NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
We are a leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S. Our contract operations services primarily include designing, sourcing, owning, installing, operating, servicing, repairing and maintaining natural gas compression equipment to provide natural gas compression services to our customers.
In April 2018, Archrock completed the acquisition of all of our outstanding common units that it did not already own and, as a result, we became its wholly-owned subsidiary. See
Note 10 (“Partners’ Capital”)
for further details of the Merger.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with GAAP 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
2018
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.
Omission of Information by Certain Wholly-Owned Subsidiaries
We meet the conditions specified in General Instruction H(1)(a) and (b) of Form 10-Q and are thereby permitted to use the reduced disclosure format for wholly-owned subsidiaries of reporting companies specified therein. Accordingly, we have omitted from this report the information called for by Part I Item 3 “Quantitative and Qualitative Disclosures About Market Risk,” Part II Item 2 “Unregistered Sales of Equity Securities” and Part II Item 3 “Defaults Upon Senior Securities.” In addition, in lieu of the information called for by Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have included, under Item 2, “Management’s Narrative Analysis of Results of Operations” to explain the reasons for material changes in the amount of revenue and expense items in the year-to-date periods reported herein.
Recent Business Developments
Elite Acquisition
On June 23, 2019, Archrock entered into an asset purchase agreement with Elite Compression pursuant to which Archrock will acquire from Elite Compression substantially all of its assets, including a fleet of predominantly-large compressor units comprising approximately
430,000
horsepower, a fleet of vehicles, real personal property and parts inventory, and certain liabilities for aggregate consideration of
$205.0 million
cash and
21,656,683
newly-issued shares of Archrock common stock. The cash portion of the purchase price will be funded with borrowings on our Credit Facility. The Elite Acquisition is expected to close in the third quarter of 2019 subject to certain closing conditions and the consummation of the Harvest Sale (see below). As a result of this transaction, we expect to own the purchased fleet of compressor units and the units’ associated customer contracts.
Harvest Sale
On June 23, 2019, Archrock entered into an asset purchase agreement with Harvest pursuant to which Harvest will acquire from Archrock approximately
80,000
active and idle compression horsepower, vehicles and parts inventory for consideration of
$30 million
to be paid in cash. All of the compression horsepower to be sold to Harvest is owned by us. The Harvest Sale is expected to close in the third quarter of 2019, subject to customary closing conditions.
During the three and six months ended June 30, 2019, we incurred transaction costs of
$2.3 million
related to the Elite Acquisition and Harvest Sale, which is reflected in transaction-related costs in our condensed consolidated statements of operations.
2. Recent Accounting Developments
Accounting Standards Updates Implemented
Leases
ASC 842 Leases establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet. Leases are 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. We are a party to leases in our contract operations services agreements. We adopted ASC 842 Leases on January 1, 2019, and have determined that ASC 842 Leases will not have an impact on our condensed consolidated financial statements.
ASC 842 Leases provides several practical expedients, one of which is for lessors to not separate lease and nonlease components and instead account for those components as a single component if certain conditions are met. ASC 842 Leases also provides clarification for lessors on whether ASC 842 Leases or ASC 606 Revenue is applicable to the combined component based on determination of the predominant component. We have concluded that for our contract operations services agreements, in which we are a lessor, the services nonlease component is predominant over the compression unit lease component and therefore ongoing recognition of these agreements will continue to follow the ASC 606 Revenue guidance.
Accounting Standards Updates Not Yet Implemented
In August 2018, the FASB issued ASU 2018-13 which amends the required fair value measurements disclosures related to valuation techniques and inputs used, uncertainty in measurement and changes in measurements applied. These amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. We are currently evaluating the impact of ASU 2018-13 on our consolidated financial statements and footnote disclosures.
In June 2016, the FASB issued ASU 2016-13 which 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 earlier recognition of allowance for losses. For public entities that meet the definition of an SEC filer, 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 and footnote disclosures.
3. Related Party Transactions
Revolving Loan Agreement with Archrock
In conjunction with the closing of the Merger, we and Archrock entered into the Revolving Loan Agreement under which we may make loans to Archrock from time to time in an aggregate amount not to exceed the Credit Facility’s outstanding balance. The Revolving Loan Agreement matures on the maturity date of our Credit Facility. Interest on amounts loaned under the Revolving Loan Agreement is payable to us on a monthly basis and is calculated as a proportion of our total interest expense on the Credit Facility.
At
June 30, 2019
, the balance of outstanding borrowings under the Revolving Loan Agreement was
$9.5 million
. We recorded interest income earned on loans to Archrock under the Revolving Loan Agreement, which was included in interest expense, net in our condensed consolidated statements of operations, of
$0.2 million
and
$0.6 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$0.3 million
and
$0.6 million
during the
six
months ended
June 30, 2019
and
2018
, respectively.
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 received is treated as a capital distribution or contribution.
Sales of Compression Equipment with Archrock
If Archrock determines in good faith that we or Archrock’s contract operations services business needs to sell compression equipment between Archrock and us, the Omnibus Agreement permits such transactions if it will not cause us to breach any existing contracts, suffer a loss of revenue under any existing contract operations services contracts or incur any unreimbursed costs. As consideration for the sale of compression equipment, the transferee will make a distribution to or receive a contribution from the transferor in an amount equal to the net book value of the compression equipment sold.
The following table summarizes compressor unit sales activity between Archrock and us (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
|
Sold to Archrock
|
|
Purchased from Archrock
|
|
Sold to Archrock
|
|
Purchased from Archrock
|
Compressor units
|
24
|
|
|
29
|
|
|
35
|
|
|
59
|
|
Horsepower
|
7,860
|
|
|
10,030
|
|
|
16,301
|
|
|
20,119
|
|
Net book value
|
$
|
7,342
|
|
|
$
|
4,653
|
|
|
$
|
14,335
|
|
|
$
|
8,779
|
|
During the
three and six
months ended
June 30, 2019
, we recorded capital distributions of
$2.7 million
and
$5.6 million
, respectively, related to the difference in net book value of the compression equipment sold to and acquired from Archrock. In addition, in accordance with the Omnibus Agreement, we recorded capital contributions of
$2.5 million
and
$4.4 million
during the
three and six
months ended
June 30, 2019
, respectively, which represented the net excess of the fair market value of the equipment sold to Archrock over the equipment purchased from Archrock.
No
customer contracts were included in these sales.
Sales of Overhauls
During the three months ended
June 30, 2019
and
2018
, Archrock contributed to us
$1.1 million
and we distributed to Archrock
$0.2 million
, respectively, related to the completion of overhauls on compression equipment that was sold to us and where the overhauls were in progress on the date of the sale. Archrock contributed to us
$2.2 million
and
$1.7 million
related to the completion of such overhauls during the
six
months ended
June 30, 2019
and
2018
, respectively.
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.
4. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Credit Facility
|
$
|
792,500
|
|
|
$
|
839,500
|
|
|
|
|
|
2027 Notes
|
500,000
|
|
|
—
|
|
Less: Deferred financing costs, net of amortization
|
(8,550
|
)
|
|
—
|
|
|
491,450
|
|
|
—
|
|
|
|
|
|
2022 Notes
|
350,000
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
(2,411
|
)
|
|
(2,766
|
)
|
Less: Deferred financing costs, net of amortization
|
(2,725
|
)
|
|
(3,133
|
)
|
|
344,864
|
|
|
344,101
|
|
|
|
|
|
2021 Notes
|
—
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
—
|
|
|
(1,789
|
)
|
Less: Deferred financing costs, net of amortization
|
—
|
|
|
(2,311
|
)
|
|
—
|
|
|
345,900
|
|
Long-term debt
|
$
|
1,628,814
|
|
|
$
|
1,529,501
|
|
Credit Facility
As of
June 30, 2019
, there were
$15.2 million
letters of credit outstanding under the Credit Facility and the applicable margin on borrowings outstanding was
2.7%
. The weighted average annual interest rate on the outstanding balance under the Credit Facility, excluding the effect of interest rate swaps, was
5.3%
and
5.4%
at
June 30, 2019
and
December 31, 2018
, respectively. We incurred
$0.6 million
in commitment fees on the daily unused amount of the Credit Facility during each of the three months ended
June 30, 2019
and
2018
and
$1.1 million
during each of the
six
months ended
June 30, 2019
and
2018
.
We must maintain the following consolidated financial ratios, as defined in our 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 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 satisfying certain thresholds is completed and for the two quarters immediately following such quarter.
|
As of
June 30, 2019
, the ratio requirements above did not constrain the undrawn capacity and as such, all of the
$442.3 million
of undrawn capacity was available for additional borrowings. As of
June 30, 2019
, we were in compliance with all covenants under the Credit Facility agreement.
2027 Notes
On March 21, 2019, we completed a private offering of
$500.0 million
aggregate principal amount of
6.875%
senior notes due April 2027 and received net proceeds of
$491.2 million
after deducting issuance costs. The
$8.8 million
of issuance costs were recorded as deferred financing costs within long-term debt in our condensed consolidated balance sheets and are being amortized to interest expense in our condensed consolidated statement of operations over the term of the notes. The net proceeds were used to repay borrowings outstanding under our Credit Facility as of March 31, 2019.
The 2027 Notes have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the U.S. except pursuant to a registration exemption under the Securities Act and applicable state securities laws. We offered and issued the 2027 Notes only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and to certain non-U.S. persons outside the U.S. in accordance with Regulation S under the Securities Act.
The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Archrock and all of its existing subsidiaries, other than Archrock Partners, L.P. and APLP Finance Corp., which are co-issuers of the 2027 Notes, and certain of its future subsidiaries. The 2027 Notes and the guarantees rank equally in right of payment with all of Archrock and the guarantors’ existing and future senior indebtedness.
The 2027 Notes may be redeemed at any time, in whole or in part, at specified redemption prices and make-whole premiums, plus any accrued and unpaid interest.
Redemption of 2021 Notes
On April 5, 2019, the 2021 Notes were redeemed at
100%
of their
$350.0 million
aggregate principal amount plus accrued and unpaid interest of
$0.2 million
with borrowings from the Credit Facility. We recorded a debt extinguishment loss of
$3.7 million
related to the redemption during the
three and six
months ended
June 30, 2019
.
2022 Notes
The 2022 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 2022 Notes) and certain of our future subsidiaries. The 2022 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 2022 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 2022 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.
5. Revenue from Contracts with Customers
Disaggregation of Revenue
The following table presents our revenue from contracts with customers disaggregated by revenue source (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
0 - 1,000 horsepower per unit
|
$
|
57,826
|
|
|
$
|
54,389
|
|
|
$
|
115,987
|
|
|
$
|
108,816
|
|
1,001 - 1,500 horsepower per unit
|
69,546
|
|
|
63,390
|
|
|
137,753
|
|
|
124,084
|
|
Over 1,500 horsepower per unit
|
41,684
|
|
|
32,465
|
|
|
80,709
|
|
|
63,900
|
|
Other
(1)
|
328
|
|
|
622
|
|
|
654
|
|
|
1,068
|
|
Total revenue
(2)
|
$
|
169,384
|
|
|
$
|
150,866
|
|
|
$
|
335,103
|
|
|
$
|
297,868
|
|
——————
|
|
(1)
|
Primarily relates to fees associated with owned non-compressor equipment.
|
|
|
(2)
|
Included
$2.1 million
and
$1.4 million
for the three months ended
June 30, 2019
and
2018
, respectively, and
$4.2 million
and
$2.5 million
for the
six
months ended
June 30, 2019
and
2018
, respectively, related to billable maintenance on owned units that was recognized at a point in time. All other revenue is recognized over time.
|
Performance Obligations
As of
June 30, 2019
, we had
$289.0 million
of remaining performance obligations related to our contract operations. We have elected to apply 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. The remaining performance obligations will be recognized through 2024 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Total
|
Remaining performance obligations
|
$
|
134,148
|
|
|
$
|
109,586
|
|
|
$
|
35,531
|
|
|
$
|
8,295
|
|
|
$
|
1,122
|
|
|
$
|
293
|
|
|
$
|
288,975
|
|
Contract Balances
As of
June 30, 2019
and
December 31, 2018
, our receivables from contracts with customers, net of allowance for doubtful accounts, were
$82.1 million
and
$78.6 million
, respectively. As of
June 30, 2019
and
December 31, 2018
, our contract liabilities were
$9.4 million
and
$9.7 million
, respectively, which are included in deferred revenue and other liabilities in our condensed consolidated balance sheets. Freight billings to customers for the transport of compressor assets often result in a contract liability. We recognized
$9.4 million
of our
December 31, 2018
contract liability balance as revenue during the
six
months ended
June 30, 2019
, primarily related to freight billings.
6. Derivatives
We are exposed to market risks associated with changes in the variable interest rate of the Credit Facility. We use derivative instruments to manage our exposure to fluctuations in this variable interest rate and thereby minimize the risks and costs associated with financial activities. We do not use derivative instruments for trading or other speculative purposes.
At
June 30, 2019
, the following interest rate swaps, entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates, were outstanding (in millions):
|
|
|
|
|
Expiration Date
|
Notional Value
|
May 2020
|
$
|
100
|
|
March 2022
|
300
|
|
|
$
|
400
|
|
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 collateral posted for the derivative instruments.
We have designated these interest rate swaps as cash flow hedging instruments. Changes in the fair value of the interest rate swaps are recognized as a component of other comprehensive income (loss) until the hedged transaction affects earnings. At that time, amounts are reclassified into earnings to interest expense, net, the same statement of operations line item to which the earnings effect of the hedged item is recorded. 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.
We expect the hedging relationship to be highly effective 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 perform quarterly qualitative prospective and retrospective hedge effectiveness assessments 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
$0.3 million
of the deferred gain attributable to interest rate swaps included in accumulated other comprehensive income at
June 30, 2019
will be reclassified into earnings as interest income at then-current values during the next 12 months as the underlying hedged transactions occur.
As of
June 30, 2019
, the weighted average effective fixed interest rate on our interest rate swaps was
1.8%
.
The following table presents the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Derivative asset
|
$
|
336
|
|
|
$
|
3,185
|
|
Other assets
|
—
|
|
|
4,122
|
|
Total derivative assets
|
$
|
336
|
|
|
$
|
7,307
|
|
|
|
|
|
Other liabilities
|
$
|
(1,574
|
)
|
|
$
|
—
|
|
The following tables present the effect of our derivative instruments designated as cash flow hedging instruments on our condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pre-tax gain (loss) recognized in other comprehensive income (loss)
|
$
|
(4,529
|
)
|
|
$
|
2,245
|
|
|
$
|
(6,828
|
)
|
|
$
|
6,941
|
|
Pre-tax gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense, net
|
791
|
|
|
6
|
|
|
1,717
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Total amount of interest expense, net in which the effects of cash flow hedges are recorded
|
$
|
25,720
|
|
|
$
|
22,542
|
|
|
$
|
49,148
|
|
|
$
|
44,151
|
|
Amount of gain reclassified from accumulated other comprehensive income (loss) into interest expense, net
|
791
|
|
|
207
|
|
|
1,717
|
|
|
153
|
|
See
Note 7 (“Fair Value Measurements”)
for further details on our derivative instruments.
7. Fair Value Measurements
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 London Interbank Offered Rate forward 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):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Interest rate swaps asset
|
$
|
336
|
|
|
$
|
7,307
|
|
Interest rate swaps liability
|
(1,574
|
)
|
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the
six
months ended
June 30, 2019
, 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 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
$0.8 million
and
$1.0 million
at
June 30, 2019
and
December 31, 2018
, respectively. See
Note 8 (“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 amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. 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):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Carrying amount of fixed rate debt
(1)
|
$
|
836,314
|
|
|
$
|
690,001
|
|
Fair value of fixed rate debt
|
881,000
|
|
|
674,000
|
|
——————
|
|
(1)
|
Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See
Note 4 (“Long-Term Debt”)
.
|
8. 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
June 30,
|
|
Six Months Ended
June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Idle compressor units retired from the active fleet
|
75
|
|
|
70
|
|
|
90
|
|
|
105
|
|
Horsepower of idle compressor units retired from the active fleet
|
19,000
|
|
|
17,000
|
|
|
32,000
|
|
|
30,000
|
|
Impairment recorded on idle compressor units retired from the active fleet
|
$
|
3,621
|
|
|
$
|
3,846
|
|
|
$
|
6,305
|
|
|
$
|
6,912
|
|
9. Income Taxes
Unrecognized Tax Benefits
As of
June 30, 2019
, we believe it is reasonably possible that
$1.2 million
of our unrecognized tax benefits, including penalties and interest, will be reduced prior to
June 30, 2020
due to the settlement of audits or the expiration of statutes of limitations or both. However, due to the uncertain and complex application of the tax regulations, it is possible that the ultimate resolution of these matters may result in liabilities which could materially differ from this estimate.
10. Partners’ Capital
Merger Transaction
In April 2018, Archrock completed the acquisition of all of our outstanding common units and we became a wholly-owned subsidiary of Archrock. Additionally, all outstanding treasury units were retired and our incentive distribution rights, all of which were previously owned by Archrock prior to the Merger, were canceled and ceased to exist. As a result of the Merger, our common units are no longer publicly traded. Our 2021 Notes and 2022 Notes were not impacted by the Merger.
Prior to the Merger, public unitholders held a
57%
ownership interest in us and Archrock owned our remaining equity interests, including
29,064,637
common units and
1,422,458
general partner units, collectively representing a
43%
interest.
Cash Distributions
As of the closing of the Merger, any distributions are paid to Archrock as the owner of all outstanding common and general partner units. On
July 29, 2019
, our board of directors approved a cash distribution of
$0.3075
per common unit, or approximately
$22.0 million
, to be paid to Archrock on August 14, 2019.
11. 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 each of
June 30, 2019
and
December 31, 2018
, we accrued
$3.2 million
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.
Litigation and Claims
In the ordinary course of business, we are involved in various pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 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.