NOTE 1 — ORGANIZATION, BASIS OF PRESENTATION, AND SIGNIFICANT ACCOUNTING POLICIES
Organization
CSI Compressco LP, a Delaware limited partnership, is a provider of compression and treating services. Natural gas compression is used for oil production, gathering, artificial lift, transmission, processing, and storage. Treating services include the removal of contaminants from a natural gas stream and cooling to reduce the temperature of produced gas and liquids. We also sell used standard compressor packages and provide aftermarket services and compressor package parts and components manufactured by third-party suppliers. We provide contract and treating services and compressor parts and component sales 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, Argentina, Egypt and Chile. Previously, our equipment sales (new unit sales) business included the fabrication and sale of new standard and custom-designed, engineered compressor packages fabricated primarily at our facility in Midland, Texas. 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 March 31, 2023, and for the three-month periods ended March 31, 2023 and March 31, 2022 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-month period ended March 31, 2023 are not necessarily indicative of results that may be expected for the twelve months ended December 31, 2023.
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, 2022 and notes thereto included in our Annual Report on Form 10-K, which we filed with the SEC on March 13, 2023.
Segments
Our general partner has concluded that we operate in one reportable segment.
Significant Accounting Policies
Our significant accounting policies are described in the notes to our consolidated financial statements for the year ended December 31, 2022 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-months ended March 31, 2023.
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.
Cash Equivalents
We consider all highly liquid cash investments with maturities of three months or less when purchased to be cash equivalents. We have concentrated credit risk for cash by maintaining deposits in a major bank, which may at times exceed amounts covered by insurance provided by the United States Federal Deposit Insurance Corporation (“FDIC”). We monitor the financial health of the bank and have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk. Management believes the financial institutions are financially sound and risk of loss is minimal.
Financial Instruments
Financial instruments that subject us to concentrations of credit risk consist principally of trade accounts receivable, which are primarily due from companies of varying size engaged in oil and gas activities in the United States, Canada, Mexico, Argentina, Chile, and Egypt. Our policy is to review the financial condition of customers before extending credit and periodically updating customer credit information. Payment terms are on a short-term basis. The risk of loss from the inability to collect trade receivables is heightened during prolonged periods of low oil and natural gas commodity prices.
We have currency exchange rate risk exposure related to transactions denominated in a foreign currency as well as to investments in certain of our international operations. Our risk management activities include the use of foreign currency forward purchase and sale derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected international operations.
We have $59.0 million outstanding under our variable rate revolving credit facilities as of March 31, 2023 and face market risk exposure related to changes in applicable interest rates.
Foreign Currencies
We have designated the Canadian dollar, Mexican peso, Egyptian pound, Chilean peso and the Euro as the functional currency for Canada, Mexico, Egypt, Chile, and the Netherlands, respectively. We are exposed to fluctuations between the U.S. dollar and certain foreign currencies, including the Canadian dollar, the Mexican peso, the Argentine peso, the Egyptian pound, the Chilean peso, and Euro as a result of our international operations. Foreign currency exchange (gains) losses are included in other (income) expense, net and totaled $0.04 million and $0.4 million during the three-month periods ended March 31, 2023 and March 31, 2022, respectively.
Leases
Lessee
As a lessee, unless the lease meets the criteria of short-term and is excluded per our policy election described below, we initially recognize a lease liability and related right-of-use asset on the commencement date. The right-of-use asset represents our right to use an underlying asset and the lease liability represents our obligation to make lease payments to the lessor over the lease term.
All of our long-term leases are operating leases and are included in operating lease right-of-use assets, accrued liabilities and other, and operating lease liabilities in our consolidated balance sheet as of March 31, 2023 and December 31, 2022. We determine whether a contract is or contains a lease at inception of the contract. Where we are a lessee in a contract that includes an option to extend or terminate the lease, we include the extension period or exclude the period covered by the termination option in our lease term in determining the right-of-use asset and lease liability, if it is reasonably certain that we would exercise the option.
As an accounting policy election, we do not include short-term leases on our balance sheet. Short-term leases include leases with a term of 12 months or less, inclusive of renewal options we are reasonably certain to exercise. The lease payments for short-term leases are included as operating lease costs on a straight-line basis over the lease term in cost of revenues or selling, general, and administrative expense based on the use of the underlying asset. We recognize lease costs for variable lease payments not included in the determination of a lease liability in the period in which an obligation is incurred.
As allowed by U.S. GAAP, we do not separate nonlease components from the associated lease component for our contract services contracts and instead account for those components as a single component based on the accounting treatment of the predominant component. In our evaluation of whether Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 842 “Leases” or ASC 606 “Revenue from Contracts with Customers” is applicable to the combined component based on the predominant component, we determined the services nonlease component is predominant, resulting in the ongoing recognition of our compression services contracts following ASC 606.
Our operating leases are recognized at the present value of lease payments over the lease term. When the implicit discount rate is not readily determinable, we use our incremental borrowing rate to calculate the discount rate used to determine the present value of lease payments. Consistent with other long-lived assets or asset groups that are held and used, we test for impairment of our right-of-use assets when impairment indicators are present.
Lessor
Our agreements for rental equipment contain an operating lease component under ASC 842 because we, as the lessor, retain substantial exposure to changes in the underlying asset’s value, unlike a sale or secured lending arrangement. Therefore, we do not derecognize the underlying asset, and recognize income associated with providing the lessee the right to control the use of the asset ratably over the lease term.
As a lessor, we recognize operating lease revenue on our statement of operations as equipment rentals. This revenue is recognized on a straight-line basis over the term of the lease based on the monthly rate in the agreement. The leased asset remains on the balance sheet consistent with other property, plant and equipment. Cash receipts associated with all leases are classified as cash flows from operating activities in the statement of cash flows.
The leased equipment primarily consists of the Spartan Treating amine plants, cooling units and production equipment. All of this equipment is modular and skid mounted. It can be moved between locations. Lease terms for this equipment vary in length. Amine plants range from one to five years while the cooling units range from six months to two years.
Allowance for Credit Losses
Trade accounts receivable are stated at their net realizable value. The allowance for credit losses against gross trade accounts receivable reflects the best estimate of expected credit losses of the receivables portfolio determined on the basis of historical experience, current information, and forecasts of future economic conditions. In developing the estimate for expected credit losses, trade accounts receivables are segmented into pools of assets depending on market (U.S. versus international), delinquency status, and customer type, and fixed reserve percentages are established for each pool of trade accounts receivables.
In determining the reserve percentages for each pool of trade accounts receivables, we considered our historical experience with certain customers and customer types, regulatory and legal environments, country and political risk, and other relevant current and future forecasted macroeconomic factors. These credit risk indicators are monitored on a quarterly basis to determine whether there have been any changes in the economic environment that would indicate the established reserve percentages should be adjusted, and are considered on a regional basis to reflect more geographic-specific metrics. Additionally, write-offs and recoveries of customer receivables are tracked against collections on a quarterly basis to determine whether the reserve percentages remain appropriate. When management becomes aware of certain customer-specific factors that impact credit risk, specific allowances for these known troubled accounts are recorded. Trade accounts receivable are written off after all reasonable means to collect the full amount (including litigation, where appropriate) have been exhausted.
During the first quarter of 2023, additions to the allowance for credit losses, write-offs and recoveries of customer receivables were not material to our condensed consolidated financial statements.
Inventories
Inventories consist primarily of compressor package spare parts and supplies and work in process, and 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.
We did not record any impairments of long-lived assets during the three-month periods ended March 31, 2023 and March 31, 2022.
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 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-month periods ended March 31, 2023 and March 31, 2022, 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. We 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 7 – “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, 2023, the board of directors of our general partner declared a cash distribution attributable to the quarter ended December 31, 2022 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 was paid on February 14, 2023 to each of the holders of common units of record as of the close of business on January 31, 2023.
New Accounting Pronouncements
Standards adopted in 2023
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. We adopted this new standard on January 1, 2023 and our adoption of this standard did not have a material impact on our consolidated financial statements.
NOTE 2 — REVENUE FROM CONTRACTS WITH CUSTOMERS
As of March 31, 2023, we had $141.0 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 March 31, 2023 for completion of performance obligations of compression service contracts are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
| | (In Thousands) |
| Compression service contracts remaining performance obligations | $ | 54,196 | | | $ | 62,182 | | | $ | 20,177 | | | $ | 3,699 | | | $ | 741 | | | $ | 140,995 | |
Our contract asset balances included in trade accounts receivable in our consolidated balance sheet, primarily associated with revenue accruals prior to invoicing, were $7.7 million and $4.2 million as of March 31, 2023 and December 31, 2022, respectively.
The following table reflects the changes in unearned income in our consolidated balance sheets for the periods indicated:
| | | | | | | | | | | |
| Three Months Ended
March 31, |
| | 2023 | | 2022 |
| | (In Thousands) |
| Unearned income, beginning of period | $ | 2,590 | | | $ | 2,187 | |
| Additional unearned income | 2,868 | | | 2,339 | |
| Revenue recognized | (1,360) | | | (1,773) | |
| Unearned income, end of period | $ | 4,098 | | | $ | 2,753 | |
Unearned income is included in accrued liabilities and other on the consolidated balance sheets. As of March 31, 2023 and December 31, 2022, contract costs were immaterial.
Disaggregated revenue from contracts with customers by geography is as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| (In Thousands) |
| Contract services | | | | | | | |
| United States | $ | 63,677 | | | $ | 52,926 | | | | | |
| International | 5,970 | | | 9,881 | | | | | |
| 69,647 | | | 62,807 | | | | | |
| Aftermarket services | | | | | | | |
| United States | 16,893 | | | 12,689 | | | | | |
| International | 458 | | | 179 | | | | | |
| 17,351 | | | 12,868 | | | | | |
| Equipment rentals | | | | | | | |
| United States | 2,805 | | | 1,966 | | | | | |
| International | 1,309 | | | 1,534 | | | | | |
| 4,114 | | | 3,500 | | | | | |
| Equipment sales | | | | | | | |
| United States | 84 | | | 715 | | | | | |
| International | 175 | | | 122 | | | | | |
| 259 | | | 837 | | | | | |
| Total Revenue | | | | | | | |
| United States | 83,459 | | | 68,296 | | | | | |
| International | 7,912 | | | 11,716 | | | | | |
| $ | 91,371 | | | $ | 80,012 | | | | | |
NOTE 3 — INVENTORIES
Components of inventories as of March 31, 2023 and December 31, 2022, are as follows:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (In Thousands) |
| Parts and supplies | $ | 47,513 | | | $ | 44,042 | |
| Work in progress | 3,363 | | | 1,860 | |
| Total inventories | $ | 50,876 | | | $ | 45,902 | |
Inventories consist primarily of compressor package spare parts and supplies. Work in progress inventories consist of work in progress for our aftermarket business that has not been invoiced.
NOTE 4 — LEASES
Lessee Accounting
We have operating leases for some of our office space, warehouse space, operating locations, and machinery and equipment. Our leases have remaining lease terms up to ten years. Some of our leases have options to extend for various periods, while some have termination options with prior notice of generally 30 days or six months. Our leases generally require us to pay all maintenance and insurance costs. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Lease costs are included in either cost of revenues or selling, general, and administrative expense depending on the use of the underlying asset. Total lease expense (inclusive of lease expense for leases not included on our consolidated balance sheet based on our accounting policy election to exclude leases with a term of 12 months or less), was $3.9 million for the three months ended March 31, 2023, of which $0.2 million was related to short-term leases. Total lease expense was $4.2 million for the three months ended March 31, 2022, of which $1.4 million was related to short-term leases. Variable rent expense was not material.
Operating lease supplemental cash flow information:
| | | | | | | | | | | |
| | Three Months Ended March 31, |
| 2023 | | 2022 |
| | (In Thousands) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows - operating leases | $ | 3,717 | | | $ | 2,779 | |
| | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 6,023 | | | $ | 6,770 | |
Supplemental balance sheet information:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | (In Thousands) |
| Operating leases: | | | |
| Operating right-of-use asset | $ | 30,701 | | | $ | 27,205 | |
| | | |
| Accrued liabilities and other | $ | 10,433 | | | $ | 7,620 | |
| Operating lease liabilities | 20,163 | | | 19,419 | |
| Total operating lease liabilities | $ | 30,596 | | | $ | 27,039 | |
Additional operating lease information:
| | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| Weighted average remaining lease term: | | | |
| Operating leases | 3.85 years | | 4.33 years |
| | | |
| Weighted average discount rate: | | | |
| Operating leases | 10.00 | % | | 10.00 | % |
Future minimum lease payments by year and in the aggregate, under non-cancelable operating leases with terms in excess of one year, consist of the following at March 31, 2023:
| | | | | | | | |
| | | Operating Leases |
| | | (In Thousands) |
| | |
| Remainder of 2023 | | $ | 10,191 | |
| 2024 | | 9,614 | |
| 2025 | | 6,153 | |
| 2026 | | 5,355 | |
| 2027 | | 2,523 | |
| Thereafter | | 2,781 | |
| Total lease payments | | 36,617 | |
| Less imputed interest | | (6,021) | |
| Total lease liabilities | | $ | 30,596 | |
Lessor Accounting
Our leased equipment primarily consists of amine plants, cooling units, and other production equipment. Certain of our agreements with our customers for rental equipment contain an operating lease component under ASC 842 because (i) there are identified assets, (ii) the customer has the right to obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use, and (iii) the customer directs the use of the identified assets throughout the period of use. We have elected to apply the practical expedient provided to lessors to combine the lease and non-lease component of a contract where the revenue recognition pattern is the same and where the lease component, when accounted for separately, would be considered an operating lease. The practical expedient also allows a lessor to account for the combined lease and non-lease components under
ASC 606, Revenue from Contracts with Customers, when the non-lease component is the predominant element of the combined component.
Our lease agreements generally have contract terms based on monthly rates. Lease revenue is recognized straight-line based on these monthly rates. We do not provide an option for the lessee to purchase the rented assets at the end of the lease and the lessees do not provide residual value guarantees on the rented assets.
We recognized operating lease revenue, which is included in “Equipment rentals” on the consolidated statements of operations as follows:
| | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | |
| | 2023 | | 2022 | | | | |
| | (In Thousands) | | |
| Equipment rentals | $ | 4,114 | | | $ | 3,500 | | | | | |
The following table presents the maturity of lease payments for operating lease agreements in effect as of March 31, 2023. This presentation includes minimum fixed lease payments and does not include an estimate of variable lease consideration. These agreements have remaining lease terms ranging from 1 month to 6 years. The following table presents the undiscounted cash flows expected to be received related to these agreements:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| | (In Thousands) |
| Future minimum lease revenue | $ | 11,052 | | | $ | 8,899 | | | $ | 1,599 | | | $ | 1,576 | | | $ | 1,576 | | | $ | 1,839 | |
NOTE 5 — LONG-TERM DEBT AND OTHER BORROWINGS
Long-term debt consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 |
| | Scheduled Maturity | | (In Thousands) |
Credit Agreement (1) | | June 29, 2025 | | $ | 3,656 | | | $ | 6,312 | |
Spartan Credit Agreement (2) | | October 17, 2025 | | 54,251 | | | 54,912 | |
7.50% First Lien Notes due 2025 (3) | | April 1, 2025 | | 400,235 | | | 400,293 | |
10.00%/10.75% Second Lien Notes due 2026 (4) | | April 1, 2026 | | 172,575 | | | 172,499 | |
| Total long-term debt | | | | 630,717 | | | 634,016 | |
Other borrowings (5) | | Various | | 18,407 | | | 14,129 | |
| Total long-term debt and other borrowings | | | | $ | 649,124 | | | $ | 648,145 | |
| | | | | | |
| | | | | | |
(1) Net of unamortized deferred financing costs of $0.3 million and $0.4 million as of March 31, 2023 and December 31, 2022, respectively.
(2) Net of unamortized deferred financing costs of $0.7 million and $0.6 million as of March 31, 2023 and December 31, 2022, respectively.
(3) Net of unamortized deferred financing costs of $2.0 million and $2.3 million as of March 31, 2023 and December 31, 2022, respectively, unamortized discount of $0.1 million and $0.1 million as of March 31, 2023 and December 31, 2022, respectively, and deferred restructuring gain of $2.4 million and $2.7 million as of March 31, 2023 and December 31, 2022, respectively.
(4) Net of unamortized deferred financing costs of $1.8 million and $1.9 million, unamortized discount of $0.6 million and $0.7 million, and deferred restructuring gain of $2.2 million and $2.4 million as of March 31, 2023 and December 31, 2022, respectively.
(5) Includes $6.9 million and $5.4 million of current liability classified as Accrued liabilities and other, and $11.5 million and $8.7 million classified as Other long-term liabilities on the accompanying consolidated balance sheet as of March 31, 2023 and December 31, 2022, respectively.
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 March 31, 2023.
See Note 6 – “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
On June 30, 2022, the Partnership, CSI Compressco Sub Inc. and CSI Compressco Operating LLC (collectively with the Partnership and CSI Compressco Sub Inc., the “Borrowers”), and certain subsidiaries of the Partnership named therein as guarantors (the “Guarantors”), entered into that certain Fifth Amendment to Loan and Security Agreement (the “Fifth Amendment”) with the Lenders (as defined below) party thereto, and Bank of America, N.A., in its capacity as administrative agent (in such capacity, “Administrative Agent”), collateral agent, letter of credit issuer and swing line lender.
The Fifth Amendment amends and modifies that certain Loan and Security Agreement among the Borrowers, the Guarantors, the financial institutions from time to time party thereto as lenders (the “Lenders”) and the Administrative Agent dated as of June 29, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). The Fifth Amendment provided for changes and modifications to the Credit Agreement as set forth therein, which include, among other things, the reduction of the reserve to $3.5 million and the extension of the Termination Date (as defined in the Credit Agreement) from June 29, 2023 to June 29, 2025.
As of March 31, 2023, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Credit Agreement, we had availability of $26.1 million.
The maturity date of the Credit Agreement is June 29, 2025. As of March 31, 2023 we had $4.0 million outstanding balance and $1.4 million in letters of credit against our Credit Agreement.
Spartan Credit Agreement
As of March 31, 2023, and subject to compliance with the covenants, borrowing base, and other provisions of the agreements that may limit borrowings under the Spartan Credit Agreement, we had availability of $12.2 million.
As of March 31, 2023, we had $55.0 million outstanding and no letters of credit against the Spartan Credit Agreement and the maturity date of the Spartan Credit Agreement is January 29, 2024.
7.50% First Lien Notes due 2025
As of March 31, 2023, our 7.50% First Lien Notes due 2025 (the “First Lien Notes”) had $400.2 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 March 31, 2023, our 10.000%/10.750% Second Lien Notes due 2026 (the “Second Lien Notes”) had $172.6 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”).
During the fourth quarter of 2020, the second quarter of 2021, and the fourth quarter of 2021, the Partnership elected to increase the principal amount outstanding through the issuance of PIK notes. As of March 31, 2023, our principal amount outstanding included $7.2 million of PIK notes.
Finance Agreements
During 2022, CSI Compressco Leasing LLC and CSI Compressco Operating LLC (individually and collectively as Debtor), with CSI Compressco LP (as Guarantor), entered into a Master Equipment Finance Agreement with a third party in the amount of $14.1 million to finance certain compression equipment. The note is payable in monthly installments of $0.4 million for 36 months. The current portion of this amount is classified in accrued liabilities and other and the long-term portion is classified in other long-term liabilities on the accompanying consolidated balance sheet.
During the first quarter of 2023, CSI Compressco Leasing LLC and CSI Compressco Operating LLC (individually and collectively as Debtor), with CSI Compressco LP (as Guarantor), entered into a Master Equipment Finance Agreements with a third party totaling $5.1 million to finance certain compression equipment. The notes are payable in monthly installments totaling $0.2 million for 36 months. The current portion of these amounts are classified in accrued liabilities and other and the long-term portion is classified in other long-term liabilities on the accompanying consolidated balance sheet.
NOTE 6 — RELATED PARTY TRANSACTIONS
GP Sale
On January 29, 2021, Spartan acquired from TETRA Technologies, Inc. (“TETRA”) the Partnership’s general partner, its incentive distribution rights (the “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.
Acquisition of Spartan entities
On November 10, 2021, the Partnership entered into the Contribution Agreement by and among the Partnership, the general partner, Spartan, and Compressco Sub. Pursuant to the terms of the Contribution Agreement, Spartan contributed to the Partnership 100% of the limited liability company interest in Treating Holdco, 100% of the common stock in Spartan Terminals, and 99% of the limited liability company interests in Spartan Operating and the general partner agreed to cancel its IDRs in the Partnership in exchange for 48.4 million common units representing the limited partner interests in the Partnership. We refer to the acquisition of the Contributed Interests as the Spartan Acquisition. The general partner agreed to cancel its IDRs in the Partnership within 60 days of the Spartan Acquisition, and amended and restated its limited partnership agreement on January 6, 2022 to effect such cancellation. In connection with the Spartan Acquisition, we closed a private placement of common units to certain investors for gross proceeds of $52.7 million (the “Private Placement”).
Spartan and General Partner Ownership
As of March 31, 2023, Spartan’s ownership interest in us was approximately 45.2%, with the common units held by the public representing an approximate 55% interest in us. As of March 31, 2023, Spartan’s ownership was through various wholly owned subsidiaries and consisted of approximately 44.9% of the limited partner interests plus the approximate 0.5% general partner interest. As a result of its ownership of common units and its general partner interest in us, Spartan received distributions of $0.6 million and $0.6 million during the three months ended March 31, 2023 and 2022, respectively.
Indemnification Agreement
We have entered into indemnification agreements with each of our current directors and officers with regard to their services as a director or officer, in order to enhance the indemnification rights provided under Delaware law and our Partnership Agreement. The individual indemnification agreements provide each such director or officer with the right to receive his or her costs of defense if he or she is made a party or witness to any proceeding other than a proceeding brought by or in the right of us, provided that such director or officer has not acted in bad faith or engaged in fraud with respect to the action that gave rise to his or her participation in the proceeding.
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 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. In December 2020, TETRA sold these compressors and assigned the corresponding leases to Spartan Energy Partners LP (“Spartan”). In January 2021, TETRA sold the general partner, IDRs and a majority of its common units in the Partnership to Spartan who assumed the financing obligation. On November 10, 2021, the Partnership completed the Spartan Acquisition. See ‘Acquisition of Spartan entities’ for further description above. This resulted in the reassessment of the lease as an operating lease, thus the Partnership derecognized the assets and the related liabilities as of November 10, 2021. Additionally, all revenue and expenses were eliminated in consolidation.
Common Unit Purchase Agreement
On November 10, 2021, the Partnership closed a private placement of 39,050,210 common units to certain investors for gross proceeds of $52.7 million, pursuant to a Common Unit Purchase Agreement (the “Unit Purchase Agreement”) (the “Private Placement”). Of the amount raised, $7.0 million was contributed by management and other related parties. The Partnership also issued and sold approximately 3.0 million common units at $1.35 per unit to Spartan, raising an additional $4.0 million.
Purchase of Compressor units from the Partnership by SES (“Spartan Sale-Leaseback”)
On November 10, 2021, the Partnership sold 25 compressor units to Spartan Energy Service LLC (“SES”) and concurrently signed a lease agreement with SES for those units. This generated approximately $24 million in cash proceeds. As SES is an unrestricted subsidiary of the Partnership, the Spartan Sale-Leaseback has been eliminated in the consolidated income statements.
NOTE 7 — 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 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 March 31, 2023, 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 | | $ | 1,644 | | | 18.25 | | 4/5/2023 |
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-month periods ended March 31, 2023 and March 31, 2022, we recognized $0.2 million and $1.1 million, respectively, of net (gains) losses associated with our foreign currency derivatives program. 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):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | (In Thousands) |
| | | | | | | | |
7.50% First Lien Notes | | $ | 400,000 | | | $ | 382,000 | | | $ | 400,000 | | | $ | 373,000 | |
10.00%/10.75% Second Lien Notes | | 172,717 | | | 148,968 | | | 172,717 | | | 136,446 | |
| | $ | 572,717 | | | $ | 530,968 | | | $ | 572,717 | | | $ | 509,446 | |
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 8 — 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. State tax expense relating to the Texas franchise
tax liability is included in the provision for income taxes. 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 rates for the three-month periods ended March 31, 2023 and March 31, 2022 were negative 26.8% and negative 14.2%, respectively, 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 9 — 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 10 — SUBSEQUENT EVENTS
On April 17, 2023, the board of directors of our general partner declared a cash distribution attributable to the quarter ended March 31, 2023 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 May 15, 2023 to each of the holders of common units of record as of the close of business on April 30, 2023.