NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of the Partnership included herein have been prepared in accordance with U.S. GAAP for interim financial information and the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP are not required in these interim financial statements and have been condensed or omitted. Management believes that the information furnished includes all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly our consolidated financial position, results of operations and cash flows for the periods indicated. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements presented in our
2017
Form 10-K, which contains a more comprehensive summary of our accounting policies. The interim results reported herein are not necessarily indicative of results for a full year. Certain prior year amounts have been reclassified to conform to the current year presentation.
Organization
We are a publicly-held Delaware limited partnership formed in June 2006 to provide natural gas contract operations services to customers throughout the U.S. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining equipment to provide natural gas compression services to our customers.
Our General Partner is an indirect wholly-owned subsidiary of Archrock. Its general partner is Archrock GP, and the board of directors and officers of Archrock GP, which we refer to herein as our board of directors and our officers, make decisions on our behalf.
As of
March 31, 2018
, public unitholders held an approximate
57%
ownership interest in us and Archrock owned our remaining equity interests, including the general partner interests and all of the incentive distribution rights. As a result of the closing of the Merger, we are an indirect wholly-owned subsidiary of Archrock and the incentive distribution rights were canceled.
Merger Transaction
On April 26, 2018, Archrock completed the acquisition of all of our outstanding common units at a fixed exchange ratio of
1.40
shares of Archrock common stock for each of our common units not owned by Archrock. In connection with the closing of the Merger, Archrock issued an aggregate of
57.6
million shares of its common stock to unaffiliated holders of our common units in exchange for all of the
41.2
million common units not owned by Archrock. Additionally, our incentive distribution rights, which were previously owned indirectly by Archrock, were canceled and ceased to exist. As a result of the Merger, our common units are no longer publicly traded. See
Note 13
(“Subsequent Events”)
for further details of this transaction.
Significant Accounting Policies
Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with our limited partners or General Partner. Our accumulated other comprehensive income (loss) consists only of derivative instruments. Changes in accumulated other comprehensive income (loss) represent changes in the fair value of derivative instruments that are designated as cash flow hedges and amortization of terminated interest rate swaps. See
Note 9
(“Derivatives”)
for additional disclosures related to comprehensive income (loss).
Income (Loss) Per Common Unit
Income (loss) per common unit is computed using the two-class method. Under the two-class method, basic income (loss) per common unit is determined by dividing net income (loss) allocated to the common units, after deducting the amounts allocated to our General Partner (including distributions to our General Partner on its incentive distribution rights) and participating securities, by the weighted average number of outstanding common units excluding the weighted average number of outstanding participating securities during the period. Participating securities include unvested phantom units with nonforfeitable tandem distribution equivalent rights to receive cash distributions in the quarter in which distributions are paid on common units. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.
When computing income (loss) per common unit in periods when distributions are greater than income (loss), the amount of the actual incentive distribution rights, if any, is deducted from net income (loss) and allocated to our General Partner for the corresponding period. The remaining amount of net income (loss), after deducting distributions to participating securities, is allocated between the general partner and common units based on how our Partnership Agreement allocates net losses.
When computing income per common unit in periods when income is greater than distributions, income is allocated to the General Partner, participating securities and common units based on how our Partnership Agreement would allocate income if the full amount of income for the period had been distributed. This allocation of net income does not impact our total net income, consolidated results of operations or total cash distributions (including actual incentive distribution rights); however, it may result in our General Partner being allocated additional incentive distributions for purposes of our income per unit calculation, which could reduce net income per common unit. However, as required by our Partnership Agreement, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our General Partner based on actual distributions.
The following table reconciles net income (loss) used in the calculation of basic and diluted income (loss) per common unit (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Net income (loss)
|
$
|
10,290
|
|
|
$
|
(4,316
|
)
|
Less: General partner 2% ownership interest
|
(204
|
)
|
|
86
|
|
Common unitholder interest in net income (loss)
|
10,086
|
|
|
(4,230
|
)
|
Less: Net income attributable to participating securities
|
(28
|
)
|
|
(34
|
)
|
Net income (loss) used in basic and diluted income (loss) per common unit
|
$
|
10,058
|
|
|
$
|
(4,264
|
)
|
The following table shows the potential common units that were included in computing diluted income (loss) per common unit (in thousands):
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Weighted average common units outstanding including participating securities
|
70,208
|
|
|
65,536
|
|
Less: Weighted average participating securities outstanding
|
(137
|
)
|
|
(118
|
)
|
Weighted average common units outstanding — used in basic income (loss) per common unit
|
70,071
|
|
|
65,418
|
|
Net dilutive potential common units issuable:
|
|
|
|
Phantom units
|
—
|
|
|
—
|
|
Weighted average common units and dilutive potential common units — used in diluted income (loss) per common unit
|
70,071
|
|
|
65,418
|
|
2. Recent Accounting Developments
Accounting Standards Updates Implemented
On January 1, 2018, we adopted ASU 2017-12 using the modified retrospective approach to existing cash flow hedge relationships as of January 1, 2018. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements and eliminates the requirement to separately measure and report hedge ineffectiveness. As a result of the adoption of ASU 2017-12, we recognized a net gain of
$0.4 million
as a cumulative-effect adjustment to opening retained earnings, with a corresponding adjustment to other comprehensive income (loss), to reverse the cumulative ineffectiveness previously recognized in interest expense.
On January 1, 2018, we adopted ASU 2016-15 on a retrospective basis. ASU 2016-15 addresses diversity in practice and simplifies several elements of cash flow classification, including how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 did not have an impact on our condensed consolidated statement of cash flow for the three months ended
March 31, 2017
.
Revenue Recognition Update
On January 1, 2018, we adopted the Revenue Recognition Update using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. We recognized the cumulative effect of initially applying the Revenue Recognition Update as an adjustment to the opening balance of retained earnings. For contracts that were modified before the effective date, we identified performance obligations on the basis of the current version of the contract, which included any contract modifications since inception. The application of the practical expedient for contract modifications did not have a material effect on the adjustment to retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Under previous guidance, contract operations revenue was recognized when earned, which generally occurs monthly when the service is provided under our customer contracts. Under the Revenue Recognition Update the timing of revenue recognition is impacted by contractual provisions for service availability guarantees of our compressor assets and re-billable costs associated with moving our compressor assets to a customer site. These changes are further discussed below and did not result in a material difference from previous practice for contract operations.
The Revenue Recognition Update provides guidance on contract costs that should be recognized as assets and amortized over the period that the related goods or services transfer to the customer. Certain costs that were previously expensed as incurred, such as sales commissions and freight charges to transport compressor assets, are deferred and amortized.
The following table summarizes the cumulative impact of the adoption of the Revenue Recognition Update on the opening balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Adjustments Due to the Revenue Recognition Update
|
|
January 1, 2018
|
Assets
|
|
|
|
|
|
Contract costs
|
$
|
—
|
|
|
$
|
16,316
|
|
|
$
|
16,316
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Accrued liabilities
|
$
|
7,597
|
|
|
$
|
186
|
|
|
$
|
7,783
|
|
Deferred revenue
|
1,299
|
|
|
3,416
|
|
|
4,715
|
|
|
|
|
|
|
|
Partners
’
capital
|
|
|
|
|
|
Common units
|
$
|
501,023
|
|
|
$
|
12,462
|
|
|
$
|
513,485
|
|
General partner units
|
11,582
|
|
|
252
|
|
|
11,834
|
|
The following tables summarize the impact of the application of the Revenue Recognition Update on our condensed consolidated balance sheet and condensed consolidated statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Balance Sheet
|
As Reported
|
|
Balance Excluding the Impact of the Revenue Recognition Update
|
|
Effect of Change
|
Assets
|
|
|
|
|
|
Accounts receivable, trade
|
$
|
69,100
|
|
|
$
|
68,858
|
|
|
$
|
242
|
|
Contract costs
|
20,819
|
|
|
—
|
|
|
20,819
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Accrued liabilities
|
$
|
9,683
|
|
|
$
|
9,483
|
|
|
$
|
200
|
|
Deferred revenue
|
6,761
|
|
|
1,375
|
|
|
5,386
|
|
Other long-term liabilities
|
9,284
|
|
|
9,272
|
|
|
12
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Common units
|
$
|
506,035
|
|
|
$
|
490,879
|
|
|
$
|
15,156
|
|
General partner units
|
11,650
|
|
|
11,343
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Statement of Operations
|
As Reported
|
|
Balance Excluding the Impact of the Revenue Recognition Update
|
|
Effect of Change
|
Revenue
|
$
|
147,002
|
|
|
$
|
148,931
|
|
|
$
|
(1,929
|
)
|
Cost of sales (excluding depreciation and amortization) — affiliates
|
56,302
|
|
|
60,296
|
|
|
(3,994
|
)
|
Selling, general and administrative — affiliates
|
19,801
|
|
|
20,310
|
|
|
(509
|
)
|
Provision for income taxes
|
519
|
|
|
507
|
|
|
12
|
|
Net income
|
10,290
|
|
|
7,728
|
|
|
2,562
|
|
Accounting Standards Updates Not Yet Implemented
In June 2016, the FASB issued ASU 2016-13 that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. Entities will apply ASU 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the impact of ASU 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 that establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are currently evaluating the impact of ASU 2016-02 on our consolidated financial statements.
3. Revenue from Contracts with Customers
Revenue Recognition
Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services. Sales and usage-based taxes that are collected from the customer are excluded from revenue.
The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
0 - 1,000 horsepower per unit
|
$
|
54,427
|
|
1,001 - 1,500 horsepower per unit
|
60,694
|
|
Over 1,500 horsepower per unit
|
31,435
|
|
Other
(1)
|
446
|
|
Total Contract Operations
(2)
|
$
|
147,002
|
|
——————
|
|
(1)
|
Primarily relates to fees associated with Archrock-owned non-compressor equipment.
|
|
|
(2)
|
Includes
$1.1 million
for the three months ended
March 31, 2018
related to billable maintenance on Archrock-owned units that was recognized at a point in time. All other revenue is recognized over time.
|
Contract Operations
We provide comprehensive contract operations services, including the personnel, equipment, tools, materials and supplies to meet our customers’ natural gas compression needs. Based on the operating specifications at the customer location and each customer's unique needs, these services include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining equipment to provide natural gas compression services to our customers.
Natural gas compression services are generally satisfied over time, as the customer simultaneously receives and consumes the benefits provided by these services. Our performance obligation is a series in which the unit of service is one month, as the customer receives substantially the same benefit each month from the services regardless of the type of service activity performed, which may vary. If the transaction price is based on a fixed fee, revenue is recognized monthly on a straight-line basis over the period that we are providing services to the customer. Amounts invoiced to customers for costs associated with moving our compressor assets to a customer site are also included in the transaction price and are amortized over the initial contract term.
Variable consideration exists if customers are billed at a lesser standby rate when a unit is not running. We have elected to apply the invoicing practical expedient to recognize revenue for such variable consideration, as the invoice corresponds directly to the value transferred to the customer based on our performance completed to date. The rate for standby service is lower to reflect the decrease in costs and effort required to provide standby service when a unit is not running.
We also perform billable maintenance service on our natural gas compression equipment at the customer’s request on an as-needed basis. The performance obligation is satisfied and revenue is recognized at the agreed-upon transaction price at the point in time when service is complete and the customer has accepted the work performed and can obtain the remaining benefits of the service that the unit will provide.
As of
March 31, 2018
, we had
$168.0 million
of remaining performance obligations related to our contract compression service. This amount does not reflect revenue for contracts whose original expected duration is less than 12 months or performance obligations for which we recognize revenue in the amount at which we have the right to invoice for services performed. We have elected the practical expedient to not consider the effects of the time value of money, as the expected time between the transfer of services and payment for such services is less than one year. This amount will be recognized through 2021 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2019
|
|
2020
|
|
2021
|
|
Total
|
Remaining performance obligations
|
$
|
106,284
|
|
|
$
|
46,104
|
|
|
$
|
12,725
|
|
|
$
|
2,865
|
|
|
$
|
167,978
|
|
Contract Balances
Contract operations services are generally billed monthly at the beginning of the month in which service is being provided. We recognize a contract asset when we have the right to consideration in exchange for goods or services transferred to a customer when the right is conditioned on something other than the passage of time. We recognize a contract liability when we have an obligation to transfer goods or services to a customer for which we have already received consideration. Freight billings to transport compressor assets often result in a contract liability.
As of
March 31,
and
January 1, 2018
, our receivables from contracts with customers, net of allowance for doubtful accounts were
$68.3 million
and
$66.2 million
, respectively. As of
March 31,
and
January 1, 2018
, our contract liabilities were
$7.3 million
and
$5.4 million
, respectively, which are included in deferred revenue and other long-term liabilities in our condensed consolidated balance sheets. The increase in the contract liability balance was due to deferral of
$4.1 million
, partially offset by
$2.2 million
which was recognized as revenue during the period each primarily related to freight billings.
4. Related Party Transactions
On January 1, 2018, we entered into the Merger Agreement pursuant to which we agreed to merge with and into an indirect wholly-owned subsidiary of Archrock. On April 26, 2018, the Merger was completed and we survived as Archrock’s indirect wholly-owned subsidiary. See
Note 13
(“Subsequent Events”)
for further details of the Merger.
Omnibus Agreement
Our Omnibus Agreement with Archrock, our General Partner and others includes, among other things:
|
|
•
|
certain agreements not to compete between Archrock and its affiliates, on the one hand, and us and our affiliates, on the other hand;
|
|
|
•
|
Archrock’s obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Archrock for such services;
|
|
|
•
|
the terms under which we, Archrock, and our respective affiliates may transfer, exchange or lease compression equipment among one another;
|
|
|
•
|
Archrock’s grant to us of a license to use certain intellectual property, including our logo; and
|
|
|
•
|
Archrock’s and our obligations to indemnify each other for certain liabilities.
|
Common Control Transactions
Transactions between us and Archrock and its affiliates are transactions between entities under common control. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as a capital distribution or contribution.
Transfer, Exchange or Lease of Compression Equipment with Archrock
If Archrock determines in good faith that we or Archrock’s contract operations services business need to transfer, exchange or lease compression equipment between Archrock and us, the Omnibus Agreement permits such equipment to be transferred, exchanged or leased if it will not cause us to breach any existing contracts, suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs. In consideration for such transfer, exchange or lease of compression equipment, the transferee will either (i) transfer to the transferor compression equipment equal in value to the appraised value of the compression equipment transferred to it, (ii) agree to lease such compression equipment from the transferor or (iii) pay the transferor an amount in cash equal to the appraised value of the compression equipment transferred to it.
The TCJA made significant changes to the determination of partnership taxable income that included the cessation of like-kind exchange treatment for exchanges of tangible personal property. In accordance with this change, we no longer perform such exchanges as of January 1, 2018.
Transfer and Exchange of Overhauls.
During the
three
months ended
March 31, 2018
and
March 31, 2017
, Archrock contributed to us
$1.8 million
and
$1.4 million
, respectively, related
to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.
Other Exchanges.
The following table summarizes the exchange activity between Archrock and us prior to the enactment of the TCJA (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Transferred to Archrock
|
|
Transferred from Archrock
|
Compressor units
|
79
|
|
|
70
|
|
Horsepower
|
47,700
|
|
|
41,200
|
|
Net book value
|
$
|
21,559
|
|
|
$
|
20,063
|
|
During the
three
months ended
March 31, 2017
, we recorded capital distributions of
$1.5 million
related to the differences in net book value on the exchanged compression equipment.
No
customer contracts were included in the exchanges.
Leases.
The following table summarizes the aggregate cost and accumulated depreciation of equipment on lease to and from Archrock (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Equipment on lease to Archrock:
|
|
|
|
Aggregate cost
|
$
|
14,740
|
|
|
$
|
3,560
|
|
Accumulated depreciation
|
2,366
|
|
|
272
|
|
|
|
|
|
Equipment on lease from Archrock:
|
|
|
|
Aggregate cost
|
$
|
24,273
|
|
|
$
|
224
|
|
Accumulated depreciation
|
11,824
|
|
|
34
|
|
The following table summarizes the revenue from Archrock related to the lease of our compression equipment and the cost of sales related to the lease of Archrock compression equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Revenue
|
$
|
149
|
|
|
$
|
28
|
|
Cost of sales
|
251
|
|
|
68
|
|
Reimbursement of Operating and SG&A Expense
Archrock provides all operational staff, corporate staff and support services reasonably necessary to run our business. These services may include, without limitation, operations, marketing, maintenance and repair, periodic overhauls of compression equipment, inventory management, legal, accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, facilities management, investor relations, enterprise resource planning system, training, executive, sales, business development and engineering.
Archrock charges us for costs that are directly attributable to us. Costs that are indirectly attributable to us and Archrock’s other operations are allocated among Archrock’s other operations and us. The allocation methodologies vary based on the nature of the charge and have included, among other things, headcount and horsepower. We believe that the allocation methodologies used to allocate indirect costs to us are reasonable.
5. Contract Costs
We capitalize incremental costs to obtain a contract with a customer if we expect to recover those costs.
Capitalized costs include commissions paid to our sales force to obtain contract operations contracts. As of March 31, and January 1, 2018, we recorded contract costs of
$2.5 million
and
$2.0 million
, respectively, associated with sales commissions.
We capitalize costs incurred to fulfill a contract if those costs relate directly to a contract, enhance resources that we will use in satisfying performance obligations and if we expect to recover those costs. Capitalized costs incurred to fulfill our customer contracts include freight charges to transport compressor assets before transferring services to the customer and mobilization activities associated with our contract operations services. As of March 31, and January 1, 2018, we recorded contract costs of
$18.4 million
and
$14.3 million
, respectively, associated with freight and mobilization.
Contract operations costs are amortized based on the transfer of service to which the assets relate, which is estimated to be
36 months
based on average contract term, including anticipated renewals. We assess periodically whether the
36
-month estimate fairly represents the average contract term and adjust as appropriate. Contract costs associated with commissions are amortized to SG&A. Contract costs associated with freight and mobilization are amortized to cost of sales (excluding depreciation and amortization). During the three months ended
March 31, 2018
, we amortized
$0.2 million
and
$1.9 million
related to commissions and freight and mobilization, respectively. During the three months ended
March 31, 2018
, there was
no
impairment loss recorded in relation to the costs capitalized.
6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Credit Facility
|
$
|
687,000
|
|
|
$
|
674,306
|
|
|
|
|
|
6% senior notes due April 2021
|
350,000
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
(2,344
|
)
|
|
(2,523
|
)
|
Less: Deferred financing costs, net of amortization
|
(3,082
|
)
|
|
(3,338
|
)
|
|
344,574
|
|
|
344,139
|
|
|
|
|
|
6% senior notes due October 2022
|
350,000
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
(3,276
|
)
|
|
(3,441
|
)
|
Less: Deferred financing costs, net of amortization
|
(3,746
|
)
|
|
(3,951
|
)
|
|
342,978
|
|
|
342,608
|
|
Long-term debt
|
$
|
1,374,552
|
|
|
$
|
1,361,053
|
|
Credit Facility
The Credit Facility is a
five
-year,
$1.1 billion
asset-based revolving credit facility that will mature on
March 30, 2022
, except that if any portion of our
6%
senior notes due April 2021 are outstanding as of
December 2, 2020
, then maturity will instead be on
December 2, 2020
. In March 2017, we incurred
$14.9 million
in transaction costs related to the formation of the Credit Facility. Concurrent with entering into the Credit Facility, we expensed
$0.6 million
of unamortized deferred financing costs and recorded a debt extinguishment loss of
$0.3 million
related to the termination of our Former Credit Facility.
As of
March 31, 2018
, we had
no
outstanding letters of credit under the Credit Facility and the applicable margin on amounts outstanding was
3.3%
. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was
5.1%
and
6.3%
at
March 31, 2018
and
2017
, respectively. We incurred
$0.5 million
and
$0.4 million
in commitment fees on the daily unused amount of the Credit Facility and Former Credit Facility during the
three
months ended
March 31, 2018
and
2017
, respectively.
On February 23, 2018, we amended the Credit Facility to, among other things, increase the maximum Total Debt to EBITDA ratio. We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:
|
|
|
EBITDA to Interest Expense
|
2.5 to 1.0
|
Senior Secured Debt to EBITDA
|
3.5 to 1.0
|
Total Debt to EBITDA
|
|
Through fiscal year 2018
|
5.95 to 1.0
|
Through fiscal year 2019
|
5.75 to 1.0
|
Through second quarter of 2020
|
5.50 to 1.0
|
Thereafter
(1)
|
5.25 to 1.0
|
——————
|
|
(1)
|
Subject to a temporary increase to
5.5
to 1.0 for any quarter during which an acquisition meeting certain thresholds is completed and for the following two quarters after the quarter in which the acquisition closes.
|
As of
March 31, 2018
, we had undrawn capacity of
$413.0 million
under the Credit Facility. As a result of the financial ratio requirements discussed above,
$177.2 million
of the
$413.0 million
of undrawn capacity was available for additional borrowings as of
March 31, 2018
. As of
March 31, 2018
, we were in compliance with all covenants under the Credit Facility agreement.
Amendment No. 1 amended certain other terms of the Credit Facility effective upon completion of the Merger on April 26, 2018. See
13
(“Subsequent Events”)
for further details.
The Notes
The Notes are guaranteed on a senior unsecured basis by all of our existing subsidiaries (other than Archrock Partners Finance Corp., which is a co-issuer of the Notes) and certain of our future subsidiaries. The Notes and the guarantees, respectively, are our and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of our and the guarantors’ other senior obligations, and are effectively subordinated to all of our and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness. In addition, the Notes and guarantees are effectively subordinated to all existing and future indebtedness and other liabilities of any future non-guarantor subsidiaries. All of our subsidiaries are
100%
owned, directly or indirectly, by us and guarantees by our subsidiaries are full and unconditional and constitute joint and several obligations. We have
no
assets or operations independent of our subsidiaries and there are no significant restrictions upon our subsidiaries’ ability to distribute funds to us. Archrock Partners Finance Corp. has no operations and does not have revenue other than as may be incidental as co-issuer of the Notes. Because we have no independent operations, the guarantees are full and unconditional (subject to customary release provisions) and constitute joint and several obligations of our subsidiaries other than Archrock Partners Finance Corp., and as a result we have not included consolidated financial information of our subsidiaries.
7. Partners’ Capital
On April 26, 2018, Archrock completed the acquisition of all of our outstanding common units at a fixed exchange ratio of
1.40
shares of Archrock common stock for each of our common units not owned by Archrock. Additionally, our incentive distribution rights, which were previously owned indirectly by Archrock, were canceled and ceased to exist. As a result of the Merger, our common units are no longer publicly traded. See
Note 13
(“Subsequent Events”)
for further details of this transaction.
Unit Transactions
During the
three
months ended
March 31, 2018
and
March 31, 2017
, we issued and sold
690
and
1,119
general partner units, respectively, to our General Partner to maintain its approximate
2%
general partner interest in us.
As of
March 31, 2018
, Archrock owned
29,064,637
common units and
1,422,458
general partner units, collectively representing an approximate
43%
interest in us.
Cash Distributions
We make distributions of available cash (as defined in our Partnership Agreement) from operating surplus in the following manner:
|
|
•
|
first
,
98%
to all common unitholders, pro rata, and
2%
to our general partner, until each unit has received a distribution of
$0.4025
;
|
|
|
•
|
second
,
85%
to all common unitholders, pro rata, and
15%
to our general partner, until each unit has received a distribution of
$0.4375
;
|
|
|
•
|
third
,
75%
to all common unitholders, pro rata, and
25%
to our general partner, until each unit has received a total of
$0.5250
; and
|
|
|
•
|
thereafter
,
50%
to all common unitholders, pro rata, and
50%
to our general partner.
|
The following table summarizes our distributions per unit:
|
|
|
|
|
|
|
|
|
|
|
|
Period Covering
|
|
Payment Date
|
|
Distribution per
Common Unit
|
|
Total Distribution
(in thousands)
|
1/1/2017 — 3/31/2017
|
|
May 15, 2017
|
|
$
|
0.285
|
|
|
$
|
19,124
|
|
4/1/2017 — 6/30/2017
|
|
August 14, 2017
|
|
0.285
|
|
|
20,459
|
|
7/1/2017 — 9/30/2017
|
|
November 14, 2017
|
|
0.285
|
|
|
20,459
|
|
10/01/2017 — 12/31/2017
|
|
February 13, 2018
|
|
0.285
|
|
|
20,455
|
|
On
April 30, 2018
, our board of directors approved a cash distribution of approximately
$15.5 million
. The distribution covers the period from
January 1, 2018
through
March 31, 2018
. Any distributions in respect of our common units will be paid to Archrock as the owner of all outstanding common units.
8. Unit-Based Compensation
Long-Term Incentive Plan
In April 2017, we adopted the 2017 LTIP to provide for the benefit of the employees, directors and consultants of us, Archrock and our respective affiliates.
Two million
common units have been authorized for issuance with respect to awards under the 2017 LTIP. The 2017 LTIP provides for the issuance of unit options, unit appreciation rights, restricted units, phantom units, performance awards, bonus awards, distribution equivalent rights, cash awards and other unit-based awards. The 2017 LTIP will be administered by the Plan Administrator. The 2006 LTIP expired in 2016 and, as such, no further grants have been or can be made under that plan following expiration. Previous grants made under the 2006 LTIP continue to be governed by the 2006 LTIP and the applicable award agreements.
Phantom units are notional units that entitle the grantee to receive common units upon the vesting of such phantom units or, at the discretion of the Plan Administrator, cash equal to the fair market value of the underlying common units. Because we grant phantom units to non-employees, we are required to remeasure the fair value of these phantom units, which is based on the fair value of our common units, each period and record a cumulative adjustment of the expense previously recognized. Phantom units granted under the 2017 LTIP may include nonforfeitable tandem distribution equivalent rights to receive cash distributions on unvested phantom units in the quarter in which distributions are paid on common units. Phantom units granted generally vest one-third per year on dates as specified in the applicable award agreements subject to continued service through the applicable vesting date.
Phantom Units
The following table presents phantom unit activity during the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
Phantom
Units
(in thousands)
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
Phantom units outstanding, January 1, 2018
|
153
|
|
|
$
|
12.19
|
|
Vested
|
(53
|
)
|
|
11.24
|
|
Phantom units outstanding, March 31, 2018
|
100
|
|
|
12.69
|
|
As of
March 31, 2018
, we expect
$1.1 million
of unrecognized compensation cost related to unvested phantom units to be recognized over the weighted-average period of
1.7
years.
9. Derivatives
We are exposed to market risks associated with changes in interest rates. We use derivative instruments to minimize the risks and costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative instruments for trading or other speculative purposes.
At
March 31, 2018
, we were a party to the following interest rate swaps, which were entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates:
|
|
|
|
|
|
Expiration Date
|
|
Notional Value
(in millions)
|
May 2019
|
|
$
|
100.0
|
|
May 2020
|
|
100.0
|
|
March 2022
|
|
300.0
|
|
|
|
$
|
500.0
|
|
As of
March 31, 2018
, the weighted average effective fixed interest rate on our interest rate swaps was
1.8%
. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts in other comprehensive income (loss) are reclassified into earnings and presented in the same income statement line item as the earnings effect of the hedged item. Prior to adoption of ASU 2017-12, we performed quarterly calculations to determine whether the swap agreements continued to be highly effective at achieving offsetting changes in cash flows attributable to the hedged risk. As the swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, we expect the hedging relationship to continue to be highly effective. Upon adoption of ASU 2017-12, we perform subsequent quarterly prospective and retrospective hedge effectiveness assessments qualitatively unless facts and circumstances related to the hedging relationships change such that we can no longer assert qualitatively that the cash flow hedge relationships were and continue to be highly effective. We estimate that
$1.5 million
of deferred gain attributable to interest rate swaps and included in our accumulated other comprehensive income (loss) at
March 31, 2018
, will be reclassified into earnings as interest income at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions, unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities in our condensed consolidated statements of cash flows.
In August 2017, we amended the terms of certain of our interest rate swap agreements, designated as cash flow hedges against the variability of future interest payments due under the Credit Facility, with a notional value of
$300.0 million
. The amended terms adjusted the fixed interest rate and extended the maturity dates to March 2022. These amendments effectively created new derivative contracts and terminated the old derivative contracts. As a result, as of the amendment date, we discontinued the original cash flow hedge relationships on a prospective basis and designated the amended interest rate swaps under new cash flow hedge relationships based on the amended terms. The fair value of the interest rate swaps immediately prior to the execution of the amendments was a liability of
$0.7 million
. The associated amount in accumulated other comprehensive income (loss) is being amortized into interest expense over the original terms of the interest rate swaps through May 2018.
The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset (Liability)
|
|
Balance Sheet Location
|
|
March 31, 2018
|
|
December 31, 2017
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps
|
Current portion of interest rate swaps
|
|
$
|
1,646
|
|
|
$
|
186
|
|
Interest rate swaps
|
Other long-term assets
|
|
8,164
|
|
|
4,490
|
|
Interest rate swaps
|
Current portion of interest rate swaps
|
|
—
|
|
|
(134
|
)
|
Total derivatives
|
|
|
$
|
9,810
|
|
|
$
|
4,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives
|
|
Location of Loss
Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)
|
|
Loss
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
$
|
4,696
|
|
|
Interest expense
|
|
$
|
(455
|
)
|
Three months ended March 31, 2017
|
699
|
|
|
Interest expense
|
|
(976
|
)
|
|
|
|
|
|
|
Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships
|
|
Three Months Ended March 31, 2018
|
|
Interest Expense
|
Total amounts of income and expense line items presented in the statement of operations in which the effects of cash flow hedges are recorded
|
$
|
21,609
|
|
Interest Contracts:
|
|
Amount of loss reclassified from accumulated other comprehensive income into income
|
$
|
(54
|
)
|
Amount of gain (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring
|
$
|
—
|
|
The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments.
10. Fair Value Measurements
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value into the following three categories:
|
|
•
|
Level 1
— Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
|
|
|
•
|
Level 2
— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.
|
|
|
•
|
Level 3
— Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
On a quarterly basis, our interest rate swaps are valued based on the income approach (discounted cash flow) using market observable inputs, including forward London Interbank Offered Rate curves. These fair value measurements are classified as Level 2.
The following table presents our interest rate swaps asset and liability measured at fair value on a recurring basis with pricing levels as of the date of valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Interest rate swaps asset
|
$
|
9,810
|
|
|
$
|
4,676
|
|
Interest rate swaps liability
|
—
|
|
|
(134
|
)
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the three months ended
March 31, 2018
, we recorded non-recurring fair value measurements related to our idle and previously-culled compressor units. Our estimate of the compressor units’ fair value was primarily based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of
four years
. These fair value measurements are classified as Level 3. The fair value of our impaired compressor units was
$0.2 million
and
$1.8 million
at
March 31, 2018
and
December 31, 2017
, respectively. See
Note 11
(“Long-Lived Asset Impairment”)
for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amounts of borrowings outstanding under our Credit Facility approximate fair value due to their variable interest rates. The fair value of these outstanding borrowings was estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs.
The fair value of our fixed rate debt was estimated based on quoted prices in inactive markets and is considered a Level 2 measurement. The following table summarizes the carrying amount and fair value of our fixed rate debt (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Carrying amount of fixed rate debt
(1)
|
$
|
687,552
|
|
|
$
|
686,747
|
|
Fair value of fixed rate debt
|
700,000
|
|
|
702,000
|
|
——————
|
|
(1)
|
Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See
Note 6
(“Long-Term Debt”)
for further details.
|
11. Long-Lived Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determine that certain idle compressor units should be retired from the active fleet. The retirement of these units from the active fleet triggers a review of these assets for impairment and as a result of our review, we may record an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit is estimated based on the expected net sale proceeds compared to other fleet units we recently sold, a review of other units recently offered for sale by third parties or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets, we evaluate for impairment idle units that were culled from our fleet in prior years and are available for sale. Based on that review, we may reduce the expected proceeds from disposition and record additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our impairment review (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Idle compressor units retired from the active fleet
|
35
|
|
|
65
|
|
Horsepower of idle compressor units retired from the active fleet
|
13,000
|
|
|
22,000
|
|
Impairment recorded on idle compressor units retired from the active fleet
|
$
|
3,066
|
|
|
$
|
6,210
|
|
12. Commitments and Contingencies
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. Archrock insures our property and operations against many, but not all, of these risks. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.
In addition, Archrock is substantially self-insured for worker’s compensation, employer’s liability, property, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles it absorbs under its insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of
March 31, 2018
and
December 31, 2017
, we accrued
$2.4 million
and
$1.6 million
, respectively, for the outcomes of non-income based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows for the period in which the resolution occurs.
Litigation and Claims
In 2011, the Texas Legislature enacted changes related to the appraisal of natural gas compressors for ad valorem tax purposes by expanding the definitions of “Heavy Equipment Dealer” and “Heavy Equipment” effective from the beginning of 2012. Under the revised Heavy Equipment Statutes, we believe we are a Heavy Equipment Dealer, that our natural gas compressors are Heavy Equipment and that we, therefore, are required to file our ad valorem taxes under this new methodology. We further believe that our natural gas compressors are taxable under the Heavy Equipment Statutes in the counties where we maintain a business location and keep natural gas compressors instead of where the compressors may be located on January 1 of a tax year. As a result of this new methodology, our ad valorem tax expense (which is reflected in our condensed consolidated statements of operations as a component of cost of sales (excluding depreciation and amortization expense)) includes a benefit of
$4.3 million
during the
three
months ended
March 31, 2018
. Since the change in methodology became effective in 2012, we have recorded an aggregate benefit of
$70.5 million
as of
March 31, 2018
, of which
$13.1 million
has been agreed to by a number of appraisal review boards and county appraisal districts and
$57.4 million
has been disputed and is currently in litigation. A large number of appraisal review boards denied our position, although some accepted it, and we filed
82
petitions for review in the appropriate district courts with respect to the 2012 tax year,
93
petitions for review in the appropriate district courts with respect to the 2013 tax year,
103
petitions for review in the appropriate district courts with respect to the 2014 tax year,
111
petitions for review in the appropriate district courts with respect to the 2015 tax year,
105
petitions for review in the appropriate district courts with respect to the 2016 tax year and
107
petitions for review in the appropriate district courts with respect to the 2017 tax year.
To date, only
five
cases have advanced to the point of trial or submission of summary judgment motions on the merits, and only
three
cases have been decided, with
two
of the decisions having been rendered by the same presiding judge. All
three
of those decisions were appealed, and all
three
of the appeals have been decided by intermediate appellate courts.
On October 17, 2013, the 143rd Judicial District Court of Loving County, Texas ruled in
EXLP Leasing LLC & EES Leasing LLC v. Loving County Appraisal District
that our wholly-owned subsidiary, Archrock Partners Leasing LLC, formerly known as EXLP Leasing, and Archrock’s subsidiary, Archrock Services Leasing LLC, formerly known as EES Leasing, are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the district court further held that the Heavy Equipment Statutes were unconstitutional as applied to EXLP Leasing’s and EES Leasing’s compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Eighth Court of Appeals in El Paso, Texas. On September 23, 2015, the Eighth Court of Appeals ruled in EXLP Leasing’s and EES Leasing’s favor by overruling the 143rd District Court’s constitutionality ruling. The Eighth Court of Appeals also ruled, however, that EXLP Leasing’s and EES Leasing’s natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue.
On October 28, 2013, the 143rd Judicial District Court of Ward County, Texas ruled in
EES Leasing LLC & EXLP Leasing LLC v. Ward County Appraisal District
that EXLP Leasing and EES Leasing are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the court held that the Heavy Equipment Statutes were unconstitutional as applied to their compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Eighth Court of Appeals in El Paso, Texas, and the Ward County Appraisal District cross-appealed the district court’s rulings that EXLP Leasing’s and EES Leasing’s compressors qualify as Heavy Equipment. On September 23, 2015, the Eighth Court of Appeals ruled in EXLP Leasing’s and EES Leasing’s favor by overruling the 143rd District Court’s constitutionality ruling and affirming its ruling that EXLP Leasing’s and EES Leasing’s compressors qualify as Heavy Equipment. The Eighth Court of Appeals also ruled, however, that EXLP Leasing’s and EES Leasing’s natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue.
The Ward County Appraisal District and Loving County Appraisal District each filed (on January 27, 2016 and February 10, 2016, respectively) a petition asking the Texas Supreme Court to review its respective Eighth Court of Appeals decision. On March 11, 2016, EXLP Leasing and EES Leasing filed responses to the appraisal districts’ petitions and cross-petitions for review in each case asking the Texas Supreme Court to also review the Eighth Court of Appeals’ determination that natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue. The Ward County Appraisal District filed its response to EXLP Leasing’s and EES Leasing’s cross-petition on June 6, 2016, and EXLP Leasing and EES Leasing filed their reply on June 21, 2016. The Loving County Appraisal District filed its response to EXLP Leasing’s and EES Leasing’s cross-petition on May 27, 2016, and EXLP Leasing and EES Leasing filed their reply on June 10, 2016.
On March 18, 2014, the 10th Judicial District Court of Galveston, Texas ruled in
EXLP Leasing LLC & EES Leasing LLC v. Galveston Central Appraisal District
that EXLP Leasing and EES Leasing are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the court held the Heavy Equipment Statutes unconstitutional as applied to their compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Fourteenth Court of Appeals in Houston, Texas. On August 25, 2015, the Fourteenth Court of Appeals issued a ruling stating that EXLP Leasing’s and EES Leasing’s compressors are taxable in the counties where they were located on January 1 of the tax year at issue, and it remanded the case to the district court for further evidence on the issue of whether the Heavy Equipment Statutes are constitutional as applied to EXLP Leasing’s and EES Leasing’s compressors. On November 24, 2015, EXLP Leasing and EES Leasing filed a petition asking the Texas Supreme Court to review this decision. On March 21, 2016, the Galveston Central Appraisal District filed a response to EXLP Leasing’s and EES Leasing’s petition for review, and EXLP Leasing and EES Leasing filed their reply on April 26, 2016.
In
EES Leasing v. Irion County Appraisal District
, EES Leasing and the appraisal district each filed motions for summary judgment in the 51st District Court concerning the applicability and constitutionality of the Heavy Equipment Statutes. On May 20, 2014, the district court entered an order denying both motions for summary judgment, holding that a fact issue existed as to the applicability of the Heavy Equipment Statutes to the one compressor at issue. The presiding judge for the 51st District Court has since consolidated the 2012 tax year case with EES Leasing’s 2013 tax year case, which also included EXLP Leasing as a party. On August 27, 2015, the presiding judge abated the combined case,
EES Leasing LLC and EXLP Leasing LLC v. Irion County Appraisal District
, until the final resolution of the appellate cases considering the constitutionality of the Heavy Equipment Statutes, or further order of the court.
EXLP Leasing and EES Leasing also filed a motion for summary judgment in
EES Leasing LLC & EXLP Leasing LLC v. Harris County Appraisal District
, pending in the 189th Judicial District Court of Harris County, Texas. The court heard arguments on the motion on December 6, 2013 but has yet to rule. No trial date has been set.
On June 3, 2015, the Fourth Court of Appeals in San Antonio, Texas issued a decision reversing the 406th District Court’s dismissal of EXLP Leasing’s and EES Leasing’s tax appeals for want of jurisdiction. In
EXLP Leasing LLC et. al v. Webb County Appraisal District
, United Independent School District (“United ISD”) intervened as a party in interest and sought to dismiss the lawsuit arguing that the district court was without jurisdiction to hear the appeal. Under Section 42.08(b) of the Texas Tax Code, a property owner must pay before the delinquency date the lesser of (1) the amount of taxes due on the portion of the taxable value of the property that is not in dispute or (2) the amount of taxes due on the property under the order from which the appeal is taken. EXLP Leasing and EES Leasing paid zero taxes to Webb County because the entire amount of tax assessed by Webb County was in dispute. Instead, as required by the Heavy Equipment Statutes and Texas Comptroller forms, EXLP Leasing and EES Leasing paid taxes on the compressors at issue to Victoria County, where they maintain their place of business and keep natural gas compressors. The Webb County Appraisal District and United ISD contested EXLP Leasing’s and EES Leasing’s position that the Heavy Equipment Statutes contain situs provisions requiring that taxes be paid where the dealer has a business location and keeps its natural gas compressors, instead arguing that taxes are payable to the county where each compressor is located as of January 1 of the tax year at issue. The district court granted United ISD’s motion to dismiss on April 1, 2014 and declined EXLP Leasing’s and EES Leasing’s motion to reconsider. The Fourth Court of Appeals reversed, holding that, based on the plain meaning of Section 42.08(b)(1), and because the entire amount was in dispute, EXLP Leasing and EES Leasing were not required to prepay disputed taxes to invoke the trial court’s jurisdiction. The Fourth Court of Appeals denied United ISD’s request for a rehearing. On September 29, 2015, United ISD filed a petition for review in the Texas Supreme Court. On December 4, 2015, the Texas Supreme Court denied United ISD’s petition for review.
United ISD has
four
delinquency lawsuits pending against EXLP Leasing and EES Leasing in the 49th District Court of Webb County, Texas. The cases have been abated pending the resolution of EXLP Leasing’s and EES Leasing’s 2012 tax year case pending in the 406th Judicial District Court of Webb County, Texas.
On September 2, 2016, the Texas Supreme Court requested that consolidated merits briefs be filed in EXLP Leasing’s and EES Leasing’s cases against the Loving County Appraisal District, Ward County Appraisal District, and Galveston Central Appraisal District, as well as two similar cases involving different taxpayers. On September 19, 2016, the Supreme Court entered a consolidated briefing schedule for the
five
cases. Consolidated briefing was completed on February 7, 2017.
On March 10, 2017, the Texas Supreme Court granted EXLP Leasing’s and EES Leasing’s petition for review in
EXLP Leasing LLC & EES Leasing LLC v. Galveston Central Appraisal District
. The case was argued before the Texas Supreme Court on October 10, 2017. On March 2, 2018, the Texas Supreme Court ruled in favor of EXLP Leasing and EES Leasing by reversing the Fourteenth Court of Appeals’ decision. In doing so, the Supreme Court upheld the validity of the Heavy Equipment Rules and held that compressors are taxable in the county of EXLP Leasing’s and EES Leasing’s business location, not where each compressor is located on January 1. On March 8, 2018, the Galveston Central Appraisal District filed a motion for extension of time to file a motion for rehearing. The Court granted the motion and Galveston Central Appraisal District filed the motion for rehearing on April 2, 2018.
We continue to believe that the revised statutes are constitutional as applied to natural gas compressors and that under the revised statutes our natural gas compressors are taxable in the counties where we maintain a business location and keep natural gas compressors. Recognizing the similarity of the issues and that these cases will ultimately be resolved by the Texas appellate courts, most of the remaining 2012-2017 district court cases have been formally or effectively abated pending final judgment from the Texas Supreme Court.
If we are unsuccessful in our litigation, we would be required to pay ad valorem taxes up to the aggregate benefit we have recorded, and the additional ad valorem tax payments may also be subject to substantial penalties and interest. In addition, while we do not expect the ultimate determination of the issue of where the natural gas compressors are taxable under the Heavy Equipment Statutes would have an impact on the amount of taxes due, we could be subject to substantial penalties if we are unsuccessful on this issue. Also, if we are unsuccessful in our litigation, or if legislation is enacted in Texas that repeals or alters the Heavy Equipment Statutes such that in the future we do not qualify as a Heavy Equipment Dealer or our compressors do not qualify as Heavy Equipment, then we would likely be required to pay these ad valorem taxes under the old methodology going forward, which would increase our quarterly cost of sales expense up to approximately the amount of our then most recent quarterly benefit recorded. If this litigation is resolved against us in whole or in part, or if in the future we do not qualify as a Heavy Equipment Dealer or our compressors do not qualify as Heavy Equipment because of new or revised Texas statutes, we will incur additional taxes and could be subject to substantial penalties and interest, which would impact our future results of operations, financial position and cash flows, including our cash available for distribution.
In the ordinary course of business, we are also involved in various other pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these other actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to make cash distributions to our unitholders. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to make cash distributions to our unitholders.
13. Subsequent Events
Merger Transaction
On January 1, 2018, we entered into the Merger Agreement pursuant to which we agreed to merge with and into an indirect wholly-owned subsidiary of Archrock. On April 26, 2018, the Merger was completed and we survived as Archrock’s indirect wholly-owned subsidiary. Upon completion of the Merger, each of our
41.2
million common units not owned by Archrock was converted to Archrock shares at a fixed exchange ratio of
1.40
for total implied consideration of approximately
$625.3 million
and all of our incentive distribution rights, which were owned indirectly by Archrock, were canceled and ceased to exist. As a result of the completion of the Merger, our common units are no longer publicly traded.
Amendment to the Credit Facility
On February 23, 2018, we amended the Credit Facility to, among other things:
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increase the maximum Total Debt to EBITDA ratio (as defined in the Credit Facility agreement), effective as of the execution of Amendment No. 1 on February 23, 2018; and
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effective upon completion of the Merger on April 26, 2018:
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increase the aggregate revolving commitment to
$1.25 billion
;
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increase the amount available for incremental increases to the commitments under the Credit Facility to
$500.0 million
;
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increase the amount available for the issuance of letters of credit to
$50.0 million
;
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increase the basket sizes under certain covenants including covenants limiting our ability to make investments, incur debt, make restricted payments, incur liens and make asset dispositions;
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name Archrock Services, L.P., one of Archrock’s subsidiaries, as a borrower under the Credit Facility and certain of Archrock’s other subsidiaries as loan guarantors; and
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amend the definition of “Borrowing Base” to include certain assets of Archrock’s subsidiaries.
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On April 26, 2018, in connection with the Merger and Amendment No. 1, Archrock terminated its credit facility and we borrowed on the Credit Facility to repay the
$63.2 million
in borrowings and accrued and unpaid interest and fees outstanding. In addition, the $
15.4
million of letters of credit outstanding under its facility as of the Merger were converted to letters of credit under our Credit Facility.