Annual Statements Open main menu

Archrock, Inc. - Quarter Report: 2012 June (Form 10-Q)

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. 001-33666

 

EXTERRAN HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

74-3204509

(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 o

 

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 x

 

Accelerated filer o

 

 

 

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 o No x

 

Number of shares of the common stock of the registrant outstanding as of July 26, 2012: 64,857,546 shares.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

Condensed Consolidated Statements of Equity

6

Condensed Consolidated Statements of Cash Flows

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

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

31

Item 3. Quantitative and Qualitative Disclosures About Market Risk

47

Item 4. Controls and Procedures

47

PART II. OTHER INFORMATION

47

Item 1. Legal Proceedings

47

Item 1A. Risk Factors

48

Item 6. Exhibits

52

SIGNATURES

54

 

2


 


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share amounts)

(unaudited)

 

 

 

June 30,
2012

 

December 31,
2011

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

21,379

 

$

21,903

 

Restricted cash

 

1,283

 

1,121

 

Accounts receivable, net of allowance of $7,556 and $11,270, respectively

 

503,040

 

448,998

 

Inventory, net

 

414,037

 

342,095

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

110,346

 

122,214

 

Current deferred income taxes

 

33,190

 

37,401

 

Other current assets

 

94,455

 

111,531

 

Current assets held for sale

 

13,480

 

 

Current assets associated with discontinued operations

 

40,005

 

38,664

 

Total current assets

 

1,231,215

 

1,123,927

 

Property, plant and equipment, net

 

2,835,059

 

2,934,664

 

Intangible and other assets, net

 

208,029

 

222,851

 

Long-term assets held for sale

 

294

 

 

Long-term assets associated with discontinued operations

 

29,088

 

79,220

 

Total assets

 

$

4,303,685

 

$

4,360,662

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable, trade

 

$

232,454

 

$

210,812

 

Accrued liabilities

 

226,028

 

275,130

 

Deferred revenue

 

110,036

 

83,836

 

Billings on uncompleted contracts in excess of costs and estimated earnings

 

117,758

 

83,961

 

Current liabilities held for sale

 

6,230

 

 

Current liabilities associated with discontinued operations

 

13,872

 

16,142

 

Total current liabilities

 

706,378

 

669,881

 

Long-term debt

 

1,803,906

 

1,773,039

 

Other long-term liabilities

 

78,016

 

98,165

 

Deferred income taxes

 

109,474

 

124,847

 

Long-term liabilities held for sale

 

15

 

 

Long-term liabilities associated with discontinued operations

 

16,341

 

14,688

 

Total liabilities

 

2,714,130

 

2,680,620

 

Commitments and contingencies (Note 13)

 

 

 

 

 

Equity:

 

 

 

 

 

Preferred stock, $0.01 par value per share; 50,000,000 shares authorized; zero issued

 

 

 

Common stock, $0.01 par value per share; 250,000,000 shares authorized; 71,179,542 and 70,407,010 shares issued, respectively

 

712

 

704

 

Additional paid-in capital

 

3,701,986

 

3,645,332

 

Accumulated other comprehensive income

 

12,328

 

6,059

 

Accumulated deficit

 

(2,155,035

)

(2,007,922

)

Treasury stock — 6,320,024 and 6,143,589 common shares, at cost, respectively

 

(208,779

)

(206,937

)

Total Exterran stockholders’ equity

 

1,351,212

 

1,437,236

 

Noncontrolling interest

 

238,343

 

242,806

 

Total equity

 

1,589,555

 

1,680,042

 

Total liabilities and equity

 

$

4,303,685

 

$

4,360,662

 

 

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

 

3



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

North America contract operations

 

$

148,564

 

$

146,581

 

$

299,152

 

$

293,434

 

International contract operations

 

112,628

 

110,944

 

225,414

 

216,625

 

Aftermarket services

 

101,902

 

84,812

 

191,547

 

159,160

 

Fabrication

 

267,641

 

301,731

 

529,863

 

581,777

 

 

 

630,735

 

644,068

 

1,245,976

 

1,250,996

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (excluding depreciation and amortization expense):

 

 

 

 

 

 

 

 

 

North America contract operations

 

70,423

 

73,906

 

144,659

 

152,194

 

International contract operations

 

47,092

 

49,766

 

90,981

 

90,732

 

Aftermarket services

 

77,528

 

77,647

 

149,259

 

142,309

 

Fabrication

 

241,357

 

269,352

 

476,960

 

508,643

 

Selling, general and administrative

 

94,134

 

90,450

 

188,973

 

179,875

 

Depreciation and amortization

 

88,909

 

90,412

 

174,020

 

178,611

 

Long-lived asset impairment

 

128,543

 

2,063

 

132,665

 

2,063

 

Restructuring charges

 

1,266

 

 

4,313

 

 

Interest expense

 

36,968

 

34,586

 

74,959

 

71,756

 

Equity in income of non-consolidated affiliates

 

(4,728

)

 

(42,067

)

 

Other (income) expense, net

 

8,752

 

(2,853

)

2,657

 

(2,930

)

 

 

790,244

 

685,329

 

1,397,379

 

1,323,253

 

Loss before income taxes

 

(159,509

)

(41,261

)

(151,403

)

(72,257

)

Benefit from income taxes

 

(35,502

)

(14,113

)

(35,845

)

(17,580

)

Loss from continuing operations

 

(124,007

)

(27,148

)

(115,558

)

(54,677

)

Loss from discontinued operations, net of tax

 

(42,891

)

(3,076

)

(44,053

)

(6,011

)

Net loss

 

(166,898

)

(30,224

)

(159,611

)

(60,688

)

Less: Net loss attributable to the noncontrolling interest

 

14,290

 

2,198

 

12,498

 

2,632

 

Net loss attributable to Exterran stockholders

 

$

(152,608

)

$

(28,026

)

$

(147,113

)

$

(58,056

)

 

 

 

 

 

 

 

 

 

 

Basic loss per common share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Exterran stockholders

 

$

(1.73

)

$

(0.40

)

$

(1.63

)

$

(0.83

)

Loss from discontinued operations attributable to Exterran stockholders

 

(0.67

)

(0.05

)

(0.69

)

(0.10

)

Net loss attributable to Exterran stockholders

 

$

(2.40

)

$

(0.45

)

$

(2.32

)

$

(0.93

)

 

 

 

 

 

 

 

 

 

 

Diluted loss per common share:

 

 

 

 

 

 

 

 

 

Loss from continuing operations attributable to Exterran stockholders

 

$

(1.73

)

$

(0.40

)

$

(1.63

)

$

(0.83

)

Loss from discontinued operations attributable to Exterran stockholders

 

(0.67

)

(0.05

)

(0.69

)

(0.10

)

Net loss attributable to Exterran stockholders

 

$

(2.40

)

$

(0.45

)

$

(2.32

)

$

(0.93

)

Weighted average common and equivalent shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

63,478

 

62,669

 

63,321

 

62,529

 

Diluted

 

63,478

 

62,669

 

63,321

 

62,529

 

 

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

 

4



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(166,898

)

$

(30,224

)

$

(159,611

)

$

(60,688

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Derivative gain (loss), net of reclassifications to earnings

 

644

 

(3,714

)

1,642

 

(20

)

Adjustments from sale of Partnership units

 

 

142

 

360

 

1,184

 

Amortization of payments to terminate interest rate swaps

 

3,945

 

4,873

 

7,833

 

9,722

 

Foreign currency translation adjustment

 

(5,510

)

2,570

 

(4,759

)

16,186

 

Total other comprehensive income

 

(921

)

3,871

 

5,076

 

27,072

 

Comprehensive loss

 

(167,819

)

(26,353

)

(154,535

)

(33,616

)

Less: Comprehensive loss attributable to the noncontrolling interest

 

14,952

 

3,778

 

13,691

 

4,231

 

Comprehensive loss attributable to Exterran stockholders

 

$

(152,867

)

$

(22,575

)

$

(140,844

)

$

(29,385

)

 

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

 

5



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(unaudited)

 

 

 

Exterran Holdings, Inc. Stockholders

 

 

 

 

 

 

 

Common
Stock

 

Additional
Paid-in
Capital

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury
Stock

 

Accumulated
Deficit

 

Noncontrolling
Interest

 

Total

 

Balance at December 31, 2010

 

$

691

 

$

3,500,292

 

$

(20,225

)

$

(203,996

)

$

(1,667,314

)

$

192,976

 

$

1,802,424

 

Treasury stock purchased

 

 

 

 

 

 

 

(2,415

)

 

 

 

 

(2,415

)

Options exercised

 

 

 

487

 

 

 

 

 

 

 

 

 

487

 

Shares issued in employee stock purchase plan

 

 

 

940

 

 

 

 

 

 

 

 

 

940

 

Stock-based compensation, net of forfeitures

 

8

 

10,318

 

 

 

 

 

 

 

133

 

10,459

 

Income tax benefit from stock-based compensation expense

 

 

 

(221

)

 

 

 

 

 

 

 

 

(221

)

Net proceeds from sale of Partnership units, net of tax

 

 

 

123,681

 

 

 

 

 

 

 

92,190

 

215,871

 

Cash distribution to noncontrolling unitholders of the Partnership

 

 

 

 

 

 

 

 

 

 

 

(15,841

)

(15,841

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(58,056

)

(2,632

)

(60,688

)

Derivative gain (loss), net of reclassifications to earnings

 

 

 

 

 

1,579

 

 

 

 

 

(1,599

)

(20

)

Adjustments from sale of Partnership units

 

 

 

 

 

1,184

 

 

 

 

 

 

 

1,184

 

Amortization of payments to terminate interest rate swaps, net of tax

 

 

 

 

 

9,722

 

 

 

 

 

 

 

9,722

 

Foreign currency translation adjustment

 

 

 

 

 

16,186

 

 

 

 

 

 

 

16,186

 

Balance at June 30, 2011

 

$

699

 

$

3,635,497

 

$

8,446

 

$

(206,411

)

$

(1,725,370

)

$

265,227

 

$

1,978,088

 

Balance at December 31, 2011

 

$

704

 

$

3,645,332

 

$

6,059

 

$

(206,937

)

$

(2,007,922

)

$

242,806

 

$

1,680,042

 

Treasury stock purchased

 

 

 

 

 

 

 

(1,842

)

 

 

 

 

(1,842

)

Shares issued in employee stock purchase plan

 

1

 

887

 

 

 

 

 

 

 

 

 

888

 

Stock-based compensation, net of forfeitures

 

7

 

8,295

 

 

 

 

 

 

 

325

 

8,627

 

Income tax benefit from stock-based compensation expense

 

 

 

(1,730

)

 

 

 

 

 

 

 

 

(1,730

)

Net proceeds from sale of Partnership units, net of tax

 

 

 

49,202

 

 

 

 

 

 

 

35,920

 

85,122

 

Cash distribution to noncontrolling unitholders of the Partnership

 

 

 

 

 

 

 

 

 

 

 

(27,017

)

(27,017

)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(147,113

)

(12,498

)

(159,611

)

Derivative gain (loss), net of reclassifications to earnings

 

 

 

 

 

2,835

 

 

 

 

 

(1,193

)

1,642

 

Adjustments from sale of Partnership units

 

 

 

 

 

360

 

 

 

 

 

 

 

360

 

Amortization of payments to terminate interest rate swaps, net of tax

 

 

 

 

 

7,833

 

 

 

 

 

 

 

7,833

 

Foreign currency translation adjustment

 

 

 

 

 

(4,759

)

 

 

 

 

 

 

(4,759

)

Balance at June 30, 2012

 

$

712

 

$

3,701,986

 

$

12,328

 

$

(208,779

)

$

(2,155,035

)

$

238,343

 

$

1,589,555

 

 

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

 

6



Table of Contents

 

EXTERRAN HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(159,611

)

$

(60,688

)

Adjustments:

 

 

 

 

 

Depreciation and amortization

 

174,020

 

178,611

 

Long-lived asset impairment

 

132,665

 

2,063

 

Deferred financing cost amortization

 

4,339

 

4,393

 

Loss from discontinued operations, net of tax

 

44,053

 

6,011

 

Amortization of debt discount

 

9,971

 

8,902

 

Provision for doubtful accounts

 

1,373

 

(45

)

Gain on sale of property, plant and equipment

 

(1,809

)

(2,752

)

Equity in income of non-consolidated affiliates

 

(42,067

)

 

Amortization of payments to terminate interest rate swaps

 

7,833

 

9,722

 

(Gain) loss on remeasurement of intercompany balances

 

5,121

 

(1,026

)

Stock-based compensation expense

 

8,302

 

10,326

 

Deferred income tax provision

 

(52,962

)

(27,667

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable and notes

 

(70,534

)

1,910

 

Inventory

 

(62,950

)

(2,463

)

Costs and estimated earnings versus billings on uncompleted contracts

 

33,693

 

(46,037

)

Other current assets

 

14,927

 

(4,121

)

Accounts payable and other liabilities

 

(9,414

)

(48,709

)

Deferred revenue

 

8,859

 

(31,404

)

Other

 

6,795

 

(3,894

)

Net cash provided by (used in) continuing operations

 

52,604

 

(6,868

)

Net cash provided by discontinued operations

 

1,123

 

1,990

 

Net cash provided by (used in) operating activities

 

53,727

 

(4,878

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(227,854

)

(104,302

)

Proceeds from sale of property, plant and equipment

 

26,033

 

30,633

 

Return of investments in non-consolidated affiliates

 

42,291

 

 

(Increase) decrease in restricted cash

 

(162

)

184

 

Cash invested in non-consolidated affiliates

 

(224

)

 

Net cash used in continuing operations

 

(159,916

)

(73,485

)

Net cash used in discontinued operations

 

(973

)

(1,269

)

Net cash used in investing activities

 

(160,889

)

(74,754

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

1,179,000

 

1,003,409

 

Repayments of long-term debt

 

(1,158,104

)

(1,205,258

)

Payments for debt issue costs

 

(549

)

(980

)

Net proceeds from the sale of Partnership units

 

114,530

 

289,908

 

Proceeds from stock options exercised

 

 

487

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

888

 

940

 

Purchases of treasury stock

 

(1,842

)

(2,415

)

Stock-based compensation excess tax benefit

 

208

 

816

 

Distributions to noncontrolling partners in the Partnership

 

(27,017

)

(15,841

)

Net cash provided by financing activities

 

107,114

 

71,066

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and equivalents

 

(476

)

(1,012

)

Net decrease in cash and cash equivalents

 

(524

)

(9,578

)

Cash and cash equivalents at beginning of period

 

21,903

 

44,361

 

Cash and cash equivalents at end of period

 

$

21,379

 

$

34,783

 

 

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

 

7



Table of Contents

 

EXTERRAN HOLDINGS, INC.

 

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 Holdings, Inc. (“we” or “Exterran”) 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. It is the opinion of management that the information furnished includes all adjustments, consisting only of normal recurring adjustments, that are necessary to present fairly our financial position, results of operations and cash flows for the periods indicated.

 

Correction of Misclassification in the Statement of Cash Flows

 

We received $289.9 million of net proceeds from the sale of common units of Exterran Partners, L.P. (together with its subsidiaries, the “Partnership”) during the six months ended June 30, 2011. These net proceeds were previously reported in our consolidated statement of cash flows as cash flows from investing activities. We have subsequently determined that the net proceeds from the sale of Partnership common units during the six months ended June 30, 2011 should have been reported as cash flows from financing activities. This correction had no impact on cash flows from operating activities. The impact of the reclassification on the statement of cash flows for the six months ended June 30, 2011 is shown below (in thousands):

 

 

 

Six Months Ended June 30, 2011

 

 

 

Investing

 

Financing

 

Net Cash Provided By (Used In)

 

Activities

 

Activities

 

As previously reported

 

$

215,154

 

$

(218,842

)

Increase (decrease)

 

(289,908

)

289,908

 

As corrected

 

$

(74,754

)

$

71,066

 

 

Revenue Recognition

 

Revenue from contract operations is recorded when earned, which generally occurs monthly at the time the monthly service is provided to customers in accordance with the contracts. Aftermarket services revenue is recorded as products are delivered and title is transferred or services are performed for the customer.

 

Fabrication revenue is recognized using the percentage-of-completion method when the applicable criteria are met. We estimate percentage-of-completion for compressor and accessory fabrication on a direct labor hour to total labor hour basis. Production and processing equipment fabrication percentage-of-completion is estimated using the direct labor hour to total labor hour and the cost to total cost basis. The duration of these projects is typically between three and 36 months. Fabrication revenue is recognized using the completed contract method when the applicable criteria of the percentage-of-completion method are not met. Fabrication revenue from a claim is recognized to the extent that costs related to the claim have been incurred, when collection is probable and can be reliably estimated.

 

Earnings (Loss) Attributable to Exterran Stockholders Per Common Share

 

Basic income (loss) attributable to Exterran stockholders per common share is computed by dividing income (loss) attributable to Exterran common stockholders by the weighted average number of shares outstanding for the period. Unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of earnings (loss) per share following the two-class method. Therefore, restricted share awards that contain the right to vote and receive dividends are included in the computation of basic and diluted earnings (loss) per share, unless their effect would be anti-dilutive.

 

Diluted income (loss) attributable to Exterran stockholders per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options and warrants to purchase common stock, restricted stock, restricted stock units, stock to be issued pursuant to our employee stock purchase plan and convertible senior notes, unless their effect would be anti-dilutive.

 

8



Table of Contents

 

The table below summarizes loss attributable to Exterran stockholders (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Loss from continuing operations attributable to Exterran stockholders

 

$

(109,717

)

$

(24,950

)

$

(103,060

)

$

(52,045

)

Loss from discontinued operations, net of tax

 

(42,891

)

(3,076

)

(44,053

)

(6,011

)

Net loss attributable to Exterran stockholders

 

$

(152,608

)

$

(28,026

)

$

(147,113

)

$

(58,056

)

 

There were no potential shares of common stock included in computing the dilutive potential shares of common stock used in dilutive loss per common share for the three and six month periods ended June 30, 2012 and 2011, as the effect of their inclusion would have been anti-dilutive.  The table below indicates the potential shares of common stock issuable that were excluded from net dilutive potential shares of common stock issuable 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 shares issuable:

 

 

 

 

 

 

 

 

 

On exercise of options where exercise price is greater than average market value for the period

 

2,272

 

2,333

 

2,391

 

1,826

 

On exercise of options and vesting of restricted stock and restricted stock units

 

1,341

 

433

 

698

 

634

 

On settlement of employee stock purchase plan shares

 

 

14

 

13

 

12

 

On exercise of warrants

 

14,038

 

14,038

 

14,038

 

14,038

 

On conversion of 4.25% convertible senior notes due 2014

 

15,334

 

15,334

 

15,334

 

15,334

 

On conversion of 4.75% convertible senior notes due 2014

 

3,114

 

3,115

 

3,114

 

3,115

 

Net dilutive potential common shares issuable

 

36,099

 

35,267

 

35,588

 

34,959

 

 

Financial Instruments

 

Our financial instruments include cash, restricted cash, receivables, payables, interest rate swaps and debt. At June 30, 2012 and December 31, 2011, the estimated fair value of these financial instruments approximated their carrying value as reflected in our condensed consolidated balance sheets. We estimate the fair value of our fixed rate debt based on quoted market yields in inactive markets or model derived calculations using market yields observed in active markets, which are Level 2 inputs. We estimate the fair value of our floating rate debt using 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 9 for additional information regarding the fair value hierarchy. A summary of the fair value and carrying value of our 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

 

Fixed rate debt

 

$

803,906

 

$

821,000

 

$

794,039

 

$

792,000

 

Floating rate debt

 

1,000,000

 

1,003,000

 

979,000

 

989,000

 

Total debt

 

$

1,803,906

 

$

1,824,000

 

$

1,773,039

 

$

1,781,000

 

 

GAAP requires that all derivative instruments (including certain derivative instruments embedded in other contracts) be recognized in the balance sheet at fair value, and that changes in such fair values be recognized in earnings (loss) unless specific hedging criteria are met. Changes in the values of derivatives that meet these hedging criteria will ultimately offset related earnings effects of the hedged item pending recognition in earnings.

 

2.  DISCONTINUED OPERATIONS

 

In May 2009, the Venezuelan government enacted a law that reserves to the State of Venezuela certain assets and services related to hydrocarbon activities, which included substantially all of our assets and services in Venezuela. The law provides that the reserved activities are to be performed by the State, by the State-owned oil company, Petroleos de Venezuela S.A. (“PDVSA”), or its affiliates, or through mixed companies under the control of PDVSA or its affiliates. The law authorizes PDVSA or its affiliates to take

 

9



Table of Contents

 

possession of the assets and take over control of those operations related to the reserved activities as a step prior to the commencement of an expropriation process, and permits the national executive of Venezuela to decree the total or partial expropriation of shares or assets of companies performing those services.

 

In June 2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela and by the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

 

While the law provides that companies whose assets are expropriated in this manner may be compensated in cash or securities, we are unable to predict what, if any, compensation we ultimately will receive or when we may receive any such compensation. We reserve and will continue to reserve the right to seek full compensation for any and all expropriated assets and investments under all applicable legal regimes, including investment treaties and customary international law, as well as to seek resolution through direct discussions with Venezuela and/or PDVSA, which could result in us recording a gain on our investment in future periods. In June 2009, our Spanish subsidiary delivered to the Venezuelan government and PDVSA an official notice of dispute relating to the seized assets and investments under the Agreement between Spain and Venezuela for the Reciprocal Promotion and Protection of Investments and under Venezuelan law. In March 2010, our Spanish subsidiary filed a request for the institution of an arbitration proceeding against Venezuela with the International Centre for Settlement of Investment Disputes (“ICSID”) related to the seized assets and investments, which was registered by ICSID in April 2010. The arbitration hearing occurred in July 2012 and a decision from the arbitration tribunal is not expected until 2013.

 

We maintained insurance for the risk of expropriation of our investments in Venezuela, subject to a policy limit of $50 million. During the year ended December 31, 2009, we recorded a receivable of $50 million related to this insurance policy because we determined that recovery under this policy of a portion of our loss was probable. We collected the $50 million under our policy in January 2010. Under the terms of the insurance policy, certain compensation we may receive from the Venezuelan government or PDVSA for our expropriated assets, receivables and operations will be applied first to the reimbursement of out-of-pocket expenses incurred by us and the insurance company, second to the insurance company until the $50 million payment has been repaid and third to us.

 

As a result of PDVSA taking possession of substantially all of our assets and operations in Venezuela, we recorded asset impairments during the year ended December 31, 2009 totaling $329.7 million ($379.7 million excluding the insurance proceeds of $50 million). These charges primarily related to receivables, inventory, fixed assets and goodwill, and are reflected in Income (loss) from discontinued operations. We believe the fair value of our seized Venezuelan operations substantially exceeds the historical cost-based carrying value of the assets, including the goodwill allocable to those operations; however, GAAP requires that our claim be accounted for as a gain contingency with no benefit being recorded until resolved. Accordingly, we did not include any compensation we may receive for our seized assets and operations from Venezuela in recording the loss on expropriation.

 

The expropriation of our business in Venezuela meets the criteria established for recognition as discontinued operations under accounting standards for presentation of financial statements. Therefore, our Venezuela contract operations and aftermarket services businesses are now reflected as discontinued operations in our condensed consolidated statements of operations.

 

In June 2012, we committed to a plan to sell our contract operations and aftermarket services businesses in Canada as part of our continued emphasis on simplification and focus on our core business. We expect this sale to be completed within the next twelve months.  Our Canadian contract operations and aftermarket services businesses are now reflected as discontinued operations in our condensed consolidated financial statements, including all periods prior to June 2012.  These operations were previously included in our North American contract operations and aftermarket services business segments.  In conjunction with the planned disposition, we recorded an impairment of intangible assets and long-lived assets that totaled $40.8 million during the three months ended June 30, 2012.  The impairment charges are reflected in Loss from discontinued operations.

 

The table below summarizes the operating results of the discontinued operations (in thousands):

 

 

 

Three months ended June 30,

 

Three months ended June 30

 

 

 

2012

 

2011

 

 

 

Venezuela

 

Canada

 

Total

 

Venezuela

 

Canada

 

Total

 

Revenue

 

$

 

$

13,966

 

$

13,966

 

$

 

$

13,504

 

$

13,504

 

Expenses and selling, general and administrative

 

271

 

13,826

 

14,097

 

135

 

14,492

 

14,627

 

Loss attributable to expropriation and impairments

 

1,568

 

40,813

 

42,381

 

148

 

 

148

 

Other (income) loss, net

 

 

860

 

860

 

(69

)

(94

)

(163

)

Provision for income taxes

 

823

 

(1,304

)

(481

)

355

 

1,613

 

1,968

 

Loss from discontinued operations, net of tax

 

$

(2,662

)

$

(40,229

)

$

(42,891

)

$

(569

)

$

(2,507

)

$

(3,076

)

 

10



Table of Contents

 

 

 

Six months ended June 30,

 

Six months ended June 30,

 

 

 

2012

 

2011

 

 

 

Venezuela

 

Canada

 

Total

 

Venezuela

 

Canada

 

Total

 

Revenue

 

$

 

$

25,240

 

$

25,240

 

$

 

$

25,055

 

$

25,055

 

Expenses and selling, general and administrative

 

443

 

27,677

 

28,120

 

591

 

28,723

 

29,314

 

Loss attributable to expropriation and impairments

 

1,581

 

40,813

 

42,394

 

1,461

 

 

1,461

 

Other (income) loss, net

 

 

174

 

174

 

(150

)

(431

)

(581

)

Provision for (benefit from) income taxes

 

1,263

 

(2,658

)

(1,395

)

805

 

67

 

872

 

Loss from discontinued operations, net of tax

 

$

(3,287

)

$

(40,766

)

$

(44,053

)

$

(2,707

)

$

(3,304

)

$

(6,011

)

 

The table below summarizes the balance sheet data for discontinued operations (in thousands):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Venezuela

 

Canada

 

Total

 

Venezuela

 

Canada

 

Total

 

Cash

 

$

480

 

$

94

 

$

574

 

$

304

 

$

135

 

$

439

 

Accounts receivable

 

9

 

14,432

 

14,441

 

9

 

13,973

 

13,982

 

Inventory

 

1,017

 

19,436

 

20,453

 

1,017

 

19,590

 

20,607

 

Other current assets

 

2,210

 

2,327

 

4,537

 

2,683

 

953

 

3,636

 

Total current assets associated with discontinued operations

 

3,716

 

36,289

 

40,005

 

4,013

 

34,651

 

38,664

 

Property, plant and equipment

 

 

22,035

 

22,035

 

 

69,788

 

69,788

 

Intangible and other long-term assets

 

 

7,053

 

7,053

 

 

9,432

 

9,432

 

Total assets associated with discontinued operations

 

$

3,716

 

$

65,377

 

$

69,093

 

$

4,013

 

$

113,871

 

$

117,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

561

 

$

5,195

 

$

5,756

 

$

589

 

$

5,515

 

$

6,104

 

Accrued liabilities

 

3,922

 

1,997

 

5,919

 

4,295

 

3,924

 

8,219

 

Deferred revenues

 

1,499

 

698

 

2,197

 

1,499

 

320

 

1,819

 

Total current liabilities associated with discontinued operations

 

5,982

 

7,890

 

13,872

 

6,383

 

9,759

 

16,142

 

Other long-term liabilities

 

15,390

 

951

 

16,341

 

14,140

 

548

 

14,688

 

Total liabilities associated with discontinued operations

 

$

21,372

 

$

8,841

 

$

30,213

 

$

20,523

 

$

10,307

 

$

30,830

 

 

3.  ASSETS HELD FOR SALE

 

In June 2012, we committed to a plan to sell our subsidiary in the United Kingdom (Exterran (UK) Ltd.) as part of our continued emphasis on simplification and focus on our core business. We expect this sale to be completed within the next twelve months.  Our assets and liabilities associated with this subsidiary are now reflected as assets or liabilities held for sale in our condensed consolidated balance sheet as of June 30, 2012.  All assets and liabilities have been reported at the lower of their carrying value or their fair value based on current market conditions and expected sales proceeds based on level 3 fair value assumptions related to anticipated cash flows. The results of this subsidiary are included in our fabrication business segment.  In conjunction with the planned disposition, we recorded an impairment of long-lived assets that totaled $1.5 million during the three months ended June 30, 2012.  The impairment charges are reflected in Long-lived asset impairment in our condensed consolidated statements of operations.

 

The table below summarizes the balance sheet data for assets and liabilities held for sale at June 30, 2012 (in thousands):

 

 

 

June 30,
2012

 

Cash

 

$

378

 

Accounts receivable

 

3,638

 

Inventory

 

324

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

8,881

 

Other current assets

 

259

 

Total current assets held for sale

 

13,480

 

Property, plant and equipment, net

 

294

 

Total assets held for sale

 

$

13,774

 

 

 

 

 

Accounts payable

 

$

4,102

 

Accrued liabilities

 

2,077

 

Billings on uncompleted contracts in excess of costs and estimated earnings

 

51

 

Total current liabilities held for sale

 

6,230

 

Deferred income taxes

 

15

 

Total liabilities held for sale

 

$

6,245

 

 

11



Table of Contents

 

4.  INVENTORY

 

Inventory, net of reserves, consisted of the following amounts (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

Parts and supplies

 

$

240,682

 

$

212,228

 

Work in progress

 

126,328

 

98,402

 

Finished goods

 

47,027

 

31,465

 

Inventory, net of reserves

 

$

414,037

 

$

342,095

 

 

As of June 30, 2012 and December 31, 2011, we had inventory reserves of $12.9 million and $14.0 million, respectively.

 

5.  PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following (in thousands):

 

 

 

June 30,
2012

 

December 31,
2011

 

Compression equipment, facilities and other fleet assets

 

$

4,115,378

 

$

4,226,307

 

Land and buildings

 

179,896

 

176,764

 

Transportation and shop equipment

 

248,567

 

233,689

 

Other

 

150,790

 

144,946

 

 

 

4,694,631

 

4,781,706

 

Accumulated depreciation

 

(1,859,572

)

(1,847,042

)

Property, plant and equipment, net

 

$

2,835,059

 

$

2,934,664

 

 

6.  INVESTMENTS IN NON-CONSOLIDATED AFFILIATES

 

Investments in affiliates that are not controlled by Exterran but where we have the ability to exercise significant influence over the operations are accounted for using the equity method.

 

We own a minority interest in WilPro Energy Services (PIGAP II) Limited (“PIGAP II”) and WilPro Energy Services (El Furrial) Limited (“El Furrial”), joint ventures that provided natural gas compression and injection services in Venezuela. In March 2009, these joint ventures recorded impairments on their assets due to lack of payments from their only customer, PDVSA. Accordingly, we reviewed our expected cash flows related to these two joint ventures and determined in March 2009 that the fair value of our investment in PIGAP II and El Furrial had declined and that we had a loss in our investment that was not temporary. Therefore, we recorded an impairment charge of $90.1 million ($81.7 million net of tax) to write-off our investments in PIGAP II and El Furrial. In May 2009, PDVSA assumed control over the assets of PIGAP II and El Furrial and transitioned the operations of PIGAP II and El Furrial, including the hiring of their employees, to PDVSA. In March 2011, PIGAP II and El Furrial, together with the Netherlands’ parent company of our joint venture partners, filed a request for the institution of an arbitration proceeding against Venezuela with ICSID related to the seized assets and investments, which was registered by ICSID in April 2011.

 

In March 2012, PIGAP II and El Furrial completed the sale of their assets to PDVSA Gas, S.A. We received an initial payment of approximately $37.6 million in March 2012, and received an installment payment of $4.7 million in June 2012. We are due to receive an additional approximately $70.0 million in periodic cash payments through the first quarter of 2016. Payments we receive from the sale will be recognized in Equity in income of non-consolidated affiliates in our condensed consolidated statements of operations in the period such payments are received. In connection with the sale of the PIGAP II and El Furrial assets, the WilPro joint ventures and our joint venture partners have agreed to suspend their previously filed arbitration proceeding against Venezuela pending payment in full by PDVSA Gas of the purchase price for the assets.

 

12



Table of Contents

 

7.  LONG-TERM DEBT

 

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

 

 

 

June 30,
2012

 

December 31,
2011

 

Revolving credit facility due July 2016

 

$

356,500

 

$

433,500

 

Partnership’s revolving credit facility due November 2015

 

493,500

 

395,500

 

Partnership’s term loan facility due November 2015

 

150,000

 

150,000

 

4.25% convertible senior notes due June 2014 (presented net of the unamortized discount of $44.9 million and $54.9 million, respectively)

 

310,120

 

300,149

 

4.75% convertible senior notes due January 2014

 

143,750

 

143,750

 

7.25% senior notes due December 2018

 

350,000

 

350,000

 

Other, interest at various rates, collateralized by equipment and other assets

 

36

 

140

 

Long-term debt

 

$

1,803,906

 

$

1,773,039

 

 

In March 2012, the Partnership and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership, increased the borrowing capacity under their revolving credit facility by $200 million to $750 million. During the three months ended March 31, 2012, the Partnership incurred transaction costs of approximately $0.5 million related to the increase in borrowing capacity. These costs were included in Intangible and other assets, net and are being amortized over the facility term. Concurrently with this increase, we decreased the borrowing capacity under our revolving credit facility by $200 million to $900 million. As a result of the decrease in borrowing capacity under our revolving credit facility, we expensed $1.3 million of unamortized deferred financing costs associated with our revolving credit facility in the first quarter of 2012, which is reflected in Interest expense in our condensed consolidated statements of operations.

 

In March 2011, we repaid the $6.0 million outstanding balance under our asset-backed securitization facility and terminated that facility. As a result of the termination, we expensed $1.4 million of unamortized deferred financing costs, which is reflected in Interest expense in our condensed consolidated statements of operations.

 

As of June 30, 2012, we had $356.5 million in outstanding borrowings and $195.9 million in outstanding letters of credit under our revolving credit facility. At June 30, 2012, taking into account guarantees through letters of credit, we had undrawn and available capacity of $347.6 million under our revolving credit facility.

 

As of June 30, 2012, the Partnership had $256.5 million of undrawn and available capacity under its revolving credit facility.

 

8.  ACCOUNTING FOR DERIVATIVES

 

We are exposed to market risks primarily associated with changes in interest rates and foreign currency exchange 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 also use derivative financial instruments to minimize the risks caused by currency fluctuations in certain foreign currencies. 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 $715.0 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 over varying dates, with interest rate swaps having a notional amount of $465.0 million expiring on or before August 2012 and the remaining interest rate swaps expiring in November 2015. As of June 30, 2012, the weighted average effective fixed interest rate on our interest rate swaps was 3.6%. 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 income (loss) and is included in accumulated other comprehensive income (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. We recorded no ineffectiveness in the three and six month periods ended June 30, 2012 and 2011. We estimate that approximately $5.4 million of deferred pre-tax 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

 

13



Table of Contents

 

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 the fourth quarter of 2010, we paid $43.0 million to terminate interest rate swap agreements with a total notional value of $585.0 million and a weighted average effective fixed interest rate of 4.6%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive income (loss). The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive income (loss) will be amortized into interest expense over the original term of the swaps. We estimate that $3.8 million of deferred pre-tax losses from these terminated interest rate swaps will be amortized into interest expense during the next twelve months.

 

Foreign Currency Exchange Risk

 

We operate in approximately 30 countries throughout the world, and a fluctuation in the value of the currencies of these countries relative to the U.S. dollar could impact our profits from international operations and the value of the net assets of our international operations when reported in U.S. dollars in our financial statements. From time to time, we may enter into foreign currency hedges to reduce our foreign exchange risk associated with cash flows we will receive in a currency other than the functional currency of the local Exterran affiliate that entered into the contract. The impact of foreign currency exchange on our condensed consolidated statements of operations will depend on the amount of our net asset and liability positions exposed to currency fluctuations in future periods.

 

Foreign currency swaps or forward contracts that meet the hedging requirements or that qualify for hedge accounting treatment are accounted for as cash flow hedges and changes in the fair value are recognized as a component of comprehensive income (loss) to the extent the hedge is effective. The amounts recognized as a component of other comprehensive income (loss) will be reclassified into earnings (loss) in the periods in which the underlying foreign currency exchange transaction is recognized and are included under the same category as the income or loss from the underlying assets, liabilities, or anticipated transactions in our condensed consolidated statements of operations. For foreign currency swaps and forward contracts that do not qualify for hedge accounting treatment, changes in fair value and gains and losses on settlement are included under the same category as the income or loss from the underlying assets, liabilities or anticipated transactions in our condensed consolidated statements of operations.

 

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands). The impacts to other comprehensive income (loss) on derivatives and accumulated other comprehensive (income) loss disclosed below are presented net of tax:

 

 

 

June 30, 2012

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Accrued liabilities

 

$

(5,432

)

Interest rate hedges

 

Other long-term liabilities

 

(6,630

)

Total derivatives

 

 

 

$

(12,062

)

 

 

 

December 31, 2011

 

 

 

Balance Sheet Location

 

Fair Value
Asset (Liability)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

Interest rate hedges

 

Accrued liabilities

 

$

(14,250

)

Interest rate hedges

 

Other long-term liabilities

 

(5,196

)

Total derivatives

 

 

 

$

(19,446

)

 

 

 

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

 

$

(5,265

)

Interest expense

 

$

(9,854

)

$

(10,126

)

Interest expense

 

$

(19,601

)

 

14



Table of Contents

 

 

 

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

 

$

(10,205

)

Interest expense

 

$

(11,364

)

$

(13,983

)

Interest expense

 

$

(24,095

)

Foreign currency hedge

 

 

 

Fabrication revenue

 

 

 

 

 

Fabrication revenue

 

 

410

 

Total

 

$

(10,205

)

 

 

$

(11,364

)

$

(13,983

)

 

 

$

(23,685

)

 

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 facilities and, in that capacity, share proportionally in the collateral pledged under the related facility.

 

9.  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:

 

·    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)

 

$

 

$

(12,062

)

$

 

$

 

$

(19,446

)

$

 

 

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

 

$

 

$

 

$

31,311

 

$

 

$

 

$

416

 

Impaired assets —Discontinued operations

 

 

 

22,035

 

 

 

 

Impaired assets —Assets held for sale

 

 

 

294

 

 

 

 

 

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%. Our estimate of the fair value of

 

15



Table of Contents

 

the impaired long-lived assets that are classified as discontinued operations and assets held for sale was based on our expected proceeds, net of selling costs.

 

10.  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 920 idle compressor units, or approximately 316,000 horsepower, that we previously used to provide services in our North America contract operations segment. 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 $96.5 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 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.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units used in our contract operations segments 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 $34.8 million to reduce the book value of each unit to its estimated fair value.

 

During the six months ended June 30, 2011, we also reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient 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 $2.1 million for the six months ended June 30, 2011 and was recorded as a long-lived asset impairment.

 

In June 2012, we committed to a plan to sell our subsidiary in the United Kingdom (Exterran (UK) Ltd.) as part of our continued emphasis on simplification and focus on our core business. In conjunction with the planned disposition, we recorded an impairment of long-lived assets that totaled $1.5 million during the three months ended June 30, 2012.  The impairment charges are reflected in Long-lived asset impairment in our condensed consolidated statements of operations.

 

11.  RESTRUCTURING CHARGES

 

In November 2011, we announced a workforce cost reduction program across all of our business segments as a first step in a broader overall profit improvement initiative. These actions were the result of a review of our cost structure aimed at identifying ways to reduce our on-going operating costs and to adjust the size of our workforce to be consistent with current and expected activity levels. A significant portion of the workforce cost reduction program was completed in 2011, with the remainder expected to be completed in 2012.

 

During the six months ended June 30, 2012, we incurred $4.3 million of restructuring charges primarily related to consulting services and termination benefits. These charges are reflected as Restructuring charges in our condensed consolidated statements of operations. We currently estimate that we will incur additional charges with respect to the profit improvement initiative of approximately $1.0 million. We expect all of the estimated additional charges will result in cash expenditures.

 

The following table summarizes the changes to our accrued liability balance related to restructuring charges for the six months ended June 30, 2012 (in thousands):

 

 

 

Restructuring
Charges Accrual

 

Beginning balance at December 31, 2011

 

$

1,776

 

Additions for costs expensed

 

4,313

 

Less non-cash expenses

 

(83

)

Reductions for payments

 

(5,561

)

Ending balance at June 30, 2012

 

$

445

 

 

16



Table of Contents

 

Restructuring charges by segment are as follows (in thousands):

 

 

 

North America
Contract
Operations

 

International
Contract
Operations

 

Aftermarket
Services

 

Fabrication

 

Other(1)

 

Total

 

Costs incurred in 2012

 

$

491

 

$

100

 

$

118

 

$

629

 

$

2,975

 

$

4,313

 

Cumulative costs incurred

 

511

 

602

 

540

 

2,203

 

12,051

 

15,907

 

Total expected costs

 

560

 

1,081

 

591

 

2,353

 

12,364

 

16,949

 

 


(1)                   Includes corporate related items

 

12.  STOCK-BASED COMPENSATION

 

Stock Incentive Plan

 

In August 2007, we adopted the Exterran Holdings, Inc. 2007 Stock Incentive Plan (as amended and restated, the “2007 Plan”) that provides for the granting of stock-based awards in the form of options, restricted stock, restricted stock units, stock appreciation rights and performance awards to our employees and directors. In May 2011, our stockholders approved an amendment to the 2007 Plan that increased the aggregate number of shares of common stock that may be issued under the 2007 Plan to 12,500,000 from 9,750,000. Each option and stock appreciation right granted counts as one share against the aggregate share limit, and each share of restricted stock and restricted stock unit granted counts as two shares against the aggregate share limit. Awards granted under the 2007 Plan that are subsequently cancelled, terminated or forfeited are available for future grant, and awards that are granted as cash settled awards are not counted against the aggregate share limit.

 

Stock Options

 

Under the 2007 Plan, stock options are granted at fair market value at the date of grant, are exercisable in accordance with the vesting schedule established by the compensation committee of our board of directors in its sole discretion and expire no later than seven years after the date of grant. Options generally vest 33 1/3% on each of the first three anniversaries of the grant date.

 

The weighted average fair value at date of grant for options granted during the six months ended June 30, 2012 was $5.74, and was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

 

 

 

Six Months
Ended
June 30, 2012

 

Expected life in years

 

4.5

 

Risk-free interest rate

 

0.78

%

Volatility

 

47.96

%

Dividend yield

 

0.0

%

 

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a period commensurate with the estimated expected life of the stock options. Expected volatility is based on the historical volatility of our stock over the period commensurate with the expected life of the stock options and other factors. We have not historically paid a dividend and do not expect to pay a dividend during the expected life of the stock options.

 

The following table presents stock option activity for the six months ended June 30, 2012 (in thousands, except per share data and remaining life in years):

 

 

 

Stock
Options

 

Weighted
Average
Exercise Price

 

Weighted
Average
Remaining
Life

 

Aggregate
Intrinsic
Value

 

Options outstanding, December 31, 2011

 

3,271

 

$

27.39

 

 

 

 

 

Granted

 

153

 

14.36

 

 

 

 

 

Cancelled

 

(603

)

25.56

 

 

 

 

 

Options outstanding, June 30, 2012

 

2,821

 

27.07

 

4.9

 

$

1,395

 

Options exercisable, June 30, 2012

 

1,865

 

33.51

 

3.4

 

 

 

17



Table of Contents

 

Intrinsic value is the difference between the market value of our stock and the exercise price of each option multiplied by the number of options outstanding for those options where the market value exceeds their exercise price. As of June 30, 2012, $3.8 million of unrecognized compensation cost related to unvested stock options is expected to be recognized over the weighted-average period of 2.2 years.

 

Restricted Stock, Restricted Stock Units and Cash Settled Restricted Stock Units

 

For grants of restricted stock and restricted stock units, we recognize compensation expense over the vesting period equal to the fair value of our common stock at the date of grant. For grants of cash settled restricted stock units, we re-measure the fair value of these cash settled restricted stock units and record a cumulative adjustment of the expense previously recognized. Our obligation related to the cash settled restricted stock units is reflected as a liability in our condensed consolidated balance sheets. Our restricted stock, restricted stock unit and cash settled restricted stock unit grants generally vest 33 1/3% on each of the first three anniversaries of the grant date.

 

The following table presents restricted stock, restricted stock unit and cash settled restricted stock unit activity for the six months ended June 30, 2012 (in thousands, except per share data):

 

 

 

Shares

 

Weighted
Average
Grant-Date
Fair Value
Per Share

 

Non-vested awards, December 31, 2011

 

1,670

 

$

19.49

 

Granted

 

1,216

 

14.31

 

Vested

 

(632

)

20.56

 

Cancelled

 

(83

)

21.21

 

Non-vested awards, June 30, 2012

 

2,171

 

16.21

 

 

As of June 30, 2012, $27.4 million of unrecognized compensation cost related to unvested restricted stock, restricted stock units and cash settled restricted stock units is expected to be recognized over the weighted-average period of 2.2 years.

 

Our compensation committee’s general practice has been to grant equity-based awards once a year.  While typically these awards have been made in late February or early March after fourth quarter earnings information for the prior year has been released for at least two full trading days, it is possible that the compensation committee may make equity awards 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 stock price. This practice results in awards being granted on a regular, predictable cycle, after annual earnings information has been disseminated to the marketplace. 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, the compensation committee 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. In March 2012, the compensation committee of our board of directors authorized annual long-term incentive awards of stock options, restricted stock, restricted stock units, cash settled restricted stock units and cash settled performance awards to our executive officers, other employees and non-employee directors.

 

Employee Stock Purchase Plan

 

In August 2007, we adopted the Exterran Holdings, Inc. Employee Stock Purchase Plan (“ESPP”), which is intended to provide employees with an opportunity to participate in our long-term performance and success through the purchase of shares of common stock at a price that may be less than fair market value. The ESPP is designed to comply with Section 423 of the Internal Revenue Code of 1986, as amended. Each quarter, an eligible employee may elect to withhold a portion of his or her salary up to the lesser of $25,000 per year or 10% of his or her eligible pay to purchase shares of our common stock at a price equal to 85% to 100% of the fair market value of the stock as of the first trading day of the quarter, the last trading day of the quarter or the lower of the first trading day of the quarter and the last trading day of the quarter, as the compensation committee of our board of directors may determine. The ESPP will terminate on the date that all shares of common stock authorized for sale under the ESPP have been purchased, unless it is extended. In May 2011, our stockholders approved an amendment to the ESPP that increased the aggregate number of shares of common stock available for purchase under the ESPP to 1,000,000. At June 30, 2012, 393,696 shares remained available for purchase under the ESPP. Our ESPP is compensatory and, as a result, we record an expense on our condensed consolidated statements of operations related to the ESPP. Since July 2009, the purchase discount under the ESPP has been 5% of the fair market value of our common stock on the first trading day of the quarter or the last trading day of the quarter, whichever is lower.

 

18



Table of Contents

 

Partnership Long-Term Incentive Plan

 

The Partnership has a long-term incentive plan that was adopted by Exterran GP LLC, the general partner of the Partnership’s general partner, in October 2006 for employees, directors and consultants of the Partnership, us or our respective affiliates. The long-term incentive plan currently permits the grant of awards covering an aggregate of 1,035,378 common units, common 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 value of a common unit.

 

Partnership 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, $1.2 million of unrecognized compensation cost related to unvested phantom units is expected to be recognized over the weighted-average period of 2.2 years.

 

13.  COMMITMENTS AND CONTINGENCIES

 

We have issued the following guarantees that are not recorded on our accompanying balance sheet (dollars in thousands):

 

 

 

Term

 

Maximum Potential
Undiscounted
Payments as of
June 30, 2012

 

Performance guarantees through letters of credit(1)

 

2012-2016

 

$

225,045

 

Standby letters of credit

 

2012-2015

 

19,584

 

Commercial letters of credit

 

2012

 

3,807

 

Bid bonds and performance bonds(1)

 

2012-2018

 

95,121

 

Maximum potential undiscounted payments

 

 

 

$

343,557

 

 


(1)  We have issued guarantees to third parties to ensure performance of our obligations, some of which may be fulfilled by third parties.

 

As part of an acquisition in 2001, we may be required to make contingent payments of up to $46 million to the seller, depending on our realization of certain U.S. federal tax benefits through the year 2015. To date, we have not realized any such benefits that would require a payment and we do not anticipate realizing any such benefits that would require a payment before the year 2013.

 

See Note 2 for a discussion of our gain contingency related to assets that were expropriated in Venezuela.

 

Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. In addition, we have a minimal amount of insurance on our offshore assets. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.

 

19



Table of Contents

 

Additionally, we are substantially self-insured for workers’ compensation and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.

 

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 for the period in which the resolution occurs.

 

14.  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.

 

In September 2011, the FASB issued an update allowing entities to use a qualitative approach to test goodwill for impairment. Under this update, entities are permitted to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This update is effective for annual and interim goodwill impairment tests performed for fiscal years beginning 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.

 

15.  REPORTABLE SEGMENTS

 

We manage our business segments primarily based upon the type of product or service provided. We have four reportable segments: North America contract operations, international contract operations, aftermarket services and fabrication. The North America and international contract operations segments primarily provide natural gas compression services, production and processing equipment services and maintenance services to meet specific customer requirements on Exterran-owned assets. The aftermarket services segment provides a full range of services to support the surface production, compression and processing needs of customers, from parts sales and normal maintenance services to full operation of a customer’s owned assets. The fabrication segment provides (i) design, engineering, fabrication, installation and sale of natural gas compression units and accessories and equipment used in the production, treating and processing of crude oil and natural gas and (ii) engineering, procurement and fabrication services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants.

 

We evaluate the performance of our segments based on gross margin for each segment. Revenues include only sales to external customers. We do not include intersegment sales when we evaluate the performance of our segments.

 

The following table presents sales and other financial information by reportable segment for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

Three months ended

 

North
America
Contract
Operations

 

International
Contract
Operations

 

Aftermarket
Services

 

Fabrication

 

Reportable
Segments
Total

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

148,564

 

$

112,628

 

$

101,902

 

$

267,641

 

$

630,735

 

Gross margin(1)

 

78,141

 

65,536

 

24,374

 

26,284

 

194,335

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

146,581

 

$

110,944

 

$

84,812

 

$

301,731

 

$

644,068

 

Gross margin(1)

 

72,675

 

61,178

 

7,165

 

32,379

 

173,397

 

 

20



Table of Contents

 

Six months ended

 

North
America
Contract
Operations

 

International
Contract
Operations

 

Aftermarket
Services

 

Fabrication

 

Reportable
Segments
Total

 

June 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

299,152

 

$

225,414

 

$

191,547

 

$

529,863

 

$

1,245,976

 

Gross margin(1)

 

154,493

 

134,433

 

42,288

 

52,903

 

384,117

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

$

293,434

 

$

216,625

 

$

159,160

 

$

581,777

 

$

1,250,996

 

Gross margin(1)

 

141,240

 

125,893

 

16,851

 

73,134

 

357,118

 

 


(1)       Gross margin, a non-GAAP financial measure, is reconciled to net loss below.

 

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. 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.

 

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

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(166,898

)

$

(30,224

)

$

(159,611

)

$

(60,688

)

Selling, general and administrative

 

94,134

 

90,450

 

188,973

 

179,875

 

Depreciation and amortization

 

88,909

 

90,412

 

174,020

 

178,611

 

Long-lived asset impairment

 

128,543

 

2,063

 

132,665

 

2,063

 

Restructuring charges

 

1,266

 

 

4,313

 

 

Interest expense

 

36,968

 

34,586

 

74,959

 

71,756

 

Equity in income of non-consolidated affiliates

 

(4,728

)

 

(42,067

)

 

Other (income) expense, net

 

8,752

 

(2,853

)

2,657

 

(2,930

)

Benefit from income taxes

 

(35,502

)

(14,113

)

(35,845

)

(17,580

)

Loss from discontinued operations, net of tax

 

42,891

 

3,076

 

44,053

 

6,011

 

Gross margin

 

$

194,335

 

$

173,397

 

$

384,117

 

$

357,118

 

 

16.  TRANSACTIONS RELATED TO THE PARTNERSHIP

 

In March 2012, we sold to the Partnership 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 our and the Partnership’s combined U.S. contract operations business. In addition, the assets sold included 139 compressor units, comprising approximately 75,000 horsepower, that we previously leased to the Partnership, 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. Total consideration for the transaction was approximately $182.8 million, excluding transaction costs, and included the Partnership’s payment of $77.4 million in cash and assumption of $105.4 million of our debt. In connection with this transaction, we entered into an amendment to our omnibus agreement with the Partnership that, among other things, increased the cap on selling, general and administrative (“SG&A”) costs we allocate to the Partnership based on such costs we incur on the Partnership’s behalf and extended the term of the caps on the Partnership’s obligation to reimburse us for SG&A costs and operating costs we allocate to the Partnership based on such costs we incur on the Partnership’s behalf for an additional year such that the caps will now terminate on December 31, 2013.

 

In March 2012, the Partnership sold, pursuant to a public underwritten offering, 4,965,000 common units representing limited partner interests in the Partnership, including 465,000 common units sold pursuant to an over-allotment option. The Partnership used the $114.5 million of net proceeds from this offering to repay borrowings outstanding under its revolving credit facility. In connection with this sale and as permitted under the Partnership’s partnership agreement, the Partnership issued and sold to Exterran General Partner, L.P. (“GP”), our wholly-owned subsidiary and the Partnership’s general partner, approximately 101,000 general partner units in consideration of the continuation of GP’s approximate 2.0% general partner interest in the Partnership. The change in our

 

21



Table of Contents

 

ownership interest of the Partnership resulting from the sale of the common units resulted in adjustments to noncontrolling interest, accumulated other comprehensive income, deferred income taxes and additional paid-in capital to reflect our new ownership percentage in the Partnership.

 

In June 2011, we sold to the Partnership 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 our and the Partnership’s combined U.S. contract operations business (the “June 2011 Contract Operations Acquisition”). In addition, the assets sold included 207 compressor units, comprising approximately 98,000 horsepower, that we previously leased to the Partnership, and a natural gas processing plant with a capacity of 8 million cubic feet per day used to provide processing services pursuant to a long-term services agreement. Total consideration for the transaction was approximately $223.0 million, excluding transaction costs. In connection with this acquisition, the Partnership assumed $159.4 million of our debt, paid us $62.2 million in cash and issued approximately 51,000 general partner units to GP.

 

In May 2011, the Partnership sold, pursuant to a public underwritten offering, 5,134,175 common units representing limited partner interests in the Partnership, including 134,175 common units sold pursuant to an over-allotment option. The Partnership used the $127.7 million of net proceeds from this offering (i) to repay approximately $64.8 million of borrowings outstanding under its revolving credit facility and (ii) for general partnership purposes, including to fund a portion of the consideration for the June 2011 Contract Operations Acquisition. In connection with this sale and as permitted under the Partnership’s partnership agreement, the Partnership issued and sold to GP approximately 53,000 general partner units in consideration of the continuation of GP’s approximate 2.0% general partner interest in the Partnership.

 

In March 2011, we sold, pursuant to a public underwritten offering, 5,914,466 common units representing limited partner interests in the Partnership, including 664,466 common units sold pursuant to an over-allotment option. We used the $162.2 million of net proceeds received from the sale of the common units to repay borrowings under our revolving credit facility and term loan. The change in our ownership interest of the Partnership resulting from the sale of the common units resulted in adjustments to noncontrolling interest, accumulated other comprehensive income, deferred income taxes and additional paid-in capital to reflect our new ownership percentage in the Partnership.

 

The table below presents the effects of changes from net income (loss) attributable to Exterran stockholders and changes in our equity interest of the Partnership on our equity attributable to Exterran’s stockholders (in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Net loss attributable to Exterran stockholders

 

$

(147,113

)

$

(58,056

)

Increase in Exterran stockholders’ additional paid in capital for sale of Partnership units

 

49,202

 

123,681

 

Change from net loss attributable to Exterran stockholders and transfers to the noncontrolling interest

 

$

(97,911

)

$

65,625

 

 

17.  SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

 

Exterran Energy Corp., our 100% owned subsidiary, was the original issuer of the 4.75% Notes, which Exterran Holdings, Inc. (“Parent”) had agreed to fully and unconditionally guarantee.  In the second quarter of 2012, in connection with an organizational restructuring of certain of our subsidiaries, Exterran Energy Corp. distributed and assigned substantially all its assets and liabilities, including its obligations under the 4.75% Notes, to Parent.  As a result, Parent became the direct obligor under the 4.75% Notes; therefore, subsidiary issuer financial information is no longer provided in this footnote.

 

Parent is the issuer of the 7.25% Notes. Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, and EXH MLP LP LLC (each a 100% owned subsidiary; together, the Guarantor Subsidiaries), have agreed to fully and unconditionally guarantee Parent’s obligations relating to the 7.25% Notes. As a result of this guarantee, we are presenting the following condensed consolidating financial information pursuant to Rule 3-10 of Regulation S-X. These schedules are presented using the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for our share in the subsidiaries’ cumulative results of operations, capital contributions and distributions and other changes in equity. Elimination entries relate primarily to the elimination of investments in subsidiaries and associated intercompany balances and transactions. The Other Subsidiaries column includes financial information for those subsidiaries that do not guarantee the 7.25% Notes.

 

22



Table of Contents

 

Condensed Consolidating Balance Sheet

June 30, 2012

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

277

 

$

721,516

 

$

468,525

 

$

892

 

$

1,191,210

 

Current assets associated with discontinued operations

 

 

 

40,005

 

 

40,005

 

Total current assets

 

277

 

721,516

 

508,530

 

892

 

1,231,215

 

Property, plant and equipment, net

 

 

1,309,128

 

1,525,931

 

 

2,835,059

 

Investments in affiliates

 

1,492,092

 

1,395,337

 

 

(2,887,429

)

 

Intangible and other assets, net

 

35,883

 

42,183

 

152,121

 

(22,158

)

208,029

 

Intercompany receivables

 

991,627

 

91,354

 

567,245

 

(1,650,226

)

 

Long-term assets held for sale

 

 

 

294

 

 

294

 

Long-term assets associated with discontinued operations

 

 

 

29,088

 

 

29,088

 

Total long-term assets

 

2,519,602

 

2,838,002

 

2,274,679

 

(4,559,813

)

3,072,470

 

Total assets

 

$

2,519,879

 

$

3,559,518

 

$

2,783,209

 

$

(4,558,921

)

$

4,303,685

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

8,297

 

$

439,612

 

$

244,619

 

$

(22

)

$

692,506

 

Current liabilities associated with discontinued operations

 

 

 

13,872

 

 

13,872

 

Total current liabilities

 

8,297

 

439,612

 

258,491

 

(22

)

706,378

 

Long-term debt

 

1,160,370

 

 

643,536

 

 

1,803,906

 

Intercompany payables

 

 

1,558,872

 

91,354

 

(1,650,226

)

 

Other long-term liabilities

 

 

68,942

 

139,807

 

(21,244

)

187,505

 

Long-term liabilities associated with discontinued operations

 

 

 

16,341

 

 

16,341

 

Total liabilities

 

1,168,667

 

2,067,426

 

1,149,529

 

(1,671,492

)

2,714,130

 

Total equity

 

1,351,212

 

1,492,092

 

1,633,680

 

(2,887,429

)

1,589,555

 

Total liabilities and equity

 

$

2,519,879

 

$

3,559,518

 

$

2,783,209

 

$

(4,558,921

)

$

4,303,685

 

 

23



Table of Contents

 

Condensed Consolidating Balance Sheet

December 31, 2011

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

94

 

$

562,964

 

$

522,193

 

$

12

 

$

1,085,263

 

Current assets associated with discontinued operations

 

 

 

38,664

 

 

38,664

 

Total current assets

 

94

 

562,964

 

560,857

 

12

 

1,123,927

 

Property, plant and equipment, net

 

 

1,504,399

 

1,430,265

 

 

2,934,664

 

Investments in affiliates

 

1,531,223

 

1,456,782

 

 

(2,988,005

)

 

Intangible and other assets, net

 

57,556

 

78,835

 

125,248

 

(38,788

)

222,851

 

Intercompany receivables

 

1,092,298

 

96,378

 

637,165

 

(1,825,841

)

 

Long-term assets associated with discontinued operations

 

 

 

79,220

 

 

79,220

 

Total long-term assets

 

2,681,077

 

3,136,394

 

2,271,898

 

(4,852,634

)

3,236,735

 

Total assets

 

$

2,681,171

 

$

3,699,358

 

$

2,832,755

 

$

(4,852,622

)

$

4,360,662

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

14,268

 

$

352,981

 

$

299,408

 

$

(12,918

)

$

653,739

 

Current liabilities associated with discontinued operations

 

 

 

16,142

 

 

16,142

 

Total current liabilities

 

14,268

 

352,981

 

315,550

 

(12,918

)

669,881

 

Long-term debt

 

1,227,399

 

 

545,640

 

 

1,773,039

 

Intercompany payables

 

 

1,705,911

 

119,930

 

(1,825,841

)

 

Other long-term liabilities

 

2,268

 

109,243

 

137,359

 

(25,858

)

223,012

 

Long-term liabilities associated with discontinued operations

 

 

 

14,688

 

 

14,688

 

Total liabilities

 

1,243,935

 

2,168,135

 

1,133,167

 

(1,864,617

)

2,680,620

 

Total equity

 

1,437,236

 

1,531,223

 

1,699,588

 

(2,988,005

)

1,680,042

 

Total liabilities and equity

 

$

2,681,171

 

$

3,699,358

 

$

2,832,755

 

$

(4,852,622

)

$

4,360,662

 

 

24



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended June 30, 2012

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

411,262

 

$

257,037

 

$

(37,564

)

$

630,735

 

Costs of sales (excluding depreciation and amortization expense)

 

 

315,099

 

158,865

 

(37,564

)

436,400

 

Selling, general and administrative

 

133

 

45,184

 

48,817

 

 

94,134

 

Depreciation and amortization

 

 

34,278

 

54,631

 

 

88,909

 

Long-lived asset impairment

 

 

97,626

 

30,917

 

 

128,543

 

Restructuring charges

 

 

746

 

520

 

 

1,266

 

Interest expense

 

26,554

 

3,743

 

6,671

 

 

36,968

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Intercompany charges, net

 

(16,595

)

16,149

 

446

 

 

 

Equity in (income) loss of affiliates

 

146,205

 

85,477

 

(4,728

)

(231,682

)

(4,728

)

Other, net

 

10

 

(1,945

)

10,687

 

 

8,752

 

Loss before income taxes

 

(156,307

)

(185,095

)

(49,789

)

231,682

 

(159,509

)

Provision for (benefit from) income taxes

 

(3,699

)

(38,890

)

7,087

 

 

(35,502

)

Loss from continuing operations

 

(152,608

)

(146,205

)

(56,876

)

231,682

 

(124,007

)

Loss from discontinued operations, net of tax

 

 

 

(42,891

)

 

(42,891

)

Net loss

 

(152,608

)

(146,205

)

(99,767

)

231,682

 

(166,898

)

Less: Net loss attributable to the noncontrolling interest

 

 

 

14,290

 

 

14,290

 

Net loss attributable to Exterran stockholders

 

(152,608

)

(146,205

)

(85,477

)

231,682

 

(152,608

)

Other comprehensive loss attributable to Exterran stockholders

 

(259

)

(1,103

)

(4,391

)

5,494

 

(259

)

Comprehensive loss attributable to Exterran stockholders

 

$

(152,867

)

$

(147,308

)

$

(89,868

)

$

237,176

 

$

(152,867

)

 

25



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Three Months Ended June 30, 2011

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

344,033

 

$

421,643

 

$

(121,608

)

$

644,068

 

Costs of sales (excluding depreciation and amortization expense)

 

 

273,929

 

318,350

 

(121,608

)

470,671

 

Selling, general and administrative

 

207

 

42,953

 

47,290

 

 

90,450

 

Depreciation and amortization

 

 

39,218

 

51,194

 

 

90,412

 

Long-lived assets impairment

 

 

1,743

 

320

 

 

2,063

 

Interest expense

 

24,533

 

13

 

10,040

 

 

34,586

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Intercompany charges, net

 

(16,287

)

16,287

 

 

 

 

Equity in loss of affiliates

 

22,470

 

409

 

 

(22,879

)

 

Other, net

 

10

 

(2,453

)

(410

)

 

(2,853

)

Loss before income taxes

 

(30,933

)

(28,066

)

(5,141

)

22,879

 

(41,261

)

Benefit from income taxes

 

(2,907

)

(5,596

)

(5,610

)

 

(14,113

)

Loss from continuing operations

 

(28,026

)

(22,470

)

469

 

22,879

 

(27,148

)

Loss from discontinued operations, net of tax

 

 

 

(3,076

)

 

(3,076

)

Net loss

 

(28,026

)

(22,470

)

(2,607

)

22,879

 

(30,224

)

Less: Net loss attributable to the noncontrolling interest

 

 

 

2,198

 

 

2,198

 

Net loss attributable to Exterran stockholders

 

(28,026

)

(22,470

)

(409

)

22,879

 

(28,026

)

Other comprehensive income attributable to Exterran stockholders

 

5,451

 

7,428

 

4,640

 

(12,068

)

5,451

 

Comprehensive income (loss) attributable to Exterran stockholders

 

$

(22,575

)

$

(15,042

)

$

4,231

 

$

10,811

 

$

(22,575

)

 

26



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Six Months Ended June 30, 2012

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

741,253

 

$

604,614

 

$

(99,891

)

$

1,245,976

 

Costs of sales (excluding depreciation and amortization expense)

 

 

572,219

 

389,531

 

(99,891

)

861,859

 

Selling, general and administrative

 

341

 

94,535

 

94,097

 

 

188,973

 

Depreciation and amortization

 

 

70,541

 

103,479

 

 

174,020

 

Long-lived asset impairment

 

 

100,542

 

32,123

 

 

132,665

 

Restructuring charges

 

 

2,948

 

1,365

 

 

4,313

 

Interest expense

 

55,237

 

6,796

 

12,926

 

 

74,959

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Intercompany charges, net

 

(33,870

)

30,951

 

2,919

 

 

 

Equity in (income) loss of affiliates

 

132,903

 

47,656

 

(42,067

)

(180,559

)

(42,067

)

Other, net

 

20

 

(3,996

)

6,633

 

 

2,657

 

Income (loss) before income taxes

 

(154,631

)

(180,939

)

3,608

 

180,559

 

(151,403

)

Provision for (benefit from) income taxes

 

(7,518

)

(48,036

)

19,709

 

 

(35,845

)

Loss from continuing operations

 

(147,113

)

(132,903

)

(16,101

)

180,559

 

(115,558

)

Loss from discontinued operations, net of tax

 

 

 

(44,053

)

 

(44,053

)

Net loss

 

(147,113

)

(132,903

)

(60,154

)

180,559

 

(159,611

)

Less: Net loss attributable to the noncontrolling interest

 

 

 

12,498

 

 

12,498

 

Net loss attributable to Exterran stockholders

 

(147,113

)

(132,903

)

(47,656

)

180,559

 

(147,113

)

Other comprehensive income (loss) attributable to Exterran stockholders

 

6,269

 

4,053

 

(3,160

)

(893

)

6,269

 

Comprehensive loss attributable to Exterran stockholders

 

$

(140,844

)

$

(128,850

)

$

(50,816

)

$

179,666

 

$

(140,844

)

 

27



Table of Contents

 

Condensed Consolidating Statement of Operations and Comprehensive Income (Loss)

Six Months Ended June 30, 2011

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Revenues

 

$

 

$

640,367

 

$

810,907

 

$

(200,278

)

$

1,250,996

 

Costs of sales (excluding depreciation and amortization expense)

 

 

506,905

 

587,251

 

(200,278

)

893,878

 

Selling, general and administrative

 

397

 

88,120

 

91,358

 

 

179,875

 

Depreciation and amortization

 

 

77,695

 

100,916

 

 

178,611

 

Long-lived asset impairment

 

 

1,743

 

320

 

 

2,063

 

Interest (income) expense

 

49,902

 

(542

)

22,396

 

 

71,756

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

 

 

Intercompany charges, net

 

(32,506

)

32,506

 

 

 

 

Equity in loss of affiliates

 

46,559

 

3,661

 

 

(50,220

)

 

Other, net

 

20

 

(5,426

)

2,476

 

 

(2,930

)

Income (loss) before income taxes

 

(64,372

)

(64,295

)

6,190

 

50,220

 

(72,257

)

Provision for (benefit from) income taxes

 

(6,316

)

(17,736

)

6,472

 

 

(17,580

)

Loss from continuing operations

 

(58,056

)

(46,559

)

(282

)

50,220

 

(54,677

)

Loss from discontinued operations, net of tax

 

 

 

(6,011

)

 

(6,011

)

Net loss

 

(58,056

)

(46,559

)

(6,293

)

50,220

 

(60,688

)

Less: Net loss attributable to the noncontrolling interest

 

 

 

2,632

 

 

2,632

 

Net loss attributable to Exterran stockholders

 

(58,056

)

(46,559

)

(3,661

)

50,220

 

(58,056

)

Other comprehensive income attributable to Exterran stockholders

 

28,671

 

28,317

 

22,543

 

(50,860

)

28,671

 

Comprehensive income (loss) attributable to Exterran stockholders

 

$

(29,385

)

$

(18,242

)

$

18,882

 

$

(640

)

$

(29,385

)

 

28



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2012

(In thousands)

 

 

 

Parent

 

Guarantor
Subsidiaries

 

Other
Subsidiaries

 

Eliminations

 

Consolidation

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) continuing operations

 

$

2,324

 

$

(11,787

)

$

62,067

 

$

 

$

52,604

 

Net cash provided by discontinued operations

 

 

 

1,123

 

 

1,123

 

Net cash provided by (used in) operating activities

 

2,324

 

(11,787

)

63,190

 

 

53,727

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(143,969

)

(83,885

)

 

(227,854

)

Contract operations acquisition

 

 

77,415

 

(77,415

)

 

 

Proceeds from sale of property, plant and equipment

 

 

7,719

 

18,314

 

 

26,033

 

Capital distributions received from consolidated subsidiaries

 

 

15,043

 

 

(15,043

)

 

Increase in restricted cash

 

 

 

(162

)

 

(162

)

Return of investments in non-consolidated affiliates

 

 

 

42,291

 

 

42,291

 

Cash invested in non-consolidated affiliates

 

 

 

(224

)

 

(224

)

Investment in consolidated subsidiaries

 

 

(16,552

)

 

16,552

 

 

Net cash used in continuing operations

 

 

(60,344

)

(101,081

)

1,509

 

(159,916

)

Net cash used in discontinued operations

 

 

 

(973

)

 

(973

)

Net cash used in investing activities

 

 

(60,344

)

(102,054

)

1,509

 

(160,889

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

570,000

 

 

609,000

 

 

1,179,000

 

Repayments of long-term debt

 

(541,650

)

 

(616,454

)

 

(1,158,104

)

Payments for debt issue costs

 

 

 

(549

)

 

(549

)

Net proceeds from the sale of Partnership units

 

 

 

114,530

 

 

114,530

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

888

 

 

 

 

888

 

Purchases of treasury stock

 

(1,842

)

 

 

 

(1,842

)

Stock-based compensation excess tax benefit

 

208

 

 

 

 

208

 

Distributions to noncontrolling partners in the Partnership

 

 

 

(42,060

)

15,043

 

(27,017

)

Net proceeds from sale of general partner units

 

 

 

2,426

 

(2,426

)

 

Captial contributions received from parent

 

 

 

14,126

 

(14,126

)

 

Borrowings (repayments) between consolidated subsidiaries, net

 

(29,744

)

69,909

 

(40,165

)

 

 

Net cash provided by financing activities

 

(2,140

)

69,909

 

40,854

 

(1,509

)

107,114

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(476

)

 

(476

)

Net increase (decrease) in cash and cash equivalents

 

184

 

(2,222

)

1,514

 

 

(524

)

Cash and cash equivalents at beginning of year

 

93

 

2,810

 

19,000

 

 

21,903

 

Cash and cash equivalents at end of year

 

$

277

 

$

588

 

$

20,514

 

$

 

$

21,379

 

 

29



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

Six Months Ended June 30, 2011

(In thousands)

 

 

 

Parent

 

Guarantor
 Subsidiaries

 

Other
 Subsidiaries

 

Eliminations

 

Consolidation

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) continuing operations

 

$

(471

)

$

(19,552

)

$

13,155

 

$

 

$

(6,868

)

Net cash provided by discontinued operations

 

 

 

1,990

 

 

1,990

 

Net cash provided by (used in) operating activities

 

(471

)

(19,552

)

15,145

 

 

(4,878

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(56,592

)

(47,710

)

 

(104,302

)

Contract operations acquisition

 

 

62,217

 

(62,217

)

 

 

Proceeds from sale of property, plant and equipment

 

 

6,105

 

24,528

 

 

30,633

 

Capital distributions received from consolidated subsidiaries

 

 

16,392

 

 

(16,392

)

 

Increase in restricted cash

 

 

 

184

 

 

184

 

Investment in consolidated subsidiaries

 

 

(20,645

)

 

20,645

 

 

Return on investment in consolidated subsidiaries

 

87,419

 

 

87,419

 

(174,838

)

 

Net cash provided by (used in) continuing operations

 

87,419

 

7,477

 

2,204

 

(170,585

)

(73,485

)

Net cash used in discontinued operations

 

 

 

(1,269

)

 

(1,269

)

Net cash provided by (used in) investing activities

 

87,419

 

7,477

 

935

 

(170,585

)

(74,754

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Proceeds from borrowings of long-term debt

 

528,740

 

 

474,669

 

 

1,003,409

 

Repayments of long-term debt

 

(655,824

)

 

(549,434

)

 

(1,205,258

)

Payments for debt issue costs

 

 

 

(980

)

 

(980

)

Net proceeds from the sale of Partnership units

 

 

162,236

 

127,672

 

 

289,908

 

Proceeds from stock options exercised

 

487

 

 

 

 

487

 

Proceeds from stock issued pursuant to our employee stock purchase plan

 

940

 

 

 

 

940

 

Purchases of treasury stock

 

(2,415

)

 

 

 

(2,415

)

Stock-based compensation excess tax benefit

 

816

 

 

 

 

816

 

Distributions to noncontrolling partners in the Partnership

 

 

 

(32,233

)

16,392

 

(15,841

)

Net proceeds from sale of general partner units

 

 

 

1,316

 

(1,316

)

 

Capital distributions to affiliates

 

 

(87,419

)

(87,419

)

174,838

 

 

Captial contributions received from parent

 

 

 

19,329

 

(19,329

)

 

Borrowings (repayments) between consolidated subsidiaries, net

 

40,283

 

(61,146

)

20,863

 

 

 

Net cash provided by (used in) financing activities

 

(86,973

)

13,671

 

(26,217

)

170,585

 

71,066

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(1,012

)

 

(1,012

)

Net increase (decrease) in cash and cash equivalents

 

(25

)

1,596

 

(11,149

)

 

(9,578

)

Cash and cash equivalents at beginning of year

 

160

 

1,586

 

42,615

 

 

44,361

 

Cash and cash equivalents at end of year

 

$

135

 

$

3,182

 

$

31,466

 

$

 

$

34,783

 

 

30


 


Table of Contents

 

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

 

This report contains “forward-looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 expected amount of our capital expenditures; anticipated cost savings, future revenue, gross margin and other financial or operational measures related to our business and our primary business segments; the future value of our equipment and non-consolidated affiliates; and plans and objectives of our management for our future operations. 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 and oil and natural gas production and processing equipment and services;

 

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

 

·             the success of our subsidiaries, including Exterran Partners, L.P. (along with its subsidiaries, the “Partnership”);

 

·             changes in economic or political conditions in the countries in which we do business, including civil uprisings, riots, terrorism, kidnappings, violence associated with drug cartels, legislative changes and the expropriation, confiscation or nationalization of property without fair compensation;

 

·             changes in currency exchange rates, including the risk of currency devaluations by foreign governments, and restrictions on currency repatriation;

 

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

 

·             loss of the Partnership’s status as a partnership for federal income tax purposes;

 

·             a decline in the Partnership’s quarterly distribution of cash to us attributable to our ownership interest in the Partnership;

 

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

 

·             the financial condition of our customers;

 

·             our ability to timely and cost-effectively obtain components necessary to conduct our business;

 

·             employment and workforce factors, including our ability to hire, train and retain key employees;

 

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

 

31



Table of Contents

 

·              winning profitable new business;

 

·              sales of additional United States of America (“U.S.”) contract operations contracts and equipment to the Partnership;

 

·              timely and cost-effective execution of projects;

 

·              enhancing our asset utilization, particularly with respect to our fleet of compressors;

 

·              integrating acquired businesses;

 

·              generating sufficient cash; and

 

·              accessing the capital markets at an acceptable cost;

 

·             liability related to the use of our products and services;

 

·             changes in governmental safety, health, environmental and 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

 

Exterran Holdings, Inc., together with its subsidiaries (“we” or “Exterran”), is a global market leader in the full service natural gas compression business and a premier provider of operations, maintenance, service and equipment for oil and natural gas production, processing and transportation applications. Our global customer base consists of companies engaged in all aspects of the oil and natural gas industry, including large integrated oil and natural gas companies, national oil and natural gas companies, independent producers and natural gas processors, gatherers and pipelines. We operate in three primary business lines: contract operations, fabrication and aftermarket services. In our contract operations business line, we own a fleet of natural gas compression equipment and crude oil and natural gas production and processing equipment that we utilize to provide operations services to our customers. In our fabrication business line, we fabricate and sell equipment similar to the equipment that we own and utilize to provide contract operations to our customers. We also fabricate the equipment utilized in our contract operations services. In addition, our fabrication business line provides engineering, procurement and fabrication services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants. In our Total Solutions projects, which we offer to our customers on either a contract operations basis or a sale basis, we provide the engineering, design, project management, procurement and construction services necessary to incorporate our products into production, processing and compression facilities. In our aftermarket services business line, we sell parts and components and provide operations, maintenance, overhaul and reconfiguration services to customers who own compression, production, processing, treating and other equipment.

 

Exterran Partners, L.P.

 

We have an equity interest in the Partnership, a master limited partnership that provides natural gas contract operations services to customers throughout the U.S. As of June 30, 2012, public unitholders held a 69% ownership interest in the Partnership and we owned the remaining equity interest, including the general partner interest and all incentive distribution rights. The general partner of the Partnership is our subsidiary and we consolidate the financial position and results of operations of the Partnership. It is our intention for the Partnership to be the primary vehicle for the growth of our U.S. contract operations business and for us to continue to contribute U.S. contract operations customer contracts and equipment to the Partnership over time in exchange for cash, the Partnership’s assumption of our debt and/or additional interests in the Partnership. As of June 30, 2012, the Partnership had a fleet of 4,694 compressor units comprising approximately 2,026,000 horsepower, or 62% (by then available horsepower) of our and the Partnership’s combined total U.S. horsepower. This fleet included 306 compressor units with an aggregate horsepower of

 

32



Table of Contents

 

approximately 158,000 leased from us and excluded 36 compressor units owed by the Partnership with an aggregate horsepower of approximately 20,000 leased to us as of June 30, 2012.

 

In March 2012, we sold to the Partnership 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 our combined U.S. contract operations business. In addition, the assets sold included 139 compressor units, comprising approximately 75,000 horsepower, that we previously leased to the Partnership, 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. Total consideration for the transaction was approximately $182.8 million, excluding transaction costs, and included the Partnership’s payment of $77.4 million in cash and assumption of $105.4 million of our debt. Also in connection with this transaction, we entered into an amendment to our omnibus agreement with the Partnership that, among other things, increased the cap on selling, general and administrative (“SG&A”) costs we allocate to the Partnership based on such costs we incur on the Partnership’s behalf and extended the term of the caps on the Partnership’s obligation to reimburse us for SG&A costs and operating costs we allocate to the Partnership based on such costs we incur on the Partnership’s behalf for an additional year such that the caps will now terminate on December 31, 2013.

 

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 oil and natural gas reserves. Spending by oil and 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 contract operations business will typically be less impacted by commodity prices than certain other energy service products and services, changes in oil and natural gas exploration and production spending will normally result in changes in demand for our products and services.

 

Natural Gas Consumption and Production.  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 consumption worldwide is projected to increase by 1.6% per year until 2035, according to the EIA.

 

Natural gas marketed production in the U.S. for the twelve months ended April 30, 2012 increased by approximately 8% over the twelve months ended April 30, 2011. In 2010, the U.S. accounted for an estimated annual production of approximately 22 trillion cubic feet of natural gas, or 19% of the worldwide total of approximately 119 trillion cubic feet. The EIA estimates that the U.S.’s natural gas production level will be approximately 26 trillion cubic feet in 2035, or 16% of the projected worldwide total of approximately 169 trillion cubic feet.

 

Our Performance Trends and Outlook

 

Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and pricing for natural gas compression and oil and natural gas production and processing, our customers’ decisions regarding whether to utilize our products and services rather than utilize products and services from our competitors and their decisions regarding whether to own and operate the equipment themselves. In particular, many of our North America contract operations agreements 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.

 

During 2011 and the first six months of 2012, we saw robust drilling activity in North America, 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 fabricated compression, fabricated production and processing equipment, and contract operations businesses 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 North America 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 natural gas compression and oil and natural gas production and processing equipment and services. However, given our current backlog levels for our fabricated products and the level of activity we are

 

33



Table of Contents

 

generating in North America, we believe our fabrication revenues will grow during the second half of 2012 over the levels we generated in the first half of 2012.

 

In international markets, we believe there will continue to be demand for our contract operations and fabricated projects and we expect to have opportunities to grow our international business through our contract operations, aftermarket services and fabrication business segments over the long term. However, in 2011, we saw decreases in our international backlog in our fabrication business segment due to the longer lead times for the development of international energy projects, which could negatively impact our revenue during the remainder of 2012.

 

Our level of capital spending depends on our forecast for the demand for our products and services and the equipment we require to provide services to our customers. As we believe there will be a high level of activity in certain North American areas focused on the production of oil and natural gas liquids, we anticipate investing more capital in our contract operations fleet in 2012 than we have in the recent past.

 

Based on current market conditions, we expect that net cash provided by operating activities and availability under our credit facilities will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through December 31, 2012; however, to the extent it is not, we may seek additional debt or equity financing.

 

We intend to continue to contribute over time additional U.S. contract operations customer contracts and equipment to the Partnership in exchange for cash, the Partnership’s assumption of our debt and/or our receipt of additional interests in the Partnership. Such transactions would depend on, among other things, market and economic conditions, our ability to reach agreement with the Partnership regarding the terms of any purchase and the availability to the Partnership of debt and equity capital on reasonable terms.

 

Operating Highlights

 

The following tables summarize our total available horsepower, total operating horsepower, horsepower utilization percentages and fabrication backlog (horsepower in thousands and dollars in millions):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Total Available Horsepower (at period end):

 

 

 

 

 

 

 

 

 

North America(1)

 

3,285

 

3,605

 

3,285

 

3,605

 

International

 

1,254

 

1,196

 

1,254

 

1,196

 

Total

 

4,539

 

4,801

 

4,539

 

4,801

 

Total Operating Horsepower (at period end):

 

 

 

 

 

 

 

 

 

North America

 

2,811

 

2,784

 

2,811

 

2,784

 

International

 

996

 

980

 

996

 

980

 

Total

 

3,807

 

3,764

 

3,807

 

3,764

 

Total Operating Horsepower (average during the quarter):

 

 

 

 

 

 

 

 

 

North America

 

2,820

 

2,782

 

2,823

 

2,782

 

International

 

989

 

978

 

975

 

979

 

Total

 

3,809

 

3,760

 

3,798

 

3,761

 

Horsepower Utilization (at period end):

 

 

 

 

 

 

 

 

 

North America(1)

 

86

%

77

%

86

%

77

%

International

 

79

%

82

%

79

%

82

%

Total

 

84

%

78

%

84

%

78

%

 

 

 

June 30,
2012

 

December 31,
2011

 

June 30,
2011

 

Compressor and Accessory Fabrication Backlog

 

$

297.0

 

$

249.7

 

$

221.0

 

Production and Processing Equipment Fabrication Backlog

 

677.7

 

416.0

 

487.8

 

Installation Backlog(2)

 

311.7

 

69.6

 

27.4

 

Fabrication Backlog(2)

 

$

1,286.4

 

$

735.3

 

$

736.2

 

 


(1)          Amounts for the periods ended June 30, 2012 exclude approximately 299,000 horsepower of idle compressor units that were removed from the compressor fleet as a result of the June 2012 impairment review.

(2)          In the second quarter of 2012, we began including installation backlog in our total fabrication backlog, and have updated all prior periods to also include installation backlog.

 

34



Table of Contents

 

FINANCIAL RESULTS OF OPERATIONS

 

Summary of Results

 

Revenue.  Revenue for the three months ended June 30, 2012 was $630.7 million compared to $644.1 million for the three months ended June 30, 2011. Revenue for the six months ended June 30, 2012 was $1,246.0 million compared to $1,251.0 million for the six months ended June 30, 2011. The change in revenue for the three and six months ended June 30, 2012 compared to the corresponding 2011 periods was primarily caused by lower fabrication revenue in the Eastern Hemisphere, substantially offset by higher fabrication and aftermarket services revenues in North America.

 

Net income (loss) attributable to Exterran stockholders and EBITDA, as adjusted.  We recorded net loss attributable to Exterran stockholders of $152.6 million and $28.0 million for the three months ended June 30, 2012 and 2011, respectively. We recorded net loss attributable to Exterran stockholders of $147.1 million and $58.1 million for the six months ended June 30, 2012 and 2011, respectively. We recorded EBITDA, as adjusted, of $101.5 million and $82.8 million for the three months ended June 30, 2012 and 2011, respectively. We recorded EBITDA, as adjusted, of $197.6 million and $179.1 million for the six months ended June 30, 2012 and 2011, respectively. Net loss attributable to Exterran stockholders was impacted by long-lived asset impairments of $128.5 million and $132.7 million incurred during the three and six months ended June 30, 2012, respectively.  This was partially offset by equity in income from non-consolidated affiliates of $4.7 million and $42.1 million for the three and six months ended June 30, 2012, respectively, received in conjunction with the sale of PIGAP II and El Furrial’s assets. Net loss attributable to Exterran stockholders and EBITDA, as adjusted, for the three and six months ended June 30, 2012 were favorably impacted by higher gross margins from operations. For a reconciliation of EBITDA, as adjusted, to net income (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.”

 

THE THREE MONTHS ENDED JUNE 30, 2012 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2011

 

Summary of Business Segment Results

 

North America Contract Operations

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

148,564

 

$

146,581

 

1

%

Cost of sales (excluding depreciation and amortization expense)

 

70,423

 

73,906

 

(5

)%

Gross margin

 

$

78,141

 

$

72,675

 

8

%

Gross margin percentage

 

53

%

50

%

3

%

 

The increase in revenue in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily attributable to a 1% increase in average operating horsepower, an increase in rates, a $1.3 million increase in revenue from a gas processing plant that began operations during the fourth quarter of 2011 and a $1.1 million increase in freight revenue. These increases were partially offset by a $2.3 million decrease in revenue from our contract water treatment business in the three months ended June 30, 2012 compared to the three months ended June 30, 2011. The increase in gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) and gross margin percentage in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily caused by the revenue increase explained above, better management of field operating expenses from the implementation of profitability improvement initiatives and a $3.6 million benefit from ad valorem taxes due to a change in tax law, partially offset by an increase in lube oil prices and freight expenses. Gross margin, a non-GAAP financial measure, is reconciled, in total, to net income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP, in Note 15 to the Financial Statements.

 

35



Table of Contents

 

International Contract Operations

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

112,628

 

$

110,944

 

2

%

Cost of sales (excluding depreciation and amortization expense)

 

47,092

 

49,766

 

(5

)%

Gross margin

 

$

65,536

 

$

61,178

 

7

%

Gross margin percentage

 

58

%

55

%

3

%

 

The increase in revenue and gross margin in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to a $2.5 million increase in revenue from a new contract in the Eastern Hemisphere, a $2.3 million increase in revenue in Argentina that was primarily due to inflation adjustments and a $2.2 million increase in revenue in Mexico, partially offset by a $4.6 million decrease in revenue in Brazil primarily as a result of contracts that were terminated in 2011. Gross margin percentage in the three months ended June 30, 2012 benefited from inflationary rate adjustments in Argentina, partially offset by reduced margins in Brazil due to higher demobilization expenses.

 

Aftermarket Services

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

101,902

 

$

84,812

 

20

%

Cost of sales (excluding depreciation and amortization expense)

 

77,528

 

77,647

 

0

%

Gross margin

 

$

24,374

 

$

7,165

 

240

%

Gross margin percentage

 

24

%

8

%

16

%

 

The increase in revenue in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to an increase in activity in North America of $11.7 million. Gross margin and gross margin percentage were favorably impacted by improved market conditions and the implementation of profitability improvement initiatives that began in the second half of 2011.

 

Fabrication

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

267,641

 

$

301,731

 

(11

)%

Cost of sales (excluding depreciation and amortization expense)

 

241,357

 

269,352

 

(10

)%

Gross margin

 

$

26,284

 

$

32,379

 

(19

)%

Gross margin percentage

 

10

%

11

%

(1

)%

 

The decrease in revenue for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to a $78.8 million reduction of revenue in the Eastern Hemisphere, partially offset by $43.7 million of higher revenue in North America caused by improved market conditions. The decrease in gross margin and gross margin percentage was primarily caused by the continuation of weaker market conditions in the Eastern Hemisphere in the three months ended June 30, 2012 including the impact of reduced margins from our Belleli Energy subsidiary which provides engineering, procurement and fabrication services primarily related to the manufacturing of critical process equipment for refinery and petrochemical facilities, the fabrication of tank farms and the fabrication of evaporators and brine heaters for desalination plants.  The decrease in gross margin and gross margin percentage at Belleli Energy was primarily the result of increased under-absorption caused by reduced activity and a $3.2 million loss on a job recorded in the three months ended June 30, 2012. The decrease in gross margin and gross margin percentage in the Eastern Hemisphere was partially offset by improved gross margins in North America caused by improved market conditions.

 

36



Table of Contents

 

Costs and Expenses

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Selling, general and administrative

 

$

94,134

 

$

90,450

 

4

%

Depreciation and amortization

 

88,909

 

90,412

 

(2

)%

Long-lived asset impairment

 

128,543

 

2,063

 

6,131

%

Restructuring charges

 

1,266

 

 

n/a

 

Interest expense

 

36,968

 

34,586

 

7

%

Equity in income of non-consolidated affiliates

 

(4,728

)

 

n/a

 

Other (income) expense, net

 

8,752

 

(2,853

)

(407

)%

 

The increase in SG&A expense during the three months ended June 30, 2012 was primarily due to a $7.6 million increase in state and local taxes primarily related to sales tax audits in North America.  SG&A as a percentage of revenue was 15% and 14% for the three months ended June 30, 2012 and 2011, respectively.

 

Depreciation and amortization decreased primarily due to reduced depreciation and amortization on contract operations projects in Brazil as a result of contracts that were terminated in 2011.

 

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 880 idle compressor units, or approximately 299,000 horsepower, that we previously used to provide services in our North America contract operations segment. 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 $92.2 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 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.  As of June 30, 2012, the average age of the impaired idle units was 24 years.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units previously used in our contract operations segments 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 $34.8 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 29 years.

 

During the three months ended June 30, 2011 we reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. We performed a cash flow analysis of the expected proceeds from the salvage value of these units to determine the fair value of the assets. 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 $2.1 million for the three months ended June 30, 2011 and was recorded as a long-lived asset impairment.

 

In June 2012, we committed to a plan to sell our subsidiary in the United Kingdom (Exterran (UK) Ltd.) as part of our continued emphasis on simplification and focus on our core business. In conjunction with the planned disposition, we recorded an impairment of long-lived assets that totaled $1.5 million during the three months ended June 30, 2012.  The impairment charges are reflected in Long-lived asset impairment in our condensed consolidated statements of operations.

 

In November 2011, we announced a workforce cost reduction program across all of our business segments as a first step in a broader overall profit improvement initiative. These actions were the result of a review of our cost structure aimed at identifying ways to reduce our on-going operating costs and to adjust the size of our workforce to be consistent with current and expected activity levels. A significant portion of the workforce cost reduction program was completed in 2011, with the remainder expected to be completed in 2012. During the three months ended June 30, 2012, we incurred $1.3 million of restructuring charges primarily related to consulting services and termination benefits. See Note 11 to the Financial Statements for further discussion of these charges.

 

The increase in interest expense for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 was primarily due to the refinancing of a portion of our outstanding debt at a higher interest rate and a $0.5 million increase in the amortization of the debt discount on our 4.25% convertible senior notes due June 2014.

 

37



Table of Contents

 

The increase in equity in income of non-consolidated affiliates during the three months ended June 30, 2012 relates to the receipt of a cash payment of approximately $4.7 million we received in June 2012 from the sale of PIGAP II and El Furrial’s assets. We are due to receive an additional approximately $70.0 million in periodic cash payments through the first quarter of 2016 related to this sale. Payments we receive from the sale will be recognized in Equity in income of non-consolidated affiliates in our condensed consolidated statements of operations as such payments are received.

 

The change in other (income) expense, net was primarily due to a foreign currency loss of $10.8 million for the three months ended June 30, 2012 compared to a gain of $2.2 million for the three months ended June 30, 2011. Our foreign currency gains and losses are primarily related to the remeasurement of our international subsidiaries’ net assets exposed to changes in foreign currency rates. For the three months ended June 30, 2012 and 2011, foreign currency (gain) loss included a translation loss of $11.5 million and translation gain of $4.4 million, respectively, related to the re-measurement of our Brazil subsidiary’s U.S. dollar denominated inter-company debt.

 

Income Taxes

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Benefit from income taxes

 

$

(35,502

)

$

(14,113

)

152

%

Effective tax rate

 

22.3

%

34.2

%

(11.9

)%

 

The decrease in our effective tax rate was primarily due to increased losses in low or no tax jurisdictions during the three months ended June 30, 2012. This decrease was partially offset by the $128.5 million asset impairment during the three months ended June 30, 2012, which is predominantly tax effected at the U.S. statutory rate and the $4.7 million equity in income of non-consolidated affiliates recorded during the three months ended June 30, 2012, which is not subject to income tax.

 

Discontinued Operations

(dollars in thousands)

 

 

 

Three months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Loss from discontinued operations, net of tax

 

$

(42,891

)

$

(3,076

)

(1,294

)%

 

Loss from discontinued operations, net of tax for the three months ended June 30, 2012 and 2011, related to our operations in Venezuela that were expropriated in June 2009, including the costs associated with our arbitration proceeding, and results from and impairment of our Canadian contract operations and aftermarket services businesses. As discussed in Note 2 to the Financial Statements, in June 2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela and by the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

 

In June 2012, we committed to a plan to sell our contract operations and aftermarket services businesses in Canada. The planned disposition meets the criteria established for recognition as discontinued operations and therefore our Canadian contract operations and aftermarket services businesses are now reflected as discontinued operations in our condensed consolidated financial statements.  In conjunction with the planned disposition, we recorded an impairment of intangible assets and long-lived assets that totaled $40.8 million during the three months ended June 30, 2012.

 

THE SIX MONTHS ENDED JUNE 30, 2012 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2011

 

Summary of Business Segment Results

 

North America Contract Operations

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

299,152

 

$

293,434

 

2

%

Cost of sales (excluding depreciation and amortization expense)

 

144,659

 

152,194

 

(5

)%

Gross margin

 

$

154,493

 

$

141,240

 

9

%

Gross margin percentage

 

52

%

48

%

4

%

 

38



Table of Contents

 

The increase in revenue was primarily attributable to a 1% increase in average operating horsepower, an increase in rates, a $2.5 million increase in revenue from a gas processing plant that began operations during the fourth quarter of 2011 and a $2.2 million increase in freight revenue. These increases were partially offset by a $3.7 million decrease in revenue from our contract water treatment business in the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The increase in gross margin (defined as revenue less cost of sales, excluding depreciation and amortization expense) and gross margin percentage in the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily caused by the revenue increase explained above, better management of field operating expenses from the implementation of profitability improvement initiatives and a $3.6 million benefit from ad valorem taxes due to a change in tax law, partially offset by an increase in lube oil prices and freight expenses.

 

International Contract Operations

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

225,414

 

$

216,625

 

4

%

Cost of sales (excluding depreciation and amortization expense)

 

90,981

 

90,732

 

0

%

Gross margin

 

$

134,433

 

$

125,893

 

7

%

Gross margin percentage

 

60

%

58

%

2

%

 

The increase in revenue and gross margin in the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to a $6.8 million increase in revenue in Nigeria, largely from the recognition of $5.1 million of revenue with little incremental cost from the early termination of a project in Nigeria recorded in the six months ended June 30, 2012, a $6.0 million increase in revenue in Mexico, a $4.1 million increase in revenue in Argentina that was primarily due to inflation rate adjustments and a $2.5 million increase in revenue from a new contract in the Eastern Hemisphere, partially offset by an $11.5 million decrease in revenue in Brazil primarily as a result of contracts that were terminated in 2011. Gross margin percentage in the six months ended June 30, 2012 benefited from the recognition of $5.1 million of revenue with little incremental cost from the early termination of a project in Nigeria and from inflationary rate adjustments in Argentina. These benefits were partially offset by reduced margins in Brazil due to higher demobilization expenses.

 

Aftermarket Services

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

191,547

 

$

159,160

 

20

%

Cost of sales (excluding depreciation and amortization expense)

 

149,259

 

142,309

 

5

%

Gross margin

 

$

42,288

 

$

16,851

 

151

%

Gross margin percentage

 

22

%

11

%

11

%

 

The increase in revenue in the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to an increase in activity in North America of $23.4 million. Gross margin and gross margin percentage were favorably impacted by improved market conditions and the implementation of profitability improvement initiatives that began in the second half of 2011.

 

Fabrication

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Revenue

 

$

529,863

 

$

581,777

 

(9

)%

Cost of sales (excluding depreciation and amortization expense)

 

476,960

 

508,643

 

(6

)%

Gross margin

 

$

52,903

 

$

73,134

 

(28

)%

Gross margin percentage

 

10

%

13

%

(3

)%

 

39



Table of Contents

 

The decrease in revenue for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to a $145.4 million reduction of revenue in the Eastern Hemisphere, partially offset by $98.7 million of higher revenue in North America caused by improved market conditions. The decrease in gross margin and gross margin percentage was primarily due to lower margins in the Eastern Hemisphere caused by the continuation of weaker market conditions and a $15.0 million recovery on a loss contract recorded in the first quarter of 2011. The decrease in gross margin and gross margin percentage in the Eastern Hemisphere was partially offset by improved gross margins in North America caused by improved market conditions.

 

Costs and Expenses

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Selling, general and administrative

 

$

188,973

 

$

179,875

 

5

%

Depreciation and amortization

 

174,020

 

178,611

 

(3

)%

Long-lived asset impairment

 

132,665

 

2,063

 

6,331

%

Restructuring charges

 

4,313

 

 

n/a

 

Interest expense

 

74,959

 

71,756

 

4

%

Equity in income of non-consolidated affiliates

 

(42,067

)

 

n/a

 

Other (income) expense, net

 

2,657

 

(2,930

)

(191

)%

 

The increase in SG&A expense during the six months ended June 30, 2012 was primarily due to a $12.0 million increase in state and local taxes primarily related to sales tax audits in North America. SG&A as a percentage of revenue was 15% and 14% for the six months ended June 30, 2012 and 2011, respectively.

 

Depreciation and amortization decreased primarily due to reduced depreciation and amortization on contract operations projects in Brazil as a result of contracts that were terminated in 2011.

 

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 920 idle compressor units, or approximately 316,000 horsepower, that we previously used to provide services in our North America contract operations segment. 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 $96.5 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 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.  As of June 30, 2012, the average age of the impaired idle units was 24 years.

 

In the fourth quarter of 2010, we recorded an impairment of compressor units previously used in our contract operations segments 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 $34.8 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 29 years.

 

During the six months ended June 30, 2011 we reviewed the idle compression assets used in our contract operations segments for units that are not of the type, configuration, make or model that are cost efficient to maintain and operate. We performed a cash flow analysis of the expected proceeds from the salvage value of these units to determine the fair value of the assets. 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 $2.1 million for the six months ended June 30, 2011 and was recorded as a long-lived asset impairment.

 

In June 2012, we committed to a plan to sell our subsidiary in the United Kingdom (Exterran (UK) Ltd.) as part of our continued emphasis on simplification and focus on our core business. In conjunction with the planned disposition, we recorded an impairment of long-lived assets that totaled $1.5 million during the three months ended June 30, 2012.  The impairment charges are reflected in Long-lived asset impairment in our condensed consolidated statements of operations.

 

In November 2011, we announced a workforce cost reduction program across all of our business segments as a first step in a broader overall profit improvement initiative. These actions were the result of a review of our cost structure aimed at identifying ways to reduce our on-going operating costs and to adjust the size of our workforce to be consistent with current and expected activity levels. A significant portion of the workforce cost reduction program was completed in 2011, with the remainder expected to be completed in

 

40



Table of Contents

 

2012. During the six months ended June 30, 2012, we incurred $4.3 million of restructuring charges primarily related to consulting services and termination benefits. See Note 11 to the Financial Statements for further discussion of these charges.

 

The increase in interest expense for the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily due to the refinancing of a portion of our outstanding debt at a higher interest rate and a $1.1 million increase in the amortization of the debt discount on our 4.25% convertible senior notes due June 2014. In addition, we expensed $1.3 million of unamortized deferred financing costs as a result of the decrease in capacity of our revolving credit facility in the three months ended March 31, 2012. The increase in interest expense was partially offset by $1.4 million of unamortized deferred financing costs expensed in the three months ended March 31, 2011 due to the termination of our 2007 asset-backed securitization facility.

 

The increase in equity in income of non-consolidated affiliates during the six months ended June 30, 2012 relates to payments of $42.3 million received during the six month period ended June 30, 2012 from the sale of PIGAP II and El Furrial’s assets. We are due to receive an additional approximately $70.0 million in periodic cash payments through the first quarter of 2016 related to this sale. Payments we receive from the sale will be recognized in Equity in income of non-consolidated affiliates in our condensed consolidated statements of operations as such payments are received.

 

The change in other (income) expense, net was primarily due to a foreign currency loss of $6.0 million and $0.6 million for the six months ended June 30, 2012 and 2011, respectively. Our foreign currency gains and losses are primarily related to the remeasurement of our international subsidiaries’ net assets exposed to changes in foreign currency rates. For the six months ended June 30, 2012 compared to the six months ended June 30, 2011, foreign currency loss was impacted by a $12.0 million increased translation loss related to re-measurement of our Brazil subsidiary’s U.S. dollar denominated inter-company debt.  For the six months ended June 30, 2012 compared to the six months ended June 30, 2011, foreign currency loss was also impacted by a $4.2 million increased translation gain related to the re-measurement of our Netherlands subsidiary’s non-U.S. dollar denominated inter-company debt.

 

Income Taxes

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Benefit from income taxes

 

$

(35,845

)

$

(17,580

)

104

%

Effective tax rate

 

23.7

%

24.3

%

(0.6

)%

 

The increase in our effective tax rate was primarily due to the $42.1 million equity in income of non-consolidated affiliates recorded during the six months ended June 30, 2012, which is not subject to income tax.  The effective tax rate was further increased due to the $132.7 million asset impairment during the six months ended June 30, 2012, which is predominantly tax effected at the U.S. statutory rate.  These increases to our effective tax rate were partially offset by increased losses in low or no tax jurisdictions and a $1.3 million charge for a foreign tax audit assessment received in the six months ended June 30, 2012.

 

Discontinued Operations

(dollars in thousands)

 

 

 

Six months ended
June 30,

 

Increase

 

 

 

2012

 

2011

 

(Decrease)

 

Loss from discontinued operations, net of tax

 

$

(44,053

)

$

(6,011

)

(633

)%

 

Loss from discontinued operations, net of tax for the six months ended June 30, 2012 and 2011, related to our operations in Venezuela that were expropriated in June 2009, including the costs associated with our arbitration proceeding and results from and impairment of our Canadian contract operations and aftermarket services businesses. As discussed in Note 2 to the Financial Statements, in June 2009, PDVSA commenced taking possession of our assets and operations in a number of our locations in Venezuela and by the end of the second quarter of 2009, PDVSA had assumed control over substantially all of our assets and operations in Venezuela.

 

In June 2012, we committed to a plan to sell our contract operations and aftermarket services businesses in Canada.  The planned disposition meets the criteria established for recognition as discontinued operations and therefore our Canadian contract operations and aftermarket services businesses are now reflected as discontinued operations in our condensed consolidated financial statements.  In conjunction with the planned disposition, we recorded an impairment of intangible assets and long-lived assets that totaled $40.8 million during the three months ended June 30, 2012.

 

41



Table of Contents

 

Noncontrolling Interest

 

As of June 30, 2012, noncontrolling interest is primarily comprised of the portion of the Partnership’s earnings that is applicable to the limited partner interest in the Partnership owned by the public. As of June 30, 2012, public unitholders held a 69% ownership interest in the Partnership.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our unrestricted cash balance was $21.4 million at June 30, 2012, compared to $21.9 million at December 31, 2011. Working capital increased to $524.8 million at June 30, 2012 from $454.0 million at December 31, 2011. The increase in working capital was primarily caused by increases in accounts receivable and inventory and reductions in accrued liabilities, partially offset by increases in billings on uncompleted contracts in excess of costs and estimated earnings, deferred revenue and accounts payable. The increase in inventory and accounts receivable was primarily due to the increase in the volume of fabrication projects in process in North America at June 30, 2012 compared to December 31, 2011.

 

Our cash flows from operating, investing and financing activities, as reflected in the condensed consolidated statements of cash flows, are summarized in the table below (in thousands):

 

 

 

Six Months Ended
June 30,

 

 

 

2012

 

2011

 

Net cash provided by (used in) continuing operations:

 

 

 

 

 

Operating activities

 

$

52,604

 

$

(6,868

)

Investing activities

 

(159,916

)

(73,485

)

Financing activities

 

107,114

 

71,066

 

Effect of exchange rate changes on cash and cash equivalents

 

(476

)

(1,012

)

Discontinued operations

 

150

 

721

 

Net change in cash and cash equivalents

 

$

(524

)

$

(9,578

)

 

Operating Activities.  The increase in cash provided by operating activities was primarily due to improved results from operations including the increase in gross margin during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

 

Investing Activities.  The increase in cash used in investing activities was primarily attributable to an increase in capital expenditures from $104.3 million during the six months ended June 30, 2011 to $227.9 million during the six months ended June 30, 2012, partially offset by $42.3 million of proceeds we received in the first six months of 2012 from the sale of PIGAP II and El Furrial’s assets.

 

Financing Activities.  The increase in cash provided by financing activities during the six months ended June 30, 2012 compared to the six months ended June 30, 2011 was primarily attributable to an increase in net borrowings of long-term debt during the six months ended June 30, 2012.  This was partially offset by a decrease in net proceeds from the sale of Partnership units from $289.9 million during the six months ended June 30, 2011 to $114.5 million during the six months ended June 30, 2012.

 

Capital Expenditures.  We generally invest funds necessary to fabricate fleet additions when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new equipment expenditure is expected to generate economic returns over its expected useful life that exceed our targeted return on capital. We currently plan to spend approximately $350 million to $375 million in net capital expenditures during 2012, including (1) contract operations equipment additions and (2) approximately $105 million to $115 million on equipment maintenance capital related to our contract operations business. Net capital expenditures are net of fleet sales.

 

Long-Term Debt.  As of June 30, 2012, we had approximately $1.8 billion in outstanding debt obligations, consisting of $356.5 million outstanding under our revolving credit facility, $143.8 million outstanding under our 4.75% convertible notes due 2014, $310.1 million outstanding under our 4.25% Notes due June 2014, $350.0 million outstanding under our 7.25% senior notes due 2018, $493.5 million outstanding under the Partnership’s revolving credit facility and $150.0 million outstanding under the Partnership’s term loan facility.

 

In July 2011, we entered into a new five-year, $1.1 billion senior secured revolving credit facility (the “Credit Facility”), which matures in July 2016 and replaced our former senior secured credit facility. As of June 30, 2012, we had $356.5 million in outstanding borrowings and $195.9 million in outstanding letters of credit under the Credit Facility. At June 30, 2012, taking into account guarantees through letters of credit, we had undrawn and available capacity of $347.6 million under the Credit Facility.

 

42



Table of Contents

 

In March 2012, the Partnership and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership, increased the borrowing capacity under their revolving credit facility by $200 million to $750 million. During the three months ended March 31, 2012, the Partnership incurred transaction costs of approximately $0.5 million related to the increase in borrowing capacity. These costs were included in Intangible and other assets, net and are being amortized over the term of the facility. Concurrently with this increase, we decreased the borrowing capacity under our revolving credit facility by $200 million to $900 million. As a result of the decrease in borrowing capacity of our Credit Facility, we expensed approximately $1.3 million of unamortized deferred financing costs associated with our Credit Facility in the first quarter of 2012, which is reflected in Interest expense in our condensed consolidated statements of operations.

 

Borrowings under the Credit Facility bear interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our Total Leverage Ratio (as defined in the credit agreement), the applicable margin for revolving loans varies (i) in the case of LIBOR loans, from 1.50% to 2.50% and (ii) in the case of base rate loans, from 0.50% to 1.50%. The base rate is the highest of the prime rate announced by Wells Fargo Bank, National Association, the Federal Funds Rate plus 0.5% and one-month LIBOR plus 1.0%. At June 30, 2012, all amounts outstanding under the Credit Facility were LIBOR loans and the applicable margin was 2.0%. The weighted average annual interest rate at June 30, 2012 on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was 2.3%.

 

Our Significant Domestic Subsidiaries (as defined in the credit agreement) guarantee the debt under the Credit Facility. Borrowings under the Credit Facility are secured by substantially all of the personal property assets and certain real property assets of us and our Significant Domestic Subsidiaries, including all of the equity interests of our U.S. subsidiaries (other than certain excluded subsidiaries) and 65% of the equity interests in certain of our first-tier foreign subsidiaries. The Partnership does not guarantee the debt under the Credit Facility, its assets are not collateral under the Credit Facility and the general partner units in the Partnership are not pledged under the Credit Facility. Subject to certain conditions, at our request, and with the approval of the lenders, the aggregate commitments under the Credit Facility may be increased by up to an additional $300 million.

 

The credit agreement contains various covenants with which we or certain of our subsidiaries must comply, including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, enter into 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 are also subject to financial covenants, including a ratio of Adjusted EBITDA (as defined in the credit agreement) to Total Interest Expense (as defined in the credit agreement) of not less than 2.25 to 1.0, a ratio of consolidated Total Debt to Adjusted EBITDA of not greater than 5.0 to 1.0 and a ratio of Senior Secured Debt (as defined in the credit agreement) to Adjusted EBITDA of not greater than 4.0 to 1.0. As of June 30, 2012, we maintained a 4.0 to 1.0 Adjusted EBITDA to Total Interest Expense ratio, a 3.7 to 1.0 consolidated Total Debt to Adjusted EBITDA ratio and a 1.2 to 1.0 Senior Secured Debt to Adjusted EBITDA ratio. If we fail to remain in compliance with our financial covenants we would be in default under our debt agreements. In addition, if we were to 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 our debt agreements, this could lead to a default under our debt agreements. A default under one or more of our debt agreements, including a default by the Partnership under its credit facility, would trigger cross-default provisions under certain of our other debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements. As of June 30, 2012, we were in compliance with all financial covenants under the credit agreement.

 

In November 2010, we issued $350 million aggregate principal amount of 7.25% senior notes due December 2018 (the “7.25% Notes”). The 7.25% Notes are guaranteed on a senior unsecured basis by all of our existing subsidiaries that guarantee indebtedness under the Credit Agreement and certain of our future subsidiaries. The Partnership and its subsidiaries have not guaranteed the 7.25% Notes. The 7.25% Notes and the guarantees are our and the guarantors’ general unsecured senior obligations, respectively, rank equally in right of payment with all of our and the guarantors’ other senior obligations, and are effectively subordinated to all of our and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness. In addition, the 7.25% Notes and guarantees are structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, of our non-guarantor subsidiaries.

 

Prior to December 1, 2013, we may redeem all or a part of the 7.25% Notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. In addition, we may redeem up to 35% of the aggregate principal amount of the 7.25% Notes prior to December 1, 2013 with the net proceeds of a public or private equity offering at a redemption price of 107.250% of the principal amount of the 7.25% Notes, plus any accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the 7.25% Notes issued under the indenture remains outstanding after such redemption and the redemption occurs within 120 days of the date of the closing of such equity offering. On or after December 1, 2013, we may redeem all or a part of the 7.25% Notes at redemption prices (expressed as percentages of principal amount) equal to 105.438% for the twelve-month period beginning on December 1, 2013, 103.625% for

 

43



Table of Contents

 

the twelve-month period beginning on December 1, 2014, 101.813% for the twelve-month period beginning on December 1, 2015 and 100.000% for the twelve-month period beginning on December 1, 2016 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date on the 7.25% Notes.

 

In June 2009, we issued $355.0 million aggregate principal amount of 4.25% convertible senior notes due June 2014 (the “4.25% Notes”). The 4.25% Notes are convertible upon the occurrence of certain conditions into shares of our common stock at an initial conversion rate of 43.1951 shares of our common stock per $1,000 principal amount of the convertible notes, equivalent to an initial conversion price of approximately $23.15 per share of common stock. The conversion rate will be subject to adjustment following certain dilutive events and certain corporate transactions. We may not redeem the 4.25% Notes prior to their maturity date.

 

The 4.25% Notes are our senior unsecured obligations and rank senior in right of payment to our existing and future indebtedness that is expressly subordinated in right of payment to the 4.25% Notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated; junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and liabilities incurred by our subsidiaries. The 4.25% Notes are not guaranteed by any of our subsidiaries.

 

In November 2010, the Partnership, as guarantor, and EXLP Operating LLC, a wholly-owned subsidiary of the Partnership, as borrower, entered into an amendment and restatement of their senior secured credit agreement (the “Partnership 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.

 

As of June 30, 2012, the Partnership had $256.5 million of undrawn and available capacity under its revolving credit facility. The Partnership Credit Agreement limits the Partnership’s Total Debt to EBITDA ratio (as defined in the Partnership Credit Agreement) of not greater than 4.75 to 1.0. The Partnership Credit Agreement allows for the Partnership’s 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. The Partnership completed an acquisition from us meeting these thresholds in the first quarter of 2012; therefore, 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.

 

The Partnership’s revolving credit facility bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. Depending on the Partnership’s 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 this facility were LIBOR loans and the applicable margin was 2.5%. The weighted average annual interest rate on the outstanding balance of this facility at June 30, 2012, excluding the effect of interest rate swaps, was 2.8%.

 

The Partnership’s term loan facility bears interest at a base rate or LIBOR, at the Partnership’s option, plus an applicable margin. Depending on the Partnership’s 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 Partnership Credit Agreement are secured by substantially all of the U.S. personal property assets of the Partnership and its Significant Domestic Subsidiaries (as defined in the Partnership Credit Agreement), including all of the membership interests of the Partnership’s Domestic Subsidiaries (as defined in the Partnership Credit Agreement).

 

The Partnership Credit Agreement contains various covenants with which the Partnership must comply, including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on its ability to incur additional indebtedness, enter into transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay dividends and distributions. It also contains various covenants requiring mandatory prepayments of the term loans from the net cash proceeds of certain future asset transfers. The Partnership must maintain various consolidated financial ratios, including a ratio of EBITDA (as defined in the Partnership Credit Agreement) to Total Interest Expense (as defined in the Partnership 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 Partnership Credit Agreement) and a ratio of Total Debt (as defined in the Partnership Credit Agreement) to EBITDA of not greater than 4.75 to 1.0. As discussed above, the Partnership completed an acquisition from us meeting these thresholds in the first quarter of 2012; therefore, the Partnership’s Total Debt to EBITDA ratio was temporarily increased from 4.75 to 1.0 to 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. As of

 

44



Table of Contents

 

June 30, 2012, the Partnership maintained a 8.0 to 1.0 EBITDA to Total Interest Expense ratio and a 3.6 to 1.0 Total Debt to EBITDA ratio. A violation of the Partnership’s Total Debt to EBITDA covenant would be an event of default under the Partnership Credit Agreement, which would trigger cross-default provisions under certain of our debt agreements. As of June 30, 2012, the Partnership was in compliance with all financial covenants under the Partnership Credit Agreement.

 

We have entered into interest rate swap agreements related to a portion of our variable rate debt. In the fourth quarter of 2010, we paid $43.0 million to terminate interest rate swap agreements with a total notional value of $585.0 million and a weighted average rate of 4.6%. These swaps qualified for hedge accounting and were previously included on our balance sheet as a liability and in accumulated other comprehensive income (loss). The liability was paid in connection with the termination, and the associated amount in accumulated other comprehensive income (loss) will be amortized into interest expense over the original term of the swaps. Of the total amount included in accumulated other comprehensive income (loss), $7.8 million was amortized into interest expense during the six months of 2012 and we expect $2.9 million to be amortized into interest expense during the remainder of 2012. See Part I, Item 3 “Quantitative and Qualitative Disclosures About Market Risk” of this report for further discussion of our interest rate swap agreements.

 

We may from time to time seek to retire or purchase our outstanding debt though 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.

 

Historically, we have financed capital expenditures with a combination of net cash provided by operating and financing activities. 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 adverse impact on our ability to maintain our fleet and to grow. If any of our lenders become unable to perform their obligations under our credit facilities, our borrowing capacity under these facilities could be reduced. Inability to borrow additional amounts under those facilities could limit our ability to fund our future growth and operations. Based on current market conditions, we expect that net cash provided by operating activities and borrowings under our credit facilities will be sufficient to finance our operating expenditures, capital expenditures and scheduled interest and debt repayments through December 31, 2012; however, to the extent it is not, we may seek additional debt or equity financing.

 

Dividends.  We have not paid any cash dividends on our common stock since our formation, and we do not anticipate paying such dividends in the foreseeable future. Our board of directors anticipates that all cash flows generated from operations in the foreseeable future will be retained and used to repay our debt or develop and expand our business, except for a portion of the cash flow generated from operations of the Partnership which will be used to pay distributions on its units. Any future determinations to pay cash dividends on our common stock will be at the discretion of our board of directors and will depend on our results of operations and financial condition, credit and loan agreements in effect at that time and other factors deemed relevant by our board of directors.

 

Partnership Distributions to Unitholders.  The Partnership’s partnership agreement requires it to distribute all of its “available cash” quarterly. Under the partnership agreement, available cash is defined generally to mean, for each fiscal quarter, (1) cash on hand at the Partnership at the end of the quarter in excess of the amount of reserves its general partner determines is necessary or appropriate to provide for the conduct of its business, to comply with applicable law, any of its debt instruments or other agreements or to provide for future distributions to its unitholders for any one or more of the upcoming four quarters, plus, (2) if the Partnership’s general partner so determines, all or a portion of the Partnership’s cash on hand on the date of determination of available cash for the quarter.

 

Under the terms of the partnership agreement, there is no guarantee that unitholders will receive quarterly distributions from the Partnership. The Partnership’s distribution policy, which may be changed at any time, is subject to certain restrictions, including (1) restrictions contained in the Partnership’s revolving credit facility, (2) the Partnership’s general partner’s establishment of reserves to fund future operations or cash distributions to the Partnership’s unitholders, (3) restrictions contained in the Delaware Revised Uniform Limited Partnership Act and (4) the Partnership’s lack of sufficient cash to pay distributions.

 

Through our ownership of common units and all of the equity interests in the Partnership’s general partner, we expect to receive cash distributions from the Partnership.

 

On July 30, 2012, Exterran GP LLC’s board of directors approved a cash distribution by the Partnership of $0.5025 per limited partner unit, or approximately $22.8 million, including distributions to the Partnership’s general partner on its incentive distribution rights. The distribution covers the 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.

 

45



Table of Contents

 

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 operating 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 SG&A activities, the impact of our financing methods and income taxes. Depreciation 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 income (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 income (loss). These limitations are primarily due to the exclusion of interest expense, depreciation and amortization expense, SG&A expense, impairments and restructuring charges. Each of these excluded expenses is material to our condensed 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.

 

For a reconciliation of gross margin to net loss, see Note 15 to the Financial Statements.

 

We define EBITDA, as adjusted, as net income (loss) plus income (loss) from discontinued operations (net of tax), cumulative effect of accounting changes (net of tax), income taxes, interest expense (including debt extinguishment costs and gain or loss on termination of interest rate swaps), depreciation and amortization expense, impairment charges, merger and integration expenses, restructuring charges and excluding non-cash gains or losses from foreign currency exchange rate changes recorded on intercompany obligations and other charges. We believe EBITDA, as 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), our subsidiaries’ capital structure (non-cash gains or losses from foreign currency exchange rate changes on intercompany obligations), tax consequences, impairment charges, merger and integration expenses, restructuring charges and other charges. Management uses EBITDA, as adjusted, as a supplemental measure to review current period operating performance, comparability measures and performance measures for period to period comparisons. Our EBITDA, as 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 adjusted, is not a measure of financial performance under GAAP, and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities and other measures determined in accordance with GAAP. Items excluded from EBITDA, as adjusted, are significant and necessary components to the operations of our business, and, therefore, EBITDA, as adjusted, should only be used as a supplemental measure of our operating performance.

 

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

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net loss

 

$

(166,898

)

$

(30,224

)

$

(159,611

)

$

(60,688

)

Loss from discontinued operations, net of tax

 

42,891

 

3,076

 

44,053

 

6,011

 

Depreciation and amortization

 

88,909

 

90,412

 

174,020

 

178,611

 

Long-lived asset impairment

 

128,543

 

2,063

 

132,665

 

2,063

 

Restructuring charges

 

1,266

 

 

4,313

 

 

Investments in non-consolidated affiliates impairment

 

 

 

224

 

 

Proceeds from sale of joint venture assets

 

(4,728

)

 

(42,291

)

 

Interest expense

 

36,968

 

34,586

 

74,959

 

71,756

 

(Gain) loss on currency exchange rate remeasurement of intercompany balances

 

10,008

 

(3,014

)

5,121

 

(1,026

)

Benefit from income taxes

 

(35,502

)

(14,113

)

(35,845

)

(17,580

)

EBITDA, as adjusted

 

$

101,457

 

$

82,786

 

$

197,608

 

$

179,147

 

 

46



Table of Contents

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no material off-balance sheet arrangements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks primarily associated with changes in interest rates and foreign currency exchange 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.

 

We have significant international operations. The net assets and liabilities of these operations are exposed to changes in currency exchange rates. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. We recorded a foreign currency loss in our condensed consolidated statements of operations of $6.0 million and $0.6 million for the first six months of 2012 and 2011, respectively. Our foreign currency gains and losses are primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency. Changes in exchange rates may create gains or losses in future periods to the extent we maintain net assets and liabilities not denominated in the functional currency.

 

As of June 30, 2012, after taking into consideration interest rate swaps, we had approximately $285.0 million of outstanding indebtedness that was effectively subject to floating interest rates. A 1% increase in the effective interest rate on our outstanding debt subject to floating interest rates would result in an annual increase in our interest expense of approximately $2.9 million.

 

For further information regarding our use of interest rate swap agreements to manage our exposure to interest rate fluctuations on a portion of our debt obligations, see Note 8 to the Financial Statements.

 

Item 4.  Controls and Procedures

 

Management’s Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on the evaluation, as of June 30, 2012, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

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, it believes that any ultimate liability arising from any of 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 for the period in which the resolution occurs.

 

47



Table of Contents

 

Item 1A.  Risk Factors

 

There have been no material changes or updates to our risk factors that were previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, except as follows:

 

Natural gas prices in North America are at low levels, which could decrease demand for our natural gas compression and oil and natural gas production and processing equipment and services, which could adversely affect our business.

 

Our revenue, earnings and financial position are affected by, among other things, market conditions that impact demand and pricing for natural gas compression and oil and natural gas production and processing.  Oil and natural gas exploration and development activity and the number of well completions typically decline when there is a sustained reduction in oil or natural gas prices or significant instability in energy markets. Even the perception of longer-term lower oil or natural gas prices by oil and natural gas exploration, development and production companies can result in their decision to cancel, reduce or postpone major expenditures or to reduce or shut in well production. In April 2012, natural gas prices in North America fell to the lowest levels seen in more than a decade at around $2.00 per MMBtu and, as a result, certain companies announced a reduction in their natural gas drilling and production activities, particularly in dry gas areas. Since then, natural gas prices have improved somewhat to around $3.00 per MMBtu as of July 2012, but still remain at historically low levels. Additionally, in North America, compression services for our customers’ production from unconventional natural gas sources constitute an increasing percentage of our business. Some of these unconventional sources are less economic to produce in lower natural gas price environments. If the current price levels for natural gas continue or decrease, the level of production activity and the demand for our natural gas compression and oil and natural gas production and processing equipment and services could decrease, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.  A reduction in demand for our products and services could also force us to reduce our pricing substantially.

 

There are many risks associated with conducting operations in international markets.

 

We operate in many countries outside the U.S., and these activities accounted for a substantial amount of our revenue for the year ended December 31, 2011. We are exposed to risks inherent in doing business in each of the countries in which we operate. Our operations are subject to various risks unique to each country that could have a material adverse effect on our business, financial condition, results of operations and cash flows. For example, as discussed in Note 2 to the Financial Statements, in 2009 the Venezuelan state-owned oil company, Petroleos de Venezuela S.A. (“PDVSA”), assumed control over substantially all of our assets and operations in Venezuela.

 

More recently, in April 2012, Argentina assumed control over its largest oil and gas producer, Yacimientos Petroliferos Fiscales (“YPF”).  We had 542,000 horsepower of compression in Argentina as of June 30, 2012, and we generated $75 million of revenue in Argentina, including $32 millon of revenue from YPF, during the six months ended June 30, 2012.  We are unable to predict what effect, if any, the nationalization of YPF will have on our business in Argentina, or whether Argentina will nationalize additional businesses in the oil and gas industry; however, the nationalization of YPF and any such further actions by Argentina could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The risks inherent in our international business activities include the following:

 

·                  difficulties in managing international operations, including our ability to timely and cost effectively execute projects;

 

·                  unexpected changes in regulatory requirements, laws or policies by foreign agencies or governments;

 

·                  work stoppages;

 

·                  training and retaining qualified personnel in international markets;

 

·                  the burden of complying with multiple and potentially conflicting laws and regulations;

 

·                  tariffs and other trade barriers;

 

·                  actions by governments or national oil companies that result in the nullification or renegotiation on less than favorable terms of existing contracts, or otherwise result in the deprivation of contractual rights, and other difficulties in enforcing contractual obligations;

 

48



Table of Contents

 

·                  governmental actions that result in restricting the movement of property or that impede our ability to import or export parts or equipment;

 

·                  foreign currency exchange rate risks, including the risk of currency devaluations by foreign governments;

 

·                  difficulty in collecting international accounts receivable;

 

·                  potentially longer receipt of payment cycles;

 

·                  changes in political and economic conditions in the countries in which we operate, including general political unrest, the nationalization of energy related assets, civil uprisings, riots, kidnappings, violence associated with drug cartels and terrorist acts;

 

·                  potentially adverse tax consequences or tax law changes;

 

·                  currency controls or restrictions on repatriation of earnings;

 

·                  expropriation, confiscation or nationalization of property without fair compensation;

 

·                  the risk that our international customers may have reduced access to credit because of higher interest rates, reduced bank lending or a deterioration in our customers’ or their lenders’ financial condition;

 

·                  complications associated with installing, operating and repairing equipment in remote locations;

 

·                  limitations on insurance coverage;

 

·                  inflation;

 

·                  the geographic, time zone, language and cultural differences among personnel in different areas of the world; and

 

·                  difficulties in establishing new international offices and the risks inherent in establishing new relationships in foreign countries.

 

In addition, we may plan to expand our business in international markets where we have not previously conducted business. The risks inherent in establishing new business ventures, especially in international markets where local customs, laws and business procedures present special challenges, may affect our ability to be successful in these ventures or avoid losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

New regulations, proposed regulations and proposed modifications to existing regulations under the Clean Air Act (“CAA”), if implemented, could result in increased compliance costs.

 

On August 20, 2010, the U.S. Environmental Protection Agency (“EPA”) published new regulations under the CAA to control emissions of hazardous air pollutants from existing stationary reciprocal internal combustion engines. The rule as originally published would have required us to undertake certain expenditures and activities, likely including purchasing and installing emissions control equipment, such as oxidation catalysts or non-selective catalytic reduction equipment, on a portion of our engines located at major sources of hazardous air pollutants and all our engines over a certain size regardless of location, following prescribed maintenance practices for engines (which are consistent with our existing practices), and implementing additional emissions testing and monitoring. On October 19, 2010, we submitted a legal challenge to the U.S. Court of Appeals for the D.C. Circuit and a Petition for Administrative Reconsideration to the EPA for some monitoring aspects of the rule. The legal challenge has been held in abeyance since December 3, 2010, pending the EPA’s consideration of the Petition for Administrative Reconsideration. On June 7, 2012, the EPA published proposed changes to the regulation in response to the petition such that, among other things, the proposed rule will require catalyst installation only on equipment at sites that in effect do not meet the U.S. Department of Transportation (DOT) definition of “remote.”  All other engines will be subject to management practices only.  The comment period for the proposed changes ends August 9, 2012.  At this point, we cannot predict what the EPA will adopt as its final rule, and as a result we cannot currently accurately predict the cost to comply with the rule’s requirements. Compliance with the final rule is anticipated to be required by October 2013.

 

49



Table of Contents

 

In addition, the Texas Commission on Environmental Quality (“TCEQ”) has finalized revisions to certain air permit programs that significantly increase the air permitting requirements for new and certain existing oil and natural gas production and gathering sites for 23 counties in the Barnett Shale production area. The final rule establishes new emissions standards for engines, which could impact the operation of specific categories of engines by requiring the use of alternative engines, compressor packages or the installation of aftermarket emissions control equipment. The rule became effective for the Barnett Shale production area in April 2011, and the lower emissions standards will become applicable between 2015 and 2030 depending on the type of engine and the permitting requirements. Our cost to comply with the revised air permit programs is not expected to be material at this time. Although the TCEQ had previously stated it would consider expanding application of the new air permit program statewide, the Texas Legislature adopted legislation prohibiting such an expansion in the near term, including by preventing the TCEQ from expending funds to extend the rule’s geographic scope prior to August 31, 2013 and prior to conducting and providing to the Texas Legislature an economic impact study regarding any such expansion. At this point, we cannot predict whether or when such a geographic expansion of those rules might occur or the cost to comply with any such requirements.  Notably, in June 2012, the TCEQ published a proposal that would revise these regulations to remove eight counties from the 23-county area affected by these more stringent air permit programs.  The comment period on this proposal closed on July 16, 2012.

 

On April 17, 2012, the EPA issued final rules focused on reducing the emissions of certain chemicals by the oil and natural gas industry, including volatile organic compounds, sulfur dioxide and certain air toxics. At this point, we are still reviewing the final rule, and cannot yet predict the cost to comply.

 

On May 21, 2012, the EPA issued new ozone nonattainment designations for all areas except Chicago, in relation to the 2008 national ambient air quality standard (“NAAQS”) for ozone.  Among other things, these new designations add Wise County to the Dallas-Fort Worth (“DFW”) nonattainment area.  This new designation will require Texas to modify its State Implementation Plan (“SIP”)  to include a plan to get Wise County into compliance with the ozone NAAQS.  This modification process typically takes about three to five years.  If Texas implements the same control requirements in Wise County that are already in place in the other counties in the DFW nonattainment area, we could have to modify or remove and replace a significant amount of equipment we currently utilize in Wise County.  However, at this point we cannot predict what Texas’ new SIP will require or what equipment will still be operating in Wise County when it comes into effect and, as a result, we cannot currently accurately predict the impact or cost to comply.

 

These new regulations, and any other new regulations requiring the installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could have a material adverse impact on our business, financial condition, results of operations and cash flows.

 

Climate change legislation and regulatory initiatives could result in increased compliance costs.

 

The U.S. Congress has considered legislation to restrict or regulate emissions of greenhouse gases, such as carbon dioxide and methane. One bill, passed by the House of Representatives, if enacted by the full Congress, would have required greenhouse gas emissions reductions by covered sources of as much as 17% from 2005 levels by 2020 and by as much as 83% by 2050. It presently appears unlikely that comprehensive climate legislation will be passed by either house of Congress in the near future, although energy legislation and other initiatives continue to be proposed that may be relevant to greenhouse gas emissions issues. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address greenhouse gas emissions, primarily through the planned development of emissions inventories or regional greenhouse gas cap and trade programs. Although most of the state-level initiatives have to date been focused on large sources of greenhouse gas emissions, such as electric power plants, it is possible that smaller sources such as our gas-fired compressors could become subject to greenhouse gas-related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for greenhouse gas emissions resulting from our operations.

 

Independent of Congress, the EPA has adopted regulations to control greenhouse gas emissions under its existing CAA authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and report their greenhouse gas emissions. In addition, the EPA in June 2010 published a final rule providing for the tailored applicability of air permitting requirements for greenhouse gas emissions. The EPA reported that the rulemaking was necessary because without it certain permitting requirements would apply as of January 2011 at an emissions level that would have greatly increased the number of sources required to obtain permits and, among other things, imposed undue costs on small sources and overwhelmed the resources of permitting authorities. In the rule, the EPA established two initial steps of phase-in to minimize those burdens, excluding certain smaller sources from greenhouse gas permitting until at least April 30, 2016. On January 2, 2011, the first step of the phase-in applied only to new projects at major sources (as defined under those CAA permitting programs) that, among other things, increase net greenhouse gas emissions by 75,000 tons per year. In July 2011, the second step of the phase-in began requiring permitting for otherwise minor sources of air emissions that have the potential to emit at least 100,000 tons per year of greenhouse gases. On June 29, 2012, the EPA issued a final rule that maintains the greenhouse gas permitting thresholds that were established in step one and step two of the tailoring rule.  The final rule constitutes EPA’s third step in the agency’s phased-in approach to greenhouse gas permitting

 

50



Table of Contents

 

under the CAA.  On June 26, 2012, the U.S. Court of Appeals for the D.C. Circuit upheld EPA’s greenhouse gas regulations including these permitting requirements against a challenge from a number of states and industry groups.  These rules will affect some of our and our customers’ largest new or modified facilities going forward, requiring us to obtain permits that specifically include authorizations to emit greenhouse gases after demonstrating that those facilities will use the best available control technologies and accepting firm limits on emissions.

 

Although it is not currently possible to predict how any proposed or future greenhouse gas legislation or regulation by Congress, the states or multi-state regions will impact our business, any legislation or regulation of greenhouse gas emissions that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

51



Table of Contents

 

Item 6.  Exhibits

 

Exhibit No.

 

Description

2.1 

 

 

Contribution, Conveyance and Assumption Agreement, dated May 23, 2011, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on May 24, 2011

 

 

 

 

2.2

 

 

Contribution, Conveyance and Assumption Agreement, dated February 22, 2012, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 24, 2012

 

 

 

 

3.1 

 

 

Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 20, 2007

 

 

 

 

3.2 

 

 

Second Amended and Restated Bylaws of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008

 

 

 

 

4.1 

 

 

Eighth Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 10.15 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007

 

 

 

 

4.2

 

 

Ninth Supplemental Indenture, dated as of June 27, 2012, by and among Exterran Holdings, Inc., Exterran Energy LLC and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2012

 

 

 

 

4.3

 

 

Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

 

 

 

 

4.4 

 

 

Supplemental Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, for the 4.25% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

 

 

 

 

4.5 

 

 

Indenture, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as trustee, for the 7.25% Senior Notes due 2018, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

 

 

 

 

4.6 

 

 

Registration Rights Agreement, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and the Initial Purchasers named therein, incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

 

 

 

 

31.1* 

 

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31.2*

 

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.1**

 

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.2**

 

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101.1**

*

 

Interactive data files pursuant to Rule 405 of Regulation S-T

 

52



Table of Contents

 


*

 

Filed herewith.

**

 

Furnished, not filed.

***

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to any liability under those sections.

 

53



Table of Contents

 

SIGNATURES

 

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

 

 

EXTERRAN HOLDINGS, INC.

 

 

Date: August 2, 2012

By:

/s/ WILLIAM M. AUSTIN

 

 

William M. Austin

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

 

 

 

By:

/s/ KENNETH R. BICKETT

 

 

Kenneth R. Bickett

 

 

Vice President and Controller

 

 

(Principal Accounting Officer)

 

54



Table of Contents

 

EXHIBIT INDEX

 

Exhibit No.

 

Description

2.1 

 

 

Contribution, Conveyance and Assumption Agreement, dated May 23, 2011, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed on May 24, 2011

 

 

 

 

2.2 

 

 

Contribution, Conveyance and Assumption Agreement, dated February 22, 2012, by and among Exterran Holdings, Inc., Exterran Energy Corp., Exterran General Holdings LLC, Exterran Energy Solutions, L.P., EES Leasing LLC, EXH GP LP LLC, Exterran GP LLC, EXH MLP LP LLC, Exterran General Partner, L.P., EXLP Operating LLC, EXLP Leasing LLC and Exterran Partners, L.P., incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on February 24, 2012

 

 

 

 

3.1 

 

 

Restated Certificate of Incorporation of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on August 20, 2007

 

 

 

 

3.2 

 

 

Second Amended and Restated Bylaws of Exterran Holdings, Inc., incorporated by reference to Exhibit 3.2 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008

 

 

 

 

4.1 

 

 

Eighth Supplemental Indenture, dated August 20, 2007, by and between Hanover Compressor Company, Exterran Holdings, Inc., and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 10.15 of the Registrant’s Current Report on Form 8-K filed on August 23, 2007

 

 

 

 

4.2

 

 

Ninth Supplemental Indenture, dated as of June 27, 2012, by and among Exterran Holdings, Inc., Exterran Energy LLC and U.S. Bank National Association, as trustee, for the 4.75% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on July 2, 2012

 

 

 

 

4.3

 

 

Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

 

 

 

 

4.4 

 

 

Supplemental Indenture, dated as of June 10, 2009, between Exterran Holdings, Inc. and Wells Fargo Bank, National Association, as trustee, for the 4.25% Convertible Senior Notes due 2014, incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on June 16, 2009

 

 

 

 

4.5

 

 

Indenture, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and Wells Fargo Bank, National Association, as trustee, for the 7.25% Senior Notes due 2018, incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

 

 

 

 

4.6 

 

 

Registration Rights Agreement, dated as of November 23, 2010, by and among Exterran Holdings, Inc., the Guarantors named therein and the Initial Purchasers named therein, incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 24, 2010

 

 

 

 

31.1* 

 

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

31.2*

 

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.1**

 

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

32.2**

 

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

101.1**

*

 

Interactive data files pursuant to Rule 405 of Regulation S-T

 



Table of Contents

 


*

 

Filed herewith.

**

 

Furnished, not filed.

***

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to any liability under those sections.