UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

 (Mark One)

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

 

For the quarterly period ended September 30, 2021

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

 

For the transition period from _____ to______

 

Commission File Number 001-35195 

CSI Compressco LP

(Exact name of registrant as specified in its charter)

Delaware			94-3450907
(State or Other Jurisdiction of Incorporation or Organization)			(I.R.S. Employer Identification No.)
24955 Interstate 45 North
The Woodlands,
TX			77380
(Address of Principal Executive Offices)			(Zip Code)

 (281) 364-2244

(Registrant’s Telephone Number, Including Area Code)

_______________________________________________________________________

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:

Title of each class			Trading Symbol(s)			Name of each exchange on which registered
COMMON UNITS REPRESENTING LIMITED PARTNERSHIP INTERESTS			CCLP			NASDAQ

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 ☒  No ☐

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

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

Large accelerated filer			☐			Accelerated filer			☐
Non-accelerated filer			☒			Smaller reporting company			☒
						Emerging growth company			☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

As of November 10, 2021, there were 138,391,700 Common Units outstanding.

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CSI Compressco LP
Table of Contents
			Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations			1
Consolidated Statements of Comprehensive Income (Loss)			2
Consolidated Balance Sheets			3
Consolidated Statements of Partners’ Capital			4
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			28
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults Upon Senior Securities			29
Item 4. Mine Safety Disclosures			29
Item 5. Other Information			29
Item 6. Exhibits			30
SIGNATURES			31

CERTAIN REFERENCES IN THIS QUARTERLY REPORT

 

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

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Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

CSI Compressco LP

Consolidated Statements of Operations

(In Thousands, Except Unit and Per Unit Amounts)

(Unaudited)

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Revenues:
Compression and related services			$	56,388					$	53,367					$	165,956					$	175,416
Aftermarket services			13,952						13,862						39,242						47,569
Equipment sales			954						5,029						1,564						7,478
Total revenues			71,294						72,258						206,762						230,463
Cost of revenues (excluding depreciation and amortization expense):
Cost of compression and related services			29,040						25,133						82,063						82,136
Cost of aftermarket services			11,864						11,815						33,340						41,493
Cost of equipment sales			1,492						4,820						1,838						7,407
Total cost of revenues			42,396						41,768						117,241						131,036
Depreciation and amortization			18,695						19,896						56,222						59,446
Impairments and other charges			—						—						—						8,874
Insurance recoveries			—						—						—						(517)
Selling, general, and administrative expense			9,433						7,973						28,143						26,304
Interest expense, net			13,951						13,886						41,781						40,635
Other (income) expense, net			395						(516)						622						4,327
Loss before taxes and discontinued operations			(13,576)						(10,749)						(37,247)						(39,642)
Provision for income taxes			516						715						3,042						1,872
Loss from continuing operations			(14,092)						(11,464)						$	(40,289)					$	(41,514)
Loss from discontinued operations, net of tax			(270)						(1,143)						$	(623)					$	(9,301)
Net loss			$	(14,362)					$	(12,607)					$	(40,912)					$	(50,815)
General partner interest in net loss			$	(199)					$	(177)					$	(569)					$	(714)
Common units interest in net loss			$	(14,163)					$	(12,430)					$	(40,343)					$	(50,101)
Basic and diluted net loss per common unit:
Loss from continuing operations per common unit			$	(0.29)					$	(0.23)					$	(0.83)					$	(0.85)
Loss from discontinued operations per common unit			(0.01)						(0.02)						$	(0.01)					$	(0.20)
Net loss per common unit			$	(0.30)					$	(0.25)					$	(0.84)					$	(1.05)
Weighted average common units outstanding:
Basic			47,971,240						47,344,351						47,889,691						47,284,790
Diluted			47,971,240						47,344,351						47,889,691						47,284,790

See Notes to Consolidated Financial Statements

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CSI Compressco LP

Consolidated Statements of Comprehensive Income (Loss)

(In Thousands)

(Unaudited)

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
Net loss			$	(14,362)					$	(12,607)					$	(40,912)					$	(50,815)
Foreign currency translation adjustment, net of tax of $0 in 2021 and 2020			(152)						104						(14)						(72)
Comprehensive loss			$	(14,514)					$	(12,503)					$	(40,926)					$	(50,887)

 

See Notes to Consolidated Financial Statements

2

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CSI Compressco LP

Consolidated Balance Sheets

(In Thousands, Except Unit Amounts)

			September 30, 2021						December 31, 2020
			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			$	23,484					$	16,577
Trade accounts receivable, net of allowances for doubtful accounts of $862 as of September 30, 2021 and $1,333 as of December 31, 2020			48,182						43,837
Inventories			31,894						31,188
Prepaid expenses and other current assets			6,266						5,184
Current assets associated with discontinued operations			7						39
Total current assets			109,833						96,825
Property, plant, and equipment:
Land and building			13,266						13,259
Compressors and equipment			989,386						975,375
Vehicles			7,653						7,692
Construction in progress			14,274						12,763
Total property, plant, and equipment			1,024,579						1,009,089
Less accumulated depreciation			(504,094)						(457,688)
Net property, plant, and equipment			520,485						551,401
Other assets:
Intangible assets, net of accumulated amortization of $32,932 as of September 30, 2021 and $30,711 as of December 31, 2020			22,836						25,057
Operating lease right-of-use assets			27,136						32,637
Deferred tax asset			10						10
Other assets			3,423						4,036
Total other assets			53,405						61,740
Total assets			$	683,723					$	709,966
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable			$	23,923					$	19,766
Accrued liabilities and other			48,484						36,070
Amounts payable to affiliates			2,907						3,234
Current portion of long-term debt			80,331						—
Current liabilities associated with discontinued operations			140						345
Total current liabilities			155,785						59,415
Other liabilities:
Long-term debt, net			560,874						638,631
Deferred tax liabilities			2,624						1,478
Long-term affiliate payable			11,107						—
Operating lease liabilities			19,187						24,059
Other long-term liabilities			555						11,716
Total other liabilities			594,347						675,884
Commitments and contingencies
Partners’ capital:
General partner interest			(1,475)						(885)
Common units (47,971,240 units issued and outstanding at September 30, 2021 and 47,352,291 units issued and outstanding at December 31, 2020)			(50,527)						(10,055)
Accumulated other comprehensive loss			(14,407)						(14,393)
Total partners’ capital			(66,409)						(25,333)
Total liabilities and partners’ capital			$	683,723					$	709,966

 

See Notes to Consolidated Financial Statements

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CSI Compressco LP

Consolidated Statements of Partners’ Capital

(In Thousands)

(Unaudited)

			Partners’ Capital																		Accumulated Other Comprehensive Income (Loss)						Total Partners’ Capital
			General Partner						Common Unitholders
			Amount						Units						Amount
Balance at December 31, 2020			$	(885)					47,352						$	(10,055)					$	(14,393)					$	(25,333)
Net loss			(202)						—						(14,263)						—						(14,465)
Distributions ($0.01 per unit)			(7)						—						(477)						—						(484)
Equity compensation, net			—						—						474						—						474
Vesting of Phantom Units			—						619						—						—						—
Translation adjustment, net of taxes of $0			—						—						—						57						57
Acquisition of affiliate from TETRA			—						—						(141)						—						(141)
Balance at March 31, 2021			$	(1,094)					47,971						$	(24,462)					$	(14,336)					$	(39,892)
Net loss			(168)						—						(11,917)						—						(12,085)
Distributions ($0.01 per unit)			(7)						—						(480)						—						(487)
Equity compensation, net			—						—						475						—						475
Vesting of Phantom Units			—						—						—						—						—
Translation adjustment, net of taxes of $0			—						—						—						81						81
Balance at June 30, 2021			$	(1,269)					47,971						$	(36,384)					$	(14,255)					$	(51,908)
Net loss			(199)						—						(14,163)						—						(14,362)
Distributions ($0.01 per unit)			(7)						—						(479)						—						(486)
Equity compensation			—						—						499						—						499
Vesting of Phantom Units			—						—						—						—						—
Translation adjustment, net of taxes of $0			—						—						—						(152)						(152)
Balance at September 30, 2021			$	(1,475)					47,971						$	(50,527)					$	(14,407)					$	(66,409)

See Notes to Consolidated Financial Statements

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			Partners’ Capital																		Accumulated Other Comprehensive Income (Loss)						Total Partners’ Capital
									Limited Partners
			General Partner						Common Unitholders
			Amount						Units						Amount
Balance at December 31, 2019			$	180					47,079						$	63,384					$	(14,573)					$	48,991
Net loss			(192)						—						(13,438)						—						(13,630)
Distributions ($0.01 per unit)			(7)						—						(471)						—						(478)
Equity compensation, net			—						—						229						—						229
Vesting of Phantom Units			—						213						—						—						—
Translation adjustment, net of taxes of $0			—						—						—						(353)						(353)
Balance at March 31, 2020			$	(19)					47,292						$	49,704					$	(14,926)					$	34,759
Net loss			(345)						—						(24,233)						—						(24,578)
Distributions ($0.01 per unit)			(7)						—						(473)						—						(480)
Equity compensation, net			—						—						452						—						452
Vesting of Phantom Units			—						52						—						—						—
Translation adjustment, net of taxes of $0			—						—						—						177						177
Balance at June 30, 2020			$	(371)					47,344						$	25,450					$	(14,749)					$	10,330
Net loss			(177)						—						(12,430)						—						(12,607)
Distributions ($0.01 per unit)			(7)						—						(473)						—						(480)
Equity compensation, net			—						—						229						—						229
Translation adjustment, net of taxes of $0			—						—						—						104						104
Balance at September 30, 2020			$	(555)					47,344						$	12,776					$	(14,645)					$	(2,424)

See Notes to Consolidated Financial Statements

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CSI Compressco LP

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

			Nine Months Ended September 30,
			2021						2020
Operating activities:
Net loss			$	(40,912)					$	(50,815)
Reconciliation of net loss to cash provided by operating activities:
Depreciation and amortization			56,222						59,972
Impairments and other charges			—						14,348
Provision for deferred income taxes			1,182						587
Insurance recoveries associated with damaged equipment			—						(517)
Equity compensation expense			1,807						1,044
Provision for doubtful accounts			59						1,053
Amortization of deferred financing costs			428						2,039
Equipment received in lieu of cash			—						725
Debt exchange expenses			—						4,777
Other non-cash charges and credits			(199)						(491)
Gain on sale of property, plant, and equipment			(109)						(1,676)
Changes in operating assets and liabilities:
Accounts receivable			(4,311)						6,541
Inventories			(5,673)						11,806
Prepaid expenses and other current assets			(1,229)						(2,253)
Accounts payable and accrued expenses			15,920						(32,959)
Other			(373)						(452)
Net cash provided by (used in) operating activities			22,812						13,729
Investing activities:
Purchases of property, plant, and equipment, net			(17,253)						(10,789)
Proceeds from sale of property, plant, and equipment			438						21,731
Insurance recoveries associated with damaged equipment			—						517
Acquisition of affiliate from TETRA, net of cash acquired			420						—
Advances and other investing activities			(112)						—
Net cash used in investing activities			(16,507)						11,459
Financing activities:
Proceeds from long-term debt			4,915						337,549
Payments of long-term debt			(2,154)						(341,154)
Distributions			(1,457)						(1,438)
Other financing activities			(159)						(3,563)
Payments to affiliate			(545)						(2,261)
Net cash used in financing activities			600						(10,867)
Effect of exchange rate changes on cash			2						8
Increase (decrease) in cash and cash equivalents and restricted cash			6,907						14,329
Cash and cash equivalents at beginning of period			16,577						2,370
Cash and cash equivalents and restricted cash at end of period			$	23,484					$	16,699
Supplemental cash flow information:
Interest paid			$	26,550					$	32,070
Income taxes paid			$	2,536					$	2,428
Decrease (increase) in accrued capital expenditures			$	(1,050)					$	1,166
Paid-in-kind interest			$	2,750					$	—

See Notes to Consolidated Financial Statements

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CSI Compressco LP

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 — ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES

 

Organization

    CSI Compressco LP, a Delaware limited partnership, is a provider of compression services and equipment for natural gas and oil production, gathering, artificial lift, transmission, processing, and storage. We also provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide compression services and equipment to a broad base of natural gas and oil exploration and production, midstream, and transmission companies operating throughout many of the onshore producing regions of the United States as well as in a number of international locations, including the countries of Mexico, Canada, and Argentina. Previously, our equipment sales business included our new unit sales business that consisted of the fabrication and sale of new standard and custom-designed, engineered compressor packages fabricated primarily at our facility in Midland, Texas that were used to provide compression services or sold to our customers. In the fourth quarter of 2020, we fully exited the new unit sales business and we have reflected these operations as discontinued operations for all periods presented. See Note 2 – “Discontinued Operations.” Used equipment sales revenue continues to be included in equipment sales revenue. Unless the context requires otherwise, when we refer to “the Partnership,” “we,” “us,” and “our,” we are describing CSI Compressco LP and its wholly owned subsidiaries.

Presentation

 

Our unaudited consolidated financial statements include the accounts of our wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, our unaudited consolidated financial statements as of September 30, 2021, and for the three and nine-month periods ended September 30, 2021 and 2020, include all normal recurring adjustments that are necessary to provide a fair statement of our results for these interim periods. Operating results for the three and nine-month period ended September 30, 2021 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2021.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission (“SEC”) and do not include all information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. These financial statements should be read in conjunction with the financial statements for the year ended December 31, 2020 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 4, 2021.

Going Concern Assessment

On August 15, 2022, our 7.25% Senior Notes mature. These Senior Notes had $80.3 million outstanding net of unamortized discounts and unamortized deferred financing costs as of September 30, 2021. As the maturity date of these notes is within 12 months after the date these financial statements were issued, the amount due was included in our going concern assessment. To address this maturity, on November 10, 2021, CSI Compressco, along with its General Partner, closed a series of transactions that enable the Partnership to redeem the Senior Notes. The transactions included (i) the acquisition of certain Spartan entities in exchange for 48.4 million common units and the assumption of approximately $32.5 million in debt as consideration; (ii) private placements of common unit issuance raising approximately $57 million; (iii) issuance of additional secured debt of $10 million; (iv) purchase of compressor units from the Partnership by the acquired entities of Spartan in an intercompany transaction for $24 million; and (v) issued notice of the redemption of the Senior Notes. See Note 11 - “Subsequent Events” for further details related to these transactions.

Segments

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

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Significant Accounting Policies

    Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K. There have been no significant changes in our accounting policies or the application thereof during the three and nine months ended September 30, 2021.

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclose contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues, expenses, and impairments during the reporting period. Actual results could differ from those estimates, and such differences could be material.

Reclassifications

    Certain previously reported financial information has been reclassified to present our new unit sales business as discontinued operations. See Note 2 – “Discontinued Operations” for further information. In addition, certain previously reported financial information has been reclassified to conform to the current year’s presentation. Other than the discontinued operations presentation, the impact of reclassifications was not significant to the prior year's overall presentation. Unless otherwise noted, amounts and disclosures throughout these Notes to Consolidated Financial Statements relate solely to continuing operations and exclude all discontinued operations.

Cash Equivalents

We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents.

Foreign Currencies

 

Accumulated other comprehensive income (loss) is included in partners’ capital in the accompanying consolidated balance sheets and consists of the cumulative currency translation adjustments associated with our international operations. Foreign currency exchange (gains) and losses are included in other (income) expense, net and totaled $0.3 million and $0.2 million during the three and nine-month periods ended September 30, 2021, respectively, and $(0.4) million and $1.0 million during the three and nine- month periods ended September 30, 2020, respectively.

Inventories

 

Inventories consist primarily of compressor package parts and supplies and work in process and are stated at the lower of cost or net realizable value. For parts and supplies, cost is determined using the weighted average cost method. The cost of work in progress is determined using the specific identification method.

Impairments and Other Charges

    Impairments of long-lived assets, including identified intangible assets, are determined periodically, when indicators of impairment are present. If such indicators are present, the determination of the amount of impairment is based on our judgments as to the future undiscounted operating cash flows to be generated from the relevant assets throughout their remaining estimated useful lives. If these undiscounted cash flows are less than the carrying amount of the related asset, an impairment is recognized for the excess of the carrying value over its fair value. Fair value of intangible assets is generally determined using the discounted present value of future cash flows using discount rates commensurate with the risks inherent with the specific assets. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less estimated selling costs. There were no impairments attributed to continuing operations recorded during the three and nine-month periods ended September 30, 2021. See Note 4 - "Impairments and Other Charges" for additional discussion of recorded impairments during the three and nine-month periods ended September 30, 2020.

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Income Taxes

Our operations are not subject to U.S. federal income tax other than the operations that are conducted through taxable subsidiaries. We incur state and local income taxes in certain areas of the U.S. in which we conduct business. We incur income taxes and are subject to withholding requirements related to certain of our operations in Latin America, Canada, and other foreign countries in which we operate. Furthermore, we also incur Texas Margin Tax, which, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, is classified as an income tax for reporting purposes. A portion of the carrying value of certain deferred tax assets is subject to a valuation allowance.

Earnings Per Common Unit

 

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

 

When computing earnings per common unit under the two class method in periods when distributions are greater than earnings, the amount of the distribution is deducted from net income (loss) and the excess of distributions over earnings is allocated between the General Partner and common units based on how our Partnership Agreement allocates net losses.

 

Diluted earnings per common unit are computed using the treasury stock method, which considers the potential future issuance of limited partner common units. Unvested phantom units are not included in basic earnings per common unit, as they are not considered to be participating securities, but are included in the calculation of diluted earnings per common unit. For the three and nine-month periods ended September 30, 2021 and September 30, 2020, all unvested phantom units were excluded from the calculation of diluted common units because the impact was anti-dilutive.

Fair Value Measurements

    We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements were utilized in the determination of the carrying value of our Series A Preferred Units (a Level 3 fair value measurement). We also utilize fair value measurements on a recurring basis in the accounting for our foreign currency forward purchase and sale derivative contracts. For these fair value measurements, we utilize the quoted value (a Level 2 fair value measurement). Refer to Note 8 –

“Fair Value Measurements” for further discussion.

Fair value measurements are also utilized on a nonrecurring basis, such as in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets (a Level 3 fair value measurement) and for the impairment of long-lived assets (a Level 3 fair value measurement).

Distributions

    On January 19, 2021, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended December 31, 2020 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution was paid on February 12, 2021, to each of the holders of common units of record as of the close of business on January 29, 2021.

On April 19, 2021, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended March 31, 2021 of 0.01 per outstanding common unit. This distribution equates to a distribution of 0.04 per outstanding common unit on an annualized basis. This distribution was paid on May 14, 2021 to each of the holders of common units of record as of the close of business on April 30, 2021.

On July 19, 2021, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended June 30, 2021 of $0.01 per outstanding common unit. This distribution equates to a distribution of

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$0.04 per outstanding common unit on an annualized basis. This distribution was paid on August 13, 2021 to each of the holders of common units of record as of the close of business on July 30, 2021.

New Accounting Pronouncements

Standards adopted in 2021

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions related to intraperiod tax allocation, interim period income tax calculation methodology, and the recognition of deferred tax liabilities for outside basis differences. It also simplifies certain aspects of accounting for franchise taxes and clarifies the accounting for transactions that results in a step-up in the tax basis of goodwill. On January 1, 2021, we adopted ASU 2019-12. The adoption of this standard did not have a material impact on our consolidated financial statements.

     

Standards not yet adopted

    In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 amends the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses on financial instruments not accounted for at fair value through net income. The provisions require credit impairments to be measured over the contractual life of an asset and developed with consideration for past events, current conditions, and forecasts of future economic information. Credit impairments will be accounted for as an allowance for credit losses deducted from the amortized cost basis at each reporting date. Updates at each reporting date after initial adoption will be recorded through selling, general, and administrative expense. ASU 2016-13 will be effective for us in the first quarter of 2023. We continue to assess the potential effects of these changes to our consolidated financial statements.

    

    In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848)”, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments were effective for all entities as of March 12, 2020 through December 31, 2022. Entities may elect to apply the amendments for contract modifications as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020. As of September 30, 2021, we have not modified our credit agreements to remove references to LIBOR. We are currently evaluating the impact of the provisions of ASU 2020-04 on our consolidated financial statements.

NOTE 2 — DISCONTINUED OPERATIONS

On July 2, 2020, we completed the sale of our Midland manufacturing facility. The Midland facility was used to design, fabricate and assemble new standard and customized compressor packages for our new unit sales business. In connection with the Midland manufacturing facility sale, we entered into an agreement with the buyer to continue to operate a portion of the facility, which allowed us to close out the remaining backlog for the new unit sales business and to continue to operate our aftermarket services business at that location for an interim period. Following completion of the last unit in October 2020, we ceased fabricating new compressor packages for sales to third parties or for our own service fleet. The operations associated with the new unit sales business were previously reported in equipment sales revenues and are now reflected as discontinued operations in our financial statements for all periods presented. Used equipment sales revenue continues to be included in equipment sales revenue. A summary of financial information related to our discontinued operations for the new unit sales business is as follows:

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Reconciliation of the Line Items Constituting Pretax Loss from Discontinued Operations to the After-Tax Income (Loss) from Discontinued Operations

(in thousands)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2021						2020						2021						2020
Revenue						$	—					$	6,900					$	—					$	35,387
Cost of revenues						268						7,645						277						36,173
Depreciation, amortization, and accretion						—						51						—						526
Impairments of long-lived assets						—						—						—						5,474
General and administrative expense						2						1,177						346						3,274
Other (income) expense, net						—						(810)						—						(810)
Total pretax loss from discontinued operations						(270)						(1,163)						(623)						(9,250)
Income tax provision						—						(20)						—						51
Total loss from discontinued operations						$	(270)					$	(1,143)					$	(623)					$	(9,301)

Reconciliation of Major Classes of Assets and Liabilities of the Discontinued Operations to Amounts Presented Separately in the Statement of Financial Position

(in thousands)

			September 30, 2021						December 31, 2020
Carrying amounts of major classes of assets included as part of discontinued operations
Inventories			$	7					$	32
Other Current Assets			—						7
Current assets of discontinued operations			$	7					$	39
Carrying amounts of major classes of liabilities included as part of discontinued operations
Accrued liabilities			$	140					$	345
Current liabilities of discontinued operations			$	140					$	345

NOTE 3 — REVENUE FROM CONTRACTS WITH CUSTOMERS

    As of September 30, 2021, we had $69.6 million of remaining contractual performance obligations for compression services. As a practical expedient, this amount does not include revenue for compression service contracts whose original expected duration is less than twelve months and does not consider the effects of the time value of money. Expected revenue to be recognized in the future as of September 30, 2021 for completion of performance obligations of compression service contracts are as follows:

			2021						2022						2023						2024						Thereafter						Total
			(In Thousands)
Compression service contracts remaining performance obligations			$	19,291					$	43,011					$	7,197					$	99					$	—					$	69,598

    

    Our contract asset balances included in trade accounts receivable in our consolidated balance sheets, primarily associated with revenue accruals prior to invoicing, were $10.2 million and $6.8 million as of September 30, 2021 and December 31, 2020, respectively.

    The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:

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			Nine Months Ended September 30,
			2021						2020
			(In Thousands)
Unearned income, beginning of period			$	269					$	283
Additional unearned income			1,788						11,182
Revenue recognized			(1,486)						(6,236)
Unearned income, end of period			$	571					$	5,229

    Unearned income is included in accrued liabilities and other on the consolidated balance sheets. As of September 30, 2021 and December 31, 2020, contract costs were immaterial.

    Disaggregated revenue from contracts with customers by geography is as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(In Thousands)
Compression and related services
United States			$	47,320					$	46,012					$	139,940					$	152,320
International			9,068						7,355						26,016						23,096
			56,388						53,367						165,956						175,416
Aftermarket services
United States			13,609						13,564						37,873						46,276
International			343						298						1,369						1,293
			13,952						13,862						39,242						47,569
Equipment sales
United States			897						5,001						1,482						6,677
International			57						28						82						801
			954						5,029						1,564						7,478
Total Revenue
United States			61,826						64,577						179,295						205,273
International			9,468						7,681						27,467						25,190
			$	71,294					$	72,258					$	206,762					$	230,463

NOTE 4 — IMPAIRMENTS AND OTHER CHARGES

During the second quarter of 2020, primarily as a result of continued negative impacts on our compression fleet associated with the COVID-19 pandemic and declines in oil and gas prices, we recorded impairments and other charges of approximately $9.0 million associated with non-core used compressor equipment that we had held for sale, the low horsepower class of our compression fleet, and field inventory for compression and related services. Fair value used to determine impairments was estimated based on a market approach. There were no such impairments in 2021.

NOTE 5 — INVENTORIES

Components of inventories as of September 30, 2021 and December 31, 2020, are as follows: 

			September 30, 2021						December 31, 2020
			(In Thousands)
Parts and supplies			$	29,695					$	28,483
Work in progress			2,199						2,705
Total inventories			$	31,894					$	31,188

Inventories consist primarily of compressor package parts and supplies. Work in progress inventories consist of work in progress for our aftermarket business that has not been invoiced.

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NOTE 6 — LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:

						Scheduled Maturity						September 30, 2021						December 31, 2020
												(In Thousands)
Credit Agreement (1)						June 29, 2023						$	—					$	—
7.25% Senior Notes (2)						August 15, 2022						80,331						80,001
7.50% First Lien Notes (3)						April 2025						399,354						399,655
10.00%/10.75% Second Lien Notes (4)						April 2026						161,520						158,975
Total long-term debt												$	641,205					$	638,631
Less current portion												(80,331)						—
Total long-term debt												$	560,874					$	638,631

(1)     Because there was no outstanding balance on the Credit Agreement, associated deferred financing costs of

$0.6 million as of December 31, 2020 were classified as other long-term assets on the accompanying consolidated balance sheet.

(2)     Net of the unamortized discount of $0.2 million as of September 30, 2021 and $0.3 million as of December 31, 2020 and unamortized deferred financing costs of $0.2 million as of September 30, 2021 and $0.4 million as of December 31, 2020.

(3)     Net of the unamortized deferred financing costs of $4.6 million as of September 30, 2021 and $5.2 million as of December 31, 2020, net of the unamortized discount of $0.2 million as of September 30, 2021 and $0.2 million as of December 31, 2020, and net of deferred restructuring gain of $4.2 million as of September 30, 2021 and $5.0 million as of December 31, 2020.

(4)     Net of the unamortized discount of $0.6 million as of September 30, 2021 and $0.7 million as of December 31, 2020, and net of unamortized deferred financing costs of $1.0 million as of September 30, 2021 and $1.2 million as of December 31, 2020, and net of deferred restructuring gain of $3.3 million as of September 30, 2021 and $3.7 million as of December 31, 2020.

    Our Credit Agreement and Senior Note agreements contain certain affirmative and negative covenants, including covenants that restrict the ability to pay dividends or other restricted payments. We are in compliance with all covenants of our credit and senior note agreements as of September 30, 2021.

    See Note 7 – “Related Party Transactions,” for a discussion of our amounts payable to affiliates and long-term affiliate payable to Spartan Energy Partners LP (“Spartan”).

Credit Agreement

    In June 2020, the Partnership amended the Loan and Security Agreement dated June 29, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). The Credit Agreement provides for maximum revolving credit commitments of $35.0 million and includes a $5.0 million reserve, which results in reduced borrowing availability. The Credit Agreement includes a $25.0 million sublimit for letters of credit. Additionally, on January 29, 2021, the Partnership further amended the Credit Agreement to temporarily increase the size of the reserve to $10.0 million and also required that Spartan backstop all of the Partnership’s outstanding letters of credit. These temporary restrictions expired on April 30, 2021. On April 30, 2021, the required reserve on our Credit Agreement was reduced to $5.0 million and Spartan’s backstop for the Partnership’s outstanding letters of credits was released. As of September 30, 2021, we had no balance outstanding under the Credit Agreement and $2.1 million of letters of credit against our Credit Agreement. Subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of $11.2 million as of September 30, 2021.

Borrowings under the credit facility are subject to the applicable margin related to (i) LIBOR Rate Loans (as defined in the Credit Agreement) between 3.00% and 3.50% and (ii) Base Rate Loans (as defined in the Credit Agreement) between 2.00% and 2.50%. The commitment fee in respect of the unutilized commitments under the Credit Agreement is 0.50%.

Notes

We may from time to time seek to retire or purchase certain amounts of our outstanding senior notes through cash purchases, in open market purchases, privately negotiated transactions or otherwise. Such

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repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.

7.25% Senior Notes due 2022

    As of September 30, 2021, our 7.25% Senior Notes due 2022 (the “Senior Notes”) had $80.3 million outstanding net of unamortized discounts and unamortized deferred financing costs. Interest on these notes is payable on February 15 and August 15 of each year. The Senior Notes are unsecured obligations, and are guaranteed on an unsecured basis by the Partnership’s subsidiaries that guarantee the Credit Agreement.

Our Senior Notes are jointly and severally, and fully and unconditionally, guaranteed by each of the Partnership’s domestic restricted subsidiaries (other than CSI Compressco Finance Inc. “Finance Corp”) that guarantee the Partnership’s other indebtedness (collectively, the "Guarantor Subsidiaries”). The Senior Notes indenture includes customary provisions for the release of the guarantees by the Guarantor Subsidiaries upon the occurrence of certain allowed events including the release of a guarantor under our revolving credit facility.

7.50% First Lien Notes due 2025

As of September 30, 2021, our First Lien Notes had $399.4 million outstanding net of unamortized discounts, unamortized deferred financing costs and deferred restructuring gains. Interest on these notes is payable on April 1 and October 1 of each year. The First Lien Notes are secured by a first-priority security interest in substantially all of the Partnership’s and its subsidiaries assets, subject to certain permitted encumbrances and exceptions, and are guaranteed on a senior secured basis by each of the Partnership’s U.S. restricted subsidiaries (other than Finance Corp, certain immaterial subsidiaries and certain other excluded U.S. subsidiaries).

10.000%/10.750% Second Lien Notes due 2026

As of September 30, 2021, our Second Lien Notes had $161.5 million outstanding, net of unamortized discounts, unamortized deferred financing costs and deferred restructuring gains. Interest on the Second Lien Notes is payable on April 1 and October 1 of each year. The Second Lien Notes are secured by a second-priority security interest in substantially all of the Partnership’s and its subsidiaries assets, subject to certain permitted encumbrances and exceptions, and are guaranteed on a senior secured basis by each of the Partnership’s U.S. restricted subsidiaries (other than Finance Corp and certain other excluded U.S. subsidiaries). In connection with the payment of PIK Interest (as defined below), if any, in respect of the Second Lien Notes, the issuers will be entitled to increase the outstanding aggregate principal amount of the Second Lien Notes or issue additional notes (“PIK notes”) under the Second Lien Notes indenture on the same terms and conditions as the already outstanding Second Lien Notes. Interest will accrue at (1) the annual rate of 7.250% payable in cash, plus (2) at the election of the Issuers (made by delivering a notice to the Second Lien Trustee not less than five business days prior to the record date), the annual rate of (i) 2.750% payable in cash (together with the annual rate set forth in clause (1), the “Cash Interest Rate”) or (ii) 3.500% payable by increasing the principal amount of the outstanding Second Lien Notes or by issuing additional PIK notes, in each case rounding up to the nearest $1.00 (such increased principal amount or additional PIK notes, the “PIK Interest”).

The indentures governing our First Lien Notes and Second Lien Notes contain customary covenants restricting our ability and the ability of our restricted subsidiaries to: (i) pay distributions on, purchase, or redeem our common units, make certain investments and other restricted payments, or purchase or redeem any subordinated debt; (ii) incur or guarantee additional indebtedness or issue certain kinds of preferred equity securities; (iii) create or incur certain liens securing indebtedness; (iv) sell assets, including dispositions of the collateral securing our First Lien Notes and Second Lien Notes; (v) consolidate, merge, or transfer all or substantially all of our assets; (vi) enter into transactions with affiliates; and (vii) enter into agreements that restrict distributions or other payments from our restricted subsidiaries to us. Our Second Lien Notes indenture further restricts our ability to make distributions in respect of our common units in any amount exceeding $0.04 per common unit per year, unless such increased distribution is funded by proceeds from an equity offering. These covenants are subject to a number of important limitations and exceptions, including certain provisions permitting us, subject to the satisfaction of certain conditions, to transfer assets to certain of our unrestricted subsidiaries. The indentures also contain customary events of default and acceleration provisions relating to events of default, which provide that upon an event of default under the indentures, the Trustee or the holders of at least 25% in aggregate principal amount of the then outstanding First Lien Notes and Second Lien Notes may declare all of the First Lien Notes and Second Lien Notes to be due and payable immediately.

During the fourth quarter of 2020 and the second quarter of 2021, the Partnership elected to increase the principal amount outstanding through the issuance of PIK notes. As of September 30, 2021, our principal amount outstanding included $4.4 million of PIK notes.

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NOTE 7 — RELATED PARTY TRANSACTIONS

 

On January 29, 2021, Spartan acquired from TETRA the Partnership’s General Partner, IDRs and 10.95 million common units in the Partnership (the “GP Sale”). The Partnership did not issue any common units or incur any debt as a result of the transaction. TETRA retained 5.2 million common units of the Partnership.

Omnibus Agreement

 

    Under the terms of the Omnibus Agreement, our General Partner provided all personnel and services reasonably necessary to manage our operations and conduct our business (other than in Mexico, Canada, and Argentina), and certain of TETRA’s Latin American-based subsidiaries provided personnel and services necessary for the conduct of certain of our Latin American-based businesses. In addition, under the Omnibus Agreement, TETRA provided certain corporate and general and administrative services as requested by our General Partner, including, without limitation, legal, accounting and financial reporting, treasury, insurance administration, claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, and tax services. Pursuant to the Omnibus Agreement, we reimbursed our General Partner and TETRA for services they provide to us. Upon the closing of the GP Sale, the Omnibus Agreement terminated in accordance with its terms. Beginning in February 2021, we reimburse our General Partner under the terms of our partnership agreement for any expenses and expenditures incurred or payments made on our behalf, including, operating expenses related to our operations and for the provision of various general and administrative services for our benefit.

Transition Services Agreement

TETRA will continue to provide back-office support to the Partnership under a Transition Services Agreement for a period of time until the Partnership has completed a full separation from TETRA’s back-office support functions.

Spartan and General Partner Ownership

As of September 30, 2021, Spartan’s ownership interest in us was approximately 23%, with the common units held by the public representing an approximate 65% interest in us.

Other Sources of Financing

In February 2019, we entered into a transaction with TETRA whereby TETRA agreed to fund the construction of and purchase from us of up to $15.0 million of new compression services equipment and to subsequently lease the equipment back to us in exchange for a monthly rental fee. As of November 30, 2020, pursuant to this arrangement, $14.8 million had been funded by TETRA for the construction of new compressor services equipment and all compression units were completed and deployed under this agreement. In December 2020, TETRA sold these compressors and assigned the corresponding leases to Spartan. As of September 30, 2021, the financing obligation owed to Spartan was $9.8 million and is included in amounts payable to affiliates and long-term affiliate payable in our consolidated balance sheet as of September 30, 2021. The balances were included in accrued liabilities and other and other long-term liabilities in our consolidated balance sheet as of December 31, 2020. Imputed interest expense recognized for the three and nine-month period ended September 30, 2021 was $0.6 million and $1.7 million, respectively .

Mexico Payroll Affiliate

In January 2021, the Partnership entered into an agreement to purchase a TETRA-owned entity, which administers payroll in Mexico, for consideration of approximately $0.4 million. The difference between the fair value of the affiliate and TETRA’s historic carrying value of the affiliates’ net assets was recorded as a capital distribution. The associated liability was paid in April 2021.

NOTE 8 — FAIR VALUE MEASUREMENTS

Fair value is defined by ASC Topic 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or

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transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.

Under U.S. GAAP, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.

Financial Instruments

Derivative Contracts

    We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. We enter into 30-day foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. As of September 30, 2021, we had the following foreign currency derivative contract outstanding relating to a portion of our foreign operations:

Derivative contracts

US Dollar Notional Amount

Traded Exchange Rate

Settlement Date

(In Thousands)

Forward sale Mexican peso

$

5,934

20.14

October 4, 2021

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

The fair values of our foreign currency derivative contracts are based on quoted market values (a Level 2 fair value measurement). None of our foreign currency derivative instruments contains credit risk related contingent features that would require us to post assets or collateral for contracts that are classified as liabilities. During the three and nine-month periods ended September 30, 2021, we recognized $(0.04) million and $0.1 million, respectively, of net (gains) losses associated with our foreign currency derivatives program. During the three and nine-month periods ended September 30, 2020, we recognized $0.3 million and $(0.8) million, respectively, of net (gains) losses associated with our foreign currency derivatives programs. These amounts are included in other (income) expense, net, in the accompanying consolidated statement of operations.

Fair Value of Debt

    The fair value of our debt has been estimated in accordance with the accounting standard regarding fair value. The fair value of our fixed rate long-term debt is estimated based on recent trades for these notes. The carrying and fair value of our debt, excluding unamortized debt issuance costs, are as follows (in thousands):

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						September 30, 2021												December 31, 2020
						Carrying Value						Fair Value						Carrying Value						Fair Value
						(In Thousands)
7.25% Senior Notes						$	80,722					$	79,915					$	80,722					$	67,274
7.50% First Lien Notes						400,000						396,000						400,000						369,680
10.00%/10.75% Second Lien Notes						159,919						146,726						157,162						114,728
						$	640,641					$	622,641					$	637,884					$	551,682

Other

The fair values of cash, accounts receivable, accounts payable, accrued liabilities and variable-rate long-term debt pursuant to our revolving credit facility approximate their carrying amounts due to the short-term nature of these items.

NOTE 9 — INCOME TAXES

 

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

    Our effective tax rate for the nine-month period ended September 30, 2021, was negative 8.2% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

NOTE 10 — COMMITMENTS AND CONTINGENCIES

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of any lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows. 

NOTE 11 — SUBSEQUENT EVENTS

    

On October 15, 2021, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended September 30, 2021 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This distribution will be paid on November 12, 2021 to each of the holders of common units of record as of the close of business on October 25, 2021.

On November 10, 2021, CSI Compressco, along with its General Partner, closed a series of transactions that enable the Partnership to redeem the outstanding 7.25% Senior Notes due 2022 (the “Redemption”). The redemption is anticipated to occur in December 2021. The transactions included the following:

Acquisition of Spartan entities (“Contribution”)

Pursuant to a Contribution Agreement, Spartan Energy Partners LP (“SEP”) contributed two of its subsidiaries, Spartan Energy Services LLC (“SES”) and Spartan International LLC, into a holding company, Treating Holdco LLC, which was then contributed to an unrestricted subsidiary of the Partnership. In addition, SEP contributed Spartan Operating Company LLC and Spartan Terminals Operating, Inc. to another subsidiary of the Partnership. These Spartan entities collectively were contributed in exchange for 48.4 million common units and the assumption of approximately $32.5 million in debt as consideration (the “Contribution”).

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Concurrent with the Contribution, SES executed the First Amendment to its ABL Agreement which included the following modifications: (i) removal of SEP as a borrower (ii) addition of Treating Holdco LLC as a guarantor, and (iii) increase in loan commitments from $55 million to $70 million in anticipation of a sale and leaseback of compression assets from the Partnership into SES. See further discussion of the sale and leaseback transaction below.

Private placements of common units

The Partnership entered into a Common Unit Purchase Agreement pursuant to which the Partnership issued 39 million common units at $1.35 per unit, raising approximately $53 million. Of the amount raised, $7.0 million was contributed by management and other related parties. The Partnership also issued approximately 3 million common units at $1.35 per unit to Spartan, raising an additional $4 million. All funds were collected as of November 10, 2021.

2026 Secured Note tack-on offering (“Debt Issuance”)

The Partnership and a wholly owned subsidiary entered into a Securities Purchase Agreement pursuant to which the Partnership and the wholly owned subsidiary agreed to issue $10 million aggregate principal amount of our 10.000%/10.750% Senior Secured Second Lien Notes due 2026 and 259,260 common units. The Debt Issuance is expected to close on November 16, 2021.

Purchase of Compressor units from the Partnership by SES (“2021 Sale-Leaseback”)

The Partnership sold 25 compressor units to SES and concurrently signed a lease agreement with SES for those units. This will generate approximately $24 million in cash proceeds that will be used to redeem the Senior Notes. As SES will be an unrestricted subsidiary of the Partnership, the 2021 Sale-Leaseback will be eliminated in the consolidated income statements.

Redemption of Senior Notes

Using the cash proceeds generated from the private placement of common units, Debt Issuance, and 2021 Sale-Leaseback, on November 10, 2021, the Partnership issued a notice of redemption calling for the redemption on December 13, 2021 of all of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any. The Redemption is conditioned upon the consummation of the Debt Issuance.

Fourth Amendment to Credit Agreement

On November 10, 2021, the Partnership entered into the Fourth Amendment to Loan and Security Agreement (the “Amendment”) amending the Credit Agreement.

The Amendment provided for changes and modifications to the Credit Agreement as set forth therein, which include, among other things, changes to certain terms of the Credit Agreement as follows to permit: (i) the Contribution, and after giving effect to the Contribution, Spartan Terminals Operating, Inc. and Spartan Operating Company LLC became Immaterial Subsidiaries (as defined in the Credit Agreement) and Treating Holdco LLC and its subsidiaries were designated Unrestricted Subsidiaries (as defined in the Credit Agreement), in each case under the Credit Agreement and related loan documents; (ii) the 2021 Sale-Leaseback; and (iii) the Redemption.

Business Overview

    

    We provide compression services for natural gas and oil production, gathering, artificial lift, production enhancement, transmission, processing, and storage. Our compression and related services business includes a fleet of approximately 4,900 compressor packages providing approximately 1.2 million in aggregate horsepower, utilizing a full spectrum of low-, medium-, and high-horsepower engines. Our aftermarket business provides compressor package overhaul, repair, engineering and design, reconfiguration and maintenance services, as well as the sale of compressor package parts and components manufactured by third-party suppliers. Our customers operate throughout many of the onshore producing regions of the United States, as well as Mexico, Canada and Argentina.

    

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    Demand for our services is directly driven by the production of crude oil and associated natural gas from unconventional shale plays, natural gas production in conventional plays along with transmission of natural gas to and within sales pipelines. Our fleet of compressors, ranging from 20 to 2,500 horsepower per unit, allows us to provide our customers compression solutions ranging from low horsepower production enhancement needs at the wellhead through large horsepower at centralized gathering and gas lift facilities.

During 2020, macroeconomic uncertainty in the oil and natural gas industry drove steep declines in spending by oil and gas operators which led to a number of our units being released with some of our customers temporarily shutting in wells and requesting that compression units be placed on standby. Oil prices began to stabilize during the third and fourth quarters of 2020 and gained strength throughout 2021, reaching an average of $71 per barrel in the third quarter of 2021. This improvement in commodity prices, as well as the beginning of a recovery in the general economy and the energy sector, have resulted in an increase in activity levels from our compression services and aftermarket services customers. Revenues from compression and related services has increased each quarter in 2021. In addition, we have secured orders from key customers for new high-horsepower compressors that will start generating revenues in the fourth quarter of 2021 and the first half of 2022. Our customers continue to be focused on capital discipline, however; we continue to see improvement in the levels of quote activity and awards. As the market environment continues to evolve, competition for field employees has increased and inflationary pressures has driven certain costs higher. In addition, supply chain disruptions may impact the availability of parts and supplies. We will continue to monitor these risks and take the necessary actions to mitigate them.

    We have and will continue to evaluate the sale of assets, including our low-horsepower compression fleet. We can provide no assurance that we will consummate a future sale of our low-horsepower compression fleet or any other assets.

In 2020, we took an aggressive approach towards cost management to improve our financial performance and liquidity. We implemented temporary and permanent cost reductions, including reductions in capital expenditures, workforce and salaries. We also implemented furloughs, a reduction in the cash retainers for the directors of our general partner, the suspension of 401(k) matching contributions for our employees, targeted reduction in selling, general and administrative expenses, rationalization of our real estate facilities, and negotiated reductions in expenditures with many of our suppliers. In the current year, with the improvement in market conditions, we have reversed most of the cost-reduction actions taken in 2020 and have increased capital allocated to growth. With a rapidly changing market environment, we will continue to proactively manage our capital allocation strategies and monitor our expenses and financial performance.

While we are not able to predict how long the COVID-19 pandemic will continue to impact the demand for oil and gas and the effect it will ultimately have on our business, we continued to see activity levels increase in the third quarter of 2021. We are encouraged by improvements in oil and gas commodity prices throughout the quarter and projections for demand recovery, driven by COVID-19 vaccinations as they are administered on a wider scale. However, the risk of additional strains of COVID-19, increases in the number of cases, that developed vaccines may not be successful in preventing COVID-19 or its spread or the potential outbreak of a new or mutated virus, and the possibility of future lockdowns makes any forecast for improvement uncertain. In addition, continued capital discipline throughout the energy sector may limit production growth when the economy recovers from the pandemic. Despite challenging market conditions, we will continue to maintain our commitment to safety and service quality for our customers.

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Results of Operations

On July 2, 2020, we completed the sale of our Midland manufacturing facility. The Midland facility was used to design, fabricate and assemble new standard and customized compressor packages for our new unit sales business. In connection with the Midland manufacturing facility sale, we entered into an agreement with the buyer to continue to operate a portion of the facility, which allowed us to close out the remaining backlog for the new unit sales business and to continue to operate our aftermarket services business at that location for an interim period. Following completion of the last unit in October 2020, we ceased fabricating new compressor packages for sales to third parties or for our own service fleet. The operations associated with the new unit sales business were previously reported in equipment sales revenues and are now reflected as discontinued operations in our financial statements for all periods presented.

Three months ended September 30, 2021 compared to three months ended September 30, 2020

			Three Months Ended September 30,
															Period-to-Period Change						Percentage of Total Revenues												Period-to-Period Change
Consolidated Results of Operations			2021						2020						2021 vs. 2020						2021						2020						2021 vs. 2020
			(In Thousands)
Revenues:
Compression and related services			$	56,388					$	53,367					$	3,021					79.1		%				73.9		%				5.7		%
Aftermarket services			13,952						13,862						90						19.6		%				19.2		%				0.6		%
Equipment sales			954						5,029						(4,075)						1.3		%				7.0		%				(81.0)		%
Total revenues			71,294						72,258						(964)						100.0		%				100.0		%				(1.3)		%
Cost of revenues:
Cost of compression and related services			29,040						25,133						3,907						40.7		%				34.8		%				15.5		%
Cost of aftermarket services			11,864						11,815						49						16.6		%				16.4		%				0.4		%
Cost of equipment sales			1,492						4,820						(3,328)						2.1		%				6.7		%				(69.0)		%
Total cost of revenues			42,396						41,768						628						59.5		%				57.8		%				1.5		%
Depreciation and amortization			18,695						19,896						(1,201)						26.2		%				27.5		%				(6.0)		%
Selling, general, and administrative expense			9,433						7,973						1,460						13.2		%				11.0		%				18.3		%
Interest expense, net			13,951						13,886						65						19.6		%				19.2		%				0.5		%
Other income (expense), net			395						(516)						911						0.6		%				(0.7)		%				(176.6)		%
Loss before taxes and discontinued operations			(13,576)						(10,749)						(2,827)						(19.0)		%				(14.9)		%				26.3		%
Provision for income taxes			516						715						(199)						0.7		%				1.0		%				(27.8)		%
Loss from continuing operations			(14,092)						(11,464)						(2,628)						(19.8)		%				(15.9)		%				22.9		%
Loss from discontinued operations, net of taxes			(270)						(1,143)						873						(0.4)		%				(1.6)		%				(76.4)		%
Net loss			$	(14,362)					$	(12,607)					$	(1,755)					(20.1)		%				(17.4)		%				13.9		%

 

Revenues

 

    Compression and related services revenues increased $3.0 million or 5.7%, in the current year quarter compared to the prior year quarter. The increase is revenues is due to the recovery of some of the price concessions given in 2020, as well as a significant decrease in the number of compressors on standby rates compared to the prior year period. In addition, activity levels have started to improve with stronger oil and gas commodity prices and as the energy sector recovers from the effects of the COVID-19 pandemic.

    Aftermarket services revenues increased $0.1 million during the current year quarter compared to the prior year quarter as the demand for aftermarket services continues to be impacted by the COVID-19 pandemic and its effect on the global economy including the energy sector.

    Equipment sales revenues decreased $4.1 million during the current year quarter compared to the prior year quarter due to a decrease in used unit sales.

Cost of revenues

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    Cost of compression and related services revenue increased 15.5% compared to the prior year quarter, partially due to compressors that came off of standby rates since the prior year period. Compressors on standby rates have revenues but very low associated costs. In 2021, a significant number of compressors that were on standby rates have returned to service and associated costs of service have returned to normal levels. Additionally, as activity levels increase, make-ready expenses and start-up costs associated with the redeployment of compressors have also increased. We expect these expenses to contribute to increased revenues in the fourth quarter of 2021 and in 2022. In addition, inflation also impacted certain cost categories in the third quarter of 2021.

Cost of aftermarket services revenues slightly increased compared to the prior year quarter.

Cost of equipment sales decreased during the current year quarter consistent with the decrease in the corresponding revenues.

Depreciation and amortization

 

Depreciation and amortization expense consists primarily of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense decreased compared to the prior year quarter primarily due to impairments recorded during 2020, reducing the cost basis for our compression fleet.

Selling, general, and administrative expense

 

Selling, general, and administrative expenses increased during the current year quarter compared to the prior year quarter due to $1.8 million of increased salaries and employee expenses offset by $0.4 million of decreased bad debt expense.

Interest expense, net

 

Interest expense, net, was consistent during the current year quarter compared to the prior year quarter.

Other (income) expense, net

 

Other (income) expense, net, was $0.4 million of expense, net, during the current year quarter compared to $0.5 million of income, net, during the prior year quarter. The change in other (income) expense, net is primarily due to decreased income associated with asset sales and an increase in foreign currency losses.

Provision for income taxes

 

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

Our effective tax rate for the current year quarter was negative 3.8% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes, combined with losses generated in entities for which no related tax benefit has been recorded. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

Loss from discontinued operations, net of tax

Loss from discontinued operations, net of tax changed from a $1.1 million loss for the prior year quarter to a $0.3 million loss for current year quarter. The Partnership exited the new unit sales business during 2020, with the final unit completed in October. The prior year loss includes $6.9 million of new unit sales revenues and $0.8 million of other income, offset by $7.6 million of costs of sales and $1.2 million of selling, general, and administrative expenses.

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Results of Operations

Nine months ended September 30, 2021 compared to nine months ended September 30, 2020.

			Nine Months Ended September 30,
															Period-to-Period Change						Percentage of Total Revenues												Period-to-Period Change
Consolidated Results of Operations			2021						2020						2021 vs. 2020						2021						2020						2021 vs. 2020
			(In Thousands)
Revenues:
Compression and related services			$	165,956					$	175,416					$	(9,460)					80.3		%				76.1		%				(5.4)		%
Aftermarket services			39,242						47,569						(8,327)						19.0		%				20.6		%				(17.5)		%
Equipment sales			1,564						7,478						(5,914)						0.8		%				3.2		%				(79.1)		%
Total revenues			206,762						230,463						(23,701)						100.0		%				100.0		%				(10.3)		%
Cost of revenues:
Cost of compression and related services			82,063						82,136						(73)						39.7		%				35.6		%				(0.1)		%
Cost of aftermarket services			33,340						41,493						(8,153)						16.1		%				18.0		%				(19.6)		%
Cost of equipment sales			1,838						7,407						(5,569)						0.9		%				3.2		%				(75.2)		%
Total cost of revenues			117,241						131,036						(13,795)						56.7		%				56.9		%				(10.5)		%
Depreciation and amortization			56,222						59,446						(3,224)						27.2		%				25.8		%				(5.4)		%
Impairments and other charges			—						8,874						(8,874)						—		%				3.9		%				(100.0)		%
Insurance recoveries			—						(517)						517						—		%				(0.2)		%				(100.0)		%
Selling, general, and administrative expense			28,143						26,304						1,839						13.6		%				11.4		%				7.0		%
Interest expense, net			41,781						40,635						1,146						20.2		%				17.6		%				2.8		%
Other income expense, net			622						4,327						(3,705)						0.3		%				1.9		%				(85.6)		%
Loss before taxes and discontinued operations			(37,247)						(39,642)						2,395						(18.0)		%				(17.2)		%				(6.0)		%
Provision for income taxes			3,042						1,872						1,170						1.5		%				0.8		%				62.5		%
Loss from continuing operations			$	(40,289)					$	(41,514)					$	1,225					(19.5)		%				(18.0)		%				(3.0)		%
Loss from discontinued operations, net of taxes			$	(623)					$	(9,301)					$	8,678					(0.3)		%				(4.0)		%				(93.3)		%
Net loss			$	(40,912)					$	(50,815)					$	9,903					(19.8)		%				(22.0)		%				(19.5)		%

Revenues

 

    Compression and related services revenues decreased by $9.5 million, or 5.4%, in the current year period compared to the prior year period due to the COVID-19 pandemic’s impact on demand for oil and natural gas which continued to affect demand for compression services. In the second quarter of 2020, we experienced returned compressors, compressors placed on standby rates, and made some pricing concessions, all contributing to a decrease in revenues. With the recent improvement in oil and gas commodity prices, a significant number of compressors previously placed on standby have now been returned to service, however, fleet utilization and pricing are still lower in the current year compared to 2020.

    Aftermarket services revenues decreased $8.3 million, or 17.5%, during the current year period compared to the prior year period resulting from decreased demand for parts and services as a result of the impact of the COVID-19 pandemic on the global economy including the energy sector.

    Equipment sales revenues decreased $5.9 million, or 79.1%, during the current year period compared to the prior year period due to a decrease in used unit sales. In 2020, the Partnership increased efforts to sell non-core used compressors to strengthen liquidity during the market downturn.

Cost of revenues

 

    Cost of compression and related services decreased compared to the prior year period consistent with decreased revenues. Cost of compression and related services as a percentage of compression and related

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services revenues increased from 46.8% during the prior year period to 49.4% during the current year period. The increase was due to higher make-ready expenses and start-up costs in the current year which we expect will contribute to higher revenues in the fourth quarter of 2021 and in 2022, an increase in operating expenses resulting from a lower percentage of our fleet on standby rates compared to the prior year period, and due to certain cost categories impacted by inflation in the current year.

Cost of aftermarket services and cost of equipment sales decreased during the current year consistent with decreased revenues.

Depreciation and amortization

 

Depreciation and amortization expense consists primarily of the depreciation of compressor packages in our service fleet. In addition, it includes the depreciation of other operating equipment and facilities and the amortization of intangibles. Depreciation and amortization expense decreased compared to the prior year period primarily due to impairments recorded in 2020, reducing the cost basis for our compression fleet.

Impairments and other charges

    During the nine-month period ended September 30, 2020, we recorded impairments and other charges of $9.0 million primarily on non-core used compressor equipment, the low-horsepower class of our compression fleet, and field inventory for compression and related services. There were no impairments recorded in the current year.

Selling, general, and administrative expense

 

Selling, general, and administrative expenses increased during the current year period compared to the prior year period due to $3.6 million of increased salaries and employee expenses offset by $1.2 million of decreased professional expenses and $1.0 million of decreased bad debt expense.

Interest expense, net

Interest expense, net, increased $1.1 million compared to the prior year period due to higher interest rates associated with our Second Lien Notes following the June 2020 debt exchange transaction.

 

Other (income) expense, net

 

Other (income) expense, net, was $0.6 million of expense during the current year period, compared to $4.3 million of expense during the prior year period. The decrease in other expense is primarily due to $4.8 million of fees associated primarily with the debt exchange transaction in the prior year period.

Provision for income taxes

 

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

    Our effective tax rate for the nine-month period ended September 30, 2021, was negative 8.2% primarily attributable to taxes in certain foreign jurisdictions and Texas gross margin taxes combined with losses generated in entities for which no related tax benefit has been recorded. Included in our deferred tax assets are net operating loss carryforwards and tax credits that are available to offset future income tax liabilities in the U.S. as well as in certain foreign jurisdictions.

Loss from discontinued operations, net of tax

Loss from discontinued operations, net of tax changed from a $9.3 million loss for the prior year period to a $0.6 million loss for the current year period. The Partnership exited the new unit sales business during 2020, with final deliveries made in October. The prior year loss includes $35.4 million of new unit sales revenues and $0.8

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million of other income, offset by $36.2 million of costs of sales, $5.5 million of impairments and $3.3 million of selling, general, and administrative expenses.

How We Evaluate Our Operations

 

Operating Expenses. We use operating expenses as a performance measure for our business. We track our operating expenses using month-to-month, quarter-to-quarter, year-to-date, and year-to-year comparisons and as compared to budget. This analysis is useful in identifying adverse cost trends and allows us to investigate the cause of these trends and implement remedial measures if possible. The most significant portions of our operating expenses are for our field labor, repair and maintenance of our equipment, and for the fuel and other supplies consumed while providing our services. The costs of other materials consumed while performing our services, ad valorem taxes, other labor costs, truck maintenance, rent on storage facilities, vehicle leases and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate with our level of activity.

Our labor costs consist primarily of wages and benefits for our field personnel, as well as expenses related to their training and safety. Additional information regarding our operating expenses for the three and nine-month periods ended September 30, 2021, is provided within the Results of Operations sections above.

Adjusted EBITDA. We view Adjusted EBITDA as one of our primary management tools, and we track it on a monthly basis, both in dollars and as a percentage of revenues (typically compared to the prior month, prior year period, and to budget). We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and before certain charges, including impairments, bad debt expense attributable to bankruptcy of customers, equity compensation, non-cash costs of compressors sold, gain on extinguishment of debt, write-off of unamortized financing costs, and excluding severance and other non-recurring or unusual expenses or charges. Adjusted EBITDA is used as a supplemental financial measure by our management to:

•assess our ability to generate available cash sufficient to make distributions to our common unitholders and general partner;

•evaluate the financial performance of our assets without regard to financing methods, capital structure, or historical cost basis;

•measure operating performance and return on capital as compared to those of our competitors; and

•determine our ability to incur and service debt and fund capital expenditures.

The following table reconciles net income (loss) to Adjusted EBITDA for the periods indicated:

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(In Thousands)
Net loss			$	(14,362)					$	(12,607)					$	(40,912)					$	(50,815)
Provision for income taxes			516						715						3,042						1,872
Depreciation and amortization			18,695						19,896						56,222						59,446
Impairments and other charges			—						—						—						8,874
Interest expense, net			13,951						13,886						41,781						40,635
Equity compensation			497						232						1,807						1,044
Debt exchange expenses			—						22						—						4,777
Prior year sales tax accrual adjustment			—						—						367						—
Manufacturing engine order cancellation charge			—						—						300						—
Severance			—						484						114						1,840
Non-cash cost of compressors sold			1,423						4,804						1,861						7,244
Provision for income taxes, depreciation, amortization and impairments attributed to discontinued operations			—						31						—						6,051
Other			336						306						644						1,610
Adjusted EBITDA			$	21,056					$	27,769					$	65,226					$	82,578

 

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Free Cash Flow. We define Free Cash Flow as cash from operations less capital expenditures, net of sales proceeds. Management primarily uses this metric to assess our ability to retire debt, evaluate our capacity to further invest and grow, and measure our performance as compared to our peers. The following table reconciles cash provided by operations, net, to Free Cash Flow for the periods indicated:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2021						2020						2021						2020
			(In Thousands)												(In Thousands)
Net cash (used in) provided by operating activities			$	22,884					$	(4,451)					$	22,812					$	13,729
Capital expenditures, net of sales proceeds			(6,966)						1,550						(16,815)						(6,058)
Midland proceeds			—						17,000						—						17,000
Free cash flow			$	15,918					$	14,099					$	5,997					$	24,671

    

Net cash provided by operating activities for the three months ended September 30, 2021 includes $5.1 million of revenues in excess of cash expenses and increases of $17.8 million in working capital changes. Net cash provided operating activities for the nine months ended September 30, 2021 includes $18.5 million of revenues in excess of cash expenses and increases of $4.3 million in working capital changes.

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

    Horsepower Utilization Rate of our Compressor Packages. We measure the horsepower utilization rate across our fleet of compressor packages as the amount of horsepower of compressor packages used to provide services as of a particular date, divided by the amount of horsepower of compressor packages in our services fleet as of such date. Management primarily uses this metric to determine our future need for additional compressor packages for our service fleet and to measure marketing effectiveness.

 

The following table sets forth the total horsepower in our compression fleet, our total horsepower in service, and our horsepower utilization rate by each horsepower class of our compression fleet as of the dates shown.

			September 30,
			2021						2020
Horsepower
Total horsepower in fleet			1,175,989						1,172,307
Total horsepower in service			928,303						941,747
Horsepower utilization
Low-horsepower (0-100)			56.0		%				61.7		%
Medium-horsepower (101-1,000)			78.3		%				76.5		%
High-horsepower (1,001 and over)			84.6		%				87.3		%
Total horsepower utilization rate			78.9		%				80.3		%

The total horsepower utilization rate decreased as of September 30, 2021 compared to the prior year period due to a decline in customer activity levels. This was driven by a low commodity price environment for oil and gas and the impact of the COVID-19 pandemic on the global economy and the energy sector. The market environment

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has improved in the current year resulting in an increase in total utilization of 2% compared to the utilization rate as of June 30, 2021 with meaningful gains in utilization in the medium and high-horsepower categories.

Net Increases/Decreases in Compression Fleet Horsepower. We measure the net increase (or decrease) in our compression fleet horsepower during a given period by taking the difference between the aggregate horsepower of compressor packages added to the fleet during the period, less the aggregate horsepower of compressor packages removed from the fleet during the period. We measure the net increase (or decrease) in our compression fleet horsepower in service during a given period by taking the difference between the aggregate horsepower of compressor packages placed into service during the period, less the aggregate horsepower of compressor packages removed from service during the period.

Liquidity and Capital Resources

 

Our primary cash requirements are for distributions, working capital requirements, debt service, normal operating expenses, and capital expenditures. Our potential sources of funds are our existing cash balances, cash generated from our operations, potential asset sales, and long-term and short-term borrowings, which we believe will be sufficient to meet our working capital and growth capital requirements during the remainder of 2021. We have secured orders from key customers for new high-horsepower compressors which will increase our investment in growth capital and consume liquidity in the fourth quarter of 2021 and in the first half of 2022.

Although oil and natural gas prices have recovered in the last half of 2020 and throughout 2021 from their lows in the first half of 2020, the outlook for the remainder of 2021 remains uncertain. If oil and natural gas prices decrease from current levels, our businesses could be negatively impacted. Despite these challenges, we remain committed to a long-term growth strategy. Our near-term focus is to maintain our compression fleet, while continuing to preserve and enhance liquidity through strategic operating and financial measures. We periodically evaluate engaging in strategic transactions and may consider divesting assets where our evaluation suggests such transactions are in the best interests of our business. We are subject to business and operational risks that could materially adversely affect our cash flows and together with risks associated with current debt and equity market conditions, our ability or desire to issue such securities. Please read Part I, Item 1A “Risk Factors” included in our 2020 Annual Report.

 

Capital expenditures in 2021 are expected to range from $50.0 million to $60.0 million. These capital expenditures include approximately $18.0 million to $20.0 million of maintenance capital expenditures and approximately $28.0 million to $35.0 million of capital expenditures primarily associated with the expansion of our large horsepower compression services fleet and $4.0 million to $5.0 million of capital expenditures related to investments in technology, primarily software and systems. The foregoing estimates are based on assumptions regarding our assessment of the oil and gas market.

    On October 15, 2021, the board of directors of our General Partner declared a cash distribution attributable to the quarter ended September 30, 2021 of $0.01 per outstanding common unit. This distribution equates to a distribution of $0.04 per outstanding common unit on an annualized basis. This quarterly distribution will be paid on November 12, 2021 to each of the holders of common units of record as of the close of business on October 25, 2021.

Cash Flows

A summary of our sources (uses) of cash during the nine months ended September 30, 2021 and 2020 is as follows:

			Nine Months Ended September 30,
			(In Thousands)
			2021						2020
Operating activities			$	22,812					$	13,729
Investing activities			(16,507)						11,459
Financing activities			600						(10,867)

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Operating Activities

 

Net cash provided by operating activities increased by $9.1 million compared to the prior year period. Our cash provided from operating activities is primarily generated from the provision of compression and related services and, for the prior year, the sale of new compressor packages. The increase in cash provided by operating activities was primarily due to changes in working capital.

Cash provided from our foreign operations is subject to various uncertainties, including the volatility associated with interruptions caused by customer budgetary decisions, uncertainties regarding the renewal of our existing customer contracts and other changes in contract arrangements, the timing of collection of our receivables, and the repatriation of cash generated by our international operations.

Investing Activities

 

Capital expenditures during the nine months ended September 30, 2021, increased by $6.5 million compared to the same period in 2020, primarily to grow and maintain the capacity of our compression fleet. Maintenance capital expenditures decreased during the nine months ended September 30, 2021 compared to the prior year period. The cost of fleet compression units sold was $1.9 million. Total capital expenditures for the current period include $9.9 million of maintenance capital expenditures.

The level of growth capital expenditures depends on our ability to redeploy existing fleet equipment and demand for compression services. If the demand for compression services increases or decreases, the amount of planned expenditures on growth and expansion will be adjusted. We continue to review all capital expenditure plans carefully in an effort to conserve cash and fund our liquidity needs.

Financing Activities

Distributions

During the nine months ended September 30, 2021, we distributed $1.5 million of cash distributions to our common unitholders and General Partner.

    

Long-Term Debt

Our Credit Agreement provides for maximum credit commitments of $35.0 million and includes a $5.0 million reserve which results in reduced borrowing availability. As of September 30, 2021, we had no balance outstanding under the Credit Agreement and $2.1 million in letters of credit against our Credit Agreement resulting in $11.2 million available to borrow. As of November 10, 2021, we had no balance outstanding under our Credit Agreement and $2.1 million in letters of credit, resulting in $14.7 million of availability.

See Note 6 – “Long-Term Debt” in the Notes to Consolidated Financial Statements in this Quarterly Report for further information regarding our 7.25% Senior Notes due 2022, 7.50% First Lien Notes due 2025 and 10.000%/10.750% Second Lien Notes due 2026.

Leases

We have operating leases for some of our office space, warehouse space, operating locations, and machinery and equipment. Our leases have remaining lease terms ranging from 1 to 10 years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months.

Other Financing

In February 2019, we entered into an arrangement with TETRA under which a subsidiary of TETRA entered into an agreement with one of our subsidiaries for the purchase of up to $15.0 million of compression services equipment and to subsequently lease the equipment back to us in exchange for monthly rental fees. Pursuant to this arrangement, $14.8 million had been funded by TETRA through November 30, 2020 for the construction of new compressor services equipment and all compression units were completed and deployed under this agreement.

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There is no additional future funding expected related to this arrangement. In December 2020, TETRA sold these compressors and assigned the corresponding leases to Spartan.

Off Balance Sheet Arrangements

 

As of September 30, 2021, we had no “off balance sheet arrangements” that may have a current or future material effect on our consolidated financial condition or results of operations.

Critical Accounting Policies and Estimates

 

There have been no material changes or developments in the evaluation of the accounting estimates and the underlying assumptions or methodologies pertaining to our Critical Accounting Policies and Estimates disclosed in our 2020 Annual Report. In preparing our consolidated financial statements, we make assumptions, estimates, and judgments that affect the amounts reported. These judgments and estimates may change as new events occur, as new information is acquired, and as changes in our operating environments are encountered. Actual results are likely to differ from our current estimates, and those differences may be material.

For a discussion of new accounting pronouncements that may affect our consolidated financial statements, see Note 1 – “Organization, Basis of Presentation, and Summary of Significant Accounting Policies, New Accounting Pronouncements,” in the Notes to Consolidated Financial Statements in this Quarterly Report.

Commitments and Contingencies

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.

Cautionary Statement for Purposes of Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” and information based on our beliefs and those of our general partner. Forward-looking statements in this Quarterly Report are identifiable by the use of the following words, the negative of such words, and other similar words: “anticipates”, “assumes”, “believes”, “could”, “estimates”, “expects”, “forecasts”, “goal”, “intends”, “may”, “might”, “plans”, “predicts”, “projects”, “seeks”, “should, “targets”, “will” and “would”.

    Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our 2020 Annual Report, and those described from time to time in our future reports filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures.

 

    Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer of our general partner, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the quarter ended September 30, 2021. Based on this evaluation, the Principal Executive Officer and Principal Financial Officer of our general partner concluded that our disclosure controls and procedures were effective as of September 30, 2021, the end of the period covered by this Quarterly Report.

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There were no changes in the internal control over financial reporting that occurred during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

 

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. While the outcome of these lawsuits or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such lawsuits or proceedings in excess of any amounts accrued has been incurred that is expected to have a material adverse effect on our financial condition, results of operations, or cash flows.

Item 1A. Risk Factors.

There have been no material changes in the information pertaining to our Risk Factors as disclosed in our 2020 Annual Report.    

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a)  None.

 

(b)  None.

 

(c)  Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

Period

Total Number of Units Purchased

Average Price Paid per Unit

Total Number of Units Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Units that May Yet be Purchased Under the Publicly Announced Plans or Programs

July 1 – July 30, 2021

—

$

—

N/A

N/A

August 1 – August 31, 2021

—

—

N/A

N/A

September 1 – September 30, 2021

—

—

N/A

N/A

Total

—

N/A

N/A

Item 3. Defaults Upon Senior Securities.

 

None.

Item 4. Mine Safety Disclosures.

 

None.

Item 5. Other Information.

 

    None.

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Item 6. Exhibits.

 

Exhibits: 

31.1*			Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*			Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**			Certification of Principal Executive Officer Furnished 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 Principal Financial Officer Furnished Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.SCH+			XBRL Taxonomy Extension Schema Document
101.CAL+			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+			XBRL Taxonomy Extension Label Linkbase Document
101.PRE+			XBRL Taxonomy Extension Presentation Linkbase Document
104*			Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*    Filed with this report.

**    Furnished with this report.

+    Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2021 and 2020; (ii) Consolidated Statements of Comprehensive Income for the three and nine-month periods ended September 30, 2021 and 2020; (iii) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020; (iv) Consolidated Statement of Partners’ Capital for the nine-month periods ended September 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2021 and 2020; and (iv) Notes to Consolidated Financial Statements for the nine months ended September 30, 2021.

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SIGNATURES

 

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

 

						CSI COMPRESSCO LP
						By:			CSI Compressco GP LLC,
									its General Partner
Date:			November 12, 2021			By:			/s/John E. Jackson
									John E. Jackson
									Chief Executive Officer
									Principal Executive Officer
Date:			November 12, 2021			By:			/s/Jonathan W. Byers
									Jonathan W. Byers
									Chief Financial Officer
									Principal Financial Officer
Date:			November 12, 2021			By:			/s/Michael E. Moscoso
									Michael E. Moscoso
									Vice President - Finance
									Principal Accounting Officer

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