10-Q 1 a2019063010qcclp.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q
 (Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended JUNE 30, 2019

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to______
 
Commission File Number 001-35195 
CSI Compressco LP
(Exact name of registrant as specified in its charter)
Delaware 
94-3450907
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
 
24955 Interstate 45 North
 
The Woodlands, Texas
77380
(Address of Principal Executive Offices)
(Zip Code)
 
(281) 364-2244
(Registrant’s Telephone Number, Including Area Code)

_______________________________________________________________________
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
COMMON UNITS REPRESENTING LIMITED
PARTNERSHIP INTERESTS
CCLP
NASDAQ GLOBAL MARKET

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ]  No [   ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [ X ]  No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ] 
Accelerated filer [ X ] 
Non-accelerated filer [ ]
Smaller reporting company [ ]
 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]
As of August 7, 2019, there were 47,070,886 Common Units outstanding.


CSI Compressco LP
Table of Contents
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
 
PART II—OTHER INFORMATION
 

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



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

Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 

 
 

Compression and related services
$
64,546

 
$
56,709

 
$
127,578

 
$
110,444

Aftermarket services
18,169

 
15,094

 
31,770

 
29,110

Equipment sales
53,141

 
28,119

 
79,944

 
45,785

Total revenues
135,856

 
99,922

 
239,292

 
185,339

Cost of revenues (excluding depreciation and amortization expense):
 
 
 
 
 

 
 
Cost of compression and related services
30,520

 
30,509

 
63,141

 
61,889

Cost of aftermarket services
15,428

 
12,841

 
26,678

 
23,998

Cost of equipment sales
47,402

 
24,158

 
71,631

 
39,607

Total cost of revenues
93,350

 
67,508

 
161,450

 
125,494

Depreciation and amortization
19,054

 
17,448

 
37,586

 
34,815

Impairments and other charges
2,311

 
—

 
2,311

 
—

Selling, general, and administrative expense
10,974

 
10,849

 
21,639

 
19,146

Interest expense, net
13,045

 
13,823

 
26,344

 
25,256

Series A Preferred fair value adjustment (income) expense
166

 
(586
)
 
1,470

 
967

Other (income) expense, net
607

 
(378
)
 
226

 
2,826

Loss before income tax provision
(3,651
)
 
(8,742
)
 
(11,734
)
 
(23,165
)
Provision (benefit) for income taxes
(704
)
 
850

 
3,669

 
2,164

Net loss
$
(2,947
)
 
$
(9,592
)
 
$
(15,403
)
 
$
(25,329
)
General partner interest in net loss
$
(42
)
 
$
(154
)
 
$
(219
)
 
$
(418
)
Common units interest in net loss
$
(2,905
)
 
$
(9,438
)
 
$
(15,184
)
 
$
(24,911
)
 
 
 
 
 
 

 
 
Net loss per common unit:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
(0.23
)
 
$
(0.32
)
 
$
(0.63
)
Diluted
$
(0.06
)
 
$
(0.23
)
 
$
(0.32
)
 
$
(0.63
)
Weighted average common units outstanding:
 
 
 
 
 
 
 
Basic
47,040,714

 
40,401,551

 
46,936,240

 
39,563,972

Diluted
47,040,714

 
40,401,551

 
46,936,240

 
39,563,972



See Notes to Consolidated Financial Statements

1

CSI Compressco LP
Consolidated Statements of Comprehensive Income (Loss)
(In Thousands)
(Unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(2,947
)
 
$
(9,592
)
 
$
(15,403
)
 
$
(25,329
)
Foreign currency translation adjustment, net of tax of $0 in 2019 and 2018
128

 
(2,873
)
 
400

 
(3,522
)
Comprehensive loss
$
(2,819
)
 
$
(12,465
)
 
$
(15,003
)
 
$
(28,851
)
 

See Notes to Consolidated Financial Statements

2

CSI Compressco LP
Consolidated Balance Sheets
(In Thousands, Except Unit Amounts)
 
June 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 

ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,296

 
$
15,858

Trade accounts receivable, net of allowances for doubtful accounts of $1,368 as of June 30, 2019 and $1,229 as of December 31, 2018
70,382

 
65,067

Inventories
65,765

 
65,222

Prepaid expenses and other current assets
5,168

 
5,600

Total current assets
145,611

 
151,747

Property, plant, and equipment:
 

 
 

Land and building
34,999

 
35,024

Compressors and equipment
937,664

 
913,488

Vehicles
10,053

 
10,354

Construction in progress
44,680

 
41,086

Total property, plant, and equipment
1,027,396

 
999,952

Less accumulated depreciation
(379,159
)
 
(358,633
)
Net property, plant, and equipment
648,237

 
641,319

Other assets:
 

 
 

Deferred tax asset
13

 
13

Intangible assets, net of accumulated amortization of $26,270 as of June 30, 2019 and $24,790 as of December 31, 2018
29,498

 
30,978

Operating lease right-of-use assets
8,935

 
—

Other assets
3,898

 
2,687

Total other assets
42,344

 
33,678

Total assets
$
836,192

 
$
826,744

LIABILITIES AND PARTNERS' CAPITAL
 

 
 
Current liabilities:
 

 
 
Accounts payable
$
42,578

 
$
33,408

Unearned income
30,830

 
24,898

Accrued liabilities and other
35,905

 
32,530

Amounts payable to affiliates
10,086

 
3,517

Total current liabilities
119,399

 
94,353

Other liabilities:
 

 
 

Long-term debt, net
634,373

 
633,013

Series A Preferred Units
9,000

 
30,900

Deferred tax liabilities
1,989

 
1,012

Long-term affiliate payable
11,142

 
—

Operating lease liabilities
4,955

 
—

Other long-term liabilities
39

 
63

Total other liabilities
661,498

 
664,988

Commitments and contingencies
 

 
 

Partners' capital:
 

 
 

General partner interest
273

 
505

Common units (47,064,859 units issued and outstanding at June 30, 2019 and 45,769,019 units issued and outstanding at December 31, 2018)
69,708

 
81,984

Accumulated other comprehensive income (loss)
(14,686
)
 
(15,086
)
Total partners' capital
55,295

 
67,403

Total liabilities and partners' capital
$
836,192

 
$
826,744

 
See Notes to Consolidated Financial Statements

3

CSI Compressco LP
Consolidated Statements of Partners’ Capital
(In Thousands)
(Unaudited)
 
 
Partners' Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Total Partners' Capital
 
 
 
 
General
Partner
 
Common
Unitholders
 
 
 
Amount
 
Units
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2018
$
505

 
45,769

 
$
81,984

 
$
(15,086
)
 
$
67,403

Net Loss
(177
)
 
—

 
(12,279
)
 
—

 
$
(12,456
)
Distributions ($0.01 per unit)
(6
)
 
—

 
(470
)
 
—

 
$
(476
)
Equity compensation
—

 
—

 
312

 
—

 
$
312

Vesting of Phantom Units
—

 
117

 
—

 
—

 
$
—

Conversions of Series A Preferred
—

 
1,113

 
3,048

 
—

 
$
3,048

Translation adjustment, net of taxes of $0
—

 
—

 
—

 
272

 
$
272

Other
—

 
—

 
(69
)
 
—

 
$
(69
)
Balance at March 31, 2019
$
322

 
46,999

 
$
72,526

 
$
(14,814
)
 
$
58,034

Net Loss
$
(42
)
 
—

 
$
(2,905
)
 
$
—

 
$
(2,947
)
Distributions ($0.01 per unit)
(7
)
 
—

 
(469
)
 
—

 
(476
)
Equity compensation
—

 
—

 
568

 
—

 
568

Vesting of Phantom Units
—

 
66

 
—

 
—

 
—

Conversions of Series A Preferred
—

 
—

 
—

 
—

 
—

Translation adjustment, net of taxes of $0
—

 
—

 
—

 
128

 
128

Other
—

 
—

 
(12
)
 
—

 
(12
)
Balance at June 30, 2019
$
273

 
47,065

 
$
69,708

 
$
(14,686
)
 
$
55,295

 
 
Partners' Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Total Partners' Capital
 
 
 
 
General
Partner
 
Common
Unitholders
 
 
 
Amount
 
Units
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
1,618

 
37,618

 
$
104,898

 
$
(11,489
)
 
$
95,027

Net loss
(264
)
 
—

 
(15,473
)
 
$
—

 
$
(15,737
)
Distributions ($0.1875 per unit)
(126
)
 
—

 
(7,186
)
 
—

 
(7,312
)
Equity compensation, net
—

 
—

 
(655
)
 
—

 
(655
)
Vesting of Phantom Units
—

 
32

 
—

 
—

 
—

Conversions of Series A Preferred
—

 
1,778

 
11,555

 
—

 
11,555

Translation adjustment, net of taxes of $0
—

 
—

 
—

 
(649
)
 
(649
)
Other
—

 
—

 
—

 
—

 
—

Balance at March 31, 2018
$
1,228

 
39,428

 
$
93,139

 
$
(12,138
)
 
$
82,229

Net loss
(154
)
 
—

 
(9,438
)
 
—

 
(9,592
)
Distributions ($0.3750 per unit)
(127
)
 
—

 
(7,489
)
 
—

 
(7,616
)
Equity compensation, net
—

 
—

 
356

 
—

 
356

Vesting of Phantom Units
—

 
96

 
—

 
—

 
—

Conversions of Series A Preferred
—

 
1,663

 
10,602

 
—

 
10,602

Translation adjustment, net of taxes of $0
—

 
—

 
—

 
(2,873
)
 
(2,873
)
Balance at June 30, 2018
$
947

 
41,187

 
$
87,170

 
$
(15,011
)
 
$
73,106


See Notes to Consolidated Financial Statements

4

CSI Compressco LP
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
 
Six Months Ended
June 30,
 
2019
 
2018
Operating activities:
 

 
 

Net income (loss)
$
(15,403
)
 
$
(25,329
)
Reconciliation of net income (loss) to cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
37,586

 
34,815

Impairment of long-lived assets
2,311

 
—

Provision for deferred income taxes
946

 
172

Series A Preferred redemption premium
1,069

 
—

Series A Preferred paid in kind distributions in interest expense
1,061

 
3,246

Series A Preferred fair value adjustments
1,470

 
967

Equity compensation expense
955

 
(108
)
Provision for doubtful accounts
272

 
322

Amortization of deferred financing costs
1,180

 
1,345

Expense for unamortized finance costs
—

 
3,541

Other non-cash charges and credits
374

 
366

(Gain) loss on sale of property, plant, and equipment
(262
)
 
24

Changes in operating assets and liabilities:
 

 
 
Accounts receivable
(5,254
)
 
(13,150
)
Inventories
(5,378
)
 
(23,659
)
Prepaid expenses and other current assets
491

 
(1,504
)
Accounts payable and accrued expenses
19,942

 
15,145

Other
(1,018
)
 
(466
)
Net cash provided by (used in) operating activities
40,342

 
(4,273
)
Investing activities:
 

 
 
Purchases of property, plant, and equipment, net
(39,586
)
 
(47,262
)
Advances and other investing activities
—

 
34

Net cash used in investing activities
(39,586
)
 
(47,228
)
Financing activities:
 

 
 
Proceeds from long-term debt
—

 
380,000

Payments of long-term debt
(67
)
 
(258,000
)
Cash redemptions of Preferred Units
(22,452
)
 
—

Distributions
(952
)
 
(14,928
)
Debt issuance costs
—

 
(7,662
)
Advances from affiliate
11,142

 
—

Net cash provided by (used in) financing activities
(12,329
)
 
99,410

Effect of exchange rate changes on cash
11

 
65

Increase (decrease) in cash and cash equivalents
(11,562
)
 
47,974

Cash and cash equivalents at beginning of period
15,858

 
7,601

Cash and cash equivalents at end of period
$
4,296

 
$
55,575

Supplemental cash flow information:
 

 
 
Interest paid
$
23,852

 
$
14,041

Income taxes paid
$
1,958

 
$
2,080



See Notes to Consolidated Financial Statements

5

CSI Compressco LP
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A – 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, transportation, processing, and storage. We sell standard and custom-designed 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 countries, including Mexico, Canada, and Argentina. We design and fabricate a majority of the compressor packages that we use to provide compression services or that we sell to customers.

Presentation
 
Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of June 30, 2019, and for the three and six month periods ended June 30, 2019 and 2018, include all normal recurring adjustments that are necessary to provide a fair statement of our results for these interim periods. Operating results for the three and six month periods ended June 30, 2019 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2019.

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, 2018 and notes thereto included in our 2018 Annual Report on Form 10-K, which we filed with the SEC on March 4, 2019.

Segments

Our General Partner has concluded that we operate in one business segment.

Significant Accounting Policies

We have added policies for the recording of leases in conjunction with the adoption of the new lease standard discussed in our "Leases" and "New Accounting Pronouncements" sections below. Other than the additional lease policies described herein, there have been no significant changes in our accounting policies or the application of these policies.

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 disclosures of 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.


6

Impairments and Other Charges
    
During the three month period ending June 30, 2019, we recorded impairments of $2.3 million on certain units of our low-horsepower compression fleet, reflecting our decision to dispose of these units upon management's determination that refurbishing this equipment was not economic given limited current and forecasted demand for such equipment. A recoverability analysis was performed on the remaining low-horsepower fleet and we concluded that the remaining fleet was recoverable from estimated future cash flows.

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 $(0.04) million and $(1.0) million during the three and six month periods ended June 30, 2019, respectively, and $0.5 million and $(0.6) million during the three and six month periods ended June 30, 2018, respectively.

Leases

As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election described below, we initially recognize a lease liability and related right-of-use asset on the commencement date. The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.    

All of our long-term leases are operating leases and are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of June 30, 2019. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term, if it is reasonably certain that we would exercise the option.

As an accounting policy election, we do not include short-term leases on our balance sheet. Short-term leases include leases with a term of 12 months or less, inclusive of renewal options we are reasonably certain to exercise. The lease payments for short-term leases are included as operating lease costs on a straight-line basis over the lease term in cost of revenues or selling, general, and administrative expense based on the use of the underlying asset. We recognize lease costs for variable lease payments not included in the determination of a lease liability in the period in which an obligation is incurred.

As allowed by U.S. GAAP, we do not separate nonlease components from the associated lease component for our compression services contracts and instead account for those components as a single component based on the accounting treatment of the predominant component. In our evaluation of whether Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842 "Leases" or ASC 606 "Revenue from Contracts with Customers" is applicable to the combined component based on the predominant component, we determined the services nonlease component is predominant, resulting in the ongoing recognition of our compression services contracts following ASC 606.

Our operating leases are recognized at the present value of lease payments over the lease term. When the implicit discount rate is not readily determinable, we use our incremental borrowing rate to calculate the discount rate used to determine the present value of lease payments. Consistent with other long-lived assets or asset groups that are held and used, we test for impairment of our right-of-use assets when impairment indicators are present.

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

7

When computing earnings per common unit 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 six month periods ended June 30, 2019 and June 30, 2018, 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, discussed in Note D - "Series A Convertible Preferred Units", had been converted as of the beginning of the period presented. The number of common units that may be issued upon future conversion of the Preferred Units is excluded from the calculation of diluted common units for the three and six month periods ended June 30, 2019 and 2018 as the impact would be anti-dilutive.

Distributions
 
On January 22, 2019, our General Partner declared a cash distribution attributable to the quarter ended December 31, 2018 of $0.01 per common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. Also on January 22, 2019, our General Partner approved the paid in kind distribution of 85,565 Preferred Units attributable to the quarter ended December 31, 2018 in accordance with the provisions of our partnership agreement, as amended. These distributions were paid on February 14, 2019, to each of the holders of common units and the holders of the Preferred Units in the aggregate, respectively, of record as of the close of business on February 1, 2019.

On April 18, 2019, our General Partner declared a cash distribution attributable to the quarter ended March 31, 2019 of $0.01 per common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. Also on April 18, 2019, our General Partner approved the paid in kind distribution of 59,953 Preferred Units attributable to the quarter ended March 31, 2019 in accordance with the provisions of our partnership agreement, as amended. These distributions were paid on May 15, 2019, to each of the holders of common units and the holders of the Preferred Units in the aggregate, respectively, of record as of the close of business on May 1, 2019.

New Accounting Pronouncements

Standards adopted in 2019

In February 2016, the FASB issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" to increase comparability and transparency among different organizations. Organizations are required to recognize right-of-use lease assets and lease liabilities in the balance sheet related to the right to use the underlying asset for the lease term. In addition, through improved disclosure requirements, ASC 842 will enable users of financial statements to further understand the amount, timing, and uncertainty of cash flows arising from leases. We adopted the standard effective January 1, 2019. The standard had a material impact on our consolidated balance sheet, specifically, the reporting of our operating leases.

We chose to transition using a modified retrospective approach which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented. Comparative information is reported under the accounting standards that were in effect for those periods. In addition, upon transition, we elected the package of practical expedients, which allows us to continue to apply historical lease classifications to existing contracts. Upon adoption, we recognized $8.3 million in operating right-of-use assets, $3.5 million in accrued liabilities, and $4.8 million in operating lease liabilities. Refer to Note J - “Leases” for further information on our leases.

In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220)" that gives entities the option to reclassify the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. This was effective for us on January 1, 2019,

8

however, as we do not have associated tax effects in accumulated other comprehensive income, there was no impact.

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” to align the measurement and classification guidance for share-based payments to nonemployees with the guidance currently applied to employees, with certain exceptions. We adopted this ASU during the three months ended March 31, 2019, with no material impact to 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. ASU 2016-13 has an effective date of the first quarter of fiscal 2020. We are currently assessing the potential effects of these changes to our consolidated financial statements.    

In August 2018, the FASB issued 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 interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. We are currently assessing the potential effects of these changes to our consolidated financial statements.
NOTE B – INVENTORIES

Components of inventories as of June 30, 2019 and December 31, 2018, are as follows: 

 
June 30, 2019
 
December 31, 2018
 
(In Thousands)
Parts and supplies
$
40,020

 
$
43,538

Work in progress
25,745

 
21,684

Total inventories
$
65,765

 
$
65,222


Inventories consist primarily of compressor package parts and supplies. Work in progress inventories consist primarily of new compressor packages located at our fabrication facility in Midland, Texas.


9

NOTE C – LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
 
 
 
June 30, 2019
 
December 31, 2018
 
 
Scheduled Maturity
 
(In Thousands)
Credit Agreement
 
June 2023
 
—

 
—

7.25% Senior Notes (presented net of the unamortized discount of $2 million as of June 30, 2019 and $2.2 million as of December 31, 2018 and unamortized deferred financing costs of $3.4 million as of June 30, 2019 and $3.9 million as of December 31, 2018)
 
August 2022
 
290,615

 
289,797

7.50% Senior Secured Notes (presented net of the unamortized deferred financing costs of $6.2 million as of June 30, 2019 and $6.8 million as of December 31, 2018)
 
April 2025
 
343,758

 
343,216

 
 
 
 
634,373

 
633,013

Less current portion
 
 
 
—

 
—

Total long-term debt
 
 
 
$
634,373

 
$
633,013


There was no balance outstanding under the Credit Agreement as of June 30, 2019. As of June 30, 2019, 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 $22.2 million.
    
On June 26, 2019, we entered into an amendment of the Credit Agreement that, among other things, revised and increased the borrowing base, including adding the value of certain inventory in the determination of the borrowing base.     

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 June 30, 2019.

Refer to Note F - "Related Party Transactions," for a discussion of our long-term affiliate payable to TETRA.
NOTE D – SERIES A CONVERTIBLE PREFERRED UNITS

During 2016, we issued an aggregate of 6,999,126 Preferred Units for a cash purchase price of $11.43 per Preferred Unit (the “Issue Price”). One of the purchasers was TETRA, which purchased 874,891 of the Preferred Units at the aggregate Issue Price of $10.0 million.

Unless otherwise redeemed for cash, a ratable portion of the Preferred Units has been, and may be, converted into common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Based on the number of Preferred Units outstanding as of June 30, 2019, the maximum aggregate number of common units that could be required to be issued pursuant to the conversion provisions of the Preferred Units is approximately 4.3 million common units; however, the Partnership may, at its option, pay cash, or a combination of cash and common units, to the holders of Preferred Units instead of issuing common units on any Conversion Date, subject to certain restrictions as described in the Second Amended and Restated Partnership Agreement and the Credit Agreement. Beginning with the January 2019 Conversion Date, we have elected to redeem the remaining Preferred Units for cash, resulting in 1,870,681 Preferred Units being redeemed during the six months ended June 30, 2019 for $22.5 million, which includes approximately $1.1 million of redemption premium that was paid and charged to other (income) expense, net in the accompanying consolidated statements of operations. The total number of Preferred Units outstanding as of June 30, 2019 was 751,736. The last redemption of the remaining 375,868 Preferred Units, along with a final cash payment made in lieu of paid in kind units for the quarter ended June 30, 2019, for an aggregate cash payment of $5.0 million, is scheduled to occur on August 8, 2019.

The fair value of the Preferred Units is classified as a long-term liability on our consolidated balance sheets. The fair value of the Preferred Units as of June 30, 2019 was $9.0 million. Based on the conversion provisions of the Preferred Units, and using the Conversion Price calculated as of June 30, 2019, the theoretical number of common units that would be issued if all of the outstanding Preferred Units were converted on June 30, 2019 on the

10

same basis as the monthly conversions would be approximately 2.7 million common units, with an aggregate market value of $9.7 million. A $1 decrease in the Conversion Price would result in the issuance of approximately 1.3 million additional common units pursuant to these conversion provisions.
NOTE E – FAIR VALUE MEASUREMENTS

Financial Instruments

Preferred Units

The Preferred Units are valued using a lattice modeling technique that, among a number of lattice structures, includes significant unobservable items (a Level 3 fair value measurement). These unobservable items include (i) the volatility of the trading price of our common units compared to a volatility analysis of equity prices of comparable peer companies, (ii) a yield analysis that utilizes market information related to the debt yields of comparable peer companies, and (iii) a future conversion price analysis.

Derivative Contracts

As of June 30, 2019, we had the following foreign currency derivative contract outstanding relating to a portion of our foreign operations:
Derivative Contracts
 
US Dollar Notional Amount
 
Traded Exchange Rate
 
Settlement Date

 
(In Thousands)
 

 

Forward sale Mexican peso
 
$
7,858

 
19.09
 
7/19/2019

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

The fair values of our foreign currency derivative instruments are based on quoted market values (a Level 2 fair value measurement). The fair values of our foreign currency derivative instruments as of June 30, 2019 and December 31, 2018, are as follows:
Foreign currency derivative instruments
 
Balance Sheet
 
Fair Value at
 
Location
 
June 30, 2019
 
December 31, 2018
 
 
 
 
(In Thousands)
Forward sale contracts
 
Current assets
 
$
64

 
$
—

Forward sale contracts
 
Current liabilities
 
—

 
(98
)
Net asset (liability)
 
 
 
$
64

 
$
(98
)

None of our foreign currency derivative contracts contains credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and six month periods ended June 30, 2019 we recognized $0.2 million and $0.3 million, respectively, of net (gains) losses associated with our foreign currency derivative program, and such amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations. During the three and six month periods ended June 30, 2018, we recognized $0.7 million and $0.2 million, respectively, of net (gains) losses associated with our foreign currency derivative program, and such amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations.
    
A summary of these recurring fair value measurements by valuation hierarchy as of June 30, 2019 and December 31, 2018 is as follows:

11

 
 
 
 
Fair Value Measurements Using
Description
 
Total as of
June 30, 2019
 
Quoted Prices
in Active
Markets for
Identical
Assets
or Liabilities
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
 
(In Thousands)
Series A Preferred Units
 
$
(9,000
)
 
$
—

 
$
—

 
$
(9,000
)
Asset for foreign currency derivative contracts
 
64

 
—

 
64

 
—

 
 
$
(8,936
)
 
 
 
 
 
 
    
 
 
 
 
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, 2018
 
 
 
 
 
(In Thousands)
Series A Preferred Units
 
$
(30,900
)
 
$
—

 
$
—

 
$
(30,900
)
Liability for foreign currency derivative contracts
 
(98
)
 
—

 
(98
)
 
—

 
 
$
(30,998
)
 
 
 
 
 
 

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 June 30, 2019 and December 31, 2018 were approximately $267.1 million and $266.3 million, respectively. Those fair values compare to aggregate principal amounts of such notes at June 30, 2019 and December 31, 2018 of $295.9 million. The fair values of our long-term 7.50% Senior Secured Notes at June 30, 2019 and December 31, 2018 were approximately $344.8 million and $332.5 million, respectively. These fair values compare to an aggregate principal amount of such notes at June 30, 2019 and December 31, 2018 of $350.0 million. We based the fair values of our 7.25% Senior Notes and our 7.50% Senior Secured Notes as of June 30, 2019 on recent trades for these notes.
NOTE F – 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.


12

TETRA and General Partner Ownership

As of June 30, 2019, TETRA's ownership interest in us was approximately 34% of the outstanding common units, 12.6% of the outstanding Preferred Units, and an approximately 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 has agreed to fund the construction of and purchase up to $15.0 million of new compressor services equipment and lease it to us in exchange for a monthly rental fee. As of June 30, 2019, pursuant to this arrangement, $11.1 million has been funded by TETRA for the construction of new compressor equipment and is included in long-term affiliate payable in our consolidated balance sheet.
NOTE G – 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 six month period ended June 30, 2019, was negative 31.3% 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. In addition, the application of ASC 740-270 "Income Taxes - Interim Reporting," resulted in an accrual of current income taxes for the six month period ended June 30, 2019 equal to approximately the full year estimate. 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 H – 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 I – REVENUE FROM CONTRACTS WITH CUSTOMERS

Performance Obligations. 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.

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. 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 such products or services is not expected 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

13

service period. As of June 30, 2019, we had $45.3 million of remaining performance obligations related to our compression service contracts. As a practical expedient, this amount does not reflect revenue for compression service contracts whose original expected duration is less than 12 months and does not consider the effects of the time value of money. The remaining performance obligations, and associated revenues, will be recognized through 2023 as follows:
 
2019
 
2020
 
2021
 
2022
 
2023
 
Total
 
(In Thousands)
Compression service contracts remaining performance obligations
$
19,830

 
$
19,279

 
$
6,108

 
$
101

 
$
—

 
$
45,318


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.

Equipment Sales & Aftermarket Services. Equipment sales and most aftermarket service revenues are recognized at a point in time when we transfer control of our products and complete the delivery of services to our customers.

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. Our contract asset balances, primarily associated with these documentation requirements, were $8.0 million and $5.9 million as of June 30, 2019 and December 31, 2018, respectively. 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. The following table reflects changes in our contract liabilities for the periods indicated:

 
Six Months Ended
June 30,
 
2019
 
2018
 
(In Thousands)
Unearned income, beginning of period
$
24,898

 
$
15,526

Additional unearned income
83,640

 
57,509

Revenue recognized
(77,708
)
 
(44,594
)
Unearned income, end of period
$
30,830

 
$
28,441


During the six months ended June 30, 2019, we recognized in product sales revenue $18.7 million from unearned income that was deferred as of December 31, 2018. During the six months ended June 30, 2018, we recognized in product sales revenue of $13.8 million from unearned income that was deferred as of our adoption of ASC 606 on January 1, 2018.

Contract Costs. As of June 30, 2019, contract costs are immaterial.


14

Disaggregation of Revenue. We disaggregate revenue from contracts with customers by geography based on the following table.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
(In Thousands)
Compression and related services
 
 
 
 
 
 
 
U.S.
$
55,620

 
$
48,720

 
$
109,637

 
$
95,124

International
8,926

 
7,989

 
17,941

 
15,320

 
64,546

 
56,709

 
127,578

 
110,444

Aftermarket services
 
 
 
 
 
 
 
U.S.
17,757

 
14,385

 
31,076

 
27,738

International
412

 
709

 
694

 
1,372

 
18,169

 
15,094

 
31,770

 
29,110

Equipment sales
 
 
 
 
 
 
 
U.S.
52,744

 
28,119

 
78,924

 
45,341

International
397

 
—

 
1,020

 
444

 
53,141

 
28,119

 
79,944

 
45,785

Total Revenue
 
 
 
 
 
 
 
U.S.
126,121

 
91,224

 
219,637

 
168,203

International
9,735

 
8,698

 
19,655

 
17,136

 
$
135,856

 
$
99,922

 
$
239,292

 
$
185,339

NOTE J – 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. We do not have leases 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.

Lease costs are included in either cost of revenues or selling, general, and administrative expense depending on the use of the underlying asset. Components of 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), were $1.9 million and $3.7 million for the three and six month periods ended June 30, 2019, respectively, of which, $0.5 million and $1.0 million respectively, related to short-term leases. Variable rent expense was not material.

Operating lease supplemental cash flow information:
 
Six Months Ended June 30, 2019
 
(In Thousands)
Cash paid for amounts included in the measurement of lease liabilities:
 
     Operating cash flows - operating leases
$
2,285

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
     Operating leases
$
2,663



15

Supplemental balance sheet information:
 
June 30, 2019
 
(In Thousands)
Operating leases:
 
     Operating right-of-use asset
$
8,935

 
 
     Accrued liabilities and other
$
3,980

     Operating lease liabilities
4,955

     Total operating lease liabilities
$
8,935

 
 
Additional operating lease information:
 
June 30, 2019
Weighted average remaining lease term:
 
     Operating leases
3.55 Years

 
 
Weighted average discount rate:
 
     Operating leases
6.73
%

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 June 30, 2019:
 
Operating Leases
 
(In Thousands)
 
 
Remainder of 2019
$
2,200

2020
3,953

2021
1,937

2022
500

2023
286

Thereafter
1,342

Total lease payments
10,218

Less imputed interest
(1,283
)
Total lease liabilities
$
8,935

NOTE K – SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
    
The $295.9 million and $350.0 million in aggregate principal amounts outstanding of the 7.25% Senior Notes and 7.50% Senior Secured Notes, respectively, as of June 30, 2019 are fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several senior unsecured and secured basis, respectively, by certain of our domestic restricted subsidiaries.

16

Condensed Consolidating Balance Sheet
June 30, 2019
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
$
—

 
$
118,396

 
$
27,215

 
$
—

 
$
145,611

Property, plant, and equipment, net
—

 
619,448

 
28,789

 
—

 
648,237

Investments in subsidiaries
160,645

 
24,518

 
—

 
(185,163
)
 
—

Operating lease right-of-use assets
—

 
8,390

 
545

 
—

 
8,935

Intangible and other assets, net
—

 
30,734

 
2,675

 
—

 
33,409

Intercompany receivables
554,405

 
—

 
—

 
(554,405
)
 
—

Total non-current assets
715,050

 
683,090

 
32,009

 
(739,568
)
 
690,581

Total assets
$
715,050

 
$
801,486

 
$
59,224

 
$
(739,568
)
 
$
836,192

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
Amounts payable to affiliates
—

 
6,133

 
3,953

 
—

 
10,086

Other current liabilities
$
16,382

 
$
89,202

 
$
3,729

 
$
—

 
$
109,313

Long-term debt, net
634,373

 
—

 
—

 
—

 
634,373

Series A Preferred Units
9,000

 
—

 
—

 
—

 
9,000

Operating lease liabilities
—

 
4,537

 
418

 
—

 
4,955

Intercompany payables
—

 
528,889

 
25,516

 
(554,405
)
 
—

Other long-term liabilities
—

 
12,080

 
1,090

 
—

 
13,170

Total liabilities
659,755

 
640,841

 
34,706

 
(554,405
)
 
780,897

Total partners' capital
55,295

 
160,645

 
24,518

 
(185,163
)
 
55,295

Total liabilities and partners' capital
$
715,050

 
$
801,486

 
$
59,224

 
$
(739,568
)
 
$
836,192



Condensed Consolidating Balance Sheet
December 31, 2018
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
$
—

 
$
128,084

 
$
23,663

 
$
—

 
$
151,747

Property, plant, and equipment, net
—

 
614,982

 
26,337

 
—

 
641,319

Investments in subsidiaries
146,852

 
21,330

 
—

 
(168,182
)
 
—

Intangible and other assets, net
—

 
31,874

 
1,804

 
—

 
33,678

Intercompany receivables
599,145

 
—

 
—

 
(599,145
)
 
—

Total non-current assets
745,997

 
668,186

 
28,141

 
(767,327
)
 
674,997

Total assets
$
745,997

 
$
796,270

 
$
51,804

 
$
(767,327
)
 
$
826,744

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND PARTNERS' CAPITAL
 
 
 
 
 
 
 
 
 
Amounts payable to affiliates
—

 
—

 
3,517

 
—

 
3,517

Other current liabilities
$
14,681

 
$
72,985

 
$
3,170

 
$
—

 
$
90,836

Long-term debt, net
633,013

 
—

 
—

 
—

 
633,013

Series A Preferred Units
30,900

 
—

 
—

 
—

 
30,900

Intercompany payables
—

 
576,242

 
22,903

 
(599,145
)
 
—

Other long-term liabilities
—

 
191

 
884

 
—

 
1,075

Total liabilities
678,594

 
649,418

 
30,474

 
(599,145
)
 
759,341

Total partners' capital
67,403

 
146,852

 
21,330

 
(168,182
)
 
67,403

Total liabilities and partners' capital
$
745,997

 
$
796,270

 
$
51,804

 
$
(767,327
)
 
$
826,744


17

Condensed Consolidating Statement of Operations and Comprehensive Income
Three Months Ended June 30, 2019
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
128,611

 
$
9,337

 
$
(2,092
)
 
$
135,856

Cost of revenues (excluding depreciation and amortization expense)
—

 
89,276

 
6,166

 
(2,092
)
 
93,350

Selling, general, and administrative expense
590

 
9,736

 
648

 
—

 
10,974

Depreciation and amortization
—

 
18,045

 
1,009

 
—

 
19,054

Impairment and other charges
—

 
2,311

 
—

 
—

 
2,311

Interest expense, net
12,964

 
81

 
—

 
—

 
13,045

Series A Preferred FV Adjustment expense
166

 
—

 
—

 
—

 
166

Other (income) expense, net
622

 
23

 
(38
)
 
—

 
607

Equity in net income (loss) of subsidiaries
(11,395
)
 
(1,051
)
 
—

 
12,446

 
—

Income (loss) before income tax provision
(2,947
)
 
10,190

 
1,552

 
(12,446
)
 
(3,651
)
Provision (benefit) for income taxes
—

 
(1,205
)
 
501

 
—

 
(704
)
Net income (loss)
(2,947
)
 
11,395

 
1,051

 
(12,446
)
 
(2,947
)
Other comprehensive income (loss)
128

 
128

 
—

 
(128
)
 
128

Comprehensive income (loss)
$
(2,819
)
 
$
11,523

 
$
1,051

 
$
(12,574
)
 
$
(2,819
)

Condensed Consolidating Statement of Operations and Comprehensive Income
Six Months Ended June 30, 2019
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
226,672

 
$
18,371

 
$
(5,751
)
 
$
239,292

Cost of revenues (excluding depreciation and amortization expense)
—

 
155,015

 
12,186

 
(5,751
)
 
161,450

Selling, general, and administrative expense
955

 
19,561

 
1,123

 
—

 
21,639

Depreciation and amortization
—

 
35,599

 
1,987

 
—

 
37,586

Impairment and other charges
—

 
2,311

 
—

 
—

 
2,311

Interest expense, net
26,256

 
88

 
—

 
—

 
26,344

Series A Preferred FV Adjustment expense
1,470

 
—

 
—

 
—

 
1,470

Other (income) expense, net
1,069

 
168

 
(1,011
)
 
—

 
226

Equity in net income (loss) of subsidiaries
(14,347
)
 
(3,189
)
 
—

 
17,536

 
—

Income (loss) before income tax provision
(15,403
)
 
17,119

 
4,086

 
(17,536
)
 
(11,734
)
Provision (benefit) for income taxes
—

 
2,772

 
897

 
—

 
3,669

Net income (loss)
(15,403
)
 
14,347

 
3,189

 
(17,536
)
 
(15,403
)
Other comprehensive income (loss)
400

 
400

 
—

 
(400
)
 
400

Comprehensive income (loss)
$
(15,003
)
 
$
14,747

 
$
3,189

 
$
(17,936
)
 
$
(15,003
)

18

Condensed Consolidating Statement of Operations and Comprehensive Income
Three Months Ended June 30, 2018
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
94,145

 
$
8,080

 
$
(2,303
)
 
$
99,922

Cost of revenues (excluding depreciation and amortization expense)
—

 
64,531

 
5,280

 
(2,303
)
 
67,508

Selling, general, and administrative expense
496

 
9,723

 
630

 
—

 
10,849

Depreciation and amortization
—

 
16,674

 
774

 
—

 
17,448

Interest expense, net
14,042

 
(219
)
 
—

 
—

 
13,823

Series A Preferred FV Adjustment (income)
(586
)
 
—

 
—

 
—

 
(586
)
Other (income) expense, net
—

 
(625
)
 
247

 
—

 
(378
)
Equity in net income (loss) of subsidiaries
(4,360
)
 
(1,433
)
 
—

 
5,793

 
—

Income (loss) before income tax provision
(9,592
)
 
5,494

 
1,149

 
(5,793
)
 
(8,742
)
Provision (benefit) for income taxes
—

 
1,134

 
(284
)
 
—

 
850

Net income (loss)
(9,592
)
 
4,360

 
1,433

 
(5,793
)
 
(9,592
)
Other comprehensive income (loss)
(2,873
)
 
(2,873
)
 
—

 
2,873

 
(2,873
)
Comprehensive income (loss)
$
(12,465
)
 
$
1,487

 
$
1,433

 
$
(2,920
)
 
$
(12,465
)


Condensed Consolidating Statement of Operations and Comprehensive Income
Six Months Ended June 30, 2018
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
—

 
$
173,535

 
$
15,466

 
$
(3,662
)
 
$
185,339

Cost of revenues (excluding depreciation and amortization expense)
—

 
118,820

 
10,336

 
(3,662
)
 
125,494

Selling, general, and administrative expense
(108
)
 
18,161

 
1,093

 
—

 
19,146

Depreciation and amortization
—

 
33,318

 
1,497

 
—

 
34,815

Interest expense, net
22,141

 
3,115

 
—

 
—

 
25,256

Series A Preferred FV Adjustment expense
967

 
—

 
—

 
—

 
967

Other (income) expense, net
—

 
3,710

 
(884
)
 
—

 
2,826

Equity in net income (loss) of subsidiaries
2,329

 
(2,931
)
 
—

 
602

 
—

Income (loss)before income tax provision
(25,329
)
 
(658
)
 
3,424

 
(602
)
 
(23,165
)
Provision (benefit) for income taxes
—

 
1,671

 
493

 
—

 
2,164

Net income (loss)
(25,329
)
 
(2,329
)
 
2,931

 
(602
)
 
(25,329
)
Other comprehensive income (loss)
(3,522
)
 
(3,522
)
 
—

 
3,522

 
(3,522
)
Comprehensive income (loss)
$
(28,851
)
 
$
(5,851
)
 
$
2,931

 
$
2,920

 
$
(28,851
)


19

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2019
(In Thousands)

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

 
$
37,907

 
$
2,435

 
$
—

 
$
40,342

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

 
(36,379
)
 
(3,207
)
 
—

 
(39,586
)
Advances and other investing activities
—

 
—

 
—

 
—

 
—

Net cash provided by (used in) investing activities
—

 
(36,379
)
 
(3,207
)
 
—

 
(39,586
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
—

 
—

 
—

 
—

 
—

Payments of long-term debt
—

 
(67
)
 
—

 
—

 
(67
)
Cash redemptions of Preferred Units
(22,452
)
 
—

 
—

 
—

 
(22,452
)
Distributions
(952
)
 
—

 
—

 
—

 
(952
)
Intercompany contribution (distribution)
23,404

 
(23,404
)
 
—

 
—

 
—

Advances from affiliate
—

 
11,142

 
—

 
—

 
11,142

Net cash provided by (used in) financing activities
—

 
(12,329
)
 
—

 
—

 
(12,329
)
Effect of exchange rate changes on cash
—

 
—

 
11

 
—

 
11

Increase (decrease) in cash and cash equivalents
—

 
(10,801
)
 
(761
)
 
—

 
(11,562
)
Cash and cash equivalents at beginning of period
—

 
14,148

 
1,710

 
—

 
15,858

Cash and cash equivalents at end of period
$
—

 
$
3,347

 
$
949

 
$
—

 
$
4,296


20

Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2018
(In Thousands)
 
Issuers
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
—

 
$
(10,424
)
 
$
6,151

 
$
—

 
$
(4,273
)
Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant, and equipment, net
—

 
(43,482
)
 
(3,780
)
 
—

 
(47,262
)
Advances and other investing activities
—

 
34

 
—

 
—

 
34

Net cash provided by (used in) investing activities
—

 
(43,448
)
 
(3,780
)
 
—

 
(47,228
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from long-term debt
343,800

 
36,200

 
—

 
—

 
380,000

Payments of long-term debt
—

 
(258,000
)
 
—

 
—

 
(258,000
)
Distributions
(14,928
)
 
—

 
—

 
—

 
(14,928
)
Other financing activities
(7,662
)
 
—

 
—

 
—

 
(7,662
)
Intercompany contribution (distribution)
(321,210
)
 
321,210

 
—

 
—

 
—

Net cash provided by (used in) financing activities
—

 
99,410

 
—

 
—

 
99,410

Effect of exchange rate changes on cash
—

 
—

 
65

 
—

 
65

Increase (decrease) in cash and cash equivalents
—

 
45,538

 
2,436

 
—

 
47,974

Cash and cash equivalents at beginning of period
—

 
4,197

 
3,404

 
—

 
7,601

Cash and cash equivalents at end of period
$
—

 
$
49,735

 
$
5,840

 
$
—

 
$
55,575

NOTE L – SUBSEQUENT EVENTS

On July 19, 2019, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended June 30, 2019 of $0.01 per 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 August 14, 2019 to each of the holders of common units of record as of the close of business on August 1, 2019.

On July 8, 2019, 375,868 Preferred Units were redeemed for $4.5 million.

21

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, 2018 filed with the SEC on March 4, 2019 ("2018 Annual Report"). This discussion includes forward-looking statements that involve certain risks and uncertainties.
 
Business Overview
    
The construction of infrastructure to alleviate current takeaway capacity constraints that are limiting production and new drilling in the Permian Basin has continued to contribute to increased demand for compressor equipment and services. This growth in demand continues to drive increases in our compression services and equipment sales revenues, through increased activity and customer contract pricing. Our second quarter utilization rates in our overall compression service fleet increased to 89.1% as of June 30, 2019 and for our high-horsepower class, the utilization rate increased to 97.1% at June 30, 2019. This represents the highest overall utilization rate since the acquisition of Compressor Systems, Inc. ("CSI") in 2014. Our high-horsepower (over 1,000 horsepower) compression fleet now represents 47.8% of total horsepower in our fleet. In addition to increasing our utilization rates, the increase in demand has provided us the ability to benefit from improved contract pricing on newly deployed equipment as well as increased pricing on previously deployed equipment when contracts are renewed. As overall industry utilization of high-horsepower compressor equipment approaches maximum levels, customer demand for aftermarket services and parts has increased for maintenance and overhaul of customer-owned compression fleets. Our new equipment sales backlog was $59.7 million as of June 30, 2019 and $105.2 million as of December 31, 2018. The decrease is the result of converting backlog into revenue for completed orders during the first half of the year in excess of new orders received during the period. New equipment sales orders generally take less than twelve months to build and deliver.

In light of the current high demand for compression services, our focus remains on our ability to appropriately expand and maintain our compression equipment fleet in order to serve our customers. As we seek to minimize long-term debt borrowings under our Credit Agreement and senior notes, we are supplementing available cash and operating cash flows with other forms of financing, including our February 2019 agreement with TETRA, which provided funding for the expansion of our compression equipment fleet. As a result of this agreement, beginning in July 2019, approximately 20,700 horsepower of additional compressor equipment will be deployed, and we will have the right to purchase the equipment from TETRA at any time over the five year lease term. These anticipated 2019 growth plans are expected to expand our high-horsepower compression fleet by approximately 98,000 horsepower, focused on key customers as they look to their 2020 compression needs. However, if additional desired capital expenditures exceed available sources, and other financing sources are not available, we will not have the ability to expand our compression services fleet to meet the increased demand. We continue to review other financing options available to fund our growth.
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 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 six month period ended June 30, 2019, 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

22

period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and before certain non-cash charges, consisting of impairments, equity compensation, non-cash costs of compressors sold, fair value adjustments of our Preferred Units, write-off of unamortized financing costs, and excluding Series A Preferred redemption premiums, and severance. Adjusted EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to:
•
assess our ability to generate available cash sufficient to make distributions to our common unitholders and general partner;
•
evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;
•
measure operating performance and return on capital as compared to our competitors; and
•
determine our ability to service debt and fund capital expenditures.

 The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Net loss
$
(2,947
)
 
$
(9,592
)
 
$
(15,403
)
 
$
(25,329
)
Provision (benefit) for income taxes
(704
)
 
850

 
3,669

 
2,164

Depreciation and amortization
19,054

 
17,448

 
37,586

 
34,815

Impairments and other charges
2,464

 
—

 
2,464

 
—

Interest expense, net
13,045

 
13,823

 
26,344

 
25,256

Equity compensation
590

 
496

 
955

 
(108
)
Expense for unamortized finance costs
—

 
—

 
—

 
3,541

Series A Preferred redemption premium
621

 
—

 
1,069

 
—

Series A Preferred fair value adjustments
166

 
(586
)
 
1,470

 
967

Severance
—

 
12

 
—

 
12

Non-cash cost of compressors sold
98

 
811

 
1,038

 
1,135

Other
376

 
—

 
376

 
—

Adjusted EBITDA
$
32,763


$
23,262


$
59,568


$
42,453

 
The following table reconciles cash flow from operating activities to Adjusted EBITDA:
 
Six Months Ended
June 30,
 
2019
 
2018
 
(In Thousands)
Cash flow from operating activities
$
40,342

 
$
(4,273
)
Changes in current assets and current liabilities
(8,783
)
 
23,634

Deferred income taxes
(946
)
 
(172
)
Other non-cash charges
(1,411
)
 
(2,057
)
Interest expense, net
26,344

 
25,256

Series A Preferred accrued paid in kind distributions
(1,061
)
 
(3,246
)
Provision for income taxes
3,669

 
2,164

Severance
—

 
12

Non-cash cost of compressors sold
1,038

 
1,135

Other
376

 
—

Adjusted EBITDA
$
59,568

 
$
42,453


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

23

invest and grow, and measure our performance as compared to our peers. The following table reconciles cash provided by operations, net, to Free Cash Flow for the periods indicated:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
 
(In Thousands)
Cash from operations
$
8,710

 
$
(3,908
)
 
$
40,342

 
$
(4,273
)
Capital expenditures, net of sales proceeds
(16,434
)
 
(30,223
)
 
(39,586
)
 
(47,262
)
Free cash flow
$
(7,724
)
 
$
(34,131
)
 
$
756

 
$
(51,535
)
    
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 flows from operating activities, or any other measure of financial performance presented in accordance with U.S. GAAP. These measures may not be comparable to similarly titled financial metrics of other entities, as other entities may not calculate Adjusted EBITDA or Free Cash Flow in the same manner as we do. Management compensates for the limitations of Adjusted EBITDA and Free Cash Flow as analytical tools by reviewing the comparable U.S. GAAP measures, understanding the differences between the measures, and incorporating this knowledge into management’s decision-making processes. Adjusted EBITDA and Free Cash Flow should not be viewed as indicative of the actual amount of cash we have available for distributions or that we plan to distribute for a given period, nor should it be equated with “available cash” as defined in our partnership agreement.

Horsepower Utilization Rate of our Compressor Packages. We measure the horsepower utilization rate of our fleet of compressor packages as the amount of horsepower of compressor packages used to provide services as of a particular date, divided by the amount of horsepower of compressor packages in our services fleet as of such date. Management primarily uses this metric to determine our future need for additional compressor packages for our service fleet and to measure marketing effectiveness.
 
The following table sets forth the total horsepower in our compression fleet, our total horsepower in service, and our horsepower utilization rate as of the dates shown.
 
June 30,
 
2019
 
2018
Horsepower
 
 
 
Total horsepower in fleet
1,155,440

 
1,097,546

Total horsepower in service
1,029,045

 
932,467

Total horsepower utilization rate
89.1
%
 
85.0
%

The following table sets forth our horsepower utilization rates by each horsepower class of our compression fleet as of the dates shown.

 
June 30,
 
2019
 
2018
Horsepower utilization rate by class
 
 
 
Low-horsepower (0-100)
73.7
%
 
66.4
%
Medium-horsepower (101-1,000)
84.4
%
 
82.7
%
High-horsepower (1,001 and over)
97.1
%
 
94.1
%

The utilization figures for June 30, 2019 above reflect the impairment of certain low-horsepower class compressor packages and removal of 20,286 horsepower from the compression fleet during the second quarter of 2019.


24

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 design, fabrication and sale of standard and custom-designed compressor packages, primarily at our facility in Midland, Texas. The equipment is fabricated to customer and standard specifications, as applicable. Our custom fabrication projects are typically greater in size and scope than standard fabrication projects, requiring more labor, materials, and overhead resources. Our fabrication business requires diligent planning of those resources and project and backlog management in order to meet the customer delivery dates and performance criteria. New equipment sales backlog was $59.7 million as of June 30, 2019 compared to $93.9 million and $105.2 million as of March 31, 2019 and December 31, 2018, 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. During the six months ended June 30, 2019, we received cumulative orders of $29.1 million for new compressor packages. Most of our June 30, 2019 new equipment sales backlog is expected to be recognized during 2019. 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 delivery has been scheduled. Our new equipment sales backlog is a measure of marketing effectiveness that allows us to plan future labor and raw material needs and measure our success in winning bids from our customers.
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 2018 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.


25

Results of Operations

Three months ended June 30, 2019 compared to three months ended June 30, 2018
 
Three Months Ended June 30,
 
 
 
 
 
Period-to-Period Change
 
Percentage of Total Revenues
 
Period-to-Period Change
Consolidated Results of Operations
2019
 
2018
 
2019 vs. 2018
 
2019
 
2018
 
2019 vs. 2018
 
(In Thousands)
 
 
 
 
 
 
Revenues:
 

 
 

 
 
 
 
 
 
 
 
Compression and related services
$
64,546

 
$
56,709

 
$
7,837

 
47.5
 %
 
56.8
 %
 
13.8
 %
Aftermarket services
18,169

 
15,094

 
3,075

 
13.4
 %
 
15.1
 %
 
20.4
 %
Equipment sales
53,141

 
28,119

 
25,022

 
39.1
 %
 
28.1
 %
 
89.0
 %
Total revenues
135,856

 
99,922

 
35,934

 
100.0
 %
 
100.0
 %
 
36.0
 %
Cost of revenues:
 
 
 
 
 
 
 

 
 

 
 

Cost of compression and related services
30,520

 
30,509

 
11

 
22.5
 %
 
30.5
 %
 
—
 %
Cost of aftermarket services
15,428

 
12,841

 
2,587

 
11.4
 %
 
12.9
 %
 
20.1
 %
Cost of equipment sales
47,402

 
24,158

 
23,244

 
34.9
 %
 
24.2
 %
 
96.2
 %
Total cost of revenues
93,350

 
67,508

 
25,842

 
68.7
 %
 
67.6
 %
 
38.3
 %
Depreciation and amortization
19,054

 
17,448

 
1,606

 
14.0
 %
 
17.5
 %
 
9.2
 %
Impairments and other charges
2,311

 
—

 
2,311

 
1.7
 %
 
—
 %
 
100.0
 %
Selling, general, and administrative expense
10,974

 
10,849

 
125

 
8.1
 %
 
10.9
 %
 
1.2
 %
Interest expense, net
13,045

 
13,823

 
(778
)
 
9.6
 %
 
13.8
 %
 
(5.6
)%
Series A Preferred fair value adjustment (income) expense
166

 
(586
)
 
752

 
0.1
 %
 
(0.6
)%
 
100.0
 %
Other (income) expense, net
607

 
(378
)
 
985

 
0.4
 %
 
(0.4
)%
 
(260.6
)%
Income (loss) before income taxes
(3,651
)
 
(8,742
)
 
5,091

 
(2.7
)%
 
(8.7
)%
 
(58.2
)%
Provision (benefit) for income taxes
(704
)
 
850

 
(1,554
)
 
(0.5
)%
 
0.9
 %
 
(182.8
)%
Net income (loss)
$
(2,947
)
 
$
(9,592
)
 
$
6,645

 
(2.2
)%
 
(9.6
)%
 
(69.3
)%
 
Revenues
 
Compression and related services revenues increased $7.8 million, a 13.8% increase, in the current year quarter compared to the prior year quarter. Growth in demand for compression services positively impacted our compression fleet utilization rates. Utilization of our medium-horsepower (101-1,000 HP) and high-horsepower (over 1,000 HP) compression fleets, which are used in natural gas gathering and transmission applications, has increased compared to the prior year quarter. As a result, the overall compression fleet horsepower utilization rate as of June 30, 2019 increased to 89.1% compared to 85.0% as of June 30, 2018. In addition, increased demand has also led to improved customer contract pricing. In response to the overall improving demand for compression services, we continue to invest in growth capital projects to increase certain horsepower categories of our compression fleet.

Aftermarket services revenues increased $3.1 million during the current year quarter compared to the prior year quarter. As overall industry utilization of high-horsepower compression approaches maximum levels, customer demand for aftermarket services and parts has increased for maintenance and overhaul of customer-owned compressor fleets.

Equipment sales revenues increased $25.0 million during the current year quarter compared to the prior year quarter, as we continue to see improving demand for high horsepower equipment. The level of revenues from equipment sales is typically volatile and difficult to forecast, as these revenues are tied to specific customer projects that vary in scope, design, complexity, and customer needs. In comparison, our revenues from compression and related services are typically more consistent and predictable.


26

Cost of revenues
 
The cost of compression and related services revenue remained consistent compared to the prior year quarter, despite the increased overall utilization of compressor packages. Costs of compression and related services as a percent of associated revenues decreased compared to the prior year quarter, due to improved customer contract pricing on newly deployed equipment and previously deployed equipment when contracts are renewed. In addition, there were maintenance and labor cost efficiencies resulting from the concentration and growth of newly deployed compressor equipment in our most established markets and efficiencies gained from our operating system software. These factors resulted in the highest quarterly compression services operating margin since the acquisition of CSI. The cost of compression and related services as a percentage of compression and related services revenues were 47.3% and 53.8% during the current and prior year quarters, respectively. Costs of aftermarket services increased compared to the prior year quarter, consistent with the increased activity and parts sales.

Cost of equipment sales revenues increased as a result of the increase in associated revenues. Costs of equipment sales as a percentage of equipment sales revenues increased during the current year quarter compared to the prior year quarter, as equipment sales during the prior year period were for more standardized equipment which resulted in slightly higher margins.

Depreciation and amortization
 
Depreciation and amortization expense primarily consists of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased compared to the prior year quarter due to increases in the compression fleet.

Impairments and other charges

During the three month period ending June 30, 2019, we recorded impairments of $2.3 million on certain units of our GasJack(R) fleet, reflecting our decision to dispose of these units upon management's determination that refurbishing this equipment was not economic given limited current and forecasted demand for such equipment. There were 441 GasJack units impaired, representing 20,286 of total horsepower. Following the impairment there remains in excess of 500 GasJack units currently unutilized and available for redeployment.

Selling, general, and administrative expense
 
Selling, general, and administrative expenses remained flat during the current year quarter compared to the prior year quarter. Increased professional fees of $0.4 million and increased sales and marketing expenses of $0.1 million were offset by decreased general expenses such as office, tax, and insurance expenses of $0.5 million. Selling, general, and administrative expense as a percentage of revenues decreased in the current quarter due to the increased revenues compared to the prior year quarter.

Interest expense, net
 
Interest expense, net, decreased compared to the prior year quarter primarily due to the conversion and redemption of the Preferred Units resulting in lower paid in kind distributions of Preferred Units compared to the prior year period. Interest expense, net, during the current and prior year quarters also includes $0.7 million and $0.7 million, respectively, of non-cash finance cost amortization.

Series A Preferred fair value adjustment

The Series A Preferred fair value adjustment was $0.2 million charged to earnings during the current year quarter compared to $0.6 million credited to earnings during the prior year quarter. The fair value of the Preferred Units is classified as a long-term liability on our consolidated balance sheet in accordance with ASC 480 "Distinguishing Liabilities and Equity" and changes in the fair value during each quarterly period, if any, are charged or credited to earnings, as appropriate. As of June 30, 2019, the fair value of the Preferred Units was $9.0 million. The remaining outstanding Preferred Units are scheduled to be redeemed for cash on August 8, 2019.
.


27

Other (income) expense, net
 
Other (income) expense, net, was $0.6 million of expense, net, during the current year quarter compared to $0.4 million of income, net, during the prior year quarter. The increase in expense is primarily due to $0.6 million of redemption premium incurred in connection with the redemption of Preferred Units for cash and by decreased foreign currency gains of $0.3 million.

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.
Results of Operations

Six months ended June 30, 2019 compared to six months ended June 30, 2018.
 
Six Months Ended June 30,
 
 
 
 
 
Period-to-Period Change
 
Percentage of Total Revenues
Period-to-Period Change
Consolidated Results of Operations
2019
 
2018
 
2019 vs. 2018
 
2019
 
2018
 
2019 vs. 2018
 
(In Thousands)
 
 
 
 
 
 
Revenues:
 
 
 
 
 

 
 
 
 
 
 
Compression and related services
$
127,578

 
$
110,444

 
$
17,134

 
53.3
 %
 
59.6
 %
 
15.5
 %
Aftermarket services
31,770

 
29,110

 
2,660

 
13.3
 %
 
15.7
 %
 
9.1
 %
Equipment sales
79,944

 
45,785

 
34,159

 
33.4
 %
 
24.7
 %
 
74.6
 %
Total revenues
239,292

 
185,339

 
53,953

 
100.0
 %
 
100.0
 %
 
29.1
 %
Cost of revenues:
 

 
 
 
 
 
 

 
 

 
 

Cost of compression and related services
63,141

 
61,889

 
1,252

 
26.4
 %
 
33.4
 %
 
2.0
 %
Cost of aftermarket services
26,678

 
23,998

 
2,680

 
11.1
 %
 
12.9
 %
 
11.2
 %
Cost of equipment sales
71,631

 
39,607

 
32,024

 
29.9
 %
 
21.4
 %
 
80.9
 %
Total cost of revenues
161,450

 
125,494

 
35,956

 
67.5
 %
 
67.7
 %
 
28.7
 %
Depreciation and amortization
37,586

 
34,815

 
2,771

 
15.7
 %
 
18.8
 %
 
8.0
 %
Impairments and other charges
2,311

 
—

 
2,311

 
1.0
 %
 
—
 %
 
100.0
 %
Selling, general, and administrative expense
21,639

 
19,146

 
2,493

 
9.0
 %
 
10.3
 %
 
13.0
 %
Interest expense, net
26,344

 
25,256

 
1,088

 
11.0
 %
 
13.6
 %
 
4.3
 %
Series A Preferred fair value adjustment (income) expense
1,470

 
967

 
503

 
0.6
 %
 
0.5
 %
 
52.0
 %
Other (income) expense, net
226

 
2,826

 
(2,600
)
 
0.1
 %
 
1.5
 %
 
(92.0
)%
Income (loss) before income taxes
(11,734
)
 
(23,165
)
 
11,431

 
(4.9
)%
 
(12.5
)%
 
(49.3
)%
Provision (benefit) for income taxes
3,669

 
2,164

 
1,505

 
1.5
 %
 
1.2
 %
 
69.5
 %
Net income (loss)
$
(15,403
)
 
$
(25,329
)
 
$
9,926

 
(6.4
)%
 
(13.7
)%
 
(39.2
)%

Revenues
 
Compression and related services revenues increased by $17.1 million, or 15.5%, in the current year period compared to the prior year period. Growth in demand for compression services positively impacted our compression fleet utilization rates. Utilization of our medium-horsepower (101-1,000 HP) and high-horsepower (over 1,000 HP) compression fleets, which are used to provide services in natural gas gathering and transmission applications, have increased compared to the prior year period. As a result, the overall compression fleet horsepower utilization rate as of June 30, 2019 increased to 89.1% compared to 85.0% as of June 30, 2018. Increased demand has also led to

28

improved customer contract pricing for compression services. In response to the overall improving demand for compression services, we continue to invest in growth capital projects to increase certain horsepower categories of our compression fleet.

Aftermarket services revenues increased $2.7 million, or 9.1%, during the current year period compared to the prior year period. As overall industry utilization of high-horsepower compression approaches maximum levels, customer demand for aftermarket services and parts has increased for maintenance and overhauls of customer-owned compressor equipment.

Equipment sales revenues increased $34.2 million, or 74.6%, during the current year period compared to the prior year period, as we continue to see improving demand for high-horsepower equipment. The level of revenues from equipment sales is typically volatile and difficult to forecast, as these revenues are tied to specific customer projects that vary in scope, design, complexity, and customer needs. In comparison, our revenues from compression and related services are typically more consistent and predictable.

Cost of revenues
 
The increase in the cost of compression and related services revenue, compared to the prior year period, was primarily due to the increased horsepower and overall utilization of compressor packages. The costs of compression and related services as a percentage of compression and related services revenues were 49.5% and 56.0% during the current and prior year periods, respectively. Costs of compression and related services as a percent of associated revenues decreased compared to the prior year period primarily due to improved customer contract pricing on newly deployed equipment and previously deployed equipment when contracts are renewed. In addition, there were maintenance and labor cost efficiencies resulting from the concentration and growth of newly deployed compression equipment in our most established markets and efficiencies gained from our operating system software. Costs of aftermarket services increased compared to the prior year period, consistent with the increased activity and part sales.

Cost of equipment sales revenues increased as a result of the increase in associated revenues. Costs of equipment sales as a percentage of equipment sales revenues increased primarily due to pricing on equipment orders placed in early 2018.

Depreciation and amortization
 
Depreciation and amortization expense primarily consists of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense increased compared to the prior year period due to increases in the compression fleet.

Impairments and other charges

During the six month period ended June 30, 2019, we recorded impairments of $2.3 million on certain units of our GasJack(R) fleet, reflecting our decision to dispose of these units upon management's determination that refurbishing this equipment was not economic given limited current and forecasted demand for such equipment. There were 441 GasJack units impaired, representing 20,286 of total horsepower. Following the impairment there remains in excess of 500 GasJack units currently unutilized and available for redeployment.

Selling, general, and administrative expense
 
Selling, general, and administrative expenses increased during the current year period compared to the prior year period, largely due to increased employee expenses, including wages, incentives, benefits, and other employee related expenses of $2.2 million, and increased professional services of $0.4 million. These increases were offset by decreased other general expenses of $0.2 million. Despite increased expenses, selling, general, and administrative expense as a percentage of revenues decreased due to increased revenues compared to the prior year period.
 

29

Interest expense, net
 
Interest expense, net, increased compared to the prior year period due to higher outstanding debt balances and higher interest rates associated with the issuance of our 7.50% Senior Secured Notes in March 2018. This increase was despite the reduction in interest expense from the conversion and redemption of the Preferred Units resulting in lower paid in kind distributions compared to the prior year period. Interest expense, net, during the current and prior year periods includes $1.5 million and $1.6 million, respectively, of finance cost amortization and other non-cash charges.

Series A Preferred fair value adjustment

The Series A Preferred fair value adjustment was $1.5 million charged to earnings during the current year period compared to $1.0 million charged to earnings during the prior year period. As of June 30, 2019, the fair value of the Preferred Units was $9.0 million. The remaining outstanding Preferred Units are scheduled to be redeemed for cash on August 8, 2019.
 
Other (income) expense, net
 
Other (income) expense, net, was $0.2 million of expense during the current year period, compared to $2.8 million of expense during the prior year period. This decrease in expense is primarily due to $3.5 million of unamortized deferred financing costs charged to other expense as a result of the termination of the previous credit agreement in the prior year period. This decrease was offset by increased expense of $1.1 million of redemption premium incurred in connection with the redemption of Preferred Units for cash.

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

Our effective tax rate for the six month period ended June 30, 2019, was negative 31.3% 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. In addition, the application of ASC 740-270 "Income Taxes - Interim Reporting," resulted in an accrual of current income taxes for the six month period ended June 30, 2019 equal to approximately the full year estimate. 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, normal operating expenses, and capital expenditures. Our potential sources of funds are our existing cash balances, cash generated from our operations, long-term and short-term borrowings, financing transactions with TETRA, issuances of debt and equity securities, and leases, which we believe will be sufficient to meet our working capital and planned growth requirements during 2019. Though demand for compression services and equipment is currently high, we are monitoring the spending plans of our customers due to oil and gas price volatility and its impact on our customer's demand for our products and services. If oil and gas prices decrease further during 2019, our businesses could be 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 to grow our business. Despite these challenges, we remain committed to a long-term growth strategy. Our near-term focus is to selectively expand our compression fleet to serve the growing demand for compression services, while continuing to preserve and enhance liquidity through strategic operating and financial measures.
    
We expect to fund any future capital expenditures, along with potential acquisitions, if any, with existing cash balances, cash flow generated from our operations, financing transactions with TETRA and funds received from the issuance of additional debt and equity securities. We may also seek to expand our compression fleet

30

through finance or operating leases with third parties. However, 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 2018 Annual Report.
 
Meeting increased demand for our compression services, will require ongoing capital expenditure investment, which could be significant. The level of future growth capital expenditures depends on demand for compression services, the level of cash available to fund these expenditures, and our decisions whether to utilize available cash to fund increases in our quarterly common unit distribution, retire debt, or make capital expenditures. We anticipate capital expenditures in 2019 to range from $65.0 million to $70.0 million. These capital expenditures include approximately $18.0 million to $20.0 million of maintenance capital expenditures and approximately $47 million to $50 million of capital expenditures primarily associated with the expansion of our compression services fleet. We expect that the combination of $4.3 million of cash on hand at June 30, 2019 and operating cash flows expected to be generated during the year will be sufficient to fund the remainder of these capital expenditures without having to incur additional long-term debt and without having to access the equity markets. In addition to these capital expenditures, pursuant to agreements executed in February 2019, TETRA has agreed to fund the construction of and purchase up to $15.0 million of new compression services equipment and lease it to us in exchange for a monthly rental fee. During the six months ended June 30, 2019, $11.1 million of the $15.0 million has been funded by TETRA for the construction of new compressor equipment and is included in long-term affiliate payable in our consolidated balance sheet. We are reviewing all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.
 
On July 19, 2019, our General Partner declared a cash distribution attributable to the quarter ended June 30, 2019 of $0.01 per 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 August 14, 2019 to each of the holders of common units of record as of the close of business on August 1, 2019.
Cash Flows

A summary of our sources (uses) of cash during the six months ended June 30, 2019 and 2018 is as follows:
 
Six Months Ended June 30,
 
(In Thousands)
 
2019
 
2018
Operating activities
$
40,342

 
$
(4,273
)
Investing activities
(39,586
)
 
(47,228
)
Financing activities
(12,329
)
 
99,410


Operating Activities
 
Net cash provided by operating activities increased by $44.6 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 increase in cash provided by operating activities was due to increased cash earnings and due to working capital management, particularly related to collections of accounts receivable, management of inventory levels, and timing of payments of accounts payable.
  
Investing Activities
 
Capital expenditures during the six months ended June 30, 2019, decreased by $7.7 million compared to the same period in 2018 primarily due to the reduction in total capital expenditure plans to grow and maintain the capacity of our compression fleet compared to the prior year. As a result of overall improving demand for compression services, beginning in late 2017 we began growth capital expenditure projects to increase certain horsepower categories of our compression fleet. Maintenance capital expenditures increased during the six months ended June 30, 2019 compared to the prior year period. Total capital expenditures, net of disposals and proceeds, during the current year period of $39.6 million include $10.6 million of maintenance capital expenditures and are net of $1.0 million of non-cash cost of fleet compression units sold. The level of growth capital expenditures depends on

31

forecasted demand for compression services. If the forecasted demand for compression services during 2019 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
 
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). We have used the cash savings from the reduced distribution to redeem the remaining Preferred Units for cash and avoid the further dilution to our common unitholders that would occur if the Preferred Units were converted into common units. Accordingly, during the six months ended June 30, 2019, we distributed $1.0 million of cash distributions to our common unitholders and General Partner.
    
Our sources of funds for liquidity needs are existing cash balances, cash generated from our operations, and long-term and short-term borrowings. In addition to redeeming the remaining Preferred Units, we anticipate that we will utilize available cash to fund our anticipated growth capital expenditures. In February 2019, we entered into a transaction with TETRA whereby TETRA agreed to fund the construction of and purchase up to $15 million of new compressor services equipment and agreed to lease it to us in exchange for a monthly rental fee. As of June 30, 2019, pursuant to this arrangement, $11.1 million has been funded by TETRA for the construction of new compressor equipment.

Series A Convertible Preferred Units. Unless otherwise redeemed for cash, a ratable portion of the Preferred Units has been, and will be, converted into common units on the eighth day of each month over a period of thirty months that began in March 2017 and will end in August 2019 (each, a “Conversion Date”). Beginning with the January 2019 Conversion Date, we have elected to redeem the remaining Preferred Units for cash, resulting in 1,870,681 Preferred Units being redeemed during the six months ended June 30, 2019 for $22.5 million, which includes approximately $1.1 million of redemption premium that was paid. Including the impact of paid in kind distributions of Preferred Units and the conversions of Preferred Units into common units, and the redemptions of Preferred Units for cash, the total number of Preferred Units outstanding as of June 30, 2019 was 751,736. The last redemption of the remaining Preferred Units, along with a final cash payment made in lieu of paid in kind units for the quarter ended June 30, 2019, is scheduled to occur on August 8, 2019 for an aggregate cash payment of $5.0 million.

     Bank Credit Facilities. The Credit Agreement, as amended, includes a maximum credit commitment of $50.0 million available for loans, letters of credit (with a sublimit of $25.0 million) and swingline loans (with a sublimit of $5.0 million), subject to a borrowing base to be determined by reference to the value of the Partnership’s and any other Borrowers’ accounts receivable and certain inventory. Such maximum credit commitment may be increased by $25.0 million in accordance with the terms and conditions of the Credit Agreement. As of June 30, 2019, 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 $22.2 million.

The maturity date of the Credit Agreement is June 29, 2023. As of June 30, 2019, we had no outstanding balance and had $4.5 million in letters of credit against our Credit Agreement. As of August 7, 2019, we have no balance outstanding under our Credit Agreement and $3.7 million in letters of credit, leaving availability under the CCLP Credit Agreement of $31.6 million, reflecting recent increases to the borrowing base.

7.50% Senior Secured Notes. As of August 7, 2019, $350.0 million in aggregate principal amount of our 7.50% Senior Secured Notes are outstanding. The 7.50% Senior Secured Notes accrue interest at a rate of 7.50% per annum and are scheduled to mature on April 1, 2025.

7.25% Senior Notes. As of August 7, 2019, $295.9 million in aggregate principal amount of our 7.25% Senior Notes are outstanding. The 7.25% Senior Notes accrue interest at a rate of 7.25% per annum and are scheduled to mature on August 15, 2022.

Off Balance Sheet Arrangements
 
As of June 30, 2019, 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.

32


Recently Adopted Accounting Guidance

We adopted the new lease accounting standard on January 1, 2019. The new lease standard had a material impact to our consolidated financial statements, resulting from the inclusion of operating lease right-of-use assets and operating lease liabilities in our consolidated balance sheet. Refer to Part I, Item 1. Financial Statements- Note A - "Organization, Basis of Presentation and Significant Accounting Policies" and Note J - “Leases” for further discussion.
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. During the first six months of 2019, there were no material
changes outside of the ordinary course of business in the specified contractual obligations.

For additional information about our contractual obligations as of December 31, 2018, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2018 Annual Report.
Cautionary Statement for Purposes of Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” and information based on our beliefs and those of our general partner. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “budgets”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “schedules”, “seeks”, “should, “targets”, “will” and “would”.

Such forward-looking statements reflect our current views with respect to future events and financial performance and are based on assumptions that we believe to be reasonable but such forward-looking statements
are subject to numerous risks, and uncertainties, including, but not limited to:
•
economic and operating conditions that are outside of our control, including the supply, demand, and prices of oil and natural gas;
•
the availability of adequate sources of capital to us;
•
our existing debt levels and our flexibility to obtain additional financing;
•
our ability to continue to make cash distributions, or increase cash distributions from current levels, after the establishment of reserves, payment of debt service and other contractual obligations;
•
the restrictions on our business that are imposed under our long-term debt agreements;
•
our dependence upon a limited number of customers and the activity levels of our customers;
•
the levels of competition we encounter;
•
our ability to replace our contracts with customers, which are generally short-term contracts;
•
the availability of raw materials and labor at reasonable prices;
•
risks related to acquisitions and our growth strategy;
•
our operational performance;
•
risks related to our foreign operations;
•
the credit and risk profile of TETRA;
•
the ability of our general partner to retain key personnel;
•
information technology risks including the risk from cyberattack;
•
the effect and results of litigation, regulatory matters, settlements, audits, assessments, and contingencies, and

33

•
other risks and uncertainties under “Item 1A. Risk Factors” in our 2018 Annual Report, and as included in our other filings with the U.S. Securities and Exchange Commission ("SEC"), which are available free of charge on the SEC website at www.sec.gov.

The risks and uncertainties referred to above are generally beyond our ability to control and we cannot predict all the risks and uncertainties that could cause our actual results to differ from those indicated by the forward-looking statements. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may vary from those indicated by the forward-looking statements, and such variances may be material.

All subsequent written and oral forward-looking statements made by or attributable to us or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to update or revise any forward-looking statements we may make, except as may be required by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
Market risk is the risk of loss arising from adverse changes in market rates and prices. We do not take title to any natural gas or oil in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. For a discussion of our indirect exposure to fluctuating commodity prices, please read “Risk Factors — Certain Business Risks” in our 2018 Annual Report. We depend on domestic and international demand for and production of natural gas and oil and a reduction in this demand or production could adversely affect the demand or the prices we charge for our services, which could impact our revenues and cash available for distribution to our common unitholders in the future. We do not currently hedge, and do not intend to hedge, our indirect exposure to fluctuating commodity prices.

Interest Rate Risk
 
Through June 30, 2019, there have been no material changes in the information pertaining to our interest rate risk exposures as disclosed in our 2018 Annual Report. There is no balance outstanding under the Credit Agreement as of June 30, 2019. As such, we currently do not have any long-term debt obligations that have a variable rate of interest.

Exchange Rate Risk

As of June 30, 2019, there have been no material changes pertaining to our exchange rate exposures as disclosed in our 2018 Annual Report.
Item 4. Controls and Procedures.
 
Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer of our General Partner, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer of our General Partner concluded that our disclosure controls and procedures were effective as of June 30, 2019, the end of the period covered by this quarterly report.

There were no changes in our internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


34

PART II
OTHER INFORMATION
 
Item 1. Legal Proceedings.
 
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.
Item 1A. Risk Factors.

 There have been no material changes in the information pertaining to our Risk Factors as disclosed in our 2018 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
(a)  None.
 
(b)  None.
 
(c)  Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Period
 
Total Number
of Units Purchased
 
Average
Price
Paid per Unit
 
Total Number of Units Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Units that May Yet be Purchased Under the Publicly Announced
Plans or Programs
April 1 – April 30, 2019
 
—

 
$
—

 
N/A
 
N/A
May 1 – May 31, 2019
 
—

 
—

 
N/A
 
N/A
June 1 – June 30, 2019
 
—

 
—

 
N/A
 
N/A
Total
 
—

 
 

 
N/A
 
N/A
Item 3. Defaults Upon Senior Securities.
 
None.
Item 4. Mine Safety Disclosures.
 
None.
Item 5. Other Information.
 
None.

35

Item 6. Exhibits.
 
Exhibits: 
10.1*
10.2*
31.1*
31.2*
32.1**
32.2**
101.INS+
XBRL Instance Document
101.SCH+
XBRL Taxonomy Extension Schema Document
101.CAL+
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+
XBRL Taxonomy Extension Label Linkbase Document
101.PRE+
XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed with this report.
**
Furnished with this report.
+
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and six month periods ended June 30, 2019 and 2018; (ii) Consolidated Statements of Comprehensive Income for the three and six month periods ended June 30, 2019 and 2018; (iii) Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018; (iv) Consolidated Statement of Partners’ Capital for the six month period ended June 30, 2019; (v) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2019 and 2018; and (iv) Notes to Consolidated Financial Statements for the six months ended June 30, 2019.


36

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
CSI COMPRESSCO LP
 
 
 
By:
CSI Compressco GP Inc.,
 
 
 
its General Partner
 
 
 
 
 
Date:
August 7, 2019
By:
/s/Brady M. Murphy
 
 
 
Brady M. Murphy
 
 
 
Interim President
 
 
 
Principal Executive Officer
 
 
 
 
Date:
August 7, 2019
By:
/s/Elijio V. Serrano
 
 
 
Elijio V. Serrano
 
 
 
Chief Financial Officer
 
 
 
Principal Financial Officer
 
 
 
 
Date:
August 7, 2019
By:
/s/Michael E. Moscoso
 
 
 
Michael E. Moscoso
 
 
 
Vice President - Finance
 
 
 
Principal Accounting Officer
 
 
 
 

37