Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CSI Compressco LP, a Delaware limited partnership, is a provider of compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. We sell standard and custom-designed, engineered compressor packages and provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide these compression services and equipment to a broad base of natural gas and oil exploration and production, midstream, and transmission companies operating throughout many of the onshore producing regions of the United States as well as in a number of foreign locations, including the countries of Mexico, Canada, and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services and sell to customers. Going forward, we plan to have such compressor packages fabricated through one or more third party packagers.
Presentation
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of September 30, 2020, and for the three and nine month periods ended September 30, 2020 and 2019, include all normal recurring adjustments that are necessary to provide a fair statement of our results for these interim periods. Operating results for the three and nine month periods ended September 30, 2020 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2020.
The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission (“SEC”) and do not include all information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2019 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 16, 2020.
Segments
Our General Partner has concluded that we operate in one business segment.
Significant Accounting Policies
Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K. There have been no significant changes in our accounting policies or the application thereof during the nine months ended September 30, 2020.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could be material.
Reclassifications
Certain previously reported financial information has been reclassified to conform to the current year’s presentation. The impact of such reclassifications was not significant to the prior year's overall presentation.
Cash Equivalents
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.
Financial Instruments
Financial instruments that subject us to concentrations of credit risk consist principally of trade accounts receivable, which are primarily due from customers of varying size engaged in oil and gas activities in the United States, Canada, Mexico, and Argentina. Our policy is to review the financial condition of potential customers before extending credit and periodically update their credit information. Payment terms are on a short-term basis. The risk of loss from the inability to collect trade receivables is heightened during prolonged periods of low oil and natural gas commodity prices.
We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. Our risk management activities include the use of foreign currency forward purchase and sale derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected international operations.
We have no outstanding balance under our variable rate revolving credit facility as of September 30, 2020 and face market risk exposure related to changes in applicable interest rates.
Foreign Currencies
Accumulated other comprehensive income (loss) is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with our international operations. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $(0.4) million and $1.0 million during the three and nine month periods ended September 30, 2020, respectively, and $(0.5) million and $(1.5) million during the three and nine month periods ended September 30, 2019, respectively.
Inventories
Inventories consist primarily of compressor package parts and supplies and work in progress and are stated at the lower of cost or net realizable value. For parts and supplies, cost is determined using the weighted average cost method. The cost of work in progress is determined using the specific identification method.
Impairments and Other Charges
Impairments of long-lived assets, including identified intangible assets, are determined periodically, when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgment as to the future undiscounted operating cash flows to be generated from the relevant assets throughout their remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related assets, an impairment is recognized for the excess of the carrying value over fair value. Fair value of intangible assets is generally determined using the discounted present value of future cash flows using discount rates commensurate with the risks inherent with the specific assets. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less estimated selling costs. See Note 3 - “Impairments and Other Charges” for additional discussion of recorded impairments.
Earnings Per Common Unit
Our computations of earnings per common unit are based on the weighted average number of common units outstanding during the applicable period. Basic earnings per common unit are determined by dividing net income (loss) allocated to the common units after deducting the amount allocated to our General Partner (including any distributions to our General Partner on its incentive distribution rights) by the weighted average number of outstanding common units during the period.
When computing earnings per common unit under the two class method in periods when distributions are greater than earnings, the amount of the distribution is deducted from net income (loss) and the excess of
distributions over earnings is allocated between the General Partner and common units based on how our Partnership Agreement allocates net losses.
Diluted earnings per common unit are computed using the treasury stock method, which considers the potential future issuance of limited partner common units. Unvested phantom units are not included in basic earnings per common unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per common unit. For the three and nine month periods ended September 30, 2020 and September 30, 2019, all unvested phantom units were excluded from the calculation of diluted common units because the impact was anti-dilutive. Diluted earnings per common unit are computed using the “if converted” method, whereby the amount of net income (loss) and the number of common units issuable are each adjusted as if the Preferred Units, had been converted as of the beginning of the period presented. The calculation of diluted earnings per common unit for the three and nine month period ended September 30, 2019 excludes the impact of the Preferred Units, as the inclusion of the impact from the conversion of the Preferred Units into common units would have been anti-dilutive. All remaining outstanding Preferred Units were redeemed for cash on August 8, 2019.
Revenue Recognition
Performance Obligations. Revenue is recognized when performance obligations under the terms of a contract with our customer are satisfied. Revenue is generally recognized when we transfer control of our products or services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or providing services to our customers. We receive cash equal to the invoice price for most product sales and services and payment terms typically range from 30 to 60 days from the date we invoice our customer. With the exception of the initial terms of our compression services contracts of our medium- and high-horsepower compressor packages, our customer contracts are generally for terms of one year or less. Since the period between when we deliver products or services and when the customer pays for products or services is not to exceed one year, we have elected not to calculate or disclose a financing component for our customer contracts.
Depending on the terms of the arrangement, we may also defer the recognition of revenue for a portion of the consideration received because we have to satisfy a future performance obligation. For example, consideration received from customers during the fabrication of new compressor packages is typically deferred until control of the compressor package is transferred to our customer.
For revenue associated with mobilization of service equipment as part of a service contract arrangement, such revenue, if significant, is deferred and amortized over the estimated service period.
Compression and related services. For compression services revenues recognized over time, our customer contracts typically provide agreed upon monthly service rates and we recognize service revenue based upon the number of days that services have been performed. The majority of our compression services are provided pursuant to contract terms ranging from one month to twenty-four months. Monthly agreements are generally cancellable with 30 days written notice by the customer.
Sales taxes, value added taxes, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. We recognize the cost for freight and shipping costs when control over our products (i.e. delivery) has transferred to the customer as part of cost of product sales.
Use of Estimates. Our revenues do not include material amounts of variable consideration, as our revenues typically do not require significant estimates or judgments. The transaction price on a majority of our arrangements are fixed and product returns are immaterial. Additionally, our arrangements typically do not include multiple performance obligations that require estimates of the stand-alone purchase price for each performance obligation. Revenue on certain aftermarket service arrangements that include time as a component of the transaction price is not recognized until the performance obligation is complete.
Contract Assets and Liabilities. We consider contract assets to be trade accounts receivable when we have an unconditional right to consideration and only the passage of time is required before payment is due. In certain instances, particularly those requiring customer specific documentation prior to invoicing, our invoicing of the customer is delayed until certain documentation requirements are met. In those cases, we recognize a contract asset rather than a billed trade accounts receivable until we are able to invoice the customer. Contract assets, along with billed trade accounts receivable, are included in trade accounts receivable in our consolidated balance sheets.
We classify contract liabilities as unearned income in our consolidated balance sheets. Such unearned income typically results from advance payments received on orders for new compressor equipment prior to the time such equipment is completed and transferred to the customer in accordance with the customer contract. New equipment sales orders generally take less than twelve months to build and deliver.
Bill-and-Hold Arrangements. We design compressor packages based on our customer’s specifications. In some cases, the customer will request us to hold the equipment, upon completion of the unit, until the job site is ready to receive the equipment. When this occurs, we along with the customer sign a bill-and-hold agreement, which outlines that the customer has title to the equipment, the equipment is ready for delivery, we cannot use the equipment or direct it to another customer, and we have a present right to payment. When those criteria have been met and the agreement is executed, we recognize the revenue on the equipment because control of the equipment has passed to our customer and our performance obligations are complete. Entering into these arrangements is something we have done as a courtesy for certain customers for many years. The equipment subject to the bill-and-hold agreements have generally been invoiced and paid for through progressive billings such that at the time the bill-and-hold agreement is executed, the majority of the contractual cash obligation of the customer has been received by us.
Fair Value Measurements
We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements were utilized in the determination of the carrying value of our Series A Preferred Units (a Level 3 fair value measurement). We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward purchase and sale derivative contracts. For these fair value measurements, we utilize the quoted value (a Level 2 fair value measurement). See Note 9 -
“Fair Value Measurements” for further discussion.
Fair value measurements are also utilized on a nonrecurring basis, such as in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets (a Level 3 fair value measurement) and for the impairment of long-lived assets (a Level 3 fair value measurement).
Distributions
On January 20, 2020, our General Partner declared a cash distribution attributable to the quarter ended December 31, 2019 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution was paid on February 14, 2020, to each of the holders of common units of record as of the close of business on February 1, 2020.
On April 20, 2020, our General Partner declared a cash distribution attributable to the quarter ended March 31, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution was paid on May 15, 2020, to each of the holders of common units of record as of the close of business on May 1, 2020.
On July 20, 2020, our General Partner declared a cash distribution attributable to the quarter ended June 30, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution was paid on August 14, 2020, to each of the holders of common units of record as of the close of business on August 1, 2020.
New Accounting Pronouncements
Standards adopted in 2020
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 clarifies the accounting for implementation costs in cloud computing arrangements. ASU 2018-15 is effective for us the first quarter of fiscal 2020. The adoption of this standard did not have a material impact on our consolidated financial statements.
Standards not yet adopted
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairments will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. Updates at each reporting date after initial adoption will be recorded through selling, general, and administrative expense. ASU 2016-13 is effective for us the first quarter of fiscal 2023. We continue to assess the potential effects of these changes to our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to intraperiod tax allocation, interim period income tax calculation methodology, and the recognition of deferred tax liabilities for outside basis differences. It also simplifies certain aspects of accounting for franchise taxes and clarifies the accounting for transactions that results in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for us the first quarter of fiscal 2021. We continue to assess the potential effects of these changes to our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying US GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. We are currently evaluating the impact of the provisions of ASU 2020-04 on our consolidated financial statements.
NOTE 2 – REVENUE FROM CONTRACTS WITH CUSTOMERS
As of September 30, 2020, we had $47.1 million of remaining contractual performance obligations for compression services. As a practical expedient, this amount does not include revenue for compression service contracts whose original expected duration is less than twelve months and does not consider the effects of the time value of money. Expected revenue to be recognized in the future as of September 30, 2020 for completion of performance obligations of compression service contracts are as follows:
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2020
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2021
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2022
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2023
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Thereafter
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Total
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(In Thousands)
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Compression service contracts remaining performance obligations
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$
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13,939
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$
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26,608
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$
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5,785
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$
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703
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$
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56
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$
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47,091
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Our contract asset balances included in trade accounts receivable in our consolidated balance sheets, primarily associated with customer documentation requirements prior to invoicing, were $8.8 million and $9.6 million as of September 30, 2020 and December 31, 2019, respectively.
Collections associated with progressive billings to customers for the construction of compression equipment is included in unearned income in the consolidated balance sheets. The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:
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Nine Months Ended
September 30,
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2020
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2019
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(In Thousands)
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Unearned income, beginning of period
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$
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9,505
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$
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24,898
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Additional unearned income
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38,581
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105,104
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Revenue recognized
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(41,623)
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(104,871)
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Unearned income, end of period
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$
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6,463
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$
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25,131
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During the nine months ended September 30, 2020, we recognized in equipment sales revenue $9.2 million from unearned income that was deferred as of December 31, 2019. During the nine months ended September 30, 2019, we recognized in equipment sales revenue of $21.8 million from unearned income that was deferred as of December 31, 2018.
As of September 30, 2020 and September 30, 2019, contract costs were immaterial.
Disaggregated revenue from contracts with customers by geography is as follows:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2020
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2019
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2020
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2019
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(In Thousands)
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Compression and related services
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U.S.
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$
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46,064
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$
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56,676
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$
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152,424
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$
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166,313
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International
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7,355
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8,361
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23,096
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26,660
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53,419
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65,037
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175,520
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192,973
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Aftermarket services
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U.S.
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13,564
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19,605
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46,276
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50,682
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International
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298
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821
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1,293
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1,514
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13,862
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20,426
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47,569
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52,196
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Equipment sales
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U.S.
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11,849
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28,872
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41,960
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107,797
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International
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28
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(588)
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801
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73
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11,877
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28,284
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42,761
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107,870
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Total Revenue
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U.S.
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71,477
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105,153
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240,660
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324,792
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International
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7,681
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8,594
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25,190
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28,247
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$
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79,158
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$
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113,747
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$
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265,850
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$
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353,039
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NOTE 3 – IMPAIRMENTS AND OTHER CHARGES
Impairments of Long-Lived Assets
During the first nine months of 2020, the COVID-19 pandemic and decline in oil and gas prices had a significant impact on our customers and industry, resulting in a decrease in demand in certain of our service lines.
During the first quarter of 2020, we started to see our customers revise their capital budgets downwards and adjust their operations accordingly, which led to a decline in orders for new compression equipment to be fabricated and sold to third parties. We concluded that these events were indicators of impairment for all our asset groups. We performed a recoverability analysis on all our long-lived asset groups and we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million related to these assets. Fair value was estimated based on a market approach.
During the second quarter of 2020, primarily as a result of continued negative impacts on our compression fleet associated with the COVID-19 pandemic and declines in oil and gas prices, we recorded impairments and other charges of approximately $9.0 million associated with non-core used compressor equipment that we have
held for sale, the low-horsepower class of our compression fleet, and field inventory for compression and related services. Fair value used to determine impairments was estimated based on a market approach. Given the dynamic nature of the events, we are not able to reasonably estimate how long our operations will be impacted and the full impact these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments. During the third quarter of 2020, no further impairments were recorded.
NOTE 4 – INVENTORIES
Components of inventories as of September 30, 2020 and December 31, 2019, are as follows:
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September 30, 2020
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December 31, 2019
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(In Thousands)
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Parts and supplies
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$
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29,125
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$
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42,814
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Work in progress
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4,856
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13,223
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Total inventories
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$
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33,981
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$
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56,037
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Inventories consist primarily of compressor package parts and supplies. Work in progress inventories consist of new compressor packages located at our manufacturing facility in Midland, Texas as well as work in progress on certain compression services jobs.
NOTE 5 – LEASES
We have operating leases for some of our office space, warehouse space, operating locations, and machinery and equipment. Our leases have remaining lease terms ranging from 1 to 10 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. Our leases generally require us to pay all maintenance and insurance costs. During the fourth quarter of 2019, we entered into a lease agreement commitment for 14 compressor packages. The leases are for an initial term of seven years and commenced upon the completion of the fabrication of the compressor packages. During the first quarter, we took delivery of eight compressor packages. During the second quarter, we took delivery of the remaining six compressor packages. We have no other lease agreement commitments that have not yet commenced that create significant rights and obligations. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
In November 2019, we entered into a sale and leaseback transaction with a third-party lessor whereby we received $9.8 million of proceeds from the sale of certain of our compression equipment in service and entered into an associated lease of the same equipment having an initial lease term of seven years.
Lease costs are included in either cost of revenues or selling, general, and administrative expense depending on the use of the underlying asset. Total lease expense (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less), was $3.5 million and $10.2 million for the three and nine month period ended September 30, 2020, respectively, of which, $0.8 million and $2.4 million respectively, related to short-term leases. Variable rent expense was not material.
Operating lease supplemental cash flow information:
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Nine Months Ended September 30,
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2020
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2019
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(In Thousands)
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Cash paid for amounts included in the measurement of lease liabilities:
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Operating cash flows - operating leases
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$
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7,437
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$
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3,645
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Right-of-use assets obtained in exchange for lease obligations:
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Operating leases
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$
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19,127
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$
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3,035
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Supplemental balance sheet information:
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September 30, 2020
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December 31, 2019
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(In Thousands)
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Operating leases:
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Operating right-of-use asset
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$
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34,680
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$
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21,006
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Accrued liabilities and other
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$
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8,186
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$
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6,706
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Operating lease liabilities
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25,896
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13,822
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Total operating lease liabilities
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$
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34,082
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$
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20,528
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Additional operating lease information:
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September 30, 2020
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December 31, 2019
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Weighted average remaining lease term:
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Operating leases
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4.89 years
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4.51 years
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Weighted average discount rate:
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Operating leases
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8.89
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%
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8.73
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%
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Future minimum lease payments by year and in the aggregate, under non-cancelable operating leases with terms in excess of one year, consist of the following at September 30, 2020:
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Operating Leases
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(In Thousands)
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Remainder of 2020
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$
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2,663
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2021
|
10,450
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2022
|
8,676
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2023
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7,062
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2024
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4,812
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Thereafter
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8,819
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Total lease payments
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42,482
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Less imputed interest
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(8,400)
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Total lease liabilities
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$
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34,082
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NOTE 6 – LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
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September 30, 2020
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December 31, 2019
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Scheduled Maturity
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(In Thousands)
|
|
Credit Agreement (presented net of the unamortized deferred financing costs of $0 million as of September 30, 2020 and $0.9 million as of December 31, 2019)
|
|
June 29, 2023
|
|
$
|
—
|
|
|
$
|
2,622
|
|
|
7.25% Senior Notes (presented net of the unamortized discount of $0.3 million as of September 30, 2020 and $1.7 million as of December 31, 2019 and unamortized deferred financing costs of $0.5 million as of September 30, 2020 and $2.8 million as of December 31, 2019)
|
|
August 15, 2022
|
|
79,893
|
|
|
291,444
|
|
|
7.50% First Lien Notes (presented net of the unamortized deferred financing costs of $5.4 million as of September 30, 2020 and $5.8 million as of December 31, 2019, net of the unamortized discount of $0.2 million as of September 30, 2020, and net of deferred restructuring gain of $5.3 million as of September 30, 2020)
|
|
April 1, 2025
|
|
399,640
|
|
|
344,172
|
|
|
10.00%/10.75% Second Lien Notes (presented net of the unamortized discount of $0.8 million as of September 30, 2020, and net of unamortized deferred financing costs of $1.2 million as of September 30, 2020, and net of deferred restructuring gain of $3.9 million as of September 30, 2020)
|
|
April 1, 2026
|
|
157,410
|
|
|
—
|
|
|
Total long-term debt
|
|
|
|
$
|
636,943
|
|
|
$
|
638,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020, CCLP had no balance outstanding and $2.5 million in letters of credit issued under the Credit Agreement. Because there was no outstanding balance on the CCLP Credit Agreement, associated deferred financing costs of $0.7 million were classified as other long-term assets on the accompanying consolidated balance sheet. As of September 30, 2020, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of $14.5 million.
Our credit and senior note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. We are in compliance with all covenants of our credit and senior note agreements as of September 30, 2020.
See Note 7 - “Related Party Transactions,” for a discussion of our amounts payable to affiliates and long-term affiliate payable to TETRA.
Second Amendment to Credit Agreement
On June 11, 2020, CSI Compressco, LP and CSI Compressco Sub Inc (the “Borrowers”) entered into the Second Amendment to Loan and Security Agreement (the “Amendment”) amending the Loan and Security Agreement dated June 29, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) with Bank of America, N.A., in its capacity as administrative agent, issuing bank and swing line issuer (“Administrative Agent”), and the other lenders and loan parties party thereto. The Amendment provided for changes and modifications to the Credit Agreement which include, among other things, changes to certain terms of the Credit Agreement as follows: (i) resizing of the maximum credit commitment under the Credit Agreement from $50,000,000 to $35,000,000; (ii) the inclusion of a $5,000,000 reserve with respect to the Borrowing Base (as defined in the Credit Agreement) thereunder, which would result in reduced borrowing availability; (iii) the removal of the financial covenant compliance test with respect to the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement); (iv) an increase in the applicable margin related to (x) LIBOR Rate Loans (as defined in the Credit Agreement) to a range between 3.00% and 3.50% and (y) Base Rate Loans (as defined in the Credit Agreement) to a range between 2.00% and 2.50%, in each case, which shall be determined according to average daily excess availability under the Credit Agreement; and (v) an
increase in the rate used to calculate the commitment fee in respect of the unutilized commitments under the Credit Agreement to 0.50%. In connection to this amendment, $0.2 million of financing costs were incurred, and deferred against the carrying value of the amount outstanding, if any. Additionally, $0.2 million of financing fees were charged to other (income) expense, net during the nine month period ended September 30, 2020.
First Supplemental Indenture for the Old Notes
On June 11, 2020, CSI Compressco, LP and CSI Compressco Finance Inc. (the “Issuers”) announced that they had accepted for exchange $215,208,000, or approximately 72.7%, of their outstanding 7.25% Senior Notes due 2022 (the “Old Notes”) that were validly tendered (and not validly withdrawn) by 11:59 p.m., New York City time, on June 10, 2020, for (i) $50,000,000 of the Issuers’ 7.50% Senior Secured First Lien Notes due 2025 (the “7.50% First Lien Notes”) and (ii) $155,529,000 aggregate principal amount of new 10.00%/10.75% Senior Secured Second Lien Notes due 2026 (the “10.00%/10.75% Second Lien Notes” and, together with the 7.50% First Lien Notes, the “New Notes”), pursuant to its previously announced exchange offer and consent solicitation (the “Exchange Offer”), which commenced on April 17, 2020. In connection with the exchange offer, we incurred financing fees of $4.6 million which were charged to other (income) expense, net during the nine month period ended September 30, 2020.
On June 12, 2020, following receipt of the requisite consents of the holders of the Old Notes, the Issuers entered into the First Supplemental Indenture (the “First Supplemental Indenture”), by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee, to the Indenture, dated as of August 4, 2014 (the “Unsecured Indenture”), by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee.
The First Supplemental Indenture eliminated substantially all of the restrictive covenants and certain of the default provisions in the Unsecured Indenture and became operative upon the consummation by the Issuers of the Exchange Offer.
On June 12, 2020, the Issuers issued $50,000,000 in aggregate principal amount of New First Lien Notes to certain holders of the Old Notes pursuant to the terms of the Exchange Offer. In March 2018, the Issuers had issued $350,000,000 in aggregate principal amount of 7.50% Senior Secured Notes due 2025 (the “Existing First Lien Notes” and, together with the New First Lien Notes, the “7.50% First Lien Notes”) pursuant to the First Lien Base Indenture. The New First Lien Notes were issued as “additional notes” under the First Lien Base
Indenture and will be treated as a single class with such notes but will not trade fungibly with the Existing First
Lien Notes.
Second Lien Notes Indenture
On June 12, 2020, the Issuers issued $155,529,000 in aggregate principal amount of the 10.00%/10.75% Second Lien Notes to certain holders of the Old Notes pursuant to the terms of the Exchange Offer. The Issuers issued the 10.00%/10.75% Second Lien Notes pursuant to an indenture, dated June 12, 2020 (the “Second Lien Notes Indenture”), by and among the Issuers, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee (the “Second Lien Trustee”). In connection with the payment of PIK Interest (as defined below), if any, in respect of the 10.00%/10.75% Second Lien Notes, the Issuers will be entitled, without the consent of the Holders, to increase the outstanding aggregate principal amount of the 10.00%/10.75% Second Lien Notes or issue additional notes (“PIK notes”) under the Second Lien Notes Indenture on the same terms and conditions as the 10.00%/10.75% Second Lien Notes offered hereby (each such increase or issuance, a “PIK Payment”). The Issuers may issue additional 10.00%/10.75% Second Lien Notes under the Second Lien Notes Indenture from time to time. Any issuance of additional 10.00%/10.75% Second Lien Notes (including PIK notes) is subject to all of the covenants in the Second Lien Notes Indenture. The 10.00%/10.75% Second Lien Notes and any additional 10.00%/10.75% Second Lien Notes subsequently issued under the indenture, will be treated as a single class for all purposes under the indenture, including, without limitation, waivers, amendments, redemptions and offers to purchase. Subject to the making of PIK Payments, the Issuers will issue 10.00%/10.75% Second Lien Notes in denominations of $2,000 and integral multiples of $1,000 in excess of $2,000; provided that PIK Payments may result in 10.00%/10.75% Second Lien Notes being issued in denominations of $1.00 and integral multiples of $1.00. The 10.00%/10.75% Second Lien Notes will mature on April 1, 2026. Interest on the 10.00%/10.75% Second Lien Notes will be payable semi-annually in arrears on April 1 and October 1, commencing on October 1, 2020. The Issuers will make each interest payment to the holders of record on March 15 and September 15 immediately
preceding each interest payment date. Interest will accrue at (1) the annual rate of 7.250% payable in cash, plus (2) at the election of the Issuers (made by delivering a notice to the Second Lien Trustee not less than five business days prior to the record date), the annual rate of (i) 2.750% payable in cash (together with the annual rate set forth in clause (1), the “Cash Interest Rate”) or (ii) 3.500% payable by increasing the principal amount of the outstanding 10.00%/10.75% Second Lien Notes or by issuing additional PIK notes, in each case rounding up to the nearest $1.00 (such increased principal amount or additional PIK notes, the “PIK Interest”). In the absence of an interest payment election made by the Issuers as set forth above, interest on the notes will be payable as if the Issuers had elected to pay PIK Interest with respect to the portion of interest payable pursuant to clause (2) above.
The 10.00%/10.75% Second Lien Notes are jointly and severally, and fully and unconditionally, guaranteed (the “Guarantees”) on a senior secured basis initially by each of the Partnership’s domestic restricted subsidiaries (other than Finance Corp, certain immaterial subsidiaries and certain other excluded domestic subsidiaries, the “Guarantors”) and will be secured by a second-priority security interest in substantially all of the Issuers’ and the Guarantors’ assets (other than certain excluded assets) (the “Collateral”) as collateral security for their obligations under the 10.00%/10.75% Second Lien Notes, subject to certain permitted encumbrances and exceptions. At any time prior to April 1, 2023, the Issuers may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 10.00%/10.75% Second Lien Notes issued under the Second Lien Notes Indenture at a redemption price of 110.000% of the principal amount of the 10.00%/10.75% Second Lien Notes, plus accrued and unpaid interest to the redemption date, with an amount of cash equal to the net cash proceeds of certain equity offerings. On or after April 1, 2023, the Issuers may redeem all or part of the 10.00%/10.75% Second Lien Notes at redemption prices (expressed as percentages of the principal amount) equal to (i) 107.500% for the twelve month period beginning on April 1, 2023; (ii) 105.000% for the twelve-month period beginning on April 1, 2024 and (iii) 100.000% at any time thereafter, plus accrued and unpaid interest up to, but not including, the redemption date. In addition, at any time prior to April 1, 2023, the Company may redeem all or a part of the 10.00%/10.75% Second Lien Notes at a redemption price equal to 100% of the principal amount of the 10.00%/10.75% Second Lien Notes to be redeemed plus a make-whole premium, plus accrued and unpaid interest up to, but not including, the redemption date.
The Second Lien Notes Indenture contains customary covenants restricting the Partnership’s ability and the ability of its restricted subsidiaries to: (i) pay distributions on, purchase or redeem its common units or purchase or redeem its subordinated debt; (ii) incur or guarantee additional indebtedness or issue certain kinds of preferred equity securities; (iii) create or incur certain liens securing indebtedness; (iv) sell assets, including dispositions of the Collateral; (v) consolidate, merge or transfer all or substantially all of its assets; (vi) enter into transactions with affiliates; and (vii) enter into agreements that restrict distributions or other payments from its restricted subsidiaries to the Partnership. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting the Partnership, subject to the satisfaction of certain conditions, to transfer assets to certain of its unrestricted subsidiaries. Moreover, if the 10.00%/10.75% Second Lien Notes receive an investment grade rating from at least two rating agencies and no default has occurred and is continuing under the 10.00%/10.75% Second Lien Notes Indenture, many of the restrictive covenants in the Second Lien Notes Indenture will be terminated. The Second Lien Notes Indenture also contains customary events of default and acceleration provisions relating to such events of default, which provide that upon an event of default under the Second Lien Notes Indenture, the Second Lien Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding 10.00%/10.75% Second Lien Notes may declare all of the 10.00%/10.75% Second Lien Notes to be due and payable immediately.
NOTE 7 – RELATED PARTY TRANSACTIONS
Omnibus Agreement
Under the terms of the Omnibus Agreement, our General Partner provides all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico, Canada, and Argentina), and certain of TETRA’s Latin American-based subsidiaries provide personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provides certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. Pursuant to the Omnibus Agreement, we reimburse our General Partner and TETRA for services they provide to us.
TETRA and General Partner Ownership
As of September 30, 2020, TETRA’s ownership interest in us was approximately 34% of the outstanding common units and an approximate 1.4% general partner interest, through which it holds incentive distribution rights.
Other Sources of Financing
In February 2019, we entered into a transaction with TETRA whereby TETRA agreed to fund the construction of and purchase from us of up to $15.0 million of new compression services equipment and to subsequently lease the equipment back to us in exchange for a monthly rental fee. As of September 30, 2020, pursuant to this arrangement, $14.8 million has been funded by TETRA for the construction of new compression services equipment and all such equipment was completed and deployed under this agreement. For accounting purposes, the inclusion of an option that allows us to repurchase the equipment at a fixed price during certain periods of the agreement caused the transaction to be accounted for as a financing transaction, as opposed to a sale-leaseback, resulting in the funded amount being recorded as a financing obligation. Accordingly, the compression services equipment is included in property, plant, and equipment and the corresponding financing obligations are included in amounts payable to affiliates and long-term affiliate payable in our consolidated balance sheet. As of September 30, 2020, the financing obligation was $14.9 million. Imputed interest expense recognized for the three and nine month period ended September 30, 2020 was $0.6 million and $1.8 million, respectively.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of any lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.
NOTE 9 – FAIR VALUE MEASUREMENTS
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.
Under U.S. GAAP, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.
We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. We enter into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of September 30, 2020, we had the following foreign currency derivative contract outstanding relating to a portion of our foreign operations:
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|
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|
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|
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|
|
Derivative contracts
|
|
US Dollar Notional Amount
|
|
Traded Exchange Rate
|
|
Settlement Date
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward sale Mexican peso
|
|
$
|
5,464
|
|
|
21.87
|
|
October 1, 2020
|
Under a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries, we may enter into similar derivative contracts from time to time. Although contracts pursuant to this program will serve as economic hedges of the cash flow of our currency exchange risk exposure, they will not be formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.
The fair values of our foreign currency derivative contracts are based on quoted market values (a Level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of September 30, 2020 and December 31, 2019, are as follows:
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|
|
|
|
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|
|
|
|
Foreign currency derivative contracts
|
|
Balance Sheet Location
|
|
Fair Value at
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
|
|
|
(In Thousands)
|
|
Forward sale contracts
|
|
Current assets
|
|
$
|
59
|
|
|
$
|
—
|
|
|
Forward sale contracts
|
|
Current liabilities
|
|
—
|
|
|
(53)
|
|
|
Net asset (liability)
|
|
|
|
$
|
59
|
|
|
$
|
(53)
|
|
None of our foreign currency derivative instruments contains credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and nine month periods ended September 30, 2020, we recognized $0.3 million and $(0.8) million, respectively, of net (gains) losses associated with our foreign currency derivatives program. During the three and nine month periods ended September 30, 2019, we recognized $(0.1) million and $0.2 million, respectively, of net (gains) losses associated with our foreign currency derivative program. These amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations.
During the nine months ended September 30, 2020, we recorded impairments of approximately $9.0 million, reflecting the decreased fair value for certain assets. The fair values used in these impairment calculations were estimated based on a market approach, which is based on significant unobservable inputs (Level 3) in accordance with the fair value hierarchy. See Note 3 - “Impairments and Other Charges” for further discussion.
Recurring and nonrecurring fair value measurements by valuation hierarchy as of September 30, 2020 and December 31, 2019 are as follows:
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|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
Description
|
|
Total as of
September 30, 2020
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset for foreign currency derivative contracts
|
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets or Liabilities
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Description
|
|
Total as of
December 31, 2019
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for foreign currency derivative contracts
|
|
$
|
(53)
|
|
|
$
|
—
|
|
|
$
|
(53)
|
|
|
$
|
—
|
|
|
|
|
$
|
(53)
|
|
|
|
|
|
|
|
The fair values of cash, accounts receivable, accounts payable, accrued liabilities, short-term borrowings, and variable-rate long-term debt pursuant to our Credit Agreement approximate their carrying amounts. The fair values of our publicly traded long-term 7.25% Senior Notes at September 30, 2020 and December 31, 2019 were approximately $59.7 million and $266.0 million, respectively. Those fair values compare to aggregate principal amounts of such notes at September 30, 2020 and December 31, 2019 of $80.7 million and $295.9 million, respectively. The fair values of our long-term 7.50% Senior Secured Notes at September 30, 2020 and December 31, 2019 were approximately $360.0 million and $344.8 million, respectively. These fair values compare to an aggregate principal amount of such notes at September 30, 2020 and December 31, 2019 of $400.0 million and $350.0 million, respectively. The fair value of the CCLP 10.00%/10.75% Second Lien Notes at September 30, 2020 was approximately $115.5 million. This fair value compares to aggregate principal amount of such notes at September 30, 2020 of $155.5 million. We based the fair values of our 7.25% Senior Notes, our 7.50% Senior Secured Notes, and our 10.00%/10.75% Second Lien Notes as of September 30, 2020 on recent trades for these notes. See Note 6 - “Long-Term Debt and Other Borrowings” for further discussion.
NOTE 10 – INCOME TAXES
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S., and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.
Our effective tax rate for the nine month period ended September 30, 2020, was negative 3.9% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.
NOTE 11 – SALE OF ASSETS
In April 2020, we entered into a purchase and sale agreement for the sale of our Midland manufacturing facility. During the nine months ended September 30, 2020, we recorded an impairment of $3.1 million to reduce this asset to its approximate fair market value based on a market approach and expected net proceeds. The impairment charges are reflected in impairment and other charges in our statement of operations.
On July 2, 2020, we completed the previously announced sale of our Midland manufacturing facility for a total sale price of $17.0 million. The Midland facility was used to design, fabricate and assemble new standard and customized compressor packages. The sale of the Midland facility resulted in a gain of $0.3 million during the three and nine months ended September 30, 2020, which is reflected in other (income) expense, net in our statement of operations.
Additionally, in the third quarter of 2020, we sold the remaining inventory and equipment related to the fabrication of new compressors for a gain of $0.5 million, which is reflected in other (income) expense, net in our statement of operations for the three and nine months ended September 30, 2020. During the nine months ended September 30, 2020, we recorded an impairment of $2.3 million to reduce the carrying value of the new unit sales inventory to its approximate fair market value based on a market approach. The impairment charges are reflected in impairment and other charges in our statement of operations.
During the third quarter ended September 30, 2020, we completed the sale of 58 low-horsepower units to one of our customers for $2.6 million. During the nine months ended September 30, 2020, we recorded an impairment of $3.7 million to reduce these assets to their approximate fair market value based on a market approach and expected net proceeds. The impairment charges are reflected in impairment and other charges in our statement of operations.
NOTE 12 – SUBSEQUENT EVENTS
In connection with the Midland manufacturing facility sale discussed in Note 11, we entered into an agreement with the buyer to continue to operate a portion of the facility, which allowed us to close out remaining backlog for the New Unit Sale business and to continue to operate our AMS business at that location for an interim period. Following the shipment of the last unit in October, we are no longer fabricating new compressor packages for sales to third parties or for our own service fleet. The operations associated with fabricating new compressor packages will be reported as a discontinued operation in the fourth quarter of 2020.
In July 2020, we received a purchase order to sell $6.7 million of idle large horsepower compressor units to one of our significant customers. During the third quarter of 2020, we received proceeds and recognized $1.7 million relating to this order. In October 2020, we received the remaining $5.0 million of proceeds and started to deliver the additional compressor units to the customer. We have and will continue to evaluate the sale of other non-core assets, including our low-horsepower compression fleet. We can provide no assurance that we will consummate a future sale of our low-horsepower compression fleet or any other non-core asset.
On October 19, 2020, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended September 30, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit, on an annualized basis. This distribution will be paid on November 13, 2020 to each of the holders of common units of record as of the close of business on November 1, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and accompanying notes included in this Quarterly Report. In addition, the following discussion and analysis also should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 16, 2020 (“2019 Annual Report”). This discussion includes forward-looking statements that involve certain risks and uncertainties.
Business Overview
We provide compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. Our compression and related services business includes a fleet of more than 4,900 compressor packages providing approximately 1.2 million in aggregate horsepower, utilizing a full spectrum of low-, medium-, and high-horsepower engines. Our equipment sales business includes the design, and sale of both standard and custom-designed, engineered compressor packages. Our aftermarket business provides compressor package reconfiguration and maintenance services, as well as the sale of compressor package parts and components manufactured by third-party suppliers. Our customers operate throughout many of the onshore producing regions of the United States, as well as in a number of foreign locations, including the countries of Mexico, Canada and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services and sell to customers. Going forward, we plan to have such compressor packages fabricated through one or more third party packagers.
Our operations are significantly dependent upon the demand for, and production of, oil and the associated natural gas from unconventional oil and natural gas production in the domestic and international markets in which we operate. During the third quarter of 2020, macroeconomic uncertainty in the oil and natural gas industry continued to drive steep declines in spending by the oil and gas operators but as oil prices stabilized around $40, the pace of horsepower being released slowed in comparison to the second quarter. In addition, the unprecedented drop in U.S. onshore oil and natural gas activity in the second quarter led to some of our customers temporarily shutting in wells and requesting that compression units be placed on standby. Customers continued bringing production back online throughout the third quarter and we ended the third quarter with approximately 8% of our US domestic fleet on standby as compared to 15% in the second quarter.
Throughout the year, we have seen our customers revise their capital budgets substantially downward and adjust their operations accordingly which we believe will continue for the foreseeable future. Given the decline in orders for new compression equipment to be fabricated and sold to third parties, in early April 2020, we announced our plan to shut down our Midland manufacturing facility. On July 2, 2020, we completed the previously announced sale of our Midland manufacturing facility for a total sale price of $17.0 million. We continued to operate the facility until the completion and sale of our remaining backlog, which was completed in October 2020. Following the completion of the backlog, we are no longer fabricating new compressor packages for sales to third parties or for our own service fleet.
The COVID-19 pandemic and decline in oil prices had a significant impact on our customers and industry. During the first quarter of 2020, we concluded that these events were indicators of impairment for all our asset groups. As a result, we performed a recoverability analysis on all our long-lived asset groups and we determined that the carrying values of our Midland manufacturing facility and related new unit sales inventory exceeded their respective fair values. Therefore, we recorded impairments of approximately $5.4 million during the first quarter of 2020 related to these assets. During the second quarter of 2020, primarily as a result of continued negative impacts on our compression fleet associated with the COVID-19 pandemic and declines in oil and gas prices, we recorded impairments and other charges of approximately $9.0 million associated with non-core used compressor equipment that we have held for sale, the low-horsepower class of our compression fleet, and field inventory for compression and related services. During the third quarter of 2020, no further impairments were recorded. Given the dynamic nature of the events, we are not able to reasonably estimate how long our operations will be impacted and the full impact these events will have on our operations. As a result, we could have indicators of impairment again in future periods resulting in additional asset impairments. We have and will continue to evaluate the sale of non-core assets, including our low-horsepower compression fleet. We can provide no assurance that we will consummate a future sale of our low-horsepower compression fleet or any other non-core asset.
We have taken aggressive cost reduction initiatives to improve our liquidity. In addition, during the second quarter of 2020, we completed a debt exchange that resulted in a permanent reduction in outstanding long-term debt of $9.6 million and the extension of maturity dates of certain of our remaining long-term debt balances.
We actively managed our flexible cost structure as a proactive response to the changing market conditions throughout the second and third quarters of 2020, taking necessary actions to manage through these conditions, some of which could result in impairments or restructuring charges in future periods. Temporary and permanent cost reductions we have implemented include reductions in 2020 capital expenditures, workforce reductions, salary reductions, furloughs, a reduction in the cash retainers for the directors of our general partner, the suspension of 401(k) matching contributions for our employees, targeted reduction in SG&A expenses, rationalization of our real estate facilities, including potential exit of leases and facility closures, and negotiated reductions in expenditures with many of our suppliers. We plan to continue executing these strategies for the remainder of the year. While we are not able to predict how long market disruptions resulting from the COVID-19 pandemic and diminished demand for oil will continue, or what impact they will ultimately have on our business, we have seen activity leveling out at the end of the third quarter. During the third quarter of 2020, completions activity in the US onshore regions has improved modestly. However, the risk of additional waves of COVID-19, increases in the number of cases, and the possibility of future lockdowns makes any forecast for improvement uncertain. Despite challenging market conditions, we will continue to maintain our commitment to safety and service quality for our customers.
How We Evaluate Our Operations
Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, quarter-to-quarter, year-to-date, and year-to-year comparisons and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and for the fuel and other supplies consumed while providing our services. The costs of other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with our level of activity.
Our labor costs consist primarily of wages and benefits for our field and fabrication personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three and nine month periods ended September 30, 2020, is provided within the Results of Operations sections below.
Adjusted EBITDA. We view Adjusted EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (typically compared to the prior month, prior year period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and before certain charges, including impairments, bad debt expense attributable to bankruptcy of customers, equity compensation, non-cash costs of compressors sold, fair value adjustments of our Preferred Units that were issued in late 2016 and redeemed for cash on August 8, 2019, gain on extinguishment of debt, write-off of unamortized financing costs, and excluding, Preferred Units redemption premium, severance and other non-recurring or unusual expenses or charges. Adjusted EBITDA is used as a supplemental financial measure by our management to:
•assess our ability to generate available cash sufficient to make distributions to our common unitholders and general partner;
•evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
•measure operating performance and return on capital as compared to those of our competitors; and
•determine our ability to incur and service debt and fund capital expenditures.
The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2020
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2019
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2020
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2019
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(In Thousands)
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|
Net loss
|
$
|
(12,607)
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|
|
$
|
(3,613)
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|
$
|
(50,815)
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|
$
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(19,016)
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Provision (benefit from) for income taxes
|
695
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|
|
(363)
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|
1,923
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|
3,306
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|
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Depreciation and amortization
|
19,947
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|
|
18,459
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|
|
59,972
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|
|
56,045
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|
Impairments and other charges
|
—
|
|
|
849
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|
14,348
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|
3,313
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Bad debt expense attributable to bankruptcy of customer
|
—
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1,768
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—
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1,768
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Interest expense, net
|
13,886
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13,533
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40,635
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39,877
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Equity compensation
|
232
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(211)
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1,044
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|
744
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Series A Preferred redemption premium
|
—
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|
|
399
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—
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|
1,468
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Series A Preferred fair value adjustments
|
—
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—
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—
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|
1,470
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Debt exchange expenses
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22
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—
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4,777
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—
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Severance
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484
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118
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1,840
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|
118
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Non-cash cost of compressors sold
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4,804
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2,803
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7,244
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3,841
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Other
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306
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254
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1,610
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630
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Adjusted EBITDA
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$
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27,769
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$
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33,996
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$
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82,578
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$
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93,564
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The following table reconciles cash flow from operating activities to Adjusted EBITDA:
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Nine Months Ended
September 30,
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2020
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2019
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(In Thousands)
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Net cash provided by operating activities
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$
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13,729
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$
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67,461
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Changes in current assets and current liabilities
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17,317
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(18,351)
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Deferred income taxes
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(587)
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(550)
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Other non-cash charges
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(1,650)
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(3,738)
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Bad debt expense attributable to bankruptcy of customer
|
—
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1,768
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Interest expense, net
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40,635
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39,877
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Series A Preferred accrued paid in kind distributions
|
—
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(1,123)
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Insurance recoveries
|
517
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|
325
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Provision for income taxes
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1,923
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|
3,306
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Severance
|
1,840
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|
118
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Non-cash cost of compressors sold
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7,244
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3,841
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Other
|
1,610
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|
630
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Adjusted EBITDA
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$
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82,578
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$
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93,564
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Free Cash Flow. We define Free Cash Flow as cash from operations less capital expenditures, net of sales proceeds. Management primarily uses this metric to assess our ability to retire debt, evaluate our capacity to further invest and grow, and measure our performance as compared to our peers. The following table reconciles cash provided by operations, net, to Free Cash Flow for the periods indicated:
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2020
|
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2019
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2020
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2019
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(In Thousands)
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(In Thousands)
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Net cash (used in) provided by operating activities
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$
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(4,451)
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$
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27,119
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$
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13,729
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$
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67,461
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Capital expenditures, net of sales proceeds
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1,550
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(20,867)
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(6,058)
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(60,453)
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Midland proceeds
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17,000
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—
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17,000
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—
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Free cash flow
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$
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14,099
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$
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6,252
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$
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24,671
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$
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7,008
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Net cash (used in) provided by operating activities in the third quarter of 2020 consists of $8.0 million of cash provided by operating activities offset by $12.4 million in working capital changes.
Adjusted EBITDA and Free Cash Flow are financial measures that are not in accordance with U.S. GAAP and should not be considered an alternative to net income, operating income, cash from operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. These measures may not be comparable to similarly titled financial metrics of other entities, as other entities may not calculate Adjusted EBITDA or Free Cash Flow in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA and Free Cash Flow as analytical tools by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. Adjusted EBITDA and Free Cash Flow should not be viewed as indicative of the actual amount of cash we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.
Horsepower Utilization Rate of our Compressor Packages. We measure the horsepower utilization rate across our fleet of compressor packages as the amount of horsepower of compressor packages used to provide services as of a particular date, divided by the amount of horsepower of compressor packages in our services fleet as of such date. Management primarily uses this metric to determine our future need for additional compressor packages for our service fleet and to measure marketing effectiveness.
The following table sets forth the total horsepower in our compression fleet, our total horsepower in service, and our horsepower utilization rate as of the dates shown.
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September 30,
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2020
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2019
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Horsepower
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Total horsepower in fleet
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1,172,307
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1,157,938
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Total horsepower in service
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941,747
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1,043,384
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Total horsepower utilization rate
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80.3
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%
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90.1
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%
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The following table sets forth our horsepower utilization rates by each horsepower class of our compression fleet as of the dates shown.
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September 30,
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2020
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2019
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Horsepower utilization rate by class
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Low-horsepower (0-100)
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61.7
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%
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72.1
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%
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Medium-horsepower (101-1,000)
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76.5
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%
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|
87.0
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%
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High-horsepower (1,001 and over)
|
87.3
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%
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|
97.4
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%
|
The total horsepower utilization rate and the utilization rate by each horsepower class have each decreased this quarter compared to the prior year period due to significantly lower customer activity levels. The third quarter of 2020 continued to be impacted by the COVID-19 pandemic and we believe our utilization rates for the fourth quarter will also continue to be negatively impacted by the COVID-19 pandemic and related market conditions in the oil and gas industry. In October, natural gas prices increased to $3.40. With improvements in the outlook for natural gas prices, we anticipate demand for our small and medium-horsepower compression to increase.
Net Increases/Decreases in Compression Fleet Horsepower. We measure the net increase (or decrease) in our compression fleet horsepower during a given period by taking the difference between the aggregate horsepower of compressor packages added to the fleet during the period, less the aggregate horsepower of compressor packages removed from the fleet during the period. We measure the net increase (or decrease) in our compression fleet horsepower in service during a given period by taking the difference between the aggregate horsepower of compressor packages placed into service during the period, less the aggregate horsepower of compressor packages removed from service during the period.
New Equipment Sales Backlog. Our new equipment sales business includes the engineering, design, fabrication, assembly, project management, and sale of both standard and custom-designed compressor packages fabricated at authorized packaging facilities in Texas. Our new equipment sales backlog consists of firm customer orders for which a purchase or work order has been received, satisfactory credit or financing arrangements exist, and target delivery dates have been established based on customer requirements. Earlier this year, we disclosed our plan to shut down our Midland manufacturing facility as a result of a decline in orders for new equipment from third parties. On July 2, 2020, we completed the previously announced sale of the manufacturing facility for a total sale price of $17.0 million. In connection with the sale, we entered into an agreement with the buyer that permits us to continue to operate the facility until the completion and sale of our remaining backlog, which was completed during October 2020. New equipment sales backlog was $1.4 million as of September 30, 2020 compared to $8.3 million and $35.5 million as of June 30, 2020 and December 31, 2019, respectively. Changes in our new equipment sales backlog are a function of additional customer orders less completed orders that result in equipment sales revenues for the period. All our September 30, 2020 new equipment sales backlog will be recognized during the fourth quarter of 2020 since our remaining backlog was completed in October. After the fourth quarter of 2020, we will no longer be fabricating new compressor packages for sales to third parties or for our own service fleet.
Critical Accounting Policies and Estimates
There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our 2019 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.
Results of Operations
Three months ended September 30, 2020 compared to three months ended September 30, 2019
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Three Months Ended September 30,
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|
Period-to-Period Change
|
|
Percentage of Total Revenues
|
|
Period-to-Period Change
|
|
Consolidated Results of Operations
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
2020
|
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2019
|
|
2020 vs. 2019
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(In Thousands)
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Revenues:
|
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Compression and related services
|
$
|
53,419
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|
|
$
|
65,037
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|
$
|
(11,618)
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|
67.5
|
%
|
|
57.2
|
%
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|
(17.9)
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%
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|
Aftermarket services
|
13,862
|
|
|
20,426
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|
(6,564)
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|
17.5
|
%
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|
18.0
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%
|
|
(32.1)
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%
|
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Equipment sales
|
11,877
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|
|
28,284
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|
|
(16,407)
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|
15.0
|
%
|
|
24.9
|
%
|
|
(58.0)
|
%
|
|
Total revenues
|
79,158
|
|
|
113,747
|
|
|
(34,589)
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
(30.4)
|
%
|
|
Cost of revenues:
|
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|
|
|
|
|
|
|
|
|
|
|
Cost of compression and related services
|
25,133
|
|
|
30,395
|
|
|
(5,262)
|
|
|
31.8
|
%
|
|
26.7
|
%
|
|
(17.3)
|
%
|
|
Cost of aftermarket services
|
11,815
|
|
|
17,163
|
|
|
(5,348)
|
|
|
14.9
|
%
|
|
15.1
|
%
|
|
(31.2)
|
%
|
|
Cost of equipment sales
|
12,465
|
|
|
26,518
|
|
|
(14,053)
|
|
|
15.7
|
%
|
|
23.3
|
%
|
|
(53.0)
|
%
|
|
Total cost of revenues
|
49,413
|
|
|
74,076
|
|
|
(24,663)
|
|
|
62.4
|
%
|
|
65.1
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%
|
|
(33.3)
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%
|
|
Depreciation and amortization
|
19,947
|
|
|
18,459
|
|
|
1,488
|
|
|
25.2
|
%
|
|
16.2
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%
|
|
8.1
|
%
|
|
Impairments and other charges
|
—
|
|
|
849
|
|
|
(849)
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|
|
—
|
%
|
|
0.7
|
%
|
|
(100.0)
|
%
|
|
Insurance recoveries
|
—
|
|
|
(325)
|
|
|
325
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|
|
—
|
%
|
|
(0.3)
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%
|
|
(100.0)
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%
|
|
Selling, general, and administrative expense
|
9,150
|
|
|
11,336
|
|
|
(2,186)
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|
|
11.6
|
%
|
|
10.0
|
%
|
|
(19.3)
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%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
13,886
|
|
|
13,533
|
|
|
353
|
|
|
17.5
|
%
|
|
11.9
|
%
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
(1,326)
|
|
|
(205)
|
|
|
(1,121)
|
|
|
(1.7)
|
%
|
|
(0.2)
|
%
|
|
546.8
|
%
|
|
Loss before income taxes
|
(11,912)
|
|
|
(3,976)
|
|
|
(7,936)
|
|
|
(15.0)
|
%
|
|
(3.5)
|
%
|
|
199.6
|
%
|
|
Provision (benefit from) for income taxes
|
695
|
|
|
(363)
|
|
|
1,058
|
|
|
0.9
|
%
|
|
(0.3)
|
%
|
|
(291.5)
|
%
|
|
Net loss
|
$
|
(12,607)
|
|
|
$
|
(3,613)
|
|
|
$
|
(8,994)
|
|
|
(15.9)
|
%
|
|
(3.2)
|
%
|
|
248.9
|
%
|
Revenues
Compression and related services revenues decreased $11.6 million, a 17.9% decrease, in the current year quarter compared to the prior year quarter. The COVID-19 pandemic’s impact on demand for oil and natural gas and the resulting decline in oil prices continued to affect demand for compression services. We experienced returned compressors, compressors placed on standby rates, and have made some pricing concessions, all contributing to a decrease in revenues. During the current quarter, with the stabilization of oil prices, some of the compressors previously placed on standby have now been returned to service.
Aftermarket services revenues decreased $6.6 million during the current year quarter compared to the prior year quarter due to decreased demand for parts and services as a result of lower customer activity levels.
Equipment sales revenues decreased $16.4 million during the current year quarter compared to the prior year quarter, as we continued to close out remaining backlog and prepared to shut down our Midland manufacturing facility and exit the new equipment sales business.
Cost of revenues
The cost of compression and related services revenue decreased compared to the prior year quarter consistent with decreased revenues. Cost of compression and related services as a percent of associated revenues remained relatively flat from the prior year quarter.
Cost of aftermarket services decreased during the current year quarter consistent with decreased revenues.
Cost of equipment sales revenues decreased consistent with the decrease in associated revenues. Margins were lower than the prior year due to the under-absorption of fixed and indirect costs associated with our Midland manufacturing facility as we prepare to exit the new unit equipment sales business.
Depreciation and amortization
Depreciation and amortization expense consists primarily of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased compared to the prior year quarter primarily due to high-horsepower compressor units added to our compression fleet this year.
Selling, general, and administrative expense
Selling, general, and administrative expenses decreased during the current year quarter compared to the prior year quarter primarily due to a decrease in bad debt expense of $1.5 million mainly associated with the bankruptcy of a single customer in the prior year quarter and decreased employee expenses of $0.7 million in the current year quarter.
Other (income) expense, net
Other (income) expense, net, was $1.3 million of income, net, during the current year quarter compared to $0.2 million of income, net, during the prior year quarter. The increase in other income is primarily due to $1.0 million in gains for the current year quarter primarily from the sale of the Midland facility and the remaining inventory and equipment related to the fabrication of new compressors.
Provision (benefit from) for income taxes
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S. and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.
Results of Operations
Nine months ended September 30, 2020 compared to nine months ended September 30, 2019.
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Nine Months Ended September 30,
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|
|
|
|
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|
Period-to-Period Change
|
|
Percentage of Total Revenues
|
Period-to-Period Change
|
|
Consolidated Results of Operations
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
2020
|
|
2019
|
|
2020 vs. 2019
|
|
|
(In Thousands)
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|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and related services
|
$
|
175,520
|
|
|
$
|
192,973
|
|
|
$
|
(17,453)
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|
|
66.0
|
%
|
|
54.7
|
%
|
|
(9.0)
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%
|
|
Aftermarket services
|
47,569
|
|
|
52,196
|
|
|
(4,627)
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|
|
17.9
|
%
|
|
14.8
|
%
|
|
(8.9)
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%
|
|
Equipment sales
|
42,761
|
|
|
107,870
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|
|
(65,109)
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|
|
16.1
|
%
|
|
30.6
|
%
|
|
(60.4)
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%
|
|
Total revenues
|
265,850
|
|
|
353,039
|
|
|
(87,189)
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|
|
100.0
|
%
|
|
100.0
|
%
|
|
(24.7)
|
%
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and related services
|
82,136
|
|
|
93,536
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|
|
(11,400)
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|
|
30.9
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%
|
|
26.5
|
%
|
|
(12.2)
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%
|
|
Cost of aftermarket services
|
41,493
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|
|
43,841
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|
|
(2,348)
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|
|
15.6
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%
|
|
12.4
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%
|
|
(5.4)
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%
|
|
Cost of equipment sales
|
43,580
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|
|
98,149
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|
|
(54,569)
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|
|
16.4
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%
|
|
27.8
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%
|
|
(55.6)
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%
|
|
Total cost of revenues
|
167,209
|
|
|
235,526
|
|
|
(68,317)
|
|
|
62.9
|
%
|
|
66.7
|
%
|
|
(29.0)
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%
|
|
Depreciation and amortization
|
59,972
|
|
|
56,045
|
|
|
3,927
|
|
|
22.6
|
%
|
|
15.9
|
%
|
|
7.0
|
%
|
|
Impairments and other charges
|
14,348
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|
|
3,160
|
|
|
11,188
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|
|
5.4
|
%
|
|
0.9
|
%
|
|
354.1
|
%
|
|
Insurance recoveries
|
(517)
|
|
|
(325)
|
|
|
(192)
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|
|
(0.2)
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%
|
|
(0.1)
|
%
|
|
59.1
|
%
|
|
Selling, general, and administrative expense
|
29,578
|
|
|
32,975
|
|
|
(3,397)
|
|
|
11.1
|
%
|
|
9.3
|
%
|
|
(10.3)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
40,635
|
|
|
39,877
|
|
|
758
|
|
|
15.3
|
%
|
|
11.3
|
%
|
|
1.9
|
%
|
|
Series A Preferred fair value adjustment (income) expense
|
—
|
|
|
1,470
|
|
|
(1,470)
|
|
|
—
|
%
|
|
0.4
|
%
|
|
(100.0)
|
%
|
|
Other expense, net
|
3,517
|
|
|
21
|
|
|
3,496
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|
|
1.3
|
%
|
|
—
|
%
|
|
16,647.6
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%
|
|
Loss before income taxes
|
(48,892)
|
|
|
(15,710)
|
|
|
(33,182)
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|
|
(18.4)
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%
|
|
(4.4)
|
%
|
|
211.2
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%
|
|
Provision for income taxes
|
1,923
|
|
|
3,306
|
|
|
(1,383)
|
|
|
0.7
|
%
|
|
0.9
|
%
|
|
(41.8)
|
%
|
|
Net loss
|
$
|
(50,815)
|
|
|
$
|
(19,016)
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|
|
$
|
(31,799)
|
|
|
(19.1)
|
%
|
|
(5.4)
|
%
|
|
167.2
|
%
|
Revenues
Compression and related services revenues decreased by $17.5 million, or 9.0%, in the current year period compared to the prior year period. The COVID-19 pandemic’s impact on demand for oil and natural gas and the resulting decline in oil prices led to a significant reduction in customer activity resulting in a decrease in demand for compression services. We experienced returned compressors, compressors placed on standby rates, and have made some pricing concessions, all contributing to a decrease in revenues. With the recent stabilization of oil prices, some of the compressors previously placed on standby have now been returned to service.
Aftermarket services revenues decreased $4.6 million, or 8.9%, during the current year period compared to the prior year period resulting from decreased demand for parts and services as a result of lower customer activity levels.
Equipment sales revenues decreased $65.1 million, or 60.4%, during the current year period compared to the prior year period primarily because of a decrease in deliveries of new compressors compared to the prior year period due to the planned shut down of our Midland manufacturing facility and exit from the new equipment sales business.
Cost of revenues
Cost of compression and related services decreased compared to the prior year period consistent with decreased revenues. Cost of compression and related services as a percentage of compression and related
services revenues decreased from 48.5% during the prior year period to 46.8% during the current year period due to cost-saving actions including labor efficiencies, reduced maintenance costs, and lower indirect and overhead costs.
Cost of aftermarket services decreased compared to the prior year period consistent with the decreased revenues.
Cost of equipment sales decreased in accordance with the decrease in associated revenues. Cost of
equipment sales as a percentage of equipment sales revenues increased primarily due to pricing on equipment sales orders placed in 2019, as well as under-absorption of fixed and indirect costs associated with our Midland manufacturing facility as we prepare to exit the new unit equipment sales business.
Depreciation and amortization
Depreciation and amortization expense consists primarily of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased compared to the prior year period due to additions to the high-horsepower class of our compression fleet.
Impairments and other charges
During the nine month period ended September 30, 2020, we recorded impairments and other charges of $14.3 million on our Midland manufacturing facility and related assets, non-core used compressor equipment that we have held for sale, the low-horsepower class of our compression fleet, and field inventory for compression and related services.
Selling, general, and administrative expense
Selling, general, and administrative expenses decreased during the current year period compared to the prior year period largely due to decreased employee expenses of $2.2 million and a decrease in bad debt expense of $1.1 million mainly associated with the bankruptcy of a single customer in the prior year period. Despite decreased expenses, as a percentage of revenues, selling, general, and administrative expense increased in the current year period compared to the prior year period due to lower revenues in the current year period.
Series A Preferred fair value adjustment
The Series A Preferred Units fair value adjustment was $1.5 million charged to earnings during the prior year period. All the remaining outstanding Preferred Units were redeemed for cash on August 8, 2019.
Other (income) expense, net
Other (income) expense, net, was $3.5 million of expense during the current year period, compared to $0.02 million of expense during the prior year period. The increase in other expense is primarily due to $4.8 million of fees associated primarily with the unsecured debt exchange transaction and increased foreign currency losses of $1.5 million offset by decreased expense of $1.5 million associated with the redemption premium incurred during the prior year period in connection with the redemption of Preferred Units for cash and $1.2 million increase in gains in the current year period primarily from the sale of the Midland facility and the remaining inventory and equipment related to the fabrication of new compressors.
Provision for income taxes
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. Our operations are treated as a partnership for federal tax purposes with each partner being separately taxed on its share of taxable income. However, a portion of our business is conducted through taxable U.S. corporate subsidiaries. Accordingly, a U.S. federal and state income tax provision has been reflected in the accompanying statements of operations. Certain of our operations are located outside of the U.S. and the Partnership, through its foreign subsidiaries, is responsible for income taxes in these countries.
Our effective tax rate for the nine month period ended September 30, 2020, was negative 3.9% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.
Liquidity and Capital Resources
Our primary cash requirements are for distributions, working capital requirements, debt service payments, normal operating expenses, and capital expenditures. Our potential sources of funds are our existing cash balances, cash generated from our operations, proceeds from the sale of non-core assets, and long-term and short-term borrowings, which we believe will be sufficient to meet our working capital and reduced growth capital requirements during 2020. We are monitoring the spending plans of our customers due to the macroeconomic uncertainties resulting from the recent substantial declines in prices of oil and natural gas and the ongoing COVID-19 pandemic. These uncertainties have negatively impacted our customers’ demands for our products and services, which has negatively impacted our businesses. Although oil and natural gas prices have recovered in the third quarter 2020 from their lows earlier in the year, the outlook for the remainder of 2020 is uncertain. If oil and natural gas prices decrease from current levels, our businesses could be further negatively impacted. In addition, current conditions in the market for debt and equity securities in the energy sector have increased the difficulty of obtaining equity and debt financing and we expect this to continue in the near future. Despite these challenges, we remain committed to a long-term growth strategy. Our near-term focus is to maintain our compression fleet, while continuing to preserve and enhance liquidity through strategic operating and financial measures. We periodically evaluate engaging in strategic transactions and may consider divesting non-core assets where our evaluation suggests such transactions are in the best interests of our business, such as the sale of the Midland facility and the agreement we entered into during the second quarter to sell 58 low-horsepower units to one of our customers. We are subject to business and operational risks that could materially adversely affect our cash flows and together with risks associated with current debt and equity market conditions, our ability or desire to issue such securities. Please read Part I, Item 1A “Risk Factors” included in our 2019 Annual Report.
Capital expenditures in 2020 are expected to range from $31.0 million to $34.0 million. These capital expenditures include approximately $20.0 million to $21.0 million of maintenance capital expenditures and approximately $6.0 million to $7.0 million of capital expenditures primarily associated with the expansion of our compression services fleet and $5.0 million to $6.0 million of capital expenditures related to investments in technology, primarily software and systems. The foregoing estimates are based on assumptions regarding the ongoing impact of the decline of oil and gas prices and the COVID-19 pandemic.
On October 19, 2020, our General Partner declared a cash distribution attributable to the quarter ended September 30, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This quarterly distribution will be paid on November 13, 2020 to each of the holders of common units of record as of the close of business on November 1, 2020.
Cash Flows
A summary of our sources (uses) of cash during the nine months ended September 30, 2020 and 2019 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
(In Thousands)
|
|
|
2020
|
|
2019
|
|
Operating activities
|
$
|
13,729
|
|
|
$
|
67,461
|
|
|
Investing activities
|
11,459
|
|
|
(60,128)
|
|
|
Financing activities
|
(10,867)
|
|
|
(7,927)
|
|
Operating Activities
Net cash provided by operating activities decreased by $53.7 million compared to the prior year period. Our cash provided from operating activities is primarily generated from the provision of compression and related services and the sale of new compressor packages. The decrease in cash provided by operating activities was
primarily due to a decrease in revenue and the effect of working capital movements, particularly related to timing of payments of accounts payable.
Cash provided from our foreign operations is subject to various uncertainties, including the volatility associated with interruptions caused by customer budgetary decisions, uncertainties regarding the renewal of our existing customer contracts and other changes in contract arrangements, the timing of collection of our receivables, and the repatriation of cash generated by our international operations.
Investing Activities
Capital expenditures during the nine months ended September 30, 2020, decreased by $49.7 million compared to the same period in 2019, as we adjusted to current market conditions. Maintenance capital expenditures decreased during the nine months ended September 30, 2020 compared to the prior year period. Total capital expenditures during the current year period was $18.0 million. Non-cash cost of fleet compression units sold were $7.2 million and the sale of property, plant and equipment was $21.7 million during the current period. Total capital expenditures for the current period include $14.8 million of maintenance capital expenditures.
The level of growth capital expenditures depends on forecasted demand for compression services. If the forecasted demand for compression services increases or decreases, the amount of planned expenditures on growth and expansion will be adjusted, subject to the availability of funds. We continue to review all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.
Financing Activities
Distributions
Beginning with the distribution to common unitholders during February 2019, we reduced our common unit distributions from $0.75 per unit per year (or $0.1875 per quarter) to $0.04 per unit per year (or $0.01 per quarter). During the nine months ended September 30, 2020, we distributed $1.4 million of cash distributions to our common unitholders and General Partner.
Series A Convertible Preferred Units
In January 2019, we began redeeming Preferred Units for cash, resulting in 2,660,569 Preferred Units being redeemed during the nine months ended September 30, 2019 for $31.9 million, which includes approximately $1.5 million of redemption premium that was paid. The last redemption of the remaining Preferred Units, along with a final cash payment made in lieu of paid in kind units occurred on August 8, 2019.
Bank Credit Facilities
On June 11, 2020, CSI Compressco, LP and CSI Compressco Sub Inc (the “Borrowers”) entered into the Second Amendment to Loan and Security Agreement (the “Amendment”) amending the Loan and Security Agreement dated June 29, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) with Bank of America, N.A., in its capacity as administrative agent, issuing bank and swing line issuer (“Administrative Agent”), and the other lenders and loan parties party thereto. The revolving credit facility agreement provides for a maximum credit commitment of $35,000,000 and includes a $5,000,000 reserve with respect to the borrowing base which would result in reduced borrowing availability. During the nine month period ended September 30, 2020 we charged $0.2 million of financing fees to other (income) expense, net in our consolidated statement of operations. As of September 30, 2020, subject to compliance with the covenants, borrowing base and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had no outstanding balance, $2.5 million in letters of credit against our Credit Agreement and $14.5 million available to borrow. As of October 30, 2020, we have $0.0 million outstanding under our Credit Agreement and $3.4 million in letters of credit, resulting in $16.4 million of availability.
7.25% Senior Notes due 2022.
As of September 30, 2020, our 7.25% Senior Notes due 2022 had $79.9 million outstanding net of unamortized discounts and unamortized deferred financing costs. Interest on these notes is payable on February 15 and August 15 of each year. The 2022 Senior Notes are unsecured obligations, and are guaranteed on a unsecured basis by the Credit Agreement.
7.5% Senior Secured Notes due 2025.
As of September 30, 2020, our 7.5% Senior Secured Notes due 2025 (the “First Lien Notes”) had $399.6 million outstanding net of unamortized discounts and unamortized deferred financing costs. Interest on these notes is payable on April 1 and October 1 of each year. The First Lien Notes are secured by a first-priority security interest in substantially all of our and our subsidiaries assets, subject to certain permitted encumbrances and exceptions, and are guaranteed on a senior secured basis by each of our domestic restricted subsidiaries, with limited exceptions.
10.00%/10.75% Senior Secured Second Lien Notes due 2026.
As of September 30, 2020, our 10.00%/10.75% Second Lien Notes due 2026 (the “Second Lien Notes”) had $157.4 million outstanding, net of unamortized discounts and unamortized deferred financing costs. Interest on the Second Lien Notes is payable on April 1 and October 1 of each year. The Second Lien Notes are secured by a second-priority security interest in substantially all of our and our subsidiaries assets, subject to certain permitted encumbrances and exceptions, and are guaranteed on a senior secured basis by each of our domestic restricted subsidiaries, with limited exceptions. In connection with the payment of PIK Interest (as defined below), if any, in respect of the Second Lien Notes, we will be entitled, to increase the outstanding aggregate principal amount of the Second Lien Notes or issue additional notes (“PIK notes”) under the Second Lien Notes indenture on the same terms and conditions as the already outstanding Second Lien Notes. Interest will accrue at (1) the annual rate of 7.250% payable in cash, plus (2) at the election of the Issuers (made by delivering a notice to the Second Lien Trustee not less than five business days prior to the record date), the annual rate of (i) 2.750% payable in cash (together with the annual rate set forth in clause (1), the “Cash Interest Rate”) or (ii) 3.500% payable by increasing the principal amount of the outstanding 10.00%/10.75% Second Lien Notes or by issuing additional PIK notes, in each case rounding up to the nearest $1.00 (such increased principal amount or additional PIK notes, the “PIK Interest”).
Other Financing
In February 2019, we entered into an arrangement with TETRA under which a subsidiary of TETRA entered into an agreement with one of our subsidiaries for the purchase of up to $15.0 million of compression services equipment and to subsequently lease the equipment back to us in exchange for monthly rental fees. As of September 30, 2020, pursuant to this arrangement, $14.8 million has been funded by TETRA for the construction of new compressor services equipment and all compression units were completed and deployed under this agreement. There is no additional future funding expected related to this arrangement.
Off Balance Sheet Arrangements
As of September 30, 2020, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.
Commitments and Contingencies
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.
Contractual Obligations
Our contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and obligations under operating leases.
The table below summarizes our contractual cash obligations as of September 30, 2020:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due
|
|
|
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
|
|
(In Thousands)
|
|
Long-term debt
|
|
$
|
636,249
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80,720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
555,529
|
|
|
Interest on debt
|
|
241,409
|
|
|
22,503
|
|
|
51,405
|
|
|
49,454
|
|
|
45,553
|
|
|
45,553
|
|
|
26,941
|
|
|
Operating leases
|
|
42,482
|
|
|
2,663
|
|
|
10,450
|
|
|
8,676
|
|
|
7,062
|
|
|
4,812
|
|
|
8,819
|
|
|
Affiliate financing obligation
|
|
12,111
|
|
|
754
|
|
|
3,015
|
|
|
3,015
|
|
|
3,015
|
|
|
2,312
|
|
|
—
|
|
|
Total contractual cash obligations
|
|
$
|
932,251
|
|
|
$
|
25,920
|
|
|
$
|
64,870
|
|
|
$
|
141,865
|
|
|
$
|
55,630
|
|
|
$
|
52,677
|
|
|
$
|
591,289
|
|
Cautionary Statement for Purposes of Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” and information based on our beliefs and those of our general partner. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should, “targets”, “will” and “would”.
Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our 2019 Annual Report, and those described from time to time in our future reports filed with the SEC.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.