As filed with the Securities and Exchange Commission on February 9, 2011

Registration No. 333-155260

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 2

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

COMPRESSCO PARTNERS, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

 

101 Park Avenue, Suite 1200

Oklahoma City, Oklahoma 73102

(405) 677-0221

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Ronald J. Foster

President

101 Park Avenue, Suite 1200

Oklahoma City, Oklahoma 73102

(405) 677-0221

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

 

 

Copies to:

 

 

 

 

     Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

 

     If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  o

 

     If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

     If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

     If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

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

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

Subject to Completion dated February 9, 2011

 

PROSPECTUS

 

     2,500,000 Common Units

 

 

Representing Limited Partner Interests

 

 

 

We are a Delaware limited partnership formed by TETRA Technologies, Inc., or “TETRA,” to provide wellhead compression-based production enhancement services to domestic and international customers. This is the initial public offering of our common units. We currently estimate that the initial public offering price will be between $19.00 and $21.00 per common unit. Prior to this offering, there has been no public market for our common units. We intend to apply to list our common units on the NASDAQ Global Market under the symbol “GSJK.”

 

Investing in our common units involves risks. Please read “Risk Factors” beginning on page 19.

 

These risks include, but are not limited to, the following:

 

 

 

 

 

 

 

 

 

 

 

 

We have granted the underwriters a 30-day option to purchase up to an additional 375,000 common units from us on the same terms and conditions as set forth above, if the underwriters sell more than 2,500,000 common units in this offering.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

Raymond James, on behalf of the underwriters, expects to deliver the common units on or about          , 2011.

 

 

 

The date of this prospectus is          , 2011.

 

TABLE OF CONTENTS

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

 

Until          , 2011 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

SUMMARY

 

Compressco Partners

 

Production Enhancement Fundamentals

						Trailing Twelve-Month
						Average Henry Hub
Time Period		Predecessor Revenues				Gas Price
		(in millions)				($/MMBtu)
First Quarter 2008		$	23.83			$	7.30
Second Quarter 2008		$	24.37			$	8.24
Third Quarter 2008		$	25.43			$	8.98
Fourth Quarter 2008		$	26.32			$	8.85
First Quarter 2009		$	26.33			$	7.86
Second Quarter 2009		$	22.12			$	5.96
Third Quarter 2009		$	21.65			$	4.47
Fourth Quarter 2009		$	20.48			$	3.93
First Quarter 2010		$	20.33			$	4.07
Second Quarter 2010		$	20.05			$	4.22
Third Quarter 2010		$	20.11			$	4.50

	•	Most of the wells that would benefit from our production enhancement services do not currently utilize those services;

	•	Aging natural gas and oil wells will require more of our production enhancement services;

	•	Natural gas production from unconventional sources, including tight sands, shales and coalbeds, is expected to continue to increase, according to the AEO 2011, and, over time, production from these unconventional sources could benefit substantially from our production enhancement services due to the relatively fast production decline rates of wells drilled to these formations; and

	•	Natural gas and oil producers continue to outsource their requirements for the production enhancement services we provide.

	•	Increase service coverage within our current domestic and international markets;

	•	Pursue additional domestic and international growth opportunities;

	•	Improve our service offerings;

	•	Promote our additional service applications, including vapor recovery, well monitoring, automated sand separation and production enhancement services for use on pumping oil wells;

	•	Leverage our relationships with TETRA and its customers; and

	•	Take advantage of selective acquisition opportunities.

	•	Our ability to increase the value of natural gas wells;

	•	Our superior customer service and highly trained field personnel;

	•	Our proactive, engineered approach to marketing and service;

	•	Our GasJack® units and VJacktm units;

	•	Our broad geographic presence in domestic markets and growing international presence;

	•	Our experienced management team with proven ability to deliver strong, long-term, organic growth; and

	•	Our record of maintaining established customer relationships.

Our Relationship with TETRA and Compressco

Risk Factors

 

Formation Transactions and Partnership Structure

	•	TETRA will cause Compressco and certain other subsidiaries of TETRA to contribute to us a portion of our predecessor’s business, operations and related assets and liabilities, as previously described in “Summary — Our Relationship with TETRA and Compressco”;

	•	we will issue to our general partner and to TETRA International Incorporated, a wholly owned subsidiary of TETRA,      subordinated units and      subordinated units, respectively, representing an aggregate 40.0% limited partner interest in us, and      common units and      common units, respectively1, representing an aggregate 41.6% limited partner interest in us;

	•	we will issue to our general partner 304,202 notional general partner units, representing a 2.0% general partner interest in us;

	•	we will issue to our general partner the incentive distribution rights, which entitle the holder to increasing percentages, up to a maximum of 48.0%, of the cash we distribute to our unitholders in excess of $0.474375 per unit per quarter, as described under “Provisions of Our Partnership Agreement Relating to Cash Distributions — General Partner Interest and Incentive Distribution Rights”;

	•	we will enter into an omnibus agreement with TETRA and its other controlled affiliates, as previously described in “Summary — Our Relationship with TETRA and Compressco”;

	•	we will issue 2,500,000 common units to the public in this offering, representing an aggregate 16.4% limited partner interest in us;

	•	simultaneously with the completion of this offering, we will issue restricted units to certain directors, executive officers and other employees of our general partner, Compressco and TETRA;

	•	we will assume approximately $31.5 million of intercompany indebtedness owed by our predecessor to TETRA (as partial consideration for the assets we acquire from TETRA in connection with this offering), which will be repaid in full from the proceeds of this offering, and the balance of the intercompany indebtedness will be repaid by our predecessor prior to this offering;

	•	we will use approximately $3.5 million of the net proceeds received from this offering to reimburse TETRA for certain expenses incurred in connection with this offering; and

	•	the balance of the net proceeds received from this offering will be used as described in “Use of Proceeds.”

Publicly held Common Units			2,500,000				16.4	%
Common units held by affiliates of TETRA			6,321,868				41.6	%
Subordinated units held by affiliates of TETRA			6,084,047				40.0	%
Notional general partner units held by Compressco Partners GP			304,202				2.0	%
Total			15,210,117				100.0	%

(1)		Assuming no exercise of the underwriters’ overallotment option.

 

Management of Compressco Partners

 

Principal Executive Offices and Internet Address

 

Summary of Conflicts of Interest and Fiduciary Duties

 

The Offering

Common units offered to the public		2,500,000 common units, representing a 16.4% limited partner interest in us, or 2,875,000 common units, if the underwriters exercise in full their option to purchase additional common units, representing a 18.9% limited partner interest in us.

Common units and subordinated units outstanding after this offering		8,821,868 common units, representing a 58.0% limited partner interest in us, and 6,084,047 subordinated units, representing a 40.0% limited partner interest in us. If the underwriters do not exercise their option to purchase additional common units, we will issue to our general partner 375,000 common units at the expiration of the 30-day option period. If, and to the extent, the underwriters exercise their option to purchase additional common units, the number of units purchased by the underwriters pursuant to such exercise will be issued to the public, and the remainder of any of the 375,000 common units not purchased by the underwriters pursuant to the option will be issued to our general partner. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding after the option period.

Notional general partner units outstanding after this offering		Our general partner will own 304,202 notional general partner units, representing a 2.0% general partner interest in us.

Use of proceeds		We expect to receive net proceeds from this offering of approximately $45.0 million, after deducting the underwriting discount, structuring fees and offering expenses.

		We will use approximately $31.5 million of the net proceeds received from this offering to retire intercompany indebtedness owed by our predecessor to TETRA, which we will assume as partial consideration for the assets we acquire from TETRA in connection with this offering. In addition, we will use approximately $3.5 million of the net proceeds received from this offering to reimburse TETRA for certain expenses incurred in connection with this offering. The balance of the net proceeds (approximately $9.9 million) will be available for general partnership purposes.

		Net proceeds to us will not change if the underwriters exercise their option to purchase additional common units because the net proceeds from any exercise of the underwriters’ option to purchase additional common units (approximately $7.5 million based on an assumed initial offering price of $20.00 per common unit, if exercised in full) will be used to make a distribution to TETRA.

		Please read “Use of Proceeds” on page 41 of this prospectus.

Cash distributions		We will pay the minimum quarterly distribution of $0.4125 per common unit ($1.65 per common unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. We will adjust the minimum quarterly distribution for the period from the completion of this offering through March 31, 2011, based on the actual number of days that the units were outstanding during the quarterly

		period. Our ability to pay our minimum quarterly distribution is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”

		Our partnership agreement requires us to distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement attached as Appendix A.

		Our partnership agreement requires us to distribute all of our available cash each quarter in the following manner:

		• first, 98.0% to the holders of common units and 2.0% to our general partner, until each common unit has received the minimum quarterly distribution of $0.4125 plus any arrearages from prior quarters;

		• second, 98.0% to the holders of subordinated units and 2.0% to our general partner, until each subordinated unit has received the minimum quarterly distribution of $0.4125; and

		• third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $0.474375.

		If cash distributions to our unitholders exceed $0.474375 per unit in any quarter, our unitholders and our general partner will receive distributions according to the following percentage allocations:

		Marginal Percentage
		Interest in Distributions
										General
Total Quarterly Distribution Target Amount per Unit						Unitholders				Partner
above $0.474375 up to $0.515625							85.0	%			15.0	%
above $0.515625 up to $0.61875							75.0	%			25.0	%
above $0.61875							50.0	%			50.0	%

		The percentage interests shown for our general partner include its 2.0% general partner interest. We refer to the additional increasing distributions to our general partner as “incentive distributions.” Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Distributions of Available Cash — General Partner Interest and Incentive Distribution Rights.”

		We must generate approximately $25.1 million (or approximately $6.3 million per quarter) of available cash to pay the aggregate quarterly distribution for four quarters on all of our common units and subordinated units that will be outstanding immediately after this offering and the corresponding distribution on the general partner interest. If we had completed the transaction contemplated in this prospectus on January 1, 2009 and October 1, 2009, our pro forma cash available for distribution for the twelve months ended December 31, 2009 and September 30, 2010 would have been approximately $31.7 million and $27.0 million, respectively. These amounts would have been more than sufficient to pay the aggregate minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general

		partner’s 2% interest for the twelve months ended December 31, 2009 and September 30, 2010. For a calculation of our ability to make distributions to our unitholders based on our pro forma results for the twelve months ended December 31, 2009 and September 30, 2010, please read “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma Cash Available for Distribution for the Twelve Months Ended December 31, 2009 and September 30, 2010.”

		We believe that, based on the estimates contained in our financial forecast and related assumptions listed under the caption “Our Cash Distribution Policy and Restrictions on Distributions — Estimated Cash Available for Distribution for the Twelve Months Ending December 31, 2011,” we will have sufficient cash available to pay the aggregate minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner’s 2% interest for each quarter in the twelve months ending December 31, 2011. Please read “Cash Distribution Policy and Restrictions on Distributions — Estimated Cash Available for Distribution for the Twelve Months Ending December 31, 2011.”

Subordinated units		Affiliates of TETRA will initially own all of our subordinated units. The principal difference between our common and subordinated units is that in any quarter during the subordination period, the subordinated units will not be entitled to receive any distribution until the common units have received the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Subordinated units will not accrue arrearages.

Conversion of subordinated units		The subordination period will end on the first business day after we have earned and paid at least (1) $1.65 (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit and the corresponding distribution on our general partner’s 2.0% interest for each of three consecutive, non-overlapping four quarter periods ending on or after March 31, 2014 or (2) $2.475 (150.0% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the corresponding distributions on our general partner’s 2.0% interest and the incentive distribution rights for the four-quarter period immediately preceding that date.

		The subordination period also will end upon the removal of our general partner other than for cause if no subordinated units or common units held by the holders of subordinated units or their affiliates are voted in favor of that removal.

		When the subordination period ends, all subordinated units will convert into common units on a one-for-one basis, and, thereafter, all common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordination Period.”

General partner’s right to reset the target distribution levels		Our general partner, as the initial holder of our incentive distribution rights, has the right, at any time when there are no

		subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%, in addition to distributions paid on its 2.0% general partner interest) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our cash distributions at the time of the exercise of the reset election. If our general partner transfers all or a portion of our incentive distribution rights in the future, then the holder or holders of a majority of our incentive distribution rights will be entitled to exercise this right. Assuming that our general partner holds all of the incentive distribution rights at the time that a reset election is made, following a reset election, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution, and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution.

		If our general partner elects to reset the target distribution levels, it will be entitled to receive common units and to retain its then-current general partner interest. The number of common units to be issued to our general partner will equal the number of common units that would have entitled the holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels.”

Issuance of additional partnership units		We can issue an unlimited number of partnership units in the future, including units that are senior in right of distributions, liquidation and voting to the common units, without the approval of our unitholders. Please read “Units Eligible for Future Sale” and “The Partnership Agreement — Issuance of Additional Securities.”

Limited voting rights		Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, our unitholders will have only limited voting rights on matters affecting our business. Unitholders will have no right to elect our general partner or its directors. Our general partner may not be removed except by a vote of the holders of at least 662/3% of the outstanding common and subordinated units, including any units owned by our general partner and its affiliates, voting together as a single class. Upon consummation of this offering, our general partner and its affiliates will own an aggregate of 83.2% of our common and subordinated units (assuming the underwriters do not exercise their option to purchase additional common units). This will give our general partner the ability to prevent its involuntary removal. Please read “The Partnership Agreement — Voting Rights.”

Limited call right		If at any time our general partner and its affiliates own more than 90% of the outstanding common units, our general partner will have the right, but not the obligation, to purchase all of the remaining common units at a price not less than the then-current market price of the common units.

Estimated ratio of taxable income to distributions		We estimate that a purchaser of common units in this offering who owns these common units from the date of closing of this offering through the record date for distributions for the period ending on December 31, 2013, will be allocated, on a cumulative basis, an amount of U.S. federal taxable income for that period that will be approximately     % of the cash distributed with respect to that period. For example, if our unitholders receive an annual distribution of $1.65 per unit, we estimate that our unitholders’ average allocable U.S. federal taxable income per year will be no more than $      per unit. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions.”

Material tax consequences		For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Tax Consequences.”

Exchange listing		We intend to apply to list our common units on the NASDAQ Global Market under the symbol “GSJK.”

 

Selected Historical and Pro Forma Financial and Operating Data

	•	the contribution to us of a portion of our predecessor’s business, as further described in “Summary — Our Relationship with TETRA and Compressco;”

	•	our issuance of common units to the public and affiliates of TETRA, subordinated units to affiliates of TETRA, notional general partner units and incentive distribution rights to Compressco Partners GP and restricted units to certain directors, executive officers and other employees of our general partner, TETRA and ours, as further described in “Summary — Formation Transactions and Partnership Structure;” and

	•	our use of the proceeds received from the offering, as further described in “Use of Proceeds.”

																														Compressco Partners
																																		Pro Forma
		Compressco Partners Predecessor																												Pro Forma				Nine Months
																						Nine Months Ended								Year Ended				Ended
		Year Ended December 31,																				September 30,								December 31,				September 30,
		2005				2006				2007				2008				2009				2009				2010				2009				2010
		(unaudited)																				(unaudited)								(unaudited)
		(dollars in thousands)
Statement of Operations Data:
Revenue		$	52,212			$	67,133			$	85,985			$	99,944			$	90,573			$	70,091			$	60,492			$	89,794			$	60,159
Cost of revenue			24,340				30,265				38,179				44,189				40,959				31,842				28,012				40,731				27,895
Selling, general and administrative expenses			8,445				10,612				12,964				14,352				13,193				10,092				10,262				13,134				10,227
Depreciation and amortization expense			4,558				6,436				9,433				12,112				13,823				10,427				9,819				13,745				9,775
Interest expense			8,487				9,250				10,083				10,990				11,980				8,985				9,829				—				36
Other (income) expense, net			(3	)			59				(31	)			174				(82	)			(52	)			87				(82	)			87
Income before income tax provision			6,385				10,511				15,357				18,127				10,700				8,797				2,483				22,266				12,139
Provision for income taxes			2,482				4,100				5,803				6,846				4,161				3,421				1,067				2,956				1,238
Net income		$	3,903			$	6,411			$	9,554			$	11,281			$	6,539			$	5,376			$	1,416			$	19,310			$	10,901
General partner interest in net income																															386				218
Common unitholders’ interest in net income																															11,200				6,322
Subordinated unitholders’ interest in net income																															7,724				4,361
Net income per common unit (basic and diluted)																														$	1.25			$	0.72
Balance Sheet Data (at Period End):
Working capital(1)		$	14,997			$	19,761			$	27,565			$	31,308			$	32,983			$	24,490			$	14,253							$	33,683
Total assets			139,340				163,981				186,675				212,167				202,498				205,277				192,144								201,392
Partners’ capital/net parent equity			27,562				40,048				48,713				56,792				33,900				40,361				10,291								189,662
Other Financial Data:
EBITDA(2)			19,430				26,197				34,873				41,229				36,503				28,209				22,131				36,011				21,950
Capital expenditures(3)			18,349				25,917				23,929				33,036				2,997				2,233				5,078
Cash flows provided by (used in):
Operating activities			5,656				12,251				15,737				25,569				23,936				27,044				27,336
Investing activities			(18,418	)			(25,862	)			(23,930	)			(32,997	)			(2,882	)			(2,169	)			(5,048	)
Financing activities			11,938				14,378				7,991				7,607				(17,854	)			(22,435	)			(24,984	)

		Compressco Partners Predecessor
																						Nine Months Ended
		Year Ended December 31,																				September 30,
		2005				2006				2007				2008				2009				2009				2010
		(unaudited)																				(unaudited)
		(dollars in thousands)
Operating Data:
Total compressor units in fleet (at period end)			1,990				2,595				3,108				3,603				3,627				3,614				3,652
Average number of compressor units in service (during period)(4)			1,613				2,054				2,530				2,913				2,862				2,897				2,702
Average compressor unit utilization (during period)(5)			91.3	%			89.6	%			88.7	%			86.8	%			79.2	%			80.3	%			74.2	%

(1)		Working capital is defined as current assets minus current liabilities.

(2)		Please read “Summary — Non-GAAP Financial Measures” for more information regarding EBITDA. We define EBITDA as earnings before interest, taxes, depreciation and amortization.

(3)		Capital expenditures primarily consist of capital expenditures to expand the operating capacity or revenue of existing or new assets.

(4)		“Average number of compressor units in service” for each period shown is determined by calculating an average of two numbers, the first of which is the number of compressor units being used to provide services on customer well sites at the beginning of the period and the second of which is the number of compressor units being used to provide services on customer well sites at the end of the period.

(5)		“Average compressor unit utilization” for each period shown is determined by dividing the average number of compressor units in service during such period by the average of two numbers, the first of which is the total number of compressors units in our fleet at the beginning of such period and the second of which is the total number of compressor units in our fleet at the end of such period.

 

Non-GAAP Financial Measures

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

	•	our operating performance and return on capital as compared to those of other companies in the production enhancement business, without regard to financing or capital structure;

	•	the viability of capital expenditure projects and the overall rates of return on alternative investment opportunities; and

	•	our ability to generate available cash sufficient to make distributions to our unitholders.

																														Compressco Partners
																														Pro Forma
		Compressco Partners Predecessor																																Nine
																						Nine Months								Year				Months
																						Ended								Ended				Ended
		Year Ended December 31,																				September 30,								December 31,				September 30,
		2005				2006				2007				2008				2009				2009				2010				2009				2010
		(In thousands)
Net Income		$	3,903			$	6,411			$	9,554			$	11,281			$	6,539			$	5,376			$	1,416			$	19,310			$	10,901
Provision for income taxes			2,482				4,100				5,803				6,846				4,161				3,421				1,067				2,956				1,238
Depreciation and amortization			4,558				6,436				9,433				12,112				13,823				10,427				9,819				13,745				9,775
Interest			8,487				9,250				10,083				10,990				11,980				8,985				9,829				—				36
EBITDA		$	19,430			$	26,197			$	34,873			$	41,229			$	36,503			$	28,209			$	22,131			$	36,011			$	21,950

		Compressco Partners Predecessor
		Year Ended December 31,																				Nine Months Ended September 30,
		2005				2006				2007				2008				2009				2009				2010
		(In thousands)
Cash flow from operating activities		$	5,656			$	12,251			$	15,737			$	25,569			$	23,936			$	27,044			$	27,336
Changes in current assets and current liabilities			5,086				3,963				6,951				5,029				(1,217	)			(9,314	)			(15,535	)
Deferred income taxes			(1,701	)			(2,825	)			(2,828	)			(6,281	)			(1,243	)			(1,005	)			(184	)
Other non-cash charges			(580	)			(542	)			(873	)			(924	)			(1,114	)			(922	)			(382	)
Interest and other			8,487				9,250				10,083				10,990				11,980				8,985				9,829
Provision for income taxes			2,482				4,100				5,803				6,846				4,161				3,421				1,067
EBITDA		$	19,430			$	26,197			$	34,873			$	41,229			$	36,503			$	28,209			$	22,131

 

Limited partnership interests are inherently different from capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in the natural gas wellhead compression-based production enhancement services business. You should consider carefully the following risk factors, together with all of the other information included in this prospectus, in evaluating an investment in our common units.

 

If any of the following risks were to occur, our business, financial condition or results of operations could be affected in a materially adverse manner. In that case, we might not be able to pay the aggregate minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner’s 2% interest, the trading price of our common units could decline and our unitholders could lose all or part of their investment.

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to make cash distributions to holders of our common units at the minimum quarterly distribution rate under our cash distribution policy.

 

To make our cash distributions at our minimum quarterly distribution rate of $0.4125 per common unit per quarter, or $1.65 per common unit per year, we will require available cash of approximately $6.3 million per quarter, or approximately $25.1 million per year, based on the common units, subordinated units and notional general partner units outstanding immediately after completion of this offering. We may not have sufficient available cash from operating surplus each quarter to enable us to make cash distributions at the minimum quarterly distribution rate under our cash distribution policy. The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which will fluctuate from quarter to quarter based on, among other things, the risks described in this section and also upon:

 

 

 

 

For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”

 

The assumptions underlying our estimate of cash available for distribution we include in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause our actual results to differ materially from those estimated.

 

Our estimate of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” is based on assumptions that are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated. If we do not achieve the estimated results, we may not be able to pay the aggregate minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner’s 2% interest, in which event the market price of our common units will likely decline materially.

 

We may be unable to achieve our expected growth or market penetration for the twelve months ended December 31, 2011 and thereafter.

 

We expect to achieve material revenue growth in future periods. For the twelve months ended December 31, 2011, we are assuming revenue growth of approximately 14%. Our future growth will depend upon a number of factors, some of which we cannot control. These factors include our ability to:

 

 

 

 

 

 

A deficiency in any of these factors could adversely affect our ability to execute our growth strategy. If we do not achieve our expected growth or market penetration, we may not be able to achieve our estimated results and, as a result, we may not be able to pay the aggregate minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner’s 2% interest, in which event the market price of our common units will likely decline materially.

 

We depend on domestic and international demand for and production of natural gas, and a reduction in this demand or production could adversely affect the demand or the prices we charge for our services, which could cause our revenue and cash available for distribution to our unitholders to decrease.

 

Our production enhancement services operations are significantly dependent upon the demand for, and production of, natural gas in the various domestic and international locations in which we operate. Natural gas production and consumption may be affected by, among other factors, natural gas prices, weather, demand for energy and availability of alternative energy sources. Natural gas prices have been volatile in 2010 to date, with spot prices ranging from a high of $7.51 per Mcf in January 2010 to a low of $3.18 per Mcf in October 2010. The spot price for natural gas as of January 31, 2011 was $4.42 per Mcf. Seasonality and the amount of natural gas in storage play a prominent role in natural gas prices. From time to time, in certain of our operating regions, wellhead prices are substantially lower than spot prices. Any prolonged, substantial reduction in the demand for natural gas would, in all likelihood, depress the level of production activity and result in a decline in the demand for our production enhancement services, which would reduce our cash available for distribution. In addition, natural gas production from newly developed shale plays continues to increase the amount of natural gas in storage, which tends to cause natural gas prices to decrease. While we have a significant number of customers who have retained our services through high and low commodity prices, we generally experience less growth and more attrition during periods of significantly high or low commodity prices. A sustained decrease in the price of natural gas may cause customers to cease production

of natural gas, or “shut-in” natural gas wells. If customers shut-in wells due to a decline in natural gas prices, or any other reason, demand for our services may decline.

 

Our operations in, and expansion of operations into, foreign countries exposes us to complex regulations and may present us with new obstacles to growth.

 

Internationally, we have significant operations in Canada and Mexico and a growing presence in certain countries in South America, Eastern Europe and the Asia-Pacific region. A portion of our expected future growth includes expansion throughout certain countries in these regions. Foreign operations carry special risks. Our operations in the countries in which we currently operate, and those countries in which we may operate in the future, could be adversely affected by:

 

 

 

 

 

 

 

 

If we violate any licensing, tariff, customs or tax reporting requirements, significant administrative, civil and criminal penalties could be assessed on us. In addition, foreign governments and agencies often establish permit and regulatory standards different from those in the U.S. If we cannot obtain foreign regulatory approvals, or if we cannot obtain them when we expect, our growth and profitability from international operations could be negatively affected.

 

We do not use financial instruments to minimize our exposure to changes in currency exchange rates. Our exposure to currency exchange rate fluctuations may result in fluctuations in our cash flows and could have an adverse effect on our results of operations.

 

Because we have significant operations in Canada and Mexico and a growing presence in certain countries in South America, Eastern Europe and the Asia-Pacific region, a significant portion of our business is conducted in foreign currencies. Because we do not use financial instruments to minimize our exposure to changes in currency exchange rates, we are exposed to currency exchange rate fluctuations that could have an adverse effect on our results of operations. If a foreign currency weakens significantly, we would be required to convert more of that foreign currency to U.S. dollars to satisfy our obligations, which would cause us to have less cash available for distribution. A significant strengthening of the U.S. dollar could result in an increase in our financing expenses and could materially affect our financial results under U.S. GAAP. Because we report our operating results in U.S. dollars, changes in the value of the U.S. dollar also result in fluctuations in our reported revenues and earnings. In addition, for our significant operations in Canada and Mexico, where the local currency is the functional currency under U.S. GAAP, all U.S. dollar-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations are revalued and reported based on the prevailing exchange rate at the end of the reporting period. This revaluation may cause us to report significant foreign currency exchange gains and losses in certain periods.

 

Our operations in Mexico are subject to specific risks, including our dependence on Petróleos Mexicanos (“Pemex”) as our primary customer in Mexico, Mexican legislation that authorizes Pemex to contract through an auction process, our exposure to fluctuations in the Mexican peso, our Mexican workforce unionization and escalating security disruptions in Mexico.

 

The majority of our business in Mexico is performed for Pemex. For the year ended December 31, 2009 and the nine months ended September 30, 2010, Pemex accounted for approximately 15.3% and 12.3%, respectively, of our pro forma revenues and a substantial portion of our cash flows. No work or services are guaranteed to be ordered by Pemex under our contracts with Pemex. Pemex is a decentralized public entity of

the Mexican Government, and therefore the Mexican Government controls Pemex, as well as its annual budget, which is approved by the Mexican Congress. The Mexican Government may cut spending in the future. These cuts could adversely affect Pemex’s annual budget and ability to engage us or compensate us our services and, as a result, our business, financial condition, results of operations and cash flows.

 

Under the recently enacted Ley de Petróleos Mexicanos (the “Pemex Law”), Pemex now has authority to contract through an auction process, with third parties for the exploration, development, and production of hydrocarbons. The Pemex Law permits three types of contracting: contracts resulting from open auctions or invitation-only auctions with at least three invitees, or direct contracting. To utilize an invitation-only auction or a direct contract, Pemex must provide written justification as to why the specific circumstances of the proposed service contract require less than an open auction. Additionally, open auctions must conform with one of three selected bidder models: either all bidders must be Mexican entities, all bidders must be Mexican entities or foreign entities whose countries of origin are parties to free trade agreements with Mexico that include sections related to governmental procurement, or bidders may be of any national origin. Pemex may only select the third option if Pemex determines that either (i) the Mexican market cannot adequately meet the needs of the contract, (ii) the third option would be better for Pemex in terms of price or quality, (iii) the second bidder model was attempted but was unsuccessful, or (iv) the contracts are financed by certain legally required types of foreign loans. In addition, under the Pemex Law, there may be other qualifications that must be met by bidding service providers. Bidders must meet and maintain all required qualifications at the time of bidding and throughout the term of the contract.

 

Our existing contracts with Pemex are two years in duration and, when these contracts with Pemex expire, we may be required to participate in a open auction to renew them. Any failure by us to renew our existing contracts with Pemex or renew them on favorable terms could adversely affect our business, financial condition, results of operations and cash flows. We cannot predict what impact, if any, these new rules will have on our ability to renew our existing contracts with Pemex or renew them on terms that are favorable to us.

 

Mexico has experienced several past periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Further deterioration in Mexico’s economic condition, social instability, political unrest or other adverse social developments in Mexico could adversely affect Pemex’s business, annual budget and financial condition. Those events could also lead to increased volatility in the value of the peso. The Pemex contracts provide that a portion of our billings under the contracts are charged to Pemex in Mexican pesos. As such, we are exposed to fluctuations in the value of the peso. A material decrease in the value of the Mexican peso relative to the U.S. dollar could adversely affect our revenues, cash flows and net income.

 

Our operations in Mexico are party to fourteen collective labor agreements, four of which automatically expire on July 1, 2011, August 10, 2011, September 30, 2011 and December 31, 2012, respectively. The remainder of these collective labor agreements are “evergreen” contracts that have no expiration date, and whose terms remain in full force and effect from year to year, unless the parties agree to negotiate new terms. The employees subject to these “evergreen” agreements may, however, request a renegotiation of their employee compensation terms on an annual basis or a renegotiation of the entire agreement on a biannual basis, although we are not required to honor any such request. We have not experienced work stoppages in the past but cannot guarantee that we will not experience work stoppages in the future. A prolonged work stoppage could negatively impact our revenues, cash flows and net income.

 

During the past year, incidents of security disruptions throughout many regions of Mexico have increased. Drug related gang activity has grown in response to Mexico’s efforts to reduce and control drug trafficking within the country. Certain incidents of violence have occurred in regions served by us and have resulted in the interruption of our operations and these interruptions could continue or increase in the future. To the extent that such security disruptions continue or increase, our operations will continue to be affected, and the levels of revenue and operating cash flow from our Mexican operations could be reduced.

 

The ongoing impact of the recent domestic and foreign economic downturn on our customers’ level of demand, and ability to pay, for our services could adversely affect our business.

 

Wellhead compression activity levels have decreased due to the recent decline in energy consumption and uncertainty of the credit and capital markets caused by the recent domestic and foreign economic downturn. Decreased energy consumption has resulted in a decrease in energy prices during much of 2009 and 2010 compared to prices received during early to mid-2008. This decline in energy prices, along with concerns regarding the availability of credit and capital, has negatively affected the operating cash flows and capital plans of many of our customers, which has negatively affected the demand for many of our services. If current economic conditions continue or worsen, there may be additional constraints on oil and gas industry spending levels for an extended period. Such a stagnation of economic activity would negatively affect both the demand for many of our services and the prices we charge for these services, which would continue to negatively affect our revenues and future growth.

 

During times when oil or natural gas prices are low, our customers are more likely to experience a downturn in their financial condition, which could have an adverse effect on our business. Many of our customers finance their exploration and development activities through cash flow from operations, the incurrence of debt or the issuance of equity. Recently, there have been significant declines in the availability of credit and equity capital markets as a source of financing. Similarly, many of our customers’ equity values have substantially declined. The combination of a reduction of operating cash flow resulting from low commodity prices, a reduction in borrowing bases under reserve-based credit facilities and the lack of availability of debt or equity financing may result in a significant reduction in our customers’ spending for our services. For example, our customers could seek to preserve capital by canceling our month-to-month services contracts or determining not to enter into any new services contracts, thereby reducing demand for our services. The reduced demand for our services could adversely affect our business, financial condition, results of operations and cash flow.

 

Our ability to manage and grow our business effectively and provide adequate production enhancement services to our customers may be adversely affected if our general partner loses its management or is unable to retain trained personnel.

 

We rely primarily on the executive officers and directors of our general partner to manage our operations and make decisions on our behalf. Our ability to provide quality production enhancement services depends upon our general partner’s ability to hire, train and retain an adequate number of trained personnel. The departure of any of our general partner’s executive officers could have a significant negative effect on our business, operating results, financial condition and on our ability to compete effectively in the marketplace. We operate in an industry characterized by highly competitive labor markets and, similar to many of our competitors, our predecessor has experienced high employee turnover in certain regions. It is possible that our labor expenses could increase if there is a shortage in the supply of skilled regional service supervisors and other service professionals. Our general partner may be unable to improve employee retention rates or maintain an adequate skilled labor force necessary for us to operate efficiently and to support our growth strategy without increasing labor expenses. Failure to do so could impair our ability to operate efficiently and to retain current customers and attract prospective customers, which could cause our business to suffer materially. Additionally, increases in labor expenses may have an adverse impact on our operating results, and may reduce the amount of cash available for distribution to our unitholders. For more information about directors, executive officers and other management, please read “Management of Compressco Partners — Directors, Executive Officers and Other Management.”

 

We have five customers that collectively accounted for approximately 40.5% of our pro forma 2009 revenues. Our services are provided to these customers pursuant to short-term contracts, which typically are cancellable with 30 days’ notice. The loss of any of these significant customers would result in a decline in our revenue and cash available to pay distributions to our unitholders.

 

Our five most significant customers collectively accounted for approximately 40.5% of our pro forma 2009 revenues. Therefore, our loss of a single significant customer may have a greater effect on our financial

results than it would on a company with a more diverse customer base. Our five largest customers for the twelve months ended December 31, 2009 and the nine months ended September 30, 2010, were BP, Pemex, Devon Energy Corporation, EXCO Resources, and Conoco Phillips. These five customers accounted for approximately 13.8%, 15.3%, 4.7%, 4.6% and 2.1% of our pro forma revenues for the twelve months ended December 31, 2009, respectively, and approximately 21.2%, 12.3%, 5.0%, 4.0% and 3.1% of our pro forma revenues for the nine months ended September 30, 2010, respectively. The loss of all or even a portion of the production enhancement services we provide to these customers, as a result of competition or otherwise, could have a material adverse effect on our business, results of operations, financial condition and our ability to make cash distributions to our unitholders.

 

We depend on particular suppliers and are vulnerable to compressor unit component shortages and price increases, which could have a negative impact on our results of operations and cash available for distribution to our unitholders.

 

We manufacture all of our compressor units. We obtain some of the components used in our compressor units from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including our potential inability to obtain an adequate supply of required components in a timely manner. We do not have long-term contracts with these sources and the partial or complete loss of certain of these sources could have a negative impact on our results of operations and could damage our customer relationships. Further, since any increase in component prices for compressor units manufactured by us could decrease our margins, a significant increase in the price of one or more of these components could have a negative impact on our results of operations and cash available for distribution to our unitholders.

 

We face competition that may cause us to lose market share and harm our financial performance.

 

The production enhancement services business is highly competitive. Primary competition for our production enhancement services business comes from various local and regional companies that utilize packages consisting of a screw compressor with a separate engine driver or a reciprocating compressor with a separate engine driver. These local and regional competitors tend to compete with us on the basis of price rather than equipment specifications. To a lesser extent, we face competition from large national and multinational companies with greater financial resources than ours. While these companies have traditionally focused on higher-horsepower natural gas gathering and transportation equipment and services and have represented limited competition to-date, one or more of these companies could elect to compete in the wellhead compression-based production enhancement services business segment. In addition, our competitors include plunger lift and other artificial lift service providers and companies engaged in leasing compressors and other equipment. Our ability to renew or replace existing contracts with our customers at rates sufficient to maintain current revenue and cash flows could be adversely affected by the activities of our competitors and our customers. Our competitors could substantially increase the resources they devote to the development and marketing of competitive services, develop more efficient production enhancement equipment or substantially decrease the price at which they offer their services. In addition, our customers that are significant producers of natural gas may elect to purchase their own production enhancement equipment in lieu of using our production enhancement services. Any of these competitive pressures could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders.

 

We will not have a credit facility at the closing of this offering and may be unable to obtain financing or enter into a credit facility on acceptable terms or at all in the future.

 

At the closing of this offering, we will not have a credit facility in place or commitments from any lenders to enter into future financing agreements. Depending on the impact of then-prevailing economic conditions on our customer’s operating budgets and financial, business, regulatory and other factors, some of which are beyond our control, our ability to enter into a credit facility or other debt agreements in the future may be limited. In some situations, we may be unable to obtain financing or enter into a credit facility on acceptable terms or at all.

 

We may be unable to grow successfully through future acquisitions or to manage successfully future growth, and we may not be able to effectively integrate the businesses we may acquire, which may impact our operations and limit our ability to increase distributions to our unitholders.

 

From time to time we may choose to make business acquisitions to pursue market opportunities, increase our existing capabilities and expand into new areas of operations. We have not actively pursued acquisitions previously, and in the future we may not be able to identify attractive acquisition opportunities or successfully acquire identified targets. In addition, we may not be successful in integrating any future acquisitions into our existing operations, which may result in unforeseen operational difficulties or diminished financial performance or require a disproportionate amount of our management’s attention. Even if we are successful in integrating future acquisitions into our existing operations, we may not derive the benefits, such as operational or administrative synergies, that we expected from such acquisitions, which may result in the commitment of our capital resources without the expected returns on such capital. Furthermore, competition for acquisition opportunities may escalate, increasing our cost of making acquisitions or causing us to refrain from making acquisitions. Our inability to make acquisitions, or to integrate successfully future acquisitions into our existing operations, may impact our operations and limit our ability to increase distributions to our unitholders.

 

Our ability to grow in the future is dependent on our ability to access external expansion capital.

 

We will distribute all of our available cash after expenses and prudent operating reserves to our unitholders. We will use approximately $31.5 million of the net proceeds received from this offering to retire intercompany indebtedness owed by our predecessor to TETRA, which we will assume as partial consideration for the assets we acquire from TETRA in connection with this offering. In addition, we will use approximately $3.5 million of the net proceeds received from this offering to reimburse TETRA for certain expenses incurred in connection with this offering. The balance of the net proceeds of this offering (approximately $9.9 million) will be available for general partnership purposes. Please read “Use of Proceeds.” When the net proceeds from this offering have been depleted, we expect that we will rely primarily upon external financing sources, including borrowings and the issuance of debt and equity securities, to fund expansion capital expenditures. However, we may not be able to enter into a credit facility or obtain other debt financing for the reasons stated in the preceding paragraph. To the extent we are unable to efficiently finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute all of our available cash, we may not grow as quickly as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional partnership units in connection with other expansion capital expenditures, the payment of distributions on those additional partnership units may increase the risk that we will be unable to maintain or increase our per common unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional partnership units, including partnership units ranking senior to the common units. The incurrence of borrowings or other debt by us to finance our growth strategy would result in interest expense, which in turn would affect the available cash that we have to distribute to our unitholders.

 

The credit and risk profile of TETRA could adversely affect our business and our ability to make distributions to our unitholders.

 

The credit and business risk profile of TETRA could adversely affect our ability to incur indebtedness in the future or obtain a credit rating, as credit rating agencies may consider the leverage and credit profile of TETRA and its affiliates in assigning a rating because of their control of us, their performance of administrative functions for us, our close operational links and our contractual relationships. Furthermore, the trading price of our common units may be adversely affected by financial or operational difficulties or excessive debt levels at TETRA. In addition, if TETRA’s ownership of our general partner is pledged to TETRA’s lenders, then there is a risk that control over our general partner could be transferred to TETRA’s lenders in the event of a default.

We may be unable to negotiate extensions or replacements of our contracts with our customers, which are generally cancellable on 30 days’ notice, which could adversely affect our results of operations and cash available for distribution to our unitholders.

 

We generally provide production enhancement services to our customers under “evergreen” contracts that are cancellable on thirty days’ notice. We may be unable to negotiate extensions or replacements of these contracts on favorable terms, if at all, which could adversely affect our results of operations and cash available for distribution.

 

We are subject to environmental regulation, and changes in these regulations could increase our costs or liabilities.

 

We are subject to federal, national, state, provincial and local laws and regulatory standards, including laws and regulations regarding the discharge of materials into the environment, emission controls and other environmental protection and occupational health and safety concerns. Environmental laws and regulations may, in certain circumstances, impose strict and joint and several liability for environmental contamination, rendering us liable for remediation costs, natural resource damages and other damages resulting from our ownership of property or conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could adversely affect our financial condition or results of operations. Moreover, failure to comply with these environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties, and the issuance of injunctions delaying or prohibiting operations.

 

We routinely deal with natural gas, oil and other petroleum products. Hydrocarbons or other hazardous wastes may have been disposed on wellhead sites used by us to provide production enhancement services or to store inactive GasJack^® units or on or under other locations where wastes have been taken for disposal. These properties may be subject to investigatory, remediation and monitoring requirements under foreign, federal, state and local environmental laws and regulations.

 

The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also adversely affect oil and natural gas exploration and production, which in turn could have an adverse effect on us.

 

Climate change legislation or regulations restricting emissions of “greenhouse gases” could result in increased operating costs and reduced demand for the oil and natural gas our customers produce while the physical effects of climate change could disrupt production and cause us to incur costs in preparing for or responding to those effects.

 

On December 15, 2009, the U.S. Environmental Protection Agency, or “EPA” published its final findings that emissions of carbon dioxide, methane and other “greenhouse gases” present an endangerment to public health and the environment because emissions of such gases are, according to the EPA, contributing to warming of the earth’s atmosphere and other climatic changes. These findings allow the EPA to adopt and implement regulations that would restrict emissions of greenhouse gases under existing provisions of the federal Clean Air Act. Accordingly, the EPA has adopted regulations that would require a reduction in emissions of greenhouse gases from motor vehicles and could trigger permit review for greenhouse gas emissions from certain stationary sources. In addition, on October 30, 2009, the EPA published a final rule requiring the reporting of greenhouse gas emissions from specified large greenhouse gas emission sources in the United States beginning in 2011 for emissions occurring in 2010. On November 8, 2010, the EPA finalized regulations to expand the existing greenhouse gas monitoring and reporting rule to include onshore and offshore oil and natural gas production facilities and onshore oil and gas processing, transmission, storage, and

distribution facilities. Reporting of greenhouse gas emissions from such facilities would be required on an annual basis, with reporting beginning in 2012 for emissions occurring in 2011. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our customers’ equipment and operations could increase their operating and compliance costs and reduce demand for their products, which could reduce demand for our production enhancement services. The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of greenhouse gases from, our equipment and operations could require us to incur costs to reduce emissions of greenhouse gases associated with our operations. Further, Congress has considered and almost one-half of the states have adopted legislation that seeks to control or reduce emissions of greenhouse gases from a wide range of sources. Any such legislation could adversely affect demand for the oil and natural gas our customers produce and, in turn, demand for our production enhancement services. Finally, it should be noted that some scientists have concluded that increasing concentrations of greenhouse gases in the Earth’s atmosphere may produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other climatic events; if any such effects were to occur, they could have an adverse effect on our operations and cause us to incur costs in preparing for or responding to those effects.

 

TETRA and its affiliates are not limited in their ability to compete with us, which could cause conflicts of interest and limit our ability to acquire additional assets or businesses, which in turn could adversely affect our results of operations and cash available for distribution to our unitholders.

 

Neither our partnership agreement nor the omnibus agreement between TETRA and us will prohibit TETRA and its affiliates from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, TETRA and its affiliates may acquire compression-based services business or assets in the future, without any obligation to offer us the opportunity to purchase any of that business or those assets. TETRA has significantly greater financial resources than we do, which may make it more difficult for us to compete with TETRA and its affiliates with respect to commercial activities as well as for acquisitions candidates. As a result, competition from TETRA and its affiliates could adversely affect our results of operations and cash available for distribution. Please read “Conflicts of Interest and Fiduciary Duties.”

 

We do not insure against all potential losses and could be seriously harmed by unexpected liabilities.

 

Our operations are subject to inherent risks such as equipment defects, malfunction and failures, and natural disasters that can result in uncontrollable flows of gas or well fluids, fires and explosions. These risks could expose us to substantial liability for personal injury, death, property damage, pollution and other environmental damages. Our insurance may be inadequate to cover our liabilities. Further, insurance covering the risks we face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be adversely affected. In addition, we do not maintain business interruption insurance. Please read “Our Operations — Environmental and Safety Regulations” for a description of how we are subject to federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of human health and environment.

 

An increase in interest rates may cause the market price of our common units to decline.

 

Like all equity investments, an investment in our common units is subject to certain risks. In exchange for accepting these risks, investors may expect to receive a higher rate of return than would otherwise be obtainable from lower-risk investments. Accordingly, as interest rates rise, the ability of investors to obtain higher risk-adjusted rates of return by purchasing government-backed debt securities may cause a corresponding decline in demand for riskier investments generally, including yield-based equity investments such as publicly traded limited partnership interests. Reduced demand for our common units resulting from investors seeking other more favorable investment opportunities may cause the trading price of our common units to decline.

An impairment of goodwill could reduce our earnings.

 

In connection with this offering, our predecessor will contribute approximately $72.2 million of goodwill to us. Goodwill is recorded when the purchase price of a business exceeds the fair market value of the tangible and separately measurable intangible net assets. GAAP requires us to test goodwill for impairment on an annual basis or when events or circumstances occur indicating that goodwill might be impaired. Any event that causes a further reduction in demand for our services could result in a reduction of our estimates of future cash flows and growth rates in our business. These events could cause us to record impairments of goodwill. If we determine that any of our remaining balance of goodwill is impaired, we will be required to take an immediate charge to earnings with a corresponding reduction of partners’ equity and increase in balance sheet leverage as measured by debt to total capitalization.

 

If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately or prevent fraud, which would likely have a negative impact on the market price of our common units.

 

Prior to this offering, we have not been required to file reports with the SEC. Upon the completion of this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” We prepare our consolidated financial statements in accordance with GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports, prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future or to comply with our obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as “Section 404.” For example, Section 404 will require us, among other things, to annually review and report on, and our independent registered public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. We must comply with Section 404 for our fiscal year ending December 31, 2011. Any failure to develop, implement or maintain effective internal controls or to improve our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Given the difficulties inherent in the design and operation of internal controls over financial reporting, we can provide no assurance as to our, or our independent registered public accounting firm’s, conclusions about the effectiveness of our internal controls, and we may incur significant costs in our efforts to comply with Section 404. Ineffective internal controls will subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.

 

TETRA controls us and our general partner, which has sole responsibility for conducting our business and managing our operations. TETRA has conflicts of interest, which may permit it to favor its own interests to our unitholders’ detriment.

 

Following this offering, TETRA will own and control us and our general partner. Some of our general partner’s directors are directors of Compressco, a wholly owned subsidiary of TETRA, and a majority of our general partner’s executive officers is currently officers of Compressco. Therefore, conflicts of interest may arise between Compressco and its affiliates, including TETRA and our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include, among others, the following situations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Please read “Conflicts of Interest and Fiduciary Duties”.

 

Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed in a manner materially adverse to our unitholders without a vote of the holders of a majority of our common units. Compressco’s control of our general partner and of over a majority of our common units would also allow Compressco to modify or repeal our cash distribution policy in a manner materially adverse to our unitholders (for a more detailed discussion of our cash distribution policy, read “Our Cash Distribution Policy and Restrictions on Distributions’’).

Our reliance on TETRA for certain general and administrative support services and our limited ability to control certain costs could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders. Cost reimbursements due to our general partner and its affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce our cash available for distribution to our unitholders.

 

Pursuant to an omnibus agreement to be entered into between us and TETRA, TETRA will provide to us certain general and administrative services, including, without limitation, legal, accounting, treasury, insurance administration and claims processing and risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit and tax services. Our ability to execute our growth strategy will depend significantly upon TETRA’s performance of these services. Our reliance on TETRA could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders. Additionally, TETRA will receive reimbursement for the provision of various general and administrative services for our benefit. Our general partner will also be entitled to significant reimbursement for expenses it incurs on our behalf, including reimbursement for the cost of its employees who perform services for us. Payments for these services will be substantial and will reduce the amount of cash available for distribution to our unitholders. Please read “Certain Relationships and Related Party Transactions — Omnibus Agreement.” In addition, under Delaware partnership law, our general partner has unlimited liability for our obligations, such as our debts and environmental liabilities, except for our contractual obligations that are expressly made without recourse to our general partner. To the extent our general partner incurs obligations on our behalf, we are obligated to reimburse or indemnify it. If we are unable or unwilling to reimburse or indemnify our general partner, our general partner may take actions to cause us to make payments of these obligations and liabilities. Any such payments could reduce the amount of cash otherwise available for distribution to our unitholders.

 

Our partnership agreement limits our general partner’s fiduciary duties to holders of our common units and subordinated units and restricts the remedies available to holders of our common units and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement contains provisions that reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty laws. For example, our partnership agreement:

 

 

 

 

By purchasing a common unit, a common unitholder will agree to become bound by the provisions in the partnership agreement, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties.”

 

Our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of its board of directors or the holders of our common units. This could result in lower distributions to holders of our common units.

 

Our general partner has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. Following a reset election by our general partner, the minimum quarterly distribution will be adjusted to equal the reset minimum quarterly distribution and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution.

 

If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and will retain its then-current general partner interest. The number of common units to be issued to our general partner will equal the number of common units that would have entitled the holder to an average aggregate quarterly cash distribution in the prior two quarters equal to the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such reset. It is possible, however, that our general partner could exercise this reset election at a time when it is experiencing, or expects to experience, declines in the cash distributions it receives related to its incentive distribution rights and may, therefore, desire to be issued common units rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience a reduction in the amount of cash distributions that our common unitholders would have otherwise received had we not issued new common units to our general partner in connection with resetting the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels.”

 

Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.

 

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right to elect our general partner or its board of directors. The board of directors of our general partner will be chosen by its sole shareholder, Compressco, which, in turn, is a wholly owned subsidiary of and controlled by TETRA. Furthermore, if our unitholders are dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. Due to these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.

Even if holders of our common units are dissatisfied, they cannot initially remove our general partner without its consent.

 

Our unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates will own sufficient units upon completion of this offering to be able to prevent its removal. The vote of the holders of at least 662/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the completion of this offering, TETRA, which indirectly owns our general partner, will directly own 83.2% of our aggregate outstanding common and subordinated units (or 80.7% of our common and subordinated units, if the underwriters exercise their option to purchase additional common units in full), giving TETRA the ability to block any attempted removal of our general partner. In addition, if our general partner is removed without cause during the subordination period and no units held by the holders of the subordinated units or their affiliates are voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business.

 

We can issue an unlimited number of partnership units in the future, including units that are senior in right of distributions, liquidation and voting to the common units, without the approval of our unitholders, and our general partner may elect to cause us to issue common units to it in connection with a resetting of the target distribution levels related to its incentive distribution rights, without the approval of the conflicts committee of its board of directors or the holders of our common units, each of which would dilute our unitholders’ existing ownership interests.

 

Our partnership agreement does not limit the number of additional partnership units that we may issue at any time without the approval of our unitholders. In addition, we may issue an unlimited number of partnership units that are senior to the common units in right of distribution, liquidation or voting. Our general partner also has the right, at any time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48.0%) for each of the prior four consecutive fiscal quarters, to reset the initial target distribution levels at higher levels based on our distributions at the time of the exercise of the reset election. If our general partner elects to reset the target distribution levels, it will be entitled to receive a number of common units and will retain its then-current general partner interest. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

 

 

 

Control of our general partner may be transferred to a third party without unitholder consent.