Attached files

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EX-4.1 - EX-4.1 - Compressco Partners, L.P.h75396a3exv4w1.htm
EX-3.4 - EX-3.4 - Compressco Partners, L.P.h75396a3exv3w4.htm
EX-10.2 - EX-10.2 - Compressco Partners, L.P.h75396a3exv10w2.htm
EX-23.1 - EX-23.1 - Compressco Partners, L.P.h75396a3exv23w1.htm
EX-10.1 - EX-10.1 - Compressco Partners, L.P.h75396a3exv10w1.htm
EX-10.3 - EX-10.3 - Compressco Partners, L.P.h75396a3exv10w3.htm
EX-21.1 - EX-21.1 - Compressco Partners, L.P.h75396a3exv21w1.htm
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As filed with the Securities and Exchange Commission on April 12, 2011
Registration No. 333-155260
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Amendment No. 3
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)
 
         
Delaware   1389   94-3450907
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
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:
 
         
David P. Oelman
Jeffery K. Malonson
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
  Bass C. Wallace, Jr.
TETRA Technologies, Inc.
24955 Interstate 45 North
The Woodlands, Texas 77380
(281) 367-1983
  Laura Lanza Tyson
Baker Botts L.L.P.
98 San Jacinto Boulevard
Austin, Texas 78701
(512) 322-2500
 
 
 
     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):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o
(Do not check if a smaller reporting company)
 
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.
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
 
Subject to Completion dated April 12, 2011
PROSPECTUS
 
     2,500,000 Common Units
 
(COMPRESSCO PARTNERS LP)
 
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 have applied to list our common units on the NASDAQ Stock Market LLC under the symbol “GSJK.”
 
Investing in our common units involves risks. Please read “Risk Factors” beginning on page 20.
 
These risks include, but are not limited to, the following:
 
  •  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.
 
  •  We may be unable to achieve our expected growth and market penetration.
 
  •  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.
 
  •  Our general partner and its affiliates own a controlling interest in us and will have conflicts of interest with us. Our partnership agreement limits the fiduciary duties that our general partner owes to us, which may permit it to favor the interests of TETRA to our unitholders’ detriment and limits the circumstances under which our unitholders may make a claim relating to conflicts of interest, as well as the remedies available to our unitholders in that event.
 
  •  Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors.
 
  •  Our unitholders will experience immediate and substantial dilution of $12.18 in tangible net book value per common unit.
 
  •  Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of additional entity-level taxation by individual states or non-U.S. jurisdictions. If the Internal Revenue Service treats us as a corporation or we become subject to a material amount of entity-level taxation by individual states or by non-U.S. jurisdictions, it would substantially reduce the amount of cash available for distribution to our unitholders.
 
  •  Unitholders may be required to pay taxes on income from us even if they do not receive any cash distributions from us.
 
                 
    Per
   
    Common Unit   Total
 
Initial public offering price
  $           $        
Underwriting discount(1)
  $       $    
Proceeds to Compressco Partners, L.P. (before expenses)
  $       $  
 
 
(1) Excludes aggregate fees of $      million payable to Raymond James and J.P. Morgan in consideration of advice rendered by them regarding the structure of this offering and our partnership.
 
An aggregate of 6,222,257 common units will be issued to our general partner and its affiliates at the closing of this offering. We have also 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. If the underwriters exercise their option to purchase up to 375,000 additional common units within 30 days of this offering, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public instead of to our general partner. 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 will be used to make a distribution to our general partner.
 
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.
 
RAYMOND JAMES J.P. MORGAN
The date of this prospectus is          , 2011.


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    F-1  
    A-1  
 EX-3.4
 EX-4.1
 EX-10.1
 EX-10.2
 EX-10.3
 EX-21.1
 EX-23.1
 
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.


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This summary provides a brief overview of information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our common units. You should read the entire prospectus carefully, including the historical and pro forma financial statements and the notes to those financial statements included in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes an initial public offering price of $20.00 per common unit and that the underwriters’ option to purchase additional common units is not exercised. Please read “Risk Factors” for more information about important risks that you should consider carefully before buying our common units.
 
References in this prospectus to “Compressco Partners,” “we,” “our,” “us,” “the Partnership” or like terms refer to Compressco Partners, L.P. and its wholly owned subsidiaries, including Compressco Partners Operating, LLC and Compressco Partners Sub, Inc. References to “our Operating LLC” refer to Compressco Partners Operating LLC and its wholly owned subsidiaries and references to “our Operating Corp” refer to Compressco Partners Sub, Inc. References to “TETRA” refer to TETRA Technologies, Inc., or “TETRA,” and TETRA’s controlled subsidiaries, other than us. References to “Compressco” refer to Compressco, Inc., a wholly owned subsidiary of TETRA, and Compressco’s controlled subsidiaries, other than us. References to “Compressco Partners GP” or “our general partner” refer to our general partner, Compressco Partners GP Inc., a wholly owned subsidiary of Compressco. References to “compressor units” refer to our GasJack® units and our VJacktm units. References to “Compressco Partners Predecessor” or “our predecessor” refer to the predecessor of Compressco Partners for accounting purposes. As further described elsewhere in this prospectus, our predecessor consists of (1) all of the historical assets, liabilities and operations of Compressco, combined with (2) certain assets, liabilities and operations of the subsidiaries of TETRA conducting wellhead compression-based production enhancement services and related well monitoring and automated sand separation services in Mexico.
 
At or prior to the completion of this offering, TETRA will contribute to us a portion of our predecessor’s business, as further described in “Our Relationship with TETRA and Compressco.” All historical operations, results of operations, financial statements and notes to the financial statements presented throughout this prospectus reflect those of our predecessor and exclude the pro forma adjustments required to reflect the portion of our predecessor’s business that will not be contributed to us in connection with this offering. Because our operations will not represent the entirety of our predecessor’s business, and due to other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Items Impacting the Comparability of Our Financial Results,” certain total amounts that will be presented in our future results of operations may not be initially comparable to our predecessor’s historical results.
 
Compressco Partners
 
Overview
 
We are a leading provider of wellhead compression-based production enhancement services, or “production enhancement services,” to a broad base of natural gas and oil exploration and production companies operating throughout most of the onshore producing regions of the United States. 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. Our production enhancement services primarily consist of wellhead compression, related liquids separation, gas metering and vapor recovery services. In certain circumstances, we also provide ongoing well monitoring services and, in Mexico, automated sand separation services in connection with our primary production enhancement services. While our services are applied primarily to mature wells with low formation pressures, our services are also employed on newer wells that have experienced significant production declines or are characterized by lower formation pressures. Our services are performed by our highly trained staffs of regional service supervisors, optimization specialists and


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field mechanics. In addition, we design and manufacture the compressor units we use to provide our production enhancement services and, in certain markets, sell our compressor units to customers.
 
We believe that we provide a strong value proposition to our customers. Our production enhancement services improve the value of natural gas and oil wells by increasing daily production and total recoverable reserves. We primarily utilize our natural gas powered GasJack® compressors, or “GasJack® units,” to provide our wellhead compression services. In addition, we recently introduced our electric VJacktm compressors, or “VJacktm units,” to provide our wellhead compression services on wells located in larger, mature oil fields, such as the Permian Basin in West Texas and New Mexico, and in environmentally sensitive markets, such as California, when electric power is available at the production site. We believe that both of these compressor platforms provide a reliable, compact and low-emission package that is easy to transport and install on our customer’s well site.
 
GasJack® units and VJacktm units
 
We believe that our 46-horsepower GasJack® unit is more fuel-efficient, produces lower emissions, and handles variable liquid conditions encountered in natural gas and oil wells more effectively, than the higher horsepower screw and reciprocating compressors utilized by many of our competitors. Our compact GasJack® unit allows us to perform wellhead compression, liquids separation and optional gas metering services all from one skid, thereby providing services that otherwise would generally require the use of multiple, more costly pieces of equipment from our competitors. As of December 31, 2010, we had a fleet of 3,620 GasJack® units, 2,691 of which were being utilized.
 
We believe that our 40-horsepower VJacktm unit provides production uplift with zero engine-driven emissions and requires significantly less maintenance than a natural gas powered compressor. Our VJacktm unit is primarily designed for vapor recovery applications (to capture natural gas vapors emitting from closed storage tanks after production and to reduce storage tank pressures) and backside pumping applications on oil wells (to reduce pressures caused by casing head gas in oil wells with pumping units). Centered on GasJack® unit technology, the VJacktm unit is capable of full wellbore stream production, and can handle up to 50 barrels per day, or “bpd,” of liquids on a standard skid package. As of December 31, 2010, we had a fleet of 28 VJacktm units, 20 of which were being utilized under services contracts.
 
Our Services and Marketing
 
Our production enhancement services primarily consist of wellhead compression, related liquids separation, gas metering and vapor recovery services. Utilizing our ePumper® system, a state-of-the-art SCADA satellite telemetry-based reporting system, we remotely monitor, in real time, whether our wellhead compression services are being continuously provided at each well site. The ePumper® system has been instrumental in improving the response time of our field personnel and, consequently, reducing well downtime and increasing production for our customers. In certain circumstances, we also provide ongoing well monitoring services and, in Mexico, automated sand separation services in connection with our primary production enhancement services. Our well monitoring services involve the ongoing testing and evaluation of wells to determine the expected production uplift that may be achieved by the provision of our wellhead compression services on the well and the optimal way to utilize our wellhead compression services for maximum production uplift. These services allow well operators to make informed decisions about how to maximize the production from a well. Our automated sand separation services are utilized at the well to remove and discharge solids that would otherwise cause abrasive wear damage to production enhancement and other equipment that is installed downstream and inhibit the production from the well. We believe that the value, breadth and quality of services that we provide to natural gas and oil producers gives us an advantage over our competitors who primarily provide only equipment and maintenance services, without ongoing monitoring and modification services.
 
Central to our marketing efforts is our emphasis on performing well data analyses at our petroleum engineering office in Houston, Texas. Our engineering staff focuses on geologic basins with reservoir characteristics that are known to be responsive to our technology and analyzes publicly available production


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data to identify wells within those basins that we believe could benefit from our production enhancement services. We proactively market to producers in these basins and our marketing services range from a low cost two-week trial of our production enhancement services up to a comprehensive well-test project that allows our customers to confirm the effectiveness of our services prior to entering into a service contract. We believe this proactive strategy of performing well data analyses and approaching producers with targeted solutions increases our marketing and application success rates and further differentiates us from our competitors.
 
Trends and Growth Prospects
 
We believe that the natural gas and oil production enhancement services market continues to demonstrate significant domestic and international long-term growth potential. According to the abridged, early release Annual Energy Outlook 2011, or “Preliminary AEO 2011,” issued by the Energy Information Administration, or “EIA,” U.S. dry natural gas production is expected to increase by 22.4% from 2010 to 2035, driven primarily by the continued growth in production of shale gas. The EIA forecasts in the Preliminary AEO 2011 that natural gas production from onshore conventional resources will decline by 22.7% from 2010 to 2035, while production from unconventional natural gas resources will increase by 108.9% over this same period.
 
As a result of this expected shift in domestic natural gas supply sources, we believe that onshore conventional resources will increasingly be characterized by mature wells with marginal production that will benefit from our production enhancement services. Additionally, onshore unconventional wells are often characterized by more significant decline rates than typical conventional wells, which we believe will provide additional opportunities to employ our production enhancement services. We are currently providing our services on approximately 140 natural gas wells in the Fort Worth Basin and Barnett Shale, one of the largest unconventional natural gas resources in the United States.
 
We primarily target natural gas wells in our operating regions that produce between 30 thousand and 300 thousand cubic feet of natural gas per day, or “Mcf/d,” and, to maximize our compressor units’ ability to separate fluids effectively, we primarily target wells that produce less than 50 barrels of water per day. We also provide our services on wells that produce 50 to 150 barrels of water per day. According to the EIA, approximately 219,000 natural gas wells in the United States produced approximately 24 Mcf/d to 300 Mcf/d in 2009, an increase of approximately 22% of the number of such wells since 2004. We do not have a practical method of determining how many of these natural gas wells produce less than 50 barrels of water per day, so we cannot estimate with certainty how many of these wells could be primary candidates for our production enhancement services. With the rapid pace of drilling over the last several years, we believe that the number of wells with daily production within this 24 Mcf/d to 300 Mcf/d range described by the EIA has grown substantially since 2009, although not all of these wells will be candidates for our production enhancement services. We believe that our long-term growth opportunities are strong based on the small size of most of our competitors and the significant number of wells that may be candidates for our services. Along with increased domestic opportunities, we continue to experience strong demand for our services in gas producing regions of Canada and Mexico and growing demand for our services in certain countries in South America, Eastern Europe and the Asia-Pacific region.
 
Predecessor’s Growth and Historical Operating Results
 
Our predecessor’s business experienced substantial organic growth over the past eight fiscal years. Our predecessor’s revenues grew during that eight-year period from approximately $14.9 million during 2002 to approximately $81.4 million during 2010, representing a 446.3% increase. Our predecessor’s number of compressor units in service grew from 761 compressor units as of December 31, 2002 to 2,711 compressor units as of December 31, 2010, representing a 256.2% increase. This growth was generated entirely by organic expansion, with no acquisitions made during that eight-year period. For more detail on our predecessor’s operating results, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


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Production Enhancement Fundamentals
 
Demand for our production enhancement services is linked more to natural gas production and consumption than to natural gas exploration activities. 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. We do not take title to any natural gas in connection with our services and, accordingly, have no direct exposure to fluctuating commodity prices. 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. For a discussion of our indirect exposure to fluctuating natural gas prices, please read “Risk Factors — Risks Related to Our Business — 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.” The following chart illustrates the historical correlation between our predecessor’s revenues for the quarters shown and the trailing twelve-month average Henry Hub gas price during such quarters.
 
Predecessor Revenues and Trailing Twelve-Month Average Henry Hub Gas Price
 
(CHART)
 
                 
        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  
Fourth Quarter 2010
  $ 20.92     $ 4.37  
 
Gas price source: Platts Gas Daily reports


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We believe we will be able to continue growing our business by capitalizing on the following positive, long-term fundamentals that we believe exist for the production enhancement services industry:
 
  •  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 Preliminary 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.
 
Business Strategies
 
We intend to grow our business by implementing the following strategies:
 
  •  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.
 
Competitive Strengths
 
We believe that we are well positioned to successfully execute our business strategies for the following reasons:
 
  •  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
 
We are a Delaware limited partnership formed by TETRA and our general partner is an indirect, wholly owned subsidiary of TETRA. TETRA is a geographically diversified oil and gas services company focused on completion fluids and other products, production testing, wellhead compression and selected offshore services, including well plugging and abandonment, decommissioning and diving, with a concentrated domestic exploration and production business. Through Compressco and certain other subsidiaries of TETRA, TETRA provides wellhead compression-based and certain other production enhancement services to the natural gas and oil industry in the United States, Canada and Mexico and in certain countries in South America, Eastern


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Europe and the Asia-Pacific region. Compressco designs and manufactures the compressor units used to provide these production enhancement services and, in certain markets, Compressco sells compressor units to customers.
 
Following this offering, and as a result of the formation transactions that will occur in connection with this offering, TETRA will retain a significant economic interest in us through its indirect ownership of 6,597,257 common units (6,222,257 common units if the underwriters exercise their option to purchase additional common units in full) and 6,273,970 subordinated units, representing an aggregate 42.1% and 40.0% limited partner interest in us, respectively, and through its indirect ownership of our general partner, which will own a 2.0% general partner interest in us and receive incentive distribution rights. For more information about these formation transactions and TETRA’s retained economic interest in us, please read “Summary — Formation Transactions and Partnership Structure.” While we believe our relationship with TETRA provides many benefits to us, it may also be a source of conflicts. For example, neither TETRA nor its affiliates are prohibited from competing with us. TETRA and its affiliates may acquire, construct or dispose of assets in the future without any obligation to offer us the opportunity to purchase or construct those assets. Please read “Conflicts of Interest and Fiduciary Duties.” From time to time following the completion of this offering, TETRA may utilize our compressor units in connection with the production enhancement services it provides, and we expect to be appropriately compensated for any equipment or services we provide to TETRA for such use of our equipment, although we do not expect such transactions to be material going forward.
 
The Contributed Business
 
At or prior to the completion of this offering, TETRA will contribute to us substantially all of our predecessor’s business, operations and related assets and liabilities. Based on the business and related assets of our predecessor that we will receive in connection with this offering, our pro forma revenues represent approximately 99.4% of our predecessor’s revenues for the year ended December 31, 2010 and our pro forma assets, including the impact of the retained offering net proceeds, represent approximately 104.6% of our predecessor’s assets as of December 31, 2010. For more pro forma financial and operating information about the portion of our predecessor’s business that will be contributed to us in connection with this offering, please read “Selected Historical and Pro Forma Financial and Operating Data.”
 
Following TETRA’s contribution to us, a significant majority of our production enhancement services will be performed by our Operating LLC pursuant to contracts that our counsel has concluded will generate qualifying income under Section 7704 of the Internal Revenue Code, or “qualifying income.” We will not pay federal income taxes on the portion of our business conducted by Operating LLC. For a detailed discussion of Section 7704 of the Internal Revenue Code, please read “Material Tax Consequences — Partnership Status” and, for a summary of certain of the relevant terms of these contracts, please read “Business — Our Operations — Our Production Enhancement Services Contract Terms.” Our Operating Corp will conduct substantially all of our operations that our counsel has not concluded will generate qualifying income and it will pay federal income tax with respect to such operations. Approximately 73.8% of our pro forma revenues for the year ended December 31, 2010 is attributable to the portion of our operations that will be conducted by our Operating LLC, and approximately 26.2% of our pro forma revenues for the year December 31, 2010 is attributable to the portion of our operations that will be conducted by our Operating Corp. Going forward, we intend to conduct substantially all of our new production enhancement service business pursuant to contracts that our counsel concludes will generate qualifying income and such business will be conducted through our Operating LLC.
 
Following the completion of this offering, all of Compressco’s employees will become our or our general partner’s employees and will devote substantially all of their time to conducting our business. In addition, TETRA will provide certain employees of its Mexican subsidiaries to conduct our Mexican operations, as well as certain corporate staff and general and administrative support services that are necessary to conduct our operations, and we will reimburse TETRA for those employees and services. For more information about the employees that will conduct our business and operations, please read “Business — Our Operations — Employees” and “Certain Relationships and Related Party Transactions — Omnibus Agreement — Provision of Services Necessary to Operate Our Business.”


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Omnibus Agreement
 
Following this offering, our relationship with TETRA will be governed by an omnibus agreement. Pursuant to the omnibus agreement, we will reimburse TETRA and our general partner for services they provide to us. For the year ending December 31, 2011, we expect reimbursements to TETRA to be approximately $900,000.
 
TETRA will indemnify us against certain potential claims, losses and expenses associated with environmental, title and tax issues. For a further description of the omnibus agreement, please read “Certain Relationships and Related Party Transactions — Omnibus Agreement.”
 
Risk Factors
 
An investment in our common units involves risks associated with our business, our limited partnership structure and the tax characteristics of our common units. Please read carefully the risks under the caption “Risk Factors” beginning on page 20 of this prospectus.
 
Formation Transactions and Partnership Structure
 
At or prior to the completion of this offering, the following transactions will occur:
 
  •  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 affiliates of TETRA, including our general partner, 6,597,257 common units representing an aggregate 42.1% limited partner interest in us1, and 6,273,970 subordinated units representing an aggregate 40.0% limited partner interest in us;
 
  •  we will issue to our general partner 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 ($0.445625) 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 15.9% 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 net proceeds received from this offering, and the balance of the intercompany indebtedness will be repaid by our predecessor prior to this offering; and
 
 
1 An aggregate of 6,222,257 common units will be issued to our general partner and its affiliates at the closing of this offering and up to an aggregate of 375,000 common units will be issued to our general partner within 30 days of this offering. However, if the underwriters exercise their option to purchase up to 375,000 additional common units within 30 days of this offering, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public instead of to our general partner. The 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 our general partner.


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  •  the balance of the net proceeds received from this offering will be used as described in “Use of Proceeds.”
 
We will conduct our operations through our subsidiaries. We will initially have two direct operating subsidiaries: (1) Compressco Partners Operating, LLC, a limited liability company that will, directly and through its subsidiaries, conduct business that our counsel has concluded will generate qualifying income and (2) Compressco Partners Sub, Inc., a corporation that will conduct business that our counsel has not concluded will generate qualifying income. The diagram on the following page depicts our organization and ownership after giving effect to the formation transactions and the offering.


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Organizational Structure After the Formation Transactions and the Offering
 
Ownership of Compressco Partners, L.P. (1)
 
                 
Publicly held common units
    2,500,000       15.9 %
Common units held by affiliates of TETRA
    6,597,257       42.1 %
Subordinated units held by affiliates of TETRA
    6,273,970       40.0 %
General partner interest held by Compressco Partners GP
          2.0 %
                 
Total
    15,371,227       100.0 %
                 
 
 
(1) Assuming no exercise of the underwriters’ overallotment option.
 
(ORGANIZATIONAL STRUCTURE CHART)


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Management of Compressco Partners
 
We rely on our general partner’s board of directors and executive officers to manage our operations and make decisions on our behalf. Our general partner, Compressco Partners GP, is an indirect, wholly owned subsidiary of TETRA. Unlike shareholders in a publicly traded corporation, our unitholders will not be entitled to elect our general partner or its directors. All of our general partner’s directors will be elected by TETRA. For more information about our general partner’s board of directors, executive officers and other management, please read “Management of Compressco Partners — Directors, Executive Officers and Other Management.”
 
Our general partner will not receive any management fee in connection with its management of our business or this offering. Our general partner, however, may receive incentive distributions resulting from holding the incentive distribution rights. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — Distributions of Available Cash — General Partner Interest and Incentive Distribution Rights.” Under the terms of the omnibus agreement, our general partner and its affiliates will be reimbursed for all expenses incurred on our behalf, including the compensation of employees of our general partner or its affiliates that perform services on our behalf. Please read “Certain Relationships and Related Party Transactions — Omnibus Agreement — Provision of Services Necessary to Operate Our Business.” Our general partner will also be entitled to distributions from us, based on its general partner interest, to the extent we have available cash. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions” and “Certain Relationships and Related Party Transactions.”
 
Principal Executive Offices and Internet Address
 
Our principal executive offices are located at 101 Park Avenue, Suite 1200, Oklahoma City, Oklahoma 73102 and our telephone number is (405) 677-0221. Our website will be located at www.compresscopartners.com and will be activated in connection with the completion of this offering. We will make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
 
Summary of Conflicts of Interest and Fiduciary Duties
 
Conflicts of Interest.  Our general partner has a legal duty to manage us in a manner beneficial to our common and subordinated unitholders. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary duty.” However, because our general partner is indirectly owned by TETRA, the executive officers and directors of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to TETRA. As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, including TETRA, on the other hand. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, please read “Risk Factors — Risks Inherent in an Investment in Us.”
 
Partnership Agreement Modifications to Fiduciary Duties.  Our general partner and its affiliates own a controlling interest in us and will have conflicts of interest with us. Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to our unitholders, which may permit it to favor its own interests to our unitholders’ detriment. Our partnership agreement also restricts the remedies available to our unitholders for actions that might otherwise constitute a breach of our general partner’s fiduciary duties owed to our unitholders. By purchasing a common unit, the purchaser agrees to be bound by the terms of our partnership agreement and, pursuant to the terms of our partnership agreement, each unitholder consents to various actions contemplated in the partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable state law.
 
For a more detailed description of the conflicts of interest that may affect us and the fiduciary duties of our general partner and the relationships we have with our affiliates, please read “Management of Compressco Partners — Directors, Executive Officers and other Management,” “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties.”


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The Offering
 
Common units offered to the public
2,500,000 common units, representing a 15.9% 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 18.3% limited partner interest in us.
 
Common units and subordinated units outstanding after this offering
9,097,257 common units, representing a 58.0% limited partner interest in us, and 6,273,970 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.
 
General partner interest outstanding after this offering
Our general partner will own a 2.0% general partner interest in us.
 
Use of proceeds
We expect to receive net proceeds from this offering of approximately $41.4 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. The balance of the net proceeds (approximately $9.9 million) will be available for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. The following table summarizes our intended use of proceeds:
 
         
    Compressco
 
    Partners, L.P.  
    (in thousands)  
 
Gross proceeds from this offering (2,500,000 common units at $20.00 per unit)
  $ 50,000  
Less: Underwriting discount, structuring fees and offering expenses
    (8,575 )
         
Net proceeds from this offering
  $ 41,425  
Less: Repayment on intercompany indebtedness to TETRA
    (31,500 )
         
Balance of net proceeds from this offering available for general partnership purposes
  $ 9,925  
         


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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 our general partner.
 
Please read “Use of Proceeds” on page 43 of this prospectus.
 
Cash distributions We will pay the minimum quarterly distribution of $0.3875 per common unit ($1.55 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 June 30, 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 $0.3875 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 $0.3875; and
 
third, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unit has received a distribution of $0.445625.
 
If cash distributions to our unitholders exceed $0.445625 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 $0.445625 up to $0.484375
            85.0 %     15.0 %        
above $0.484375 up to $0.581250
            75.0 %     25.0 %        
above $0.581250
            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.”


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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 $24.3 million (or approximately $6.1 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 December 31, 2010, our pro forma cash available for distribution for the year ended December 31, 2010 would have been approximately $24.7 million. This amount 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 interest for the year ended December 31, 2010. For a calculation of our ability to make distributions to our unitholders based on our pro forma results for the year ended December 31, 2010, please read “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma Cash Available for Distribution for the Twelve Months Ended December 31, 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 June 30, 2012,” 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 interest for each quarter in the twelve months ending June 30, 2012. Please read “Cash Distribution Policy and Restrictions on Distributions — Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2012.”
 
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) $1.55 (the minimum quarterly distribution on an annualized basis) on each outstanding common and subordinated unit and the corresponding distribution on the general partner interest for each of three consecutive, non-overlapping four quarter periods ending on or after June 30, 2014 or (2) $2.325 (150.0% of the annualized minimum quarterly distribution) on each outstanding common and subordinated unit and the corresponding distributions on the general partner interest and the incentive distribution rights for the four-quarter period immediately preceding that date.


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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 the 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


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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 83.7% 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 $1.55 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 have applied to list our common units on the NASDAQ Stock Market LLC under the symbol “GSJK.”


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Selected Historical and Pro Forma Financial and Operating Data
 
At or prior to the completion of this offering, TETRA will contribute to us a portion of our predecessor’s business, as further described in “Summary — Our Relationship with TETRA and Compressco.” Based on the business and assets of our predecessor that we will receive in connection with this offering, our pro forma revenues represent approximately 99.4% of our predecessor’s revenues for the year ended December 31, 2010 and our pro forma assets, including the impact of the retained offering net proceeds, represent approximately 104.6% of our predecessor’s assets as of December 31, 2010. All historical operations, results of operations, financial statements and notes to the financial statements presented throughout this prospectus reflect those of our predecessor and exclude the pro forma adjustments required to reflect the portion of our predecessor’s business that will not be contributed to us in connection with this offering. Because our operations will not represent the entirety of our predecessor’s business, and due to other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Items Impacting the Comparability of Our Financial Results,” certain total amounts that will be presented in our future results of operations may not be initially comparable to our predecessor’s historical results.
 
The table on the following page shows selected historical combined financial and operating data of our predecessor and pro forma financial and operating data of Compressco Partners for the periods and as of the dates presented. The selected historical financial data as of December 31, 2010, 2009, 2008 and 2007, as well as the selected historical financial data for the four-year period ended December 31, 2010, have been derived from the audited combined financial statements of our predecessor. The selected historical financial data as of December 31, 2006, as well as the selected historical financial data for the year ended December 31, 2006, have been derived from the unaudited combined financial statements of our predecessor. The selected pro forma financial data for the year ended December 31, 2010 are derived from the unaudited pro forma financial statements of Compressco Partners included elsewhere in this prospectus.
 
The pro forma financial statements have been prepared as if certain transactions to be effected at the completion of this offering had taken place on December 31, 2010, in the case of the pro forma balance sheet, or as of January 1, 2010, in the case of the pro forma statement of operations for the year ended December 31, 2010. These transactions include:
 
  •  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, a 2.0% general partner interest 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.”
 
We derived the information in the following table from, and that information should be read together with, and is qualified in its entirety by reference to, the historical combined and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. The table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma financial statements and accompanying notes included elsewhere in this prospectus.
 
The following table includes the non-GAAP financial measure of EBITDA. We define EBITDA as earnings before interest, taxes, depreciation and amortization. For a reconciliation of EBITDA to its most


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directly comparable financial measures calculated and presented in accordance with Generally Accepted Accounting Principles, or “GAAP,” please read “Summary — Non-GAAP Financial Measures.”
 
Selected Historical and Pro Forma Financial and Operating Data
 
                                                     
                                      Compressco
 
            Partners  
            Pro Forma Year
 
    Compressco Partners Predecessor       Ended
 
    Year Ended December 31,       December 31,  
    2006       2007     2008     2009     2010       2010  
    (unaudited)
      (dollars in thousands)       (unaudited)
 
    (dollars in
              (dollars in
 
    thousands)               thousands,
 
                    except per unit
 
                    amounts)  
Statement of Operations Data:
                                                   
Revenue
  $ 67,133       $ 85,985     $ 99,944     $ 90,573     $ 81,412       $ 80,932  
Cost of revenue
    30,265         38,179       44,189       40,959       37,977         37,759  
Selling, general and administrative expenses
    10,612         12,964       14,352       13,193       14,328         14,295  
Depreciation and amortization expense
    6,436         9,433       12,112       13,823       13,112         13,070  
Interest expense
    9,250         10,083       10,990       11,980       13,096         38  
Other (income) expense, net
    59         (31 )     174       (82 )     113         113  
                                                     
Income before income tax provision
    10,511         15,357       18,127       10,700       2,786         15,657  
Provision for income taxes
    4,100         5,803       6,846       4,161       1,169         1,705  
                                                     
Net income
  $ 6,411       $ 9,554     $ 11,281     $ 6,539     $ 1,617       $ 13,952  
                                                     
General partner interest in net income
                                              $ 279  
Common unitholders’ interest in net income
                                              $ 8,092  
Subordinated unitholders’ interest in net income
                                              $ 5,581  
Net income per common unit (basic and diluted)
                                              $ 0.89  
Balance Sheet Data (at Period End):
                                                   
Working capital(1)
  $ 19,761       $ 27,565     $ 31,308     $ 32,983     $ 28,943            
Total assets
  $ 163,981       $ 186,675     $ 212,167     $ 202,497     $ 196,566            
Partners’ capital/net parent equity
  $ 40,048       $ 48,713     $ 56,792     $ 33,900     $ 25,953            
Other Financial Data:
                                                   
EBITDA(2)
  $ 26,197       $ 34,873     $ 41,229     $ 36,503     $ 28,994       $ 28,765  
Capital expenditures(3)
  $ 25,917       $ 23,929     $ 33,036     $ 2,997     $ 8,715            
Cash flows provided by (used in):
                                                   
Operating activities
  $ 12,251       $ 15,737     $ 25,569     $ 23,936     $ 20,391            
Investing activities
  $ (25,862 )     $ (23,930 )   $ (32,997 )   $ (2,882 )   $ (8,613 )          
Financing activities
  $ 14,378       $ 7,991     $ 7,607     $ (17,854 )   $ (9,735 )          
Operating Data:
                                                   
Total compressor units in fleet (at period end)
    2,595         3,108       3,603       3,627       3,647            
Total compressor units in service (at period end)
    2,297         2,763       3,064       2,660       2,711            
Average number of compressor units in service (during period)(4)
    2,054         2,530       2,913       2,862       2,686            
Average compressor unit utilization (during period)(5)
    89.6 %       88.7 %     86.8 %     79.2 %     73.8 %          
 
 
(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.


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(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.
 
The unaudited pro forma financial information should not be considered as indicative of (i) the historical results we would have generated if we had been formed at the beginning of each respective pro forma period or (ii) the results we will actually achieve after this offering.
 
Non-GAAP Financial Measures
 
We include in this prospectus the non-GAAP financial measure of EBITDA. We define EBITDA as earnings before interest, taxes, depreciation and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to assess:
 
  •  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 and our general partner.
 
We believe disclosure of EBITDA provides useful information to investors because, when viewed with our GAAP results and the accompanying reconciliations, it provides a more complete understanding of our performance than GAAP results alone. We also believe that investors benefit from having access to the same financial measures that management uses in evaluating the results of our business. When using this measure to compare to other companies, which we believe can be a useful tool to evaluate us, please note that EBITDA may be calculated differently between companies. We cannot ensure that this non-GAAP financial measure is directly comparable to other companies’ similarly titled measures.
 
EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP.
 
The following table reconciles net income to EBITDA:
 
                                                   
                                    Compressco
 
                                    Partners
 
            Pro Forma  
    Compressco Partners Predecessor       Year Ended
 
    Year Ended December 31,       December 31,  
    2006     2007     2008     2009     2010       2010  
    (In thousands)       (In thousands)  
Net Income
  $ 6,411     $ 9,554     $ 11,281     $ 6,539     $ 1,617       $ 13,952  
Provision for income taxes
    4,100       5,803       6,846       4,161       1,169         1,705  
Depreciation and amortization
    6,436       9,433       12,112       13,823       13,112         13,070  
Interest
    9,250       10,083       10,990       11,980       13,096         38  
                                                   
EBITDA
  $ 26,197     $ 34,873     $ 41,229     $ 36,503     $ 28,994       $ 28,765  
                                                   


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The following table reconciles cash flow from operating activities to EBITDA:
 
                                         
    Compressco Partners Predecessor  
    Year Ended December 31,  
    2006     2007     2008     2009     2010  
    (In thousands)  
 
Cash flow from operating activities
  $ 12,251     $ 15,737     $ 25,569     $ 23,936     $ 20,391  
Changes in current assets and current liabilities
    3,963       6,951       5,029       (1,217 )     (5,834 )
Deferred income taxes
    (2,825 )     (2,828 )     (6,281 )     (1,243 )     895  
Other non-cash charges
    (542 )     (873 )     (924 )     (1,114 )     (723 )
Interest expense
    9,250       10,083       10,990       11,980       13,096  
Provision for income taxes
    4,100       5,803       6,846       4,161       1,169  
                                         
EBITDA
  $ 26,197     $ 34,873     $ 41,229     $ 36,503     $ 28,994  
                                         


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RISK FACTORS
 
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 interest, the trading price of our common units could decline and our unitholders could lose all or part of their investment.
 
Risks Related to Our Business
 
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 $0.3875 per common unit per quarter, or $1.55 per common unit per year, we will require available cash of approximately $6.1 million per quarter, or approximately $24.3 million per year, based on the common units, subordinated units and the general partner interest 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:
 
  •  the level of capital expenditures we make;
 
  •  the cost of achieving organic growth in current and new markets;
 
  •  the cost of any acquisitions;
 
  •  fluctuations in our working capital requirements;
 
  •  our ability to borrow funds and access capital markets;
 
  •  the amount of cash reserves established by our general partner;
 
  •  the fees we charge and the margins we realize from our production enhancement services operations;
 
  •  the level of our operating costs and expenses;
 
  •  the prices of, levels of production of, and demand for, natural gas;
 
  •  the level of competition from other companies;
 
  •  the impact of prevailing economic conditions on our customer’s operating budgets; and
 
  •  any future debt service requirements and other liabilities.
 
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.”


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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 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 June 30, 2012 and thereafter.
 
We expect to achieve material revenue growth in future periods. For the twelve months ended June 30, 2012, we are assuming revenue growth of approximately 15.8% from revenue achieved for the twelve months ended December 31, 2010. Our future growth will depend upon a number of factors, some of which we cannot control. These factors include our ability to:
 
  •  attract new customers;
 
  •  maintain our existing customers and maintain or expand the level of production enhancement services we provide to them;
 
  •  recruit and train qualified field services personnel and retain valued employees;
 
  •  increase the scale of our compressor unit manufacturing operations;
 
  •  allocate our human resources optimally;
 
  •  consummate accretive acquisitions;
 
  •  expand our domestic and international presence; and
 
  •  obtain required financing for our future operations.
 
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 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 March 31, 2011 was $4.31 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


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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:
 
  •  government controls and actions, such as expropriation of assets and changes in legal and regulatory environments;
 
  •  import and export license requirements;
 
  •  political, social, or economic instability;
 
  •  trade restrictions;
 
  •  changes in tariffs and taxes;
 
  •  restrictions on repatriating foreign profits back to the United States; and
 
  •  the impact of anti-corruption laws.
 
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.


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Escalating security disruptions in regions of Mexico served by us could adversely affect our Mexican operations and, as a result, the levels of revenue and operating cash flow from our Mexican operations could be reduced.
 
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


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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 35.9% of our pro forma 2010 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 35.9% of our pro forma 2010 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 year ended December 31, 2010, were BP, Pemex, Devon Energy Corporation, EXCO Resources, and Conoco Phillips. These five customers accounted for approximately 14.2%, 11.7%, 4.2%, 3.4% and 2.4% of our pro forma revenues for the year ended December 31, 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.
 
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. Our existing contracts with Pemex are two years in duration and, when these contracts with Pemex expire, we may be required to participate in an 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.
 
Under the recently enacted 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 an 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.
 
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


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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.
 
The majority of our business in Mexico is performed for Petróleos Mexicanos (“Pemex”) and, due to our dependence on Pemex as our primary customer, any cutbacks by the Mexican Government on Pemex’s annual spending budget could adversely affect our business, financial condition, results of operations and cash flows.
 
The majority of our business in Mexico is performed for Pemex. For the year ended December 31, 2010, Pemex accounted for approximately 11.7% 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, thus, its ability to engage us or compensate us for our services and, as a result, our business, financial condition, results of operations and cash flows.
 
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.


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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. The balance of the net proceeds of this offering (approximately $9.9 million) will be available for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. 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.


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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, or “GHGs” 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 GHGs under existing provisions of the federal Clean Air Act, or “CAA.” Based on these findings, the EPA has begun adopting and implementing regulations to restrict emissions of GHGs under existing provisions of the CAA. The EPA recently adopted two sets of rules that became effective January 2, 2011 that regulate GHG emissions under the CAA, one of which requires a reduction in emissions of GHGs from motor vehicles and the other of which regulates emissions of GHGs from certain large stationary sources. The EPA has also adopted rules requiring the reporting, on an annual basis, beginning in 2011, of GHG emissions from specified large GHG emission sources in the United States,


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including petroleum refineries, for emissions occurring after January 1, 2010, as well as certain oil and gas production facilities, on an annual basis, beginning in 2012 for emissions occurring in 2011.
 
The adoption and implementation of any regulations imposing reporting obligations on, or limiting emissions of GHGs from, our equipment and operations could require us to incur costs to reduce emissions of GHGs 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 GHGs 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 GHGs 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.


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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 may be required 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.
 
We are exposed to fluctuations in the value of the Mexican peso. A material increase in the value of the Mexican peso relative to the U.S. dollar would adversely affect our cash flows and net income.
 
Most of our billings under the contracts with Pemex and other clients in Mexico are in U.S. dollars; however a large portion of our expenses and costs under those contracts are incurred in Mexican pesos. As such, we are exposed to fluctuations in the value of the Mexican peso against the U.S. dollar. A material increase in the value of the Mexican peso relative to the U.S. dollar would adversely affect our cash flows and net income.
 
Our operations in Mexico are party to fourteen collective labor agreements and a prolonged work stoppage of our operations in Mexico could adversely impact 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 consists of “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


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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 adversely impact our revenues, cash flows and net income.
 
Risks Inherent in an Investment in Us
 
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:
 
  •  neither our partnership agreement nor any other agreement requires TETRA or Compressco to pursue a business strategy that favors us. Compressco’s directors and officers have a fiduciary duty to make these decisions in the best interests of TETRA, the owner of Compressco, which may be contrary to our interests;
 
  •  our general partner controls the interpretation and enforcement of contractual obligations between us and our affiliates, on the one hand, and TETRA, on the other hand, including provisions governing administrative services, acquisitions and non-competition provisions;
 
  •  our general partner is allowed to take into account the interests of parties other than us, including TETRA and its affiliates, in resolving conflicts of interest;
 
  •  our general partner has limited its liability and reduced its fiduciary duties to our unitholders and us, and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty;
 
  •  our general partner determines the amount and timing of any capital expenditures and whether a capital expenditure is a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure, which does not reduce operating surplus, and this determination can affect the amount of cash that is distributed to our unitholders, which, in turn, may affect the ability of the subordinated units to convert. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordination Period”;
 
  •  our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;
 
  •  our partnership agreement permits us to distribute up to $15 million as operating surplus, even if it is generated from asset sales, non-working capital borrowings or other sources that would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units or the incentive distribution rights;
 
  •  our general partner determines which costs incurred by it and its affiliates are reimbursable by us and TETRA and will determine the allocation of shared overhead expenses;
 
  •  our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;
 
  •  our general partner intends to limit its liability regarding our contractual and other obligations and, in some circumstances, is entitled to be indemnified by us;


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  •  our general partner may exercise its limited right to call and purchase common units if it and its affiliates own more than 90% of the common units;
 
  •  our general partner decides whether to retain separate counsel, accountants or others to perform services for us; 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 our general partner’s incentive distribution rights without the approval of the conflicts committee of the board of directors of our general partner or the unitholders. This election may result in lower distributions to the common unitholders in certain 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:
 
  •  permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to consider any interest of, or factors affecting,


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  us, our affiliates or any limited partner. Examples include the exercise of its limited call right, the exercise of its rights to transfer or vote the partnership units it owns, the exercise of its registration rights and its determination whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement;
 
  •  provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decision was in the best interests of our partnership;
 
  •  generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner acting in good faith and not involving a vote of our unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or must be “fair and reasonable” to us, as determined by our general partner in good faith and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us;
 
  •  provides that our general partner and its executive officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
 
  •  provides that in resolving conflicts of interest, it will be presumed that in making its decision our general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
 
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


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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 83.7% of our aggregate outstanding common and subordinated units (or 81.3% 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.


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The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
 
  •  our previously existing unitholders’ proportionate ownership interests in us will decrease;
 
  •  the amount of cash available for distribution on each common unit may decrease;
 
  •  because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;
 
  •  the ratio of taxable income to distributions may increase;
 
  •  the relative voting strength of each previously outstanding common unit may be diminished; and
 
  •  the market price of the common units may decline.
 
Control of our general partner may be transferred to a third party without unitholder consent.
 
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of our unitholders. Furthermore, our partnership agreement does not restrict the ability of Compressco, the owner of our general partner, from transferring all or a portion of its ownership interest in our general partner to a third party. The new owners of our general partner would then be in a position to replace the board of directors and executive officers of our general partner with its own choices and thereby influence the decisions taken by the board of directors and executive officers.
 
Our unitholders will experience immediate and substantial dilution of $12.18 in tangible net book value per common unit.
 
The assumed initial public offering price of $20.00 per common unit exceeds our pro forma net tangible book value of $7.82 per common unit. Based on the assumed initial public offering price of $20.00 per common unit, our unitholders will incur immediate and substantial dilution of $12.18 per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded in accordance with GAAP at their historical cost, and not their fair value. Please read “Dilution.”
 
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units, other than our general partner and its affiliates, including TETRA. Accordingly, such unitholders’ voting rights may be limited.
 
Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any partnership units held by a person that owns 20% or more of any class of partnership units then outstanding, other than our general partner, its affiliates, including TETRA, its transferees and persons who acquired such partnership units with the prior approval of the board of directors of our general partner, cannot vote on any matter. Our partnership agreement also contains provisions limiting the ability of our unitholders to call meetings or to acquire information about our operations, as well as other provisions.
 
Affiliates of our general partner may sell common units in the public markets, which sales could have an adverse impact on the trading price of the common units.
 
After this offering, we will have 9,097,257 common units and 6,273,970 subordinated units outstanding, which include the 2,500,000 common units we are selling in this offering that may be resold in the public market immediately. All of the subordinated units will convert into common units on a one-for-one basis at the end of the subordination period. All of the 6,597,257 common units (6,222,257 common units if the underwriters exercise their option to purchase additional common units in full) that are issued to affiliates of TETRA will be subject to resale restrictions under a 180-day lock-up agreement with the underwriters. Each of the lock-up agreements with the underwriters may be waived in the discretion of certain of the underwriters. Sales by affiliates of TETRA or other large holders of a substantial number of our common units in the public markets following this offering, or the perception that such sales might occur, could have a


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material adverse effect on the price of our common units or could impair our ability to obtain capital through an offering of equity securities. Under our agreement, our general partner and its affiliates have registration rights relating to the offer and sale of any units that they hold, subject to certain limitations. Please read “Units Eligible for Future Sale.”
 
Our general partner has a limited call right that may require our unitholders to sell common units at an undesirable time or price.
 
If at any time our general partner and its affiliates own more than 90% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than the then-current market price. As a result, our unitholders may be required to sell common units at an undesirable time or price and may not receive any return on their investment. Our unitholders may also incur a tax liability upon a sale of common units. At the completion of this offering, our general partner and its affiliates will own an aggregate of 83.7% of our common and subordinated units (assuming the underwriters do not exercise their option to purchase additional common units). At the end of the subordination period, assuming no additional issuances of units (other than upon the conversion of the subordinated units), our general partner and its affiliates will own 83.7% of our common units. For additional information about this right, please read “The Partnership Agreement — Limited Call Right.”
 
Our unitholders’ liability may not be limited if a court finds that unitholder action constitutes control of our business.
 
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner. Our partnership is organized under Delaware law and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. Our unitholders could be liable for any and all of our obligations as if they were a general partner if:
 
  •  a court or government agency determined that we were conducting business in a state but had not complied with that particular state’s partnership statute; or
 
  •  our unitholders’ right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitutes “control” of our business.
 
For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement — Limited Liability.”
 
Our unitholders may have liability to repay distributions that were wrongfully distributed to them.
 
Under certain circumstances, our unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners because of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.


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While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended.
 
While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by affiliates of TETRA) after the subordination period has ended. At the closing of this offering, TETRA and its affiliates will own an aggregate of 83.7% of our common and subordinated units (assuming the underwriters do not exercise their option to purchase additional common units). Please read “The Partnership Agreement — Amendment of the Partnership Agreement.”
 
There is no existing market for our common units, and a trading market that will provide our unitholders with adequate liquidity may not develop. The price of our common units may fluctuate significantly, and our unitholders could lose all or part of their investment.
 
Prior to this offering, there has been no public market for the common units. After this offering, there will be publicly traded common units, assuming the underwriters’ over-allotment option is not exercised. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. Our unitholders may not be able to resell common units at or above the initial public offering price. Additionally, the lack of liquidity may contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
 
The initial public offering price for the common units will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of the market price of the common units that will prevail in the trading market. The market price of our common units may decline below the initial public offering price. The market price of our common units may also be influenced by many factors, some of which are beyond our control, including:
 
  •  the level of our distributions and our earnings or those of other companies in our industry;
 
  •  announcements by us or our competitors of significant contracts, acquisitions or other business developments;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  general economic conditions;
 
  •  the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts; and
 
  •  the other factors described in these “Risk Factors.”
 
We will incur increased costs as a result of being a publicly traded company.
 
We have no history operating as a publicly traded company. As a publicly traded company, we will incur additional selling, general and administrative and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NASDAQ Stock Market LLC, has required changes in corporate governance practices of publicly traded companies. We expect these rules and regulations to increase our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly traded company, we are required to prepare audited financial statements, comply with periodic filing requirements, have at least three independent directors, create additional board committees and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In addition, we will incur additional costs associated with our publicly traded company reporting requirements, including those related to financial audit services and Schedule K-1 preparation and distribution. We have included


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$2.0 million of estimated incremental costs per year associated with being a publicly traded limited partnership for purposes of our estimate of our cash available for distribution for the twelve months ending June 30, 2012 included elsewhere in this prospectus; however, it is possible that our actual incremental costs of being a publicly traded company will be higher than we currently estimate.
 
We are exempt from certain corporate governance requirements that provide additional protection to stockholders of other public companies.
 
Companies listed on the NASDAQ Stock Market LLC are required to meet the high standards of corporate governance, as set forth in the NASDAQ Listing Rules. These requirements generally do not apply to limited partnerships or to a “controlled company,” within the meaning of the NASDAQ Stock Market LLC rules. We are a limited partnership and will be a “controlled company,” within the meaning of the NASDAQ Stock Market LLC rules, and, as a result, we will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other public companies.
 
Tax Risks to Common Unitholders
 
In addition to reading the following risk factors, please read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.
 
Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes. If the IRS were to treat us as a corporation for U.S. federal income tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
 
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service, or IRS, on this or any other tax matter affecting us.
 
Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. Although we do not believe based upon our current operations that we are so treated, a change in our business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
 
If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on all of our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay additional state and local income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
 
We have a subsidiary that is treated as a corporation for U.S. federal income tax purposes and is subject to corporate-level income taxes.
 
We conduct a portion of our operations through a subsidiary that is organized as a corporation for U.S. federal income tax purposes. We may elect to conduct additional operations through this corporate subsidiary in the future. This corporate subsidiary is subject to U.S. corporate-level tax, which will reduce the cash available for distribution to us and, in turn, to our unitholders. If the IRS were to successfully assert that this corporation has more tax liability than we anticipate or legislation were enacted that increased the corporate tax rate, our cash available for distribution to our unitholders would be further reduced.


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The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
 
Current law may change to cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subjecting us to entity-level taxation. Specifically, the present federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, members of Congress have recently considered substantive changes to the existing federal income tax laws that affect publicly traded partnerships. Any modification to the federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. Although the considered legislation would not have appeared to affect our treatment as a partnership, we are unable to predict whether any of these changes, or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.
 
If we were subjected to a material amount of additional entity-level taxation by individual states, it would reduce our cash available for distribution to our unitholders.
 
Changes in current state law may subject us to additional entity-level taxation by individual states. Because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. For example, we will be required to pay Texas franchise tax each year at a maximum effective rate of 0.7% of our gross income apportioned to Texas in the prior year. Imposition of any such taxes may substantially reduce the cash available for distribution to our unitholders.
 
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to additional amounts of entity-level taxation, the minimum quarterly distribution amount and the target distribution amounts may be adjusted to reflect the impact of that law on us.
 
Although we are not subject to U.S. federal income tax other than with respect to our operating subsidiary that is treated as a corporation for federal income tax purposes, we will be subject to certain non-U.S. taxes. If a taxing authority were to successfully assert that we have more tax liability than we anticipate or legislation were enacted that increased the taxes to which we are subject, our cash available for distribution to you could be further reduced.
 
Approximately 23.1% of our pro forma revenues for the year ended December 31, 2010 was generated in non-U.S. jurisdictions, primarily Mexico, Canada, and Argentina. This percentage of non-U.S. revenues is expected to increase in the future, as we seek to grow our operations in these countries and expand our operations into additional non-U.S. locations. Our non-U.S. operations and subsidiaries will be subject to income, withholding and other taxes in the non-U.S. jurisdictions in which they are organized or from which they receive income, reducing the amount of cash available for distribution. In computing our tax obligation in these non-U.S. jurisdictions, we are required to take various tax accounting and reporting positions on matters that are not entirely free from doubt and for which we have not received rulings from the governing tax authorities, such as whether withholding taxes will be reduced by the application of certain tax treaties. Upon review of these positions the applicable authorities may not agree with our positions. A successful challenge by a tax authority could result in additional tax being imposed on us, reducing the cash available for distribution to you. In addition, changes in our operations or ownership could result in higher than anticipated tax being imposed in jurisdictions in which we are organized or from which we receive income and further reduce the cash available for distribution. Although these taxes may be properly characterized as foreign income taxes, you may not be able to credit them against your liability for U.S. federal income taxes on your share of our earnings. For more details, please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Foreign Tax Credits.” In addition, our operations in countries in which we operate now or in the future may involve risks associated with the legal structure used, and the taxation on assets transferred into a particular country. Tax laws of non-U.S. jurisdictions are subject to potential legislative, judicial or


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administrative changes and differing interpretations, possibly on a retroactive basis. Any such changes may result in additional taxes above the amounts we currently anticipate and further reduce our cash available for distribution to you.
 
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
 
We have not requested a ruling from the IRS with respect to our treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.
 
Unitholders’ share of our income will be taxable for U.S. federal income tax purposes even if they do not receive any cash distributions from us.
 
Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to it, which may require the payment of U.S. federal income taxes and, in some cases, state and local income taxes on their share of our taxable income even if they receive no cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
 
Tax gain or loss on the disposition of our common units could be more or less than expected.
 
If our unitholders sell common units, they will recognize a gain or loss for federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in that common unit, the amount, if any, of such prior excess distributions with respect to the units our unitholders sell will, in effect, become taxable income to our unitholders if they sell such units at a price greater than their tax basis in those units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if our unitholders sell their units, they may incur a tax liability in excess of the amount of cash the unitholders receive from the sale. Please read “Material Tax Consequences — Disposition of Common Units — Recognition of Gain or Loss” for a further discussion of the foregoing.
 
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
 
Investment in common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share


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of our taxable income. If a unitholder is a tax-exempt entity or a non-U.S. person, it should consult a tax advisor before investing in our common units.
 
We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
 
Due to a number of factors, including our inability to match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. Our counsel is unable to opine as to the validity of such filing positions. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to our unitholders’ tax returns. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.
 
We will prorate our items of income, gain, loss and deduction, for U.S. federal income tax purposes, between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
 
We will prorate our items of income, gain, loss and deduction, for U.S. federal income tax purposes, between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge our proration method or new Treasury Regulations were issued, we may be required to change our allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees.”
 
A unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of those units. If so, he would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
 
Because a unitholder whose units are loaned to a “short seller” to cover a short sale of units may be considered as having disposed of the loaned units, he may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Vinson & Elkins L.L.P. has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units; therefore, unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their units.


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We will adopt certain valuation methodologies, for U.S. federal income tax purposes, that may result in a shift of income, gain, loss and deduction between our general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
 
When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and our general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of taxable income, gain, loss and deduction between our general partner and certain of our unitholders.
 
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of taxable gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
 
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for U.S. federal income tax purposes.
 
We will be considered to have technically terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same unit will be counted only once. While we would continue our existence as a Delaware limited partnership, our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1) for one fiscal year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. A technical termination would not affect our classification as a partnership for U.S. federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a technical termination occurred. The IRS has recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership will be required to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.
 
Unitholders will likely be subject to non-U.S., state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.
 
In addition to U.S. federal income taxes, unitholders will likely be subject to other taxes, including non-U.S., state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or control property now or in the future, even if they do not live in any of those jurisdictions. Unitholders will likely be required to file non-U.S., state and local income tax returns and pay non-U.S., state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. In the United States, we will initially own assets and conduct business in Arkansas, California, Colorado, Kansas, Louisiana, Mississippi, Montana, New Mexico, Oklahoma, Pennsylvania, Texas, Utah, West Virginia and Wyoming. Each of these states, other than Texas and Wyoming, currently imposes a personal income tax on individuals. In addition, most of these states also impose an income tax on corporations and other entities. As we make acquisitions or expand our business, we may own or control assets or conduct business in additional jurisdictions that impose a personal income tax.


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Unitholders may be subject to tax in one or more non-U.S. jurisdictions, including Canada, Mexico and Argentina, as a result of owning our common units if, under the laws of any such country, we are considered to be carrying on business there. If unitholders are subject to tax in any such country, they may be required to file a tax return with, and pay taxes to, that country based on their allocable share of our income. We may be required to reduce distributions to unitholders on account of any withholding obligations imposed upon us by that country in respect of such allocation to the unitholders. In addition, the United States may not allow a tax credit for any foreign income taxes that unitholders directly or indirectly incur.
 
It is the responsibility of each unitholder to file all U.S. federal, state and local tax returns and non-U.S. tax returns. Vinson & Elkins L.L.P. has not rendered an opinion on the non-U.S., state or local tax consequences of an investment in our common units.
 
 
The risks described in this prospectus are not the only risks facing the Partnership. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or financial results.


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USE OF PROCEEDS
 
We expect to receive net proceeds from this offering of approximately $41.4 million, after deducting the underwriting discount, structuring fees and offering expenses. Our estimate assumes an initial public offering price of $20.00 per common unit. An increase or decrease in the initial public offering price of $1.00 per common unit would cause the net proceeds from the offering, after deducting the underwriting discount, structuring fees and offering expenses payable by us, to increase or decrease by approximately $2.3 million.
 
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. The balance of the net proceeds of this offering (approximately $9.9 million) will be available for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. The indebtedness to TETRA bears interest at a rate of 7.5% and matures on December 31, 2020.
 
The following table summarizes our intended use of proceeds:
 
         
    Compressco
 
    Partners, L.P.  
    (in thousands)  
 
Gross proceeds from this offering (2,500,000 common units at $20.00 per unit)
  $ 50,000  
Less: Underwriting discount, structuring fees and offering expenses
    (8,575 )
         
Net proceeds from this offering
  $ 41,425  
Less: Repayment on intercompany indebtedness to TETRA
    (31,500 )
         
Balance of net proceeds from this offering available for general partnership purposes
  $ 9,925  
         
 
An aggregate of 6,222,257 common units will be issued to our general partner and its affiliates at the closing of this offering and up to an aggregate of 375,000 common units will be issued to our general partner within 30 days of this offering. However, if the underwriters exercise their option to purchase up to 375,000 additional common units within 30 days of this offering, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public instead of to our general partner. The 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 our general partner.


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CAPITALIZATION
 
The following table shows:
 
  •  the cash and the capitalization of our predecessor as of December 31, 2010; and
 
  •  our pro forma cash and capitalization as of December 31, 2010, as adjusted to reflect this offering, the other transactions described under “Summary — Formation Transactions and Partnership Structure — General” and the application of the net proceeds from this offering as described under “Use of Proceeds.”
 
We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our predecessor’s historical and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Summary — Formation Transactions and Partnership Structure — General,” “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                   
    As of December 31, 2010  
    Compressco
      Compressco
 
    Partners
      Partners Pro
 
    Predecessor       Forma  
    (In thousands)       (In thousands)  
Cash
  $ 6,629       $ 16,554  
                   
Long-term debt
    145,085 (3)        
Partners’ equity/owners’ equity:
                 
Partners’ equity
    25,953          
Common unitholders — public interest(1)(2)
            41,425  
Common unitholders — parent interest(2)
            77,011  
Subordinated unitholders
            73,237  
General partner interest
            3,662  
                   
Total capitalization
  $ 171,038       $ 195,335  
                   
 
 
(1) Each $1.00 increase or decrease in the assumed initial public offering price of $20.00 per common unit would increase or decrease, respectively, each of total partners’ equity and total capitalization by approximately $2.3 million, after deducting the estimated underwriting discount, structuring fee and offering expenses payable by us. We may also increase or decrease the number of common units we are offering. Each increase of 1.0 million common units offered by us, together with a concomitant $1.00 increase in the assumed offering price to $21.00 per common unit, would increase total partners’ equity and total capitalization by approximately $21.9 million. Similarly, each decrease of 1.0 million common units offered by us, together with a concomitant $1.00 decrease in the assumed offering price to $19.00 per common unit, would decrease total partners’ equity and total capitalization by approximately $21.9 million. The pro forma information set forth above is illustrative only and, following the completion of this offering, will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.
 
(2) This table does not reflect the issuance of common units that will be issued to the underwriters and/or affiliates of TETRA upon exercise or expiration of the underwriters’ option to purchase additional common units.
 
(3) We will assume approximately $31.5 million of this intercompany indebtedness owed by our predecessor to TETRA (as partial consideration for the assets we acquire from TETRA in connection with this offering), which $31.5 million will be repaid in full from the proceeds of this offering. The balance of this indebtedness will be repaid by our predecessor prior to this offering.


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DILUTION
 
Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. On a pro forma basis as of December 31, 2010, after giving effect to the offering of common units and the application of the related net proceeds, our net tangible book value would be $122.7 million, or $7.82 per common unit. Purchasers of common units in this offering will experience immediate and substantial dilution in net tangible book value per common unit for financial accounting purposes, as illustrated in the following table:
 
                 
Assumed initial public offering price per common unit
          $ 20.00  
Net tangible book value per common unit before the offering(1)
  $ 9.31          
Decrease in net tangible book value per common unit attributable to purchasers in the offering
    (1.49 )        
                 
Less: Pro forma net tangible book value per common unit after the offering(2)
            7.82  
                 
Immediate dilution in net tangible book value per common unit to new investors(3)
          $ 12.18  
                 
 
 
(1) Determined by dividing the net tangible book value of the contributed assets and liabilities by the number of units (6,597,257 common units (assuming the underwriters do not exercise their option to purchase additional common units) and 6,273,970 subordinated units) and 2.0% general partner interest to be issued to our general partner and its affiliates for their contribution of assets and liabilities to us.
 
(2) Determined by dividing our pro forma net tangible book value, after giving effect to the use of the net proceeds of the offering by the total number of units (9,097,257 common units and 6,273,970 subordinated units) and the 2.0% general partner interest.
 
(3) For each increase or decrease in the initial public offering price of $1.00 per common unit, then dilution in net tangible book value per common unit would increase or decrease by $0.93 per common unit.
 
The following table sets forth the number of common units and subordinated units and the general partner interest that we will issue and the total consideration contributed to us by our general partner and its affiliates and by the purchasers of common units in this offering upon consummation of the transactions contemplated by this prospectus:
 
                                 
    Units Acquired     Total Consideration  
    Number     Percent     Amount     Percent  
                (dollars in millions)  
 
General partner and affiliates(1)(2)
    12,871,227       83.7 %   $ 153.9       78.8 %
New investors
    2,500,000       16.3 %   $ 41.4       21.2 %
                                 
Total
    15,371,227       100.0 %   $ 195.3       100.0 %
                                 
 
 
(1) Upon the consummation of the transactions contemplated by this prospectus, our general partner and its affiliates will own 6,597,257 common units (if the underwriters do not exercise their option to purchase additional common units), 6,273,970 subordinated units and a 2.0% general partner interest.
 
(2) The contribution by TETRA of a portion of our predecessor’s business was recorded at historical cost in accordance with GAAP. The pro forma book value of the consideration provided by TETRA as of December 31, 2010 would have been approximately $153.9 million.


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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
 
Please read the following discussion of our cash distribution policy in conjunction with the specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “— Assumptions and Considerations” below. In addition, please read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.
 
All information in this section refers to Compressco Partners Predecessor and Compressco Partners, L.P. For additional information regarding our historical and pro forma operating results, you should refer to the historical financial statements of our predecessor and the unaudited pro forma financial statements of Compressco Partners included elsewhere in this prospectus. The information presented in the following discussion assumes the underwriters’ option to purchase additional common units is not exercised.
 
General
 
Our partnership agreement requires us to distribute all of our available cash quarterly. Because we believe we will generally finance any expansion capital expenditures with additional borrowings or issuances of additional partnership units, we believe that our investors are best served by our distributing all of our available cash after reserves and expenses, rather than retaining it. For a discussion of our capital requirements, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Our Liquidity and Capital Resources — Capital Requirements.” Because we expect to be treated as a partnership for U.S. federal income tax purposes and, except for our Operating Corp, are not subject to entity-level federal income tax, we should have more cash to distribute to our unitholders than would be the case if we were treated as a corporation for such purposes.
 
Definition of Available Cash.  We define available cash in the partnership agreement, and it generally means, for each fiscal quarter, the sum of all cash and cash equivalents on hand at the end of the quarter:
 
  •  less the amount of cash reserves established by our general partner to:
 
  •  provide for the proper conduct of our business after the end of the quarter;
 
  •  comply with applicable law, any of our future debt instruments or other agreements; or
 
  •  provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for future distributions unless it determines that the establishment of reserves will not prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages for such quarter);
 
  •  plus, if our general partner so determines, all additional cash and cash equivalents on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.
 
The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months from sources other than additional working capital borrowings. We may borrow funds to pay quarterly distributions to our unitholders.
 
Limitations on Cash Distributions.  There is no guarantee that our unitholders will receive quarterly distributions from us. We do not have a legal obligation to pay distributions at the minimum quarterly


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distribution rate or at any other rate, except as provided in our partnership agreement. Our distribution policy is subject to certain restrictions and may be changed at any time. These restrictions include the following:
 
  •  We may lack sufficient cash to pay distributions to our unitholders due to a number of factors, including reduced demand for our production enhancement services, loss of a key customer, increases in our general and administrative expense, principal and interest payments on any future borrowings, tax expenses, working capital requirements and anticipated cash needs. Our cash available for distribution to our unitholders is directly impacted by our cash expenses necessary to run our business and will be reduced dollar-for-dollar to the extent that such expenses increase.
 
  •  Our general partner will have the authority to establish reserves for the prudent conduct of our business and for future cash distributions to our unitholders. The establishment of those reserves could result in a reduction in cash distributions to our unitholders from the levels currently anticipated pursuant to our stated cash distribution policy. Our partnership agreement does not set a limit on the amount of cash reserves that our general partner may establish.
 
  •  Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur and payments they make on our behalf. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our partnership agreement provides that our general partner will determine in good faith the expenses that are allocable to us. The reimbursement of expenses and payment of fees, if any, to our general partner and its affiliates will reduce the amount of available cash to pay cash distributions to our unitholders.
 
  •  While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Our partnership agreement generally may not be amended during the subordination period without the approval of our general partner and our public common unitholders. However, our partnership agreement can be amended with the consent of our general partner and the approval of a majority of the outstanding common units (including common units held by TETRA) after the subordination period has ended. At the closing of this offering, TETRA and its affiliates will own an aggregate of 83.7% of our common and subordinated units (assuming the underwriters do not exercise their option to purchase additional common units). Please read “The Partnership Agreement — Amendment of the Partnership Agreement.”
 
  •  Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.
 
  •  Any determination by our general partner of the amount of cash to be reserved and the amount of cash to be distributed to our unitholders made in good faith will be binding on all of our unitholders. Our partnership agreement provides that in order for a determination by our general partner to be made in good faith, our general partner must believe that such determination is in our best interests.
 
  •  Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to our unitholders if the distribution would cause our liabilities to exceed the fair value of our assets.
 
  •  If we make distributions out of capital surplus, as opposed to operating surplus, such distributions will result in a reduction in the minimum quarterly distribution and the target distribution levels. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels.” We do not anticipate that we will make any distributions from capital surplus.


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  •  Our ability to make distributions to our unitholders depends on the performance of our subsidiaries and their ability to distribute cash to us. The ability of our subsidiaries to make distributions to us may be restricted by, among other things, the provisions of future indebtedness, applicable state partnership and limited liability company laws and other laws and regulations.
 
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 reserves and expenses 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. The balance of the net proceeds of this offering (approximately $9.9 million) will be available for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. Please read “Use of Proceeds.” We believe that the net proceeds from this offering will be sufficient to fund our operations for approximately the next 18 months. Once 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 or potential acquisitions. To the extent we are unable to 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 any acquisitions or 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 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 impact the available cash that we have to distribute to our unitholders.
 
Our Ability to Change Our Cash Distribution Policy.  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.
 
Our Cash Distributions
 
We expect to pay the minimum quarterly distribution of $0.3875 per unit for each complete quarter, or $1.55 per unit on an annualized basis, to be paid no later than 45 days after the end of each fiscal quarter to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including reimbursements to our general partner and its affiliates. This equates to an aggregate cash distribution of approximately $6.1 million per quarter, or approximately $24.3 million per year, in each case based on the number of common and subordinated units and the 2.0% general partner interest to be outstanding immediately after completion of this offering. Our ability to make cash distributions equal to the minimum quarterly distribution will be subject to the factors previously described above under “— General — Limitations on Cash Distributions.” The amount of available cash needed to pay the minimum quarterly distribution on all of the common units, subordinated units and the 2.0% general partner interest to be outstanding immediately after this offering for one quarter and on an annualized basis is summarized in the following table:
 
                         
    Number of
    Distributions  
    Units     One Quarter     Annualized  
 
Common units
    9,097,257     $ 3,525,187     $ 14,100,748  
Subordinated units
    6,273,970       2,431,163       9,724,654  
2.0% general partner interest
          121,558       486,233  
                         
Total
    15,371,227     $ 6,077,908     $ 24,311,635  
                         


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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 or the amount of cash needed to pay the minimum quarterly distribution on all units after the option period. Please read “Underwriting.”
 
As of the date of this offering, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner’s initial 2.0% general partner interest in these distributions may be reduced if we issue additional partnership units in the future and our general partner does not elect to contribute a proportionate amount of capital to us to maintain its initial 2.0% general partner interest.
 
TETRA and its affiliates 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.
 
We will pay our distributions on or about the 15th of each of February, May, August and November to holders of record on or about the 1st of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will prorate the quarterly distribution for the period from the completion of this offering through June 30, 2011, based on the actual number of days that the units were outstanding during the quarterly period.
 
Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement; however, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above.
 
In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund the annualized minimum quarterly distribution of $1.55 per unit for the four-quarter period ending June 30, 2012. In those sections, we present two tables, consisting of:
 
  •  “Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash we would have had available for distribution on a pro forma basis for the twelve months ended December 31, 2010; and
 
  •  “Estimated Cash Available for Distribution,” in which we present how we calculate the estimated EBITDA necessary for us to have sufficient cash available to pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012. In “— Assumptions and Considerations” below, we also present the assumptions supporting this calculation.
 
Pro Forma Cash Available for Distribution for the Twelve Months Ended December 31, 2010
 
We must generate approximately $24.3 million (or approximately $6.1 million per quarter) of available cash to pay the aggregate minimum 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, 2010, our pro forma cash available for distribution for the twelve months ended December 31, 2010 would have been approximately $24.7 million. This amount 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 interest for the twelve months ended December 31, 2010.


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The pro forma financial statements, upon which pro forma cash available for distribution is based, do not purport to present our results of operations had the transaction contemplated in this prospectus actually been completed as of the dates indicated. Furthermore, cash available for distribution is a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution shown above in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated if we had been formed in earlier periods. Please read our unaudited pro forma financial statements included elsewhere in this prospectus.
 
The following table illustrates, on a pro forma basis, for the twelve months ended December 31, 2010, the amount of available cash (without any reserve) that would have been available for distribution on all of our common units and subordinated units and the corresponding distribution on the general partner interest, assuming that the offering had been consummated on January 1, 2010. The pro forma adjustments presented below are explained in the footnotes to such adjustments.


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Compressco Partners
 
Unaudited Pro Forma Cash Available for Distribution
 
         
    Twelve Months
 
    Ended
 
    December 31,
 
    2010(a)  
    (In thousands, except per unit
 
    amounts)  
 
Revenue
       
Compression and other services
  $ 76,915  
Sales of compressors and parts
    4,017  
         
Total revenues
    80,932  
Cost of revenues (excluding depreciation and amortization expense)
       
Cost of compression and other services(b)
    35,205  
Cost of sales of compressors and parts
    2,554  
         
Total cost of revenues
    37,759  
Selling, general and administrative expense
    14,295  
Depreciation and amortization
    13,070  
Interest expense
    38  
Other (income) expense
    113  
         
Income before income tax expense
    15,657  
Provision for income taxes(c)
    1,705  
         
Pro forma net income
  $ 13,952  
Adjustments to reconcile pro forma net income to pro forma EBITDA:
       
Add:
       
Provision for income taxes(c)
    1,705  
Interest expense
    38  
Depreciation and amortization
    13,070  
         
Pro forma EBITDA(d)
  $ 28,765  
Adjustments to reconcile pro forma EBITDA to pro forma cash available for distribution:
       
Less:
       
Current income tax expense and withholding(c)
    1,879  
Expansion capital expenditures(e)
    8,127  
Maintenance capital expenditures(f)
    1,794  
Incremental general and administrative expense associated with being a publicly traded limited partnership(g)
    2,000  
Plus:
       
Non-cash cost of sales of compressors(h)
    1,206  
Equity compensation(i)
    392  
Cash from parent to fund expansion capital expenditures(e)
    8,127  
         
Pro forma cash available for distribution by Compressco Partners
  $ 24,690  
         
Implied cash distributions based on the minimum quarterly distribution per unit:
       
Annualized minimum quarterly distribution per unit
  $ 1.55  
Distribution to common unitholders
  $ 14,101  
Distribution to subordinated unitholder
  $ 9,725  
Distribution to general partner
  $ 486  
         
Total distributions(j)
  $ 24,312  
         
Excess
  $ 378  
         
 
 
(a) Unaudited pro forma cash available for distribution for the twelve months ended December 31, 2010 was derived from the unaudited pro forma financial statements included elsewhere in this prospectus.


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(b) Includes maintenance, repair and refurbishment expense for our compressor units. These expenses were $32.3 million for the twelve months ended December 31, 2010. These amounts are not included in maintenance capital expenditures as noted in (f) below.
 
(c) Reflects income taxes for our Operating Corp and from our operations in Canada, Mexico and Argentina, as well as Texas franchise tax, which, in accordance with generally accepted accounting principles, was classified as an income tax for reporting purposes.
 
(d) Please read “Summary — Non-GAAP Financial Measures” for more information regarding EBITDA. We define EBITDA as earnings before interest, taxes, depreciation and amortization.
 
(e) Reflects actual expansion capital expenditures for the period presented. Expansion capital expenditures for the twelve months ended December 31, 2010 is primarily due to the expansion of our VJacktm unit fleet and the expansion of our operations into Argentina, Indonesia and Romania. Expansion capital expenditures are expenditures that result in the expansion of our assets and operations. These expansion capital expenditures are primarily related to the manufacture of new compressor units added to our service fleet that are not replacements for sold units, as well as the purchase of vehicles, well monitoring assets, automated sand separation assets and other related assets that expand our asset base. For historical periods we have assumed that expansion capital expenditures were funded by TETRA.
 
(f) Maintenance capital expenditures are generally capital expenditures that maintain the operating capacity of our business. Maintenance capital expenditures include capital expenditures made to replace partially or fully depreciated assets, disposed and/or sold assets, including our compressor units, vehicles, well monitoring assets and automated sand separation assets. For a compressor unit sold from our active service fleet, maintenance capital expenditures reflect the cost of the newly manufactured replacement unit. The book value of the sold service unit is recognized above as a non-cash charge to cost of sales of compressors and parts. The cost of refurbishing our compressor units is included in our cost of compression and other services as noted in (b) above.
 
(g) Reflects an adjustment for estimated incremental cash expenses associated with being a publicly traded limited partnership, including costs associated with annual and quarterly reports to unitholders, financial statement audits, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and executive officer liability insurance costs and director compensation.
 
(h) Reflects the non-cash cost of sales of compressors related to units sold from our service fleet. Since these units were already in our service fleet, capital expenditures related to these units were incurred during prior periods.
 
(i) Reflects non-cash equity compensation in accordance with TETRA’s equity compensation plan within our pro forma selling, general and administrative expense.
 
(j) Represents the amount that would be required to pay the minimum quarterly distribution for four quarters on all of the common and subordinated units that will be outstanding immediately following this offering and the corresponding distribution on the general partner interest.
 
Estimated Cash Available for Distribution for the Twelve Months Ending June 30, 2012
 
As a result of the factors described in this section and in “— Assumptions and Considerations” below, we believe we will be able to pay the annualized minimum quarterly distribution of $1.55 on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012.
 
To pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012, we estimate that our EBITDA for the twelve months ending June 30, 2012 must be at least $26.7 million. EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure our operating performance, liquidity or ability to service debt obligations. Please read “Summary — Non-GAAP Financial Measures” for an explanation of EBITDA and a reconciliation of


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EBITDA to cash flow from operating activities and to net income, its most directly comparable financial measure calculated in and presented in accordance with GAAP.
 
We believe we will generate estimated EBITDA of $31.0 million for the twelve months ending June 30, 2012. Please read “— Assumptions and Considerations” below for a discussion of the material assumptions underlying this belief. We can give you no assurance that our assumptions will be realized or that we will generate the $26.7 million in EBITDA required to pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012. If we do not generate the estimated EBITDA or if our maintenance capital expenditures are higher than estimated, we may not be able to pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012.
 
When considering our ability to generate our estimated EBITDA of $31.0 million, you should keep in mind the risk factors and other cautionary statements under the heading “Risk Factors” and elsewhere in this prospectus. Any of these factors or the other risks discussed in this prospectus could cause our results of operations and cash available for distribution to our unitholders to vary significantly from those set forth below.
 
We do not as a matter of course make public projections as to future revenues, earnings, or other results of operations. However, our management has prepared the prospective financial information set forth below to present the estimated cash available for distribution for the twelve months ending June 30, 2012. The accompanying prospective financial information was not prepared with a view toward public disclosure or with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of our management’s knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information.
 
Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.
 
We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast to reflect events or circumstances after the date of this prospectus. In light of the above, the statement that we believe that we will have sufficient cash available for distribution to allow us to pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012 should not be regarded as a representation by us or the underwriters or any other person that we will make such distributions.
 
The following table shows how we calculate the estimated EBITDA necessary to pay the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012. Our estimated EBITDA presents the forecasted results of operations of Compressco Partners for the twelve months ending June 30, 2012. Our assumptions that we believe are relevant to particular line items in the table below are explained in the corresponding footnotes set forth in “— Assumptions and Considerations.”


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Compressco Partners
Estimated Cash Available for Distribution
 
         
    Twelve Months
 
    Ending
 
    June 30, 2012  
    (In thousands, except
 
    per unit amounts)  
 
Revenue
       
Compression and other services
  $ 84,394  
Sales of compressors and parts
    9,363  
         
Total revenues
    93,757  
Cost of revenues (excluding depreciation and amortization expense)
       
Cost of compression and other services(a)
    37,990  
Cost of sales of compressors and parts
    7,193  
         
Total cost of revenues
    45,183  
Selling, general and administrative expense(b)
    17,622  
Depreciation and amortization
    13,027  
Interest expense (income)(c)
    (331 )
         
Income before income tax expense
    18,256  
Provision for income taxes(d)
    2,455  
         
Estimated net income
  $ 15,801  
Adjustments to reconcile estimated net income to estimated EBITDA:
       
Add:
       
Interest expense (income)(c)
  $ (331 )
Provision for income taxes(d)
    2,455  
Depreciation and amortization
    13,027  
         
Estimated EBITDA
  $ 30,952  
Adjustments to reconcile estimated EBITDA to estimated cash available for distribution:
       
Less:
       
Interest expense (income)(c)
  $ (331 )
Current income tax expense and withholding
    2,455  
Expansion capital expenditures(e)
    1,950  
Maintenance capital expenditures(f)
    2,470  
Plus:
       
Non-cash cost of sales of compressors
    570  
Equity compensation(g)
    1,600  
Use of offering net proceeds to fund expansion capital expenditures(e)
    1,950  
         
Estimated cash available for distribution by Compressco Partners
  $ 28,528  
         
Implied cash distributions based on the minimum quarterly distribution per unit:
       
Annualized minimum quarterly distribution per unit
  $ 1.55  
Distribution to common unitholders
  $ 14,101  
Distribution to subordinated unitholder
  $ 9,725  
Distribution to general partner
  $ 486  
         
Total distributions(h)
  $ 24,312  
         
Excess
  $ 4,216  
         


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(a) Includes maintenance, repair and refurbishment expense for our compressor units. We estimate these expenses to be $34.9 million for the twelve months ending June 30, 2012. This amount is not included in estimated maintenance capital expenditures as noted in (f) below.
 
(b) Includes estimated incremental expenses of approximately $2.0 million associated with being a publicly traded limited partnership, including costs associated with annual and quarterly reports to unitholders, financial statement audits, tax return and Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, incremental director and executive officer liability insurance costs and director compensation.
 
(c) We estimate that interest income will be earned on the net proceeds of the offering at a 2.0% interest rate. 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. Please read “Use of Proceeds.” At the time of the offering, we will not have an outstanding credit agreement because we will retain approximately $9.9 million of the net proceeds of the offering. We may enter into a credit agreement to satisfy future liquidity needs at a later date.
 
(d) We will not be subject to U.S. federal income tax, except with respect to operations conducted by our Operating Corp. We will incur state and local income taxes in certain of the states in which we conduct business. Moreover, we will incur income taxes and will be subject to withholding requirements related to our operations in Canada, Mexico, Argentina and in other foreign countries in which we operate. Furthermore, we will also incur Texas franchise tax, which, in accordance with Financial Accounting Standards Board, or “FASB,” Accounting Standards Codification, or “ASC,” 710, is classified as an income tax for reporting purposes. The current income tax shown in the calculation of cash available for distribution includes only the cash portion of such taxes and is net of any deferred income tax expense.
 
(e) Reflects estimated expansion capital expenditures for the period presented. Expansion capital expenditures are expenditures that result in the expansion of our assets and operations. These expenditures are primarily related to the manufacture of new compressor units that we expect to add to our service fleet that are not replacements for sold units, as well as our expected purchase of vehicles, well monitoring assets, automated sand separation assets and other related assets to expand our asset base.
 
(f) Maintenance capital expenditures are generally capital expenditures that maintain the operating capacity of our business. Maintenance capital expenditures include capital expenditures made to replace partially or fully depreciated assets, disposed and/or sold assets, including our compressor units, vehicles, well monitoring assets and automated sand separation assets. The cost of refurbishing our compressor units is included in our estimated cost of wellhead compression and other services, as noted in (a) above.
 
(g) Reflects non-cash equity compensation in accordance with TETRA’s and the Partnership’s equity compensation plans within our estimated selling, general and administrative expense.
 
(h) Represents the amount that would be required to pay distributions for four quarters at our minimum quarterly distribution rate of $0.3875 per unit on all of the common and subordinated units that will be outstanding immediately following this offering, and the corresponding distribution on the general partner interest.
 
Assumptions and Considerations
 
Based on a number of specific assumptions, we believe that, following the completion of this offering, we will have sufficient cash available for distribution to allow us to make the annualized minimum quarterly distribution on our common units and subordinated units and the corresponding distribution on the general partner interest for the twelve months ending June 30, 2012. We believe that our assumptions, which include the following, are reasonable.


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Revenue
 
  •  Revenue is estimated to be $93.8 million for the twelve months ending June 30, 2012, as compared to $80.9 million for the twelve months ended December 31, 2010 on a pro forma basis. The reasons for the anticipated increase in our revenue are presented below.
 
  •  Our predecessor’s pro forma revenue from wellhead compression and other services is estimated to be $84.4 million for the twelve months ending June 30, 2012, as compared to $76.9 million for the twelve months ended December 31, 2010. The main component of this category of pro forma revenue is from production enhancement (including wellhead compression) and related services, which is approximately $75.0 million for the twelve months ending June 30, 2012, as compared to $68.7 million for the twelve months ended December 31, 2010. We expect the majority of this increase to result from increased market demand for our production enhancement (including wellhead compression) and related services, which market demand we believe is shown by the total number of our compressor units being used to provide services on customer well sites (or, “compressor units in service”).
 
  •  We believe that market demand for our predecessor’s services reached a cyclical low point during the period of December 2009 to February 2010, largely due to the effect of the recent domestic and foreign economic downturn on the production enhancement services market, as our predecessor experienced a 13.2% year-over-year decrease in the total number of compressor units in service during 2009 (from 3,064 compressor units to 2,660 compressor units). This economic downturn led to a significant decrease in the industrial consumption of natural gas, lower natural gas prices compared to those of recent years, cost cutting by our predecessor’s customers and, consequently, lower demand for our predecessor’s wellhead compression services and lower compressor utilization rates. Since that period, however, our predecessor has experienced a modest recovery in market demand for its services, as our predecessor has experienced increases in the total number of compressor units in service during 2010 (from 2,660 compressor units to 2,711 compressor units) and 2011 (from 2,711 compressor units to 2,753 compressor units through March 31, 2011). We estimate the total number of compressor units in service will grow from 2,711 compressor units in service as of December 31, 2010 to 3,056 compressor units in service as of June 30, 2012, and we estimate a 1.3% increase in our service fee rates. We believe this anticipated growth is reasonable based on 2010 and 2011 growth rates in the total number of compressor units in service and current and expected demand for our services.
 
  •  We expect the remainder of the increase in our annual revenue from wellhead compression and other services during the twelve months ending June 30, 2012 will result from our further expansion into foreign markets, expansion into unconventional resources markets and introduction of new service applications of our compressor units.
 
  •  Revenue from sales of our compressor units and parts are estimated to increase from $4.0 million for the twelve months ended December 31, 2010 on a pro forma basis to $9.4 million for the twelve months ending June 30, 2012 due to several anticipated large purchase orders from one customer who has recently purchased compressor units from us and is interested in purchasing additional compressor units from us as part of an ongoing program. These amounts include $1.9 million in sales of compressors for the twelve months ended December 31, 2010, and an estimated $7.3 million in sales of compressors for the twelve months ending June 30, 2012. Parts sales are estimated to decrease from approximately $2.1 million during the twelve months ended December 31, 2010 to approximately $2.0 million for the twelve months ending June 30, 2012.
 
Cost of revenues (excluding depreciation and amortization expenses)
 
  •  Cost of revenues (excluding depreciation and amortization expenses) is projected to be $45.2 million for the twelve months ending June 30, 2012, as compared to $37.8 million for the twelve months ended December 31, 2010 on a pro forma basis. The reasons for the anticipated increase in our cost of revenues are presented below.


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  •  Cost of wellhead compression and other services is estimated to be $38.0 million for the twelve months ending June 30, 2012, as compared to $35.2 million for the twelve months ended December 31, 2010 on a pro forma basis. These costs include personnel and various other field service costs that are added mostly in proportion to the addition of compressor units both domestically and globally. This increase in expense is primarily attributable to the growth of wellhead compression and other service revenue described above. Our ongoing cost of refurbishing our units is reflected within our maintenance and repair expense within cost of wellhead compression and other services. Maintenance, repair and refurbishment expense is estimated to be $34.9 million for the twelve months ending June 30, 2012, compared to $32.3 million for the twelve months ended December 31, 2010.
 
  •  We are estimating that cost of sales of compressors and parts will increase from $2.6 million for the twelve months ended December 31, 2010 on a pro forma basis to $7.2 million for the twelve months ending June 30, 2012, as a result of the higher number of compressor units sold and higher average sales prices as described above.
 
Selling, general and administrative expense
 
  •  We estimate that selling, general and administrative expense will be $17.6 million for the twelve months ending June 30, 2012, as compared to $14.3 million for the twelve months ended December 31, 2010 on a pro forma basis. This $3.3 million increase in estimated selling, general and administrative expense includes $2.0 million in incremental expenses associated with being a publicly traded limited partnership and $1.2 million in additional compensation expense associated with grants expected to be made under our Long-Term Incentive Plan. Additional expected increases in selling, general and administrative expense associated with our growth during the twelve months ending June 30, 2012 are largely offset by decreased allocated costs from TETRA.
 
Depreciation and amortization expense
 
  •  We estimate that depreciation and amortization expense will be $13.0 million for the twelve months ending June 30, 2012, as compared to $13.1 million for the twelve months ended December 31, 2010 on a pro forma basis. Depreciation expense is assumed to continue to be based on consistent average depreciable asset lives and depreciation methodologies, taking into account estimated capital expenditures primarily for our fleet of compressor units and other assets as described below.
 
Interest expense (income)
 
  •  Interest income will be earned on the net proceeds of the offering at an assumed 2.0% interest rate. Net proceeds from this offering will be used, over time, for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. At the time of this offering, we will not have an outstanding line of credit due to the fact that we will retain approximately $9.9 million of the net proceeds of this offering. We will enter into a credit agreement to satisfy future liquidity needs at a later date.
 
Provision for income taxes
 
  •  We will not be subject to U.S. federal income tax other than with respect to operations conducted by our Operating Corp. We will incur state and local income taxes in certain of the states in which we conduct business. Moreover, we will incur income taxes and will be subject to withholding requirements related to our operations in Canada, Mexico, Argentina and in the other foreign countries in which we operate. Furthermore, we will also incur Texas franchise tax, which, in accordance with FASB ASC 710, is classified as an income tax for reporting purposes. The current income tax shown in the calculation of cash available for distribution includes only the cash portion of such taxes and is net of any deferred income tax expense.


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Capital expenditures
 
  •  We project that maintenance capital expenditures will be $2.5 million for the twelve months ending June 30, 2012 compared to $1.8 million for the twelve months ended December 31, 2010 on a pro forma basis. This increase in maintenance capital expenditures during the twelve months ended June 30, 2012 is primarily due to the postponement of major maintenance capital expenditure replacement projects during 2010. Maintenance capital expenditures during the twelve months ended June 30, 2012 primarily relate to the replacement of field service trucks and expansion of our sand separator fleet.
 
  •  We project that expansion capital expenditures will be $2.0 million for the twelve months ending June 30, 2012 compared to $8.1 million for the twelve months ended December 31, 2010 on a pro forma basis. This decrease is primarily due to a decrease in the expansion of our compressor unit fleet during the twelve months ended June 30, 2012, when compared to the significant expansion of our compressor unit fleet and the expansion of our operations into Argentina, Indonesia and Romania during 2010.
 
  •  Based on our current growth expectations, we believe the net proceeds of this offering will be sufficient to fund our working capital requirements for approximately the next 18 months. Accordingly, for the twelve months ending June 30, 2012 we do not assume any borrowings from TETRA or third-party lenders.
 
While we believe that our assumptions supporting our estimated EBITDA and cash available for distribution for the twelve months ending June 30, 2012 are reasonable in light of management’s current beliefs concerning future events, the assumptions are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual EBITDA and cash available for distribution that we generate could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make the full minimum quarterly distribution on all of our units for the four-quarter period ending June 30, 2012, in which event the market price of the common units may decline materially.


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PROVISIONS OF OUR PARTNERSHIP AGREEMENT
RELATING TO CASH DISTRIBUTIONS
 
Distributions of Available Cash
 
General.  Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending June 30, 2011, we distribute all of our available cash to our unitholders of record on the applicable record date and to our general partner. We will adjust the minimum quarterly distribution for the period from the closing of the offering through June 30, 2011.
 
Definition of Available Cash.  We define available cash in the partnership agreement, and it generally means, for each fiscal quarter, the sum of all cash and cash equivalents on hand at the end of the quarter:
 
  •  less the amount of cash reserves established by our general partner to:
 
  •  provide for the proper conduct of our business after the end of the quarter;
 
  •  comply with applicable law, any of our future debt instruments or other agreements; or
 
  •  provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters (provided that our general partner may not establish cash reserves for future distributions unless it determines that the establishment of reserves will not prevent us from distributing the minimum quarterly distribution on all common units and any cumulative arrearages for such quarter);
 
  •  plus, if our general partner so determines, all additional cash and cash equivalents on hand on the date of determination of available cash for the quarter resulting from working capital borrowings made after the end of the quarter.
 
The purpose and effect of the last bullet point above is to allow our general partner, if it so decides, to use cash from working capital borrowings made after the end of the quarter but on or before the date of determination of available cash for that quarter to pay distributions to unitholders. Under our partnership agreement, working capital borrowings are borrowings that are made under a credit agreement, commercial paper facility or similar financing arrangement, and in all cases are used solely for working capital purposes or to pay distributions to partners and with the intent of the borrower to repay such borrowings within twelve months from sources other than additional working capital borrowings. We may borrow funds to pay quarterly distributions to our unitholders.
 
Intend to Pay Minimum Quarterly Distribution.  We intend to pay to the holders of common and subordinated units on a quarterly basis the minimum quarterly distribution of $0.3875 per unit, or $1.55 on an annualized basis, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. However, there is no guarantee that we will pay the minimum quarterly distribution on the units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.
 
General Partner Interest and Incentive Distribution Rights.  Initially, our general partner will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its initial 2.0% general partner interest. Our general partner’s initial 2.0% interest in our distributions may be reduced if we issue additional limited partner units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest.
 
Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50.0%, of the cash we distribute from operating surplus (as defined below) in excess of $0.445625 per unit per quarter. The maximum distribution of 50.0% includes distributions paid to our general partner on its 2.0% general partner interest and assumes that our general partner maintains its


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general partner interest at 2.0%. The maximum distribution of 50.0% does not include any distributions that our general partner may receive on any limited partner units that it owns.
 
Operating Surplus and Capital Surplus
 
General.  All cash distributed will be characterized as either “operating surplus” or “capital surplus.” Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus.
 
Operating Surplus.  Operating surplus consists of:
 
  •  $15 million (as described below); plus
 
  •  all of our cash receipts after the closing of this offering, excluding cash from interim capital transactions, which include the following:
 
  •  borrowings that are not working capital borrowings;
 
  •  sales of equity and debt securities;
 
  •  sales or other dispositions of assets outside the ordinary course of business; and
 
  •  capital contributions received; plus
 
  •  working capital borrowings made after the end of a period but on or before the date of determination of operating surplus for the period; plus
 
  •  cash distributions paid on equity issued (including incremental distributions on incentive distribution rights) to finance all or a portion of expansion capital expenditures in respect of the period from such financing until the earlier to occur of the date the capital asset commences commercial service and the date that it is abandoned or disposed of; plus
 
  •  cash distributions paid on equity issued by us (including incremental distributions on incentive distribution rights) to pay the construction period interest on debt incurred, or to pay construction period distributions on equity issued, to finance the expansion capital expenditures referred to above; less
 
  •  all of our operating expenditures (as defined below) after the closing of this offering; less
 
  •  the amount of cash reserves established by our general partner to provide funds for future operating expenditures; less
 
  •  all working capital borrowings not repaid within twelve months after having been incurred or repaid within such twelve-month period with the proceeds of additional working capital borrowings; less
 
  •  any loss realized on disposition of an investment capital expenditure.
 
As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders and is not limited to cash generated by our operations. For example, it includes a basket of $15 million that will enable us, if we choose, to distribute as operating surplus cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity interests in operating surplus will be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash that we receive from non-operating sources.
 
The proceeds of working capital borrowings increase operating surplus and repayments of working capital borrowings are generally operating expenditures, as described below, and thus reduce operating surplus when made. However, if a working capital borrowing is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time.


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When such working capital borrowing is in fact repaid, it will be excluded from operating expenditures because operating surplus will have been previously reduced by the deemed repayment.
 
We define operating expenditures in the partnership agreement, and it generally means all of our cash expenditures, including, but not limited to, taxes, reimbursement of expenses to our general partner or its affiliates, officer compensation, repayment of working capital borrowings, debt service payments and estimated maintenance capital expenditures (as discussed in further detail below), provided that operating expenditures will not include:
 
  •  repayment of working capital borrowings deducted from operating surplus pursuant to the penultimate bullet point of the definition of operating surplus above when such repayment actually occurs;
 
  •  payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness, other than working capital borrowings;
 
  •  expansion capital expenditures;
 
  •  actual maintenance capital expenditures (as discussed in further detail below);
 
  •  investment capital expenditures;
 
  •  payment of transaction expenses relating to interim capital transactions;
 
  •  distributions to our partners (including distributions in respect of our incentive distribution rights); or
 
  •  repurchases of equity interests except to fund obligations under employee benefit plans.
 
Capital Surplus.  Capital surplus is defined in our partnership agreement as any distribution of available cash in excess of our cumulative operating surplus. Accordingly, capital surplus would generally be generated by:
 
  •  borrowings other than working capital borrowings;
 
  •  sales of our equity and debt securities; and
 
  •  sales or other dispositions of assets for cash, other than inventory, accounts receivable and other assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.
 
All available cash distributed by us on any date from any source will be treated as distributed from operating surplus until the sum of all available cash distributed since the closing of the initial public offering equals the operating surplus from the closing of the initial public offering through the end of the quarter immediately preceding that distribution. Any excess available cash distributed by us on that date will be deemed to be capital surplus.
 
Characterization of Cash Distributions.  Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus from the closing of this offering through the end of the quarter immediately preceding that distribution. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. We do not anticipate that we will make any distributions from capital surplus.
 
Capital Expenditures.  Estimated maintenance capital expenditures reduce operating surplus, but expansion capital expenditures, actual maintenance capital expenditures and investment capital expenditures do not. Maintenance capital expenditures are those capital expenditures required to maintain our long-term operating capacity. Examples of maintenance capital expenditures include costs to replace equipment, tools, automobiles and computers. Capital expenditures made solely for investment purposes will not be considered maintenance capital expenditures.
 
Because our maintenance capital expenditures can be irregular, the amount of our actual maintenance capital expenditures may differ substantially from period to period, which could cause similar fluctuations in


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the amounts of operating surplus, adjusted operating surplus and cash available for distribution to our unitholders if we subtracted actual maintenance capital expenditures from operating surplus.
 
Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity over the long term. Examples of expansion capital expenditures include costs to manufacture new compressors and acquire additional equipment, to the extent such capital expenditures are expected to expand our long-term operating capacity. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued (including incremental distributions on incentive distribution rights) to finance all or any portion of the costs to manufacture new compressors and acquire additional equipment. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.
 
Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of assets that are in excess of the maintenance of our existing operating capacity, but which are not expected to expand, for more than the short term, our operating capacity.
 
As described below, neither investment capital expenditures nor expansion capital expenditures are included in operating expenditures, and thus will not reduce operating surplus. Because expansion capital expenditures include interest payments (and related fees) on debt incurred to finance all or a portion of the construction, replacement or improvement of a capital asset during the period that begins when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service and the date that it is abandoned or disposed of, such interest payments also do not reduce operating surplus. Losses on disposition of an investment capital expenditure will reduce operating surplus when realized and cash receipts from an investment capital expenditure will be treated as a cash receipt for purposes of calculating operating surplus only to the extent the cash receipt is a return on principal.
 
Capital expenditures that are made in part for maintenance capital purposes, investment capital purposes and/or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditure by our general partner.
 
Subordination Period
 
General.  Our partnership agreement provides that, during the subordination period (which we define below), the common units will have the right to receive distributions of available cash from operating surplus each quarter in an amount equal to $0.3875 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. These units are deemed “subordinated” because for a period of time, referred to as the subordination period, the subordinated units will not be entitled to receive any distributions from operating surplus until the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be sufficient available cash from operating surplus to pay the minimum quarterly distribution on the common units.


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Subordination Period.  Except as described below, the subordination period will begin on the closing date of this offering and expire on the first business day after the distribution to unitholders in respect of any quarter, beginning with the quarter ending June 30, 2014, if each of the following has occurred:
 
  •  distributions of available cash from operating surplus on each of the outstanding common and subordinated units and the general partner interest equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
 
  •  the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distribution on all of the outstanding common and subordinated units and the general partner interest during those periods on a fully diluted weighted average basis; and
 
  •  there are no arrearages in payment of the minimum quarterly distribution on the common units.
 
Early Termination of Subordination Period.  Notwithstanding the foregoing, the subordination period will automatically terminate on the first business day after the distribution to unitholders in respect of any quarter, if each of the following has occurred:
 
  •  distributions of available cash from operating surplus on each of the outstanding common and subordinated units and the general partner interest equaled or exceeded $2.325 (150.0% of the annualized minimum quarterly distribution) for the four-quarter period immediately preceding that date;
 
  •  the “adjusted operating surplus” (as defined below) generated during the four-quarter period immediately preceding that date equaled or exceeded $2.325 (150% of the annualized minimum quarterly distribution) on all of the outstanding common and subordinated units and the general partner interest during those periods on a fully diluted weighted average basis and the related distribution on the incentive distribution rights; and
 
  •  there are no arrearages in payment of the minimum quarterly distributions on the common units.
 
We do not expect to satisfy the foregoing requirements for any four-quarter period ending on or before January 30, 2012.
 
Expiration Upon Removal of our General Partner.  In addition, if the unitholders remove our general partner other than for cause:
 
  •  the subordinated units held by any person will immediately and automatically convert into common units on a one-for-one basis, provided (1) neither such person nor any of its affiliates voted any of its units in favor of the removal and (2) such person is not an affiliate of the successor general partner; and
 
  •  if all of the subordinated units convert pursuant to the foregoing, all cumulative common unit arrearages on the common units will be extinguished and the subordination period will end.
 
Expiration of the Subordination Period.  When the subordination period ends, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash.
 
Adjusted Operating Surplus.  Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes net increases in working capital borrowings and net drawdowns of reserves of cash generated in prior periods. Adjusted operating surplus consists of:
 
  •  operating surplus generated with respect to that period (excluding any amounts attributable to the items described in the first bullet point under “— Operating Surplus and Capital Surplus — Operating Surplus” above); less
 
  •  any net increase in working capital borrowings with respect to that period; less


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  •  any net decrease in cash reserves for operating expenditures with respect to that period not relating to an operating expenditure made with respect to that period; plus
 
  •  any net decrease in working capital borrowings with respect to that period; plus
 
  •  any net increase in cash reserves for operating expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium; plus
 
  •  any net decrease made in subsequent periods in cash reserves for operating expenditures initially established with respect to such period to the extent such decrease results in a reduction of adjusted operating surplus in subsequent periods pursuant to the third bullet point above.
 
Distributions of Available Cash From Operating Surplus During the Subordination Period
 
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:
 
  •  first, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit an amount equal to the minimum quarterly distribution for that quarter;
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
 
  •  third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “— General Partner Interest and Incentive Distribution Rights” below.
 
The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity interests.
 
Distributions of Available Cash From Operating Surplus After the Subordination Period
 
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:
 
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we distribute for each unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “— General Partner Interest and Incentive Distribution Rights” below.
 
The preceding discussion is based on the assumptions that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity interests.
 
General Partner Interest and Incentive Distribution Rights
 
Our partnership agreement provides that the general partner interest initially will be entitled to 2.0% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its 2.0% general partner interest if we issue additional units. The general partner interest, and the percentage of our cash distributions to which it is entitled, will be proportionately reduced if we issue additional units in the future (other than the issuance of common units upon exercise by the underwriters of their option to purchase additional common units or the issuance of common units upon conversion of outstanding subordinated units) and our general partner does not contribute a proportionate amount of capital to us in order to maintain its then-current general partner interest. Our partnership agreement does not require that our general partner fund its capital contribution with cash and


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our general partner may fund its capital contribution by the contribution to us of common units or other property.
 
Incentive distribution rights represent the right to receive an increasing percentage (13.0%, 23.0% and 48.0%, in each case, not including distributions paid on the 2.0% general partner interest) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its 2.0% general partner interest, subject to restrictions in the partnership agreement.
 
The following discussion assumes that our general partner maintains its 2.0% general partner interest, that there are no arrearages on common units and that our general partner continues to own the incentive distribution rights.
 
If for any quarter:
 
  •  we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and
 
  •  we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;
 
then, our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and our general partner in the following manner:
 
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives a total of $0.445625 per unit for that quarter (the “first target distribution”);
 
  •  second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives a total of $0.484375 per unit for that quarter (the “second target distribution”);
 
  •  third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives a total of $0.581250 per unit for that quarter (the “third target distribution”); and
 
  •  thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.
 
Percentage Allocations of Available Cash From Operating Surplus
 
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit.” The percentage interests shown for our unitholders and our general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include distributions paid on its 2.0% general partner interest, assume our general partner has contributed any additional capital required to maintain its 2.0% general partner interest and has not transferred its incentive distribution rights, and assume that there are no arrearages on common units.
 
                     
        Marginal Percentage Interest in Distributions
    Total Quarterly
      General
   
Distribution per Unit
  Unitholders   Partner
 
Minimum Quarterly Distribution
  $0.3875     98.0 %     2.0 %
First Target Distribution
  up to $0.445625     98.0 %     2.0 %
Second Target Distribution
  above $0.445625 up to $0.484375     85.0 %     15.0 %
Third Target Distribution
  above $0.484375 up to $0.58125     75.0 %     25.0 %
Thereafter
  above $0.58125     50.0 %     50.0 %


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General Partner’s Right to Reset Incentive Distribution Levels
 
Our general partner, as the initial holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial cash target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and cash target distribution levels upon which the incentive distribution payments to our general partner would be set. 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. The following discussion assumes that our general partner holds all of the incentive distribution rights at the time that a reset election is made. The right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that there will be no incentive distributions paid under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.
 
In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive a number of newly issued common units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters prior to the reset event as compared to the average cash distributions per common unit during this period. In addition, our general partner will be issued a general partner interest necessary to maintain its then-current general partner interest in us immediately prior to the reset election.
 
The number of common units that our general partner would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to the quotient determined by dividing (x) the average amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election by (y) the average of the amount of cash distributed per common unit during each of these two quarters.
 
Following a reset election, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per unit for the two fiscal quarters immediately preceding the reset election (which amount we refer to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:
 
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until each unitholder receives an amount per unit equal to 115.0% of the reset minimum quarterly distribution for that quarter;
 
  •  second, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until each unitholder receives an amount per unit equal to 125.0% of the reset minimum quarterly distribution for the quarter;
 
  •  third, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until each unitholder receives an amount per unit equal to 150.0% of the reset minimum quarterly distribution for the quarter; and
 
  •  thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.


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The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels (1) pursuant to the cash distribution provisions of our partnership agreement in effect at the closing of this offering, as well as (2) following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.70.
 
                         
        Marginal
   
        Percentage
   
        Interest in
   
    Quarterly
  Distribution   Quarterly
    Distribution per
      2.0%
  Distribution
    Unit Prior to
      General
  per Unit
    Hypothetical
  Common
  Partner
  Following
   
Reset
  Unitholders   Interest   Hypothetical Reset
 
                         
Minimum Quarterly Distribution
  $0.3875     98.0 %     2.0 %   $0.70
                         
First Target Distribution
  up to $0.445625     98.0 %     2.0 %   up to $0.805(1)
                         
Second Target Distribution
  above $0.445625 up to
$0.484375
    85.0 %     15.0 %   above $0.805(1) up to
$0.875(2)
                         
Third Target Distribution
  above $0.484375 up to
$0.581250
    75.0 %     25.0 %   above $0.875(2) up to
$1.05(3)
                         
Thereafter
  above $0.581250     50.0 %     50.0 %   above $1.05(3)
 
 
(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
 
(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
 
(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.
 
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, based on an average of the amounts distributed for a quarter for the two quarters immediately prior to the reset. The table assumes that immediately prior to the reset there would be 15,371,227 common units outstanding, our general partner has maintained its 2.0% general partner interest, and the average distribution to each common unit would be $0.70 per quarter for the two quarters prior to the reset.
 
                                                     
        Cash
  Cash Distributions to
   
        Distributions
  General Partner Prior to
   
    Quarterly
  to Common
  Hypothetical Reset    
    Distribution
  Unitholders
      2.0%
           
    per Unit
  Prior to
      General
  Incentive
       
    Prior to
  Hypothetical
  Common
  Partner
  Distribution
      Total
   
Hypothetical Reset
  Reset   Units   Interest   Rights   Total   Distributions
 
                                                     
Minimum Quarterly Distribution
  $0.3875   $ 5,956,350     $                $ 121,558     $     $ 121,558     $ 6,077,908  
                                                     
First Target Distribution
  up to $0.445625     893,453                   18,234             18,234       911,687  
                                                     
Second Target Distribution
  above $0.445625 up to $0.484375     595,635                   14,015       91,097       105,112       700,747  
                                                     
Third Target Distribution
  above $0.484375 up to $0.581250     1,489,088                   39,709       456,654       496,363       1,985,451  
                                                     
Thereafter
  above $0.581250     1,825,333                   73,013       1,752,320       1,825,333       3,650,666  
                                                     
                                                     
        $ 10,759,859     $           $ 266,529     $ 2,300,071     $ 2,566,600     $ 13,326,459  
                                                     
 
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and our general partner, including in respect of incentive distribution rights, with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there would be


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18,657,042 common units outstanding, the 2.0% general partner interest has been maintained, and the average distribution to each common unit would be $0.70. The number of common units to be issued to our general partner upon the reset was calculated by dividing (1) the average of the amounts received by our general partner in respect of its incentive distribution rights for the two quarters prior to the reset as shown in the table above, or $2,300,071, by (2) the average available cash distributed on each common unit for the two quarters prior to the reset as shown in the table above, or $0.70.
 
                                                     
        Cash
    Cash Distributions to
       
        Distributions
    General Partner Following
       
    Quarterly
  to Common
    Hypothetical Reset        
    Distribution
  Unitholders
          2.0%
                   
    per Unit
  Following
          General
    Incentive
             
    Following
  Hypothetical
    Common
    Partner
    Distribution
          Total
 
   
Hypothetical Reset
  Reset     Units     Interest     Rights     Total     Distributions  
 
Minimum Quarterly Distribution
  $0.70   $ 10,759,859     $ 2,300,071     $ 266,529     $     $ 2,566,600     $ 13,326,459  
First Target Distribution
  up to $0.805(1)                                    
Second Target Distribution
  above $0.805(1) up to $0.875(2)                                    
Third Target Distribution
  above $0.875(2) up to $1.05(3)                                    
Thereafter
  above $1.05(3)                                    
                                                     
        $ 10,759,859     $ 2,300,071     $ 266,529     $     $ 2,566,600     $ 13,326,459  
                                                     
 
 
(1) This amount is 115.0% of the hypothetical reset minimum quarterly distribution.
 
(2) This amount is 125.0% of the hypothetical reset minimum quarterly distribution.
 
(3) This amount is 150.0% of the hypothetical reset minimum quarterly distribution.
 
Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
 
Distributions From Capital Surplus
 
How Distributions From Capital Surplus Will Be Made.  Our partnership agreement requires that we make distributions of available cash from capital surplus, if any, in the following manner:
 
  •  first, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until the minimum quarterly distribution is reduced to zero, as described below;
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until we distribute for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and
 
  •  thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
 
The preceding paragraph assumes that our general partner maintains its 2.0% general partner interest and that we do not issue additional classes of equity interests.
 
Effect of a Distribution From Capital Surplus.  Our partnership agreement treats a distribution of capital surplus as the repayment of the consideration for the issuance of the unit, which is a return of capital. Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the distribution had in relation to the fair market value of the common units prior to the announcement of the distribution. Because distributions of capital surplus will


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reduce the minimum quarterly distribution and target distribution levels, after any of these distributions are made, it may be easier for our managing general partner to receive incentive distributions and for the subordinated units to convert into common units. However, any distribution of capital surplus before the minimum quarterly distribution is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.
 
Once we distribute capital surplus on a unit issued in this offering, our partnership agreement specifies that we then make all future distributions from operating surplus, with 50.0% being paid to the holders of units and 50.0% to our general partner. The percentage interests shown for our general partner include its 2.0% general partner interest and assume our general partner has not transferred the incentive distribution rights.
 
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
 
In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, our partnership agreement specifies that the following items will be proportionately adjusted:
 
  •  the minimum quarterly distribution;
 
  •  the target distribution levels;
 
  •  the unrecovered initial unit price; and
 
  •  the per unit amount of any outstanding arrearages in payment of the minimum quarterly distribution on the common units.
 
For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50.0% of its initial level. If we combine our common units into a lesser number of units or subdivide our common units into a greater number of units, we will combine or subdivide our subordinated units using the same ratio applied to the common units. Our partnership agreement provides that we do not make any adjustment by reason of the issuance of additional units for cash or property.
 
In addition, if legislation is enacted or if existing law is modified or interpreted by a governmental taxing authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels for each quarter may, in the sole discretion of our general partner, be reduced by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus our general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
 
Distributions of Cash Upon Liquidation
 
General
 
If we dissolve in accordance with our partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to our unitholders, our general partner and the holders of the incentive distribution rights, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
 
The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of common units to a preference over the holders of subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of


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the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the common unitholders to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of our general partner.
 
Manner of Adjustments for Gain
 
The manner of the adjustment for gain is set forth in the partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to the partners in the following manner:
 
  •  first, to our general partner to the extent of certain prior losses specially allocated to our general partner;
 
  •  second, 98.0% to the common unitholders, pro rata, and 2.0% to our general partner, until the capital account for each common unit is equal to the sum of: (1) the unrecovered initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;
 
  •  third, 98.0% to the subordinated unitholders, pro rata, and 2.0% to our general partner, until the capital account for each subordinated unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;
 
  •  fourth, 98.0% to all unitholders, pro rata, and 2.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98.0% to the unitholders, pro rata, and 2.0% to our general partner, for each quarter of our existence;
 
  •  fifth, 85.0% to all unitholders, pro rata, and 15.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85.0% to the unitholders, pro rata, and 15.0% to our general partner for each quarter of our existence;
 
  •  sixth, 75.0% to all unitholders, pro rata, and 25.0% to our general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75.0% to the unitholders, pro rata, and 25.0% to our general partner for each quarter of our existence; and
 
  •  thereafter, 50.0% to all unitholders, pro rata, and 50.0% to our general partner.
 
The percentage interests set forth above for our general partner include its 2.0% general partner interest and assume our general partner has not transferred the incentive distribution rights.
 
If the liquidation occurs after the end of the subordination period, the distinction between common and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the third bullet point above will no longer be applicable.
 
Manner of Adjustments for Losses
 
If our liquidation occurs before the end of the subordination period, after making allocations of loss to our general partner and the unitholders in a manner intended to offset in reverse order the allocations of gains


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that have previously been allocated, we will generally allocate any loss to our general partner and the unitholders in the following manner:
 
  •  first, 98.0% to holders of subordinated units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;
 
  •  second, 98.0% to the holders of common units in proportion to the positive balances in their capital accounts and 2.0% to our general partner, until the capital accounts of the common unitholders have been reduced to zero; and
 
  •  thereafter, 100.0% to our general partner.
 
If the liquidation occurs after the end of the subordination period, the distinction between common and subordinated units will disappear, so that all of the first bullet point above will no longer be applicable.
 
Adjustments to Capital Accounts
 
Our partnership agreement requires that we make adjustments to capital accounts upon the issuance of additional partnership units. In this regard, our partnership agreement specifies that we allocate any unrealized and, for U.S. federal income tax purposes, unrecognized gain or loss resulting from the adjustments to our unitholders and our general partner in the same manner as we allocate gain or loss upon liquidation. In the event that we make positive adjustments to the capital accounts upon the issuance of additional units, our partnership agreement requires that we generally allocate any later negative adjustments to the capital accounts resulting from the issuance of additional partnership units or upon our liquidation in a manner which results, to the extent possible, in the partners’ capital account balances equaling the amount which they would have been if no earlier positive adjustments to the capital accounts had been made. By contrast to the allocations of gain, and except as provided above, we generally will allocate any unrealized and unrecognized loss resulting from the adjustments to capital accounts upon the issuance of additional units to the unitholders and our general partner based on their respective percentage ownership of us. In this manner, prior to the end of the subordination period, we generally will allocate any such loss equally with respect to our common and subordinated units. In the event we make negative adjustments to the capital accounts as a result of such loss, future positive adjustments resulting from the issuance of additional units will be allocated in a manner designed to reverse the prior negative adjustments, and special allocations will be made upon liquidation in a manner that results, to the extent possible, in our unitholders’ capital account balances equaling the amounts they would have been if no earlier adjustments for loss had been made.


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SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
 
At or prior to the completion of this offering, TETRA will contribute to us a portion of our predecessor’s business, as further described in “Business — Our Relationship with TETRA and Compressco.” Based on the business and assets of our predecessor that we will receive in connection with this offering, our pro forma revenues represent approximately 99.4% of our predecessor’s revenues for the year ended December 31, 2010, and our pro forma assets, including the impact of the retained offering net proceeds, represent approximately 104.6% of our predecessor’s assets as of December 31, 2010. All historical operations, results of operations, financial statements and notes to the financial statements presented throughout this prospectus reflect those of our predecessor and exclude the pro forma adjustments required to reflect the portion of our predecessor’s business that will not be contributed to us in connection with this offering. Because our operations will not represent the entirety of our predecessor’s business, and due to other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Items Impacting the Comparability of Our Financial Results,” certain total amounts that will be presented in our future results of operations may not be initially comparable to our predecessor’s historical results.
 
The table on the following page shows selected historical combined financial and operating data of our predecessor and pro forma financial and operating data of Compressco Partners for the periods and as of the dates presented. The selected historical financial data as of December 31, 2010, 2009, 2008 and 2007 as well as the selected historical financial data for the four-year period ended December 31, 2010, have been derived from the audited combined financial statements of our predecessor. The selected historical financial data as of December 31, 2006, as well as the selected historical financial data for the year ended December 31, 2006, have been derived from the unaudited combined financial statements of our predecessor. The selected pro forma financial data for the year ended December 31, 2010 are derived from the unaudited pro forma financial statements of Compressco Partners included elsewhere in this prospectus.
 
The pro forma financial statements have been prepared as if certain transactions to be effected at the completion of this offering had taken place on December 31, 2010, in the case of the pro forma balance sheet, or as of January 1, 2010, in the case of the pro forma statement of operations for the year ended December 31, 2010. These transactions include:
 
  •  the contribution to us of a portion of our predecessor’s business, as further described in “Business — Our Relationship with TETRA and Compressco;”
 
  •  our issuance of common units to the public and affiliates of TETRA, subordinated units to affiliates of TETRA, a 2.0% general partner interest 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.”
 
We derived the information in the following table from, and that information should be read together with, and is qualified in its entirety by reference to, the historical combined and pro forma financial statements and the accompanying notes included elsewhere in this prospectus. The table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical and pro forma financial statements and accompanying notes included elsewhere in this prospectus.


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The following table includes the non-GAAP financial measure of EBITDA. We define EBITDA as earnings before interest, taxes, depreciation and amortization. For a reconciliation of EBITDA to its most directly comparable financial measures calculated and presented in accordance with GAAP, please read “Summary — Non-GAAP Financial Measures.”
 
Selected Historical and Pro Forma Financial and Operating Data
 
                                                     
                                      Compressco Partners  
                                      Pro Forma
 
    Compressco Partners Predecessor       Year Ended
 
    Year Ended December 31,       December 31,
 
    2006       2007     2008     2009     2010       2010  
    (unaudited)
      (dollars in thousands)       (unaudited)
 
    (dollars in
              (dollars in
 
    thousands)               thousands,
 
                    except per unit
 
                    amounts)  
Statement of Operations Data:
                                                   
Revenue
  $ 67,133       $ 85,985     $ 99,944     $ 90,573     $ 81,412       $ 80,932  
Cost of revenue
    30,265         38,179       44,189       40,959       37,977         37,759  
Selling, general and administrative expenses
    10,612         12,964       14,352       13,193       14,328         14,295  
Depreciation and amortization expense
    6,436         9,433       12,112       13,823       13,112         13,070  
Interest expense
    9,250         10,083       10,990       11,980       13,096         38  
Other (income) expense, net
    59         (31 )     174       (82 )     113         113  
                                                     
Income before income tax provision
    10,511         15,357       18,127       10,700       2,786         15,657  
Provision for income taxes
    4,100         5,803       6,846       4,161       1,169         1,705  
                                                     
Net income
  $ 6,411       $ 9,554     $ 11,281     $ 6,539     $ 1,617       $ 13,952  
                                                     
General partner interest in net income
                                              $ 279  
Common unitholders’ interest in net income
                                              $ 8,092  
Subordinated unitholders’ interest in net income
                                              $ 5,581  
Net income per common unit (basic and diluted)
                                              $ 0.89  
Balance Sheet Data (at Period End):
                                                   
Working capital(1)
  $ 19,761       $ 27,565     $ 31,308     $ 32,983     $ 28,943            
Total assets
  $ 163,981       $ 186,675     $ 212,167     $ 202,497     $ 196,566            
Partners’ capital/net parent equity
  $ 40,048       $ 48,713     $ 56,792     $ 33,900     $ 25,953            
Other Financial Data:
                                                   
EBITDA(2)
  $ 26,197       $ 34,873     $ 41,229     $ 36,503     $ 28,994       $ 28,765  
Capital expenditures(3)
  $ 25,917       $ 23,929     $ 33,036     $ 2,997     $ 8,715            
Cash flows provided by (used in):
                                                   
Operating activities
  $ 12,251       $ 15,737     $ 25,569     $ 23,936     $ 20,391            
Investing activities
  $ (25,862 )     $ (23,930 )   $ (32,997 )   $ (2,882 )   $ (8,613 )          
Financing activities
  $ 14,378       $ 7,991     $ 7,607     $ (17,854 )   $ (9,735 )          
Operating Data:
                                                   
Total compressor units in fleet (at period end)
    2,595         3,108       3,603       3,627       3,647            
Total compressor units in service (at period end)
    2,297         2,763       3,064       2,660       2,711            
Average number of compressor units in service (during period)(4)
    2,054         2,530       2,913       2,862       2,686            
Average compressor unit utilization (during period)(5)
    89.6 %       88.7 %     86.8 %     79.2 %     73.8 %          
 
 
(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.


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(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.
 
The unaudited pro forma financial information should not be considered as indicative of (i) the historical results we would have generated if we had been formed at the beginning of each respective pro forma period or (ii) the results we will actually achieve after this offering.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the combined financial statements of our predecessor and the notes thereto, and the other financial information appearing elsewhere in this prospectus. This discussion includes forward-looking statements that involve certain risks and uncertainties. Please read “Forward-Looking Statements” and “Risk Factors.”
 
References in this prospectus to “Compressco Partners,” “we,” “our,” “us,” “the Partnership” or like terms refer to Compressco Partners, L.P. and its wholly owned subsidiaries, including Compressco Partners Operating, LLC and Compressco Partners Sub, Inc. References to “our Operating LLC” refer to Compressco Partners Operating LLC and its wholly owned subsidiaries and references to “our Operating Corp” refer to Compressco Partners Sub, Inc. References to “TETRA” refer to TETRA Technologies, Inc., or “TETRA,” and TETRA’s controlled subsidiaries, other than us. References to “Compressco” refer to Compressco, Inc., a wholly owned subsidiary of TETRA, and Compressco’s controlled subsidiaries, other than us. References to “Compressco Partners GP” or “our general partner” refer to our general partner, Compressco Partners GP Inc., a wholly owned subsidiary of Compressco. References to “compressor units” refer to our GasJack® units and our VJacktm units. References to “Compressco Partners Predecessor” or “our predecessor” refer to the predecessor of Compressco Partners for accounting purposes. As further described elsewhere in this prospectus, our predecessor consists of (1) all of the historical assets, liabilities and operations of Compressco, combined with (2) certain assets, liabilities and operations of the subsidiaries of TETRA conducting wellhead compression-based production enhancement services and related well monitoring and automated sand separation services in Mexico.
 
At or prior to the completion of this offering, TETRA will contribute to us a portion of our predecessor’s business, as further described in “Our Relationship with TETRA and Compressco.” All historical operations, results of operations, financial statements and notes to the financial statements presented throughout this prospectus reflect those of our predecessor and exclude the pro forma adjustments required to reflect the portion of our predecessor’s business that will not be contributed to us in connection with this offering. Because our operations will not represent the entirety of our predecessor’s business, and due to other factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Items Impacting the Comparability of Our Financial Results,” certain total amounts that will be presented in our future results of operations may not be initially comparable to our predecessor’s historical results.
 
Overview
 
We are a leading provider of wellhead compression-based production enhancement services, or “production enhancement services,” to a broad base of natural gas and oil exploration and production companies operating throughout most of the onshore producing regions of the United States. 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. Our production enhancement services primarily consist of wellhead compression, related liquids separation, gas metering and vapor recovery services. In certain circumstances, we also provide ongoing well monitoring services and, in Mexico, automated sand separation services in connection with our primary production enhancement services. While our services are applied primarily to mature wells with low formation pressures, our services are also employed on newer wells that have experienced significant production declines or are characterized by lower formation pressures. Our services are performed by our highly trained staffs of regional service supervisors, optimization specialists and field mechanics. In addition, we design and manufacture the compressor units we use to provide our production enhancement services and, in certain markets, sell our compressor units to customers.
 
Our predecessor’s business experienced substantial organic growth over the past eight fiscal years. Our predecessor’s revenues grew during that period from approximately $14.9 million during 2002 to approximately $81.4 million during 2010, representing a 446.3% increase. Our predecessor’s number of


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compressor units in service grew from 761 compressor units as of December 31, 2002 to 2,711 compressor units as of December 31, 2010, representing a 256.2% increase. This growth was generated entirely by organic expansion, with no acquisitions made during that eight-year period.
 
Demand for our predecessor’s services declined during late 2009 and early 2010, largely due to the effect of the recent domestic and foreign economic downturn on the production enhancement services market. This economic downturn has led to a significant decrease in the industrial consumption of natural gas, lower natural gas prices compared to those of recent years (decreasing from an average Henry Hub spot price of $8.86 per million British thermal units, or “MMBtu,” in 2008 to $4.372 per MMBtu in 2010), cost cutting by our predecessor’s customers and, consequently, lower demand for our predecessor’s wellhead compression services and lower compressor utilization rates. In addition, our predecessor has experienced increasing competition in many of its key domestic operating regions, which has resulted in decreased pricing and the termination of services contracts by certain domestic customers. Also, decreased wellhead compression and other production enhancement services activity in Mexico as a result of Pemex budgetary issues and escalating security disruptions in Mexico have also resulted in decreased activity and decreased profitability. As a result, our predecessor’s revenues decreased from approximately $90.6 million during 2009 to approximately $81.4 million during 2010, a decrease of 10.1%, and our predecessor’s average number of compressor units in service decreased from 2,862 compressor units during the year ended December 31, 2009 to 2,686 compressor units during the year ended December 31, 2010, a 6.1% decrease. However, since that low point, our predecessor experienced a modest recovery in market demand for its production enhancement and related services, as the total number of compressor units in service increased from 2,660 compressor units as of December 31, 2009 to 2,711 compressor units and 2,753 compressor units as of December 31, 2010 and March 31, 2011, respectively, a 1.9% and 1.5% increase, respectively.
 
How We Evaluate Our Operations
 
Operating Expenses.  We use operating expenses as a performance measure for each of our customers’ work sites. We also track our operating expenses on a company-wide basis, using month-to-month, year-to-date and year-to-year comparisons, and as compared to budget. This analysis is useful in identifying adverse, company-wide cost trends and allows us to investigate the cause of any adverse trends and implement remedial measures if the cause or cure is within our control. We define operating expenses as costs associated with providing production enhancement services. The most significant portions of our operating expenses are the labor costs of our field personnel, repair and maintenance of our equipment, and the fuel and other supplies consumed by us while providing our services. Other materials consumed while performing our services, ad valorem taxes, sales taxes and insurance expenses comprise the significant remainder of our operating expenses. Our operating expenses generally fluctuate depending on the level of the activities performed during a specific period. Our labor costs consist primarily of wages for our field personnel, as well as expenses related to their training and safety.
 
EBITDA.  We view EBITDA as one of our primary management tools, and we track this item on a monthly basis, both in dollars and as a percentage of revenue (compared to the prior month, prior year-to-date period and prior year), and as compared to budget. We define EBITDA as earnings before interest, taxes, depreciation and amortization. EBITDA is used as a supplemental financial measure by our management and by external users of our financial statements, including investors, to assess:
 
  •  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.


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EBITDA should not be considered an alternative to net income, operating income, cash flows from operating activities or any other measure of financial performance presented in accordance with GAAP. Our EBITDA may not be comparable to EBITDA or similarly titled measures of other entities, as other entities may not calculate EBITDA in the same manner as we do. Management compensates for the limitations of EBITDA as an analytical tool by reviewing the comparable GAAP measures, understanding the differences between the measures and incorporating this knowledge into management’s decision-making processes.
 
Average Utilization Rate of our Compressor Units.  We measure the average compressor unit utilization rate of our fleet of compressor units as the number of compressor units currently used to provide services on customer well sites during a particular period, divided by the total number of compressor units currently in our fleet at the end of such period. Our management primarily uses this metric to manage the number of idle compressor units in our fleet and to determine our future need for additional compressor units. We track our average utilization rate on a monthly basis.
 
The following table sets forth our predecessor’s historical fleet size and average number of compressor units being utilized to provide our production enhancement services on customer well sites during the periods shown and our predecessor’s historical average utilization rates during those periods.
 
                                         
    Compressco Partners Predecessor
    Year Ended December 31,
    2006   2007   2008   2009   2010
 
Total compressor units in fleet (at period end)
    2,595       3,108       3,603       3,627       3,647  
Total compressor units in service (at period end)
    2,297       2,763       3,064       2,660       2,711  
Average number of compressor units in service (during period)(1)
    2,054       2,530       2,913       2,862       2,686  
Average compressor unit utilization (during period)(2)
    89.6 %     88.7 %     86.8 %     79.2 %     73.8 %
 
 
(1) “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.
 
(2) “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.
 
While our predecessor’s historical average utilization rates decreased marginally over time, this decrease generally reflects the managed growth of our predecessor’s compressor unit fleet size. However, during 2009 and 2010, our predecessor’s average utilization rates fell due to the effect of the recent domestic and foreign economic downturn on the production enhancement services market. Despite this recent trend of declining average compressor utilization rates, we expect to see an increase in average compressor unit utilization for the twelve months ending June 30, 2012 to 78.8%. This expectation is primarily driven by our expectation that the total number of compressor units in service will grow 12.7% to approximately 3,056 compressor units in service as of June 30, 2012, on a pro forma basis, while our fleet of compressor units is expected to grow by 2.8% to approximately 3,748 compressor units as of June 30, 2012, on a pro forma basis.
 
Net Increase in Compressor Fleet Size.  We define the net increase in our compressor fleet size during a given period of time as the difference between the number of compressor units we placed into service, less the number of compressor units we removed from service. Management uses this metric to evaluate our operating performance and specifically the effectiveness of our marketing efforts to grow our overall base of business.


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Industry Trends
 
We believe we will be able to continue growing our business by capitalizing on the following positive, long-term fundamentals, which we believe exist for the production enhancement services industry:
 
  •  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 Energy Information Administration, 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.
 
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 these shale plays exhibit steep decline rates from their initial production rates, we do not expect these shale plays to require wellhead production enhancement services for many years.
 
We intend to expand our 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 on pumping oil wells, continue to leverage our relationships with TETRA and its customers, and take advantage of selective acquisition opportunities, as further described in “Business Strategies.” Such growth is expected to be funded by cash provided by operations, from the portion of the net proceeds we will retain following completion of this offering, from issuances of additional partnership units and from future borrowings.
 
Items Impacting the Comparability of Our Historical Financial Results to our Future Results of Operations
 
The future results of our operations may initially not be comparable to our predecessor’s historical results of operations for the periods presented below, for the reasons described below:
 
  •  Following TETRA’s contribution to us, a significant majority of our production enhancement services will be performed by our Operating LLC pursuant to contracts that our counsel has concluded will generate qualifying income under Section 7704 of the Internal Revenue Code, or “qualifying income.” We will not pay federal income taxes on the portion of our business conducted by Operating LLC. For a detailed discussion of Section 7704 of the Internal Revenue Code, please read “Material Tax Consequences — Partnership Status” and, for a summary of certain of the relevant terms of these contracts, please read “Business — Our Operations — Our Production Enhancement Services Contract Terms.” Our Operating Corp will conduct substantially all of our operations that our counsel has not concluded will generate qualifying income and it will pay federal income tax with respect to such operations. Approximately 73.8% of our pro forma revenues for the year ended December 31, 2010 is attributable to the portion of our operations that will be conducted by our Operating LLC, and approximately 26.2% of our pro forma revenues for the year December 31, 2010 is attributable to the portion of our operations that will be conducted by our Operating Corp. Going forward, we intend to conduct substantially all of our new production enhancement service business pursuant to contracts that our counsel concludes will generate qualifying income and such business will be conducted through our Operating LLC.


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  •  The contracts pursuant to which we provide production enhancement services that our counsel has concluded will generate qualifying income generally require us to pay certain ad valorem taxes and insurance expenses.
 
  •  The results of our predecessor’s operations include an allocation of certain selling, general and administrative expenses from TETRA. Upon completion of this offering, we will be charged for certain selling, general and administrative costs in accordance with an omnibus agreement between TETRA and us, and the amount of such charges could vary from the amounts presented in our predecessor’s results of operations.
 
  •  The results of our predecessor’s operations include interest expense associated with revolving credit indebtedness owed to an affiliate of TETRA. Under this indebtedness, which originated in August 2004, our predecessor could borrow up to $150 million at an interest rate of 9.0% per annum. This indebtedness was originally scheduled to mature on December 31, 2010 and the outstanding principal balance as of December 31, 2010 was $145.1 million. In December 2010, this indebtedness was refinanced to increase the maximum borrowings to $250 million, accrue interest at 7.5% and extend the maturity date to December 31, 2020. We will assume approximately $31.5 million of this indebtedness (as partial consideration for the assets we acquire from TETRA in connection with this offering), which $31.5 million will be repaid in full from the proceeds of this offering, and we will not reflect interest on this indebtedness in our future results of operations. The balance of this intercompany indebtedness will be repaid by our predecessor prior to this offering.
 
  •  Upon completion of this offering, we anticipate that we will incur additional selling, general and administrative expenses of approximately $2.0 million per year as a result of being a publicly traded limited partnership, including costs associated with annual and quarterly reports to our unitholders, annual financial audits, Schedule K-1 preparation and distribution, investor relations activities, registrar and transfer agent fees, attorney fees, incremental director and executive officer liability insurance costs and director compensation.
 
  •  Given our partnership structure and cash distribution policy, we will distribute all of our available cash from operating surplus at the end of each quarter (excluding cash reserved to operate our business).
 
  •  We will use approximately $31.5 million of the net proceeds received from this offering to retire the 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. The balance of the net proceeds of this offering (approximately $9.9 million) will be available for general partnership purposes, which include funding the manufacturing of compressor units and the acquisition of field trucks and other equipment, as needed, and otherwise investing in short-term interest bearing securities. Please read “Use of Proceeds.”
 
  •  We are not a restricted subsidiary of TETRA for purposes of TETRA’s credit facility with J.P. Morgan Chase Bank, N.A., as Administrative Agent, which we refer to as the “TETRA Credit Facility,” or under several series of notes which TETRA has issued pursuant to certain note purchase agreements in September 2004, April 2006, April 2008 and October 2010 (which included Series A and Series B notes) and which we collectively refer to as the “TETRA Senior Notes.” As such, our ability to take certain actions, including incurring indebtedness, granting liens on our assets and making acquisitions and capital expenditures, will not be restricted by the TETRA Credit Facility and the TETRA Senior Notes.


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Results of Operations
 
The following data should be read in conjunction with the Combined Financial Statements and the associated Notes contained elsewhere in this prospectus.
 
Compressco Partners Predecessor
 
                                         
                      Period-to-Period Change  
                      Year Ended  
    Year Ended December 31,     2009
    2010
 
Combined Results of Operations
  2008     2009     2010     vs. 2008     vs. 2009  
    (In thousands)  
 
Revenues:
                                       
Compression and other services
  $ 91,925     $ 86,105     $ 77,395     $ (5,820 )   $ (8,710 )
Sales of compressors and parts
    8,019       4,468       4,017       (3,551 )     (451 )
                                         
Total revenues
  $ 99,944     $ 90,573     $ 81,412     $ (9,371 )   $ (9,161 )
Cost of revenues:
                                       
Cost of compression and other services
    38,736       38,108       35,423       (628 )     (2,685 )
Cost of compressors and parts sales
    5,453       2,851       2,554       (2,602 )     (297 )
                                         
Total cost of revenues
  $ 44,189     $ 40,959     $ 37,977     $ (3,230 )   $ (2,982 )
Selling, general and administrative expense
    14,352       13,193       14,328       (1,159 )     1,135  
Depreciation and amortization
    12,112       13,823       13,112       1,711       (711 )
Interest expense
    10,990       11,980       13,096       990       1,116  
Other (income) expense, net
    174       (82 )     113       (256 )     195  
                                         
Income before income taxes
  $ 18,127     $ 10,700     $ 2,786     $ (7,427 )   $ (7,914 )
Provision for income taxes
    6,846       4,161       1,169       (2,685 )     (2,992 )
                                         
Net income
  $ 11,281     $ 6,539     $ 1,617     $ (4,742 )   $ (4,922 )
                                         
 
                                         
                      Period-to-Period Change  
    Percentage of Total Revenues     Year Ended  
    Year Ended December 31,     2009
    2010
 
Combined Results of Operations
  2008     2009     2010     vs. 2008     vs. 2009  
 
Revenues:
                                       
Compression and other services
    92.0 %     95.1 %     95.1 %     (6.3 )%     (10.1 )%
Sales of compressors and parts
    8.0 %     4.9 %     4.9 %     (44.3 )%     (10.1 )%
                                         
Total revenues
    100.0 %     100.0 %     100.0 %     (9.4 )%     (10.1 )%
Cost of revenues:
                                       
Cost of compression and other services
    38.8 %     42.1 %     43.5 %     (1.6 )%     (7.0 )%
Cost of compressors and parts sales
    5.5 %     3.1 %     3.1 %     (47.7 )%     (10.4 )%
                                         
Total cost of revenues
    44.2 %     45.2 %     46.6 %     (7.3 )%     (7.3 )%
Selling, general and administrative expense
    14.4 %     14.6 %     17.6 %     (8.1 )%     8.6 %
Depreciation and amortization
    12.1 %     15.3 %     16.1 %     14.1 %     (5.1 )%
Interest expense
    11.0 %     13.2 %     16.1 %     9.0 %     9.3 %
Other (income) expense, net
    0.2 %     (0.1 )%     0.1 %     (147.1 )%     237.8 %
Income before income taxes
    18.1 %     11.8 %     3.4 %     (41.0 )%     (74.0 )%
                                         
Net income
    11.3 %     7.2 %     2.0 %     (42.0 )%     (75.3 )%
                                         


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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
 
Revenue.  Our predecessor’s combined revenues for the year ended December 31, 2010 decreased $9.2 million to $81.4 million, compared to $90.6 million for the year ended December 31, 2009, a decrease of 10.1%. This change was primarily associated with a 10.1% decrease in services revenues, as our predecessor utilized an average of 2,686 compressor units to provide services during the year ended December 31, 2010 compared to an average of 2,862 compressor units during the year ended December 31, 2009. Domestic revenues decreased $6.0 million during the year ended December 31, 2010 to $62.3 million, an 8.8% decrease from the prior year. This decrease in domestic services revenues was primarily due to decreased demand and increased competition. These factors also resulted in a decrease in average compressor unit monthly service rates during 2010 compared to the prior year period. Canadian revenues declined from $6.0 million for the year ended December 31, 2009 to $4.9 million for the year ended December 31, 2010, primarily due to lower capital spending by Canadian exploration and production companies caused by decreased prices for natural gas from Canada and increased production costs. Mexican revenues for the year ended December 31, 2010 decreased 25.7% from $15.1 million to $11.3 million, due to a decrease in our predecessor’s business in Mexico partially caused by Pemex budgetary issues and security disruptions in Mexico, as well as flooding which occurred during the third quarter of 2010. In addition to these decreases, revenues from sales of compressor units and parts decreased to $4.0 million for the year ended December 31, 2010 compared to $4.5 million for the prior year.
 
Cost of revenue.  Combined cost of revenues decreased from $41.0 million for the year ended December 31, 2009 to $38.0 million for the same period in 2010, a decrease of $3.0 million or 7.3%. This change reflects the decreased number of compressor units being utilized to provide services, with cost of wellhead compression and other services decreasing $2.7 million during the year ended December 31, 2010 over the prior year. This decrease was primarily driven by decreases in field labor, repair and maintenance and fuel costs, reflecting the decreased service fleet during the year ended December 31, 2010 compared to the prior year. Domestic cost of revenues made up the greatest portion of this change, commensurate with a decrease in domestic services revenues. Cost of compressor units sold decreased during this period as a result of decreased compressor sales. As a percentage of combined revenues, cost of revenues increased to 46.6% for the year ended December 31, 2010 compared to 45.2% for the prior year, as the decrease in Mexican revenues and activity resulted in lower combined operating profitability during 2010.
 
Selling, general and administrative expense.  Selling general and administrative expenses increased from $13.2 million for the year ended December 31, 2009 to $14.3 million for the year ended December 31, 2010, an increase of $1.1 million or 8.6%. As a percentage of combined revenues, our predecessor’s selling, general and administrative expense increased during the year ended December 31, 2010 to 17.6% compared to 14.6% for the prior year. Selling, general and administrative expense includes costs allocated by TETRA for administrative costs incurred by TETRA.
 
Depreciation and amortization.  Depreciation and amortization expense primarily consists of the depreciation of compressor units. In addition, depreciation and amortization expense also includes the depreciation of other operating equipment and facilities locations, as well as the amortization of certain intangible assets. Depreciation and amortization expense decreased $0.7 million during the year ended December 31, 2010 compared to the year ended December 31, 2009, a decrease of approximately 5.1%. This change was primarily due to the decreased size and cost of the compressor unit fleet.
 
Interest expense.  Interest expense increased from $12.0 million to $13.1 million due to the increase principal balance of our predecessor’s note payable to an affiliate of TETRA.
 
Income before taxes and net income.  Income before taxes for the year ended December 31, 2010 was $2.8 million, compared to $10.7 million for the year ended December 31, 2009, a decrease of $7.9 million or 74.0%. As a percentage of combined total revenues, income before taxes decreased to 3.4% for the year ended December 31, 2010, compared to 11.8% for the prior year. Net income for the year ended December 31, 2010 was $1.6 million, compared to $6.5 million for the prior year, a decrease of $4.9 million or 75.3%. As described above, our predecessor’s profitability decreased due to decreased activity, both domestically and internationally.


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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Revenue.  Our predecessor’s combined revenues decreased from $99.9 million for 2008 to $90.6 million for 2009, a decrease of $9.4 million or 9.4%. This change was primarily associated with a 6.3% decrease in services revenues, as our predecessor utilized an average of 2,862 compressor units to provide services during the year ended December 31, 2009, compared to an average of 2,913 compressor units during the year ended December 31, 2008. In addition, average compressor unit monthly service rates decreased slightly during 2009 compared to 2008. Domestic revenues decreased 11.5% during 2009 from $77.1 million for 2008 to $68.2 million for 2009. In addition, Mexican revenues decreased 2.3% during 2009, from $15.5 million during 2008 to $15.1 million during 2009. Canadian revenues declined $1.2 million, or 16.1%, from $7.2 million for 2008 to $6.0 million for 2009, primarily due to lower capital spending by Canadian exploration and production companies caused by decreased prices for natural gas from Canada and increased production costs. Approximately $3.6 million of the decrease in combined revenues was also due to decreased sales of compressor units during 2009 compared to 2008, as the number of compressor units sold decreased from 101 for 2008 to 26 for 2009 due to a decrease in demand for compressor units by our customers.
 
Cost of revenue.  Combined cost of revenues decreased from $44.2 million for 2008 to $41.0 million for 2009, a decrease of $3.2 million or 7.3%. This decrease was partially due to decreased cost of services, which decreased $0.6 million due to the decreased service fleet in 2009. Domestic cost of services, including field labor, repair and maintenance and fuel, decreased due to the decreased service fleet, but were offset by increased Canadian operating expenses. More significantly, cost of compressors and parts sales decreased $2.6 million as a result of decreased sales of compressor units and parts. As a percentage of combined revenues, however, cost of revenues increased from 44.2% for 2008 to 45.2% for 2009 primarily due to lower margins on sales of fewer compressor units during 2009 compared to 2008.
 
Selling, general and administrative expense.  As a percentage of combined revenues, our predecessor’s selling, general and administrative expense increased slightly during 2009 to approximately 14.6%, compared to 14.4% for 2008. However, selling, general and administrative expense decreased by $1.2 million from $14.4 million to $13.2 million, consistent with the overall decrease of our predecessor’s operations.
 
Depreciation and amortization.  Depreciation and amortization expense primarily consists of the depreciation of compressor units. In addition, depreciation and amortization expense also includes the depreciation of other operating equipment and facilities locations, as well as the amortization of certain intangible assets. Depreciation and amortization expense increased $1.7 million during 2009, or approximately 14.1%, primarily due to the increased size of the compressor unit fleet.
 
Interest expense.  Interest expense increased from $11.0 million to $12.0 million due to the increased principal balance of our predecessor’s note payable to an affiliate of TETRA.
 
Income before taxes and net income.  Income before taxes for 2009 was $10.7 million, compared to $18.1 million for 2008, a decrease of $7.4 million or 41.0%. As a percentage of combined total revenues, income before taxes was 11.8% for 2009, compared to 18.1% for 2008. Net income for 2009 was $6.5 million, compared to $11.3 million for 2008, a decrease of $4.7 million or 42.0%. As described above, our predecessor’s profitability decreased as a result of decreased activity domestically and internationally.
 
Liquidity and Capital Resources
 
Our Predecessor’s Liquidity and Capital Resources
 
Operating Activities.  Net cash from operating activities decreased by $3.5 million during 2010 to $20.4 million compared to $23.9 million for 2009, primarily due to decreased earnings and the use of operating cash during 2010 to increase inventories, and the decrease in collection of service billings during the year. Net cash from operating activities decreased by $1.6 million during 2009 to $23.9 million compared to $25.6 million for 2008 primarily due to increased receivables and inventory during 2008.
 
Investing Activities.  Capital expenditures for 2010 increased by $5.7 million to $8.7 million compared to $3.0 million for 2009 due to an increase in the number of compressor units manufactured during the year.


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Total compressor units manufactured in 2010 increased to 69, compared to 40 compressor units completed in the prior year. Capital expenditures for 2009 decreased by $30.0 million to $3.0 million compared to $33.0 million for 2008, as the number of compressor units manufactured decreased to 40 compressor units from 608 compressor units manufactured during 2008. In particular, our predecessor significantly decreased the number of compressor units manufactured for our operations domestically, where activity during the year was slow.
 
Financing Activities.  Historically, our predecessor’s sources of liquidity included cash internally generated from operations as well as intercompany loans and capital contributions from TETRA. Our predecessor’s cash receipts were deposited in TETRA’s bank accounts and all cash disbursements were made from these accounts. Accordingly, the amount of cash reflected in our predecessor’s historical financial statements is not indicative of its actual cash position, as TETRA retained any cash surplus, shortfalls and debt borrowings on its balance sheet. Cash transactions handled by TETRA were reflected in net parent equity. Net cash provided by and used in financing activities represents the pass through of our predecessor’s net cash flows to TETRA, pursuant to its cash management program.
 
Our Liquidity and Capital Resources
 
Liquidity.  We must generate approximately $24.3 million (or approximately $6.1 million per quarter) of available cash to pay the minimum 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, 2010, the pro forma cash available for distribution for the twelve months ended December 31, 2010 would have been approximately $24.7 million. This amount 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 interest for the year ended December 31, 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, 2010, please read “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma Cash Available for Distribution for the Twelve Months Ended December 31, 2010.” Following this offering, we plan to maintain our own bank accounts, although TETRA’s personnel will manage our cash and investments.
 
In addition to distributions on our partnership units, our primary short-term liquidity needs are to fund the working capital requirements of our business. We anticipate that our primary source of funds for our short-term liquidity needs will be the remainder of the net proceeds retained from this offering of approximately $9.9 million and cash generated from our operations, which we believe will be sufficient to meet our working capital requirements for the next 18 months.
 
Because we will distribute all of our available cash, we expect that we will rely upon external financing sources, including borrowings and issuance of additional partnership units, to fund capital expenditures or acquisitions. We cannot assure you that we will be able to raise additional funds on favorable terms. For more information, please read “— Capital Requirements” below.
 
Capital Requirements.  The natural gas production enhancement services business is capital intensive, requiring significant investment to maintain, expand and upgrade existing operations. Our predecessor’s capital requirements historically have been primarily for the expansion of our compressor unit fleet. Our predecessor’s capital requirements historically have been funded with internally generated cash flows as well as loans and capital contributions from TETRA. Given our primary objective of growth through the expansion of our operations, both domestically and internationally, over the long term, we anticipate that we will continue to invest significant amounts of capital to manufacture additional compressor units. As more completely discussed in “Our Cash Distribution Policy and Restrictions on Distributions — Assumptions and Considerations,” for the twelve months ending June 30, 2012, we estimate that our capital expenditures will be approximately $4.4 million, consisting of $2.5 million of maintenance capital expenditure requirements and $2.0 million of expansion capital expenditure requirements. We anticipate capital expenditures of approximately $3.0 million to replace a significant portion of our Mexican automated sand separator fleet


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dturing the next three years, beginning in 2011. We currently have approximately 800 compressor units not currently being utilized, which we can utilize to provide our production enhancement services as our business grows. Once those compressor units are utilized, we would expect our expansion capital expenditures to increase to fund the construction of additional compressor units. In addition to organic growth, we may also consider a variety of assets or businesses for potential acquisition. We expect to fund any future acquisitions with capital from external financing sources and issuance of debt and equity securities, including our issuance of additional partnership units as appropriate, given market conditions, and, if necessary, future debt offerings by us.
 
Our Long-Term Ability to Grow will Depend on Our Ability to Access External Expansion Capital.  The amount of cash we have to distribute to our unitholders will be reduced by cash reserves established by our general partner to provide for the proper conduct of our business (including for future capital expenditures). Although we believe the remainder of the net proceeds from this offering of approximately $9.9 million and cash generated from our operations will be sufficient to fund our working capital requirements for approximately the next 18 months, over the long term, we expect that we will rely primarily upon external financial sources, including borrowings and the issuance of debt and equity securities, rather than depleting the remaining cash reserves established by our general partner to fund our expansion capital expenditures and acquisitions. To the extent we are unable to finance our long-term growth externally, our cash distribution policy may significantly impair our ability to grow. In addition, because we will distribute all or a portion of our distributable 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 any expansion capital expenditures or acquisitions, the payment of distributions on those additional partnership units may increase the risk that we will be unable to maintain or increase our per unit distribution level. There are no limitations in our partnership agreement on our ability to issue additional partnership units, including units ranking senior to the common units.
 
Contractual Obligations.  The following table summarizes our predecessor’s total contractual cash obligations as of December 31, 2010:
 
                                                         
    Compressco Partners Predecessor  
    Payments Due  
                                        More than
 
          Less than
                            5 Years
 
          1 Year
    2 Years
    3 Years
    4 Years
    5 Years
    (Beyond
 
    Total     (2011)     (2012)     (2013)     (2014)     (2015)     2015)  
    (In thousands)  
 
Long-term debt(a)
  $ 145,085     $     $     $     $     $     $ 145,085  
Interest on debt
    108,810       10,881       10,881       10,881       10,881       10,881       54,405  
Operating leases obligations
    1,354       506       405       342       81       20