XNAS:EXLP Exterran Partners LP Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

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, 2012

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                TO                .

 

Commission File No. 001-33078

 

EXTERRAN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

Delaware

22-3935108

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

 

16666 Northchase Drive

 

Houston, Texas

77060

(Address of principal executive offices)

(Zip Code)

 

(281) 836-7000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer x

 

 

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

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 July 26, 2012, there were 42,264,302 common units outstanding.

 

 

 




Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for unit amounts)

(unaudited)

 

 

 

June 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

596

 

$

5

 

Accounts receivable, trade, net of allowance of $1,231 and $985, respectively

 

42,642

 

33,275

 

Due from affiliates, net

 

3,106

 

4,383

 

Total current assets

 

46,344

 

37,663

 

Property, plant and equipment

 

1,400,657

 

1,219,605

 

Accumulated depreciation

 

(472,210

)

(412,553

)

Net property, plant and equipment

 

928,447

 

807,052

 

Goodwill

 

124,019

 

124,019

 

Intangible and other assets, net

 

25,754

 

22,271

 

Total assets

 

$

1,124,564

 

$

991,005

 

 

 

 

 

 

 

LIABILITIES AND PARTNERS’ CAPITAL

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued liabilities

 

$

8,829

 

$

12,224

 

Accrued interest

 

1,410

 

1,278

 

Current portion of interest rate swaps

 

3,425

 

3,040

 

Total current liabilities

 

13,664

 

16,542

 

Long-term debt

 

643,500

 

545,500

 

Interest rate swaps

 

6,630

 

5,197

 

Total liabilities

 

663,794

 

567,239

 

Commitments and contingencies (Note 12)

 

 

 

 

 

Partners’ capital:

 

 

 

 

 

Limited partner units:

 

 

 

 

 

Common units, 42,305,103 and 37,308,402 units issued, respectively

 

457,974

 

420,960

 

General partner units, 2% interest with 858,583 and 757,722 equivalent units issued and outstanding, respectively

 

14,236

 

12,877

 

Accumulated other comprehensive loss

 

(10,517

)

(9,313

)

Treasury units, 40,801 and 33,811 common units, respectively

 

(923

)

(758

)

Total partners’ capital

 

460,770

 

423,766

 

Total liabilities and partners’ capital

 

$

1,124,564

 

$

991,005

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3



Table of Contents

 

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per unit amounts)

(unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Revenue — third parties

 

$

97,007

 

$

71,403

 

$

185,452

 

$

139,943

 

Revenue — affiliates

 

164

 

438

 

416

 

627

 

Total revenues

 

97,171

 

71,841

 

185,868

 

140,570

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (excluding depreciation and amortization expense) — affiliates

 

45,446

 

39,824

 

89,559

 

76,876

 

Depreciation and amortization

 

22,788

 

15,459

 

43,150

 

29,608

 

Long-lived asset impairment

 

28,122

 

305

 

28,927

 

305

 

Selling, general and administrative — affiliates

 

13,450

 

9,927

 

25,672

 

20,143

 

Interest expense

 

6,399

 

7,553

 

12,281

 

14,628

 

Other (income) expense, net

 

(261

)

455

 

266

 

234

 

Total costs and expenses

 

115,944

 

73,523

 

199,855

 

141,794

 

Loss before income taxes

 

(18,773

)

(1,682

)

(13,987

)

(1,224

)

Income tax expense

 

277

 

256

 

558

 

491

 

Net loss

 

$

(19,050

)

$

(1,938

)

$

(14,545

)

$

(1,715

)

 

 

 

 

 

 

 

 

 

 

General partner interest in net loss

 

$

692

 

$

676

 

$

1,787

 

$

1,248

 

Common units interest in net loss

 

$

(19,742

)

$

(2,240

)

$

(16,332

)

$

(2,537

)

Subordinated units interest in net loss

 

 

 

$

(374

)

 

 

$

(426

)

 

 

 

 

 

 

 

 

 

 

Weighted average common units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

42,264

 

29,089

 

40,467

 

28,231

 

Diluted

 

42,264

 

29,089

 

40,467

 

28,231

 

 

 

 

 

 

 

 

 

 

 

Weighted average subordinated units outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

4,744

 

 

 

4,744

 

Diluted

 

 

 

4,744

 

 

 

4,744

 

 

 

 

 

 

 

 

 

 

 

Loss per common unit:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.47

)

$

(0.08

)

$

(0.40

)

$

(0.09

)

Diluted

 

$

(0.47

)

$

(0.08

)

$

(0.40

)

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

Loss per subordinated unit:

 

 

 

 

 

 

 

 

 

Basic

 

 

 

$

(0.08

)

 

 

$

(0.09

)

Diluted

 

 

 

$

(0.08

)

 

 

$

(0.09

)

 

 

 

 

 

 

 

 

 

 

Distributions declared and paid per limited partner unit in respective periods

 

$

0.4975

 

$

0.4775

 

$

0.9900

 

$

0.9500

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(unaudited) 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(19,050

)

$

(1,938

)

$

(14,545

)

$

(1,715

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Interest rate swap loss, net of reclassifications to earnings

 

(1,444

)

(5,457

)

(1,818

)

(4,094

)

Amortization of payments to terminate interest rate swaps

 

298

 

2,557

 

614

 

5,131

 

Total other comprehensive income (loss)

 

(1,146

)

(2,900

)

(1,204

)

1,037

 

Comprehensive loss

 

$

(20,196

)

$

(4,838

)

$

(15,749

)

$

(678

)

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(In thousands, except for unit amounts)

(unaudited)

 

 

 

Partners’ Capital

 

 

 

 

 

Accumulated

 

 

 

 

 

Common Units

 

Subordinated Units

 

General Partner
Units

 

Treasury
Units

 

Other
Comprehensive

 

 

 

 

 

$

 

Units

 

$

 

Units

 

$

 

Units

 

$

 

Units

 

Loss

 

Total

 

Balance, December 31, 2010

 

$

379,748

 

27,363,451

 

$

(30,702

)

4,743,750

 

$

10,638

 

653,318

 

$

(274

)

(15,756

)

$

(8,673

)

$

350,737

 

Issuance of common units for vesting of phantom units

 

 

 

43,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury units purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(281

)

(9,845

)

 

 

(281

)

Net proceeds from issuance of common units

 

127,672

 

5,134,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

127,672

 

Proceeds from sale of general partner units to Exterran Holdings

 

 

 

 

 

 

 

 

 

1,316

 

53,431

 

 

 

 

 

 

 

1,316

 

Transaction costs for the public offering of common units by Exterran Holdings

 

(261

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(261

)

Acquisition of a portion of Exterran Holdings U.S. contract operations business

 

(24,655

)

 

 

 

 

 

 

767

 

50,973

 

 

 

 

 

 

 

(23,888

)

Contribution of capital, net

 

13,753

 

 

 

6,928

 

 

 

947

 

 

 

 

 

 

 

 

 

21,628

 

Cash distributions

 

(26,000

)

 

 

(4,506

)

 

 

(1,727

)

 

 

 

 

 

 

 

 

(32,233

)

Unit based compensation expense

 

510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

510

 

Interest rate swap loss, net of reclassification to earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,094

)

(4,094

)

Amortization of payments to terminate interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,131

 

5,131

 

Net income (loss)

 

(2,537

)

 

 

(426

)

 

 

1,248

 

 

 

 

 

 

 

 

 

(1,715

)

Balance, June 30, 2011

 

$

468,230

 

32,541,390

 

$

(28,706

)

4,743,750

 

$

13,189

 

757,722

 

$

(555

)

(25,601

)

$

(7,636

)

$

444,522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

$

420,960

 

37,308,402

 

$

 

 

$

12,877

 

757,722

 

$

(758

)

(33,811

)

$

(9,313

)

$

423,766

 

Issuance of common units for vesting of phantom units

 

 

 

31,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury units purchased

 

 

 

 

 

 

 

 

 

 

 

 

 

(165

)

(6,990

)

 

 

(165

)

Net proceeds from issuance of common units

 

114,530

 

4,965,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

114,530

 

Proceeds from sale of general partner units to Exterran Holdings

 

 

 

 

 

 

 

 

 

2,426

 

100,861

 

 

 

 

 

 

 

2,426

 

Acquisition of a portion of Exterran Holdings U.S. contract operations business

 

(28,221

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,221

)

Contribution of capital, net

 

8,520

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

 

 

 

8,502

 

Excess of purchase price of equipment over Exterran Holdings’ cost of equipment

 

(2,576

)

 

 

 

 

 

 

(162

)

 

 

 

 

 

 

 

 

(2,738

)

Cash distributions

 

(39,386

)

 

 

 

 

 

 

(2,674

)

 

 

 

 

 

 

 

 

(42,060

)

Unit based compensation expense

 

479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

479

 

Interest rate swap loss, net of reclassification to earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,818

)

(1,818

)

Amortization of payments to terminate interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

614

 

Net income (loss)

 

(16,332

)

 

 

 

 

 

 

1,787

 

 

 

 

 

 

 

 

 

(14,545

)

Balance, June 30, 2012

 

$

457,974

 

42,305,103

 

$

 

 

$

14,236

 

858,583

 

$

(923

)

(40,801

)

$

(10,517

)

$

460,770

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

6



Table of Contents

 

EXTERRAN PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(14,545

)

$

(1,715

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

43,150

 

29,608

 

Long-lived asset impairment

 

28,927

 

305

 

Amortization of debt issuance cost

 

741

 

638

 

Amortization of payments to terminate interest rate swaps

 

614

 

5,131

 

Unit based compensation expense

 

485

 

517

 

Provision for doubtful accounts

 

545

 

29

 

Gain on sale of compression equipment

 

(418

)

(327

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable, trade

 

(9,912

)

(3,231

)

Other liabilities

 

(3,271

)

1,165

 

Net cash provided by operating activities

 

46,316

 

32,120

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(51,455

)

(23,820

)

Payment to Exterran Holdings for a portion of the contract operations acquisitions

 

(77,415

)

(62,217

)

Proceeds from sale of compression equipment

 

1,003

 

1,268

 

Decrease in amounts due from affiliates, net

 

1,184

 

5,329

 

Net cash used in investing activities

 

(126,683

)

(79,440

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

609,000

 

474,500

 

Repayments of long-term debt

 

(616,350

)

(543,434

)

Distributions to unitholders

 

(42,060

)

(32,233

)

Net proceeds from issuance of common units

 

114,530

 

127,672

 

Net proceeds from sale of general partner units

 

2,426

 

1,316

 

Payments for debt issue costs

 

(549

)

(980

)

Purchases of treasury units

 

(165

)

(281

)

Capital contribution from limited partners and general partner

 

14,126

 

19,329

 

Increase in amounts due to affiliates, net

 

 

1,613

 

Net cash provided by financing activities

 

80,958

 

47,502

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

591

 

182

 

Cash and cash equivalents at beginning of period

 

5

 

50

 

Cash and cash equivalents at end of period

 

$

596

 

$

232

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Non-cash capital contribution from limited and general partner

 

$

8,885

 

$

594

 

Contract operations equipment acquired/exchanged, net

 

$

57,615

 

$

193,069

 

Intangible assets allocated in contract operations acquisitions

 

$

5,005

 

$

6,400

 

Debt assumed in contract operations acquisitions

 

$

105,350

 

$

159,434

 

Non-cash capital distribution due to the contract operations acquisitions

 

$

28,221

 

$

24,655

 

General partner units issued in contract operations acquisitions

 

$

 

$

767

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

 

EXTERRAN PARTNERS, L.P.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated financial statements of Exterran Partners, L.P. (“we,” or the “Partnership”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our Annual Report on Form 10-K for the year ended December 31, 2011. That report contains a more comprehensive summary of our accounting policies. These interim results are not necessarily indicative of results for a full year.

 

Organization

 

Exterran General Partner, L.P. is our general partner and an indirect wholly-owned subsidiary of Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, “Exterran Holdings”). As Exterran General Partner, L.P. is a limited partnership, its general partner, Exterran GP LLC, conducts our business and operations, and the board of directors and officers of Exterran GP LLC make decisions on our behalf.

 

Financial Instruments

 

Our financial instruments consist of cash, trade receivables and payables, interest rate swaps and long-term debt. At June 30, 2012 and December 31, 2011, the estimated fair values of those financial instruments approximated their carrying values as reflected in our condensed consolidated balance sheets. The fair value of our long-term debt has been estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs. See Note 8 for additional information regarding the fair value hierarchy. A summary of the fair value and carrying value of our long-term debt as of June 30, 2012 and December 31, 2011 is shown in the table below (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

Long-term debt

 

$

643,500

 

$

649,000

 

$

545,500

 

$

556,000

 

 

Earnings Per Common and Subordinated Unit

 

The computations of earnings per common and subordinated unit are based on the weighted average number of common and subordinated units, respectively, outstanding during the applicable period. Our subordinated units meet the definition of a participating security and therefore we are required to use the two-class method in the computation of earnings per unit. Basic earnings per common and subordinated unit are determined by dividing net income allocated to the common and subordinated units, respectively, after deducting the amount allocated to our general partner (including distributions to our general partner on its incentive distribution rights), by the weighted average number of outstanding common and subordinated units, respectively, during the period.

 

When computing earnings per common and subordinated unit under the two-class method in periods when distributions are greater than earnings, the amount of the incentive distribution rights, if any, is deducted from net income and allocated to our general partner for the corresponding period. The remaining amount of net income, after deducting the incentive distribution rights, is allocated between the general partner, common and subordinated units based on how our partnership agreement allocates net losses.

 

When computing earnings per common and subordinated unit under the two-class method in periods when earnings are greater than distributions, earnings are allocated to the general partner, common and subordinated units based on how our partnership agreement would allocate earnings if the full amount of earnings for the period had been distributed. This allocation of net income does not impact our total net income, consolidated results of operations or total cash distributions; however, it may result in our general partner being allocated additional incentive distributions for purposes of our earnings per unit calculation, which could reduce net income per common and subordinated unit. However, as required by our partnership agreement, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our general partner based on actual distributions.

 

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In November 2011, all remaining subordinated units outstanding converted into common units. As a result, for periods subsequent to 2011, there will not be a computation of basic and diluted earnings per subordinated unit.

 

There were no potential common units included in computing the dilutive potential number of common units used in dilutive loss per common unit for the three and six months ended June 30, 2012 and 2011, as the effect of their inclusion would have been anti-dilutive. The table below indicates the potential number of common units that were excluded from net dilutive potential common units as their effect would have been anti-dilutive (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net dilutive potential common units issuable:

 

 

 

 

 

 

 

 

 

Phantom units

 

9

 

9

 

7

 

6

 

Net dilutive potential common units issuable

 

9

 

9

 

7

 

6

 

 

Reclassifications

 

Certain amounts in the prior financial statements have been reclassified to conform to the 2012 financial statement classification. These reclassifications have no impact on our consolidated results of operations, cash flows or financial position.

 

2.  MARCH 2012 AND JUNE 2011 CONTRACT OPERATIONS ACQUISITIONS

 

In March 2012, we acquired from Exterran Holdings contract operations customer service agreements with 39 customers and a fleet of 406 compressor units used to provide compression services under those agreements, comprising approximately 188,000 horsepower, or 5% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “March 2012 Contract Operations Acquisition”). In addition, the acquired assets included 139 compressor units, comprising approximately 75,000 horsepower, previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 10 million cubic feet per day used to provide processing services to a customer pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $149.5 million, net of accumulated depreciation of $67.0 million. Total consideration for the transaction was approximately $182.8 million, excluding transaction costs. In connection with this acquisition, we assumed $105.4 million of Exterran Holdings’ long-term debt and paid $77.4 million in cash to Exterran Holdings.

 

In connection with this acquisition, we were allocated $5.0 million finite life intangible assets associated with customer relationships of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. These intangible assets are being amortized through 2024, based on the present value of income expected to be realized from these intangible assets.

 

In June 2011, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of 407 compressor units used to provide compression services under those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “June 2011 Contract Operations Acquisition”). In addition, the acquired assets included 207 compressor units, comprising approximately 98,000 horsepower, previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 8 million cubic feet per day used to provide processing services to a customer pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of $85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran Holdings’ long-term debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to our general partner.

 

In connection with this acquisition, we were allocated $6.4 million finite life intangible assets associated with customer relationships of Exterran Holdings’ North America contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Exterran Holdings’ North America contract operations segment. These intangible assets are being amortized through 2024, based on the present value of income expected to be realized from these intangible assets.

 

Because Exterran Holdings and we are considered entities under common control, GAAP requires that we record the assets acquired and liabilities assumed from Exterran Holdings in connection with the March 2012 Contract Operations Acquisition and June 2011 Contract Operations Acquisition using Exterran Holdings’ historical cost basis in the assets and liabilities. The difference between the historical cost basis of the assets acquired and liabilities assumed and the purchase price is treated as either a capital contribution or distribution. As a result, we recorded capital distributions of $28.2 million and $24.7 million for the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition, respectively, in the six months ended June 30, 2012 and 2011, respectively.

 

An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be

 

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substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenues and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.

 

Pro Forma Financial Information

 

Pro forma financial information for the six months ended June 30, 2012 and the three and six months ended June 30, 2011 has been included to give effect to the expansion of our compressor fleet and service contracts and addition of natural gas processing plants as a result of the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. The March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition are presented in the pro forma financial information as though both transactions occurred as of January 1, 2011. The pro forma financial information for the six months ended June 30, 2012 and the three and six months ended June 30, 2011 reflects the following transactions:

 

As related to the March 2012 Contract Operations Acquisition:

 

·                       our acquisition in March 2012 of certain contract operations customer service agreements, compression equipment and a natural gas processing plant from Exterran Holdings;

 

·                       our assumption of $105.4 million of Exterran Holdings’ long-term debt; and

 

·                       our payment of $77.4 million in cash to Exterran Holdings.

 

As related to the June 2011 Contract Operations Acquisition:

 

·                       our acquisition in June 2011 of certain contract operations customer service agreements, compression equipment and a natural gas processing plant from Exterran Holdings;

 

·                       our assumption of $159.4 million of Exterran Holdings’ long-term debt;

 

·                       our payment of $62.2 million in cash to Exterran Holdings; and

 

·                       our issuance of approximately 51,000 general partner units to our general partner.

 

The pro forma financial information below is presented for informational purposes only and is not necessarily indicative of the results of operations that would have occurred had each transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. The pro forma consolidated financial information below was derived by adjusting our historical financial statements.

 

The following table presents pro forma financial information for the six months ended June 30, 2012 and the three and six months ended June 30, 2011 (in thousands, except per unit amounts):

 

 

 

Three Months
Ended

 

Six Months Ended June 30,

 

 

 

June 30, 2011

 

2012

 

2011

 

Revenue

 

$

92,632

 

$

193,802

 

$

185,057

 

Net income (loss)

 

$

1,379

 

$

(12,533

)

$

4,529

 

Basic earnings (loss) per common unit

 

$

0.02

 

$

(0.35

)

$

0.10

 

Diluted earnings (loss) per common unit

 

$

0.02

 

$

(0.35

)

$

0.10

 

Basic earnings per subordinated unit

 

$

0.02

 

 

 

$

0.10

 

Diluted earnings per subordinated unit

 

$

0.02

 

 

 

$

0.10

 

 

Pro forma net income per limited partner unit is determined by dividing the pro forma net income that would have been allocated to the common and subordinated unitholders by the weighted average number of common and subordinated units expected to be outstanding after the completion of the transactions included in the pro forma consolidated financial statements. Pursuant to our partnership agreement, to the extent that the quarterly distributions exceed certain targets, our general partner is entitled to receive certain incentive distributions that will result in more net income proportionately being allocated to our general partner than to the holders of our common and subordinated units. The pro forma net earnings (loss) per limited partner unit calculations reflect pro forma incentive distributions to our general partner. There was no additional pro forma reduction of net income allocable to our

 

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limited partners, including the amount of additional incentive distributions that would have occurred, for the six months ended June 30, 2012 and the three and six month periods ended June 30, 2011.

 

3.  RELATED PARTY TRANSACTIONS

 

We are a party to an omnibus agreement with Exterran Holdings and others (as amended and/or restated, the “Omnibus Agreement”), the terms of which include, among other things:

 

·             certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand;

 

·             Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below;

 

·             the terms under which we, Exterran Holdings, and our respective affiliates may transfer, exchange or lease compression equipment among one another;

 

·             the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings’ affiliates;

 

·             Exterran Holdings’ grant of a license of certain intellectual property to us, including our logo; and

 

·             Exterran Holdings’ obligation to indemnify us for certain liabilities and our obligation to indemnify Exterran Holdings for certain liabilities.

 

The Omnibus Agreement will terminate upon a change of control of our general partner or the removal or withdrawal of our general partner, and certain provisions of the Omnibus Agreement will terminate upon a change of control of Exterran Holdings.

 

During the six months ended June 30, 2012, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 245 compressor units, totaling approximately 106,500 horsepower with a net book value of approximately $42.9 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership of 245 compressor units, totaling approximately 72,000 horsepower with a net book value of approximately $28.4 million, to us. During the six months ended June 30, 2011, pursuant to the terms of the Omnibus Agreement, we transferred ownership of 73 compressor units, totaling approximately 29,200 horsepower with a net book value of approximately $14.7 million, to Exterran Holdings. In exchange, Exterran Holdings transferred ownership of 75 compressor units, totaling approximately 32,000 horsepower with a net book value of approximately $16.7 million, to us. During the six months ended June 30, 2012, we recorded capital distributions of approximately $14.5 million related to the differences in net book value on the compression equipment that was exchanged with us. During the six months ended June 30, 2011, we recorded capital contributions of approximately $2.0 million related to the differences in net book value on the compression equipment that was exchanged with us. No customer contracts were included in the transfers. Under the terms of the Omnibus Agreement, such transfers must be of equal appraised value, as defined in the Omnibus Agreement, with any difference being settled in cash. As a result, Exterran Holdings paid to us a nominal amount for the difference in fair value of the equipment in connection with the transfers during each of the six month periods ended June 30, 2012 and 2011.

 

Exterran Holdings provides all operational staff, corporate staff and support services reasonably necessary to run our business. The services provided by Exterran Holdings may include, without limitation, operations, marketing, maintenance and repair, periodic overhauls of compression equipment, inventory management, legal, accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, facilities management, investor relations, enterprise resource planning system, training, executive, sales, business development and engineering.

 

We are charged costs incurred by Exterran Holdings that are directly attributable to us. Costs incurred by Exterran Holdings that are indirectly attributable to us and Exterran Holdings’ other operations are allocated among Exterran Holdings’ other operations and us. The allocation methodologies vary based on the nature of the charge and include, among other things, revenue and horsepower. We believe that the allocation methodologies used to allocate indirect costs to us are reasonable.

 

Under the Omnibus Agreement, Exterran Holdings has agreed that, for a period that will terminate on December 31, 2013, our obligation to reimburse Exterran Holdings for: (i) any cost of sales that it incurs in the operation of our business will be capped (after taking into account any such costs we incur and pay directly); and (ii) any cash selling, general and administrative (“SG&A”) costs allocated to us will be capped (after taking into account any such costs we incur and pay directly). Cost of sales is capped at $21.75

 

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per operating horsepower per quarter through December 31, 2013. SG&A costs were capped at $7.6 million per quarter from November 10, 2009 through June 9, 2011 and at $9.0 million per quarter from June 10, 2011 through March 7, 2012, and are capped at $10.5 million per quarter from March 8, 2012 through December 31, 2013. These caps may be subject to future adjustment or termination in connection with expansions of our operations through the acquisition or construction of new assets or businesses.

 

Our cost of sales exceeded the cap provided in the Omnibus Agreement by $3.5 million and $8.3 million, respectively, for the three months ended June 30, 2012 and 2011, and by $8.8 million and $15.2 million, respectively, for the six months ended June 30, 2012 and 2011. Our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $2.8 million and $1.9 million, respectively, for the three months ended June 30, 2012 and 2011, and by $5.3 million and $4.2 million, respectively, for the six months ended June 30, 2012 and 2011. The excess amounts over the caps are included in the consolidated statements of operations as cost of sales or SG&A expense. The cash received for the amounts over the caps has been accounted for as a capital contribution in our consolidated balance sheets and consolidated statements of cash flows.

 

Pursuant to the Omnibus Agreement, we are permitted to purchase newly-fabricated compression equipment from Exterran Holdings or its affiliates at Exterran Holdings’ cost to fabricate such equipment plus a fixed margin of 10%, which may be modified with the approval of Exterran Holdings and our conflicts committee. During the six months ended June 30, 2012, we purchased $27.3 million of newly-fabricated compression equipment from Exterran Holdings. During the six months ended June 30, 2011, we did not purchase any newly-fabricated compression equipment from Exterran Holdings. Transactions between us and Exterran Holdings and its affiliates are transactions between entities under common control. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as a capital distribution or contribution. As a result, the newly-fabricated compression equipment purchased during the six months ended June 30, 2012 was recorded in our consolidated balance sheet as property, plant and equipment of $24.6 million, which represents the carrying value of the Exterran Holdings affiliates that sold it to us, and as a distribution of equity of $2.7 million, which represents the fixed margin we paid above the carrying value in accordance with the Omnibus Agreement. During the six months ended June 30, 2012 and 2011, Exterran Holdings contributed to us $8.9 million and $0.6 million, respectively, primarily related to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.

 

Pursuant to the Omnibus Agreement, in the event that Exterran Holdings determines in good faith that there exists a need on the part of Exterran Holdings’ contract operations services business or on our part to transfer, exchange or lease compression equipment between Exterran Holdings and us, such equipment may be so transferred, exchanged or leased if it will not cause us to breach any existing contracts, suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs.

 

At June 30, 2012, we had equipment on lease to Exterran Holdings with an aggregate cost and accumulated depreciation of $10.2 million and $1.2 million, respectively. For the six months ended June 30, 2012 and 2011, we had revenues of $0.4 million and $0.6 million, respectively, from Exterran Holdings related to the lease of our compression equipment. For the six months ended June 30, 2012 and 2011, we had cost of sales of $4.9 million and $7.9 million, respectively, with Exterran Holdings related to the lease of Exterran Holdings’ compression equipment.

 

4.  LONG-TERM DEBT

 

Long-term debt consisted of the following (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

Revolving credit facility due November 2015

 

$

493,500

 

$

395,500

 

Term loan facility due November 2015

 

150,000

 

150,000

 

Long-term debt

 

$

643,500

 

$

545,500

 

 

In November 2010, we entered into an amendment and restatement of our senior secured credit agreement (the “Credit Agreement”) to provide for a new five-year, $550.0 million senior secured credit facility consisting of a $400.0 million revolving credit facility and a $150.0 million term loan facility. The revolving borrowing capacity under this facility was increased by $150.0 million to $550.0 million in March 2011 and by $200.0 million to $750.0 million in March 2012. During the first quarter of 2012, we incurred transaction costs of approximately $0.5 million related to the amendment of our Credit Agreement. These costs were included in Intangible and other assets, net and are being amortized over the term of the facility.

 

As of June 30, 2012, we had undrawn and available capacity of $256.5 million under our revolving credit facility.

 

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5.  CASH DISTRIBUTIONS

 

For quarters during the subordination period, which ended on September 30, 2011, we made distributions of available cash (as defined in our partnership agreement) from operating surplus in the following manner:

 

·                       first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distributed for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

·                       second, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distributed for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution for that quarter;

 

·                       third, 98% to the subordinated unitholders, pro rata, and 2% to our general partner, until we distributed for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter;

 

·                       fourth, 98% to all common and subordinated unitholders, pro rata, and 2% to our general partner, until each unit had received a distribution of $0.4025;

 

·                       fifth, 85% to all common and subordinated unitholders, pro rata, and 15% to our general partner, until each unit had received a distribution of $0.4375;

 

·                       sixth, 75% to all common and subordinated unitholders, pro rata, and 25% to our general partner, until each unit had received a total of $0.525; and

 

·                       thereafter, 50% to all common and subordinated unitholders, pro rata, and 50% to our general partner.

 

For quarters following the end of the subordination period, which ended on September 30, 2011, we make distributions of available cash (as defined in our partnership agreement) from operating surplus in the following manner:

 

·                       first, 98% to the common unitholders, pro rata, and 2% to our general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;

 

·                       second, 98% to common unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.4025;

 

·                       third, 85% to all common unitholders, pro rata, and 15% to our general partner, until each unit has received a distribution of $0.4375;

 

·                       fourth, 75% to all common unitholders, pro rata, and 25% to our general partner, until each unit has received a total of $0.525; and

 

·                       thereafter, 50% to all common unitholders, pro rata, and 50% to our general partner.

 

The following table summarizes our distributions per unit for 2011 and 2012:

 

Period Covering

 

Payment Date

 

Distribution per
Limited Partner
Unit

 

Total Distribution (1)

 

1/1/2011 — 3/31/2011

 

May 13, 2011

 

$

0.4775

 

$

16.2 million

 

4/1/2011 — 6/30/2011

 

August 12, 2011

 

0.4825

 

19.1 million

 

7/1/2011 — 9/30/2011

 

November 14, 2011

 

0.4875

 

19.3 million

 

10/1/2011 — 12/31/2011

 

February 14, 2012

 

0.4925

 

19.6 million

 

1/1/2012 — 3/31/2012

 

May 15, 2012

 

0.4975

 

22.5 million

 

 


(1)  Includes distributions to our general partner on its incentive distribution rights.

 

On July 30, 2012, Exterran GP LLC’s board of directors approved a cash distribution of $0.5025 per limited partner unit, or approximately $22.8 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2012 through June 30, 2012. The record date for this distribution is August 10, 2012 and payment is expected to occur on August 14, 2012.

 

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6.  UNIT-BASED COMPENSATION

 

Long-Term Incentive Plan

 

We have a long-term incentive plan that was adopted by Exterran GP LLC, the general partner of our general partner, in October 2006 for employees, directors and consultants of us, Exterran Holdings or our respective affiliates. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,035,378 common units, unit options, restricted units and phantom units. The long-term incentive plan is administered by the board of directors of Exterran GP LLC or a committee thereof (the “Plan Administrator”).

 

Phantom units are notional units that entitle the grantee to receive a common unit upon the vesting of the phantom unit or, at the discretion of the Plan Administrator, cash equal to the fair market value of a common unit.

 

Exterran GP LLC’s general practice has been to grant equity-based awards once a year. While typically these awards have been made (i) to Exterran GP LLC’s officers in late February or early March around the time the compensation committee of the board of directors of Exterran Holdings grants equity-based awards to Exterran Holdings’ officers, and (ii) to Exterran GP LLC’s directors in October or November, around the anniversary of our initial public offering, it is possible that equity awards may be made at other, or additional, times during the year. The schedule for making equity-based awards is typically established several months in advance and is not set based on knowledge of material nonpublic information or in response to our unit price. This practice results in awards being granted on a regular, predictable cycle. Equity-based awards are occasionally granted at other times during the year, such as upon the hiring of a new employee or following the promotion of an employee. In some instances, Exterran GP LLC’s board of directors may be aware, at the time grants are made, of matters or potential developments that are not ripe for public disclosure at that time but that may result in public announcement of material information at a later date.

 

Phantom Units

 

The following table presents phantom unit activity for the six months ended June 30, 2012:

 

 

 

Phantom
Units

 

Weighted
Average
Grant-Date
Fair Value
per Unit

 

Phantom units outstanding, December 31, 2011

 

75,267

 

$

21.45

 

Granted

 

22,340

 

23.38

 

Vested

 

(31,701

)

17.97

 

Cancelled

 

(771

)

28.50

 

Phantom units outstanding, June 30, 2012

 

65,135

 

23.72

 

 

As of June 30, 2012, $1.1 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 2.2 years.

 

7.  ACCOUNTING FOR INTEREST RATE SWAP AGREEMENTS

 

We are exposed to market risks primarily associated with changes in interest rates. We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative financial instruments for trading or other speculative purposes.

 

Interest Rate Risk

 

At June 30, 2012, we were a party to interest rate swaps pursuant to which we make fixed payments and receive floating payments on a notional value of $250.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire in November 2015. As of June 30, 2012, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive loss and is included in accumulated other comprehensive loss to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and, therefore, we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. For the three and six months ended June 30, 2012 and 2011, there was no

 

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ineffectiveness related to interest rate swaps. We estimate that $3.4 million of deferred losses attributable to existing interest rate swaps and included in our accumulated other comprehensive loss at June 30, 2012, will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

 

In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total notional value of $285.0 million and a weighted average effective fixed interest rate of 4.4%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive loss. The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive loss is being amortized into interest expense over the original terms of the swaps. We estimate that $0.5 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

 

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

 

 

 

June 30, 2012

 

 

 

Balance Sheet Location

 

Fair Value
Asset
(Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Current portion of interest rate swaps

 

$

(3,425

)

Interest rate hedges

 

Interest rate swaps

 

(6,630

)

Total derivatives

 

 

 

$

(10,055

)

 

 

 

 

December 31, 2011

 

 

 

Balance Sheet Location

 

Fair Value
Asset
(Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Current portion of interest rate swaps

 

$

(3,040

)

Interest rate hedges

 

Interest rate swaps

 

(5,197

)

Total derivatives

 

 

 

$

(8,237

)

 

 

 

Three Months Ended June 30, 2012

 

Six Months Ended June 30, 2012

 

 

 

Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$

(2,405

)

Interest expense

 

$

(1,259

)

$

(3,723

)

Interest expense

 

$

(2,519

)

 

 

 

Three Months Ended June 30, 2011

 

Six Months Ended June 30, 2011

 

 

 

Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives

 

Location of Gain
(Loss) Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)

 

Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)

 

Derivatives designated as cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate hedges

 

$

(6,433

)

Interest expense

 

$

(3,533

)

$

(5,844

)

Interest expense

 

$

(6,881

)

 

The counterparties to our derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments. The counterparties to our interest rate swaps are also lenders under our credit facility and, in that capacity, share proportionally in the collateral pledged under the credit facility.

 

8.  FAIR VALUE MEASUREMENTS

 

The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the following three broad categories:

 

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·                       Level 1 — Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.

 

·                       Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.

 

·                       Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.

 

The following table presents our assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, with pricing levels as of the date of valuation (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Interest rate swaps asset (liability)

 

$

 

$

(10,055

)

$

 

$

 

$

(8,237

)

$

 

 

On a quarterly basis, our interest rate swaps are recorded at fair value utilizing a combination of the market approach and income approach to estimate fair value based on forward LIBOR curves.

 

The following table presents our assets and liabilities measured at fair value on a nonrecurring basis for the six months ended June 30, 2012 and 2011, with pricing levels as of the date of valuation (in thousands):

 

 

 

Six Months Ended June 30, 2012

 

Six Months Ended June 30, 2011

 

 

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired long-lived assets

 

$

 

$

 

$

7,436

 

$

 

$

 

$

156

 

 

Our estimate of the fair value of the impaired long-lived assets was based on the expected net sale proceeds compared to other fleet units we have recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use. Because we expect the disposition of the fleet assets we impaired during the three months ended June 30, 2012 to take more than twelve months, we discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of four years and a discount rate of 10.4%.

 

9.  LONG-LIVED ASSET IMPAIRMENT

 

During the six months ended June 30, 2012, we evaluated the future deployment of our idle fleet and, as a result, determined to retire and either sell or re-utilize key components on approximately 260 idle compressor units, or approximately 69,000 horsepower, that we previously used to provide services. As a result of our decision to sell or re-utilize key components on these compressor units, we performed an impairment review and, based on that review, have recorded a $21.5 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on the expected net sale proceeds as compared to other fleet units we recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units that we retired from our active fleet and made available for sale.  In connection with our review of our fleet in June 2012, we re-evaluated the key assumptions used in the fleet impairment recorded in the fourth quarter of 2010. Based upon that review, we reduced the expected proceeds from disposition for most of the remaining units and increased the weighted average disposal period for the units from the impairment in the fourth quarter of 2010. This resulted in an additional impairment of $7.4 million to reduce the book value of each unit to its estimated fair value.

 

Additionally, during the six months ended June 30, 2011, we reviewed our idle compression fleet for units that were not of the type, configuration, make or model that are cost effective to maintain and operate. Our estimate of the fair value of the impaired long-lived assets was based on the expected net sale proceeds compared to other fleet units we have recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use. The net book value of these assets exceeded the fair value by $0.3 million for the six months ended June 30, 2011 and was recorded as a long-lived asset impairment.

 

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10.  UNIT TRANSACTIONS

 

In March 2012, we sold, pursuant to a public underwritten offering, 4,965,000 common units representing limited partner interests in us, including 465,000 common units sold pursuant to an over-allotment option. The net proceeds from this offering of $114.5 million were used to repay borrowings outstanding under the revolving credit facility. In connection with this sale and as permitted under our partnership agreement, we issued approximately 101,000 general partner units to our general partner in consideration of the continuation of its approximate 2.0% general partner interest in us. Our general partner made a capital contribution to us in the amount of $2.4 million as consideration for such units.

 

All of our subordinated units were owned by a wholly-owned subsidiary of Exterran Holdings. In August 2011, pursuant to the terms of our partnership agreement, 1,581,250 subordinated units owned by Exterran Holdings converted into common units. As of September 30, 2011, we met the requirements under our partnership agreement for the end of the subordination period and, therefore, our remaining 3,162,500 subordinated units converted into common units in November 2011.

 

In June 2011, we completed the June 2011 Contract Operations Acquisition from Exterran Holdings. In connection with this acquisition, we issued approximately 51,000 general partner units to our general partner, a wholly-owned subsidiary of Exterran Holdings.

 

In May 2011, we sold, pursuant to a public underwritten offering, 5,134,175 common units representing limited partner interests in us, including 134,175 common units sold pursuant to an over-allotment option. The net proceeds from this offering were used (i) to repay approximately $64.8 million of borrowings outstanding under the revolving credit facility and (ii) for general partnership purposes, including to fund a portion of the consideration for the June 2011 Contract Operations Acquisition from Exterran Holdings. In connection with this sale and as permitted under the partnership agreement, we issued approximately 53,000 general partner units to our general partner in consideration of the continuation of its approximate 2.0% general partner interest in us. Our general partner made a capital contribution to us in the amount of $1.3 million as consideration for such units.

 

In March 2011, Exterran Holdings sold, pursuant to a public underwritten offering, 5,914,466 common units representing limited partner interests in us, including 664,466 common units sold pursuant to an over-allotment option. We did not sell any common units in this offering and did not receive any proceeds from the sale of the common units by Exterran Holdings. In connection with our initial issuance of these units to Exterran Holdings, we agreed to pay certain costs relating to their future public sale. These costs have been recorded as a reduction to partners’ capital.

 

As of June 30, 2012, Exterran Holdings owned 12,495,391 common units and 858,583 general partner units, collectively representing a 31% interest in us.

 

11.  RECENT ACCOUNTING DEVELOPMENTS

 

In May 2011, the FASB issued an update to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This update changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This update is effective for interim and annual periods beginning on or after December 15, 2011. Our adoption of this new guidance on January 1, 2012 did not have a material impact on our condensed consolidated financial statements.

 

In June 2011, the FASB issued an update on the presentation of other comprehensive income. Under this update, entities will be required to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This update is effective for interim and annual periods beginning on or after December 15, 2011. Our adoption of this new guidance on January 1, 2012 did not have a material impact on our condensed consolidated financial statements.

 

12.  COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, we believe that any ultimate liability arising from these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. Because of the inherent uncertainty of litigation, however, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to make cash distributions to our unitholders, for the period in which the resolution occurs.

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and the notes thereto included in the Condensed Consolidated Financial Statements in Part I, Item 1 (“Financial Statements”) of this report and in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2011.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

All statements other than statements of historical fact contained in this report are forward-looking statements, including, without limitation, statements regarding our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations; the sufficiency of available cash flows to make cash distributions; the expected amount of our capital expenditures; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; plans and objectives of our management for our future operations; and any potential contribution of additional assets from Exterran Holdings, Inc. (individually, and together with its wholly-owned subsidiaries, “Exterran Holdings”) to us. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.

 

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2011, and those set forth from time to time in our filings with the Securities and Exchange Commission (“SEC”), which are available through our website at www.exterran.com and through the SEC’s website at www.sec.gov, as well as the following risks and uncertainties:

 

·                       conditions in the oil and natural gas industry, including a sustained decrease in the level of supply or demand for oil or natural gas or a sustained decrease in the price of oil or natural gas, which could cause a decline in the demand for our natural gas compression services;

 

·                       reduced profit margins or the loss of market share resulting from competition or the introduction of competing technologies by other companies;

 

·                       our dependence on Exterran Holdings to provide services and compression equipment, including its ability to hire, train and retain key employees and to timely and cost effectively obtain compression equipment and components necessary to conduct our business;

 

·                       our dependence on and the availability of cost caps from Exterran Holdings to generate sufficient cash to enable us to make cash distributions at our current distribution rate;

 

·                       changes in economic or political conditions, including terrorism and legislative changes;

 

·                       the inherent risks associated with our operations, such as equipment defects, impairments, malfunctions and natural disasters;

 

·                       loss of our status as a partnership for federal income tax purposes;

 

·                       the risk that counterparties will not perform their obligations under our financial instruments;

 

·                       the financial condition of our customers;

 

·                       our ability to implement certain business and financial objectives, such as:

 

·                       growing our asset base and utilization, particularly for our fleet of compressors;

 

·                       integrating acquired businesses;

 

·                       generating sufficient cash;

 

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·                       accessing the capital markets at an acceptable cost; and

 

·                       purchasing additional contract operation contracts and equipment from Exterran Holdings;

 

·                       liability related to the provision of our services;

 

·                       changes in governmental safety, health, environmental or other regulations, which could require us to make significant expenditures; and

 

·                       our level of indebtedness and ability to fund our business.

 

All forward-looking statements included in this report are based on information available to us on the date of this report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.

 

GENERAL

 

We are a publicly held Delaware limited partnership formed in 2006 to acquire certain contract operations customer service agreements and a compressor fleet used to provide compression services under those agreements. We completed our initial public offering in October 2006.

 

March 2012 Contract Operations Acquisition

 

In March 2012, we acquired from Exterran Holdings contract operations customer service agreements with 39 customers and a fleet of 406 compressor units used to provide compression services under those agreements, comprising approximately 188,000 horsepower, or 5% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “March 2012 Contract Operations Acquisition”). In addition, the acquired assets included 139 compressor units, comprising approximately 75,000 horsepower, previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 10 million cubic feet per day used to provide processing services to a customer pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $149.5 million, net of accumulated depreciation of $67.0 million. Total consideration for the transaction was approximately $182.8 million, excluding transaction costs. In connection with this acquisition, we assumed $105.4 million of Exterran Holdings’ long-term debt and paid $77.4 million in cash to Exterran Holdings.

 

June 2011 Contract Operations Acquisition

 

In June 2011, we acquired from Exterran Holdings contract operations customer service agreements with 34 customers and a fleet of 407 compressor units used to provide compression services under those agreements, comprising approximately 289,000 horsepower, or 8% (by then available horsepower) of the combined U.S. contract operations business of Exterran Holdings and us (the “June 2011 Contract Operations Acquisition”). In addition, the acquired assets included 207 compressor units, comprising approximately 98,000 horsepower, previously leased from Exterran Holdings to us, and a natural gas processing plant with a capacity of 8 million cubic feet per day used to provide processing services to a customer pursuant to a long-term services agreement. At the date of acquisition, the acquired fleet assets had a net book value of $191.4 million, net of accumulated depreciation of $85.5 million. Total consideration for the transaction was approximately $223.0 million, excluding transaction costs. In connection with this acquisition, we assumed $159.4 million of Exterran Holdings’ long-term debt, paid $62.2 million in cash and issued approximately 51,000 general partner units to our general partner.

 

Omnibus Agreement

 

We are a party to an omnibus agreement with Exterran Holdings, our general partner, and others (as amended and/or restated, the “Omnibus Agreement”), the terms of which include, among other things:

 

·                       certain agreements not to compete between Exterran Holdings and its affiliates, on the one hand, and us and our affiliates, on the other hand;

 

·                       Exterran Holdings’ obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Exterran Holdings for the provision of such services, subject to certain limitations and the cost caps discussed below;

 

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·                       the terms under which we, Exterran Holdings and our respective affiliates may transfer, exchange or lease compression equipment among one another; and

 

·                       the terms under which we may purchase newly-fabricated contract operations equipment from Exterran Holdings’ affiliates.

 

For further discussion of the Omnibus Agreement, please see Note 3 to the Condensed Consolidated Financial Statements included in Part I, Item 1 (“Financial Statements”) of this report.

 

OVERVIEW

 

Industry Conditions and Trends

 

Our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration, development and production of natural gas reserves in the U.S. Spending by natural gas exploration and production companies is dependent upon these companies’ forecasts regarding the expected future supply, demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find, develop and produce reserves. Although we believe our business is typically less impacted by commodity prices than certain other oil and natural gas service providers, changes in natural gas exploration and production spending will normally result in changes in demand for our services.

 

Natural gas consumption in the U.S. for the twelve months ended April 30, 2012 increased by approximately 1% over the twelve months ended April 30, 2011. The Energy Information Administration (“EIA”) estimates that natural gas consumption in the U.S. will increase by 4.9% in 2012 and will increase by an average of 0.5% per year thereafter until 2035. Natural gas marketed production in the U.S. for the twelve months ended April 30, 2012 increased by approximately 8% compared to the twelve months ended April 30, 2011. The EIA expects total U.S. natural gas marketed production growth in 2012 to occur at a lower rate than in 2011. In 2010, the U.S. accounted for an estimated annual production of approximately 22 trillion cubic feet of natural gas. The EIA estimates that the natural gas production level in the U.S. will be approximately 26 trillion cubic feet in calendar year 2035.

 

Our Performance Trends and Outlook

 

Our results of operations depend upon the level of activity in the U.S. energy market. Oil and natural gas prices and the level of drilling and exploration activity can be volatile. For example, oil and natural gas exploration and development activity and the number of well completions typically decline when there is a significant reduction in oil and natural gas prices or significant instability in energy markets.

 

Our revenue, earnings and financial position are affected by, among other things, (i) market conditions that impact demand and pricing for natural gas compression, (ii) our customers’ decisions regarding whether to utilize our services rather than utilize products or services from our competitors, (iii) our customers’ decisions regarding whether to own and operate the equipment themselves, and (iv) the timing and consummation of acquisitions of additional contract operations customer service agreements and equipment from Exterran Holdings. In particular, many of our contracts with customers have short initial terms; we cannot be certain that these contracts will be renewed after the end of the initial contractual term, and any such nonrenewal, or renewal at a reduced rate, could adversely impact our results of operations and cash available for distribution. As we believe there will be a high level of activity in certain U.S. areas focused on the production of oil and natural gas liquids, we anticipate investing in more new fleet units, and therefore investing more capital, in 2012 than we did in 2011.

 

During 2011 and the first six months of 2012, we saw robust drilling activity, particularly in shale plays and areas focused on the production of oil and natural gas liquids. This activity led to higher demand and bookings for our contract operations services in these markets. The new development activity has increased the overall amount of compression horsepower in the industry and in our business; however, these increases continue to be partially offset by horsepower declines in more mature and predominantly dry gas markets. In April 2012, natural gas prices in the U.S. fell to the lowest levels seen in more than a decade. Since then, natural gas prices have improved somewhat, but still remain at historically low levels which could decrease natural gas production, particularly in dry gas areas. We believe that the low natural gas price environment, as well as the recent investment of capital in new equipment by our competitors and other third parties, could decrease demand for our services. A 1% decrease in average utilization of our contract operations fleet would result in a decrease in our revenue and gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) for the six months ended June 30, 2012 of approximately $1.9 million and $1.0 million, respectively. Gross margin is a non-GAAP financial measure. For a reconciliation of gross margin to net loss, its most directly comparable financial measure, calculated and presented in accordance with accounting principles generally accepted in the U.S. (“GAAP”), please read “— Non-GAAP Financial Measures.”

 

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Pursuant to the Omnibus Agreement between us and Exterran Holdings, our obligation to reimburse Exterran Holdings for cost of sales and selling, general and administrative (“SG&A”) expenses is capped through December 31, 2013 (see Note 3 to the Financial Statements). Our cost of sales exceeded the cap provided in the Omnibus Agreement by $3.5 million and $8.3 million, respectively, for the three months ended June 30, 2012 and 2011, and by $8.8 million and $15.2 million, respectively, for the six months ended June 30, 2012 and 2011. Our SG&A expenses exceeded the cap provided in the Omnibus Agreement by $2.8 million and $1.9 million, respectively, for the three months ended June 30, 2012 and 2011, and by $5.3 million and $4.2 million, respectively, for the six months ended June 30, 2012 and 2011.

 

Exterran Holdings intends for us to be the primary long-term growth vehicle for its U.S. contract operations business and intends to offer us the opportunity to purchase the remainder of its U.S. contract operations business over time, but is not obligated to do so. Likewise, we are not required to purchase any additional portions of such business. The consummation of any future purchase of additional portions of Exterran Holdings’ U.S. contract operations business and the timing of any such purchase will depend upon, among other things, our reaching an agreement with Exterran Holdings regarding the terms of such purchase, which will require the approval of the conflicts committee of our board of directors. The timing of such transactions would also depend on, among other things, market and economic conditions and our access to additional debt and equity capital. Future contributions of assets to us upon consummation of transactions with Exterran Holdings may increase or decrease our operating performance, financial position and liquidity. Unless otherwise indicated, this discussion of performance trends and outlook excludes any future potential transfers of additional contract operations customer service agreements and equipment from Exterran Holdings to us.

 

Operating Highlights

 

The following table summarizes total available horsepower, total operating horsepower, average operating horsepower and horsepower utilization percentages (in thousands, except percentages):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total Available Horsepower (at period end)(1)(2)

 

2,026

 

1,905

 

2,026

 

1,905

 

Total Operating Horsepower (at period end)(1)

 

1,908

 

1,684

 

1,908

 

1,684

 

Average Operating Horsepower

 

1,916

 

1,442

 

1,828

 

1,419

 

Horsepower Utilization:

 

 

 

 

 

 

 

 

 

Spot (at period end)(2)

 

94

%

88

%

94

%

88

%

Average

 

91

%

87

%

91

%

87

%

 


(1)          Includes compressor units with an aggregate horsepower of approximately 158,000 and 226,000 leased from Exterran Holdings as of June 30, 2012 and 2011, respectively. Excludes compressor units with an aggregate horsepower of approximately 20,000 and 21,000 leased to Exterran Holdings as of June 30, 2012 and 2011, respectively.

(2)          Amounts for the periods ended June 30, 2012 exclude approximately 67,000 horsepower of idle compressor units that were removed from the compressor fleet as a result of the June 2012 impairment review.

 

Summary of Results

 

Net loss.  We recorded net losses of $19.1 million and $1.9 million for the three months ended June 30, 2012 and 2011, respectively, and $14.5 million and $1.7 million for the six months ended June 30, 2012 and 2011, respectively. The increase in net loss during the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011 was primarily caused by a long-lived asset impairment of $28.1 million recorded in June 2012, partially offset by improved gross margins including the impact of the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

EBITDA, as further adjusted.  Our EBITDA, as further adjusted, was $45.0 million and $32.0 million for the three months ended June 30, 2012 and 2011, respectively, and $85.0 million and $63.2 million for the six months ended June 30, 2012 and 2011, respectively. The increase in EBITDA, as further adjusted, during the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011 was primarily caused by improved gross margins, partially offset by higher depreciation and amortization expense and SG&A expense, from the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. For a reconciliation of EBITDA, as further adjusted, to net loss, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read “— Non-GAAP Financial Measures.”

 

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FINANCIAL RESULTS OF OPERATIONS

 

The Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30, 2011

 

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net loss (dollars in thousands):

 

 

 

Three Months Ended
June 30,

 

 

 

2012

 

2011

 

Revenue

 

$

97,171

 

$

71,841

 

Gross margin(1)

 

51,725

 

32,017

 

Gross margin percentage

 

53

%

45

%

Expenses:

 

 

 

 

 

Depreciation and amortization

 

$

22,788

 

$

15,459

 

Long-lived asset impairment

 

28,122

 

305

 

Selling, general and administrative — affiliates

 

13,450

 

9,927

 

Interest expense

 

6,399

 

7,553

 

Other (income) expense, net

 

(261

)

455

 

Income tax expense

 

277

 

256

 

Net loss

 

$

(19,050

)

$

(1,938

)

 


(1)         For a reconciliation of gross margin to net loss, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read “— Non-GAAP Financial Measures.”

 

Revenue.  Average operating horsepower was approximately 1,916,000 and 1,442,000 for the three months ended June 30, 2012 and 2011, respectively. The increase in revenue and average operating horsepower was primarily due to the inclusion of the results from the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

Gross Margin.  The increase in gross margin during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to the inclusion of results from the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. The increase in gross margin was also impacted by better management of field operating expenses from the implementation of profitability improvement initiatives by Exterran Holdings, a $2.1 million benefit from ad valorem taxes due to a change in tax law, a $1.3 million reduction in estimated use taxes and a $2.0 million decrease in intercompany lease expense for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, partially offset by an increase in lube oil prices.

 

Depreciation and Amortization.  The increase in depreciation and amortization expense during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to additional depreciation on compression equipment additions, including the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

Long-lived Asset Impairment.  During the three months ended June 30, 2012, we evaluated the future deployment of our idle fleet and, as a result, determined to retire and either sell or re-utilize key components on approximately 250 idle compressor units, or approximately 67,000 horsepower, that we previously used to provide services. As a result of our decision to sell or re-utilize key components on these compressor units, we performed an impairment review and, based on that review, have recorded a $20.7 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on the expected net sale proceeds as compared to other fleet units we recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use.  As of June 30, 2012, the average age of the impaired idle units was 27 years.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units that we retired from our active fleet and made available for sale. In connection with our review of our fleet in June 2012, we re-evaluated the key assumptions used in the fleet impairment recorded in the fourth quarter of 2010. Based upon that review, we reduced the expected proceeds from disposition for most of the remaining units and increased the weighted average disposal period for the units from the impairment in the fourth quarter of 2010. This resulted in an additional impairment of $7.4 million to reduce the book value of each unit to its estimated fair value.  As of June 30, 2012, the average age of the units we further impaired in the second quarter of 2012 was 27 years.

 

During the three months ended June 30, 2011, we reviewed our idle compression fleet for units that were not of the type, configuration, make or model that are cost effective to maintain and operate. Our estimate of the fair value of the impaired long-lived assets was based on the expected net sale proceeds compared to other fleet units we have recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use. The net book value of these assets exceeded the fair value by $0.3 million for the three months ended June 30, 2011, and was recorded as a long-lived asset impairment.

 

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SG&A — affiliates.  SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the terms of the Omnibus Agreement. The increase in SG&A expense was primarily due to increased costs associated with the impact of the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. SG&A expenses represented 14% of revenues for each of the three month periods ended June 30, 2012 and 2011.

 

Interest Expense.  The decrease in interest expense was primarily due to a decrease of $2.3 million in the amortization of payments to terminate interest rate swaps, which was partially offset by a higher average balance of long-term debt, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The payments to terminate interest rate swap agreements are being amortized into interest expense over the original terms of the swaps.

 

Other (Income) Expense, Net.  Other (income) expense, net for the three months ended June 30, 2011 included $0.5 million of transaction costs associated with the June 2011 Contract Operations Acquisition. Additionally, Other (income) expense, net for the three months ended June 30, 2012 and 2011 included $0.2 million and $0.1 million, respectively, of gains on the sale of used compression equipment.

 

Income Tax Expense.  Income tax expense primarily reflects taxes recorded under the Texas margins tax. The increase in income tax expense for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to an increase in our revenue earned within the state of Texas.

 

The Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

 

The following table summarizes our revenue, gross margin, gross margin percentage, expenses and net loss (dollars in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Revenue

 

$

185,868

 

$

140,570

 

Gross margin(1)

 

96,309

 

63,694

 

Gross margin percentage

 

52

%

45

%

Expenses:

 

 

 

 

 

Depreciation and amortization

 

$

43,150

 

$

29,608

 

Long-lived asset impairment

 

28,927

 

305

 

Selling, general and administrative — affiliates

 

25,672

 

20,143

 

Interest expense

 

12,281

 

14,628

 

Other (income) expense, net

 

266

 

234

 

Income tax expense

 

558

 

491

 

Net loss

 

$

(14,545

)

$

(1,715

)

 


(1)         For a reconciliation of gross margin to net loss, its most directly comparable financial measure, calculated and presented in accordance with GAAP, please read “— Non-GAAP Financial Measures.”

 

Revenue.  Average operating horsepower was approximately 1,828,000 and 1,419,000 for the six months ended June 30, 2012 and 2011, respectively. The increase in revenue and average operating horsepower was primarily due to the inclusion of the results from the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

Gross Margin.  The increase in gross margin during the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to the inclusion of results from the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. The increase in gross margin was also impacted by better management of field operating expenses from the implementation of profitability improvement initiatives by Exterran Holdings, a $2.1 million benefit from ad valorem taxes due to a change in tax law, a $1.9 million reduction in estimated use taxes and a $3.1 million decrease in intercompany lease expense for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, partially offset by an increase in lube oil prices.

 

Depreciation and Amortization.  The increase in depreciation and amortization expense during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to additional depreciation on compression equipment additions, including the assets acquired in the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

Long-lived Asset Impairment.  During the six months ended June 30, 2012, we evaluated the future deployment of our idle fleet and, as a result, determined to retire and either sell or re-utilize key components on approximately 260 idle compressor units, or approximately 69,000 horsepower, that we previously used to provide services. As a result of our decision to sell or re-utilize key components on these

 

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compressor units, we performed an impairment review and, based on that review, have recorded a $21.5 million asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on the expected net sale proceeds as compared to other fleet units we recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use.  As of June 30, 2012, the average age of the impaired idle units was 27 years.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units that we retired from our active fleet and made available for sale. In connection with our review of our fleet in June 2012, we re-evaluated the key assumptions used in the fleet impairment recorded in the fourth quarter of 2010. Based upon that review, we reduced the expected proceeds from disposition for most of the remaining units and increased the weighted average disposal period for the units from the impairment in the fourth quarter of 2010. This resulted in an additional impairment of $7.4 million to reduce the book value of each unit to its estimated fair value.  As of June 30, 2012, the average age of the units we further impaired in the second quarter of 2012 was 27 years.

 

Additionally, during the six months ended June 30, 2011, we reviewed our idle compression fleet for units that were not of the type, configuration, make or model that are cost effective to maintain and operate. Our estimate of the fair value of the impaired long-lived assets was based on the expected net sale proceeds compared to other fleet units we have recently sold, as well as our review of other units that were recently offered for sale by third parties, or the estimated component value of the equipment that we plan to use. The net book value of these assets exceeded the fair value by $0.3 million for the six months ended June 30, 2011 and was recorded as a long-lived asset impairment.

 

SG&A — affiliates.  SG&A expenses are primarily comprised of an allocation of expenses, including costs for personnel support and related expenditures, from Exterran Holdings to us pursuant to the terms of the Omnibus Agreement. The increase in SG&A expense was primarily due to increased costs associated with the impact of the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition. SG&A expenses represented 14% of revenues for each of the six month periods ended June 30, 2012 and 2011.

 

Interest Expense.  The decrease in interest expense was primarily due to a decrease of $4.5 million in the amortization of payments to terminate interest rate swaps, which was partially offset by a higher average balance of long-term debt, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The payments to terminate interest rate swap agreements are being amortized into interest expense over the original terms of the swaps.

 

Other (Income) Expense, Net.  Other (income) expense, net for the six months ended June 30, 2012 included $0.7 million of transaction costs associated with the March 2012 Contract Operations Acquisition. Other (income) expense, net for the six months ended June 30, 2011 included $0.5 million of transaction costs associated with the June 2011 Contract Operations Acquisition. Additionally, Other (income) expense, net for the six months ended June 30, 2012 and 2011 included $0.4 million and $0.3 million, respectively, of gains on the sale of used compression equipment.

 

Income Tax Expense.  Income tax expense primarily reflects taxes recorded under the Texas margins tax. The increase in income tax expense for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to an increase in our revenue earned within the state of Texas.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following tables summarize our sources and uses of cash for the six months ended June 30, 2012 and 2011, and our cash and working capital as of the end of the periods presented (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Net cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

46,316

 

$

32,120

 

Investing activities

 

(126,683

)

(79,440

)

Financing activities

 

80,958

 

47,502

 

Net change in cash and cash equivalents

 

$

591

 

$

182

 

 

 

 

June 30,
2012

 

December 31,
2011

 

Cash and cash equivalents

 

$

596

 

$

5

 

Working capital

 

32,680

 

21,121

 

 

Operating Activities.  The increase in net cash provided by operating activities was primarily due to the increase in business levels resulting from the March 2012 Contract Operations Acquisition and the June 2011 Contract Operations Acquisition.

 

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Investing Activities.  The increase in cash used in investing activities was primarily attributable to an increase of $27.6 million in capital expenditures during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. Capital expenditures for the six months ended June 30, 2012 were $51.5 million, consisting of $32.0 million for fleet growth capital and $19.5 million for compressor maintenance activities. We purchased $27.3 million of newly-fabricated compression equipment, which was included in fleet growth capital, from Exterran Holdings during the six months ended June 30, 2012. In addition, we used $15.2 million more cash for the March 2012 Contract Operations Acquisition than we used for the June 2011 Contract Operations Acquisition.

 

Financing Activities.  The increase in net cash provided by financing activities was primarily the result of a decrease in net repayments under our debt facilities and an increase in distributions to unitholders during the six months ended June 30, 2012 compared to the six months ended June 30, 2011, partially offset by our receipt of $13.1 million less in net proceeds from the issuance of common units. We used all of the net proceeds we received from the March 2012 public offering and a portion of the net proceeds we received from the May 2011 public offering to repay borrowings under our senior secured credit facility.

 

Capital Requirements.  The natural gas compression business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is dependent on the demand for our services and the availability of the type of compression equipment required for us to render those services to our customers. Our capital requirements have consisted primarily of, and we anticipate that our capital requirements will continue to consist of, the following:

 

·                       maintenance capital expenditures, which are capital expenditures made to maintain the existing operating capacity of our assets and related cash flows further extending the useful lives of the assets; and

 

·                       expansion capital expenditures, which are capital expenditures made to expand or to replace partially or fully depreciated assets or to expand the operating capacity or revenue generating capabilities of existing or new assets, whether through construction, acquisition or modification.

 

Without giving effect to any equipment we may acquire pursuant to any future acquisitions, we currently plan to make approximately $37 million to $42 million in equipment maintenance capital expenditures during 2012. Exterran Holdings manages its and our respective U.S. fleets as one pool of compression equipment from which we can each readily fulfill our respective customers’ service needs. When we or Exterran Holdings are advised of a contract operations services opportunity, Exterran Holdings reviews both our and its fleet for an available and appropriate compressor unit. Given that the majority of the idle compression equipment has been and is currently held by Exterran Holdings, much of the idle compression equipment required for these contract operations services opportunities has been held by Exterran Holdings. Under the Omnibus Agreement, the owner of the equipment being transferred is required to pay the costs associated with making the idle equipment suitable for the proposed customer and then has generally leased the equipment to the recipient of the equipment or exchanged the equipment for other equipment of the recipient. Because Exterran Holdings has owned the majority of such equipment, Exterran Holdings has generally had to bear a larger portion of the maintenance capital expenditures associated with making transferred equipment ready for service. For equipment that is then leased, the maintenance capital cost is a component of the lease rate that is paid under the lease. As we acquire more compression equipment, we expect that more of our equipment will be available to satisfy our or Exterran Holdings’ customer requirements. As a result, we expect that our maintenance capital expenditures will increase (and that lease expense will be reduced).

 

In addition, our capital requirements include funding distributions to our unitholders. We anticipate such distributions will be funded through cash provided by operating activities and borrowings under our credit facility and that we have the ability to generate or borrow under our credit facility adequate amounts of cash to meet our short-term needs and needs for the foreseeable future. Given our objective of long-term growth through acquisitions, expansion capital expenditure projects and other internal growth projects, we anticipate that over time we will continue to invest capital to grow and acquire assets. We expect to actively consider a variety of assets for potential acquisitions and expansion projects. We expect to fund future capital expenditures with borrowings under our credit facility, the issuance of additional partnership units and future debt offerings, as appropriate, given market conditions. The timing of future capital expenditures will be based on the economic environment, including the availability of debt and equity capital.

 

Our Ability to Grow Depends on Our Ability to Access External Expansion Capital.  We expect that we will rely primarily upon external financing sources, including our senior secured credit facility and the issuance of debt and equity securities, rather than cash reserves established by our general partner, to fund our acquisitions and expansion capital expenditures. Our ability to access the capital markets may be restricted at a time when we would like, or need, to do so, which could have an impact on our ability to grow.

 

We expect that we will distribute all of our available cash to our unitholders. Available cash is reduced by cash reserves established by our general partner to provide for the proper conduct of our business, including future capital expenditures. To the extent we are unable to finance growth externally and we are unwilling to establish cash reserves to fund future acquisitions, our cash distribution policy will significantly impair our ability to grow. Because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with

 

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any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute for each unit. There are no limitations in our partnership agreement or in the terms of our credit facility on our ability to issue additional units, including units ranking senior to our common units.

 

Long-term Debt.  In November 2010, we entered into an amendment and restatement of our senior secured credit agreement (the “Credit Agreement”) to provide for a new five-year, $550.0 million senior secured credit facility consisting of a $400.0 million revolving credit facility and a $150.0 million term loan facility. The revolving borrowing capacity under this facility was increased by $150.0 million to $550.0 million in March 2011 and by $200.0 million to $750.0 million in March 2012. During the first quarter of 2012, we incurred transaction costs of approximately $0.5 million related to the amendment of our Credit Agreement. These costs were included in Intangible and other assets, net and are being amortized over the term of the facility. As of June 30, 2012, we had undrawn and available capacity of $256.5 million under our revolving credit facility.

 

The revolving credit facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin for revolving loans varies (i) in the case of LIBOR loans, from 2.25% to 3.25% and (ii) in the case of base rate loans, from 1.25% to 2.25%. The base rate is the highest of the prime rate announced by Wells Fargo Bank, National Association, the Federal Funds Effective Rate plus 0.5% and one-month LIBOR plus 1.0%. At June 30, 2012, all amounts outstanding under the revolving credit facility were LIBOR loans and the applicable margin was 2.5%. The weighted average annual interest rate on the outstanding balance of our revolving credit facility at June 30, 2012, excluding the effect of interest rate swaps, was 2.8%.

 

The term loan facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin for term loans varies (i) in the case of LIBOR loans, from 2.5% to 3.5% and (ii) in the case of base rate loans, from 1.5% to 2.5%. At June 30, 2012, all amounts outstanding under the term loan facility were LIBOR loans and the applicable margin was 2.75%. The average annual interest rate on the outstanding balance of the term loan facility at June 30, 2012 was 3.0%.

 

Borrowings under the Credit Agreement are secured by substantially all of the U.S. personal property assets of us and our Significant Domestic Subsidiaries (as defined in the Credit Agreement), including all of the membership interests of our Domestic Subsidiaries (as defined in the Credit Agreement).

 

The Credit Agreement contains various covenants with which we must comply, including restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay dividends and distributions. We must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the Credit Agreement) to Total Interest Expense (as defined in the Credit Agreement) of not less than 3.0 to 1.0 (which will decrease to 2.75 to 1.0 following the occurrence of certain events specified in the Credit Agreement) and a ratio of Total Debt (as defined in the Credit Agreement) to EBITDA of not greater than 4.75 to 1.0. The Credit Agreement allows for our Total Debt to EBITDA ratio to be increased from 4.75 to 1.0 to 5.25 to 1.0 during a quarter when an acquisition meeting certain thresholds is completed and for the following two quarters after such an acquisition closes. Therefore, because the March 2012 Contract Operations Acquisition closed in the first quarter of 2012 and met the applicable thresholds, the maximum allowed ratio of Total Debt to EBITDA is 5.25 to 1.0 through September 30, 2012, reverting to 4.75 to 1.0 for the quarter ending December 31, 2012 and subsequent quarters. Because the March 2012 Contract Operations Acquisition closed during the first quarter of 2012, our Total Debt to EBITDA ratio was temporarily increased from 4.75 to 1.0 to 5.25 to 1.0 during the quarter ended March 31, 2012 and will continue at that level through September 30, 2012, reverting to 4.75 to 1.0 for the quarter ending December 31, 2012 and subsequent quarters. As of June 30, 2012, we maintained an 8.0 to 1.0 EBITDA to Total Interest Expense ratio and a 3.6 to 1.0 Total Debt to EBITDA ratio. The Credit Agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. If we experience a material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform our obligations under the Credit Agreement, this, among other things, could lead to a default under that agreement. As of June 30, 2012, we were in compliance with all financial covenants under the Credit Agreement.

 

We have entered into interest rate swap agreements related to a portion of our variable rate debt. In November 2010, we paid $14.8 million to terminate interest rate swap agreements with a total notional value of $285.0 million and a weighted average effective fixed interest rate of 4.4%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive loss. The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive loss is being amortized into interest expense over the original terms of the swaps. Of the total amount included in accumulated other comprehensive loss, $0.6 million was amortized into interest expense during the six months ended June 30, 2012 and we expect $0.3 million to be amortized into interest expense during the remainder of 2012. See Note 7 to the Financial Statements for further discussion of our interest rate swap agreements.

 

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We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

Distributions to Unitholders.  Our partnership agreement requires us to distribute all of our “available cash” quarterly. Under our partnership agreement, available cash is defined generally to mean, for each fiscal quarter, (i) our cash on hand at the end of the quarter in excess of the amount of reserves our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters, plus, (ii) if our general partner so determines, all or a portion of our cash on hand on the date of determination of available cash for the quarter.

 

On July 30, 2012, Exterran GP LLC’s board of directors approved a cash distribution of $0.5025 per limited partner unit, or approximately $22.8 million, including distributions to our general partner on its incentive distribution rights. The distribution covers the time period from April 1, 2012 through June 30, 2012. The record date for this distribution is August 10, 2012 and payment is expected to occur on August 14, 2012.

 

NON-GAAP FINANCIAL MEASURES

 

We define gross margin as total revenue less cost of sales (excluding depreciation and amortization expense). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management as it represents the results of revenue and cost of sales (excluding depreciation and amortization expense), which are key components of our operations. We believe gross margin is important because it focuses on the current performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, the impact of our financing methods and income tax expense. Depreciation and amortization expense may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs from current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net loss as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly titled measure of another company because other entities may not calculate gross margin in the same manner.

 

Gross margin has certain material limitations associated with its use as compared to net loss. These limitations are primarily due to the exclusion of interest expense, depreciation and amortization expense and SG&A expense. Each of these excluded expenses is material to our consolidated results of operations. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue, and SG&A expenses are necessary costs to support our operations and required corporate activities. To compensate for these limitations, management uses this non-GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.

 

The following table reconciles our net loss to our gross margin (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(19,050

)

$

(1,938

)

$

(14,545

)

$

(1,715

)

Depreciation and amortization

 

22,788

 

15,459

 

43,150

 

29,608

 

Long-lived asset impairment

 

28,122

 

305

 

28,927

 

305

 

Selling, general and administrative — affiliates

 

13,450

 

9,927

 

25,672

 

20,143

 

Interest expense

 

6,399

 

7,553

 

12,281

 

14,628

 

Other (income) expense, net

 

(261

)

455

 

266

 

234

 

Income tax expense

 

277

 

256

 

558

 

491

 

Gross margin

 

$

51,725

 

$

32,017

 

$

96,309

 

$

63,694

 

 

We define EBITDA, as further adjusted, as net loss plus income taxes, interest expense (including debt extinguishment costs and gain or loss on termination of interest rate swaps), depreciation and amortization expense, impairment charges, other charges, and non-cash SG&A costs and any amounts by which cost of sales and SG&A costs are reduced as a result of caps on these costs contained in the Omnibus Agreement, which amounts are treated as capital contributions from Exterran Holdings for accounting purposes. We believe EBITDA, as further adjusted, is an important measure of operating performance because it allows management, investors and others to evaluate and compare our core operating results from period to period by removing the impact of our capital structure (interest expense from our outstanding debt), asset base (depreciation and amortization expense, impairment charges), tax consequences, caps on operating and SG&A costs, non-cash SG&A costs and reimbursements. Management uses EBITDA, as further adjusted, as a

 

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supplemental measure to review current period operating performance, comparability measures and performance measures for period to period comparisons. Our EBITDA, as further adjusted, may not be comparable to a similarly titled measure of another company because other entities may not calculate EBITDA in the same manner.

 

EBITDA, as further adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net loss, cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from EBITDA, as further adjusted, are significant and necessary components to the operations of our business, and, therefore, EBITDA, as further adjusted, should only be used as a supplemental measure of our operating performance.

 

The following table reconciles our net loss to EBITDA, as further adjusted (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(19,050

)

$

(1,938

)

$

(14,545

)

$

(1,715

)

Income tax expense

 

277

 

256

 

558

 

491

 

Depreciation and amortization

 

22,788

 

15,459

 

43,150

 

29,608

 

Long-lived asset impairment

 

28,122

 

305

 

28,927

 

305

 

Cap on operating and selling, general and administrative costs provided by Exterran Holdings

 

6,321

 

10,200

 

14,126

 

19,329

 

Non-cash selling, general and administrative costs — affiliates

 

140

 

153

 

485

 

517

 

Interest expense

 

6,399

 

7,553

 

12,281

 

14,628

 

EBITDA, as further adjusted

 

$

44,997

 

$

31,988

 

$

84,982

 

$

63,163

 

 

We define distributable cash flow as net loss plus depreciation and amortization expense, impairment charges, non-cash SG&A costs, interest expense and any amounts by which cost of sales and SG&A costs are reduced as a result of caps on these costs contained in the Omnibus Agreement, which amounts are treated as capital contributions from Exterran Holdings for accounting purposes, less cash interest expense (excluding amortization of deferred financing fees and costs incurred to terminate interest rate swaps early) and maintenance capital expenditures, and excluding gains or losses on asset sales and other charges. We believe distributable cash flow is an important measure of operating performance because it allows management, investors and others to compare basic cash flows we generate (prior to the establishment of any retained cash reserves by our general partner) to the cash distributions we expect to pay our unitholders. Using distributable cash flow, management can quickly compute the coverage ratio of estimated cash flows to planned cash distributions. Our distributable cash flow may not be comparable to a similarly titled measure of another company because other entities may not calculate distributable cash flow in the same manner.

 

Distributable cash flow is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net loss, cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from distributable cash flow are significant and necessary components to the operations of our business, and, therefore, distributable cash flow should only be used as a supplemental measure of our operating performance.

 

The following table reconciles our net loss to distributable cash flow (in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(19,050

)

$

(1,938

)

$

(14,545

)

$

(1,715

)

Depreciation and amortization

 

22,788

 

15,459

 

43,150

 

29,608

 

Long-lived asset impairment

 

28,122

 

305

 

28,927

 

305

 

Cap on operating and selling, general and administrative costs provided by Exterran Holdings

 

6,321

 

10,200

 

14,126

 

19,329

 

Non-cash selling, general and administrative costs — affiliates

 

140

 

153

 

485

 

517

 

Interest expense

 

6,399

 

7,553

 

12,281

 

14,628

 

Expensed acquisition costs

 

 

514

 

695

 

514

 

Less: Gain on sale of compression equipment

 

(244

)

(115

)

(418

)

(327

)

Less: Cash interest expense

 

(5,718

)

(4,652

)

(10,926

)

(8,859

)

Less: Maintenance capital expenditures