in Texas, New Mexico, Colorado and Canada. In
addition, our predecessor leases certain vehicles with original
terms ranging up to two years.
As of December 31, 2007, future annual minimum lease
payments under noncancellable operating leases with initial or
remaining terms greater than one year were approximately
$113,000 for 2008, $10,000 for 2009, $8,000 for 2010, $0 for
2011 and $0 for 2012.
Rent expense under all operating leases was approximately
$802,000, $512,000, and $495,000 for the years ended
December 31, 2005, 2006, and 2007, respectively.
Through December 31, 2007, our predecessor provided the
majority of its production enhancement services under a
different form of contract. Subsequent to December 31,
2007, our predecessor began providing its production enhancement
services to certain customers under new production enhancement
services agreements. Total compressor equipment being used to
provide production enhancement services or available for
production enhancement services as of December 31, 2007 and
2006 is approximately $88.0 million and $68.8 million,
respectively. Future minimum payments as of December 31,
2007 are not considered material, as our predecessors
services arrangements are typically on a month-to-month basis.
|
|
NOTE F
|
COMMITMENTS
AND CONTINGENCIES
|
Compressco is a named defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of lawsuits
against Compressco cannot be predicted with certainty,
management does not expect these matters to have a material
adverse impact on our predecessors financial statements.
|
|
NOTE G
|
EQUITY-BASED
COMPENSATION
|
TETRA grants stock options and restricted stock to designated
employees, including certain of our predecessors
employees. Effective January 1, 2006, TETRA and its
subsidiaries adopted the fair value recognition provisions of
SFAS No. 123R, Share-Based Payment,
(SFAS No. 123R) using the modified prospective
transition method. Under the modified prospective transition
method, TETRAs compensation cost recognized during the
years ended December 31, 2006 and 2007 includes:
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 (as amended),
Accounting for Share-Based Compensation
(SFAS No. 123) and (b) compensation cost for
all share-based payments granted beginning January 1, 2006,
based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123R. The Black-Scholes
option-pricing model was used to estimate the option fair
values. Prior to 2006, TETRA and its subsidiaries accounted for
stock options in accordance with Accounting Principles Board
F-11
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under APB No. 25, stock
option expense was not recognized in net income as the exercise
price of stock options granted was equal to the market value of
the stock on the date of grant. In accordance with the modified
prospective method, results for prior periods have not been
restated.
Stock-based compensation expense incurred by TETRA associated
with our predecessors employees is a direct cost of our
predecessors operations. During 2006 and 2007,
TETRAs adoption of SFAS 123R affected our
predecessors results by increasing selling, general and
administrative expense by $485,000 and $759,000, respectively.
Our predecessors net income for the year ended
December 31, 2005 was $13.0 million. If TETRA had
adopted SFAS No. 123R for this period, net income
would have been $12.6 million, due to $384,000 of increased
direct and indirect selling, general and administrative expense
associated with stock-based compensation.
|
|
NOTE H
|
BUSINESS
SEGMENTS
|
Nearly all of our predecessors operations consist of
production enhancement services. Accordingly, our predecessor
operates as a single reportable business segment pursuant to
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information which requires that
companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring
performance. All of our revenues are from external customers.
Compressco is domiciled in the United States of America with
operations in Canada and Mexico. We attribute revenue to the
countries based on the location of customers. Long-lived assets
consist primarily of
GasJack
tm
units and are attributed to the countries based on the physical
location of the
GasJack
tm
units at a given year-end. Information by geographic area is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
39,832
|
|
|
$
|
49,707
|
|
|
$
|
68,298
|
|
Canada
|
|
|
9,818
|
|
|
|
12,090
|
|
|
|
8,405
|
|
Mexico
|
|
|
384
|
|
|
|
3,526
|
|
|
|
6,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,034
|
|
|
|
65,323
|
|
|
|
83,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
132,450
|
|
|
$
|
155,330
|
|
|
$
|
173,004
|
|
Canada
|
|
|
4,634
|
|
|
|
4,595
|
|
|
|
5,280
|
|
Mexico
|
|
|
1,550
|
|
|
|
3,429
|
|
|
|
6,857
|
|
South America
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
138,634
|
|
|
$
|
163,354
|
|
|
$
|
185,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE I
|
QUARTERLY
FINANCIAL INFORMATION (Unaudited)
|
Summarized quarterly financial data for 2008, 2007 and 2006 is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2008
|
|
|
|
March 31
|
|
|
June 30
|
|
|
|
(In thousands)
|
|
|
Total revenues
|
|
$
|
23,053
|
|
|
$
|
23,553
|
|
Net income
|
|
|
5,927
|
|
|
|
6,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2007
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
(In thousands)
|
|
|
Total revenues
|
|
$
|
18,631
|
|
|
$
|
19,396
|
|
|
$
|
22,432
|
|
|
$
|
23,095
|
|
Net income
|
|
|
5,583
|
|
|
|
5,665
|
|
|
|
5,999
|
|
|
|
6,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2006
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Total revenues
|
|
$
|
15,733
|
|
|
$
|
15,895
|
|
|
$
|
16,779
|
|
|
$
|
16,916
|
|
Net income
|
|
|
3,818
|
|
|
|
4,605
|
|
|
|
4,438
|
|
|
|
4,740
|
|
F-13
COMPRESSCO
PARTNERS, L.P.
UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
Introduction
The unaudited pro forma financial statements of Compressco
Partners, L.P. (the Partnership) as of June 30, 2008 and
the six months ended June 30, 2008 and the year ended
December 31, 2007 are based on the historical combined
balance sheet and results of operations of our predecessor. Upon
the closing of the initial public offering, a portion of our
predecessors production enhancement services business and
GasJack
tm
unit fleet will be owned by the Partnership. The customer
contracts and compressor fleet owned by the Partnership
initially will include service agreements with 86 domestic
customers that make up approximately 51.6% of our
predecessors domestic revenues for the six months ended
June 30, 2008. In addition, the Partnership will own our
predecessors manufacturing assets as well as its Canada
and Mexico operations. The production enhancement services
agreements to be contributed to us in connection with this
offering include approximately 51.3% of the total
GasJack
tm
units currently used by our predecessor to provide production
enhancement services. The contribution of these contracts to the
Partnership will be recorded at historical cost. The unaudited
pro forma financial statements of the Partnership have been
derived from the historical combined financial statements of our
predecessor included elsewhere in the Prospectus and are
qualified in their entirety by reference to such historical
combined financial statements and related notes contained
therein. The unaudited pro forma financial statements have been
prepared on the basis that we will be treated as a partnership
for U.S. federal income tax purposes. The unaudited pro
forma financial statements should be read in conjunction with
the accompanying notes and with the historical combined
financial statements and related notes of our predecessor.
The unaudited pro forma financial statements reflect the
following transactions:
|
|
|
|
|
The contribution of certain production enhancement services
agreements and related equipment from our predecessor and its
subsidiaries to the Partnership;
|
|
|
|
The issuance by the Partnership of common units to the public,
Compressco, Inc. and TETRA International Incorporated, general
partner units to Compressco Partners GP, payment of estimated
underwriting commissions and other expenses of the offering;
|
The unaudited pro forma balance sheet and results of operations
were derived by adjusting the historical combined financial
statements of our predecessor. The adjustments are based on
currently available information and certain estimates and
assumptions; therefore, actual adjustments will differ from pro
forma adjustments. However, management believes that the
assumptions provide a reasonable basis for presenting the
significant effects of the transaction as contemplated and the
pro forma adjustments give appropriate effect to those
assumptions and are property applied in the pro forma financial
information.
The unaudited pro forma financial statements are not necessarily
indicative of the results that actually would have occurred if
the Partnership had owned the production enhancement services
agreements and related equipment that will be owned by the
Partnership as of the closing of the initial public offering on
the dates indicated or which would have obtained in the future.
F-14
COMPRESSCO
PARTNERS, L.P.
June 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
Predecessor
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
ASSETS
|
Cash
|
|
$
|
1,340
|
|
|
$
|
|
(a)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
12,166
|
|
|
|
(5,622
|
)(c)
|
|
|
6,544
|
|
Inventories
|
|
|
19,526
|
|
|
|
|
|
|
|
19,526
|
|
Prepaid expenses and other current assets
|
|
|
337
|
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,369
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
|
1,622
|
|
|
|
|
|
|
|
1,622
|
|
Compressors and other equipment
|
|
|
117,521
|
|
|
|
(53,627
|
)(c)
|
|
|
63,894
|
|
Less accumulated depreciation
|
|
|
(25,114
|
)
|
|
|
8,280
|
(c)
|
|
|
(16,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
94,029
|
|
|
|
|
|
|
|
48,682
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
72,107
|
|
|
|
(29,850
|
)(d)
|
|
|
42,257
|
|
Intangibles and other assets
|
|
|
687
|
|
|
|
(334
|
)(c)
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
72,794
|
|
|
|
|
|
|
|
42,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
200,192
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL/NET PARENT EQUITY
|
Accounts payable
|
|
$
|
3,105
|
|
|
$
|
(132
|
)(c)
|
|
$
|
2,973
|
|
Accrued liabilities
|
|
|
1,412
|
|
|
|
(54
|
)(c)
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,517
|
|
|
|
|
|
|
|
4,331
|
|
Other long-term liabilities
|
|
|
88
|
|
|
|
|
|
|
|
88
|
|
Net parent equity
|
|
|
195,587
|
|
|
|
(195,587
|
)(e)
|
|
|
|
|
Common unitholders public
|
|
|
|
|
|
|
|
|
|
|
|
|
Common unitholders TETRA affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
(51,117
|
)(c)
|
|
|
|
|
General partner interest
|
|
|
|
|
|
|
(29,850
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital/net parent
equity
|
|
$
|
200,192
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma financial
statements.
F-15
COMPRESSCO
PARTNERS, L.P.
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
Predecessor
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands, except unit and per unit data)
|
|
|
Revenue
|
|
$
|
83,554
|
|
|
$
|
(35,263
|
)(f)
|
|
$
|
48,291
|
|
Cost of revenues (excluding depreciation and amortization
expense)
|
|
|
37,514
|
|
|
|
(15,090
|
)(f)
|
|
|
22,424
|
|
Selling, general and administrative expense
|
|
|
12,539
|
|
|
|
(4,152
|
)(f)
|
|
|
8,387
|
|
Depreciation and amortization expense
|
|
|
9,300
|
|
|
|
(3,162
|
)(g)
|
|
|
6,138
|
|
Other (income) expense, net
|
|
|
(31
|
)
|
|
|
31
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
24,232
|
|
|
|
|
|
|
|
11,342
|
|
Provision for income taxes
|
|
|
660
|
|
|
|
(128
|
)(i)
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
23,572
|
|
|
|
|
|
|
$
|
10,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent and general partner interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partner interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of limited partner units outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma financial
statements.
F-16
COMPRESSCO
PARTNERS, L.P.
Six
Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
Predecessor
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands, except unit and per unit data)
|
|
|
Revenue
|
|
$
|
46,606
|
|
|
$
|
(18,808
|
)(f)
|
|
$
|
27,798
|
|
Cost of revenues (excluding depreciation and amortization
expense)
|
|
|
21,338
|
|
|
|
(8,282
|
)(f)
|
|
|
13,056
|
|
Selling, general and administrative expense
|
|
|
6,548
|
|
|
|
(2,112
|
)(f)
|
|
|
4,436
|
|
Depreciation and amortization expense
|
|
|
5,473
|
|
|
|
(1,825
|
)(g)
|
|
|
3,648
|
|
Other (income) expense, net
|
|
|
6
|
|
|
|
(6
|
)(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
13,241
|
|
|
|
|
|
|
|
6,658
|
|
Provision for income taxes
|
|
|
619
|
|
|
|
(133
|
)(i)
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,622
|
|
|
|
|
|
|
$
|
6,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent and general partner interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partner interest in net income
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of limited partner units outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per limited partner unit
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma financial
statements.
F-17
COMPRESSCO
PARTNERS, L.P.
|
|
A.
|
Basis of
Presentation, the Offering and Other Transactions
|
The historical financial information is derived from the
historical combined financial statements of our predecessor. The
pro forma adjustments have been prepared as if the transactions
to be effected at the completion of this offering had taken
place on June 30, 2008, in the case of the pro forma
balance sheet, or as of January 1, 2007, in the case of the
pro forma statements of operations for the year ended
December 31, 2007 and the six months ended June 30,
2008.
The pro forma financial statements reflect the following
transactions:
|
|
|
|
|
The contribution of certain production enhancement services
agreements, the related
GasJack
tm
fleet, and the manufacturing assets from our predecessor to the
Partnership;
|
|
|
|
The issuance by the Partnership of common units to the public
Compressco, Inc. and TETRA International Incorporated, general
partner units to Compressco Partners GP, payment of estimated
underwriting commissions and other expenses of the offering.
|
Upon completion of this offering, the Partnership anticipates
incurring incremental general and administrative expenses of
approximately $2.0 million per year as a result of being a
publicly traded limited partnership, including costs associated
with annual and quarterly reports to our unitholders, financial
statement audit, tax return and
Schedule K-1
preparation and distribution, investor relations activities,
registrar and transfer agent fees, incremental director and
officer liability insurance costs and director compensation. The
unaudited pro forma financial statements do not reflect this
anticipated incremental general and administrative expense.
Upon completion of this offering, the Partnership will assume
the
GasJack
tm
manufacturing activities previously performed by our
predecessor. The accompanying unaudited pro forma statements of
operations exclude the impact of sales of
GasJack
tm
units, sold during the periods presented, to customers whose
service agreements and associated compressor equipment were not
initially contributed to the Partnership. Following the
offering, the Partnership anticipates that
GasJack
tm
sales will consist primarily of newly manufactured
GasJack
tm
units, and that revenues and cost of revenues associated with
all of these future
GasJack
tm
sales will be recognized by the Partnership.
|
|
B.
|
Pro Forma
Adjustments and Assumptions
|
(a) Reflects the gross proceeds to the Partnership of
$ million from the issuance
and sale of million common
units at an assumed initial public offering price of
$ per unit.
(b) Reflects the payment of estimated underwriting
commissions and other expenses of the offering of
$ million, which will be
allocated to the public common units.
(c) Reflects assets and liabilities of our predecessor that
are not being contributed to the Partnership.
(d) Reflects goodwill of our predecessor related to that
portion of our predecessors business that is not being
contributed to the Partnership. Pro forma Partnership goodwill
has been determined based on the percentage of fair value of net
assets contributed to the Partnership to total fair value of our
predecessors net assets other than goodwill.
(e) Reflects the conversion of the adjusted net parent
equity of $ million from net
parent equity to limited partner equity of the Partnership and
the general partners interest in the Partnership. The
conversion is allocated as follows:
|
|
|
|
|
$ million
for common units
|
|
|
|
$ million
for parent and general
partner units
|
F-18
COMPRESSCO
PARTNERS, L.P.
NOTES TO
UNAUDITED PRO FORMA FINANCIAL
STATEMENTS (Continued)
After the conversion, the equity amounts of the common
unitholders are % of total equity,
with the remaining % equity
representing the parent and general partner interest.
(f) Reflects revenue and cost of revenues (excluding
depreciation and amortization expense) of our predecessor that
relates to production enhancement services agreements that are
not being contributed by our predecessor. Our predecessors
selling, general and administrative expenses have been allocated
to the Partnership based on the percentage of total Predecessor
GasJack
tm
units contributed to the Partnership to total Predecessors
GasJack
tm
units.
(g) Reflects depreciation expense of our predecessor that
relates to assets that are not being contributed to the
Partnership by our predecessor.
(h) Reflects other (income) loss, net of our predecessor
that is not being contributed to the Partnership by our
predecessor.
(i) Reflects income tax provision of our predecessor that
relates to international production enhancement services
agreements that are not being contributed by our predecessor.
|
|
C.
|
Pro Forma
Net Income Per Limited Partner Unit
|
Pro forma net income per limited partner unit is determined by
dividing the pro forma net income that would have been allocated
to the common unitholders, which
is % of the pro forma net income,
by the number of common units expected to be outstanding at the
closing of the offering. For purposes of this calculation, the
number of common units assumed to be outstanding
was . All units were assumed to
have been outstanding since January 1, 2007. Basic and
diluted pro forma net income per unit are equivalent as there
are no dilutive units at the date of closing of the initial
public offering of the common units of the Partnership.
|
|
D.
|
Pro Forma
Taxable Income Per Limited Partner Unit
|
The unaudited pro forma financial information does not reflect
U.S. federal income taxes, except Texas Margin Tax, as
U.S. income taxes will be the responsibility of our
unitholders and not the Partnership. Our predecessors
operations are currently included in TETRAs combined
U.S. federal tax return. The historical taxable income of
our predecessor bears no material relationship to the amount of
federal taxable income that the Partnership will allocate to our
unitholders. Among other considerations, depreciation allocable
to our unitholders will significantly exceed the historical
depreciation on the assets because our unitholders effectively
will have
stepped-up
basis in their share of at least a large part of the assets of
the Partnership. Please read Material Tax
Consequences Tax Consequences of Unit
Ownership Allocation of Income, Gain, Loss and
Deduction. The Partnership estimates that through the year
ended ,
purchasers of unit in this offering will be allocated, on a
cumulative basis, an amount of federal taxable income that will
be % or less of the cash
distributed to them. For example, if the Partnership pays an
annual distribution of $ per unit,
the Partnership estimates that a unitholder would be allocated
no more than $ per unit of federal
taxable income for that annual period. Please read
Material Tax Consequences Tax Consequences of
Unit Ownership Allocation of Income, Gain, Loss and
Deduction.
Certain of the Partnerships operations are located outside
of the United States, including operations in Canada and Mexico,
and the Partnership will be responsible for income taxes in
these countries. Accordingly, the Partnership has included the
provision for these international income taxes, along with
certain U.S. state income taxes, in the accompanying pro forma
statements of operations.
F-19
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Compressco Partners, L.P.:
We have audited the accompanying balance sheet of Compressco
Partners, L.P., or the Partnership, as of
October 31, 2008. This financial statement is the
responsibility of the Partnerships management. Our
responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of
material misstatement. We were not engaged to perform an audit
of the Partnerships internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnerships internal control over financial
reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the balance sheet, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of
Compressco Partners, L.P. as of October 31, 2008, in
conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
November 7, 2008
F-20
COMPRESSCO
PARTNERS, L.P.
October 31,
2008
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
Cash
|
|
$
|
1,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,000
|
|
|
|
|
|
|
|
PARTNERS EQUITY
|
Limited partners interest
|
|
$
|
999
|
|
General partners interest
|
|
|
1
|
|
|
|
|
|
|
Total partners equity
|
|
$
|
1,000
|
|
|
|
|
|
|
See accompanying note to balance sheet.
F-21
COMPRESSCO
PARTNERS, L.P.
|
|
NOTE A
|
NATURE OF
OPERATIONS
|
Compressco Partners, L.P., or the Partnership, is a
Delaware limited partnership formed in October 2008, to acquire
certain natural gas wellhead compression-based customer service
agreements and related compressor fleet used to service those
customers from Compressco Partners Predecessor. In order to
simplify the Partnerships obligations under the laws of
selected jurisdictions in which the Partnership will conduct
business, the Partnerships activities will be conducted
through a wholly owned operating partnership.
The Partnership intends to offer common units, representing
limited partner interests, pursuant to a public offering and to
concurrently issue common units, representing limited partner
interests, to Compressco, Inc., a direct wholly owned subsidiary
of TETRA Technologies, Inc., as well as an aggregate 0.1%
general partner interest in the Partnership and its operating
partnership on a consolidated basis to Compressco Partners GP
Inc.
Compressco Partners GP Inc., as general partner, contributed $1
and Compressco, Inc. and TETRA International Incorporated, as
the organizational limited partners, contributed $999 to the
Partnership on October 31, 2008. There have been no other
transactions involving the Partnership as of October 31,
2008.
F-22
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder of Compressco Partners GP Inc.:
We have audited the accompanying balance sheet of Compressco
Partners GP Inc. (the Company) as of October 31, 2008. This
financial statement is the responsibility of the Companys
management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of
material misstatement. We were not engaged to perform an audit
of the Companys internal control over financial reporting.
Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents
fairly, in all material respects, the financial position of
Compressco Partners GP Inc. as of October 31, 2008, in
conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Houston, Texas
November 7, 2008
F-23
COMPRESSCO
PARTNERS GP INC.
October 31,
2008
|
|
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
Cash
|
|
$
|
999
|
|
Investment in Compressco Partners, L.P.
|
|
|
1
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,000
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Stockholders equity
|
|
$
|
1,000
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
1,000
|
|
|
|
|
|
|
See accompanying note to balance sheet.
F-24
COMPRESSCO
PARTNERS GP INC.
|
|
NOTE A
|
NATURE OF
OPERATIONS
|
Compressco Partners GP Inc. (the Company) is a Delaware
corporation formed in October 2008, to become the general
partner of Compressco Partners, L.P., or the
Partnership,. The Company is an indirect, wholly
owned subsidiary of TETRA Technologies, Inc. The Company owns a
0.1% general partner interest in the Partnership.
On October 31, 2008, TETRA Technologies, Inc. and its
subsidiaries contributed $1,000 to the Company in exchange for a
100% ownership interest.
The Company has invested $1 in the Partnership. There have been
no other transactions involving the Company as of
October 31, 2008.
F-25
APPENDIX A
FIRST
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
COMPRESSCO PARTNERS, L.P.
A-1
Common Units
Representing Limited Partner
Interests
PROSPECTUS
RAYMOND JAMES
J.P.MORGAN
,
2008
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
Set forth below are the expenses expected to be incurred in
connection with the issuance and distribution of the securities
registered hereby. With the exception of the Securities and
Exchange Commission registration fee, the NASD filing fee and
the NASDAQ Global Market listing fee, the amounts set forth
below are estimates.
|
|
|
|
|
SEC registration fee
|
|
$
|
2,161.50
|
|
FINRA filing fee
|
|
$
|
6,000.00
|
|
NASDAQ Global Market listing fee*
|
|
$
|
|
|
Printing and engraving expenses*
|
|
$
|
|
|
Accounting fees and expenses*
|
|
$
|
|
|
Legal fees and expenses*
|
|
$
|
|
|
Transfer agent and registrar fees*
|
|
$
|
|
|
Structuring fee*
|
|
$
|
|
|
Miscellaneous*
|
|
$
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
|
|
|
|
|
|
|
*
|
|
To be provided by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
The section of the prospectus entitled The Partnership
Agreement Indemnification is incorporated
herein by this reference. Reference is also made to the
Underwriting Agreement filed as Exhibit 1.1 to this
registration statement. Subject to any terms, conditions or
restrictions set forth in the partnership agreement,
Section 17-108
of the Delaware Revised Uniform Limited Partnership Act empowers
a Delaware limited partnership to indemnify and hold harmless
any partner or other person from and against all claims and
demands whatsoever.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
On October 31, 2008, in connection with the formation of
Compressco Partners, or the Partnership, the
Partnership issued to (i) Compressco Partners GP Inc. the
0.1% general partner interest in the Partnership and
(ii) to Compressco, Inc. and TETRA International
Incorporated a 99.9% and 0.1% limited partner interest,
respectively, in the Partnership in an offering exempt from
registration under Section 4(2) of the Securities Act.
There have been no other sales of unregistered securities within
the past three years.
II-1
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules.
|
(a) The following documents are filed as exhibits to this
registration statement:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Certificate of Limited Partnership of Compressco Partners, L.P.
|
|
3
|
.2*
|
|
Form of Amended and Restated Agreement of Limited Partnership of
Compressco Partners, L.P. (included as Appendix A to the
Prospectus)
|
|
3
|
.3
|
|
Certificate of Incorporation of Compressco Partners GP Inc.
|
|
3
|
.4*
|
|
Bylaws of Compressco Partners GP Inc.
|
|
4
|
.1*
|
|
Specimen Unit Certificate representing Common Units
|
|
5
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered
|
|
8
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. relating to tax
matters
|
|
10
|
.1*
|
|
Form of Contribution, Conveyance and Assumption Agreement
|
|
10
|
.2*
|
|
Form of Omnibus Agreement
|
|
10
|
.3*
|
|
Form of Long-Term Incentive Plan of Compressco Partners, L.P.
|
|
21
|
.1*
|
|
List of subsidiaries of Compressco Partners, L.P.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1)
|
|
23
|
.3*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 8.1)
|
|
24
|
.1
|
|
Powers of Attorney (included on the signature page)
|
|
|
|
*
|
|
To be filed by amendment.
|
(b) Financial Statement Schedules. Financial statement
schedules are omitted because they are not required or the
required information is shown in our financial statements or
notes thereto.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h)
II-2
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The registrant undertakes to send to each limited partner at
least on an annual basis a detailed statement of any
transactions with Compressco Partners GP or its affiliates, and
of fees, commissions, compensation and other benefits paid, or
accrued to Compressco Partners GP or its affiliates for the
fiscal year completed, showing the amount paid or accrued to
each recipient and the services performed.
The registrant undertakes to provide to the limited partners the
financial statements required by
Form 10-K
for the first full fiscal year of operations of the registrant.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Oklahoma City, Oklahoma on November 10, 2008.
COMPRESSCO PARTNERS, L.P.
|
|
|
|
By:
|
Compressco Partners GP Inc.
|
its General Partner
Ronald J. Foster
President
We, the undersigned directors and officers of Compressco
Partners, L.P., a Delaware limited partnership, do hereby
constitute and appoint Ronald J. Foster and Gary L. McBride, and
each of them, our true and lawful attorney-in-fact and agent, to
do any and all acts and things in our names and on our behalf in
our capacities as directors and officers and to execute any and
all instruments for us and in our name in the capacities
indicated below, which said attorney and agent may deem
necessary or advisable to enable said Registrant to comply with
the Securities Act of 1933 and any rules, regulations and
requirements of the Securities and Exchange Commission, in
connection with the registration statements, or any registration
statement for this offering that is to be effective upon filing
pursuant to Rule 462 under the Securities Act of 1933,
including specifically, but without limitation, power and
authority to sign for us or any of us in our names in the
capacities indicated below, any and all amendments (including
post-effective amendments) hereof; and we do hereby ratify and
confirm all that said attorneys and agents shall do or cause to
be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on November 10, 2008.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/
Ronald
J. Foster
Ronald
J. Foster
|
|
President
(Principal Executive Officer)
and Director
|
|
|
|
/s/
Gary
McBride
Gary
McBride
|
|
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
|
|
|
|
/s/
Geoffrey
M. Hertel
Geoffrey
M. Hertel
|
|
Director
|
|
|
|
/s/
Stuart
M. Brightman
Stuart
M. Brightman
|
|
Director
|
|
|
|
/s/
William
D. Sullivan
William
D. Sullivan
|
|
Director
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Certificate of Limited Partnership of Compressco Partners, L.P.
|
|
3
|
.2*
|
|
Form of Amended and Restated Agreement of Limited Partnership of
Compressco Partners, L.P. (included as Appendix A to the
Prospectus)
|
|
3
|
.3
|
|
Certificate of Incorporation of Compressco Partners GP Inc.
|
|
3
|
.4*
|
|
Bylaws of Compressco Partners GP Inc.
|
|
4
|
.1*
|
|
Specimen Unit Certificate representing Common Units
|
|
5
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered
|
|
8
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. relating to tax
matters
|
|
10
|
.1*
|
|
Form of Contribution, Conveyance and Assumption Agreement
|
|
10
|
.2*
|
|
Form of Omnibus Agreement
|
|
10
|
.3*
|
|
Form of Long-Term Incentive Plan of Compressco Partners, L.P.
|
|
21
|
.1*
|
|
List of subsidiaries of Compressco Partners, L.P.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1)
|
|
23
|
.3*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 8.1)
|
|
24
|
.1
|
|
Powers of Attorney (included on the signature page)
|
|
|
|
*
|
|
To be filed by amendment.
|