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)
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Delaware
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1389
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94-3450907
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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101 Park Avenue, Suite 1200
Oklahoma City, Oklahoma 73102
(405) 677-0221
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
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:
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David P. Oelman
Jeffery K. Malonson
Vinson & Elkins L.L.P.
1001 Fannin Street, Suite 2500
Houston, Texas 77002
(713) 758-2222
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Bass C. Wallace, Jr.
TETRA Technologies, Inc.
24955 Interstate 45 North
The Woodlands, Texas 77380
(281) 367-1983
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Laura Lanza Tyson
Baker Botts L.L.P.
98 San Jacinto Boulevard
Austin, Texas 78701
(512) 322-2500
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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):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer x
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Smaller
reporting
company o
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(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.
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.
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Subject
to Completion dated April 12, 2011
PROSPECTUS
2,500,000
Common Units
Representing
Limited Partner Interests
We are a Delaware limited partnership formed by TETRA
Technologies, Inc., or TETRA, to provide wellhead
compression-based production enhancement services to domestic
and international customers. This is the initial public offering
of our common units. We currently estimate that the initial
public offering price will be between $19.00 and $21.00 per
common unit. Prior to this offering, there has been no public
market for our common units. We 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:
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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.
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We may be unable to achieve our expected growth and market
penetration.
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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.
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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.
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Holders of our common units have limited voting rights and
are not entitled to elect our general partner or its
directors.
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Our unitholders will experience immediate and substantial
dilution of $12.18 in tangible net book value per common
unit.
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Our tax treatment depends on our status as a partnership for
U.S. federal income tax purposes, as well as our not being
subject to a material amount of additional entity-level taxation
by individual states or
non-U.S. jurisdictions.
If the Internal Revenue Service treats us as a corporation or we
become subject to a material amount of entity-level taxation by
individual states or by
non-U.S. jurisdictions,
it would substantially reduce the amount of cash available for
distribution to our unitholders.
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Unitholders may be required to pay taxes on income from us
even if they do not receive any cash distributions from us.
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Per
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Common Unit
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Total
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Initial public offering price
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$
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$
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Underwriting discount(1)
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$
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$
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Proceeds to Compressco Partners, L.P. (before expenses)
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$
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$
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(1) |
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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.
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RAYMOND
JAMES |
J.P.
MORGAN |
The date
of this prospectus
is ,
2011.
TABLE OF
CONTENTS
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1
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1
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4
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5
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7
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59
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64
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ii
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iii
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.
iv
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 TETRAs controlled subsidiaries,
other than us. References to Compressco refer to
Compressco, Inc., a wholly owned subsidiary of TETRA, and
Compresscos 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 predecessors 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 predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements 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 predecessors 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
1
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 customers 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
2
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.
Predecessors
Growth and Historical Operating Results
Our predecessors business experienced substantial organic
growth over the past eight fiscal years. Our predecessors
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 predecessors 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
predecessors operating results, please read
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
3
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 predecessors 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
|
|
|
|
|
|
|
|
|
|
|
|
|
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
4
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
5
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 TETRAs 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 predecessors
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 predecessors
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
predecessors assets as of December 31, 2010. For more
pro forma financial and operating information about the portion
of our predecessors business that will be contributed to
us in connection with this offering, please read Selected
Historical and Pro Forma Financial and Operating Data.
Following TETRAs 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
Compresscos employees will become our or our general
partners 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.
6
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 predecessors
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.
7
|
|
|
|
|
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.
8
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. |
9
Management
of Compressco Partners
We rely on our general partners 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 partners directors will be
elected by TETRA. For more information about our general
partners 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
partners 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.
10
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
|
|
|
|
|
|
|
11
|
|
|
|
|
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. |
12
|
|
|
|
|
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. |
13
|
|
|
|
|
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 partners 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 Partners 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 |
14
|
|
|
|
|
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. |
15
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 predecessors 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 predecessors 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 predecessors 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 predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements 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 predecessors 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 predecessors
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 Managements 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
16
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. |
17
|
|
|
(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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compressco
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|
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|
|
|
|
|
|
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|
|
|
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|
Partners
|
|
|
|
|
|
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|
Pro Forma
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|
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|
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
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
EBITDA
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|
$
|
26,197
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|
|
$
|
34,873
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|
|
$
|
41,229
|
|
|
$
|
36,503
|
|
|
$
|
28,994
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|
|
|
$
|
28,765
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|
|
|
|
|
|
|
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18
The following table reconciles cash flow from operating
activities to EBITDA:
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|
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|
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|
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Compressco Partners Predecessor
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|
|
Year Ended December 31,
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|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
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|
(In thousands)
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|
|
Cash flow from operating activities
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|
$
|
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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|
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19
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:
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the level of capital expenditures we make;
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the cost of achieving organic growth in current and new markets;
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the cost of any acquisitions;
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fluctuations in our working capital requirements;
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our ability to borrow funds and access capital markets;
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the amount of cash reserves established by our general partner;
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the fees we charge and the margins we realize from our
production enhancement services operations;
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the level of our operating costs and expenses;
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the prices of, levels of production of, and demand for, natural
gas;
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the level of competition from other companies;
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the impact of prevailing economic conditions on our
customers operating budgets; and
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any future debt service requirements and other liabilities.
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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.
20
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:
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attract new customers;
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|
maintain our existing customers and maintain or expand the level
of production enhancement services we provide to them;
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|
recruit and train qualified field services personnel and retain
valued employees;
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|
increase the scale of our compressor unit manufacturing
operations;
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|
allocate our human resources optimally;
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consummate accretive acquisitions;
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|
expand our domestic and international presence; and
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|
obtain required financing for our future operations.
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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
21
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:
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|
|
|
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.
22
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 Mexicos 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 partners
ability to hire, train and retain an adequate number of trained
personnel. The departure of any of our general partners
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
23
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
24
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 Pemexs 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 Pemexs 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 customers
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 managements 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 TETRAs
ownership of our general partner is pledged to TETRAs
lenders, then there is a risk that control over our general
partner could be transferred to TETRAs lenders in the
event of a default.
26
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
earths 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,
27
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 Earths 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.
28
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 firms,
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 partners directors
are directors of Compressco, a wholly owned subsidiary of TETRA,
and a majority of our general partners 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:
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neither our partnership agreement nor any other agreement
requires TETRA or Compressco to pursue a business strategy that
favors us. Compresscos 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;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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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;
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our general partner decides whether to retain separate counsel,
accountants or others to perform services for us; and
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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 partners 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.
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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. Compresscos
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 TETRAs
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 partners
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:
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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;
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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;
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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;
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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
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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.
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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
32
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 Partners 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
managements 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:
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our previously existing unitholders proportionate
ownership interests in us will decrease;
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the amount of cash available for distribution on each common
unit may decrease;
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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;
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the ratio of taxable income to distributions may increase;
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the relative voting strength of each previously outstanding
common unit may be diminished; and
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the market price of the common units may decline.
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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
34
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:
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a court or government agency determined that we were conducting
business in a state but had not complied with that particular
states partnership statute; or
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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.
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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:
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the level of our distributions and our earnings or those of
other companies in our industry;
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announcements by us or our competitors of significant contracts,
acquisitions or other business developments;
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changes in accounting standards, policies, guidance,
interpretations or principles;
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general economic conditions;
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the failure of securities analysts to cover our common units
after this offering or changes in financial estimates by
analysts; and
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the other factors described in these Risk Factors.
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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
38
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 IRSs positions may ultimately be sustained. It may be
necessary to resort to administrative or court proceedings to
sustain some or all of our counsels conclusions or the
positions we take. A court may not agree with some or all of our
counsels 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 unitholders 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 unitholders 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
39
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.
41
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.
42
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.
43
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
predecessors 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 Managements 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. |
44
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 predecessors
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. |
45
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 Managements 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
46
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.
|
47
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
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 partners 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.
49
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.
50
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. |
51
|
|
|
(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
TETRAs 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
52
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 managements
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.
53
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
|
|
|
|
|
|
|
54
|
|
|
(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
TETRAs and the Partnerships 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.
55
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 predecessors 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 predecessors
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
predecessors customers and, consequently, lower demand for
our predecessors 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.
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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.
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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.
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Cost
of revenues (excluding depreciation and amortization
expenses)
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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.
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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.
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Selling,
general and administrative expense
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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.
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Depreciation
and amortization expense
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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.
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Interest
expense (income)
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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.
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Provision
for income taxes
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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
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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.
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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.
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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.
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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
managements 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.
58
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:
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less the amount of cash reserves established by our general
partner to:
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provide for the proper conduct of our business after the end of
the quarter;
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comply with applicable law, any of our future debt instruments
or other agreements; or
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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);
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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.
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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 partners 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
59
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:
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$15 million (as described below); plus
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all of our cash receipts after the closing of this offering,
excluding cash from interim capital transactions, which include
the following:
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borrowings that are not working capital borrowings;
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sales of equity and debt securities;
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sales or other dispositions of assets outside the ordinary
course of business; and
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capital contributions received; plus
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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
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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
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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
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all of our operating expenditures (as defined below) after the
closing of this offering; less
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the amount of cash reserves established by our general partner
to provide funds for future operating expenditures; less
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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
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any loss realized on disposition of an investment capital
expenditure.
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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:
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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;
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payments (including prepayments and prepayment penalties) of
principal of and premium on indebtedness, other than working
capital borrowings;
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expansion capital expenditures;
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actual maintenance capital expenditures (as discussed in further
detail below);
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investment capital expenditures;
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payment of transaction expenses relating to interim capital
transactions;
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distributions to our partners (including distributions in
respect of our incentive distribution rights); or
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repurchases of equity interests except to fund obligations under
employee benefit plans.
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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:
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borrowings other than working capital borrowings;
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sales of our equity and debt securities; and
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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.
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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:
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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;
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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
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there are no arrearages in payment of the minimum quarterly
distribution on the common units.
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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:
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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;
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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
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there are no arrearages in payment of the minimum quarterly
distributions on the common units.
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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:
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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
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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.
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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:
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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
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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
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any net decrease in working capital borrowings with respect to
that period; plus
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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
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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.
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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:
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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;
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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;
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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
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thereafter, in the manner described in
General Partner Interest and Incentive
Distribution Rights below.
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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:
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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
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thereafter, in the manner described in
General Partner Interest and Incentive
Distribution Rights below.
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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
|
%
|
65
General
Partners 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.
|
66
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
67
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
68
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 partners 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
69
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:
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first, to our general partner to the extent of certain
prior losses specially allocated to our general partner;
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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;
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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;
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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;
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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;
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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
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thereafter, 50.0% to all unitholders, pro rata, and 50.0%
to our general partner.
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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
70
that have previously been allocated, we will generally allocate
any loss to our general partner and the unitholders in the
following manner:
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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;
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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
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thereafter, 100.0% to our general partner.
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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.
71
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 predecessors 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 predecessors 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 predecessors 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 predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements 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 predecessors 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:
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the contribution to us of a portion of our predecessors
business, as further described in Business Our
Relationship with TETRA and Compressco;
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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
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our use of the proceeds received from the offering, as further
described in Use of Proceeds.
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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 Managements 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.
72
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
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Compressco Partners
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Pro Forma
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Compressco Partners Predecessor
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Year Ended
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Year Ended December 31,
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December 31,
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2006
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2007
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2008
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2009
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2010
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2010
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(unaudited)
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(dollars in thousands)
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(unaudited)
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(dollars in
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(dollars in
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thousands)
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thousands,
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except per unit
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amounts)
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Statement of Operations Data:
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Revenue
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$
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67,133
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$
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85,985
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$
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99,944
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$
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90,573
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$
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81,412
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$
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80,932
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Cost of revenue
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30,265
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38,179
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44,189
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40,959
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37,977
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37,759
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Selling, general and administrative expenses
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10,612
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12,964
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14,352
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13,193
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14,328
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14,295
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Depreciation and amortization expense
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6,436
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9,433
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12,112
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13,823
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13,112
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13,070
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Interest expense
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9,250
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10,083
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10,990
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11,980
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13,096
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38
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Other (income) expense, net
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59
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(31
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)
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174
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(82
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)
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113
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113
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Income before income tax provision
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10,511
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15,357
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18,127
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10,700
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2,786
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15,657
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Provision for income taxes
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4,100
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5,803
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6,846
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4,161
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1,169
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1,705
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Net income
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$
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6,411
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$
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9,554
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$
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11,281
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$
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6,539
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$
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1,617
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$
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13,952
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General partner interest in net income
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$
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279
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Common unitholders interest in net income
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$
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8,092
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Subordinated unitholders interest in net income
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$
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5,581
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Net income per common unit (basic and diluted)
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$
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0.89
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Balance Sheet Data (at Period End):
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Working capital(1)
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$
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19,761
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$
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27,565
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$
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31,308
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$
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32,983
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$
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28,943
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Total assets
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$
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163,981
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$
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186,675
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$
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212,167
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$
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202,497
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$
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196,566
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Partners capital/net parent equity
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$
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40,048
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$
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48,713
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$
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56,792
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$
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33,900
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$
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25,953
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Other Financial Data:
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EBITDA(2)
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$
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26,197
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$
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34,873
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$
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41,229
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$
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36,503
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$
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28,994
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$
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28,765
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Capital expenditures(3)
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$
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25,917
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$
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23,929
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$
|
33,036
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$
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2,997
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$
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8,715
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Cash flows provided by (used in):
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Operating activities
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$
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12,251
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$
|
15,737
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$
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25,569
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$
|
23,936
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$
|
20,391
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Investing activities
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$
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(25,862
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)
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$
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(23,930
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)
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$
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(32,997
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)
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$
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(2,882
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)
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$
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(8,613
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)
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Financing activities
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$
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14,378
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$
|
7,991
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$
|
7,607
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$
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(17,854
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)
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$
|
(9,735
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)
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Operating Data:
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Total compressor units in fleet (at period end)
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2,595
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3,108
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3,603
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|
|
3,627
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|
|
|
3,647
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Total compressor units in service (at period end)
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2,297
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|
|
|
|
2,763
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|
|
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3,064
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|
|
|
2,660
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|
|
|
2,711
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|
|
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Average number of compressor units in service (during period)(4)
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2,054
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|
|
|
|
2,530
|
|
|
|
2,913
|
|
|
|
2,862
|
|
|
|
2,686
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|
|
|
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Average compressor unit utilization (during period)(5)
|
|
|
89.6
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%
|
|
|
|
88.7
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%
|
|
|
86.8
|
%
|
|
|
79.2
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%
|
|
|
73.8
|
%
|
|
|
|
|
|
|
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(1) |
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Working capital is defined as current assets minus current
liabilities. |
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(2) |
|
Please read Summary Non-GAAP Financial
Measures for more information regarding EBITDA. We define
EBITDA as earnings before interest, taxes, depreciation and
amortization. |
73
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(3) |
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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. |
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(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.
74
MANAGEMENTS
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 TETRAs controlled subsidiaries,
other than us. References to Compressco refer to
Compressco, Inc., a wholly owned subsidiary of TETRA, and
Compresscos 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 predecessors 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 predecessors business that
will not be contributed to us in connection with this offering.
Because our operations will not represent the entirety of our
predecessors business, and due to other factors described
in Managements 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 predecessors 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 predecessors business experienced substantial organic
growth over the past eight fiscal years. Our predecessors
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 predecessors number of
75
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 predecessors 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
predecessors customers and, consequently, lower demand for
our predecessors 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 predecessors revenues
decreased from approximately $90.6 million during 2009 to
approximately $81.4 million during 2010, a decrease of
10.1%, and our predecessors 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.
|
76
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 managements 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 predecessors 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 predecessors
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 predecessors historical average utilization
rates decreased marginally over time, this decrease generally
reflects the managed growth of our predecessors compressor
unit fleet size. However, during 2009 and 2010, our
predecessors 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.
77
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 predecessors historical results of
operations for the periods presented below, for the reasons
described below:
|
|
|
|
|
Following TETRAs 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.
|
78
|
|
|
|
|
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 predecessors 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 predecessors results of operations.
|
|
|
|
The results of our predecessors 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
TETRAs 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.
|
79
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
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009
Revenue. Our predecessors 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 predecessors 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
predecessors 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 predecessors 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
predecessors profitability decreased due to decreased
activity, both domestically and internationally.
81
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenue. Our predecessors 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 predecessors 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 predecessors 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 predecessors 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 predecessors profitability decreased as a
result of decreased activity domestically and internationally.
Liquidity
and Capital Resources
Our
Predecessors 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.
82
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
predecessors sources of liquidity included cash internally
generated from operations as well as intercompany loans and
capital contributions from TETRA. Our predecessors cash
receipts were deposited in TETRAs bank accounts and all
cash disbursements were made from these accounts. Accordingly,
the amount of cash reflected in our predecessors
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 predecessors 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 TETRAs 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 predecessors capital requirements
historically have been primarily for the expansion of our
compressor unit fleet. Our predecessors 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
83
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 predecessors 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
255,249
|
|
|
$
|
11,387
|
|
|
$
|
11,286
|
|
|
$
|
11,223
|
|
|
$
|
10,962
|
|
|
$
|
10,901
|
|
|
$
|
199,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the December 2010 refinancing of our predecessors
revolving credit promissory note to an affiliate of TETRA
whereby the maturity date was extended from December 2010 to
December 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. The balance of this indebtedness will be repaid
by our predecessor prior to this offering. |
Critical
Accounting Policies and Estimates
This discussion and analysis of our predecessors financial
condition and results of operations is based upon our
predecessors combined financial statements. Our
predecessors management prepared these financial
statements in conformity with United States generally accepted
accounting principles. In preparing our predecessors
combined financial statements, management makes assumptions,
estimates, and judgments that affect the reported amounts of
assets and liabilities at the date of the financial statements
and the reported
84
amounts of revenue and expenses during the periods presented.
Management bases these estimates on historical experience,
available information and various other assumptions it believes
to be reasonable under the circumstances. Management
periodically evaluates these estimates and judgments, including
those related to potential impairments of long-lived assets, the
useful life of long-lived assets, the collectability of accounts
receivable, and the allocation of certain parent company
administrative costs. These judgments and estimates may change
as new events occur, as new information is acquired, and with
changes in our operating environment. Actual results are likely
to differ from current estimates, and those differences may be
material. The following critical accounting policies reflect the
most significant judgments and estimates used in the preparation
of our predecessors and our financial statements.
Impairment of Long-Lived Assets The
determination of impairment of long-lived assets is conducted
periodically whenever indicators of impairment are present. If
such indicators are present, the determination of the amount of
impairment is based on our judgments as to the future operating
cash flows to be generated from these assets throughout their
estimated useful lives. If an impairment of a long-lived asset
is warranted, we estimate the fair value of the asset based on a
present value of these cash flows or the value that could be
realized from disposing of the asset in a transaction between
market participants. The estimation of future operating cash
flows is inherently imprecise and, if our estimates are
materially incorrect, it could result in an overstatement or
understatement of our financial position and results of
operations. In particular, the oil and gas industry is cyclical,
and estimates of the period over which future cash flows will be
generated, as well as the predictability of these cash flows,
can have an additional significant impact on the carrying value
of these assets and, particularly in periods of prolonged down
cycles, may result in impairment charges. Historically, our
predecessor has not experienced significant impairments of its
long-lived compressor assets, as utilized compressor units
generate cash flows sufficient to support their carrying values.
Unutilized assets are well maintained and evaluated on a regular
basis. Serviceable compressor units that are currently
unutilized are anticipated to be placed in service in future
years as demand increases, or as fully depreciated units in
service are replaced. Sales of compressor units have
historically been at selling prices in excess of asset cost.
While we have not experienced significant impairments in the
past, impairments of our long-lived assets could occur in the
future, particularly as a result of a significant and sustained
deterioration of natural gas production.
Impairment of Goodwill The impairment of
goodwill is also assessed whenever impairment indicators are
present but not less than once annually. The assessment for
goodwill impairment for our predecessor consists of a comparison
of the net parent equity to the estimation of the fair value of
our predecessor. If the net parent equity exceeds its estimated
fair value, an impairment loss is calculated by comparing the
carrying amount of our predecessors goodwill to our
estimated implied fair value of that goodwill. Our estimates of
fair value are imprecise and are subject to our estimates of the
future cash flows of our predecessors business and our
judgment as to how these estimated cash flows translate into our
predecessors business estimated fair value. These
estimates and judgments are affected by numerous factors,
including our general economic environment at the time of our
assessment. Specific uncertainties affecting the estimated fair
value of our predecessor include the prices received by our
customers for natural gas production, the rate of future growth
of our business, and the need and timing of the full resumption
of the fabrication of new compressor units. In addition, our
Mexico operation may continue to be disrupted by security and
budgetary issues. If we over-estimate the fair value of our
predecessor, the balance of our predecessors goodwill
asset may be overstated. Alternatively, if our estimated fair
values are understated, impairments might be recognized
unnecessarily or in excess of the appropriate amounts. We
believe our estimates of the fair value are reasonable. However,
given the current volatile economic environment, the likelihood
of material impairments of goodwill in future periods is high.
Bad Debt Reserves Reserves for bad debts are
calculated on a specific identification basis, whereby we
estimate whether or not specific accounts receivable will be
collected. Such estimates of future collectability may be
incorrect, which could result in the recognition of
unanticipated bad debt expenses in future periods. A significant
portion of our revenues come from oil and gas exploration and
production companies, and historically our estimates of
uncollectible receivables have proven reasonably accurate. If,
due to adverse circumstances, however, certain customers are
unable to repay some or all of the amounts owed, an additional
bad debt allowance may be required, and such amount may be
material.
85
Depreciation Property and equipment are
carried at cost. Depreciation for financial reporting purposes
is computed on the straight-line basis using estimated useful
lives and salvage values. Estimates of the useful lives and
salvage values of our property and equipment, including our
compressor fleet, are inherently imprecise and subject to errors
in judgment particularly due to unexpected operating conditions,
quality of materials and components, and changing market
conditions. Although our estimates of useful lives and salvage
values have proven reasonably accurate in the past, if the
actual useful life of property and equipment is less than the
estimate used for purposes of computing depreciation expense, we
could experience an acceleration in depreciation expense, which
could result in unexpected volatility in our results of
operations.
Stock-Based Compensation In the past, TETRA
granted to certain of Compresscos employees stock options
and restricted shares of TETRA common stock that remain
outstanding. Such compensation cost associated with Compressco
employees has been included in our predecessors financial
statements. In addition to the grants of employee options and
restricted stock grants of TETRA common stock, our general
partner intends to adopt the 2008 Long-Term Incentive Plan,
which will provide for the granting of options, restricted
units, and other unit-based awards. The compensation cost for
all unit-based payments granted pursuant to the 2008 Long-Term
Incentive Plan will also be based on the grant date fair value
estimated in accordance with Accounting Standards Codification
718 Compensation Stock
Compensation.
TETRA estimates the fair value of share-based payments of stock
options using the Black-Scholes option-pricing model. This
option-pricing model requires a number of assumptions, of which
the most significant are: expected stock price volatility, the
expected pre-vesting forfeiture rate, and the expected option
term (the amount of time from the grant date until the options
are exercised or expire). Expected volatility is calculated
based upon actual historical stock price movements over the most
recent periods equal to the expected option term. Expected
pre-vesting forfeitures are estimated based on actual historical
pre-vesting forfeitures over the most recent periods for the
expected option term. All of these estimates are inherently
imprecise, and may result in compensation cost being recorded
that is materially different from the actual fair value of the
stock options granted. While the assumptions for expected stock
price volatility and pre-vesting forfeiture rate are updated
with each years option-valuing process, there have not
been significant revisions made in these estimates to date.
Methodologies Used by Our Predecessor to Allocate Parent
Company Administrative Costs TETRA and
Compressco employed various allocation methodologies to separate
certain general and administrative costs incurred by TETRA and
recorded in our predecessors financial statements
presented herein. TETRA provides Compressco with centralized
corporate functions such as legal, accounting and financial
reporting, treasury, insurance administration, claims
processing, risk management, health, safety and environmental,
information technology, human resources, credit, payroll,
internal audit, taxes and other corporate services and the use
of facilities that support these functions. The allocation
methodologies are based on an estimate by each parent company
function of the time spent on behalf of our business. While the
use of incorrect cost allocation estimates could significantly
impact our levels of general and administrative expenses, we
believe that the methodology and estimates used to allocate
indirect costs are reasonable. If certain selling, general and
administrative expenses were allocated using different
methodologies, our predecessors results of operations
could have been significantly different from those presented
herein.
Recently
Issued Accounting Pronouncements
The accounting treatment required by Financial Accounting
Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 260 affects how a master
limited partnership, or MLP, allocates income
between the limited partners and its general partner, which
typically holds incentive distribution rights along with its
general partner interest. It is not uncommon for MLPs to
experience timing differences between the recognition of income
and partnership distributions. The amount of incentive
distributions is typically calculated based on the amount of
distributions paid to the MLPs partners. When current
period earnings are in excess of cash distributions, the
undistributed earnings should be allocated to the holders of the
general partner interest, the holders of the limited partner
interest and the holders of incentive distribution rights, based
upon the terms of the partnership agreement. Under this
scenario, contractual limitations on distributions to holders of
incentive distribution rights should be considered when
determining the amount of earnings to
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allocate to them. That is, undistributed earnings should not be
considered available cash for purposes of allocating earnings to
the holders of incentive distribution rights. Conversely, when
cash distributions are in excess of earnings, net income (or
loss) should be reduced (increased) by the distributions made to
the holders of the general partner interest, the holders of the
limited partner interest and the holders of incentive
distribution rights. The resulting net loss should then be
allocated to the holders of the general partner interest, and
the holders of the limited partner interest, based on their
respective sharing of the losses based upon the terms of the
partnership agreement. This accounting treatment is required on
all financial statements presented for fiscal years beginning
after December 15, 2008 and interim periods within those
fiscal years. We do not expect the impact of the adoption of
this item on our presentation of earnings per unit to be
significant.
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PRODUCTION
ENHANCEMENT SERVICES INDUSTRY
Compression is used by oil and natural gas exploration and
production companies, or producers, to assist with
the production of oil and natural gas, for transportation of
natural gas from one point to another and for enhancing the
recovery of crude oil from reservoirs. Low pressure or aging
natural gas wells require compression for transportation of
produced natural gas into higher pressured natural gas gathering
or pipeline systems. Compression at the wellhead is often
required because, over the life of a natural gas or crude oil
well, reservoir pressure typically declines as reserves are
produced.
We believe the primary demand driver for production enhancement
services for natural gas and oil wells is the growing number of
wells with declining production rates. Our production
enhancement services improve the production rates and
recoverable reserves of natural gas and oil wells, in both
domestic and international locations. As of December 31,
2010, we utilized 2,513 compressor units to provide our
production enhancement services in the United States and 198
compressor units to provide our production enhancement services
in foreign locations. Along with compression at the wellhead,
the production enhancement services that we provide with our
compressor units include the following:
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removal of liquids in natural gas well production tubing, which
reduces surface pressure and allows natural gas to flow more
freely, resulting in increased production and total recoverable
reserves;
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separation of oil, condensates and water from natural gas;
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metering of natural gas, liquids, and oil; and
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various other applications, including the capture of vapors and
corresponding reduction of pressures in natural gas condensate
holding tanks, and the reduction of pressures caused by well
casing head gas in oil wells.
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We believe that our production enhancement services offer:
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increased cash flow from producing higher volumes of natural gas
and oil;
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reduced operating, maintenance and equipment costs; and
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the ability to more efficiently meet changing wellhead
compression needs over time, while limiting capital investments
in wellhead compression equipment.
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General
Activity Levels for Oil and Natural Gas Drilling
According to Baker Hughes, there are currently 1,776 rotary rigs
currently drilling in the United States as of April 1,
2011, of which 877 are drilling for oil and 891 are drilling for
natural gas. The total rig count has increased significantly
from its 2009 low of 876 on June 12, 2009. Horizontal and
directional rigs, which are commonly utilized to explore and
develop unconventional resources, account for 70.1% of the total
rig count as of April 1, 2011.
Figure 1:
Baker Hughes Total Rig Count
Source: Baker Hughes
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U.S.
Natural Gas Market and Production Enhancement Overview
Natural gas production enhancement activity is driven primarily
by the number of producing natural gas wells. Of those wells,
those most suitable for production enhancement are characterized
by low, declining pressure and production rates between 24 and
300 thousand cubic feet of natural gas per day, or
Mcf/d.
We primarily target natural gas wells in our operating regions
that produce between 30 thousand and 300 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 Energy Information Administration, or
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, as shown in Figure 2. 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 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 service.
Figure 2:
U.S. Lower 48 Natural Gas Wells by Production Rate
(Mcf/Day)
Source:
EIA.
According to the abridged, early release Annual Energy Outlook
2011, or Preliminary AEO 2011, issued by the EIA,
U.S. 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. However, despite advances in
drilling and completion techniques, including horizontal
drilling, the average well productivity declined by 34.5% from
1999 to 2009. This declining productivity per well has required
an increasing number of natural gas wells to be drilled in order
to maintain production at existing levels. According to the EIA,
the number of natural gas wells drilled per year has increased
by 70.9% from 1999 to 2009, while total production has only
increased 9.3%. Should the productivity per well continue to
decline, an increasing number of wells will need to be drilled
to maintain or increase natural gas production, leading to a
growing market for our natural gas production enhancement
services. Further, the Preliminary AEO 2011 predicts that dry
natural gas production
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in the United States from unconventional sources will increase
by 108.9% while production from conventional sources will
decline by 22.7% from 2010 to 2035.
Figure 3:
U.S. Producing Natural Gas Wells and Well Productivity
Source:
EIA.
Wells from unconventional resources 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. While our production
enhancement services cannot be applied to these wells in the
early years of their productive life, they present a significant
growth opportunity as these wells reach terminal decline. We
believe that we will provide our production enhancement services
to a growing number of unconventional wells as they reach
production and pressure rates that are suitable for our
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 that has begun to reach maturity.
Other major natural gas shales include the Haynesville Shale
(East Texas and Northern Louisiana), Marcellus Shale (West
Virginia, Pennsylvania and New York), Fayetteville Shale
(Arkansas), Eagle Ford Shale (South Texas), Woodford Shale
(Oklahoma), New Albany Shale (Illinois) and Antrim Shale
(Michigan).
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U.S.
Crude Oil Market and Production Enhancement Overview
Crude oil production enhancement activity is driven primarily by
the number of producing crude oil wells. Of those wells, those
most suitable for production enhancement are characterized by
high producing
gas-to-oil
ratios.
Figure 4:
U.S. Producing Crude Oil Wells and Well Productivity
Source:
EIA.
According to the Preliminary AEO 2011, U.S. crude oil
production is expected to increase by 15.8% from 2010 to 2035,
spurring advances in horizontal drilling and hydraulic
fracturing techniques, improved drill bits, steering systems,
and instrumentation monitoring equipment that, according to the
Preliminary AEO 2011, will aid future growth. However, despite
advances in drilling and completion techniques, including
horizontal drilling, the average well productivity declined by
6.3% from 1999 to 2009. This declining productivity per well has
required an increasing number of crude oil wells to be drilled
in order to maintain production at existing levels. According to
the EIA, the number of crude oil wells drilled per year has
increased by 170.8% from 1999 to 2009, while total production
has only increased 5.7%. Should the productivity per well
continue to decline, an increasing number of wells will need to
be drilled to maintain or increase crude oil production, leading
to a growing market for our crude oil production enhancement
services.
Foreign
Production Enhancement Services Overview
Foreign demand for oil and gas continues to increase throughout
many regions of the world and declining production rates from
existing foreign wells makes meeting this demand a challenge. As
we have continued to expand internationally, it has been our
experience that foreign conventional natural gas and crude oil
wells have similar characteristics to those in the United States
and can benefit from our production enhancement services
utilizing our compressor units. These factors contribute to a
growing foreign demand for production enhancement services,
particularly in countries with mature producing wells. Global
interest in reducing greenhouse gas emissions has also created
more opportunities for production enhancement services to be
used in applications where natural gas is otherwise being vented
or flared to the atmosphere. Our production enhancement services
can capture the gas and compress it to the required pressure for
re-injection into the gas collection system.
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BUSINESS
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. 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. 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 predecessors business experienced substantial organic
growth over the past eight fiscal years. Our predecessors
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 predecessors 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. During the year ended December 31,
2010, our predecessors services revenues decreased to
$77.4 million, as compared to $86.1 million for the
same period in 2009. For more detail on our predecessors
operating results, please read Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
Business
Strategies
We intend to grow our business by executing the following
strategies:
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Increase service coverage within our current domestic and
international markets. We provide services to
more than 400 natural gas and oil exploration and production
companies operating throughout most of the onshore producing
regions of the United States. Most of our services are performed
in the Ark-La-Tex region (encompassing east Texas, north
Louisiana and southwest Arkansas), San Juan Basin and
Mid-Continent region 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. 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 service. To realize the potential of this
market opportunity, we intend to expand our highly trained
service staffs as well as utilize our in-house manufacturing
capabilities to increase our fleet of compressor units.
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Pursue additional domestic and international growth
opportunities. Along with focusing on our
existing markets, we also intend to expand our service coverage
into other natural gas producing areas of the United States,
Mexico, Canada and Argentina, as well as other select
international markets in South America, Eastern Europe and the
Asia-Pacific region.
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Improve our service offerings. We are
constantly seeking to improve our services by increasing the
efficiency and capabilities of our compressor units, as well as
expanding the expertise of our field service personnel through
enhanced training and education. For example, utilizing our
ePumper®
system, a
state-of-the-art
SCADA satellite telemetry-based reporting system, we remotely
monitor, in
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real time, whether our 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. 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.
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Promote our additional service
applications. While our production enhancement
services improve the value of customers natural gas wells
by increasing daily production and total recoverable reserves,
they also have other applications, such as vapor recovery and
solids removal. Certain types of natural gas wells produce
substantial amounts of condensate, which are stored in closed
tanks after production. Due to evaporation, the condensate in
these tanks emits vapors, resulting in a loss of condensate and
the creation of undue pressure within these tanks. Our
compressor units capture such vapors and reduce tank pressures.
Our production enhancement services can also be used to reduce
pressures caused by casing head gas in oil wells with pumping
units, which results in an increased flowing bottom hole
pressure and typically results in increased oil and natural gas
production for our customers. 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.
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Leverage our relationships with TETRA and its
customers. We intend to leverage our
relationships with TETRA and its customers in the natural gas
industry to grow our production enhancement services business.
As our coverage grows, we believe that we will have
opportunities to offer our production enhancement services to
some of TETRAs customers that are not currently using
them. For example, the production enhancement services that we
provide in Mexico resulted, in large part, from TETRAs
relationship with Pemex. We expect to continue to work with
TETRA to identify opportunities for us to provide our production
enhancement services to TETRAs existing and future
customers.
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Take advantage of selective acquisition
opportunities. 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. This may involve the acquisition of a competing
business or a business that is complementary to ours. We will
consider acquisitions that (i) are compatible with our
operating philosophy and long-term business objectives,
(ii) represent opportunities in existing geographic areas
of operations or new geographic areas identified to represent
high growth potential, (iii) meet certain economic
thresholds and (iv) for which financing is available. While
there are no pending acquisitions under current consideration,
we will continually consider acquisitions.
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Competitive
Strengths
We believe that we are well positioned to successfully execute
our business strategies for the following reasons:
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Our ability to increase the value of natural gas
wells. Our customers retain our services because
of our ability to identify their underperforming natural gas
wells and, through our production enhancement services, increase
their production rates. We typically increase hydrocarbon
production by more than 120 Mcfd of natural gas, while
consuming approximately only 8 to 10 Mcfd of natural gas as
fuel. This increase in production extends the wells
productive life and, ultimately, increases total recoverable
reserves and cash flows.
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Our superior customer service and highly trained field
personnel. We provide our services through our
staffs of regional service supervisors, optimization specialists
and field mechanics. Regional service supervisors manage the
field mechanics that install, operate, monitor and maintain the
compressor units we use to provide our standard production
enhancement services, while optimization specialists spend extra
time on particular wells to optimize their production, thereby
providing an additional level of service at no further cost to
the customer. Each member of our staffs has completed a
rigorous, customer-focused training program and continues to
receive ongoing technical and safety training.
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Our proactive, engineered approach to marketing and
service. 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 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.
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Our
GasJack®
units and
VJacktm
units. We believe that our 46-horsepower
natural gas powered
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. We also believe that our 40-horsepower
electric
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. Each of these compressor
platforms provides a reliable, compact and low emission package
that is easy to transport and install on our customers
well site.
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Our broad geographic presence in domestic markets and growing
international presence. Our domestic service area
covers most of the onshore producing regions of the United
States. While most of our services are performed in the
Ark-La-Tex region, San Juan Basin and Mid-Continent region
of the United States, we have a substantial presence in other
U.S. producing regions, including the Permian Basin, North
Texas, Gulf Coast, Central and Northern Rockies, and California.
Our services have historically focused on customers with
conventional production in mature fields, but we also service
customers in some of the largest and fastest growing
unconventional gas resource markets in the United States,
including the Cotton Valley Trend, Barnett Shale, Fayetteville
Shale, Woodford Shale, Piceance Basin, and Marcellus Shale. We
are also well positioned to eventually serve the Jonah
Field/Pinedale Anticline and emerging Haynesville Shale.
Internationally, we have significant operations in Western
Canada and Northern and Southern Mexico (revenues from these
countries represented approximately 6.1% and 13.8% of our
predecessors 2010 revenues, respectively) and a growing
presence in certain countries in South America, Eastern Europe
and the Asia-Pacific region.
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Our experienced management team with proven ability to
deliver strong, long-term, growth. The management
team of our general partner, which averages 26.5 years of
oil and gas industry experience, is led by Ronald J. Foster
(President), who has over 32 years of experience in the oil
and gas industry, Gary L. McBride (Chief Financial Officer and
Corporate Secretary), Kevin W. Book (Vice President of
International Operations), Larry W. Brickman (Vice President of
Field Services), Ted D. Garner (Vice President of Engineering),
Sheri J. Vanhooser (Vice President of Marketing and Business
Development), Francis M. Wimbish, Jr. (Vice President of
Sales) and Kenneth R. Sylvester (Vice President of Production
Operations). Most of this team has been involved in the
management of our predecessor over the past eight years and was
integral to its strong growth during that period.
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Our record of maintaining established customer
relationships. We currently have over 400
customers, including BP, Pemex, Devon Energy Corporation, EXCO
Resources and Conoco Phillips. Although we enter into short-term
contracts and have added a significant number of new customers
over the last few
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years, many of our largest customers have been with us for over
five years. Because of the value, quality and breadth of our
services, we typically have enjoyed long-term relationships with
our customers, despite the short-term nature of our contracts.
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While we have set forth our strategies and competitive strengths
above, our business involves numerous risks and uncertainties,
which may prevent us from executing our strategies. These risks
include a long-term reduction in the demand for or production of
natural gas in the locations where we operate, the loss of key
customers, the short-term nature of our contracts and the
inability to grow our business. We operate in a highly
competitive environment and face competition primarily 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. In
addition, large national and multinational companies, which have
traditionally focused on higher-horsepower gathering and
transportation equipment and services, but which have greater
financial resources than are available to us could elect to
compete in the wellhead compression-based production enhancement
business. For a more complete description of the risks
associated with an investment in us, please read Risk
Factors.
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 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 TETRAs 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 predecessors
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 predecessors
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
predecessors assets as of December 31, 2010. For more
pro forma financial and operating information about the portion
of our predecessors business that will be contributed to
us in connection with this offering, please read Selected
Historical and Pro Forma Financial and Operating Data.
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Following TETRAs 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
Compresscos employees will become our or our general
partners 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.
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.
Our
Operations
We provide our production enhancement services to over 400
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 include wellhead compression, related liquids
separation, gas metering and vapor recovery services. We
primarily utilize our compressors units to provide our wellhead
compression 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. Our services are performed by our highly
trained staffs of regional service supervisors, optimization
specialists and field mechanics that are located throughout our
operating regions. 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.
GasJack®
unit fleet
We primarily utilize our natural gas powered
GasJack®
compressors, or
GasJack®
units, to provide our wellhead compression services. Our
GasJack®
units increase gas production by reducing surface pressure to
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allow wellbore liquids that would normally block gas flow to
produce up the well. The fluids are separated from the gas and
liquid-free gas flows into the
GasJack®
unit, where the gas is compressed. That gas is then cooled
before being sent to the gas sales line. The separated fluids
are either stored in an
on-site
customer-provided tank or injected into the gas sales line for
separation downstream.
The 46-horsepower
GasJack®
unit is an integrated power/compressor unit equipped with an
industrial 460-cubic inch, V-8 engine that uses natural gas from
the well to power one bank of cylinders that, in turn, powers
the other bank of cylinders, which provide compression. This
configuration is capable of creating vacuum conditions of up to
12 in/hg (inches of mercury) and discharge pressures of up to
450 PSIG (Pounds per Square Inch Gauge).
Our
GasJack®
units enable us to provide reliable service and their compact
size makes them easy to transport to the customers well
site. We believe that our
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.
Our cold-weather
GasJack®
package is completely enclosed in an insulated and heated
building. The building allows us to operate and provide routine
maintenance in relative comfort.
We design and manufacture our
GasJack®
units to meet many regional customer and government regulatory
health, safety and environmental requirements. Certain of our
GasJack®
units are designed to meet Class 1 Division II
electrical classification compliance. Furthermore, each
GasJack®
unit operated in the European market must be CE
certified. A CE certified
GasJack®
unit complies with the essential requirements of the relevant
European health, safety and environmental protection legislation
and we obtain CE certification for every
GasJack®
unit we operate in the European market. Many raw materials on
our CE certified
GasJack®
units are different from those used to manufacture our standard
GasJack®
units. In addition, our cold weather
GasJack®
package is compliant with Canadian safety and environmental
codes, including the Canadian Electrical Codes and the
Certificate of Recognition Industry Recognized Safety Program,
and Canadian Standards Association requirements and operates
within an Alberta Boilers Safety Association (ABSA)-approved
facility. Our ability to meet these stringent manufacturing
requirements further differentiates us from our competitors and
is fundamental to our growing presence in the European and
Canadian markets.
VJacktm
unit fleet
We recently introduced our electric 40-horsepower
VJacktm
compressors, or
VJacktm
units, to provide our production enhancement 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 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 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 compressor units are typically mounted on steel skids
(standard compressor units are on a 4 foot by 12 foot skid and
weigh 4,750 lbs., while cold weather compressor units are on a
8.5 foot by 15.5 foot skid and weigh 12,000 lbs.). This allows
us to easily and efficiently move them from one area or country
to another on a semi-trailer truck, on a trailer hauled by a
standard pickup truck or by ship. However, moving our compressor
units across international borders is more difficult and costly,
due to typical import and export
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restrictions. The following is a table indicating the location
by country of the compressor units we utilized to provide our
services, as of December 31, 2010.
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Number of
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Country
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Compressor Units
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United States
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2,513
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Mexico
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96
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Canada
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68
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Argentina
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19
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Indonesia
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15
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Total
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2,711
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ePumper®
system
Utilizing our
ePumper®
system, a
state-of-the-art
SCADA satellite telemetry-based reporting system, we remotely
monitor, in real time, whether our 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. 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.
Well
Monitoring and Automated Sand Separation Services
In certain circumstances, we 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 how our wellhead compression
services can be used to optimize the production from a well. We
utilize well-testing equipment to gather well data that our
personnel assess to determine the expected production uplift
that may be achieved by the provision of our wellhead
compression services on the well, as well as to determine the
optimal way to utilize our wellhead compression services to
provide 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 to protect
installed production enhancement equipment and further enhance
the productivity of a well. We utilize our automated sand
separator, a high-pressure vessel with automated valve operation
functions, 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. The solids removed in this automated
process are collected in tanks for later disposal.
Production
Enhancement Services Contract Terms
A significant portion of the production enhancement services we
perform will be conducted pursuant to contracts that our counsel
has concluded will generate qualifying income. The following
discussion describes the material terms generally common to such
contracts.
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Operation and Maintenance. As owner and
operator, we are responsible for operating and maintaining the
equipment we use to provide production enhancement services.
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Term and Termination. Our domestic production
enhancement services contracts typically have an initial term of
one month and, unless terminated by us or our customers with
30-days
notice, our production enhancement services contracts continue
on a
month-to-month
basis thereafter.
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Fees and Expenses. We charge our customers a
fixed monthly fee for the production enhancement services
specified in each service order. The fees we charge are based,
in large part, on the operating conditions at the particular
service site.
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Service Availability. If the level of
production enhancement services we provide falls below certain
contractually specified percentages, other than as a result of
factors beyond our control, our customers are generally
entitled, upon request, to limited credits against our service
fees. To date, we have not issued material credits as a result
of these provisions.
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Service Standards and Specifications. Under
our services contracts, we are responsible for providing
production enhancement services in accordance with the
particular specifications of a job.
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Title; Risk of Loss. We retain title to the
equipment used to provide services to our customers, and we bear
the risk of loss for our equipment to the extent not caused by
(i) a breach of certain customer obligations primarily
involving the service site and the fuel gas being supplied to
us, or (ii) an uncontrollable well condition.
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Ad Valorem Taxes and Insurance. As owner of
the equipment, we are obligated to pay ad valorem taxes levied
on the equipment we use to provide production enhancement
services and certain insurance expenses and cannot seek
reimbursement for such taxes and expenses from our customers.
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Manufacturing
We design and manufacture most of our compressor units in a
manufacturing facility located in Oklahoma City, Oklahoma that
we own. Our manufacturing facility is currently capable of
producing up to 80 new compressor units per month. If necessary,
we believe we could expand our domestic production to as many as
160 units per month. Additionally, we lease a smaller
manufacturing facility in Calgary, Alberta, Canada, where we
manufacture
GasJack®
units for use in serving our Canadian customers. The
GasJack®
units that we use to provide services in Canada are partially
assembled in Oklahoma City first and are then sent to Canada,
where we complete the manufacturing process. The
GasJack®
unit production output at our Canadian facility varies, but we
expect it to produce only a small number of units (approximately
three to four) each month going forward.
We are able to manufacture our compressor units in what we
believe is an efficient process because only a small percentage
of them require customization. Additionally, the majority of the
components we use to manufacture our compressor units are
obtained from third-party suppliers, which makes our
manufacturing process primarily an assembly operation. We are
can hire and train new employees on the manufacturing and
assembly processes quickly and without any significant training
costs. As a result, we believe that we could double the scale of
our manufacturing operations, if necessary, without requiring a
significant increase in capital expenditures.
Maintenance and repair of our compressor units that are already
in service occurs at our customers field locations, while
major refurbishment occurs at our manufacturing facilities and
separate service facilities.
Inventories
We take quarterly physical inventories of our parts and
equipment at all of our manufacturing and storage facilities and
on all of our field mechanics trucks. We adjust all
variances in our inventories during the following month and none
of our net adjustments has ever exceeded 1.5% of our inventory.
Additionally, we maintain and track all of our physical
inventories centrally in a database at our Oklahoma City
manufacturing facility, while our field mechanics also maintain
and track the inventories stored on their own trucks using a
laptop computer.
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Marketing
We utilize various marketing strategies to promote our
production enhancement services. We believe that all of our
personnel, from our engineers and marketing representatives to
our field service and support staff, are key components of our
overall marketing program.
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
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.
We deploy 19 marketing representatives across our target
geographic markets. Our marketing representatives attempt to
build close working relationships with our existing and
potential customers and educate them about our services by
scheduling personal visits and consultations, hosting and
attending various production enhancement-focused tradeshows and
conferences and participating in industry organizations, such as
the Independent Petroleum Association and the Society of
Petroleum Engineers. We often sponsor and make presentations at
industry events that are targeted to production managers,
compression specialists and other related decision makers. Our
marketing representatives also use these marketing opportunities
to promote our value-added service initiatives, such as the use
of our
ePumper®
SCADA satellite telemetry-based system, our well site
optimization program, and our call center, which we believe give
us a competitive edge.
We stay informed of new technologies and growth markets, such as
unconventional gas resources in the Marcellus Shale and the
Fayetteville Shale, and position ourselves to take advantage of
marketing opportunities that are available in those new growth
markets. We continue to hire additional marketing
representatives for new growth markets.
Customers
We provide our production enhancement services to over 400
natural gas and oil producers 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 customers primarily use our
services to extend production on mature wells prior to being
plugged and abandoned after production is no longer economic. To
provide our customers with flexibility, our agreements may be
terminated upon thirty days, or sometimes less, notice. We
charge a monthly fee for all of our services under our services
contracts 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. Because of the value, quality and breadth of
our services, we typically have enjoyed long-term relationships
with our customers, despite the short-term nature of our
contracts. Although we enter into short-term contracts and have
added a significant number of new customers over the last few
years, many of our largest customers have been with us for over
five years. For a more complete description of the terms of our
production enhancement agreements, please read Our
Operations General Production Enhancement Services
Contract Terms.
Our top five customers include BP, Pemex, Devon Energy
Corporation, EXCO Resources and Conoco Phillips, who generated
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.
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Suppliers
and Service Providers
Some of the components used in our compressor units are obtained
from a single supplier or a limited group of suppliers. Our
reliance on these suppliers involves several risks, including a
potential inability to obtain an adequate supply of required
components in a timely manner. We do not have long-term
contracts with these suppliers, and partial or complete loss of
certain of them 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.
Nonetheless, should we experience unexpected unavailability of
the components we use to manufacture our compressor units or
permanently lose one of the major suppliers of the components
used to manufacture our compressor units, we believe there are
adequate, alternative suppliers of these components and that we
would not experience a material adverse effect on our business,
results of operations, financial condition or ability to make
cash distributions to our unitholders.
Our material suppliers of
GasJack®
unit components are Folks Auto Machine, Eliminator Products and
AXH Air-Coolers. If and to the extent any of these suppliers
should be unavailable to us, we believe alternative suppliers
for these components are readily available or we will be able to
manufacture them ourselves.
Competition
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 large
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.
Many of our competitors attempt to compete on the basis of
price. We believe our pricing has proven to be competitive
because of the significant increases in the value of natural gas
wells that result from use of our services, our superior
customer service and highly trained field personnel and the
quality of the compressor units we use to provide the services.
In addition, because of the value, quality and breadth of our
services, we typically have enjoyed long-term relationships with
our customers, despite the short-term nature of our contracts.
Seasonality
Our results of operations have not historically reflected any
material seasonal tendencies, nor do we currently have reason to
believe seasonal fluctuations will have a material impact in the
near future.
Insurance
We believe that our insurance coverage is customary for the
industry and adequate for our business. As is customary in the
production enhancement services industry, we review our safety
equipment and procedures and carry insurance against most, but
not all, risks of our business. Losses and liabilities not
covered by insurance would increase our costs. The production
enhancement services operations can be hazardous, involving
unforeseen circumstances such as uncontrollable flows of gas or
well fluids, fires and explosions or environmental damage. To
address the hazards inherent in our business, we maintain
insurance coverage that includes physical damage coverage,
third-party general liability insurance, employers
liability, environmental and pollution and other coverage,
although coverage for environmental and pollution-related losses
is subject
101
to significant limitations. Under the terms of our standard
production enhancement services contract, we are responsible for
the maintenance of insurance coverage on our compressor units.
Environmental
and Safety Regulations
We are subject to federal, national, state, provincial and local
laws and regulations governing the discharge of materials into
the environment or otherwise relating to protection of human
health and the environment. Compliance with these environmental
laws and regulations may expose us to significant costs and
liabilities and cause us to incur significant capital
expenditures in our operations. Moreover, failure to comply with
these laws and regulations may result in the assessment of
administrative, civil, and criminal penalties, imposition of
remedial obligations, and the issuance of injunctions delaying
or prohibiting operations. While we believe that our operations
are in substantial compliance with applicable environmental laws
and regulations and that continued compliance with current
requirements would not have a material adverse effect on us,
there is no assurance that this trend will continue in the
future. In addition, the clear trend in environmental regulation
is to place more restrictions on activities that may affect the
environment, and thus, any changes in these laws and regulations
that result in more stringent and costly waste handling,
storage, transport, disposal or remediation requirements could
have a material adverse effect on our operations and financial
position.
The primary environmental laws that impact our operations
include:
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the Clean Air Act and comparable state laws, and regulations
thereunder, which regulate air emissions;
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the Clean Water Act and comparable state laws, and regulations
thereunder, which regulate the discharge of pollutants into
regulated waters, including industrial wastewater discharges and
storm water runoff;
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the Resource Conservation and Recovery Act, or RCRA,
and comparable state laws, and regulations, thereunder, which
regulate the management and disposal of solid and hazardous
waste; and
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the federal Comprehensive Environmental Response, Compensation,
and Liability Act, or CERCLA, and comparable state
laws and regulations thereunder, known more commonly as
Superfund, which impose liability for the cleanup of
releases of hazardous substances in the environment.
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Our operations are also subject to regulation under the
Occupational Safety and Health Act, or OSHA, and
comparable state laws, and regulations thereunder, which
regulate the protection of the health and safety of workers.
The Clean Air Act and implementing regulations and comparable
state laws and regulations regulate emissions of air pollutants
from various industrial sources and also impose various
monitoring and reporting requirements, including requirements
related to emissions from certain stationary engines. These laws
and regulations impose limits on the levels of various
substances that may be emitted into the atmosphere from our
GasJack®
units and require us to meet more stringent air emission
standards and install new emission control equipment on all of
our engines built after July 1, 2008. We do not expect
these rules and requirements to have a material adverse effect
on our operations or financial condition. We have developed a
cost effective emission control device to meet the more
stringent air standards for our newly manufactured engines, as
well as an emission control device that is easily retrofitted
onto existing engines when necessary. Nevertheless, there can be
no assurance that these rules or any other new regulations
requiring the installation of more sophisticated emission
control equipment would not have a material adverse impact. In
any event, we believe that, in most cases, costs and
responsibilities associated with these obligations would be
allocated to our customers under our standard services
contracts, as discussed below. Moreover, we expect that such
requirements would not have any more significant effect on our
operations or financial condition than on any similarly situated
company providing production enhancement services.
In some instances, permits for emissions from our
GasJack®
units must be obtained from either state or federal agencies,
depending on the level of emissions. Our standard services
contracts provide that our customers are responsible for
obtaining permits required for the operation of our equipment at
the customer
102
site and maintaining compliance with all permits. In addition,
these agreements require our customers to indemnify us for
certain environmental liabilities, including liabilities arising
from their failure to comply with environmental laws and certain
releases of contaminants into the environment.
On December 15, 2009, the U.S. Environmental
Protection Agency, or EPA, published its final
findings that emissions of carbon dioxide, methane and other
greenhouse gases present an endangerment to public
health and the environment because emissions of such gases are,
according to the EPA, contributing to warming of the
earths atmosphere and other climatic changes. These
findings allow the EPA to adopt and implement regulations that
would restrict emissions of greenhouse gases under existing
provisions of the federal Clean Air Act. Accordingly, the EPA
has adopted regulations that would require a reduction in
emissions of greenhouse gases from motor vehicles and could
trigger permit review for greenhouse gas emissions from certain
stationary sources. In addition, on October 30, 2009, the
EPA published a final rule requiring the reporting of greenhouse
gas emissions from specified large greenhouse gas emission
sources in the United States beginning in 2011 for emissions
occurring in 2010. On November 8, 2010, the EPA finalized
regulations to expand the existing greenhouse gas monitoring and
reporting rule to include onshore and offshore oil and natural
gas production facilities and onshore oil and gas processing,
transmission, storage, and distribution facilities. Reporting of
GHG emissions from such facilities would be required on an
annual basis, with reporting beginning in 2012 for emissions
occurring in 2011. The EPAs rules relating to emissions of
greenhouse gases from large stationary sources of emissions are
currently subject to a number of legal challenges, but the
federal courts have thus far declined to issue any injunctions
to prevent EPA or state environmental agencies from implementing
the rules. Further, Congress has considered, and almost one-half
of the states have adopted, legislation that seeks to control or
reduce emissions of greenhouse gases from a wide range of
sources.
The Clean Water Act and implementing regulations and comparable
state laws and regulations prohibit the discharge of pollutants
into regulated waters without a permit and establish limits on
the levels of pollutants contained in these discharges. In
addition, the Clean Water Act and other comparable laws and
regulations regulate storm water discharges associated with
industrial activities depending on a facilitys primary
standard industrial classification. Federal laws also mandate
the implementation of spill prevention, control, and
countermeasure requirements for the storage of oil, including
appropriate containment berms and similar structures to help
prevent the contamination of navigable waters in the event of a
petroleum hydrocarbon tank spill, rupture, or leak at such
facilities. Our facilities are in compliance with these
requirements, as necessary.
RCRA and implementing regulations and state laws and regulations
control the management and disposal of solid and hazardous
waste. These laws and regulations govern the generation,
storage, treatment, transfer and disposal of wastes that we
generate including, but not limited to, used oil, antifreeze,
filters, sludges, paint, solvents and sandblast materials. The
EPA and various state agencies have limited the approved methods
of disposal for these types of wastes. We believe we are in
substantial compliance with these requirements, as applicable.
We are considered a conditionally exempt small quantity
generator under the RCRA.
In the United States, CERCLA and comparable state laws and
regulations impose strict, joint and several liability without
regard to fault or the legality of the original conduct on
certain classes of persons that contributed to the release of a
hazardous substance into the environment. These persons include
the owner or operator of a disposal site where a hazardous
substance release occurred and any company that transported,
disposed of, or arranged for the transport or disposal of
hazardous substances released at a site. Under CERCLA, such
persons may be liable for the costs of remediating the hazardous
substances that have been released into the environment, for
damages to natural resources, and for the costs of certain
health studies. In addition, where contamination may be present,
it is not uncommon for the neighboring landowners and other
third parties to file claims for personal injury, property
damage and recovery of response costs.
Many of the sites we own or operate or at which we provide our
services have been utilized for many years by Compressco and
third parties over whom we have no control, in support of
natural gas production enhancement services or other industrial
operations. Our standard services contracts allocate liability
for releases of contaminants at the service sites between us and
our customers, such that we may be responsible only for small
superficial releases and our customers are responsible for
larger, more extensive releases. We
103
are not currently responsible for any remedial activities at
these service sites. There is, however, always the possibility
that our current or future use of such properties, or of other
properties where we provide production enhancement services, may
result in spills or releases of petroleum hydrocarbons, wastes,
or other regulated substances into the environment or otherwise
result in liability, although limited, that may cause us to
become subject to remediation costs and liabilities under
CERCLA, RCRA or other environmental laws. We cannot provide any
assurance that the costs and liabilities associated with the
future imposition of such remedial obligations upon us would not
have a material adverse effect on our operations or financial
position.
We are subject to the requirements of OSHA and comparable state
statutes. These laws and the implementing regulations strictly
govern the protection of the health and safety of employees. The
OSHA hazard communication standard, the EPA community
right-to-know
regulations under Title III of CERCLA and similar state
statutes require that we organize
and/or
disclose information about hazardous materials used or produced
in our operations. We believe that we are in substantial
compliance with these applicable requirements and with other
comparable laws.
Properties
Our facilities include an owned manufacturing facility, a leased
rebuild facility, a leased executive headquarters facility in
Oklahoma, a leased manufacturing facility in Calgary, Alberta,
Canada, three leased service facilities in California, Mexico
and Argentina, five leased sales offices in Oklahoma, Colorado,
Louisiana, Canada and Argentina, one leased service and sales
facility in New Mexico and approximately sixty leased storage
facilities located across the geographic markets we serve. We
also utilize one of TETRAs facilities in Texas as a sales
office.
Employees
As of December 31, 2010, an aggregate of 364 employees of
Compressco and certain other subsidiaries of TETRA provided
services to conduct our predecessors operations in the
United States, Canada, Mexico and certain other countries
located in South America, Eastern Europe and the Asia-Pacific
region. Following this offering, Compresscos 261 domestic
employees will become employed by our general partner,
Compresscos 19 Canadian employees and 8 Argentinean
employees will remain employed by the Canadian and Argentinean
subsidiaries of Compressco that will become our subsidiaries,
and 76 employees of a TETRA Mexican subsidiary will continue to
support our Mexican operations on a part-time basis. All of our
general partners employees and all of our employees will
be dedicated to managing our operations and conducting our
business on a full-time basis. Our general partners
domestic employees and our employees in Canada are not subject
to a collective bargaining agreement. Our employees in Argentina
are subject to a collective bargaining agreement that lacks an
automatic expiration date. The employees of TETRA who provide
services to us in Mexico are subject to fourteen collective
labor agreements, four of which automatically expire on
July 1, 2011, August 10, 2011, September 30, 2011
and December 31, 2012, respectively. The remainder of these
collective labor agreements are evergreen contracts
that have no expiration date, so all of their terms remain in
full force and effect from year to year, unless the parties
agree to negotiate new terms. The employees subject to these
evergreen agreements may, however, request a
renegotiation of their employee compensation terms on an annual
basis or a renegotiation of the entire agreement on a biannual
basis, although we are not required to honor any such request.
We believe that we have good relations with these employees and
we have not experienced work stoppages in the past.
Legal
Proceedings
From time to time, we may be involved in litigation relating to
claims arising out of our operations in the normal course of
business. We are not currently a party to any legal proceedings
that, if determined adversely against us, individually or in the
aggregate, would have a material adverse effect on our financial
position, results of operations or cash flows.
Compressco and TETRA International Incorporated are named
defendants in certain lawsuits arising in the ordinary course of
business. While the outcome of lawsuits against Compressco and
TETRA International Incorporated cannot be predicted with
certainty, management does not expect these matters to have a
material adverse impact on our predecessors financial
statements.
104
MANAGEMENT
OF COMPRESSCO PARTNERS
Our general partner, Compressco Partners GP, is an indirect,
wholly owned subsidiary of TETRA and has sole responsibility for
conducting our business and managing our operations and
activities. Our general partner is not elected by our
unitholders and will not be subject to re-election on a regular
basis in the future. All of the directors of our general partner
will be elected by TETRA. Unitholders will not be entitled to
elect the directors of our general partner or directly or
indirectly participate in our management or operation.
Upon the completion of this offering, our general partner will
have four directors, one of whom, William D. Sullivan, will be
independent as defined under the independence standards
established by the NASDAQ Stock Market LLC. In compliance with
the rules of the NASDAQ Stock Market LLC, a second independent
director will be appointed within 90 days of listing and a
third independent director will be appointed within twelve
months of listing. The NASDAQ Stock Market LLC does not require
a listed limited partnership like us to have a majority of
independent directors on the board of directors of our general
partner or to establish a compensation committee or a nominating
committee.
Our general partner will have a conflicts committee to which it
will appoint at least two independent directors to review
specific matters that the board believes may involve conflicts
of interest between us, TETRA and Compressco. Two independent
directors will be appointed to the conflicts committee when
additional independent directors are appointed to the board of
directors of our general partner. The conflicts committee will
determine if the resolution of the conflict of interest is fair
and reasonable to us. The members of the conflicts committee may
not be executive officers or employees of our general partner or
non-independent directors, officers, or employees of its
affiliates, including TETRA or Compressco, and must meet the
independence and experience standards established by the NASDAQ
Stock Market LLC and the Exchange Act to serve on an audit
committee of a board of directors, and certain other
requirements. Any matters approved by the conflicts committee in
good faith will be conclusively deemed to be fair and reasonable
to us, approved by all of our partners and not a breach by our
general partner of any duties it may owe us or our unitholders.
In addition, our general partner will have an audit committee of
at least three directors who meet the independence and
experience standards established by the NASDAQ Stock Market LLC
and the Exchange Act. Mr. Sullivan will serve as the
initial independent member of the audit committee and
Messrs. Hertel and Brightman will serve as initial members
of the audit committee until additional independent directors
are appointed to the board of directors of our general partner.
The audit committee will assist the board of directors in its
oversight of the integrity of our financial statements and our
compliance with legal and regulatory requirements and corporate
policies and controls. The audit committee will have the sole
authority to retain and terminate our independent registered
public accounting firm, approve all auditing services and
related fees and the terms thereof, and pre-approve any
non-audit services to be rendered by our independent registered
public accounting firm. The audit committee will also be
responsible for confirming the independence and objectivity of
our independent registered public accounting firm. Our
independent registered public accounting firm will be given
unrestricted access to the audit committee.
We will utilize employees of our general partner to manage and
operate our business and employees of TETRA to provide us with
general and administrative services. We will reimburse our
general partner for allocated expenses of personnel who manage
our operations and perform services for our benefit, and we will
reimburse TETRA for allocated general and administrative
expenses. Please read Reimbursement of
Expenses of Our General Partner. All of these
reimbursements will be made at cost and without
mark-up.
105
Directors,
Executive Officers and Other Management
The following table shows information regarding the current
directors, director nominees, executive officers and other
management of our general partner, Compressco Partners GP.
Directors are elected for one-year terms.
Directors
and Executive Officers
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|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Compressco Partners GP
|
|
Geoffrey M. Hertel
|
|
|
65
|
|
|
Chairman of the Board of Directors
|
Stuart M. Brightman
|
|
|
54
|
|
|
Director
|
William D. Sullivan
|
|
|
54
|
|
|
Independent Director
|
Ronald J. Foster
|
|
|
54
|
|
|
President and Director
|
Gary L. McBride
|
|
|
58
|
|
|
Chief Financial Officer and Corporate Secretary
|
Kevin W. Book
|
|
|
36
|
|
|
Vice President of International Operations
|
Larry W. Brickman
|
|
|
45
|
|
|
Vice President of Field Services
|
Other
Management
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position with Compressco Partners GP
|
|
Ted D. Garner
|
|
|
66
|
|
|
Vice President of Engineering
|
Sheri J. Vanhooser
|
|
|
51
|
|
|
Vice President of Marketing and Business Development
|
Francis M. Wimbish, Jr.
|
|
|
45
|
|
|
Vice President of Sales
|
Kenneth R. Sylvester
|
|
|
45
|
|
|
Vice President of Production Operations
|
Directors
and Executive Officers
Our general partners directors hold office until the
earlier of their death, resignation, removal or disqualification
or until their successors have been elected and qualified. Our
general partners executive officers serve at the
discretion of the board of directors. There are no family
relationships among any of our general partners directors
or executive officers.
Geoffrey M. Hertel has served as Chairman of the Board of
our general partner since October 31, 2008. Mr. Hertel
also serves as a member of TETRAs Board of Directors
(since 1984) and as a member of Compresscos Board of
Directors (since October 2004). Prior to May 2009,
Mr. Hertel served as TETRAs President (since May
2000) and Chief Executive Officer (since May 2001).
Mr. Hertel remains employed by TETRA, assisting in
strategic planning. Mr. Hertel received his B.A. and M.B.A.
degrees from Michigan State University.
Stuart M. Brightman has served as a Director of our
general partner since October 31, 2008. Mr. Brightman
also serves as TETRAs President and Chief Executive
Officer (since May 2009), as a member of TETRAs Board of
Directors (since May 2009) and as a member of the Board of
Directors of Compressco (since October 1, 2008). Prior to
May 2009, Mr. Brightman served as an Executive Vice
President of TETRA and Chief Operating Offer (since April
2005) and as a Vice President of Compressco (since
October 1, 2008). Mr. Brightman received his B.S.
degree from the University of Pennsylvania and his M.B.A. degree
from the Wharton School of Business.
William D. Sullivan is an Independent Director of our
general partner and has served as a Director of TETRA since
August 2007. Mr. Sullivan currently serves on TETRAs
Nominating and Corporate Governance Committee, Reserves
Committee and Management and Compensation Committee.
Mr. Sullivan is the non-executive chairman of the board of
directors and serves on the Nominating and Corporate Governance
and Compensation Committees of SM Energy Company, a publicly
traded exploration and production company (since May 2004).
Mr. Sullivan is also a Director, serves on the Audit and
Nominating and Corporate Governance Committees, and is Chairman
of the Conflicts Committee of Legacy Reserves GP, LLC, the
general partner of Legacy Reserves, LP, a publicly traded
limited partnership holding oil and gas producing
106
assets (since March 2006), primarily in the Permian Basin.
Mr. Sullivan is a Director, and serves on the Conflicts and
Audit Committees of Targa Resources GP, LLC, the general partner
of Targa Resources LP, a publicly traded limited partnership
focused on midstream gas gathering, processing, liquids
fractionation, and transportation (since February 2007). From
1981 through August 2003, Mr. Sullivan was employed in
various capacities by Anadarko Petroleum Corporation, most
recently as Executive Vice President, Exploration and
Production. From August 2003 to June 2005 Mr. Sullivan was
not, and since August 2005 Mr. Sullivan has not, entered
into an employment relationship with any employer. From June
2005 through August 2005, Mr. Sullivan served as President
and Chief Executive Officer of Leor Energy LP. Mr. Sullivan
received his B.S. degree in Mechanical Engineering from Texas
A&M University.
Ronald J. Foster has served as President and a Director
of our general partner since October 31, 2008.
Mr. Foster also serves as President and a Director of
Compressco (since October 1, 2008). From August 2002 to
September 30, 2008, Mr. Foster served as Senior Vice
President of Sales and Marketing of Compressco. Mr. Foster
has over 30 years of energy-related work experience that
also includes positions with Wood Group, Halliburton and
Dresser. He is an active member of several regional industry
trade organizations, including the American Petroleum Institute
(API), the Society of Petroleum Engineers (SPE) and the Oklahoma
Independent Petroleum Association (OIPA). Mr. Foster
attended Oklahoma State University, earning a B.S. degree in
Economics in 1978.
Gary L. McBride has served as Chief Financial Officer and
Corporate Secretary of our general partner since
October 31, 2008. Mr. McBride also serves as Chief
Financial Officer of Compressco. Mr. McBride joined
Compressco in November 2000 and, effective January 1, 2001,
became Compresscos Chief Financial Officer.
Mr. McBride has over 19 years of experience in the oil
and gas industry. Mr. McBride attended the University of
Central Oklahoma earning a B.S. degree in Accounting and is a
Certified Public Accountant.
Kevin W. Book has served as Vice President of
International Operations of our general partner since
October 31, 2008 and also serves as Vice
President International Operations of Compressco
(since May 2008). Mr. Book joined Compressco in 2001 and in
May 2008 was promoted to Vice President
International Operations of Compressco from Vice
President-Canada. Mr. Book has over eleven years of
experience in the oil and gas industry. Mr. Book holds a
Bachelors of Science degree in Petroleum Engineering with
Special Distinction from the University of Oklahoma, and a
Bachelors of Science degree in Mathematics with Distinction from
the University of Alberta.
Larry W. Brickman has served as Vice President of Field
Services of our general partner since October 31, 2008.
Mr. Brickman also serves as Vice President of Field
Services of Compressco (since February 2006). Mr. Brickman
was employed with Compressor Systems, Inc. from October 1998
until February 2006. Mr. Brickman has over nine years
of experience in the oil and gas industry. Mr. Brickman
earned his Associates Degree in Automotive Technology from
Oklahoma State University Okmulgee.
Other
Management
The following key managers serve at the discretion of the board
of directors. There are no family relationships among any of
these key managers.
Ted D. Garner has served as Vice President of Engineering
of our general partner since October 31, 2008.
Mr. Garner also serves as Vice President of Engineering of
Compressco (since September 2003). Mr. Garner is a
45-year
member of the Society of Petroleum Engineers (SPE) and was a
charter member of the American Association of Drilling
Engineers Houston, Texas. Mr. Garner has over
40 years of experience as both an Engineer and Executive
Manager in the onshore and offshore petroleum industry. He
earned a B.S. Degree in Petroleum Engineering from Mississippi
State University and studied Economics at Louisiana State
University in New Orleans, Louisiana.
Sheri J. Vanhooser has served as Vice President of
Marketing and Business Development of our general partner since
October 15, 2010 and, prior to that time, as Vice President
of Marketing Development of our general partner since
October 31, 2008. Ms. Vanhooser also serves as Vice
President of Marketing and Business Development for Compressco
(since March 2010) and, prior to that time, as Vice
President of
107
Marketing Development of Compressco (since July 2008) and
as a Senior Marketing Analyst (since July 2007). From January
2007 to July 2007, Ms. Vanhooser operated her own
consulting company, Superior Energy Solutions, where she
provided consulting services to various companies in the natural
gas industry. From 1993 to January 2007, Ms. Vanhooser
served as President of DRV Energy, an EPA small volume
manufacturer/converter of vehicles to natural gas and propane.
Ms. Vanhooser has over 17 years of experience in
marketing and the natural gas industry. Ms. Vanhooser
received her B.S. degree in Biology/General Physical Science
from Oklahoma Christian University.
Francis M. Wimbish, Jr. has served as Vice President
of Sales of our general partner since October 15, 2010.
Mr. Wimbish also serves as Vice President of Sales of
Compressco (since March 2010). Mr. Wimbish originally
joined Compressco in 2001 as a Sales Engineer and departed in
2004, rejoined Compressco in March 2007 as Vice President of
Business Development and was promoted to Vice President of Sales
in March 2010. From 2004 to 2007, Mr. Wimbish was employed
by Hanover Companies as a Consultant to British Petroleum and an
Alliance Director. Overall, Mr. Wimbish has nearly
20 years of experience in the natural gas compression
industry and is an active member of several industry trade
organizations, including the American Petroleum Institute (API)
and Society of Petroleum Engineers (SPE). Mr. Wimbish
received his B.S. degree in Political Science from Texas
A&M University.
Kenneth R. Sylvester has served as Vice President of
Production Operations of our general partner since
October 15, 2010. Mr. Sylvester also serves as Vice
President of Production Operations of Compressco (since August
2009). Prior to joining Compressco, Mr. Sylvester worked
for General Electric as a certified Six Sigma Black Belt from
1996-1997.
Mr. Sylvester also previously served ten years in several
roles with Mercury Marine, including as Plant Operations Manager
and Director of Safety, and was certified as a Six Sigma Green
Belt while working with Mercury Marine. Mr. Sylvester
earned his B.S. degree at Oklahoma State University and a
Masters Degree in Industrial Safety from the University of
Central Oklahoma.
Reimbursement
of Expenses of Our General Partner
Our general partner will not receive any management fee for its
management of us. Our general partner, however, may receive
incentive fees 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.
These expenses include all expenses necessary or appropriate to
the conduct of our business and that are allocable to us. Our
partnership agreement provides that our general partner will
determine in good faith the expenses that are allocable to us.
There is no cap on the amount that may be paid or reimbursed to
our general partner or its affiliates for compensation or
expenses incurred on our behalf. Please read Certain
Relationships and Related Party Transactions Omnibus
Agreement Provision of Services Necessary to Operate
Our Business.
108
EXECUTIVE
COMPENSATION AND DIRECTOR COMPENSATION
Compensation
Discussion and Analysis
Introduction
Our general partner has sole responsibility for conducting our
business and for managing our operations and its board of
directors and executive officers make decisions on our behalf.
We will reimburse our general partner and its affiliates for the
expense of the services our general partner provides to us,
including compensation expenses for executive officers and
directors of our general partner. Please read Management
of Compressco Partners Reimbursement of Expenses of
Our General Partner.
Historically, including the year ended December 31, 2010,
the compensation committee of TETRA made all decisions regarding
the compensation of the president of Compressco.
Compresscos president then made compensation
recommendations regarding the remaining Compressco executive
officers to TETRAs president and chief executive officer
(TETRAs principal executive officer, or PEO),
who then made the final compensation decisions for these
remaining executive officers. We have not formed, and will not
form, a compensation committee, and for the immediate future the
board of directors of our general partner intends to continue
its practice of having the TETRA compensation committee, or the
PEO, as applicable, make the compensation decisions for our
named executive officers.
In 2010, the named executive officers of Compressco were:
|
|
|
|
|
Ronald J. Foster President
|
|
|
|
Gary L. McBride Chief Financial Officer
|
|
|
|
Kevin W. Book Vice President
International Operations
|
|
|
|
Larry W. Brickman Vice President Field
Services
|
For purposes of this Compensation Discussion and Analysis and
the tables that follow, these individuals are referred to as the
Named Executive Officers. The historical
compensation discussion of the Named Executive Officers that
follows reflects the total compensation those individuals
received for services provided to Compressco for the year ended
December 31, 2010, and the philosophy and policies of TETRA
and Compressco that drove the compensation decisions for these
Named Executive Officers, whether implemented by TETRAs
compensation committee or the principal executive officers of
TETRA and Compressco. Our general partners compensation
philosophy, policies, and practices initially will be largely a
continuation of the compensation practices employed by TETRA and
Compressco.
Compensation
Philosophy and Objectives
TETRA and Compressco employ a compensation philosophy that
emphasizes pay for performance. TETRA and Compressco designed
the executive compensation program applicable to the Named
Executive Officers to provide a total compensation package to
allow Compressco to attract, retain and motivate skilled
executives to manage its business. The general philosophy and
programs established by TETRA and Compressco initially will be
adopted by our general partner. These programs are guided by
several key objectives:
|
|
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|
|
to design competitive total compensation programs to enhance our
general partners ability to attract and retain
knowledgeable and experienced senior management employees;
|
|
|
|
to motivate employees to meet or exceed applicable financial,
operational, heath, safety, and environmental and individual
performance goals;
|
|
|
|
to target salary and annual cash incentive levels that reflect
competitive market conditions and that are generally within the
median range for the relevant peer group;
|
109
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|
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|
|
to provide long-term incentive compensation opportunities that
are consistent with our general partners overall
compensation philosophy;
|
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to provide a significant percentage of total compensation that
is contingent on satisfying predetermined performance
criteria; and
|
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|
to ensure that a significant portion of the total compensation
package for employees is determined by increases in equity
value, thus assuring an alignment of senior management level
employees and TETRA and Compresscos equity holders.
|
By following these objectives, our general partner hopes to
optimize long-term unit holder value.
Compensation
Setting Process
Role
of the Compensation Committee and Independent
Consultants
While TETRAs compensation committee determined the overall
compensation philosophy and set the final compensation of the
president of Compressco, it also considered the recommendations
of TETRAs PEO and the compensation consultant engaged by
the compensation committee, if any for that year, when making
decisions with respect to specific compensation matters.
TETRAs compensation committee retained the final
decision-making authority as to compensation decisions, however,
in order to ensure such recommendations were consistent with the
overall good of Compressco and its equity holder, TETRA.
In September 2009, TETRAs compensation committee retained
the services of Stone Partners, Inc., an independent human
resource consulting firm, to provide an analysis of TETRAs
executive compensation program, including appropriate peer
comparisons, evolving compensation trends and regulatory
initiatives, the impact of the turmoil in the financial markets
and world economy on executive compensation plan design and
outstanding equity compensation awards. Stone Partners utilized
a peer group of fifteen companies, the Stone Partners Oilfield
Services and Manufacturing Industry Executive Compensation
Survey 2009, the Mercer Energy and Executive Compensation
Surveys 2009, and the Watson Wyatt Top Management Compensation
Survey 2009 to benchmark base salary, annual cash incentives,
and long-term incentives paid to senior management against the
25th, 50th and 75th percentiles of the averaged peer
group and survey data, employing scope factors or regression
analysis to predict compensation levels for some positions. The
peer companies included in this group are as follows:
|
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Carbo Ceramics
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Newpark Resources
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Superior Energy Services
|
Lufkin Industries
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Basic Energy Services
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Oceaneering International
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Core Laboratories
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Global Industries
|
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Oil States International
|
RPC Inc.
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Key Energy Services
|
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Helix Energy Solutions Group
|
Cal Dive International
|
|
Complete Productions Services
|
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Exterran Holdings
|
Stone Partners provided this data and its analysis to
TETRAs compensation committee and certain members of
TETRAs senior management. TETRAs compensation
committee retained and exercised sole control and authority over
Stone Partners. Following its review of the report and data
provided by Stone Partners, TETRAs compensation committee
further engaged Stone Partners to provide specific
recommendations related to modifying the structures of its
discretionary performance-based annual cash incentive program
and its long term equity incentive program. TETRAs
compensation committee has implemented certain of these
recommended modifications in an effort to bring TETRAs
total compensation package into closer alignment with market
medians, as described below. One of the plans that TETRA revised
was the TETRA Bonus Plan. On a going forward basis, TETRA
utilizes a new cash incentive plan, as described below, in which
our Named Executive Officers participated during the
2010 year.
The president of Compressco made recommendations concerning the
compensation packages of the remaining Named Executive Officers
to TETRAs PEO, but not to the full TETRA compensation
committee. After receiving these recommendations (described in
greater detail below), TETRAs PEO then made final
decisions concerning the compensation packages for the remaining
Named Executive Officers.
110
Role
of the Named Executive Officers
TETRAs PEO made compensation recommendations for 2010
compensation for all executive officers, including
Mr. Foster, to TETRAs compensation committee. As
background to these recommendations he provided a detailed
annual report that included the following items:
|
|
|
|
|
a summary of such officers historical compensation,
including base salaries, cash incentive bonuses and equity
awards in a tally sheet format;
|
|
|
|
the current equity ownership position of such officers;
|
|
|
|
an analysis of our annual performance relative to budgeted
expectations for the year; and
|
|
|
|
an assessment of such officers individual performances for
the year.
|
Historically, our president has made recommendations to
TETRAs PEO regarding compensation for the Named Executive
Officers other than himself. Although our president did not
prepare a report supporting his recommendations for our
remaining executive officers, information similar to that
contained in TETRAs compensation report was available to
TETRAs PEO and was considered during the decision-making
process for the remaining Named Executive Officers. The
remaining Named Executive Officers have not historically
provided TETRAs compensation committee with
recommendations as to compensation decisions, and it is not
anticipated that any executive officer, other than our
president, shall provide such recommendations in the future.
Timing
of Compensation Decisions
TETRAs PEO typically distributes his year-end compensation
report to TETRAs compensation committee, as well as the
entire TETRA Board of Directors, prior to TETRAs December
board and committee meetings. TETRAs compensation
committee reviews TETRAs PEOs compensation report,
information and recommendations provided by its compensation
consultant, if any for that year, and such other information it
considers relevant, and typically approves prospective changes
in compensation for employees over which it has decision-making
authority that may be implemented during the following year at
the discretion of TETRAs PEO. Also at its December
meeting, TETRAs compensation committee typically reviews a
preliminary estimate of the aggregate amount of annual cash
incentive compensation that may be awarded based on performance.
The actual amount of the annual cash incentive compensation
available for awards is finalized, individually allocated, and
approved by TETRAs compensation committee at a meeting
early the following year prior to payment, based upon our
audited full year financial and operating results (for the bonus
plan that was newly implemented for the 2010 year, both
TETRAs and our own results were considered). Our general
partner intends to continue TETRAs timing and
administrative guidelines for determining compensation, which
shall include year-end compensation review recommendations from
our president.
Elements
of Compensation
The following discussion on the elements of compensation
provided to the Named Executive Officers reflects TETRAs
and Compresscos historical philosophy concerning the
division of the elements of senior management employees
compensation packages, which our general partner intends to
continue. The principal elements of compensation for the Named
Executive Officers are base salary, annual and long-term cash
incentives, and equity incentive compensation. We believe a
material amount of executive compensation should be tied to our
performance, and a significant portion of the total prospective
compensation of each Named Executive Officer should be tied to
measurable financial, operational and individual goals. These
goals may include absolute performance or performance relative
to a peer group. During periods when performance meets or
exceeds established goals, the Named Executive Officers should
be compensated at or above targeted levels, respectively. When
our performance does not meet these goals, incentive award
payments, if any, should be less than such targeted levels.
TETRAs compensation committee has historically sought to
balance strong short-term annual results and long-term viability
and success. To achieve this balance, each executive officer is
annually provided with both short and long-term incentives.
Currently, short-term incentive
111
opportunities are in the form of annual cash incentives that are
based on both objective and subjective performance goals.
Long-term incentives include equity awards that vest over
multiple years and performance-based cash awards that vest at
the end of a three-year period based on the attainment of
established performance goals. To align the interests of the
Named Executive Officers with TETRAs security holders, a
substantial portion of the value of the long-term incentives
provided to the Named Executive Officers is tied to TETRAs
share price appreciation.
While the mix of salary, annual cash incentives, and long-term
incentives given to Named Executive Officers can vary from
year-to-year,
TETRAs compensation committee believes that a significant
portion of potential compensation in any year should be in the
form of long-term incentives. Our general partner intends to
adopt this policy as well. In connection with this initial
public offering, the board of directors of our general partner
intends to continue providing equity-based awards by
implementing a long-term incentive plan, which our general
partner believes will further incentivize its executive officers
to perform their duties in a way that will enhance our long-term
success.
Base
Salary
Base salary is designed to compensate executives for the
responsibilities associated with the positions they hold. We
agree with TETRAs compensation committee that a
competitive salary program is an important factor in our ability
to attract and retain talented senior management employees.
TETRAs compensation committee generally compares base
salaries paid to senior management employees to the median base
salaries reflected in peer group or industry survey data. We
agree that identifying median salaries is helpful in structuring
competitive compensation packages, although publicly available
data for all of our peer companies is not always readily
available. To the extent that relevant salary compensation
information is available for analysis, the compensation offered
by peer companies will be considered in establishing base
salaries. Base salaries may be adjusted for performance, which
may be individual, business unit
and/or
company-wide performance, or expansion of duties. In considering
salary adjustments each year, the compensation committee gives
weight to the foregoing factors, with particular emphasis on
corporate performance goals, our presidents analysis of
the individuals performance and our presidents
specific compensation recommendations (for officers other than
himself). However, the compensation committee does not rely on
formulas and considers all factors when evaluating salary
adjustments.
As of December 31, 2010, Messrs. Foster, McBride, Book
and Brickman were eligible to receive base salaries of $250,000;
$162,700; $200,550 and $150,000, respectively. In its December
2010 review process, neither TETRAs compensation committee
(with respect to Mr. Foster) nor TETRAs PEO (with
respect to Messrs. McBride, Book and Brickman) reviewed
prospective changes in base salary levels for 2011. It is
anticipated that TETRAs compensation committee or
TETRAs PEO will consider changes in Named Executive
Officer base salary levels on an as-needed basis during 2011.
Cash
Incentive Awards (Bonus Awards)
The Named Executive Officers and other key employees of
Compressco have historically been eligible to receive
discretionary cash bonus awards pursuant to a program maintained
by TETRA (the TETRA Bonus Plan). The TETRA Bonus
Plan was intended to provide incentive compensation relating to
annual performance, including consolidated or divisional pre-tax
profits, other financial and operational metrics, health, safety
and environmental statistics, and subjective individual
performance goals.
As part of its engagement by TETRAs compensation committee
in 2009, Stone Partners Inc. submitted recommendations to assist
TETRA in developing a cash incentive compensation plan that
would further our compensation philosophy, emphasize
pay-for-performance,
and provide competitive compensation opportunities. In March
2010 TETRAs compensation committee adopted a Cash
Incentive Compensation Plan that provides for both annual and
long-term cash incentive opportunities to our officers,
including the Named Executive Officers, managers, other key
employees and consultants beginning in 2010. The plan provides
for award opportunities based upon financial and operational
performance goals, health, safety and environmental performance
goals, as well as personal performance goals. For each annual
incentive award, a threshold, target
112
and stretch performance goal is established for each applicable
performance measure and the amount of the award payment that may
be received is based upon the level of achievement of such
goals. In addition, recipients of annual incentive awards have
the opportunity to participate in an over achievement bonus pool
that may be established under the plan. While the Cash Incentive
Compensation Plan is generally intended to provide bonus amounts
to participants based solely on the achievement of specific
performance measures, the TETRA compensation committee retained
the authority to modify the final payment amount.
The following table sets forth the 2010 annual incentive award
opportunities for the Named Executive Officers as a percentage
of base salary under the Cash Incentive Compensation Plan:
|
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|
|
|
|
|
|
|
Executive
|
|
Threshold
|
|
Target
|
|
Stretch
|
|
Mr. Foster
|
|
|
9
|
%
|
|
|
45
|
%
|
|
|
72
|
%
|
Mr. McBride
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
Mr. Book
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
Mr. Brickman
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
Annual incentive compensation may be earned by our Named
Executive Officers based on the achievement of weighted
performance measures. The specific performance measures
applicable to each Named Executive Officer are based on his
scope of responsibility. Certain performance measures may also
be weighted differently for the Named Executive Officers. The
following table describes the individual measures that apply to
each Named Executive Officer for the 2010 measurement year:
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|
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|
|
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|
|
|
TETRA
|
|
Compressco
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|
|
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|
|
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|
Consolidated
|
|
Profit
|
|
Compressco
|
|
|
|
|
|
|
|
|
|
|
Earnings
|
|
Before Tax
|
|
PBT
|
|
Compressco
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|
|
|
Personal
|
|
|
|
|
per Share
|
|
(PBT)
|
|
Margin
|
|
Safety
|
|
Net Sets
|
|
Goals
|
|
Total
|
Name
|
|
(%)(1)
|
|
(%)
|
|
(%)(2)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
Mr. Foster
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|
|
10
|
|
|
|
30
|
|
|
|
10
|
|
|
|
20
|
|
|
|
10
|
|
|
|
20
|
|
|
|
100
|
|
Mr. McBride
|
|
|
10
|
|
|
|
30
|
|
|
|
10
|
|
|
|
20
|
|
|
|
10
|
|
|
|
20
|
|
|
|
100
|
|
Mr. Brickman
|
|
|
10
|
|
|
|
30
|
|
|
|
10
|
|
|
|
20
|
|
|
|
10
|
|
|
|
20
|
|
|
|
100
|
|
Mr. Book
|
|
|
10
|
|
|
|
30
|
|
|
|
10
|
|
|
|
20
|
|
|
|
10
|
|
|
|
20
|
|
|
|
100
|
|
|
|
|
(1) |
|
TETRAs consolidated earnings per share are calculated on a
fully diluted basis. |
|
(2) |
|
Compresscos profit before tax margin is calculated by
dividing Compresscos profit before tax by
Compresscos revenues, excluding the financial results of
Compresscos Latin American operations. |
TETRAs compensation committee utilized the following
performance measures for 2010 cash awards: TETRA consolidated
earnings per share, Compressco pre-tax profitability, Compressco
pre-tax profitability margin, the net number of compressor units
placed into service, and health, safety and environmental
metrics. The specific target performance measures established by
TETRAs compensation committee for the 2010 plan year were:
(i) TETRA consolidated diluted earnings per share of $0.95;
(ii) Compressco pre-tax profitability of
$28.6 million; (iii) Compressco pre-tax profitability
margin, excluding the financial results of Compresscos
Latin American operations, of 26%; (iv) Compressco health,
safety and environmental metrics that represented, in most
cases, a minimum 10% improvement versus prior year results;
(v) Compresscos net number of compressor units placed
into service of 270; and (vi) personal objectives.
TETRAs overall performance during 2010 was marked by the
significant impact of the Macondo oil spill and resulting
regulatory actions on its operations in the Gulf of Mexico.
Despite the lifting of the federally mandated deepwater drilling
moratorium in October 2010, TETRAs Gulf of Mexico
operations were negatively affected by delays and added
regulatory costs to offshore projects. Although certain of
TETRAs onshore businesses reported increased revenues and
profitability in 2010 versus 2009 results, and despite strong
results from certain international businesses, TETRAs
consolidated performance as reflected by its consolidated
earnings per share did not reach the threshold level of
performance established for the 2010 plan year. Consequently, no
portion of the award opportunity tied to the TETRA consolidated
earnings per share performance measure was earned by any plan
participant for the 2010 plan year.
113
Although Compresscos domestic activity levels began to
improve during the last three quarters of 2010 and
Compresscos fourth quarter 2010 revenues were increased
compared to the fourth quarter of 2009, Compresscos
profitability before tax, profitability before tax margin and
net sets did not reach the threshold level of performance
established for the 2010 plan year. However, after reviewing
Compresscos health, safety and environmental performance
as measured by eight separate metrics, TETRAs compensation
committee determined that Compressco reached 114.5% of its
performance target, and approved payment of the earned portions
of our Named Executive Officers health, safety and
environmental related target award opportunities. TETRAs
compensation committee further determined that TETRAs
consolidated financial performance did not merit payment of the
majority of personal objective award opportunities, and no
Compressco participant received payment for any personal
objective performance measure for the 2010 plan year.
During 2010, the TETRA compensation committee also awarded
long-term cash incentive awards that will be measured over a
performance period of three years. These long-term cash
incentive awards were granted to certain members of TETRAs
senior management team, including Mr. Foster. The long-term
cash incentive awards may be earned by the grantees based on the
level of achievement of performance goals established by the
TETRA compensation committee for the performance period
commencing on January 1, 2010 and ending on
December 31, 2012. As with the annual cash incentive awards
described above, the TETRA compensation committee will retain
the discretion over the amounts, if any, that are ultimately
paid out with respect to the awards.
The first performance measure for the long-term cash incentive
awards is TETRAs total stockholder return relative to a
designated TETRA peer group (TSR), and the second
performance measure is TETRAs average return on net
capital employed (Return on Capital); each of the
two performance measures determines 50% of the total long-term
cash incentive award opportunity. For each performance measure,
a threshold, target, stretch and over achievement award
opportunity will be equal to 10%, 50%, 80% or 100%,
respectively, of the target award opportunity determined by the
TETRA compensation committee to be appropriate for each
individual recipient. To achieve the 10%, 50%, 80% or 100% award
opportunity for the TSR performance measure, TETRAs TSR
must meet the 40th, 50th, 75th or 90th percentiles of
TETRAs peer group; if TETRAs TSR falls below the
40th percentile relative to the peer group, no portion of
the award attributable to TSR will be considered achieved. To
achieve the 10%, 50%, 80% or 100% award opportunity for the
Return on Capital performance measure, TETRAs Return on
Capital must meet 60%, 100%, 120% or 140% of target numbers; if
TETRAs Return on Capital does not meet 60% of TETRAs
target numbers, no portion of the award attributable to Return
on Capital will be considered achieved. The TETRA compensation
committee will retain discretion over the amounts ultimately
paid, however, taking into account special or nonrecurring
events or circumstances with respect to TETRA or any company in
the peer group. The level of achievement of performance measures
for the January 2010 to December 2012 performance period will be
determined by TETRAs compensation committee following its
receipt and review of TETRAs audited financial statements,
and the financial results of each applicable subsidiary,
division, business and geographical unit, for the 2012 fiscal
year.
It is anticipated that TETRAs compensation committee will
establish long-term performance measures and performance goals
with respect to the January 1, 2011 through
December 31, 2013 performance period in conjunction with
its consideration of 2011 annual equity awards on or before
May 20, 2011.
Equity
Incentive Awards
Equity incentives, predominately awards of TETRA stock options
and restricted stock, have historically comprised a significant
portion of the Named Executive Officers total compensation
package. TETRAs compensation committee has sought to
strike a balance between achieving short-term annual results and
ensuring strong long-term success through its use of stock
options and restricted stock, both of which are geared toward
longer-term performance as they generally, though not always,
vest ratably over a three- or five-year period, and their values
are materially affected by TETRAs stock price
appreciation. These equity incentives are designed to be
consistent with TETRAs at-risk pay philosophy, which our
general partner intends to adopt for making future grants of
equity compensation awards.
114
Historically, most equity incentives have been awarded on the
same date to each of the Named Executive Officers, and the
timing of these equity-based grants are designed so that they
are not made in close proximity to TETRAs release of
material non-public information. To formalize this practice,
TETRAs compensation committee has adopted Procedures for
Grants of Awards under the TETRA Technologies, Inc. Equity
Compensation Plans (the Grant Procedures) for annual
and other awards to be made under the plans. With respect to
annual awards to employees, under the Grant Procedures,
TETRAs compensation committee determines the total number
of shares available for awards after consultation with
TETRAs PEO, who then makes a recommendation to
TETRAs compensation committee as to the number and type of
awards. TETRAs compensation committee considers such
recommendations and, after considering such factors and
information as it deems appropriate, the committee makes any
adjustments it feels are needed and approves the individual
awards at a meeting of the compensation committee held in
conjunction with its annual meeting of its stockholders. To
avoid timing of equity-based awards ahead of the release of its
quarterly earnings and other material non-public information,
the annual awards under the Grant Procedures typically have a
grant date of May 20. With respect to newly hired
employees, however, the Grant Procedures provide that awards
made to new hires may be made on a monthly basis. The Grant
Procedures provide that TETRAs compensation committee may
refrain from or delay regularly scheduled awards if it or the
senior management level employees themselves are aware of any
material non-public information. Our general partner also
intends to adopt formal procedures similar to the Grant
Procedures to govern the grant of equity incentive awards to our
general partners employees who provide services to us.
While TETRAs compensation committee does consider peer
group compensation practices in establishing equity incentive
opportunities, it does not specifically benchmark the value of
equity awards relative to any survey or peer group data. Market
price volatility resulting from changes in commodity prices,
weather events in the Gulf of Mexico and elsewhere, and other
industry-specific and broader, macro-economic cycles and trends
creates significant
year-to-year
variances in the value of TETRAs equity awards. As these
variances are difficult to predict and may not impact all peer
group companies on an equal basis, the accuracy and usefulness
of peer group data in establishing specific equity award
benchmarks is extremely limited. TETRAs compensation
committee does, however, annually review peer group equity
compensation practices in order to gain a general impression of
the proportionate share of equity award value in the total
compensation packages offered by peer group companies, and our
general partner intends to adopt this practice for making future
grants of equity compensation awards.
Based, in part, on the recommendations of Stone Partners,
TETRAs compensation committee determined that 2010
long-term incentive awards should consist of a mix of stock
options, restricted stock, and, for Mr. Foster and other
members of TETRAs senior management group, long-term cash
incentive awards. Although it did not rely on formulas,
TETRAs compensation committee anticipated that the
equity-based portion of the 2010 long-term incentive awards
would be divided
more-or-less
equally between stock options and restricted stock and that, for
grantees also receiving long-term cash incentive awards, the
equity-based awards would comprise approximately 80% of the
total value of long-term awards granted to them during 2010. On
May 18, 2010, TETRAs compensation committee approved
awards of stock options and restricted stock to be effective as
of May 20, 2010 pursuant to the TETRA Technologies, Inc.
2007 Long Term Incentive Plan or, the 2007 Plan. The
stock options, granted at 100% of the market price on the
effective grant date, together with the shares of restricted
stock, vest ratably over a period of three years following the
grant date. Each of the Named Executive Officers received awards
of stock options and restricted stock on May 20, 2010, as
described in the narrative to the Summary Compensation Table. In
the future, the majority of the long-term equity compensation
for employees of our general partner will likely be awarded
pursuant to the Compressco Partners, L.P. 2011 Long-Term
Incentive Plan or, the Long-Term Incentive Plan
(discussed below), although our employees will remain eligible
to receive awards under the 2007 Plan or other TETRA equity
plans that may be in effect, as well.
115
Other
Compensation Related Matters
Retirement
and Health Benefits
Compressco offers (and our general partner intends to continue
to offer) a variety of health and welfare and retirement
programs to all eligible employees. TETRA is the sponsor of each
of these plans and Compressco employees, as employees of a TETRA
affiliate, are eligible to participant in such plans. The 401(k)
retirement plan provides eligible employees with an opportunity
to save for retirement on a tax advantaged basis. Employees may
contribute on a pretax basis up to 70.0% of their compensation,
subject to annual limitations in the Internal Revenue Code of
1986, as amended (the Code). We make company
matching contributions to the participants accounts equal to
50.0% of the first 6.0% of a participants annual
contributions.
The Named Executive Officers participate in the 401(k) plan on
the same basis as all other employees. The Named Executive
Officers are eligible to participate in additional employee
benefits available generally to the full time employees of
Compressco, such as medical and dental benefit plans. Our
general partner intends for our full time employees to continue
to receive benefits that are currently made available to full
time employees of Compressco. The Named Executive Officers will
continue to be eligible to participate in these benefit programs
on the same terms and conditions as all other eligible employees.
Perquisites
and Other Compensation
The Named Executive Officers receive fringe benefits and
perquisites on the same basis as other similarly situated
employees of Compressco pursuant to the company policies that
may then be in effect. These perquisites include paid holiday
and vacation time, provided that no earned but unused
compensated absences may be carried over for use in a subsequent
year. Our general partner intends to continue to provide such
benefits to our Named Executive Officers.
Employment
Agreements
The Named Executive Officers have entered into standard form
employment agreements with Compressco. Each of these employment
agreements provide that the executives shall be employed on an
at will basis, and for an indefinite period of time.
Both Compressco and the executive may terminate the agreement at
any time. The agreements prohibit the executives from disclosing
our confidential information or our affiliates
confidential information during the employment relationship
period or at any time following the employment period. The
agreements to do not provide for severance or change of control
payments, nor do they govern specific compensation elements such
as salary or bonus.
Severance
Benefits and Change in Control Benefits
The Named Executive Officers are not currently eligible to
receive severance benefits pursuant to their employment
agreements or any other formal company policy. Certain equity
compensation awards may receive accelerated vesting or payment
in connection with a change in control of TETRA, but this
benefit is neither guaranteed nor promised to our Named
Executive Officers. See Narrative Description to Summary
Compensation Table; Equity Incentive Plan Compensation for
a more detailed discussion of potential change in control
acceleration for equity awards.
Tax
Deductibility of Compensation
With respect to the deduction limitations under
Section 162(m) of the Code, we are a limited partnership
and do not meet the definition of a corporation
under Section 162(m). Nonetheless, the taxable compensation
paid to each of the Named Executive Officers in 2010 was
substantially less than the Section 162(m) threshold of
$1,000,000.
116
Stock
Ownership Guidelines
TETRAs board of directors has adopted stock ownership
guidelines for its directors and executive officers. The stock
ownership guidelines are intended to further align the interests
of its directors and executive officers with the interests of
stockholders. Under these guidelines, executive officers must
hold shares of TETRA common stock equal to a multiple of their
base salaries, based upon their positions. Executive officers as
of February 21, 2008 have until February 21, 2013, to
be in compliance with the guidelines, and executive officers
appointed after February 21, 2008 will have five years
following attainment of executive officer status to be in
compliance. Mr. Foster became subject to these guidelines
during 2009.
Actions
Taken following Fiscal Year 2010
Cash
Incentive Compensation Plan
In February 2011, TETRAs compensation committee
established the following performance measures applicable to our
Named Executive Officers for the 2011 plan year under the Cash
Incentive Compensation Plan: TETRA consolidated earnings per
share, Compressco pre-tax profitability, the number of
compressor units placed into service, and health safety, and
environmental measures. A threshold, target and stretch
performance goal has been established for each performance
measure. TETRAs compensation committee also assigned
weightings applicable to our Named Executive Officers for the
2011 plan year of 20% on TETRAs consolidated earnings per
share, 40% on Compresscos pre-tax profitability, 10% on
the number of compressor units placed into service, 20% on
health, safety and environmental measures, and 10% on personal
objectives.
The following table sets forth the 2011 annual incentive award
opportunities under the Cash Incentive Compensation Plan for the
Named Executive Officers as a percentage of base salary:
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Threshold
|
|
Target
|
|
Stretch
|
|
Mr. Foster
|
|
|
9
|
%
|
|
|
45
|
%
|
|
|
72
|
%
|
Mr. McBride
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
Mr. Book
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
Mr. Brickman
|
|
|
5
|
%
|
|
|
25
|
%
|
|
|
40
|
%
|
The performance measures established by TETRAs
compensation committee for long-term incentive awards to be
granted in 2011 for the three-year performance period beginning
on January 1, 2011 are (i) TETRAs total
stockholder return relative to a peer group, and
(ii) TETRAs consolidated average return on net
capital employed, each of which determines 50% of the long-term
incentive award opportunity available to participants. For each
long-term incentive award, a threshold, target, stretch and over
achievement performance goal has been established for each
performance measure. The amount of an award that may be earned
by a participant at the end of the three-year performance period
will be based on the level of attainment of such performance
goals, subject to the discretion of TETRAs compensation
committee. As of the date of this filing, TETRAs
compensation committee has not established the threshold,
target, stretch and over achievement opportunities that may be
available to recipients of such awards. It is anticipated that
these award opportunities will be established on or before
May 31, 2011, as required by the Cash Incentive
Compensation Plan.
Long-Term
Incentive Plan
Equity compensation awards have historically been awarded
pursuant to plans maintained by TETRA. Our general partner
intends to adopt the Compressco Partners, L.P. 2011 Long-Term
Incentive Plan, or the Long-Term Incentive Plan, for
the employees, consultants and the directors of our general
partner and its affiliates who perform services for us. To date,
no awards have been made under the Long-Term Incentive Plan,
although it is contemplated that our general partners
employees will receive an initial grant of an award immediately
following the initial public offering and annual grants of
awards under this plan thereafter. The description of the
Long-Term Incentive Plan set forth below is a summary of the
material features of the plan. This summary, however, does not
purport to be a complete description of all the provisions of
the Long-Term Incentive Plan. This summary is qualified in its
entirety by reference to the Long-Term Incentive Plan, a copy of
which has been filed as an exhibit to the registration
statement. The purpose of the Long-Term Incentive Plan is to
provide
117
a means to enhance our profitable growth by attracting and
retaining individuals to serve as directors of our general
partner as well as the employees and consultants of our general
partner and its affiliates who will provide services to us
through affording such individuals a means to acquire and
maintain ownership or awards the value of which is tied to the
performance of common units. The Long-Term Incentive Plan seeks
to achieve this purpose by providing for grants of restricted
units, phantom units, unit awards and other unit-based awards.
Securities
to be Offered
The Long-Term Incentive Plan will limit the number of units that
may be delivered pursuant to awards granted under the plan
to
common units. Units withheld to satisfy exercise prices or tax
withholding obligations will again be available for new awards
under the plan. In addition, if an award is forfeited, cancelled
or otherwise terminates, expires or is settled without the
delivery of units, the units subject to such award will again be
available for new awards under the plan. The units delivered
pursuant to awards may be units acquired in the open market or
acquired from any person, units issued by us, or any combination
of the foregoing, as determined in the discretion of the plan
administrator (as defined below).
Administration
of the Plan
The Long-Term Incentive Plan will be approved by the board of
directors of our general partner prior to the completion of this
offering. The plan will be administered by the board of
directors of our general partner or a committee thereof, which
we refer to as the plan administrator. The plan administrator
may terminate or amend the Long-Term Incentive Plan or any part
of the plan at any time with respect to any units for which a
grant has not yet been made, including increasing the number of
units that may be granted, subject to the requirements of the
exchange upon which the common units are listed at that time, of
the Code and of the Securities Exchange Act of 1934, as amended.
We expect the securities exchange upon which the common units
will be listed will require the unit holders to approve any
increase in the number of units reserved for issuance under the
Long-Term Incentive Plan, and we would receive such unit holder
approval before amending the plan in this manner. No change in
any outstanding grant may be made that would materially reduce
the rights or benefits of the participant without the consent of
the participant. The plan will expire upon the earlier of
(i) the date units are no longer available under the plan
for grants, (ii) its termination by the board, or
(iii) the tenth anniversary of the date approved by our
general partner.
Awards
In General. The plan administrator may make
grants of restricted units, phantom unit awards and other
unit-based awards, which grants shall contain such terms as the
plan administrator shall determine, including terms governing
the service period
and/or other
performance conditions pursuant to which any such awards will
vest and/or
be settled, as applicable.
The availability and grant of units and other unit-based awards
are intended to furnish additional compensation to plan
participants and to align their economic interests with those of
common unitholders. In addition, the grant of restricted units
and phantom units under the plan is intended to serve as a means
of incentive compensation for performance and, to a lesser
extent, to provide an opportunity for plan participants to
participate in the equity appreciation of our common units. Plan
participants will not pay any consideration for the common units
they receive pursuant to an award of restricted units, or in
connection with the settlement of an award of phantom units, and
we will receive no remuneration for such units. The number of
units subject to awards will be determined by the board of
directors (or a committee thereof) of our general partner. Grant
levels in any given year may deviate on a discretionary basis
based on measuring our financial, operational, strategic or
other appropriate performance, as well as the individual
performance of plan participants. Since no awards have been made
under the plan to date, no such performance objectives have been
established at this time, although the board of directors (or a
committee thereof) of our general partner will consider its
general compensation policies and philosophies in making such
determinations.
Restricted Units. A restricted unit is a
common unit that vests over a period of time and during that
time is subject to forfeiture. The plan administrator may, in
its discretion, provide that the restricted units will
118
vest upon a change of control, as defined in the
plan or an applicable award agreement. Distributions made on
restricted units may be subjected to the same or different
vesting provisions as the restricted unit. In addition, the plan
administrator may provide that such distributions be used to
acquire additional restricted units. If a grantees
employment, consulting arrangement or membership on the board of
directors terminates for any reason, the grantees
restricted units will be automatically forfeited unless and to
the extent the plan administrator or the terms of the award
agreement provide otherwise.
Phantom Units. A phantom unit entitles the
grantee to receive a common unit upon or as soon as reasonably
practicable following the phantom units settlement date
or, in the discretion of the plan administrator, a cash payment
equivalent to the fair market value of a common unit. The plan
administrator may, in its discretion, provide that phantom units
will vest upon a change of control as defined in the
plan or an applicable award agreement. If a grantees
employment, consulting arrangement or membership on the board of
directors of our general partner terminates for any reason, the
grantees unvested phantom units will be automatically
forfeited unless, and to the extent, the plan administrator or
the terms of the award agreement provide otherwise.
The plan administrator may, in its discretion, grant
distribution equivalent rights, or DERs, with
respect to phantom unit awards. DERs entitle the participant to
receive cash or additional awards equal to the amount of any
cash distributions made by us during the period the phantom unit
is outstanding. Payment of a DER may be subject to the same
vesting terms
and/or
settlement terms as the award to which it relates or different
vesting terms
and/or
settlement terms, in the discretion of the plan administrator.
Unit Awards. The Long-Term Incentive Plan will
permit the grant of units that are not subject to vesting
restrictions. Unit awards may be in lieu of or in addition to
other compensation payable to the individual. The availability
of unit awards is intended to furnish additional compensation to
plan participants and to align their economic interests with
those of common unitholders.
Option awards. The plan administrator may
grant options to participants in the Long-Term Incentive Plan
that provide the individual with an option to acquire a common
unit. The exercise price of each option granted under the
Long-Term Incentive Plan will be stated in the option agreement
and may vary; provided, however, that, the exercise price for an
option must not be less than 100% of the fair market value per
common unit as of the date of grant of the option unless that
option award is intended to comply with the requirements of a
substitute award under the rules of Section 409A of the
Code. Options may be exercised in the manner and at such times
as the plan administrator determines for each option, unless
that option award is determined to be subject to
Section 409A of the Code, where the option award will be
subject to any necessary timing restrictions imposed by the Code
or federal regulations. The plan administrator will determine
the methods and form of payment for the exercise price of an
option and the methods and forms in which common units will be
delivered to a participant.
Unit Appreciation Rights (UAR). A
UAR is the right to receive, in cash or in common units, as
determined by the plan administrator, an amount equal to the
excess of the fair market value of one common unit on the date
of exercise over the grant price of the UAR. The plan
administrator will determine the time or times at which a UAR
may be exercised in whole or in part, including, without
limitation, any accelerated vesting upon the achievement of
specified performance goals or upon certain events. The grant
price of a UAR granted under the Long-Term Incentive Plan will
be stated in the UAR agreement and may vary; provided, however,
that, the grant price for per common unit subject to a UAR must
not be less than 100% of the fair market value per common unit
as of the date of grant of the UAR.
Other Unit-Based Awards. The Long-Term
Incentive Plan will permit the grant of other unit-based awards,
which are awards that are based, in whole or in part, on the
value or performance of a common unit or are denominated or
payable in common units. Upon settlement, the award may be paid
in common units, cash or a combination thereof, as provided in
the award agreement.
119
Other
Provisions
Tax Withholding. Unless other arrangements are
made, the plan administrator is authorized to withhold from any
award, from any payment due under any award, or from any
compensation or other amount owing to a participant the amount
(in cash, units, units that would otherwise be issued pursuant
to such award, or other property) of any applicable taxes
payable with respect to the grant of an award, its settlement,
its exercise, the lapse of restrictions applicable to an award
or in connection with any payment relating to an award or the
transfer of an award and to take such other actions as may be
necessary to satisfy the withholding obligations with respect to
an award.
Anti-Dilution Adjustments. If any equity
restructuring event occurs that could result in an
additional compensation expense under Financial Accounting
Standards Board Accounting Standards Codification Topic 718
(FASB ASC Topic 718) if adjustments to awards with
respect to such event were discretionary, the plan administrator
will equitably adjust the number and type of units covered by
each outstanding award and the terms and conditions of such
award to equitably reflect the restructuring event, and the plan
administrator will adjust the number and type of units with
respect to which future awards may be granted. With respect to a
similar event that would not result in a FASB ASC Topic 718
accounting charge if adjustment to awards were discretionary,
the plan administrator shall have complete discretion to adjust
awards in the manner it deems appropriate. In the event the plan
administrator makes any adjustment in accordance with the
foregoing provisions, a corresponding and proportionate
adjustment shall be made with respect to the maximum number of
units available under the plan and the kind of units or other
securities available for grant under the plan.
Summary
of Compensation
Summary
Compensation Table
A discussion of the fiscal 2010 base salaries paid by Compressco
is included above in Compensation Discussion and
Analysis. The following table sets forth the cash and
non-cash compensation earned and actually paid for the years
ended December 31, 2010 and 2009 by each of the individuals
who served as the principal executive officer, principal
financial officer and the other highest paid executive officers
of Compressco during such years 2010 (i.e., the Named Executive
Officers).
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Non-Equity
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Stock
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Option
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Incentive Plan
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All Other
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Name and
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Fiscal
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Bonus
|
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Awards
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Awards
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Compensation
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Compensation
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Principal Position
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Year
|
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Salary ($)
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($)(1)
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($)(2)
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($)(2)
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($)(3)
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($)(4)
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Total ($)(5)
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Ronald J. Foster President
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2010
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|
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250,000
|
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87,210
|
|
|
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86,565
|
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|
|
25,763
|
|
|
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8,228
|
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|
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457,766
|
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|
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2009
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|
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233,654
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56,250
|
|
|
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78,120
|
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1,817
|
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369,841
|
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Gary L. McBride Chief Financial Officer
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2010
|
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|
162,700
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|
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|
|
|
|
|
19,584
|
|
|
|
19,403
|
|
|
|
9,315
|
|
|
|
6,216
|
|
|
|
218,218
|
|
|
|
|
2009
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|
|
|
168,958
|
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|
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12,000
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|
|
|
|
|
|
|
17,360
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|
|
|
|
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|
1,314
|
|
|
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199,632
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Kevin W. Book Vice President of International
Operations
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2010
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199,081
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|
|
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19,584
|
|
|
|
19,403
|
|
|
|
11,481
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|
|
|
19,239
|
|
|
|
268,788
|
|
|
|
|
2009
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|
|
|
198,346
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|
|
|
18,000
|
|
|
|
|
|
|
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14,880
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|
|
|
|
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21,250
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|
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252,476
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Larry W. Brickman Vice President of Field Services
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2010
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|
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130,875
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|
|
|
|
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12,648
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|
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12,537
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|
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8,588
|
|
|
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16,668
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|
|
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181,316
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|
|
|
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2009
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|
|
|
124,731
|
|
|
|
10,000
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|
|
|
|
|
|
|
14,880
|
|
|
|
|
|
|
|
10,974
|
|
|
|
160,585
|
|
|
|
|
(1) |
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We did not grant discretionary bonuses for the 2010 year. |
|
(2) |
|
The amounts included in the Stock Awards and
Option Awards columns reflect the aggregate grant
date fair value of awards granted during the fiscal years 2010
and 2009 in accordance with FASB ASC |
120
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Topic 718. The value of option awards granted during 2010 has
been estimated as of the date of grant of each award using the
Black-Scholes option pricing model with the following
assumptions: expected stock price volatility, 72% to 73%;
expected life of options, 4.7 years; risk free interest
rate, 1.3% to 2.8%; and, no expected dividend yield. Restricted
stock granted during 2010 is valued at the closing market price
of TETRAs common stock on the date of the award. For
awards granted in 2009, a discussion of the assumptions used in
valuation of stock and option awards may be found in
Note L Equity-Based Compensation in
the Notes to Consolidated Financial Statements of TETRAs
Annual Report on
Form 10-K
for the year ended December 31, 2009, as filed with the SEC
on March 1, 2010. |
|
(3) |
|
The amount included in the Non-Equity Incentive Plan
Compensation column reflect the actual amount of the
annual cash incentive award earned for 2010 performance and paid
in March 2011 under the Cash Incentive Compensation Plan. |
|
(4) |
|
The amounts included in the All Other Compensation
column are comprised of the following amounts: |
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Long and
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Short Term
|
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Executive
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Car Allowance
|
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401(k) Match
|
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Basic Life
|
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Disability
|
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Health
|
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Ronald J. Foster
|
|
|
|
|
|
|
4,615
|
|
|
|
1,860
|
|
|
|
925
|
|
|
|
828
|
|
Gary L. McBride
|
|
|
|
|
|
|
3,567
|
|
|
|
1,210
|
|
|
|
611
|
|
|
|
828
|
|
Kevin W. Book
|
|
|
10,200
|
|
|
|
5,972
|
|
|
|
1,492
|
|
|
|
747
|
|
|
|
828
|
|
Larry W. Brickman
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|
|
10,200
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|
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|
3,926
|
|
|
|
1,116
|
|
|
|
565
|
|
|
|
861
|
|
|
|
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(5) |
|
This column does not include bonus or non-equity incentive
compensation plan amounts that may be paid to the Named
Executive Officers for the 2010 measurement year, with respect
to annual awards, following this filing due to the fact that
such amounts are not yet determinable. |
Grants of
Plan-Based Awards
The following table and accompanying narrative disclosure
provide information related to grants of plan-based awards to
our named executive officers during the 2010 fiscal year.
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All Other
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All Other
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Option
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Stock
|
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Awards:
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Grant Date
|
|
|
|
|
Date of
|
|
Estimated Future Payouts
|
|
Awards:
|
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Number of
|
|
Exercise
|
|
Fair Value
|
|
|
|
|
Comp.
|
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Under Non-Equity
|
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Number of
|
|
Securities
|
|
Price of
|
|
of Stock
|
|
|
Grant
|
|
Committee
|
|
Incentive Plan Awards(2)
|
|
Shares of
|
|
Underlying
|
|
Option
|
|
and Option
|
Name
|
|
Date
|
|
Action(1)
|
|
Threshold
|
|
Target
|
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Maximum
|
|
Stock
|
|
Options
|
|
Awards
|
|
Awards(3)
|
|
Ronald J. Foster
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|
|
3/8/10
|
|
|
|
3/8/10
|
|
|
|
|
|
|
$
|
25,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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5/20/10
|
|
|
|
5/18/10
|
|
|
$
|
11,118
|
|
|
$
|
55,591
|
|
|
$
|
111,182
|
|
|
|
8,550
|
|
|
|
14,500
|
|
|
$
|
10.20
|
|
|
$
|
173,775
|
|
Gary L. McBride
|
|
|
3/8/10
|
|
|
|
3/8/10
|
|
|
|
|
|
|
$
|
9,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
5/20/10
|
|
|
|
5/18/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
|
|
|
3,250
|
|
|
$
|
10.20
|
|
|
$
|
38,987
|
|
Kevin W. Book
|
|
|
3/8/10
|
|
|
|
3/8/10
|
|
|
|
|
|
|
$
|
11,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/20/10
|
|
|
|
5/18/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
|
|
|
3,250
|
|
|
$
|
10.20
|
|
|
$
|
38,987
|
|
Larry W. Brickman
|
|
|
3/8/10
|
|
|
|
3/8/10
|
|
|
|
|
|
|
$
|
8,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/20/10
|
|
|
|
5/18/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,240
|
|
|
|
2,100
|
|
|
$
|
10.20
|
|
|
$
|
25,185
|
|
|
|
|
(1) |
|
Under TETRAs Grant Procedures, TETRA may designate
effective grant dates following the date of its compensation
committees action. |
|
(2) |
|
The non-equity incentive plan awards granted on March 8,
2010 are actual amounts paid to the executives in March 2011
with respect to the annual cash incentive award under the Cash
Incentive Compensation Plan. The non-equity incentive plan award
granted on May 20, 2010 to Mr. Foster is the
threshold, target and maximum amounts of the long-term cash
incentive granted for the January 1, 2010 through
December 31, 2012 performance period that may be paid, to
the extent earned and at the discretion of TETRAs
compensation committee, in February 2013; the remaining Named
Executive Officers did not receive a long-term cash incentive
award during the 2010 year. |
121
|
|
|
(3) |
|
The FASB ASC Topic 718 value of the stock options granted on
May 20, 2010 was $5.97 per option. The value of option
awards granted during 2010 has been estimated as of the date of
grant of each award using the Black-Scholes option pricing model
with the following assumptions: expected stock price volatility,
72% to 73%; expected life of options, 4.7 years; risk free
interest rate, 1.3% to 2.8%; and, no expected dividend yield.
Restricted stock granted during 2010 is valued at the closing
market price of TETRAs common stock on the date of the
award. |
Narrative
Description to Summary Compensation Table
Explanation
of Salary and Bonus in Proportion to Total
Compensation
The following table shows the amount of salary actually paid for
each Named Executive Officer in proportion to their total
compensation. This table does not include bonus or non-equity
incentive compensation plan amounts that may be paid to the
Named Executive Officers for the 2010 measurement year following
this filing due to the fact that such amounts are not yet
determinable.
|
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|
|
|
|
|
|
|
|
|
|
Percentage to
|
|
|
|
|
Total Compensation
|
Name
|
|
Salary ($)
|
|
(%)
|
|
Ronald J. Foster
|
|
|
250,000
|
|
|
|
58
|
%
|
Gary L. McBride
|
|
|
162,700
|
|
|
|
78
|
%
|
Kevin W. Book
|
|
|
199,081
|
|
|
|
77
|
%
|
Larry W. Brickman
|
|
|
130,875
|
|
|
|
76
|
%
|
Employment
Agreements with Named Executive Officers
The Named Executive Officers have entered into standard form
employment agreements with Compressco. Each of these employment
agreements provide that the executives shall be employed on an
at will basis, and for an indefinite period of time.
Both Compressco and the executive may terminate the agreement at
any time. The agreements prohibit the executives from being
directly or indirectly connected with any business that competes
in any way with us or any of our affiliates, which includes
passive investments in other companies such as stock ownership.
The employees are prohibited from disclosing our confidential
information or our affiliates confidential information
during or after the employment relationship period, and the
employees agree to assign to us all inventions, processes or any
improvements that they assist in developing or discovering
during their employment. The agreements to do not provide for
severance or change of control payments, nor do they govern
specific compensation elements such as salary or bonus.
Equity
Incentive Plan Compensation
The stock option and restricted stock awards made to the named
executive officers in 2010 were granted under the 2007 Plan.
Under the terms of the stock option awards for each Named
Executive Officer, the stock options are intended to qualify as
incentive stock options under Section 422 of
the Code. Each stock option was granted with an exercise price
of $10.20, which was determined to the fair market value of one
share of common stock on the grant date. The stock options will
expire on the tenth anniversary of the grant date if they have
not been exercised by that time.
One-third of the stock options granted to each Named Executive
Officer will vest on the one year anniversary of the grant date
and additional 2.7778% portions of the stock option awards will
vest on the 9th day of each month thereafter; the awards
will be fully vested on May 20, 2013. One-third of the
restricted stock granted to each Named Executive Officer will
vest on the one-year anniversary of the grant date and
additional 16.6667% portions of the restricted stock awards will
vest once every six months thereafter; the awards will be fully
vested on May 20, 2013. TETRAs compensation committee
may accelerate the vesting for the stock options and restricted
stock upon the participants death, disability or
retirement, although the default treatment of the awards,
assuming that the committee does not take this action, would be
that any unvested portion of the awards would be forfeited upon
the participants death, disability or retirement.
Disability is defined for these purposes as the inability to
perform services for a period of 90 consecutive days
122
or a total of 180 days during any
365-day
period, as a result of either a mental or physical illness.
TETRAs compensation committee also has the authority, but
not the obligation, to accelerate the time of vesting in the
event of a change in control. A change of control under the 2007
Plan is generally defined as: (1) any person other than
TETRA, its subsidiaries or any employee benefit plan of TETRA or
its subsidiaries, becomes the beneficial owner of more than 50%
of the voting stock of TETRA; (2) the consummation of a
merger or similar business combination or consolidation which
results in TETRAs equity holders owning less than 50% of
the voting securities of the surviving entity;
(3) TETRAs complete liquidation or dissolution; or
(4) individuals who constitute TETRAs board of
directors cease to constitute at least a majority of the board
of directors. Holders of restricted stock are stockholders
entitled to vote and receive dividends prior to vesting.
123
Outstanding
Equity Awards at Fiscal Year End
The following table provides information on the outstanding
option and restricted share awards held by the named executive
officers as of December 31, 2010. Each equity grant is
shown separately for each Named Executive Officer.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Option Awards
|
|
|
|
Market Value
|
|
|
Number of Securities
|
|
|
|
|
|
Number of
|
|
of Shares
|
|
|
Underlying Unexercised
|
|
Option
|
|
Option
|
|
Shares of Stock
|
|
of Stock
|
|
|
Options
|
|
Exercise
|
|
Expiration
|
|
That Have
|
|
That Have Not
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
Price(1)
|
|
Date
|
|
Not Vested
|
|
Vested(2)
|
|
Ronald J. Foster
|
|
|
8,334
|
|
|
|
0
|
|
|
$
|
8.30
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
10,201
|
|
|
|
0
|
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
3,733
|
|
|
|
267
|
(3)
|
|
$
|
23.055
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
3,666
|
|
|
|
334
|
(4)
|
|
$
|
28.075
|
|
|
|
5/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
4,133
|
|
|
|
3,867
|
(5)
|
|
$
|
21.10
|
|
|
|
5/20/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
14,000
|
(6)
|
|
$
|
4.17
|
|
|
|
4/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
14,500
|
(10)
|
|
$
|
10.20
|
|
|
|
5/20/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
(7)
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,550
|
(11)
|
|
$
|
101,489
|
|
Gary L. McBride
|
|
|
30,000
|
|
|
|
0
|
|
|
$
|
8.30
|
|
|
|
7/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
|
|
0
|
|
|
$
|
9.2067
|
|
|
|
12/28/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
|
134
|
(3)
|
|
$
|
23.055
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
2,583
|
|
|
|
2,417
|
(5)
|
|
$
|
21.10
|
|
|
|
5/20/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
3,888
|
|
|
|
3,112
|
(6)
|
|
$
|
4.17
|
|
|
|
4/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
3,250
|
(10)
|
|
$
|
10.20
|
|
|
|
5/20/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
(8)
|
|
$
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600
|
(7)
|
|
$
|
7,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
(11)
|
|
$
|
22,790
|
|
Kevin W. Book
|
|
|
10,500
|
|
|
|
0
|
|
|
$
|
9.2667
|
|
|
|
12/9/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
|
134
|
(3)
|
|
$
|
23.055
|
|
|
|
4/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
1,833
|
|
|
|
167
|
(4)
|
|
$
|
28.075
|
|
|
|
5/12/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
2,583
|
|
|
|
2,417
|
(5)
|
|
$
|
21.10
|
|
|
|
5/20/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
3,333
|
|
|
|
2,667
|
(6)
|
|
$
|
4.17
|
|
|
|
4/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
3,250
|
(10)
|
|
$
|
10.20
|
|
|
|
5/20/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
(7)
|
|
$
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,920
|
(11)
|
|
$
|
22,790
|
|
Larry W. Brickman
|
|
|
6,999
|
|
|
|
501
|
(9)
|
|
$
|
18.80
|
|
|
|
3/1/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
3,100
|
|
|
|
2,900
|
(5)
|
|
$
|
21.10
|
|
|
|
5/20/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
3,333
|
|
|
|
2,667
|
(6)
|
|
$
|
4.17
|
|
|
|
4/9/2019
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
|
|
2,100
|
(10)
|
|
$
|
10.20
|
|
|
|
5/20/2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450
|
(7)
|
|
$
|
5,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,240
|
(11)
|
|
$
|
14,719
|
|
|
|
|
(1) |
|
Each of the awards in this table relates to shares of
TETRAs common stock and has been granted under one of the
equity compensation plans maintained by TETRA. Under the terms
of each plan, the option exercise price must be greater than or
equal to 100% of the closing market price of the common stock on
the date of grant. The value of option awards granted during
2010 has been estimated as of the date of grant of each award
using the Black-Scholes option pricing model with the following
assumptions: expected stock price volatility, 72% to 73%;
expected life of options, 4.7 years; risk free interest
rate, 1.3% to 2.8%; and, no expected dividend yield. Restricted
stock granted during 2010 is valued at the closing market price
of TETRAs common stock on the date of the award. |
124
|
|
|
(2) |
|
Market value is determined by multiplying the number of shares
of stock that had not vested on December 31, 2010 by
$11.87, the closing price of the common stock on
December 31, 2010. |
|
(3) |
|
The stock option award vested 20% on April 12, 2007, vests
an additional 1.6667% of the award each month, and will become
fully vested on April 12, 2011. |
|
(4) |
|
The stock option award vested 20% on May 12, 2007, vests an
additional 1.6667% of the award each month and will become fully
vested on May 12, 2011. |
|
(5) |
|
The stock option award vested 20% on May 20, 2009, vests an
additional 1.6667% of the award each month and will become fully
vested on May 20, 2013. |
|
(6) |
|
The stock option award vested 33.33% on April 9, 2010,
vests an additional 2.7778% of the award each month and will
become fully vested on April 9, 2012. |
|
(7) |
|
The restricted stock award vested 20% on May 20, 2008,
vests an additional 10% of the award once every six months and
will become fully vested on May 20, 2012. |
|
(8) |
|
The restricted stock award vested 20% on May 12, 2007,
vests an additional 10% of the award once every six months and
will become fully vested on May 12, 2011. |
|
(9) |
|
The stock option award vested 20% on March 1, 2007, vests
an additional 1.6667% of the award each month and will become
fully vested on March 1, 2011. |
|
(10) |
|
The stock option award will vest 33.33% on May 20, 2011,
will vest an additional 2.7778% of the award each month
thereafter, and will become fully vested on May 20, 2013. |
|
(11) |
|
The restricted stock award will vest 33.33% on May 20,
2011, will vest an additional 16.6667% of the award once every
six months thereafter, and will become fully vested on
May 20, 2013. |
Option
Exercises and Stock Vested in 2010
The following table sets forth, for each of the named executive
officers, information regarding the value of restricted share
awards that vested during the fiscal year ended
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
Number of
|
|
|
|
|
Shares
|
|
Value Realized
|
|
|
Acquired on
|
|
on Vesting
|
Name
|
|
Vesting
|
|
$(1)
|
|
Ronald J. Foster
|
|
|
400
|
|
|
$
|
4,126
|
|
Gary L. McBride
|
|
|
600
|
|
|
$
|
6,382
|
|
Kevin W. Book
|
|
|
200
|
|
|
$
|
2,063
|
|
Larry W. Brickman
|
|
|
300
|
|
|
$
|
3,095
|
|
|
|
|
(1) |
|
Calculated by multiplying the number of restricted shares by the
market value of the underlying shares on the vesting date. |
Pension
Benefits
We do not intend to provide pension benefits to the employees of
our general partner that provide services to us, nor did
Compressco provide such benefits.
Nonqualified
Deferred Compensation Table for 2010
TETRA maintains the TETRA Technologies, Inc. Nonqualified
Deferred Compensation Plan, an unfunded, nonqualified deferred
compensation plan, which allows participants to defer a portion
of their base salaries, and performance-based compensation. The
Named Executive Officers do not currently participate in this
plan. We will not assume this arrangement and, at this time, we
do not intend to adopt a nonqualified deferred compensation plan.
125
Potential
Payments upon a Change in Control or Termination
As of December 31, 2010, none of the Named Executive
Officers was entitled to payments upon a change in control or a
termination of employment pursuant to any employment agreement,
severance agreement or change in control agreement. The equity
compensation awards that a Named Executive Officer holds at the
time of a change in control may be accelerated at the discretion
of TETRAs compensation committee, but for purposes of this
disclosure we have assumed that no awards will receive
accelerated treatment.
Director
Compensation Table
None of Messrs. Hertel, Brightman or Foster was paid for
services as a director of Compressco during the 2010 year.
Mr. Foster was compensated for his services as the
president of Compressco as noted above in the Summary
Compensation Table, and he did not receive additional
compensation for his services as a director of Compressco.
Messrs. Hertel and Brightman are not employed by
Compressco, but were named executive officers of TETRA during
the 2010 year, and neither executive received compensation
in addition to their employee compensation during the
2010 year.
On a going-forward basis, we anticipate that each non-employee
director will receive cash compensation of
$ per year for attending regularly
scheduled quarterly board meetings, and following the adoption
of the Long-Term Incentive Plan, will be eligible to receive
equity compensation awards. Each non-employee director will be
reimbursed for
out-of-pocket
expenses in connection with attending meetings of the board of
directors or committees.
Each director will be fully indemnified for actions associated
with being a director to the extent permitted under Delaware law
and the First Amended and Restated Agreement of Limited
Partnership of Compressco Partners, L.P. (the Partnership
Agreement). The Partnership Agreement states that the
directors will not be liable for monetary damages to us or our
affiliates for losses sustained or incurred as a result of any
act or omission of a director, unless there has been a court
determination that such director acted in bad faith or engaged
in fraudulent conduct or willful misconduct in connection with
the act giving rise to the claim, or, in the case of a criminal
matter, acted with knowledge that the directors conduct
was unlawful. We also intend to enter into individual
indemnification agreements with each of the directors in order
to enhance the indemnification rights provided under Delaware
law and the Partnership Agreement. We expect that the individual
agreements will provide the director with indemnification rights
to receive his or her costs of defense if the individual is a
party or witness to any proceeding that is brought by or in the
right of, or other than by or in the right of, us, provided that
the director has not acted in bad faith or engaged in fraud or
willful misconduct with respect to the action that gave rise to
his or her participation in the proceeding. Each director will
also be covered under directors and officers
liability insurance in customary and reasonable amounts during
the period of time the director provides services to us in such
a capacity.
Compensation
Policies and Risk Management
To the extent that risks may arise from our compensation
policies and practices for our employees that are reasonably
likely to have a material adverse effect on us, we are required
to discuss our policies and practices for compensating our
employees (including our employees that are not Named Executive
Officers) as they relate to our risk management practices and
risk-taking incentives. We have determined that our compensation
policies and practices for our employees are not reasonably
likely to have a material adverse effect on us, thus no such
disclosure exists at this time. We seek to structure a balance
between achieving strong short-term annual results and ensuring
long-term viability and success by providing both annual and
long-term incentive opportunities. We believe that providing
both short- and long-term awards also helps to minimize any risk
to us or our unitholders that could arise from excessive focus
on short-term performance. Compresscos board of directors
is aware of the need to routinely assess our compensation
policies and practices and will make a determination as to the
necessity of this particular disclosure on an annual basis.
126
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our
common units and subordinated units that will be issued upon the
consummation of this offering and the related transactions and
held by:
|
|
|
|
|
each person who then will beneficially own 5% or more of the
then outstanding common units;
|
|
|
|
all of the directors and director nominees of our general
partner;
|
|
|
|
each executive officer of our general partner; and
|
|
|
|
all directors and executive officers of our general partner as a
group.
|
The amounts and percentages of units beneficially owned are
reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the
rules of the SEC, a person is deemed to be a beneficial
owner of a security if that person has or shares
voting power, which includes the power to vote or to
direct the voting of such security, or investment
power, which includes the power to dispose of or to direct
the disposition of such security. A person is also deemed to be
a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial
owner of the same securities and a person may be deemed a
beneficial owner of securities as to which he has no economic
interest.
The persons named in the table below have sole voting and
investment power with respect to all units shown as beneficially
owned by them, subject to community property laws where
applicable. The address for the beneficial owners listed below
is 24955 Interstate 45 North, The Woodlands, TX 77380.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage of
|
|
|
Percentage of
|
|
|
|
Common
|
|
|
of Common
|
|
|
Subordinated
|
|
|
Subordinated
|
|
|
Common and
|
|
|
|
Units to be
|
|
|
Units to be
|
|
|
Units
|
|
|
Units
|
|
|
Subordinated Units
|
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
Owned(1)(2)
|
|
|
Owned(2)
|
|
|
Owned
|
|
|
Owned
|
|
|
Owned(2)
|
|
|
TETRA Technologies Inc.(3)
|
|
|
6,597,257
|
|
|
|
72.5
|
%
|
|
|
6,273,970
|
|
|
|
100
|
%
|
|
|
83.7
|
%
|
Ronald J. Foster
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Gary L. McBride
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Kevin W. Book
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Larry W. Brickman
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Geoffrey M. Hertel
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Stuart M. Brightman
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
William D. Sullivan
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
All directors and executive officers as a group (persons)
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,597,257
|
|
|
|
72.5
|
%
|
|
|
6,273,970
|
|
|
|
100
|
%
|
|
|
83.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes common units as to which such person has the right to
acquire beneficial ownership within 60 days. |
|
(2) |
|
Assuming no exercise of the underwriters overallotment
option. |
|
(3) |
|
The common units and subordinated units beneficially owned by
TETRA Technologies Inc. are directly held by Compressco Partners
GP Inc. and TETRA International Incorporated, each an indirect,
wholly owned subsidiary of TETRA Technologies Inc. TETRA
Technologies Inc. has sole voting and investment power over the
common units and subordinated units directly held by Compressco
Partners GP Inc. and TETRA International Incorporated. |
127
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
After this offering, TETRA and its affiliates will own all of
our subordinated units, representing a 40.0% limited partner
interest in us, and 6,597,257 common units (6,222,257 common
units if the underwriters exercise their option to purchase
additional common units in full), representing a 42.1% limited
partner interest in us, and will own and control our general
partner, which will maintain its 2.0% general partner interest
in us and will be issued the incentive distribution rights, and
will appoint all of the directors of our general partner.
The terms of the transactions and agreements disclosed in this
section were determined by and among affiliated entities and,
consequently, are not the result of arms-length
negotiations. Such terms are not necessarily at least as
favorable to the parties to these transactions and agreements as
the terms that could have been obtained from unaffiliated third
parties.
Distributions
and Payments to Our General Partner and its Affiliates
The following table summarizes the distributions and payments to
be made by us to our general partner and its affiliates in
connection with the formation, ongoing operation and any
liquidation of Compressco Partners.
Formation
Stage
|
|
|
The consideration received by TETRA and its subsidiaries for the
contribution to us of a portion of our predecessors
business
|
|
6,597,257 common
units (6,222,257 common units if the underwriters exercise their
option to purchase additional common units in full);
|
|
|
|
6,273,970
subordinated units;
|
|
|
|
a 2.0% general
partner interest; and
|
|
|
|
the incentive
distribution rights.
|
Operational
Stage
|
|
|
Distributions of available cash to our general partner and its
affiliates
|
|
We will generally make cash distributions 98.0% to our
unitholders, including our general partner and its affiliates,
as the holders of an aggregate 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 all of
the subordinated units, and 2.0% to our general partner. In
addition, if distributions exceed the minimum quarterly
distribution and other higher target levels, our general partner
will be entitled to increasing percentages of the distributions,
up to 48.0% of the distributions above the highest target level. |
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Assuming we have sufficient available cash to pay the minimum
quarterly distribution on all of our outstanding common and
subordinated units for four quarters, our general partner and
its affiliates would receive an annual distribution of
approximately $0.5 million on their 2.0% general partner
interest and approximately $20.0 million on their common
units and subordinated units. |
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Payments to our general partner and its affiliates
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We will reimburse our general partner and its affiliates for the
payment of all direct and indirect expenses incurred on our
behalf. For further information regarding the reimbursement of
these expenses, please read Omnibus
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Withdrawal or removal of our general partner
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If our general partner withdraws or is removed, its general
partner interest and its incentive distribution rights will
either be sold to the new general partner for cash or converted
into common units, in each case for an amount equal to the fair
market value of those interests. Please read The
Partnership Agreement Withdrawal or Removal of Our
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Liquidation
Stage
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Liquidation
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Upon our liquidation, the partners, including our general
partner, will be entitled to receive liquidating distributions
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Agreements
Governing the Transactions
We and other parties have entered into or will enter into the
various documents and agreements that will effect the
transactions relating to our formation and this offering,
including our acquisition of interests in our Operating LLC and
our Operating Corp, the vesting of assets in, and the assumption
of liabilities by, us, our Operating LLC and our Operating Corp,
and the application of the net proceeds of this offering. These
agreements will not be the result of arms-length
negotiations, and they, or any of the transactions that they
provide for, may not be effected on terms as favorable to the
parties to these agreements as could have been obtained from
unaffiliated third parties. All of the transaction expenses
incurred in connection with these transactions will be paid from
the net proceeds of this offering.
Omnibus
Agreement
Upon the completion of this offering, we will enter into an
omnibus agreement with TETRA and its other controlled
affiliates. The following discussion describes provisions of the
omnibus agreement. The omnibus agreement (other than the
indemnification obligations described below under
Indemnification for Environmental and
Related Liabilities) will terminate on a change of control
of our general partner.
Provision
of Services Necessary to Operate Our Business
Following the completion of this offering, our general
partners board of directors and executive officers will
manage our operations, while our general partners
employees, our employees and certain employees of a TETRA
Mexican subsidiary will conduct our business. In addition, TETRA
will provide certain corporate staff and general and
administrative support services that are necessary to conduct
our business. These services will be provided to us in a manner
that is, in the good faith judgment of TETRA, commercially
reasonable and upon the reasonable request of our general
partner and may include, without limitation, legal, accounting
and financial reporting, treasury, insurance administration,
claims processing and risk management, health, safety and
environmental, information technology, human resources, credit,
payroll, internal audit and tax services.
Pursuant to the omnibus agreement, we will reimburse our general
partner and TETRA for services they provide to us. For the year
ending December 31, 2011, we expect reimbursements to TETRA
to be approximately $900,000.
Employees of TETRA or its affiliates that provide support
services to us pursuant to the omnibus agreement will be
eligible to participate in our compensation plans, subject to
the eligibility provisions and other employment restrictions
contained in such plans.
Indemnification
for Environmental and Related Liabilities
Under the omnibus agreement, TETRA will indemnify us for three
years after the completion of this offering against certain
potential environmental claims, losses and expenses associated
with operation of our predecessor prior to the completion of
this offering. TETRAs maximum liability for this
indemnification obligation will not exceed $5.0 million and
TETRA will not have any obligation under this indemnification
until our aggregate losses exceed $250,000. TETRA will have no
indemnification obligations with respect to
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environmental claims made as a result of additions to or
modifications of environmental laws promulgated after the
closing date of this offering. We will also indemnify TETRA for
environmental claims arising following the completion of this
offering regarding the business contributed to us.
TETRA will also indemnify us for liabilities related to:
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certain defects in title to our assets as of the completion of
this offering and any failure to obtain, prior to the completion
of this offering, certain consents and permits necessary to own
and operate such assets, to the extent we notify TETRA within
three years after the completion of this offering; and
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tax liabilities attributable to the operation of our assets
prior to the completion of this offering.
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Contribution
Agreement
In connection with the closing of this offering, we will enter
into a Contribution, Conveyance and Assumption Agreement with
TETRA and its other controlled affiliates that will effect the
transactions and the use of the net proceeds of this offering.
Under this agreement, 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. 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
not reflect interest on this indebtedness in our future results
of operations.
Under this agreement, we will also use approximately
$3.5 million of the proceeds received from this offering to
reimburse TETRA for certain expenses incurred in connection with
this offering. Finally, under this agreement, 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.
Related-Party
Transactions
Transactions
During 2008, 2009 and 2010, we made payments to Curtis1000, a
provider of marketing, human resources and safety services, of
approximately $160,475, $80,083 and $53,147, respectively. The
sales representative of Curtis1000 responsible for Compressco
business is the wife of Ronald J. Foster, the President of our
general partner. We believe the costs of the services provided
by Curtis1000 are comparable to the costs that would be charged
by an unaffiliated third party.
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.
Policy
and Procedure
The conflicts committee of the board of directors of our general
partner will be responsible for the review, approval and
ratification of transactions involving us and related
persons (our general partners directors, director
nominees, executive officers or their immediate family members,
or unitholders owning five percent or greater of our
companys outstanding common units). Going forward, our
general partners policy will be to review any
related-person transaction that meets the minimum threshold for
disclosure under the relevant SEC rules (generally, transactions
with us involving amounts exceeding $120,000 in which a related
person has a direct or indirect material interest). In
determining whether to approve or ratify a related-party
transaction, the conflicts committee shall consider whether the
transaction is (i) on terms no less favorable to us than
those generally being provided to or available from unrelated
third parties, or (ii) fair and reasonable
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to us, taking into account the totality of the relationships
between the parties involved (including other transactions that
may be particularly favorable or advantageous to us). Currently,
our only transactions with related persons (other than in their
capacity as our employees) are those described in this section.
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CONFLICTS
OF INTEREST AND FIDUCIARY DUTIES
Conflicts
of Interest
Conflicts of interest exist and may arise in the future as a
result of the relationships between our general partner and its
affiliates (including TETRA, Compressco and their subsidiaries)
on the one hand, and our partnership and our limited partners,
on the other hand. The directors and executive officers of our
general partner have fiduciary duties to manage our general
partner and our general partner in a manner beneficial to its
owners. At the same time, our general partner has a fiduciary
duty to manage our partnership in a manner beneficial to us and
our unitholders.
Whenever a conflict arises between our general partner or its
affiliates, on the one hand, and us or any other partner, on the
other hand, our general partner will resolve that conflict. Our
partnership agreement contains provisions that modify and limit
our general partners fiduciary duties to our unitholders.
Our partnership agreement also restricts the remedies available
to our unitholders for actions taken that, without those
limitations, might constitute breaches of fiduciary duty.
While our general partner will use reasonable efforts to prevent
the occurrence of a conflict of interest, it may not always be
able to do so. Our general partner is responsible for
identifying any such conflict of interest and our general
partner may choose to resolve the conflict of interest by any
one of the methods described in the following sentence. Our
general partner will not be in breach of its obligations under
the partnership agreement or its duties to us or our unitholders
if the resolution of the conflict is:
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approved by the conflicts committee in good faith, although our
general partner is not obligated to seek such approval; or
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approved by the vote of a majority of the outstanding common
units, excluding any common units owned by our general partner
or any of its affiliates; or
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on terms no less favorable to us than those generally being
provided to or available from unrelated third parties; or
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fair and reasonable to us, taking into account the totality of
the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
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As required by our partnership agreement, the board of directors
of our general partner will maintain a conflicts committee
consisting of at least two independent directors. Our general
partner may, but is not required to, seek the approval of such
resolution from the conflicts committee of its board of
directors. If our general partner does not seek approval from
the conflicts committee and its board of directors determines
that the resolution or course of action taken with respect to
the conflict of interest satisfies either of the standards set
forth in the third and fourth bullet points above, then it will
be presumed that, in making its decision, the board of directors
acted in good faith, and in any proceeding brought by or on
behalf of any limited partner or the Partnership, the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption. Unless the resolution of a conflict
is specifically provided for in our partnership agreement, our
general partner or the conflicts committee may consider any
factors it determines in good faith to consider when resolving a
conflict. When our partnership agreement provides that someone
act in good faith, it requires that person to believe he is
acting in the best interests of the Partnership.
Conflicts of interest could arise in the situations described
below, among others.
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.
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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.
Neither
our partnership agreement nor any other agreement requires TETRA
or Compressco to pursue a business strategy that favors us or
utilizes our assets or dictates what markets to pursue or grow.
TETRAs directors have a fiduciary duty to make these
decisions in the best interests of the holders of TETRAs
common stock, which may be contrary to our interests. In
addition, Compresscos officers and directors owe fiduciary
duties to TETRA as Compresscos sole stockholder, and those
duties may be similarly adverse to ours.
Because certain of the directors of our general partner are also
directors
and/or
officers of Compressco, such directors have fiduciary duties to
Compressco that may cause them to pursue business strategies
that disproportionately benefit Compressco or which otherwise
are not in our best interests.
Our
general partner is allowed to take into account the interests of
parties other than us, such as TETRA and Compressco, in
resolving conflicts of interest.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. 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 give any
consideration to any interest of, or factors affecting, 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 units it owns, the exercise of its
registration rights and its determination whether or not to
consent to any sale, merger or consolidation of the partnership
or amendment to the partnership agreement.
We
will rely on the directors, executive officers and employees of
our general partner and its affiliates, including TETRA and
Compressco.
We will rely on the directors, executive officers and employees
of our general partner and its affiliates, including TETRA and
Compressco, to manage our operations, conduct our business and
make decisions on our behalf. In addition, Compressco will own
and control our general partner and Compressco, in turn, is a
wholly owned subsidiary of TETRA. TETRA and its controlled
affiliates will conduct businesses and activities of their own
in which we will have no economic interest. If these separate
activities are significantly greater than our activities, there
could be material competition for the time and effort of these
directors, executive officers and employees. In addition, TETRA
will allocate expenses of personnel who perform general and
administrative services for us and we will reimburse TETRA and
any of its controlled affiliates for those expenses.
Our
partnership agreement limits our general partners
fiduciary duties to holders of our common units and restricts
the remedies available to holders of our common 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:
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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 give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Actions of our general partner, which are made in its individual
capacity, will be made by its sole shareholder, Compressco,
which, in turn, is a wholly owned subsidiary of and controlled
by TETRA. Examples include the exercise of its limited call
right, the exercise of its rights to transfer or vote the units
it owns, the exercise of its registration rights
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and its determination whether or not to consent to any sale,
merger or consolidation of the partnership or amendment to the
partnership agreement;
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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;
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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 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;
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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
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provides that in resolving conflicts of interest, it will be
presumed that in making its decision our general partner or its
conflicts committee 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.
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By purchasing a common unit, a common unitholder will agree to
become bound by the provisions in our partnership agreement,
including the provisions discussed above. Please read
Conflicts of Interest and Fiduciary Duties
Fiduciary Duties.
Except
in limited circumstances, our general partner has the power and
authority to conduct our business without unitholder
approval.
Under our partnership agreement, our general partner has full
power and authority to do all things, other than those items
that require unitholder approval or with respect to which our
general partner has sought conflicts committee approval, on such
terms as it determines to be necessary or appropriate to conduct
our business including, but not limited to, the following:
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the making of any expenditures, the lending or borrowing of
money, the assumption or guarantee of or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness, including indebtedness that is convertible into
our securities, and the incurring of any other obligations;
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the purchase, sale or other acquisition or disposition of our
securities, or the issuance of additional options, rights,
warrants and appreciation rights relating to our securities;
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the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of our assets or the
merger or other combination of the partnership with or into
another person;
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the negotiation, execution and performance of any contracts,
conveyances or other instruments;
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the distribution of our cash;
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the selection, employment, retention and dismissal of employees
and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and
other terms of employment or hiring;
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the maintenance of insurance for our benefit and the benefit of
our partners and indemnitees;
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the formation of, or acquisition of an interest in, the
contribution of property to, and the making of loans to, any
limited or general partnerships, joint ventures, corporations,
limited liability companies or other relationships;
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the control of any matters affecting our rights and obligations,
including the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation,
arbitration or mediation and the incurring of legal expense and
the settlement of claims and litigation;
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the indemnification of any person against liabilities and
contingencies to the extent permitted by law;
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the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies
having jurisdiction over our business or assets; and
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the entering into of agreements with any of its affiliates to
render services to us or to itself in the discharge of its
duties as our general partner.
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Our partnership agreement provides that our general partner must
act in good faith when making decisions on our
behalf, and our partnership agreement further provides that in
order for a determination by our general partner to be made in
good faith, our general partner must believe that
the determination is in our best interests. Please read
The Partnership Agreement Voting Rights
for information regarding matters that require unitholder
approval.
Our
general partner determines the amount and timing of asset
purchases and sales, capital expenditures, borrowings, issuances
of additional partnership securities and the creation, reduction
or increase of reserves, each of which can affect the amount of
cash that is distributed to our unitholders.
The amount of cash that is available for distribution to our
unitholders is affected by decisions of our general partner
regarding such matters as:
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the manner in which our business is operated;
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the amount of our borrowings;
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the amount, nature and timing of our capital expenditures;
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our issuance of additional partnership units;
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asset purchases, transfers and sales and other acquisitions and
dispositions; and
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the amount of cash reserves necessary or appropriate to satisfy
general, administrative and other expenses and debt service
requirements, and otherwise provide for the proper conduct of
our business.
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Our general partner determines the amount and timing of any
capital expenditures and whether a capital expenditure is
classified as a maintenance capital expenditure, which reduces
operating surplus, or an expansion capital expenditure, which
does not reduce operating surplus. This determination can affect
the amount of cash that is distributed to our unitholders and to
our general partner and the ability of the subordinated units to
convert into common units.
In addition, our general partner may use an amount, initially
equal to $15 million, which would not otherwise constitute
available cash from operating surplus, in order to permit the
payment of cash distributions on its units and incentive
distribution rights. All of these actions may affect the amount
of cash distributed to our unitholders and our general partner
and may facilitate the conversion of subordinated units into
common units. Please read Provisions of Our Partnership
Agreement Relating to Cash Distributions.
In addition, borrowings by us and our affiliates do not
constitute a breach of any duty owed by our general partner to
our unitholders, including borrowings that have the purpose or
effect of: (a) enabling our general partner or its
affiliates to receive distributions on any subordinated units
held by them or the incentive distribution rights; or
(b) accelerating the expiration of the subordination period.
For example, in the event we have not generated sufficient cash
from our operations to pay the minimum quarterly distribution on
our common units and subordinated units for each quarter in the
twelve months
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ending June 30, 2012, our partnership agreement permits us
to borrow funds, which may enable us to make this distribution
on all of our outstanding common and subordinated units. Please
read Provisions of Our Partnership Agreement Relating to
Cash Distributions Subordination Period.
Our partnership agreement provides that we and our subsidiaries
may borrow funds from our general partner and its affiliates.
Our general partner and its affiliates may not borrow funds from
us, our operating company, or its operating subsidiaries.
Our
general partner determines which costs incurred by TETRA and its
controlled affiliates are reimbursable by us.
We will reimburse our general partner and its affiliates,
including TETRA, for all direct and indirect costs incurred in
managing and operating us. 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. The partnership
agreement provides that our general partner will determine the
expenses that are allocable to us in good faith.
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 partnership agreement allows our general partner to
determine, in good faith, any amounts to pay itself or its
affiliates for any services rendered to us. Our general partner
may also enter into additional contractual arrangements with any
of its affiliates on our behalf. Neither our partnership
agreement nor any of the other agreements, contracts or
arrangements between us, on the one hand, and our general
partner and its affiliates, on the other hand, that will be in
effect as of the completion of this offering will be the result
of arms-length negotiations. Similarly, agreements,
contracts or arrangements between us and our general partner and
its affiliates that are entered into following the completion of
this offering will not be required to be negotiated on an
arms-length basis, although, in some circumstances, our
general partner may determine that the conflicts committee of
our general partner may make a determination on our behalf with
respect to one or more of these types of situations. Our general
partner will determine, in good faith, the terms of any of these
transactions entered into after the completion of this offering.
Our general partner and its affiliates will have no obligation
to permit us to use any facilities or assets of our general
partner or its affiliates, except as may be provided in
contracts entered into specifically dealing with that use. There
is no obligation of our general partner or its affiliates to
enter into any contracts of this kind.
Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets, and not against our general partner or its
assets. Our partnership agreement provides that any action taken
by our general partner to limit its liability is not a breach of
our general partners fiduciary duties, even if we could
have obtained more favorable terms without the limitation on
liability.
Our
general partner may exercise its right to call and purchase
common units if it and its affiliates own more than 90% of the
common units.
Our general partner may exercise its right to call and purchase
common units as provided in the partnership agreement or assign
this right to one of its affiliates or to us. Our general
partner is not bound by fiduciary duty restrictions in
determining whether to exercise this right. As a result, a
common unitholder may have his common units purchased from him
at an undesirable time or price. Please read The
Partnership Agreement Limited Call Right.
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Common
unitholders will have no right to enforce obligations of our
general partner and its affiliates under agreements with
us.
Any agreements between us on the one hand, and our general
partner and its affiliates, on the other, will not grant to our
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
Our
general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
The attorneys, independent accountants and others who have
performed services for us regarding this offering have been
retained by our general partner. Attorneys, independent
accountants and others who perform services for us are selected
by our general partner or the conflicts committee and may
perform services for our general partner and its affiliates. We
may retain separate counsel for ourselves or the holders of
common units in the event of a conflict of interest between our
general partner and its affiliates, on the one hand, and us or
the holders of common units, on the other, depending on the
nature of the conflict. We do not intend to do so in most cases.
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 partners incentive
distribution rights without the approval of the conflicts
committee of the board of directors of our general partner or
our unitholders. This election may result in lower distributions
to our common unitholders in certain situations.
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 cash distribution at the time of the exercise of
the reset election. Following a reset election by our general
partner, the minimum quarterly distribution will be reset to an
amount equal to the average cash distribution per common unit
for the two fiscal quarters immediately preceding the reset
election (such amount is referred to as 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.
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 conversion; however,
it is possible that our general partner could exercise this
reset election at a time when we are experiencing declines in
our aggregate cash distributions or at a time when our general
partner expects that we will experience declines in our
aggregate cash distributions in the foreseeable future. In such
situations, our general partner may be experiencing, or may
expect to experience, declines in the cash distributions it
receives related to its incentive distribution rights and may
therefore desire to be issued our common units, which are
entitled to specified priorities with respect to our
distributions and which therefore may be more advantageous for
our general partner to own in lieu of the right to receive
incentive distribution payments based on target distribution
levels that are less certain to be achieved in the then current
business environment. As a result, a reset election may cause
our common unitholders to experience dilution in the amount of
cash distributions that they would have otherwise received had
we not issued new common units to our general partner in
connection with resetting the target distribution levels related
to our general partners 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.
Fiduciary
Duties
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to our unitholders by our
general partner are prescribed by law and the partnership
agreement. The Delaware Revised Uniform Limited Partnership Act,
which we refer to as the Delaware Act, provides that Delaware
limited partnerships may, in their partnership agreements,
modify, restrict or expand the fiduciary duties otherwise owed
by a general partner to limited partners and the partnership.
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Our partnership agreement contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner. We have adopted these restrictions
to allow our general partner or its affiliates to engage in
transactions with us that might otherwise be prohibited by
state-law fiduciary duty standards and to take into account the
interests of other parties in addition to our interests when
resolving conflicts of interest. We believe this is appropriate
and necessary because our general partners board of
directors will have fiduciary duties to manage our general
partner in a manner beneficial to its owners, as well as to our
unitholders. Without these modifications, our general
partners ability to make decisions involving conflicts of
interest would be restricted. The modifications to the fiduciary
standards enable our general partner to take into consideration
all parties involved in the proposed action, so long as the
resolution is fair and reasonable to us. These modifications
also enable our general partner to attract and retain
experienced and capable directors. These modifications are
detrimental to our unitholders because they restrict the
remedies available to our unitholders for actions that, without
those limitations, might constitute breaches of fiduciary duty,
as described below, and permit our general partner to take into
account the interests of third parties in addition to our
interests when resolving conflicts of interest. The following is
a summary of the material restrictions of the fiduciary duties
owed by our general partner to the limited partners:
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State-law fiduciary duty standards
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Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would require a general partner to act in
good faith and would generally prohibit a general partner of a
Delaware limited partnership from taking any action or engaging
in any transaction where a conflict of interest is present. |
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The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
the limited partners. |
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Partnership agreement modified standards
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Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in good faith and
will not be subject to any other standard under applicable law.
Good faith requires that the person or persons
making such determination or taking or declining to take such
other action believe that the determination or other action is
in the best interests of the Partnership or the holders of the
common units, as the case may be. Therefore, the only claim
available to us or our unitholders based on a breach of
fiduciary duty by our general partner is a claim that our
general partner did not act in good faith. In any
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presumed to have acted in good faith, and the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption. In addition, when our general
partner is acting in its individual capacity, as opposed to in
its capacity as our general partner, it may act without any
fiduciary obligation to us or our unitholders whatsoever. These
standards reduce the obligations to which our general partner
would otherwise be held. |
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In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further 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 errors of judgment
or for any acts or omissions unless there has been a final and
non-appealable judgment by a court of competent jurisdiction
determining that our general partner or its executive officers
and directors 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. |
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Special provisions regarding affiliated transactions
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Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest not
involving a vote of our unitholders and that are not approved by
the conflicts committee of the board of directors of our general
partner must be: |
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on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
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fair and reasonable to us, taking into
account the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us).
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If our general partner does not seek approval from the conflicts
committee and its board of directors determines that the
resolution or course of action taken with respect to the
conflict of interest satisfies either of the standards set forth
in the bullet points above, then it will be presumed that, in
making its decision, the board of directors, which may include
board members affected by the conflict of interest, acted in
good faith and in any proceeding brought by or on behalf of any
limited partner or the partnership, the person bringing or
prosecuting such proceeding will have the burden of overcoming
such presumption. These standards reduce the obligations to
which our general partner would otherwise be held. |
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Our partnership agreement provides for the allocation of
overhead costs to us by our general partner and its affiliates
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By purchasing our common units, each common unitholder
automatically agrees to be bound by the provisions in our
partnership agreement, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that
person.
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We must indemnify our general partner and its executive
officers, directors, managers and certain other specified
persons, to the fullest extent permitted by law, against
liabilities, costs and expenses incurred by our general partner
or these other persons. We must provide this indemnification
unless there has been a final and non-appealable judgment by a
court of competent jurisdiction determining that these persons
acted in bad faith or engaged in fraud or willful misconduct. We
must also provide this indemnification for criminal proceedings
unless our general partner or these other persons acted with
knowledge that their conduct was unlawful. Thus, our general
partner could be indemnified for its negligent acts if it meets
the requirements set forth above. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be
permitted to our general partners directors, executive
officers or persons pursuant to the such indemnification
provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in Securities Act of 1933 and
is therefore unenforceable. Please read The Partnership
Agreement Indemnification.
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DESCRIPTION
OF THE COMMON UNITS
The
Units
The common units and the subordinated units are separate classes
of limited partner interests in us. The holders of common units
and the subordinated units are entitled to participate in
partnership distributions and exercise the rights or privileges
available to limited partners under our partnership agreement.
For a description of the relative rights and preferences of
holders of common and subordinated units in and to partnership
distributions, please read this section and Cash
Distribution Policy and Restrictions on Distributions. For
a description of other rights and privileges of limited partners
under our partnership agreement, including voting rights, please
read The Partnership Agreement.
Transfer
Agent and Registrar
Duties. Computershare Trust Company, N.A.
will serve as registrar and transfer agent for the common units.
We will pay all fees charged by the transfer agent for transfers
of common units, except the following that must be paid by our
unitholders:
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surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
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special charges for services requested by a common
unitholder; and
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other similar fees or charges.
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There will be no charge to our unitholders for disbursements of
our cash distributions. We will indemnify the transfer agent,
its agents and each of their stockholders, directors, executive
officers and employees against all claims and losses that may
arise out of acts performed or omitted for its activities in
that capacity, except for any liability due to any gross
negligence or intentional misconduct of the indemnified person
or entity.
Resignation or Removal. The transfer agent may
resign, by notice to us, or be removed by us. The resignation or
removal of the transfer agent will become effective upon our
appointment of a successor transfer agent and registrar and its
acceptance of the appointment. If no successor has been
appointed, our general partner may act as the transfer agent and
registrar until a successor is appointed.
Transfer
of Common Units
The transfer of the common units to persons that purchase
directly from the underwriters will be accomplished through the
proper completion, execution and delivery of a transfer
application by the investor. Any later transfers of a common
unit will not be recorded by the transfer agent or recognized by
us unless the transferee executes and delivers a properly
completed transfer application. By executing and delivering a
transfer application, the transferee of common units:
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becomes the record holder of the common units and is entitled to
be admitted into our partnership as a substituted limited
partner;
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automatically requests admission as a substituted limited
partner in our partnership;
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executes and agrees to be bound by the terms and conditions of
our partnership agreement;
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement; and
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gives the consents, waivers and approvals contained in our
partnership agreement, such as the approval of all transactions
and agreements that we are entering into in connection with our
formation and this offering.
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A transferee that executes and delivers a properly completed
transfer application will become a substituted limited partner
of our partnership for the transferred common units
automatically upon the recording of the transfer on our books
and records. Our general partner will cause any transfers to be
recorded on our books and records no less frequently than
quarterly.
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A transferees broker, agent or nominee may, but is not
obligated to, complete, execute and deliver a transfer
application. We may, at our discretion, treat the nominee holder
of a common unit as the absolute owner. In that case, the
beneficial holders rights are limited solely to those that
it has against the nominee holder as a result of any agreement
between the beneficial owner and the nominee holder.
Common units are securities and any transfers are subject to the
laws governing the transfer of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a substituted limited partner in
our partnership for the transferred common units. A purchaser or
transferee of common units who does not execute and deliver a
properly completed transfer application obtains only:
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the right to assign the common unit to a purchaser or other
transferee; and
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the right to transfer the right to seek admission as a
substituted limited partner in our partnership for the
transferred common units.
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Thus, a purchaser or transferee of common units who does not
execute and deliver a properly completed transfer application:
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will not receive cash distributions;
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will not be allocated any of our income, gain, deduction, losses
or credits for federal income tax or other tax purposes; and
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may not receive some federal income tax information or reports
furnished to record holders of common units;
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unless the common units are held in a nominee or street
name account and the nominee or broker has executed and
delivered a transfer application and certification as to itself
and any beneficial holders.
The transferor does not have a duty to ensure the execution of
the transfer application by the transferee and has no liability
or responsibility if the transferee neglects or chooses not to
execute and deliver a properly completed transfer application to
the transfer agent. Please read The Partnership
Agreement Status as Limited Partner.
Until a common unit has been transferred on our books, we and
the transfer agent may treat the record holder of the unit as
the absolute owner for all purposes, except as otherwise
required by law or stock exchange regulations.
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THE
PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our
partnership agreement. The form of our partnership agreement is
included in this prospectus as Appendix A. We will provide
prospective investors with a copy of our partnership agreement
upon request at no charge.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
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with regard to distributions of available cash, please read
Provisions of Our Partnership Agreement Relating to Cash
Distributions;
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with regard to the fiduciary duties of our general partner,
please read Conflicts of Interest and Fiduciary
Duties;
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with regard to the transfer of common units, please read
Description of the Common Units Transfer of
Common Units; and
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with regard to allocations of taxable income and taxable loss,
please read Material Tax Consequences.
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Organization
and Duration
Our partnership was organized on October 31, 2008 and will
have a perpetual existence.
Purpose
Our purpose, as set forth in our partnership agreement, is
limited to any business activity that is approved by our general
partner and that lawfully may be conducted by a limited
partnership organized under Delaware law; provided that without
the approval of unitholders holding at least 90% of the
outstanding units (including units held by our general partner
and its affiliates) voting as a single class, our general
partner shall not cause us to take any action that our general
partner determines would be reasonably likely to cause us to be
treated as an association taxable as a corporation or otherwise
taxable as an entity for federal income tax purposes.
Although our general partner has the ability to cause us and our
subsidiaries to engage in activities other than the business of
providing natural gas production enhancement services, our
general partner has no current plans to do so and may decline to
do so free of any fiduciary duty or obligation whatsoever to us
or the limited partners, including any duty to act in good faith
or in the best interests of us or the limited partners. Our
general partner is authorized in general to perform all acts it
determines to be necessary or appropriate to carry out our
purposes and to conduct our business.
Cash
Distributions
Our partnership agreement specifies the manner in which we will
make cash distributions to holders of our common units and other
partnership securities as well as to our general partner in
respect of its general partner interest and its incentive
distribution rights. For a description of these cash
distribution provisions, please read Provisions of Our
Partnership Agreement Relating to Cash Distributions.
Capital
Contributions
Our unitholders are not obligated to make additional capital
contributions, except as described below under
Limited Liability.
For a discussion of our general partners right to
contribute capital to maintain its 2.0% general partner interest
if we issue additional units, please read
Issuance of Additional Interests.
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Voting
Rights
The following is a summary of the unitholder vote required for
the matters specified below. Matters that require the approval
of a unit majority require:
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during the subordination period, the approval of a majority of
the common units, excluding those common units held by our
general partner and its affiliates, and a majority of the
subordinated units, voting as separate classes; and
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after the subordination period, the approval of a majority of
the common units.
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In voting their common and subordinated units, our general
partner and its affiliates will have no fiduciary duty or
obligation whatsoever to us or the limited partners, including
any duty to act in good faith or in the best interests of us or
the limited partners.
The incentive distribution rights may be entitled to vote in
certain circumstances.
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Issuance of additional partnership units
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No approval right. |
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Amendment of the partnership agreement
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Certain amendments may be made by our general partner without
the approval of our unitholders. Other amendments generally
require the approval of a unit majority. Please read
Amendment of the Partnership Agreement. |
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Merger of our partnership or the sale of all or substantially
all of our assets
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Unit majority in certain circumstances. Please read
Merger, Consolidation, Conversion, Sale or
Other Disposition of Assets. |
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Dissolution of our partnership
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Unit majority. Please read Termination and
Dissolution. |
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Continuation of our business upon dissolution
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Unit majority. Please read Termination and
Dissolution. |
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Withdrawal of our general partner
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Under most circumstances, the approval of a majority of the
common units, excluding common units held by our general partner
and its affiliates, is required for the withdrawal of our
general partner prior to June 30, 2021 in a manner that
would cause a dissolution of our partnership. Please read
Withdrawal or Removal of our General
Partner. |
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Removal of our general partner
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Not less than
662/3%
of the outstanding partnership units, including partnership
units held by our general partner and its affiliates. Please
read Withdrawal or Removal of our General
Partner. |
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Transfer of the general partner interest
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Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to an affiliate or another person in connection with
its merger or consolidation with or into, or sale of all or
substantially all of its assets, to such person. The approval of
a majority of the common units, excluding common units held by
our general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior to June 30, 2021. Please read
Transfer of General Partner Interest. |
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Transfer of incentive distribution rights
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No approval right. Please read Transfer of
Incentive Distribution Rights. |
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Transfer of ownership interests in our general partner
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No approval required at any time. Please read
Transfer of Ownership Interests in our General
Partner. |
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If any person or group other than our general partner and its
affiliates acquires beneficial ownership of 20% or more of any
class of units, that person or group loses voting rights on all
of its units. This loss of voting rights does not apply to any
person or group that acquires the units from our general partner
or its affiliates and any transferees of that person or group
approved by our general partner or to any person or group who
acquires the units with the specific prior approval of our
general partner.
Applicable
Law; Forum, Venue and Jurisdiction
Our partnership agreement is governed by Delaware law. Our
partnership agreement requires that any claims, suits, actions
or proceedings:
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arising out of or relating in any way to the partnership
agreement (including any claims, suits or actions to interpret,
apply or enforce the provisions of the partnership agreement or
the duties, obligations or liabilities among limited partners or
of limited partners to us, or the rights or powers of, or
restrictions on, the limited partners or us);
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brought in a derivative manner on our behalf;
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asserting a claim of breach of a fiduciary duty owed by any
director, officer or other employee of us or our general
partner, or owed by our general partner, to us or the limited
partners;
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asserting a claim arising pursuant to any provision of the
Delaware Act; and
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asserting a claim governed by the internal affairs doctrine;
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shall be exclusively brought in the Court of Chancery of the
State of Delaware, regardless of whether such claims, suits,
actions or proceedings sound in contract, tort, fraud or
otherwise, are based on common law, statutory, equitable, legal
or other grounds, or are derivative or direct claims. By
purchasing a common unit, a limited partner is irrevocably
consenting to these limitations and provisions regarding claims,
suits, actions or proceedings and submitting to the exclusive
jurisdiction of the Court of Chancery of the State of Delaware
in connection with any such claims, suits, actions or
proceedings.
Limited
Liability
Assuming that a limited partner does not participate in the
control of our business within the meaning of the Delaware Act
and that he otherwise acts in conformity with the provisions of
the partnership agreement, his liability under the Delaware Act
will be limited, subject to possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
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to remove or replace our general partner;
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to approve some amendments to the partnership agreement; or
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to take other action under the partnership agreement;
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constituted participation in the control of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as our general
partner. This liability would extend to persons who transact
business with us who reasonably believe that the limited partner
is a general partner. Neither the partnership agreement nor the
Delaware Act specifically provides for legal recourse against
our general partner if a limited partner were to lose limited
liability through any fault of our general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited partnership, other than liabilities
to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to
specific property of the partnership, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value
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of property subject to liability for which recourse of creditors
is limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and
knew at the time of the distribution that the distribution was
in violation of the Delaware Act shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a
limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except that
such person is not obligated for liabilities unknown to him at
the time he became a limited partner and that could not be
ascertained from the partnership agreement.
Following the offering we will conduct business in several
states and we may have subsidiaries that conduct business in
additional states in the future. Maintenance of our limited
liability as a member of the operating company may require
compliance with legal requirements in the jurisdictions in which
the operating company conducts business, including qualifying
our subsidiaries to do business there.
Limitations on the liability of members or limited partners for
the obligations of a limited liability company or limited
partnership have not been clearly established in many
jurisdictions. If, by virtue of our ownership interest in our
subsidiaries or otherwise, it were determined that we were
conducting business in any jurisdiction without compliance with
the applicable limited partnership or limited liability company
statute, or that the right or exercise of the right by the
limited partners as a group to remove or replace our general
partner, to approve some amendments to our partnership
agreement, or to take other action under our partnership
agreement constituted participation in the control
of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally
liable for our obligations under the law of that jurisdiction to
the same extent as our general partner under the circumstances.
We will operate in a manner that our general partner considers
reasonable and necessary or appropriate to preserve the limited
liability of the limited partners.
Issuance
of Additional Securities
Our partnership agreement authorizes us to issue an unlimited
number of additional partnership securities for the
consideration and on the terms and conditions determined by our
general partner without the approval of our unitholders.
It is possible that we will fund acquisitions through the
issuance of additional common units, subordinated units or other
partnership interests. Holders of any additional common units we
issue will be entitled to share equally with the then-existing
holders of common units in our distributions of available cash.
In addition, the issuance of additional common units or other
partnership securities may dilute the value of the interests of
the then-existing holders of common units in our net assets.
In accordance with Delaware law and the provisions of our
partnership agreement, we may also issue additional partnership
securities that, as determined by our general partner, may have
special voting rights to which the common units are not
entitled. In addition, our partnership agreement does not
prohibit the issuance by our subsidiaries of equity securities,
which may effectively rank senior to the common units.
Upon issuance of additional partnership securities (other than
the issuance of common units upon exercise by the underwriters
of their option to purchase additional common units, the
issuance of common units to TETRA and its affiliates upon
expiration of the underwriters option to purchase
additional common units, the issuance of partnership interests
in connection with a reset of the incentive distribution target
levels relating to our general partners incentive
distribution rights or the issuance of partnership interests
upon conversion of outstanding partnership securities), our
general partner will be entitled, but not required, to make
additional capital contributions to the extent necessary to
maintain its 2.0% general partner interest in us. The 2.0%
general partner interest will be reduced if we issue additional
common units in the future (other than the issuance of common
units upon exercise by the underwriters of the option to
purchase additional common units) and our general partner does
not contribute a proportionate amount of capital to us to
maintain its 2.0% general partner interest. Moreover, our
general partner will have the right, which it may from time to
time assign in whole or in part to any of its affiliates, to
purchase common units, subordinated units or other partnership
securities whenever, and on the same terms that, we issue those
securities to persons other than our
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general partner and its affiliates, to the extent necessary to
maintain the percentage interest of our general partner and its
affiliates, including such interest represented by common and
subordinated units, that existed immediately prior to each
issuance. The holders of common units will not have preemptive
rights to acquire additional common units or other partnership
securities.
Amendment
of the Partnership Agreement
General. Amendments to our partnership
agreement may be proposed only by our general partner. However,
our general partner will have no duty or obligation to propose
any amendment and may decline to do so free of any fiduciary
duty or obligation whatsoever to us or the limited partners,
including any duty to act in good faith or in the best interests
of us or the limited partners. In order to adopt a proposed
amendment, other than the amendments discussed below, our
general partner is required to seek written approval of the
holders of the number of partnership units required to approve
the amendment or to call a meeting of the limited partners to
consider and vote upon the proposed amendment. Except as
described below, an amendment must be approved by a unit
majority.
Prohibited Amendments. No amendment may be
made that would:
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enlarge the obligations of any limited partner without its
consent, unless approved by at least a majority of the type or
class of limited partner interests so affected; or
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enlarge the obligations of, restrict in any way any action by or
rights of, or reduce in any way the amounts distributable,
reimbursable or otherwise payable by us to our general partner
or any of its affiliates without the consent of our general
partner, which consent may be given or withheld at its option.
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The provision of our partnership agreement preventing the
amendments having the effects described in any of the clauses
above can be amended upon the approval of the holders of at
least 90% of the outstanding partnership units voting together
as a single class (including partnership units owned by our
general partner and its affiliates). Upon completion of the
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).
No Unitholder Approval. Our general partner
may generally make amendments to our partnership agreement
without the approval of any limited partner or assignee to
reflect:
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a change in our name, the location of our principal place of our
business, our registered agent or our registered office;
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the admission, substitution, withdrawal or removal of partners
in accordance with our partnership agreement;
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a change that our general partner determines to be necessary or
appropriate to qualify or continue our qualification as a
limited partnership or a partnership in which the limited
partners have limited liability under the laws of any state or
to ensure that neither we nor the operating limited liability
company nor any of its subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an
entity for U.S. federal income tax purposes;
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an amendment that is necessary, in the opinion of our counsel,
to prevent us or our general partner or its directors, executive
officers, agents or trustees from in any manner being subjected
to the provisions of the Investment Company Act of 1940, the
Investment Advisors Act of 1940, or plan asset
regulations adopted under the Employee Retirement Income
Security Act of 1974, or ERISA, whether or not substantially
similar to plan asset regulations currently applied or proposed
by the U.S. Department of Labor;
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an amendment that our general partner determines to be necessary
or appropriate in connection with the creation, authorization or
issuance of additional partnership interests or the right to
acquire partnership interests;
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any amendment expressly permitted in our partnership agreement
to be made by our general partner acting alone;
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an amendment effected, necessitated or contemplated by a merger
agreement that has been approved under the terms of our
partnership agreement;
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any amendment that our general partner determines to be
necessary or appropriate for the formation by us of, or our
investment in, any corporation, partnership or other entity, as
otherwise permitted by our partnership agreement;
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a change in our fiscal year or taxable year and related changes;
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an amendment necessary to require limited partners to provide a
statement, certification or other evidence to us regarding
whether such limited partner is subject to United States federal
income taxation on the income generated by us;
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conversions into, mergers with or conveyances to another limited
liability entity that is newly formed and has no assets,
liabilities or operations at the time of the conversion, merger
or conveyance other than those it receives by way of the
conversion, merger or conveyance; or
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any other amendments substantially similar to any of the matters
described in the clauses above.
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In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner if our general partner determines that those amendments:
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do not adversely affect the limited partners (or any particular
class of limited partners) in any material respect;
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are necessary or appropriate to satisfy any requirements,
conditions or guidelines contained in any opinion, directive,
order, ruling or regulation of any federal or state agency or
judicial authority or contained in any federal or state statute;
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are necessary or appropriate to facilitate the trading of
limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading;
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are necessary or appropriate for any action taken by our general
partner relating to splits or combinations of partnership units
under the provisions of our partnership agreement; or
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are required to effect the intent expressed in this prospectus
or the intent of the provisions of our partnership agreement or
are otherwise contemplated by our partnership agreement.
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Opinion of Counsel and Unitholder
Approval. Any amendment that our general partner
determines adversely affects in any material respect one or more
particular classes of limited partners will require the approval
of at least a majority of the class or classes so affected, but
no vote will be required by any class or classes of limited
partners that our general partner determines are not adversely
affected in any material respect. Any amendment that would have
a material adverse effect on the rights or preferences of any
type or class of outstanding units in relation to other classes
of units will require the approval of at least a majority of the
type or class of units so affected. Any amendment that would
reduce the voting percentage required to take any action other
than to remove our general partner or call a meeting of
unitholders is required to be approved by the affirmative vote
of limited partners whose aggregate outstanding units constitute
not less than the voting requirement sought to be reduced. Any
amendment that would increase the percentage of units required
to remove our general partner or call a meeting of unitholders
must be approved by the affirmative vote of limited partners
whose aggregate outstanding units constitute not less than the
percentage sought to be increased. For amendments of the type
not requiring unitholder approval, our general partner will not
be required to obtain an opinion of counsel that an amendment
will neither result in a loss of limited liability to the
limited partners nor result in our being treated as a taxable
entity for federal income tax purposes in connection with any of
the amendments. No other amendments to our partnership agreement
will become effective without the approval of holders of at
least 90% of the outstanding units, voting as a single class,
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unless we first obtain an opinion of counsel to the effect that
the amendment will not affect the limited liability under
applicable law of any of our limited partners.
Merger,
Consolidation, Conversion, Sale or Other Disposition of
Assets
A merger, consolidation or conversion of us requires the prior
consent of our general partner. However, our general partner
will have no duty or obligation to consent to any merger,
consolidation or conversion and may decline to do so free of any
fiduciary duty or obligation whatsoever to us or the limited
partners, including any duty to act in good faith or in the best
interest of us or the limited partners.
In addition, the partnership agreement generally prohibits our
general partner without the prior approval of the holders of a
unit majority, from causing us to, among other things, sell,
exchange or otherwise dispose of all or substantially all of our
assets in a single transaction or a series of related
transactions, including by way of merger, consolidation or other
combination, or approving on our behalf the sale, exchange or
other disposition of all or substantially all of the assets of
our subsidiaries. Our general partner may, however, mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of our assets without that approval. Our
general partner may also sell all or substantially all of our
assets under a foreclosure or other realization upon those
encumbrances without that approval. Finally, our general partner
may consummate any merger without the prior approval of our
unitholders if we are the surviving entity in the transaction,
our general partner has received an opinion of counsel regarding
limited liability and tax matters, the transaction would not
result in a material amendment to the partnership agreement,
each of our partnership units will be an identical unit of our
partnership following the transaction, and the partnership
securities to be issued do not exceed 20% of our outstanding
partnership securities (other than incentive distribution
rights) immediately prior to the transaction.
If the conditions specified in the partnership agreement are
satisfied, our general partner may convert us or any of our
subsidiaries into a new limited liability entity or merge us or
any of our subsidiaries into, or convey all of our assets to, a
newly formed entity if the sole purpose of that conversion,
merger or conveyance is to effect a mere change in our legal
form into another limited liability entity, our general partner
has received an opinion of counsel regarding limited liability
and tax matters, and the governing instruments of the new entity
provide the limited partners and our general partner with the
same rights and obligations as contained in the partnership
agreement. Our unitholders are not entitled to dissenters
rights of appraisal under the partnership agreement or
applicable Delaware law in the event of a conversion, merger or
consolidation, a sale of substantially all of our assets or any
other similar transaction or event.
Termination
and Dissolution
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
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the election of our general partner to dissolve us, if approved
by the holders of partnership units representing a unit majority;
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there being no limited partners, unless we are continued without
dissolution in accordance with applicable Delaware law;
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the entry of a decree of judicial dissolution of our
partnership; or
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the withdrawal or removal of our general partner or any other
event that results in it ceasing to be our general partner other
than by reason of a transfer of its general partner interest in
accordance with our partnership agreement or withdrawal or
removal following approval and admission of a successor.
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Upon a dissolution under the last clause above, the holders of a
unit majority may also elect, within specific time limitations,
to continue our business on the same terms and conditions
described in our partnership agreement by appointing as a
successor general partner an entity approved by the holders of
partnership units representing a unit majority, subject to our
receipt of an opinion of counsel to the effect that:
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the action would not result in the loss of limited liability of
any limited partner; and
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neither our partnership, our operating limited liability company
nor any of our other subsidiaries would be treated as an
association taxable as a corporation or otherwise be taxable as
an entity for U.S. federal income tax purposes upon the
exercise of that right to continue.
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Liquidation
and Distribution of Proceeds
Upon our dissolution, unless we are continued as a new limited
partnership, the liquidator authorized to wind up our affairs
will, acting with all of the powers of our general partner that
are necessary or appropriate to liquidate our assets and apply
the proceeds of the liquidation as described in Provisions
of Our Partnership Agreement Relating to Cash
Distributions Distributions of Cash Upon
Liquidation. The liquidator may defer liquidation or
distribution of our assets for a reasonable period of time or
distribute assets to partners in kind if it determines that a
sale would be impractical or would cause undue loss to our
partners.
Withdrawal
or Removal of Our General Partner
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
March 31, 2021 without obtaining the approval of the
holders of at least a majority of the outstanding common units,
excluding common units held by our general partner and its
affiliates, and furnishing an opinion of counsel regarding
limited liability and tax matters. On or after March 31,
2021, our general partner may withdraw as general partner
without first obtaining approval of any unitholder by giving
90 days written notice, and that withdrawal will not
constitute a violation of our partnership agreement.
Notwithstanding the information above, our general partner may
withdraw without unitholder approval upon 90 days
notice to the limited partners if at least 50% of the
outstanding common units are held or controlled by one person
and its affiliates other than our general partner and its
affiliates. In addition, the partnership agreement permits our
general partner in some instances to sell or otherwise transfer
all of its general partner interest in us without the approval
of our unitholders. Please read Transfer of
General Partner Interest.
Upon withdrawal of our general partner under any circumstances,
other than as a result of a transfer by our general partner of
all or a part of its general partner interest in us, the holders
of a unit majority, voting as separate classes, may select a
successor to that withdrawing general partner. If a successor is
not elected, or is elected but an opinion of counsel regarding
limited liability and tax matters cannot be obtained, we will be
dissolved, wound up and liquidated, unless within a specified
period after that withdrawal, the holders of a unit majority
agree in writing to continue our business and to appoint a
successor general partner. Please read
Termination and Dissolution.
Our general partner may not be removed unless that removal is
approved by the vote of the holders of not less than
662/3%
of the outstanding units, voting together as a single class,
including units held by our general partner and its affiliates,
and we receive an opinion of counsel regarding limited liability
and tax matters. Any removal of our general partner is also
subject to the approval of a successor general partner by the
vote of the holders of a majority of the outstanding common
units, voting as a class, and the outstanding subordinated
units, voting as a class. The ownership of more than
331/3%
of the outstanding units by our general partner and its
affiliates would give them the practical ability to prevent our
general partners removal. 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).
Our partnership agreement also provides that if our general
partner is removed as our general partner under circumstances
where cause does not exist:
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all subordinated units held by any person who did not, and whose
affiliates did not, vote any units in favor of the removal of
our general partner, will immediately and automatically convert
into common units on a
one-for-one
basis; and
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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.
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In the event of the removal of our general partner under
circumstances where cause exists or withdrawal of our general
partner where that withdrawal violates our partnership
agreement, a successor general partner will have the option to
purchase the general partner interest and incentive distribution
rights of the departing general partner and its affiliates for a
cash payment equal to the fair market value of those interests.
Under all other circumstances where our general partner
withdraws or is removed by the limited partners, the departing
general partner will have the option to require the successor
general partner to purchase the general partner interest and the
incentive distribution rights of the departing general partner
and its affiliates for fair market value. In each case, this
fair market value will be determined by agreement between the
departing general partner and the successor general partner. If
no agreement is reached, an independent investment banking firm
or other independent expert selected by the departing general
partner and the successor general partner will determine the
fair market value. Alternatively, if the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partners general partner interest and
all its and its affiliates incentive distribution rights
will automatically convert into common units equal to the fair
market value of those interests as determined by an investment
banking firm or other independent expert selected in the manner
described in the preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Transfer
of General Partner Interest
Except for a transfer by our general partner of all, but not
less than all, of its general partner interest to:
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an affiliate of our general partner (other than an
individual); or
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another entity as part of the merger or consolidation of our
general partner with or into another entity or the transfer by
our general partner of all or substantially all of its assets to
another entity,
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our general partner may not transfer all or any of its general
partner interest to another person prior to June 30, 2021
without the approval of the holders of at least a majority of
the outstanding common units, excluding common units held by our
general partner and its affiliates. As a condition of this
transfer, the transferee must assume, among other things, the
rights and duties of our general partner, agree to be bound by
the provisions of our partnership agreement, and furnish an
opinion of counsel regarding limited liability and tax matters.
Transfer
of Ownership Interests in Our General Partner
At any time, Compressco and its affiliates may sell or transfer
all or part of their shares in our general partner to an
affiliate or third party without the approval of our unitholders.
Transfer
of Subordinated Units and Incentive Distribution
Rights
Our general partner and its affiliates may, at any time,
transfer common units, subordinated units or incentive
distribution rights to one or more persons, without unitholder
approval, except that they may not transfer subordinated units
to us.
By transfer of subordinated units or incentive distribution
rights in accordance with our partnership agreement, each
transferee of subordinated units or incentive distribution
rights will be admitted as a limited partner with respect to the
subordinated units or incentive distribution rights transferred
when such transfer and admission is reflected in our books and
records. Each transferee:
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represents that the transferee has the capacity, power and
authority to become bound by our partnership agreement;
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automatically becomes bound by the terms and conditions of our
partnership agreement; and
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gives the consents, waivers and approvals contained in our
partnership agreement, such as the approval of all transactions
and agreements we are entering into in connection with our
formation and this offering.
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Our general partner will cause any transfers to be recorded on
our books and records no less frequently than quarterly.
We may, at our discretion, treat the nominee holder of
subordinated units or incentive distribution rights as the
absolute owner. In that case, the beneficial holders
rights are limited solely to those that it has against the
nominee holder as a result of any agreement between the
beneficial owner and the nominee holder.
Subordinated units or incentive distribution rights are
securities and any transfers are subject to the laws governing
transfer of securities. In addition to other rights acquired
upon transfer, the transferor gives the transferee the right to
become a limited partner for the transferred subordinated units
or incentive distribution rights.
Until a subordinated unit or incentive distribution right has
been transferred on our books, we and the transfer agent may
treat the record holder of the unit or right as the absolute
owner for all purposes, except as otherwise required by law or
stock exchange regulations.
Change of
Management Provisions
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove our general partner or otherwise change our management.
Please read Withdrawal or Removal of Our
General Partner for a discussion of certain consequences
of the removal of our general partner. If any person or group
other than our general partner and its affiliates acquires
beneficial ownership of 20% or more of any class of partnership
units, that person or group loses voting rights on all of its
partnership units. This loss of voting rights does not apply in
certain circumstances. Please read Meetings;
Voting.
Our partnership agreement also provides that, if our general
partner is removed under circumstances where cause does not
exist and the general partner interest held by our general
partner and its affiliates are not voted in favor of that
removal, our general partner will have the right to convert its
general partner interest into common units or to receive cash in
exchange for that interest based on the fair market value of
that interest at that time.
Limited
Call Right
If at any time our general partner and its affiliates own more
than 90% of the then-issued and outstanding limited partner
interests of any class, our general partner will have the right,
which it may assign in whole or in part to any of its affiliates
or beneficial owners or to us, to acquire all, but not less than
all, of the limited partner interests of the class held by
unaffiliated persons, as of a record date to be selected by our
general partner, on at least 10, but not more than 60, days
notice. The purchase price in the event of this purchase is the
greater of:
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the highest price paid by our general partner or any of its
affiliates for any limited partner interests of the class
purchased within the 90 days preceding the date on which
our general partner first mails notice of its election to
purchase those limited partner interests; and
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the current market price as of the date three days before the
date the notice is mailed.
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As a result of our general partners right to purchase
outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests
purchased at an undesirable time or at a price that may be lower
than market prices at various times prior to such purchase or
lower than a unitholder may anticipate the market price to be in
the future. The tax consequences to a unitholder of the exercise
of this call
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right are the same as a sale by that unitholder of his common
units in the market. Please read Material Tax
Consequences Disposition of Common Units.
Meetings;
Voting
Except as described below regarding a person or group owning 20%
or more of any class of partnership units then outstanding,
record holders of partnership units on the record date will be
entitled to notice of, and to vote at, meetings of our limited
partners and to act upon matters for which approvals may be
solicited. In the case of common units held by our general
partner on behalf of non-citizen assignees, our general partner
will distribute the votes on those common units in the same
ratios as the votes of limited partners on other units are cast.
Our general partner does not anticipate that any meeting of our
unitholders will be called in the near future. Any action that
is required or permitted to be taken by our unitholders may be
taken either at a meeting of our unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of partnership units
necessary to authorize or take that action at a meeting.
Meetings of our unitholders may be called by our general partner
or by unitholders owning at least 20% of the outstanding
partnership units of the class for which a meeting is proposed.
Unitholders may vote either in person or by proxy at meetings.
The holders of a majority of the outstanding partnership units
of the class or classes for which a meeting has been called
represented in person or by proxy will constitute a quorum
unless any action by our unitholders requires approval by
holders of a greater percentage of the partnership units, in
which case the quorum will be the greater percentage.
Each record unitholder has a vote according to his percentage
interest in us, although additional limited partner interests
having special voting rights could be issued. Please read
Issuance of Additional Securities.
However, if at any time any person or group, other than our
general partner and its affiliates, or a direct or subsequently
approved transferee of our general partner or its affiliates,
acquires, in the aggregate, beneficial ownership of 20% or more
of any class of partnership units then outstanding, that person
or group will lose voting rights on all of its partnership units
and the partnership units may not be voted on any matter and
will not be considered to be outstanding when sending notices of
a meeting of unitholders, calculating required votes,
determining the presence of a quorum or for other similar
purposes. Common units held in nominee or street name account
will be voted by the broker or other nominee in accordance with
the instruction of the beneficial owner unless the arrangement
between the beneficial owner and his nominee provides otherwise.
Except as our partnership agreement otherwise provides,
subordinated units will vote together with common units, as a
single class.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
Voting
Rights of Incentive Distribution Rights
If a majority of the incentive distribution rights are held by
our general partner and its affiliates, the holders of the
incentive distribution rights will have no right to vote in
respect of such rights on any matter, unless otherwise required
by law, and the holders of the incentive distribution rights
shall be deemed to have approved any matter approved by our
general partner.
If less than a majority of the incentive distribution rights are
held by our general partner and its affiliates, the incentive
distribution rights will be entitled to vote on all matters
submitted to a vote of unitholders, other than amendments and
other matters that our general partner determines do not
adversely affect the holders of the incentive distribution
rights in any material respect. On any matter in which the
holders of incentive distribution rights are entitled to vote,
such holders will vote together with the subordinated units,
prior to the end of the subordination period, or together with
the common units, thereafter, in either case as a single class.
The relative voting power of the holders of the incentive
distribution rights and the subordinated units or common units,
depending on which class the holders of incentive distribution
rights are voting with, will be set in the same proportion as
cumulative cash distributions, if any, in respect of the
incentive distribution
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rights for the four consecutive quarters prior to the record
date for the vote bears to the cumulative cash distributions in
respect of such class of units for such four quarters.
Status as
Limited Partner
By the transfer of common units in accordance with our
partnership agreement, each transferee of common units shall be
admitted as a limited partner with respect to the common units
transferred when such transfer and admission is reflected in our
books and records. Except as described under
Limited Liability, the common units will
be fully paid, and unitholders will not be required to make
additional contributions.
Indemnification
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, from and against all losses, claims, damages or similar
events:
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our general partner;
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any departing general partner;
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any person who is or was an affiliate of our general partner or
any departing general partner;
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any person who is or was a manager, managing member, director,
officer, employee, agent, fiduciary or trustee of our
partnership, our subsidiaries, our general partner, any
departing general partner or any of their affiliates;
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any person who is or was serving as a manager, managing member,
director, officer, employee, agent, fiduciary or trustee of
another person owing a fiduciary duty to us or our subsidiaries;
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any person who controls our general partner or any departing
general partner; and
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any person designated by our general partner.
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Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or lend funds or assets to us to enable us to
effectuate, indemnification. We may purchase insurance against
liabilities asserted against and expenses incurred by persons
for our activities, regardless of whether we would have the
power to indemnify the person against liabilities under our
partnership agreement.
Reimbursement
of Expenses
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. 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 general
partner will determine in good faith the expenses that are
allocable to us.
Books and
Reports
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and financial reporting purposes, our fiscal year
is the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record unitholder with information
reasonably required for tax reporting purposes within
90 days after the close of each calendar year. This
information is expected to be furnished in summary
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form so that some complex calculations normally required of
partners can be avoided. Our ability to furnish this summary
information to our unitholders will depend on the cooperation of
unitholders in supplying us with specific information. Every
unitholder will receive information to assist him in determining
his federal and state tax liability and filing his federal and
state income tax returns, regardless of whether he supplies us
with information.
Right to
Inspect Our Books and Records
Our partnership agreement provides that a limited partner can,
for a purpose reasonably related to his interest as a limited
partner, upon reasonable written demand stating the purpose of
such demand and at his own expense, have furnished to him:
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a current list of the name and last known address of each
partner;
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a copy of our tax returns;
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information as to the amount of cash, and a description and
statement of the agreed value of any other property or services,
contributed or to be contributed by each partner and the date on
which each partner became a partner;
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copies of our partnership agreement, our certificate of limited
partnership, related amendments and powers of attorney under
which they have been executed;
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information regarding the status of our business and financial
condition; and
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any other information regarding our affairs as is just and
reasonable.
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Our general partner may, and intends to, keep trade secrets or
other information, the disclosure of which our general partner
believes in good faith is not in our best interests, could
damage our business or that we are required by law or by
agreements with third parties to keep, confidential from the
limited partners.
Registration
Rights
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common units, subordinated units or other limited
partner interests proposed to be sold by our general partner or
any of its affiliates or their assignees if an exemption from
the registration requirements is not otherwise available. These
registration rights continue for two years following any
withdrawal or removal of our general partner. We are obligated
to pay all expenses incidental to the registration, excluding
underwriting discounts, commissions and structuring fees. Please
read Units Eligible for Future Sale.
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UNITS
ELIGIBLE FOR FUTURE SALE
After the sale of the common units offered hereby, TETRAs
affiliates will hold an aggregate of 6,597,257 common units and
6,273,970 subordinated units. All of the subordinated units will
convert into common units at the end of the subordination
period. The sale of these common and subordinated units could
have an adverse impact on the price of the common units or on
any trading market that may develop.
The common units sold in the offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units owned by an
affiliate of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
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1% of the total number of the securities outstanding; or
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the average weekly reported trading volume of the common units
for the four calendar weeks prior to the sale.
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Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned our common units for at least six
months (provided we are in compliance with the current public
information requirement), or one year (regardless of whether we
are in compliance with the current public information
requirement), would be entitled to sell those common units under
Rule 144, subject only to the current public information
requirement. After beneficially owning Rule 144 restricted
units for at least one year, a person who is not deemed to have
been an affiliate of ours at any time during the 90 days
preceding a sale would be entitled to freely sell those common
units without regard to the public information requirements,
volume limitations, manner of sale provisions and notice
requirements of Rule 144.
The partnership agreement does not restrict our ability to issue
any partnership securities at any time. Any issuance of
additional common units or other equity securities would result
in a corresponding decrease in the proportionate ownership
interest in us represented by, and could adversely affect the
cash distributions to and market price of, common units then
outstanding. Please read The Partnership
Agreement Issuance of Additional Securities.
Under our partnership agreement, our general partner and its
affiliates have the right, subject to certain limitations, to
cause us to register under the Securities Act and state
securities laws the offer and sale of any common units or other
partnership securities that they hold. Subject to the terms and
conditions of our partnership agreement, these registration
rights allow our general partner and its affiliates or their
assignees holding any partnership units or other partnership
securities to require registration of any of these partnership
units or other partnership securities and to include them in a
registration by us of other partnership units, including
partnership units offered by us or by any unitholder. Our
general partner will continue to have these registration rights
for two years following its withdrawal or removal as our general
partner. In connection with any registration of this kind, we
will indemnify each unitholder participating in the registration
and its executive officers, directors and controlling persons
from and against any liabilities under the Securities Act or any
state securities laws arising from the registration statement or
prospectus. We will bear all costs and expenses incidental to
any registration, excluding any underwriting discounts,
commissions and structuring fees. Except as described below, our
general partner and its affiliates may sell their partnership
units or other partnership interests in private transactions at
any time, subject to compliance with applicable laws.
We, our subsidiaries, our general partner and its affiliates,
including the executive officers and directors of our general
partner, have agreed, with exceptions, not to sell or transfer
any of our common units for 180 days after the date of this
prospectus. For a description of these
lock-up
provisions, please read Underwriting.
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MATERIAL
TAX CONSEQUENCES
This section is a discussion of the material U.S. federal
income tax consequences that may be relevant to prospective
unitholders who are individual citizens or residents of the
United States and, unless otherwise noted in the following
discussion, is the opinion of Vinson & Elkins L.L.P.,
counsel to our general partner and us, insofar as it relates to
legal conclusions with respect to matters of U.S. federal
income tax law. This section is based upon current provisions of
the Internal Revenue Code of 1986, as amended (the
Internal Revenue Code), existing and proposed
Treasury Regulations promulgated under the Internal Revenue Code
(the Treasury Regulations) and current
administrative rulings and court decisions, all of which are
subject to change. Later changes in these authorities may cause
the tax consequences to vary substantially from the consequences
described below. Unless the context otherwise requires,
references in this section to us or we
are references to Compressco Partners, L.P. and our operating
company.
The following discussion does not comment on all
U.S. federal income tax matters affecting us or our
unitholders. Moreover, the discussion focuses on unitholders who
are individual citizens or residents of the United States and
has only limited application to corporations, estates, trusts,
nonresident aliens or other unitholders subject to specialized
tax treatment, such as tax-exempt institutions,
non-U.S. persons,
individual retirement accounts (IRAs), employee benefit plans,
real estate investment trusts (REITs) or mutual funds.
Accordingly, we encourage each prospective unitholder to
consult, and depend on, his own tax advisor in analyzing the
U.S. federal, state, local and
non-U.S. tax
consequences particular to him of the ownership or disposition
of common units.
No ruling has been or will be requested from the Internal
Revenue Service (the IRS) regarding any matter
affecting us or prospective unitholders. Instead, we will rely
on opinions of Vinson & Elkins L.L.P. Unlike a ruling,
an opinion of counsel represents only that counsels best
legal judgment and does not bind the IRS or the courts.
Accordingly, the opinions and statements made herein may not be
sustained by a court if contested by the IRS. Any contest of
this sort with the IRS may materially and adversely impact the
market for the common units and the prices at which the common
units trade. In addition, the costs of any contest with the IRS,
principally legal, accounting and related fees, will result in a
reduction in cash available for distribution to our unitholders
and our general partner and thus will be borne indirectly by our
unitholders and our general partner. Furthermore, the tax
treatment of us, or of an investment in us, may be significantly
modified by future legislative or administrative changes or
court decisions. Any modifications may or may not be
retroactively applied.
All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless
otherwise noted, are the opinion of Vinson & Elkins
L.L.P. and are based on the accuracy of the representations made
by us.
For the reasons described below, Vinson & Elkins
L.L.P. has not rendered an opinion with respect to the following
specific federal income tax issues: (1) the treatment of a
unitholder whose common units are loaned to a short seller to
cover a short sale of common units (please read
Tax Consequences of Unit Ownership
Treatment of Short Sales); (2) whether our monthly
convention for allocating taxable income and losses is permitted
by existing Treasury Regulations (please read
Disposition of Common Units
Allocations Between Transferors and Transferees); and
(3) whether our method for depreciating Section 743
adjustments is sustainable in certain cases (please read
Tax Consequences of Unit Ownership
Section 754 Election).
Partnership
Status
A partnership is not a taxable entity and incurs no federal
income tax liability. Instead, each partner of a partnership is
required to take into account his share of items of income,
gain, loss and deduction of the partnership in computing his
federal income tax liability, regardless of whether cash
distributions are made to him by the partnership. Distributions
by a partnership to a partner are generally not taxable to the
partnership or the partner unless the amount of cash distributed
to him is in excess of the partners adjusted basis in his
partnership interest.
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Section 7704 of the Internal Revenue Code provides that
publicly traded partnerships will, as a general rule, be taxed
as corporations. However, an exception, referred to as the
Qualifying Income Exception, exists with respect to
publicly traded partnerships of which 90% or more of the gross
income for every taxable year consists of qualifying
income. Qualifying income includes income and gains
derived from the production, transportation, storage and
processing of crude oil, natural gas and products thereof. Other
types of qualifying income include interest (other than from a
financial business), dividends, gains from the sale of real
property and gains from the sale or other disposition of capital
assets held for the production of income that otherwise
constitutes qualifying income. We estimate that less
than % of our current gross income
is not qualifying income; however, this estimate could change
from time to time. Based upon and subject to this estimate, the
factual representations made by us and our general partner and a
review of the applicable legal authorities, Vinson &
Elkins L.L.P. is of the opinion that at least 90% of our current
gross income constitutes qualifying income. The portion of our
income that is qualifying income may change from time to time.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status or the status of our
operating companies for U.S. federal income tax purposes or
whether our gross income is qualifying income under
Section 7704 of the Internal Revenue Code. Instead, we will
rely on the opinion of Vinson & Elkins L.L.P. on such
matters. It is the opinion of Vinson & Elkins L.L.P.
that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations described below, we will be classified as a
partnership and our non-corporate operating subsidiaries will be
disregarded as entities separate from us for U.S. federal
income tax purposes.
In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general
partner. The representations made by us and our general partner
upon which Vinson & Elkins L.L.P. has relied include:
(a) Neither we, nor our operating LLC or other
non-corporate operating subsidiaries, has elected or will elect
to be treated as a corporation for U.S. federal income tax
purposes; and
(b) For each taxable year, more than 90% of our gross
income has been and will be income that Vinson &
Elkins L.L.P. has opined or will opine is qualifying
income within the meaning of Section 7704(d) of the
Internal Revenue Code.
We believe that these representations have been true in the past
and expect that these representations will continue to be true
in the future.
If we fail to meet the Qualifying Income Exception, other than a
failure that is determined by the IRS to be inadvertent and that
is cured within a reasonable time after discovery (in which case
the IRS may also require us to make adjustments with respect to
our unitholders or pay other amounts), we will be treated as if
we had transferred all of our assets, subject to liabilities, to
a newly formed corporation, on the first day of the year in
which we fail to meet the Qualifying Income Exception, in return
for stock in that corporation, and then distributed that stock
to our unitholders in liquidation of their interests in us. This
deemed contribution and liquidation should be tax-free to
unitholders and us so long as we, at that time, do not have
liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for
U.S. federal income tax purposes.
If we were treated as a corporation in any taxable year, either
as a result of a failure to meet the Qualifying Income Exception
or otherwise, our items of income, gain, loss and deduction
would be reflected only on our tax return rather than being
passed through to our unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution
made to a unitholder would be treated as taxable dividend
income, to the extent of our current or accumulated earnings and
profits, and, in the absence of earnings and profits, a
nontaxable return of capital, to the extent of the
unitholders tax basis in his common units, or taxable
capital gain, after the unitholders tax basis in his
common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a
unitholders cash flow and after-tax return and thus would
likely result in a substantial reduction of the value of the
units.
The discussion below is based on Vinson & Elkins
L.L.P.s opinion that we will be classified as a
partnership for U.S. federal income tax purposes.
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Limited
Partner Status
Unitholders who have become limited partners of Compressco
Partners, L.P. will be treated as partners of Compressco
Partners, L.P. for U.S. federal income tax purposes. Also,
unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the
exercise of all substantive rights attendant to the ownership of
their common units will be treated as partners of Compressco
Partners, L.P. for U.S. federal income tax purposes.
A beneficial owner of common units whose units have been
transferred to a short seller to complete a short sale would
appear to lose his status as a partner with respect to those
units for U.S. federal income tax purposes. Please read
Tax Consequences of Unit Ownership
Treatment of Short Sales.
Income, gain, deductions or losses would not appear to be
reportable by a unitholder who is not a partner for
U.S. federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for
U.S. federal income tax purposes would therefore appear to
be fully taxable as ordinary income. These holders are urged to
consult their own tax advisors with respect to their tax
consequences of holding common units in Compressco Partners, L.P.
The references to unitholders in the discussion that
follows are to persons who are treated as partners in Compressco
Partners, L.P. for U.S. federal income tax purposes.
Tax
Consequences of Unit Ownership
Flow-Through of Taxable Income. Aside from
U.S. federal income taxes paid by our U.S. corporate
subsidiary and subject to the discussion below under
Entity-Level Collections, we will
not pay any U.S. federal income tax. Instead, each
unitholder will be required to report on his income tax return
his share of our income, gains, losses and deductions without
regard to whether we make cash distributions to him.
Consequently, we may allocate income to a unitholder even if he
has not received a cash distribution. Each unitholder will be
required to include in income his allocable share of our income,
gains, losses and deductions for our taxable year ending with or
within his taxable year. Our taxable year ends on
December 31.
Treatment of Distributions. Distributions by
us to a unitholder generally will not be taxable to the
unitholder for U.S. federal income tax purposes, except to
the extent the amount of any cash distribution exceeds his tax
basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholders tax
basis generally will be considered to be gain from the sale or
exchange of the common units, taxable in accordance with the
rules described under Disposition of Common
Units below. Any reduction in a unitholders share of
our liabilities for which no partner, including our general
partner, bears the economic risk of loss, known as
nonrecourse liabilities, will be treated as a
distribution by us of cash to that unitholder. To the extent our
distributions cause a unitholders at risk
amount to be less than zero at the end of any taxable year, he
must recapture any losses deducted in previous years. Please
read Limitations on Deductibility of
Losses.
A decrease in a unitholders percentage interest in us
because of our issuance of additional common units will decrease
his share of our nonrecourse liabilities, and thus will result
in a corresponding deemed distribution of cash. This deemed
distribution may constitute a non-pro rata distribution. A
non-pro rata distribution of money or property may result in
ordinary income to a unitholder, regardless of his tax basis in
his common units, if the distribution reduces the
unitholders share of our unrealized
receivables, which includes depreciation recapture,
and/or
substantially appreciated inventory items, both as
defined in Section 751 of the Internal Revenue Code, and
collectively, Section 751 Assets. To that
extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and having
exchanged those assets with us in return for the non-pro rata
portion of the actual distribution made to him. This latter
deemed exchange will generally result in the unitholders
realization of ordinary income, which will equal the excess of
(1) the non-pro rata portion of that distribution over
(2) the unitholders tax basis (generally zero) for
the share of Section 751 Assets deemed relinquished in the
exchange.
Ratio of Taxable Income to Distributions. We
estimate that a purchaser of common units in this offering who
owns those common units from the date of closing of this
offering through the record date for distributions
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for the period ending 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. Thereafter, the ratio
of allocable taxable income to cash distributions to our
unitholders could substantially increase. These estimates are
based upon the assumption that gross income from operations will
approximate the amount required to make the minimum quarterly
distribution on all units and other assumptions with respect to
capital expenditures, cash flow, net working capital and
anticipated cash distributions. These estimates and assumptions
are subject to, among other things, numerous business, economic,
regulatory, legislative, competitive and political uncertainties
beyond our control. Further, the estimates are based on current
tax law and tax reporting positions that we will adopt and with
which the IRS could disagree. Accordingly, we cannot assure you
that these estimates will prove to be correct. The actual
percentage of distributions that will constitute taxable income
could be higher or lower than expected, and any differences
could be material and could materially affect the value of the
common units. For example, the ratio of allocable taxable income
to cash distributions to a purchaser of common units in this
offering will be greater, and perhaps substantially greater,
than our estimate with respect to the period described above if:
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gross income from operations exceeds the amount required to make
minimum quarterly distributions on all units, yet we only
distribute the minimum quarterly distributions on all
units; or
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we make a future offering of common units and use the net
proceeds of the offering in a manner that does not produce
substantial additional deductions during the period described
above, such as to repay indebtedness outstanding at the time of
this offering or to acquire property that is not eligible for
depreciation or amortization for U.S. federal income tax
purposes or that is depreciable or amortizable at a rate
significantly slower than the rate applicable to our assets at
the time of this offering.
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Basis of Common Units. A unitholders
initial tax basis for his common units will be the amount he
paid for the common units plus his share of our nonrecourse
liabilities at the time of purchase. That basis will be
increased by his share of our income and by any increases in his
share of our nonrecourse liabilities. That basis will be
decreased, but not below zero, by distributions from us, by the
unitholders share of our losses, by any decreases in his
share of our nonrecourse liabilities and by his share of our
expenditures that are not deductible in computing taxable income
and are not required to be capitalized. A unitholder will have
no share of our debt that is recourse to our general partner,
but will have a share, generally based on his share of profits,
of our nonrecourse liabilities. Please read
Disposition of Common Units
Recognition of Gain or Loss.
Limitations on Deductibility of Losses. The
deduction by a unitholder of his share of our losses will be
limited to the tax basis in his units and, in the case of an
individual unitholder, estate, trust or a corporate unitholder,
if more than 50% of the value of the corporate unitholders
stock is owned directly or indirectly by five or fewer
individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be at risk
with respect to our activities, if that is less than his tax
basis. A unitholder subject to these limitations must recapture
losses deducted in previous years to the extent that
distributions cause his at-risk amount to be less than zero at
the end of any taxable year. Losses disallowed to a unitholder
or recaptured as a result of these limitations will carry
forward and will be allowable as a deduction to the extent that
his at-risk amount is subsequently increased, provided such
losses do not exceed such common unitholders tax basis in
his common units. Upon the taxable disposition of a unit, any
gain recognized by a unitholder can be offset by losses that
were previously suspended by the at-risk limitation but may not
be offset by losses suspended by the basis limitation. Any
excess loss above that gain previously suspended by the at-risk
or basis limitations is no longer utilizable.
In general, a unitholder will be at risk to the extent of the
tax basis of his units, excluding any portion of that basis
attributable to his share of our nonrecourse liabilities,
reduced by (1) any portion of that basis representing
amounts otherwise protected against loss because of a guarantee,
stop loss agreement or other similar arrangement and
(2) any amount of money he borrows to acquire or hold his
units, if the lender of those borrowed funds owns an interest in
us, is related to another unitholder who has an interest in us
or can look only to the units for repayment. A unitholders
at risk amount will increase or decrease as the tax basis
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of the unitholders units increases or decreases, other
than tax basis increases or decreases attributable to increases
or decreases in his share of our nonrecourse liabilities.
In addition to the basis and at-risk limitations on the
deductibility of losses, the passive loss limitations generally
provide that individuals, estates, trusts and some closely held
corporations and personal service corporations can deduct losses
from passive activities, which are generally trade or business
activities in which the taxpayer does not materially
participate, only to the extent of the taxpayers income
from those passive activities. The passive loss limitations are
applied separately with respect to each publicly traded
partnership. Consequently, any passive losses we generate will
only be available to offset our passive income generated in the
future and will not be available to offset income from other
passive activities or investments, including our investments or
a unitholders investments in other publicly traded
partnerships, or salary or active business income. Passive
losses that are not deductible because they exceed a
unitholders share of income we generate may be deducted in
full when he disposes of his entire investment in us in a fully
taxable transaction with an unrelated party. The passive loss
limitations are applied after other applicable limitations on
deductions, including the at-risk rules and the basis limitation.
A unitholders share of our net income may be offset by any
of our suspended passive losses, but it may not be offset by any
other current or carryover losses from other passive activities,
including those attributable to other publicly traded
partnerships.
Limitations on Interest Deductions. The
deductibility of a non-corporate taxpayers
investment interest expense is generally limited to
the amount of that taxpayers net investment
income. Investment interest expense includes:
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interest on indebtedness properly allocable to property held for
investment;
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our interest expense attributed to portfolio income; and
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the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to
portfolio income.
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The computation of a unitholders investment interest
expense will take into account interest on any margin account
borrowing or other loan incurred to purchase or carry a unit.
Net investment income includes gross income from property held
for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than
interest, directly connected with the production of investment
income, but generally does not include gains attributable to the
disposition of property held for investment or qualified
dividend income. The IRS has indicated that net passive income
earned by a publicly traded partnership will be treated as
investment income to its unitholders for purposes of the
investment interest deduction limitation. In addition, the
unitholders share of our portfolio income will be treated
as investment income.
Entity-Level Collections. If we are
required or elect under applicable law to pay any
U.S. federal, state, local or
non-U.S. income
tax on behalf of any unitholder or our general partner or any
former unitholder, we are authorized to pay those taxes from our
funds. That payment, if made, will be treated as a distribution
of cash to the unitholder on whose behalf the payment was made.
If the payment is made on behalf of a person whose identity
cannot be determined, we are authorized to treat the payment as
a distribution to all current unitholders. We are authorized to
amend our partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units
and to adjust later distributions, so that after giving effect
to these distributions, the priority and characterization of
distributions otherwise applicable under our partnership
agreement is maintained as nearly as is practicable. Payments by
us as described above could give rise to an overpayment of tax
on behalf of an individual unitholder in which event the
unitholder would be required to file a claim in order to obtain
a credit or refund.
Allocation of Income, Gain, Loss and
Deduction. In general, if we have a net profit,
our items of income, gain, loss and deduction will be allocated
among our general partner and the unitholders in accordance with
their percentage interests in us. At any time that distributions
are made to the common units in excess of distributions to the
subordinated units, or incentive distributions are made to our
general partner,
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gross income will be allocated to the recipients to the extent
of these distributions. Gross income may also be allocated to
holders of subordinated units after the close of the
subordination period to the extent necessary to give them
economic rights at liquidation identical to the rights of common
units. If we have a net loss for the entire year, that loss will
be allocated first to our general partner and the unitholders in
accordance with their percentage interests in us to the extent
of their positive capital accounts and, second, to our general
partner.
Specified items of our income, gain, loss and deduction will be
allocated under Section 704(c) of the Internal Revenue Code
to account for (1) any difference between the tax basis and
fair market value of our assets at the time of an offering and
(2) any difference between the tax basis and fair market
value of any property contributed to us by our general partner
and its affiliates that exists at the time of such contribution,
together, referred to in this discussion as the
Contributed Property. The effect of these
allocations, referred to as Section 704(c) Allocations, to
a unitholder purchasing common units from us in this offering
will be essentially the same as if the tax bases of our assets
were equal to their fair market values at the time of this
offering. In the event we issue additional common units or
engage in certain other transactions in the future reverse
Section 704(c) Allocations, similar to the
Section 704(c) Allocations described above, will be made to
our general partner and our other unitholders immediately prior
to such issuance or other transactions to account for the
difference between the book basis for purposes of
maintaining capital accounts and the fair market value of all
property held by us at the time of such issuance or future
transaction. In addition, items of recapture income will be
allocated to the extent possible to the unitholder who was
allocated the deduction giving rise to the treatment of that
gain as recapture income in order to minimize the recognition of
ordinary income by some unitholders. Finally, although we do not
expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts
nevertheless result, items of our income and gain will be
allocated in an amount and manner sufficient to eliminate the
negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction,
other than an allocation required by Section 704(c) of the
Internal Revenue Code to eliminate the difference between a
partners book capital account, credited with
the fair market value of Contributed Property, and
tax capital account, credited with the tax basis of
Contributed Property, referred to in this discussion as the
Book-Tax Disparity, will generally be given effect
for U.S. federal income tax purposes in determining a
partners share of an item of income, gain, loss or
deduction only if the allocation has substantial economic
effect. In any other case, a partners share of an item
will be determined on the basis of his interest in us, which
will be determined by taking into account all the facts and
circumstances, including:
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his relative contributions to us;
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the interests of all the partners in profits and losses;
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the interest of all the partners in cash flow; and
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the rights of all the partners to distributions of capital upon
liquidation.
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Vinson & Elkins L.L.P. is of the opinion that, with
the exception of the issues described in
Tax Consequences of Unit
Ownership Section 754 Election and
Disposition of Common Units
Allocations Between Transferors and
Transferees, allocations under our partnership agreement
will be given effect for U.S. federal income tax purposes
in determining a partners share of an item of our income,
gain, loss or deduction.
Treatment of Short Sales. 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. As a
result, during this period:
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any of our income, gain, loss or deduction with respect to those
units would not be reportable by the unitholder;
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any cash distributions received by the unitholder as to those
units would be fully taxable; and
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all of these distributions would appear to be ordinary income.
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Vinson & Elkins L.L.P. has not rendered an opinion
regarding the tax treatment of a unitholder whose 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 in us for U.S. federal income tax purposes 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 borrowing and loaning their
units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership
interests. Please also read Disposition of
Common Units Recognition of Gain or Loss.
Alternative Minimum Tax. Each unitholder will
be required to take into account his distributive share of any
items of our income, gain, loss or deduction for purposes of the
alternative minimum tax. The current minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption
amount and 28% on any additional alternative minimum taxable
income. Prospective unitholders are urged to consult with their
tax advisors as to the impact of an investment in units on their
liability for the alternative minimum tax.
Tax Rates. Under current law, the highest
marginal U.S. federal income tax rate applicable to
ordinary income of individuals is 35% and the highest marginal
U.S. federal income tax rate applicable to long-term
capital gains (generally, capital gains on certain assets held
for more than 12 months) of individuals is 15%. However,
absent new legislation extending the current rates, beginning
January 1, 2013, the highest marginal U.S. federal
income tax rate applicable to ordinary income and long-term
capital gains of individuals will increase to 39.6% and 20%,
respectively. Moreover, these rates are subject to change by new
legislation at any time.
A new 3.8% Medicare tax on net investment income earned by
certain individuals, estates and trusts is scheduled to apply
for taxable years beginning after December 31, 2012. For
these purposes, net investment income generally includes a
unitholders allocable share of our income and gain
realized by a unitholder from a sale of units. In the case of an
individual, the tax will be imposed on the lesser of
(1) the unitholders net investment income or
(2) the amount by which the unitholders modified
adjusted gross income exceeds $250,000 (if the unitholder is
married and filing jointly or a surviving spouse), $125,000 (if
the unitholder is married and filing separately) or $200,000 (in
any other case). In the case of an estate or trust, the tax will
be imposed on the lesser of (1) undistributed net
investment income, or (2) the excess adjusted gross income
over the dollar amount at which the highest income tax bracket
applicable to an estate or trust begins.
Section 754 Election. We will make the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS, unless there is a constructive termination of the
partnership. Please read Disposition of Common
Units Constructive Termination. The election
will generally permit us to adjust a common unit
purchasers tax basis in our assets, or inside
basis, under Section 743(b) of the Internal Revenue
Code to reflect his purchase price of units acquired from
another unitholder. This election does not apply to a person who
purchases common units directly from us. The Section 743(b)
adjustment belongs to the purchaser and not to other
unitholders. For purposes of this discussion, a
unitholders inside basis in our assets will be considered
to have two components: (1) his share of our tax basis in
our assets, or common basis, and (2) his
Section 743(b) adjustment to that basis.
We will adopt the remedial allocation method with respect to all
of our properties. Where the remedial allocation method is
adopted, the Treasury Regulations under Section 743 of the
Internal Revenue Code require a portion of the
Section 743(b) adjustment that is attributable to recovery
property subject to depreciation under Section 168 of the
Internal Revenue Code whose book basis is in excess of its tax
basis to be depreciated over the remaining cost recovery period
for the propertys unamortized Book-Tax Disparity. Under
Treasury
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the Internal
Revenue Code, rather than cost recovery deductions under
Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance
method. Under our partnership agreement, our general partner is
authorized to take a position to preserve the uniformity of
units even if that position is not consistent with these and any
other Treasury Regulations. Please read
Disposition of Common Units
Uniformity of Units.
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Although Vinson & Elkins L.L.P. is unable to opine as
to the validity of this approach because there is no direct or
indirect controlling authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of
Contributed Property, to the extent of any unamortized Book-Tax
Disparity, using a rate of depreciation or amortization derived
from the depreciation or amortization method and useful life
applied to the propertys unamortized Book-Tax Disparity,
or treat that portion as
non-amortizable
to the extent attributable to property which is not amortizable.
This method is consistent with the methods employed by other
publicly traded partnerships but is arguably inconsistent with
Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. To the extent this Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may take a depreciation or amortization position under which
all purchasers acquiring units in the same month would receive
depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in
our assets. This kind of aggregate approach may result in lower
annual depreciation or amortization deductions than would
otherwise be allowable to some unitholders. Please read
Disposition of Common Units Uniformity of
Units. A unitholders tax basis for his common units
is reduced by his share of our deductions (whether or not such
deductions were claimed on an individuals income tax
return) so that any position we take that understates deductions
will overstate the common unitholders basis in his common
units, which may cause the unitholder to understate gain or
overstate loss on any sale of such units. Please read
Disposition of Common Units
Recognition of Gain or Loss. The IRS may challenge our
position with respect to depreciating or amortizing the
Section 743(b) adjustment we take to preserve the
uniformity of the units. If such a challenge were sustained, the
gain from the sale of units might be increased without the
benefit of additional deductions.
A Section 754 election is advantageous if the
transferees tax basis in his units is higher than the
units share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of
the election, the transferee would have, among other items, a
greater amount of depreciation and depletion deductions and his
share of any gain or loss on a sale of our assets would be less.
Conversely, a Section 754 election is disadvantageous if
the transferees tax basis in his units is lower than those
units share of the aggregate tax basis of our assets
immediately prior to the transfer. Thus, the fair market value
of the units may be affected either favorably or unfavorably by
the election. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial built-in
loss immediately after the transfer, or if we distribute
property and have a substantial basis reduction. Generally a
built-in loss or a basis reduction is substantial if it exceeds
$250,000.
The calculations involved in the Section 754 election are
complex and will be made on the basis of assumptions as to the
value of our assets and other matters. For example, the
allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue
Code. The IRS could seek to reallocate some or all of any
Section 743(b) adjustment allocated by us to our tangible
assets to goodwill instead. Goodwill, as an intangible asset, is
generally
non-amortizable
or amortizable over a longer period of time or under a less
accelerated method than our tangible assets. We cannot assure
you that the determinations we make will not be successfully
challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the
IRS require a different basis adjustment to be made, and should,
in our opinion, the expense of compliance exceed the benefit of
the election, we may seek permission from the IRS to revoke our
Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than
he would have been allocated had the election not been revoked.
Foreign Tax Credits. Subject to detailed
limitations set forth in the Internal Revenue Code, a unitholder
may be able to claim a credit against its liability for
U.S. federal income tax for the unitholders share of
certain foreign income taxes paid by us. The amount and
availability of such credit will be dependent upon several
factors, such as whether the unitholder has sufficient income
from foreign sources, whether such income is in the same foreign
tax credit category as our income, and the rate of foreign tax
to which our income is subject. Given the complexity of the
rules relating to the determination of the foreign tax credit,
prospective unitholders are urged to consult their own tax
advisors to determine whether or to what extent they
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would be entitled to such credits. Unitholders who do not elect
to claim foreign tax credits may instead claim a deduction for
their shares of foreign taxes paid by us.
Tax
Treatment of Operations
Accounting Method and Taxable Year. We use the
year ending December 31 as our taxable year and the accrual
method of accounting for U.S. federal income tax purposes.
Each unitholder will be required to include in income his share
of our income, gain, loss and deduction for our taxable year
ending within or with his taxable year. In addition, a
unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his units following the
close of our taxable year but before the close of his taxable
year must include his share of our income, gain, loss and
deduction in his taxable income for his taxable year, with the
result that he will be required to include in income for his
taxable year his share of more than 12 months of our
income, gain, loss and deduction. Please read
Disposition of Common Units
Allocations Between Transferors and Transferees.
Initial Tax Basis, Depreciation and
Amortization. The tax basis of our assets will be
used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of
these assets. The U.S. federal income tax burden associated
with the difference between the fair market value of our assets
and their tax basis immediately prior to (1) this offering
will be borne by our general partner and its affiliates, and
(2) any other offering will be borne by our general partner
and all of our unitholders as of that time. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction.
To the extent allowable, we may elect to use the depreciation
and cost recovery methods that will result in the largest
deductions being taken in the early years after assets are
placed in service. Property we subsequently acquire or construct
may be depreciated using accelerated methods permitted by the
Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain, determined by reference
to the amount of depreciation previously deducted and the nature
of the property, may be subject to the recapture rules and taxed
as ordinary income rather than capital gain. Similarly, a
unitholder who has taken cost recovery or depreciation
deductions with respect to property we own will likely be
required to recapture some or all of those deductions as
ordinary income upon a sale of his interest in us. Please read
Tax Consequences of Unit Ownership
Allocation of Income, Gain, Loss and Deduction and
Disposition of Common Units
Recognition of Gain or Loss.
The costs we incur in selling our units (called
syndication expenses) must be capitalized and cannot
be deducted currently, ratably or upon our termination. There
are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as
syndication expenses, which may not be amortized by us. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
Valuation and Tax Basis of Our Properties. The
U.S. federal income tax consequences of the ownership and
disposition of units will depend in part on our estimates of the
relative fair market values, and the initial tax bases, of our
assets. Although we may from time to time consult with
professional appraisers regarding valuation matters, we will
make many of the relative fair market value estimates ourselves.
These estimates and determinations of basis are subject to
challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or basis are later found to
be incorrect, the character and amount of items of income, gain,
loss or deductions previously reported by unitholders might
change, and unitholders might be required to adjust their tax
liability for prior years and incur interest and penalties with
respect to those adjustments.
Disposition
of Common Units
Recognition of Gain or Loss. Gain or loss will
be recognized on a sale of units equal to the difference between
the amount realized and the unitholders tax basis for the
units sold. A unitholders amount realized
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will be measured by the sum of the cash or the fair market value
of other property received by him plus his share of our
nonrecourse liabilities. Because the amount realized includes a
unitholders share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability
in excess of any cash received from the sale.
Prior distributions from us in excess of cumulative net taxable
income for a common unit that decreased a unitholders tax
basis in that common unit will, in effect, become taxable income
if the common unit is sold at a price greater than the
unitholders tax basis in that common unit, even if the
price received is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder,
other than a dealer in units, on the sale or
exchange of a unit will generally be taxable as capital gain or
loss. Capital gain recognized by an individual on the sale of
units held for more than twelve months will generally be taxed
at a maximum U.S. federal income tax rate of 15% through
December 31, 2012 and 20% thereafter (absent new
legislation extending or adjusting the current rate). However, a
portion of this gain or loss, which will likely be substantial,
will be separately computed and taxed as ordinary income or loss
under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation
recapture or other unrealized receivables or to
inventory items we own. The term unrealized
receivables includes potential recapture items, including
depreciation recapture. Ordinary income attributable to
unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of
a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize
both ordinary income and a capital loss upon a sale of units.
Net capital losses may offset capital gains and no more than
$3,000 of ordinary income each year, in the case of individuals,
and may only be used to offset capital gains in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those
interests and maintain a single adjusted tax basis for all those
interests. Upon a sale or other disposition of less than all of
those interests, a portion of that tax basis must be allocated
to the interests sold using an equitable
apportionment method, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partners tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partners entire interest in the
partnership. Treasury Regulations under Section 1223 of the
Internal Revenue Code allow a selling unitholder who can
identify common units transferred with an ascertainable holding
period to elect to use the actual holding period of the common
units transferred. Thus, according to the ruling discussed
above, a common unitholder will be unable to select high or low
basis common units to sell as would be the case with corporate
stock, but, according to the Treasury Regulations, he may
designate specific common units sold for purposes of determining
the holding period of units transferred. A unitholder electing
to use the actual holding period of common units transferred
must consistently use that identification method for all
subsequent sales or exchanges of common units. A unitholder
considering the purchase of additional units or a sale of common
units purchased in separate transactions is urged to consult his
tax advisor as to the possible consequences of this ruling and
application of the Treasury Regulations.
Specific provisions of the Internal Revenue Code affect the
taxation of some financial products and securities, including
partnership interests, by treating a taxpayer as having sold an
appreciated partnership interest, one in which gain
would be recognized if it were sold, assigned or terminated at
its fair market value, if the taxpayer or related persons
enter(s) into:
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a short sale;
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an offsetting notional principal contract; or
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a futures or forward contract with respect to the partnership
interest or substantially identical property.
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Moreover, if a taxpayer has previously entered into a short
sale, an offsetting notional principal contract or a futures or
forward contract with respect to the partnership interest, the
taxpayer will be treated as having sold that position if the
taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of
the Treasury is also authorized to issue regulations that treat
a taxpayer
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that enters into transactions or positions that have
substantially the same effect as the preceding transactions as
having constructively sold the financial position.
Allocations Between Transferors and
Transferees. In general, our taxable income or
loss will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among our unitholders
in proportion to the number of units owned by each of them as of
the opening of the applicable exchange on the first business day
of the month, which we refer to in this prospectus as the
Allocation Date. However, gain or loss realized on a
sale or other disposition of our assets other than in the
ordinary course of business will be allocated among our
unitholders on the Allocation Date in the month in which that
gain or loss is recognized. As a result, a unitholder
transferring units may be allocated income, gain, loss and
deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the
Internal Revenue Code and most publicly traded partnerships use
a similar simplifying convention, the use of this method may not
be permitted under existing Treasury Regulations. Recently,
however, the Department of the Treasury and the IRS issued
proposed Treasury Regulations that provide a safe harbor
pursuant to which a publicly traded partnership may use a
similar monthly simplifying convention to allocate tax items
among transferor and transferee unitholders, although such tax
items must be prorated on a daily basis. Nonetheless, the
proposed regulations do not specifically authorize the use of
the proration method we have adopted. Existing publicly traded
partnerships are entitled to rely on these proposed Treasury
Regulations; however, they are not binding on the IRS and are
subject to change until final Treasury Regulations are issued.
Accordingly, Vinson & Elkins L.L.P. is unable to opine
on the validity of this method of allocating income and
deductions between transferor and transferee unitholders. If
this method is not allowed under the Treasury Regulations, or
only applies to transfers of less than all of the
unitholders interest, our taxable income or losses might
be reallocated among the unitholders. We are authorized to
revise our method of allocation between transferor and
transferee unitholders, as well as unitholders whose interests
vary during a taxable year, to conform to a method permitted
under future Treasury Regulations.
A unitholder who owns units at any time during a quarter and who
disposes of them prior to the record date set for a cash
distribution for that quarter will be allocated items of our
income, gain, loss and deductions attributable to that quarter
but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who
sells any of his units generally is required to notify us in
writing of that sale within 30 days after the sale (or, if
earlier, January 15 of the year following the sale). A purchaser
of units who purchases units from another unitholder also
generally is required to notify us in writing of that purchase
within 30 days after the purchase. Upon receiving such
notifications, we are required to notify the IRS of that
transaction and to furnish specified information to the
transferor and transferee. Failure to notify us of a purchase
may, in some cases, lead to the imposition of penalties.
However, these reporting requirements do not apply to a sale by
an individual who is a citizen of the United States and who
effects the sale or exchange through a broker who will satisfy
such requirements.
Constructive Termination. We will be
considered to have been terminated for tax purposes if there are
sales or exchanges that, in the aggregate, constitute 50% or
more of the total interests in our capital and profits within a
twelve-month period. For purposes of measuring whether the 50%
threshold is reached, multiple sales of the same interest within
a twelve-month period are counted only once. A constructive
termination results in the closing of our taxable year for all
unitholders. 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 result in more than twelve
months of our taxable income or loss being includable in his
taxable income for the year of termination. A constructive
termination occurring on a date other than December 31 will
result in us filing two tax returns (and could result in
unitholders receiving two Schedules K-1) for one fiscal year and
the cost of the preparation of these returns will be borne by
all common unitholders. We would be required to make new tax
elections after a termination, including a new election under
Section 754 of the Internal Revenue Code, and a termination
would result in a deferral of our deductions for depreciation. A
termination could also result in penalties if we were unable to
determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or
subject us to, any tax legislation enacted before the
termination. The
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IRS has recently announced a relief procedure whereby the IRS
may allow a publicly traded partnership that has technically
terminated to provide only a single
Schedule K-1
to each unitholder for the two tax years in the fiscal year in
which the termination occurs.
Uniformity
of Units
Because we cannot match transferors and transferees of units, we
must maintain uniformity of the economic and tax characteristics
of the units to a purchaser of these units. In the absence of
uniformity, we may be unable to completely comply with a number
of U.S. federal income tax requirements, both statutory and
regulatory. A lack of uniformity can result from a literal
application of Treasury
Regulation Section 1.167(c)-1(a)(6).
Any non- uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of
Unit Ownership Section 754 Election.
We intend to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value
of Contributed Property, to the extent of any unamortized
Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful
life applied to the propertys unamortized Book-Tax
Disparity, or treat that portion as nonamortizable to the extent
attributable to property the common basis of which is not
amortizable, consistent with the Treasury Regulations under
Section 743 of the Internal Revenue Code, even though that
position may be inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets. Please read Tax Consequences of
Unit Ownership Section 754 Election. To
the extent that the Section 743(b) adjustment is
attributable to appreciation in value in excess of the
unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury Regulations and legislative history.
If we determine that this position cannot reasonably be taken,
we may adopt a depreciation and amortization position under
which all purchasers acquiring units in the same month would
receive depreciation and amortization deductions, whether
attributable to a common basis or Section 743(b)
adjustment, based upon the same applicable methods and lives as
if they had purchased a direct interest in our property. If this
position is adopted, it may result in lower annual depreciation
and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and
amortization deductions not taken in the year that these
deductions are otherwise allowable. This position will not be
adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on
our unitholders. If we choose not to utilize this aggregate
method, we may use any other reasonable depreciation and
amortization method to preserve the uniformity of the intrinsic
tax characteristics of any units that would not have a material
adverse effect on our unitholders. The IRS may challenge any
method of depreciating the Section 743(b) adjustment
described in this paragraph. If this challenge were sustained,
the uniformity of units might be affected, and the gain from the
sale of units might be increased without the benefit of
additional deductions. Please read Disposition
of Common Units Recognition of Gain or Loss.
Tax-Exempt
Organizations and Other Investors
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens,
non-U.S. corporations
and other
non-U.S. persons
raises issues unique to those investors and, as described below,
may have substantially adverse tax consequences to them. If you
are a tax-exempt entity or a
non-U.S. person,
you should consult your tax advisor before investing in our
common units.
Employee benefit plans and most other organizations exempt from
U.S. federal income tax, including individual retirement
accounts (IRAs) and other retirement plans, are subject to
federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder that is a
tax-exempt organization will be unrelated business taxable
income and will be taxable to them.
Non-resident aliens and
non-U.S. corporations,
trusts or estates that own units will be considered to be
engaged in business in the United States because of the
ownership of units. As a consequence, they will be required to
file federal tax returns to report their share of our income,
gain, loss or deduction and pay U.S. federal income tax at
regular rates on their share of our net income or gain.
Moreover, under rules applicable to publicly traded
partnerships, our quarterly cash distributions to
non-U.S. unitholders
will be
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subject to withholding at the highest applicable effective tax
rate. Each
non-U.S. unitholder
must obtain a taxpayer identification number from the IRS and
submit that number to our transfer agent on a
Form W-8BEN
or applicable substitute form in order to obtain credit for
these withholding taxes. A change in applicable law may require
us to change these procedures.
In addition, because a
non-U.S. corporation
that owns units will be treated as engaged in a U.S. trade
or business, that corporation may be subject to the
U.S. branch profits tax at a rate of 30%, in addition to
regular federal income tax, on its share of our income and gain,
as adjusted for changes in the
non-U.S. corporations
U.S. net equity, which is effectively connected
with the conduct of a U.S. trade or business. That tax may
be reduced or eliminated by an income tax treaty between the
United States and the country in which the
non-U.S. corporate
unitholder is a qualified resident. In addition,
this type of unitholder is subject to special information
reporting requirements under Section 6038C of the Internal
Revenue Code.
A
non-U.S. unitholder
who sells or otherwise disposes of a unit will be subject to
U.S. federal income tax on gain realized from the sale or
disposition of that unit to the extent the gain is effectively
connected with a U.S. trade or business of the
non-U.S. unitholder.
Under a ruling published by the IRS, interpreting the scope of
effectively connected income, a
non-U.S. unitholder
would be considered to be engaged in a trade or business in the
United States by virtue of our U.S. activities, and part or
all of that unitholders gain would be effectively
connected with that unitholders indirect U.S. trade
or business. Therefore,
non-U.S. unitholders
may be subject to U.S. federal income tax on gain from the
sale or disposition of their units.
Administrative
Matters
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each calendar year, specific tax information,
including a
Schedule K-1,
which describes his share of our income, gain, loss and
deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take
various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders
share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the
requirements of the Internal Revenue Code, Treasury Regulations
or administrative interpretations of the IRS. Neither we nor
Vinson & Elkins L.L.P. can assure prospective
unitholders that the IRS will not successfully contend in court
that those positions are impermissible. Any challenge by the IRS
could negatively affect the value of the units.
The IRS may audit our federal income tax information returns.
Adjustments resulting from an IRS audit may require each
unitholder to adjust a prior years tax liability, and
possibly may result in an audit of his return. Any audit of a
unitholders return could result in adjustments not related
to our returns as well as those related to our returns.
Partnerships generally are treated as separate entities for
purposes of U.S. federal tax audits, judicial review of
administrative adjustments by the IRS and tax settlement
proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership
proceeding rather than in separate proceedings with the
partners. The Internal Revenue Code requires that one partner be
designated as the Tax Matters Partner for these
purposes. Our partnership agreement names our general partner,
Compressco Partners GP, as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf
and on behalf of unitholders. In addition, the Tax Matters
Partner can extend the statute of limitations for assessment of
tax deficiencies against unitholders for items in our returns.
The Tax Matters Partner may bind a unitholder with less than a
1% profits interest in us to a settlement with the IRS unless
that unitholder elects, by filing a statement with the IRS, not
to give that authority to the Tax Matters Partner. The Tax
Matters Partner may seek judicial review, by which all our
unitholders are bound, of a final partnership administrative
adjustment and, if the Tax Matters Partner fails to seek
judicial review, judicial review may be sought by any unitholder
having at least a 1% interest in profits or by any group of our
unitholders having in the aggregate at least a 5% interest in
profits. However, only one action for judicial review will go
forward, and each unitholder with an interest in the outcome may
participate.
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A unitholder must file a statement with the IRS identifying the
treatment of any item on his U.S. federal income tax return
that is not consistent with the treatment of the item on our
return. Intentional or negligent disregard of this consistency
requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an
interest in us as a nominee for another person are required to
furnish to us:
(a) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(b) whether the beneficial owner is:
1. a person that is not a U.S. person;
2. a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing; or
3. a tax-exempt entity;
(c) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(d) specific information including the dates of
acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net
proceeds from sales.
Brokers and financial institutions are required to furnish
additional information, including whether they are
U.S. persons and specific information on units they
acquire, hold or transfer for their own account. A penalty of
$100 per failure, up to a maximum of $1,500,000 per calendar
year, is imposed by the Internal Revenue Code for failure to
report that information to us. The nominee is required to supply
the beneficial owner of the units with the information furnished
to us.
Accuracy-Related Penalties. An additional tax
equal to 20% of the amount of any portion of an underpayment of
tax that is attributable to one or more specified causes,
including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial
valuation misstatements, is imposed by the Internal Revenue
Code. No penalty will be imposed, however, for any portion of an
underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith
regarding that portion.
For individuals, a substantial understatement of income tax in
any taxable year exists if the amount of the understatement
exceeds the greater of 10% of the tax required to be shown on
the return for the taxable year or $5,000. The amount of any
understatement subject to penalty generally is reduced if any
portion is attributable to a position adopted on the return:
(1) for which there is, or was, substantial
authority; or
(2) as to which there is a reasonable basis and the
pertinent facts of that position are disclosed on the return.
If any item of income, gain, loss or deduction included in the
distributive shares of our unitholders might result in that kind
of an understatement of income for which no
substantial authority exists, we must disclose the
pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for our
unitholders to make adequate disclosure on their returns and to
take other actions as may be appropriate to permit our
unitholders to avoid liability for this penalty. More stringent
rules apply to tax shelters, which we do not believe
includes us, or any of our investments, plans or arrangements.
A substantial valuation misstatement exists if (a) the
value of any property, or the tax basis of any property, claimed
on a tax return is 150% or more of the amount determined to be
the correct amount of the valuation or tax basis, (b) the
price for any property or services (or for the use of property)
claimed on any such return with respect to any transaction
between persons described in Internal Revenue Code
Section 482 is 200% or more (or 50% or less) of the amount
determined under Section 482 to be the correct amount of
such price, or (c) the net Internal Revenue Code
Section 482 transfer price adjustment for the taxable year
exceeds the lesser of $5 million or 10% of the
taxpayers gross receipts. No penalty is imposed unless the
portion of
170
the underpayment attributable to a substantial valuation
misstatement exceeds $5,000 ($10,000 for most corporations). The
penalty is increased to 40% in the event of a gross valuation
misstatement. We do not anticipate making any valuation
misstatements.
In addition, the 20% accuracy-related penalty also applies to
any portion of an underpayment of tax that is attributable to
transactions lacking economic substance. To the
extent that such transactions are not disclosed, the penalty
imposed is increased to 40%. Additionally, there is no
reasonable cause defense to the imposition of this penalty to
such transactions.
Reportable Transactions. If we were to engage
in a reportable transaction, we (and possibly you
and others) would be required to make a detailed disclosure of
the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a listed transaction or
that it produces certain kinds of losses for partnerships,
individuals, S corporations, and trusts in excess of
$2 million in any single year, or $4 million in any
combination of six successive tax years. Our participation in a
reportable transaction could increase the likelihood that our
federal income tax information return (and possibly your tax
return) would be audited by the IRS. Please read
Information Returns and Audit Procedures.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
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accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at Accuracy-Related
Penalties;
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for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability; and
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in the case of a listed transaction, an extended statute of
limitations.
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We do not expect to engage in any reportable
transactions.
State,
Local, Foreign and Other Tax Considerations
In addition to U.S. federal income taxes, you likely will
be subject to other taxes, such as state, local and
non-U.S. income
taxes, unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed by the various
jurisdictions in which we conduct business or own or control
property or in which you are a resident. In the United States,
we will initially own or control property 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. Most of these states also impose an income tax
on corporations and other entities. Although you may not be
required to file a return and pay taxes in some jurisdictions
because your income from that jurisdiction falls below the
filing and payment requirement, you will be required to file
income tax returns and to pay income taxes in many of these
jurisdictions in which we conduct business or own or control
property and may be subject to penalties for failure to comply
with those requirements. In some jurisdictions, tax losses may
not produce a tax benefit in the year incurred and may not be
available to offset income in subsequent taxable years. Some of
the jurisdictions may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to you if
you are not a resident of the jurisdiction. Withholding, the
amount of which may be greater or less than a particular
unitholders income tax liability to the jurisdiction,
generally does not relieve a nonresident unitholder from the
obligation to file an income tax return. Amounts withheld will
be treated as if distributed to our unitholders for purposes of
determining the amounts distributed by us. Please read
Tax Consequences of Unit Ownership
Entity-Level Collections. Based on current law and
our estimate of our future operations, our general partner
anticipates that any amounts required to be withheld will not be
material.
Unitholders may also 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
171
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 investigate the
legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend upon, his
tax counsel or other advisor with regard to those matters.
Further, it is the responsibility of each unitholder to file all
state, local and
non-U.S., as
well as U.S. federal tax returns that may be required of
him. Vinson & Elkins L.L.P. has not rendered an
opinion on the state, local or
non-U.S. tax
consequences of an investment in us.
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INVESTMENT
IN COMPRESSCO PARTNERS
BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to
additional considerations because the investments of these plans
are subject to the fiduciary responsibility and prohibited
transaction provisions of ERISA and restrictions imposed by
Section 4975 of the Internal Revenue Code. For these
purposes the term employee benefit plan includes,
but is not limited to, qualified pension, profit-sharing and
stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or
maintained by an employer or employee organization. Among other
things, consideration should be given to:
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whether the investment is prudent under
Section 404(a)(1)(B) of ERISA;
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whether in making the investment, that plan will satisfy the
diversification requirements of Section 404(a)(1)(C) of
ERISA; and
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whether the investment will result in recognition of unrelated
business taxable income by the plan and, if so, the potential
after-tax investment return. Please read Material Tax
Consequences Tax-Exempt Organizations and Other
Investors.
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The person with investment discretion with respect to the assets
of an employee benefit plan, often called a fiduciary, should
determine whether an investment in us is authorized by the
appropriate governing instrument and is a proper investment for
the plan.
Section 406 of ERISA and Section 4975 of the Internal
Revenue Code prohibit employee benefit plans, and also IRAs that
are not considered part of an employee benefit plan, from
engaging in specified transactions involving plan
assets with parties that are parties in
interest under ERISA or disqualified persons
under the Internal Revenue Code with respect to the plan.
In addition to considering whether the purchase of common units
is a prohibited transaction, a fiduciary of an employee benefit
plan should consider whether the plan will, by investing in us,
be deemed to own an undivided interest in our assets, with the
result that our operations would be subject to the regulatory
restrictions of ERISA, including its prohibited transaction
rules, as well as the prohibited transaction rules of the
Internal Revenue Code.
The Department of Labor regulations provide guidance with
respect to whether the assets of an entity in which employee
benefit plans acquire equity interests would be deemed
plan assets under some circumstances. Under these
regulations, an entitys assets would not be considered to
be plan assets if, among other things:
(a) The equity interests acquired by employee benefit plans
are publicly offered securities i.e., the equity
interests are widely held by 100 or more investors independent
of the issuer and each other, freely transferable and registered
under some provisions of the federal securities laws;
(b) the entity is an operating
company, i.e., it is primarily engaged in the
production or sale of a product or service other than the
investment of capital either directly or through a
majority-owned subsidiary or subsidiaries; or
(c) there is no significant investment by benefit plan
investors, which is defined to mean that less than 25% of the
value of each class of equity interest is held by the employee
benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA, including governmental plans.
Our assets should not be considered plan assets
under these regulations because it is expected that the
investment will satisfy the requirements in (a) above.
Plan fiduciaries contemplating a purchase of common units should
consult with their own counsel regarding the consequences under
ERISA and the Internal Revenue Code in light of the serious
penalties imposed on persons who engage in prohibited
transactions or other violations.
173
UNDERWRITING
Subject to the terms and conditions contained in an underwriting
agreement
dated ,
2011, the underwriters named below, for whom Raymond
James & Associates, Inc. and J.P. Morgan
Securities LLC are acting as representatives, have severally
agreed to purchase from us, and we have agreed to sell to them,
the number of common units set forth opposite their names below:
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Underwriter
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Number of Common Units
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Raymond James & Associates, Inc.
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J.P. Morgan Securities LLC
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The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the common units
offered by this prospectus are subject to satisfaction of the
conditions contained in the underwriting agreement, including:
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the representations and warranties made by us to the
underwriters are true;
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there is no material adverse change in the financial
market; and
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we deliver customary closing documents and legal opinions to the
underwriters.
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The underwriters are obligated to purchase and accept delivery
of all the common units offered by this prospectus, if any are
purchased, other than those covered by the option to purchase
additional common units described below.
The underwriters propose to offer the common units directly to
the public at the public offering price indicated on the cover
page of this prospectus and to various dealers at that price
less a concession not in excess of
$ per unit. If all of the common
units are not sold at the public offering price, the
underwriters may change the public offering price and other
selling terms. The common units are offered by the underwriters
as stated in this prospectus, subject to receipt and acceptance
by them. The underwriters reserve the right to reject any order
for the purchase of the common units in whole or in part.
Option to
Purchase Additional Common Units
We have granted the underwriters an option, exercisable for
30 days after the date of this prospectus, to purchase from
time to time, in whole or in part, up to an aggregate of 375,000
additional common units to cover over-allotments, if any, at the
public offering price less the underwriting discounts set forth
on the cover page of this prospectus. If the underwriters
exercise this option, each underwriter, subject to certain
conditions, will become obligated to purchase its pro rata
portion of these additional common units based on the
underwriters percentage purchase commitment in this
offering as indicated in the table above. The underwriters may
exercise the option to purchase additional common units only to
cover over-allotments made in connection with the sale of the
common units offered in this offering.
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. 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 $20.00 per common unit, if exercised in full,
after deducting the estimated underwriting discount) will be
used to make a distribution to our general partner.
174
Discounts
and Expenses
The following table shows the amount per unit and total
underwriting discounts we will pay to the underwriters (dollars
in thousands, except per unit amounts). The amounts are shown
assuming both no exercise and full exercise of the
underwriters option to purchase additional common units.
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Total without
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Total with
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Over-Allotment
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Over-Allotment
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Per Unit
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Exercise
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Exercise
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Public Offering Price
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$
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$
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$
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Underwriting discount and commissions
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$
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$
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$
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Proceeds to us (before offering expenses)
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$
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$
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$
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In addition, we will pay a structuring fee equal to an aggregate
of $ million to the
representatives in consideration for evaluation, analysis and
structuring of our partnership. The other expenses of the
offering that are payable by us are estimated to be
$8.6 million (exclusive of underwriting discounts and
commissions and structuring fee).
Indemnification
We, and our general partner, and TETRA have agreed to indemnify
the underwriters against certain liabilities under the
Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters
may be required to make for those liabilities.
Lock-up
Agreements
Subject to specified exceptions, we, our general partner and its
affiliates and the executive officers and directors of our
general partner and its affiliates, as well as purchasers of in
excess of 1,000 common units under the directed unit program,
have agreed with the underwriters, for a period of 180 days
after the date of this prospectus, without prior written consent
of Raymond James & Associates, Inc. and
J.P. Morgan Securities LLC:
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not to offer, sell, contract to sell, announce the intention to
sell or pledge any of the common units;
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not to grant or sell any option or contract to purchase any of
the common units;
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not to enter into any swap or other agreement that transfers any
of the economic consequences of ownership of or otherwise
transfer or dispose of, directly or indirectly, any of the
common units; and
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not to enter into any hedging, collar or other transaction or
arrangement that is designed or reasonably expected to lead to
or result in a transfer, in whole or in part, of any of the
economic consequences of ownership of the common units, whether
or not such transfer would be for any consideration.
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These agreements also prohibit us from entering into any of the
foregoing transactions with respect to any securities that are
convertible into or exchangeable for the common units.
Raymond James & Associates, Inc. and J.P. Morgan
Securities LLC may, in their discretion and at any time without
notice, release all or any portion of the securities subject to
these agreements. Raymond James & Associates, Inc. and
J.P. Morgan Securities LLC do not have any present intent
or any understanding to release all or any portion of the
securities subject to these agreements.
The 180-day
period described in the preceding paragraphs will be extended if:
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during the last 17 days of the
180-day
period, we issue an earnings release or release concerning
distributable cash or announce material news or a material event
relating to us occurs; or
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prior to the expiration of the
180-day
period, we announce that we will release earnings results or
distributable cash results during the
16-day
period beginning on the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraphs will continue to apply until the
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expiration of the
18-day
period beginning on the date of issuance of the earnings
release, the announcement of the material news or the occurrence
of the material event.
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Directed
Units Program
At our request, the underwriters have reserved up
to % of the common units being
offered by this prospectus for sale to persons who are
directors, executive officers or employees of our general
partner and its affiliates, including TETRA, at the initial
public offering price. The sales will be made by Raymond James
through a directed unit program. We do not know if these persons
will choose to purchase all or any portion of these reserved
units, but any purchases they do make will reduce the number of
units available to the public. To the extent the allotted units
are not purchased in the directed unit program, we will offer
these common units to the public on the same basis as all other
common units offered by this prospectus. These persons must
commit to purchase no later than before the open of business on
the day following the date of this prospectus, but in any event,
these persons are not obligated to purchase common units. The
executive officers and directors of our general partner and its
affiliates, including TETRA, as well as purchasers of in excess
of 1,000 common units under the directed unit program, will be
subject to a
180-day
lock-up,
subject to extension as described above in the event of earnings
releases or material announcements. We have agreed to indemnify
the underwriters against certain liabilities and expenses,
including liabilities under the Securities Act, in connection
with the sales of the reserved units.
Stabilization
Until this offering is completed, rules of the SEC may limit the
ability of the underwriters and various selling group members to
bid for and purchase the common units. As an exception to these
rules, the underwriters may engage in activities that stabilize,
maintain or otherwise affect the price of the common units,
including:
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short sales,
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syndicate covering transactions,
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imposition of penalty bids, and
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purchases to cover positions created by short sales.
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Stabilizing transactions consist of bids or purchases made for
the purpose of preventing or retarding a decline in the market
price of the common units while the offering is in progress.
Stabilizing transactions may include making short sales of the
common units, which involve the sale by the underwriters of a
greater number of common units than they are required to
purchase in the offering and purchasing common units from us or
in the open market to cover positions created by short sales.
Short sales may be covered shorts, which are short
positions in an amount not greater than the underwriters
option to purchase additional common units referred to above, or
may be naked shorts, which are short positions in
excess of that amount.
Each underwriter may close out any covered short position either
by exercising its option to purchase additional common units, in
whole or in part, or by purchasing units in the open market. In
making this determination, each underwriter will consider, among
other things, the price of units available for purchase in the
open market compared to the price at which the underwriter may
purchase units pursuant to the option to purchase additional
common units.
A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure
on the price of the common units in the open market that could
adversely affect investors who purchased in the offering. To the
extent that the underwriters create a naked short position, they
will purchase units in the open market to cover the position.
The underwriters also may impose a penalty bid on selling group
members. This means that if the underwriters purchase units in
the open market in stabilizing transactions or to cover short
sales, the underwriters can require the selling group members
that sold those units as part of the offering to repay the
selling concession received by them.
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As a result of these activities, the price of the common units
may be higher than the price that otherwise might exist in the
open market. If the underwriters commence these activities, they
may discontinue them without notice at any time. The
underwriters may carry out these transactions on the NASDAQ
Stock Market LLC or otherwise.
Conflicts/Affiliates
Certain of the underwriters and their affiliates have performed
investment banking, commercial banking and advisory services for
our affiliates from time to time, for which they have received
customary fees and expenses. Certain of the underwriters and
their affiliates may provide in the future investment banking,
financial advisory or other financial services for us and our
affiliates, for which they may receive advisory or transaction
fees, as applicable, plus
out-of-pocket
expenses, of the nature and in amounts customary in the industry
for these financial services.
Discretionary
Accounts
The underwriters may confirm sales of the common units offered
by this prospectus to accounts over which they exercise
discretionary authority but do not expect those sales to exceed
5% of the total common units offered by this prospectus.
Listing
We have applied to list the common units on the NASDAQ Stock
Market LLC under the symbol GSJK. In connection with
the listing of the common units on the NASDAQ Stock Market LLC,
the underwriters will undertake to sell round lots of
100 units or more to a minimum of 400 beneficial owners.
Determination
of Initial Offering Price
Prior to this offering, there has been no public market for the
common units. Consequently, the initial public offering price
for the common units will be determined by negotiations among us
and the underwriters. The primary factors to be considered in
determining the initial public offering price will be:
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estimates of distributions to our unitholders;
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overall quality of our properties and operations;
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industry and market conditions prevalent in the energy industry;
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the information set forth in this prospectus and otherwise
available to the representatives; and
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the general conditions of the securities markets at the time of
this offering.
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Electronic
Prospectus
A prospectus in electronic format may be available on the
Internet sites or through other online services maintained by
one or more of the underwriters and selling group members
participating in the offering, or by their affiliates. In those
cases, prospective investors may view offering terms online and,
depending upon the underwriter or the selling group member,
prospective investors may be allowed to place orders online. The
underwriters may agree with us to allocate a specific number of
units for sale to online brokerage account holders. Any such
allocation for online distributions will be made by the
underwriters on the same basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriters or any selling group members
website and any information contained in any other website
maintained by the underwriters or any selling group member is
not part of the prospectus or the registration statement of
which this prospectus forms a part, has not been approved or
endorsed by us or any underwriters or any selling group member
in its capacity as underwriter or selling group member and
should not be relied upon by investors.
177
FINRA
Rules
Because the Financial Industry Regulatory Authority, or the
FINRA, is expected to view the common units offered
hereby as interests in a direct participation program, this
offering is made in compliance with Rule 2310 of the FINRA
rules. Investor suitability with respect to the common units
should be judged similarly to the suitability with respect to
other securities that are listed for trading on a national
securities exchange.
VALIDITY
OF THE COMMON UNITS
The validity of the common units will be passed upon for us by
Vinson & Elkins L.L.P., Houston, Texas. The validity
of the common units offered hereby will be passed upon for the
underwriters by Baker Botts L.L.P., Austin, Texas.
EXPERTS
The combined financial statements of Compressco Partners
Predecessor at December 31, 2010 and 2009, and for each of
the three years in the period ended December 31, 2010,
appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts
in accounting and auditing.
The balance sheets of Compressco Partners, L.P. at
December 31, 2010 and 2009 appearing in this Prospectus and
Registration Statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or
the SEC, a registration statement on
Form S-1
regarding the common units. This prospectus does not contain all
of the information found in the registration statement. For
further information regarding us and the common units offered by
this prospectus, you may desire to review the full registration
statement, including its exhibits and schedules, filed under the
Securities Act. The registration statement of which this
prospectus forms a part, including its exhibits and schedules,
may be inspected and copied at the public reference room
maintained by the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of the
materials may also be obtained from the SEC at prescribed rates
by writing to the public reference room maintained by the SEC at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a web site on the Internet at
http://www.sec.gov.
Our registration statement, of which this prospectus constitutes
a part, can be downloaded from the SECs web site.
We intend to furnish our unitholders annual reports containing
our audited financial statements and furnish or make available
quarterly reports containing our unaudited interim financial
information for the first three fiscal quarters of each of our
fiscal years.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information in this prospectus may
constitute forward-looking statements. The words
believe, expect, anticipate,
plan, intend, foresee,
should, would, could or
other similar expressions are intended to identify
forward-looking statements, which are generally not historical
in nature. These forward-looking statements are based on our
current expectations and beliefs concerning future developments
and their potential effect on us. While management believes that
these forward-looking statements are reasonable as and when
made, there can be no assurance that future developments
affecting us
178
will be those that we anticipate. All comments concerning our
expectations for future revenues and operating results are based
on our forecasts for our existing operations and do not include
the potential impact of any future acquisitions. Our
forward-looking statements involve significant risks and
uncertainties (some of which are beyond our control) and
assumptions that could cause actual results to differ materially
from our historical experience and our present expectations or
projections. Important factors that could cause actual results
to differ materially from those in the forward-looking
statements include, but are not limited to, those described in
Risk Factors and elsewhere in this prospectus.
Readers are cautioned not to place undue reliance on
forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to publicly update or revise
any forward-looking statements after the date they are made,
whether as a result of new information, future events or
otherwise.
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INDEX TO
FINANCIAL STATEMENTS
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COMPRESSCO PARTNERS PREDECESSOR COMBINED FINANCIAL
STATEMENTS:
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|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
COMPRESSCO PARTNERS, L.P. UNAUDITED PRO FORMA FINANCIAL
STATEMENTS:
|
|
|
|
|
|
|
|
F-15
|
|
|
|
|
F-16
|
|
|
|
|
F-17
|
|
|
|
|
F-18
|
|
COMPRESSCO PARTNERS, L.P. FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
F-22
|
|
|
|
|
F-23
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of TETRA
Technologies, Inc.:
We have audited the accompanying combined balance sheets of
Compressco Partners Predecessor, or Predecessor, as
of December 31, 2010 and 2009, and the related combined
statements of operations, comprehensive income and changes in
net parent equity and cash flows for each of the three years in
the period ended December 31, 2010. These financial
statements are the responsibility of the Predecessors
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of Predecessors internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness
of Predecessors internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the combined financial
position of Compressco Partners Predecessor as of
December 31, 2010 and 2009, and the combined results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
Houston, Texas
April 12, 2011
F-2
COMPRESSCO
PARTNERS PREDECESSOR
COMBINED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,578
|
|
|
$
|
6,629
|
|
Accounts receivable, net of allowance for doubtful accounts of
$615 and $304 as of December 31, 2009 and 2010
|
|
|
12,617
|
|
|
|
9,241
|
|
Inventories
|
|
|
18,505
|
|
|
|
17,731
|
|
Deferred tax assets
|
|
|
543
|
|
|
|
580
|
|
Prepaid expenses and other current assets
|
|
|
608
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,851
|
|
|
|
35,542
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Land and building
|
|
|
2,165
|
|
|
|
2,143
|
|
Compressors and other equipment
|
|
|
122,360
|
|
|
|
128,939
|
|
Vehicles
|
|
|
12,944
|
|
|
|
13,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,469
|
|
|
|
144,234
|
|
Less accumulated depreciation
|
|
|
(44,635
|
)
|
|
|
(55,892
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
92,834
|
|
|
|
88,342
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
72,161
|
|
|
|
72,161
|
|
Patents, trademarks and other intangible assets, net of
accumulated amortization of $478, and $566 as of
December 31, 2009 and 2010
|
|
|
190
|
|
|
|
102
|
|
Deferred tax assets
|
|
|
38
|
|
|
|
|
|
Other assets
|
|
|
423
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
72,812
|
|
|
|
72,682
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
202,497
|
|
|
$
|
196,566
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND NET PARENT EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,607
|
|
|
$
|
1,939
|
|
Accrued liabilities and other
|
|
|
2,261
|
|
|
|
4,660
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,868
|
|
|
|
6,599
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Affiliate note payable
|
|
|
145,085
|
|
|
|
145,085
|
|
Deferred tax liabilities
|
|
|
19,560
|
|
|
|
18,881
|
|
Other long-term liabilities
|
|
|
84
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
|
164,729
|
|
|
|
164,014
|
|
Commitment and contingencies
|
|
|
|
|
|
|
|
|
Net parent equity
|
|
|
33,900
|
|
|
|
25,953
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND NET PARENT EQUITY
|
|
$
|
202,497
|
|
|
$
|
196,566
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-3
COMPRESSCO
PARTNERS PREDECESSOR
COMBINED
STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME
AND CHANGES IN NET PARENT EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
|
$
|
91,925
|
|
|
$
|
86,105
|
|
|
$
|
77,395
|
|
Sales of compressors and parts
|
|
|
8,019
|
|
|
|
4,468
|
|
|
|
4,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
99,944
|
|
|
|
90,573
|
|
|
|
81,412
|
|
Cost of revenues (excluding depreciation and amortization
expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
|
|
38,736
|
|
|
|
38,108
|
|
|
|
35,423
|
|
Cost of compressors and parts sales
|
|
|
5,453
|
|
|
|
2,851
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
44,189
|
|
|
|
40,959
|
|
|
|
37,977
|
|
Selling, general and administrative expense
|
|
|
14,352
|
|
|
|
13,193
|
|
|
|
14,328
|
|
Depreciation and amortization
|
|
|
12,112
|
|
|
|
13,823
|
|
|
|
13,112
|
|
Interest expense
|
|
|
10,990
|
|
|
|
11,980
|
|
|
|
13,096
|
|
Other (income) expense, net
|
|
|
174
|
|
|
|
(82
|
)
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
18,127
|
|
|
|
10,700
|
|
|
|
2,786
|
|
Provision for income taxes
|
|
|
6,846
|
|
|
|
4,161
|
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11,281
|
|
|
|
6,539
|
|
|
|
1,617
|
|
Foreign currency translation adjustment
|
|
|
(619
|
)
|
|
|
417
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
10,662
|
|
|
$
|
6,956
|
|
|
$
|
1,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined changes in net parent equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
48,713
|
|
|
$
|
56,792
|
|
|
$
|
33,900
|
|
Comprehensive income
|
|
|
10,662
|
|
|
|
6,956
|
|
|
|
1,575
|
|
Net contributions from (distributions to) parent
|
|
|
(2,583
|
)
|
|
|
(29,848
|
)
|
|
|
(9,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
56,792
|
|
|
$
|
33,900
|
|
|
$
|
25,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-4
COMPRESSCO
PARTNERS PREDECESSOR
COMBINED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,281
|
|
|
$
|
6,539
|
|
|
$
|
1,617
|
|
Reconciliation of net income to cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,112
|
|
|
|
13,823
|
|
|
|
13,112
|
|
Stock compensation expense
|
|
|
722
|
|
|
|
360
|
|
|
|
392
|
|
Deferred taxes
|
|
|
6,281
|
|
|
|
1,243
|
|
|
|
(895
|
)
|
Other non-cash charges and credits
|
|
|
202
|
|
|
|
754
|
|
|
|
331
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,410
|
)
|
|
|
734
|
|
|
|
3,159
|
|
Inventories
|
|
|
(3,312
|
)
|
|
|
567
|
|
|
|
775
|
|
Prepaid expenses and other current assets
|
|
|
(277
|
)
|
|
|
109
|
|
|
|
(982
|
)
|
Trade accounts payable and accrued expenses
|
|
|
397
|
|
|
|
(308
|
)
|
|
|
2,840
|
|
Other
|
|
|
(427
|
)
|
|
|
115
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
25,569
|
|
|
|
23,936
|
|
|
|
20,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net
|
|
|
(33,036
|
)
|
|
|
(2,997
|
)
|
|
|
(8,715
|
)
|
Other investing activities
|
|
|
39
|
|
|
|
115
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(32,997
|
)
|
|
|
(2,882
|
)
|
|
|
(8,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net contributions from (distributions to) parent
|
|
|
7,607
|
|
|
|
(17,854
|
)
|
|
|
(9,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
7,607
|
|
|
|
(17,854
|
)
|
|
|
(9,735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(479
|
)
|
|
|
402
|
|
|
|
8
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(300
|
)
|
|
|
3,602
|
|
|
|
2,051
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,276
|
|
|
|
976
|
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
976
|
|
|
$
|
4,578
|
|
|
$
|
6,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Combined Financial Statements
F-5
COMPRESSCO
PARTNERS PREDECESSOR
|
|
NOTE A
|
BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization
These notes apply to the combined financial statements of the
natural gas wellhead compression-based production enhancement
services business of our predecessor, Compressco Partners
Predecessor. The combined financial statements of our
predecessor consist of the assets, liabilities and operations of
Compressco, Inc. and its subsidiaries (Compressco) and certain
assets, liabilities and operations of certain other subsidiaries
of TETRA Technologies, Inc. (TETRA) conducting business in
Mexico. These combined financial statements are prepared in
connection with the proposed initial public offering of common
units representing limited partner interests in Compressco
Partners, L.P., or the Partnership, which was formed
on October 31, 2008 and will own substantially all of our
predecessors business.
Compressco is a wholly owned subsidiary of TETRA, and was
acquired by TETRA in July 2004. Compressco designs and
manufactures its compressor units and uses these compressor
units in conjunction with its personnel to provide wellhead
compression-based services to its customers. Compresscos
operations are located principally in the mid-continent,
mid-western, Rocky Mountain, and Gulf Coast regions of the
United States, as well as significant operations in Canada and
Mexico and an established presence in other countries located in
South America, Eastern Europe and the Asia-Pacific region.
Basis
of Presentation
The accompanying combined financial statements include the
accounts and operations of our predecessors wholly owned
subsidiaries transferred from TETRA at historical costs, and
have been prepared in accordance with generally accepted
accounting principles. All significant intercompany accounts and
transactions have been eliminated in the combined financial
statements. The combined statements of operations include all
revenue worldwide and costs directly attributable to our
predecessors operations. A portion of these revenues and
costs relate to contracts and assets that will not be
contributed to the Partnership.
In addition, selling, general and administrative expenses
include costs incurred by TETRA, and allocated to Compressco
based on allocation factors that our predecessors
management believes are reasonable. These costs include, among
other things, centralized corporate functions such as legal,
accounting and financial reporting, treasury, insurance
administration, claims processing, risk management, health,
safety and environmental, information technology, human
resources, credit, payroll, taxes and other corporate services
and the use of facilities that support these functions. These
allocations may not be necessarily indicative of the costs and
expenses that would result if our predecessor was an independent
entity.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires our
predecessors management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclose contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Cash
Equivalents
Compressco considers all highly liquid investments, with
maturities of three months or less when purchased, to be cash
equivalents.
F-6
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Financial
Instruments
The fair values of our predecessors financial instruments,
which may include cash, accounts receivable, and accounts
payable, approximate their carrying amounts. The fair value of
our predecessors affiliate note payable was
$145.1 million as of December 31, 2010 compared to its
carrying value of $145.1 million. The fair value of our
predecessor affiliate note payable was calculated internally,
using existing market conditions and average cost of debt.
Financial instruments that subject our predecessor to
concentrations of credit risk consist principally of trade
accounts receivable, which are primarily due from companies of
varying size engaged in oil and gas activities in the United
States, Canada and Mexico. Our predecessors policy is to
review the financial condition of customers before extending
credit and periodically update customer credit information.
Payment terms are on a short-term basis. During 2008, Pemex and
BP accounted for 14.1% and 12.4%, respectively, of our
predecessors combined revenues. During 2009, Pemex and BP
accounted for 15.2% and 13.7%, respectively, of our
predecessors combined revenues. During 2010, BP and Pemex
accounted for 14.1% and 12.4%, respectively, of our
predecessors combined revenues.
Our predecessor is exposed to fluctuations between the
U.S. dollar and certain foreign currencies, including the
Canadian dollar and the Mexican peso, as a result of its
international operations.
Allowances
for Doubtful Accounts
Allowances for doubtful accounts are determined on a specific
identification basis when Compressco believes that the
collection of specific amounts owed to it is not probable.
Inventories
Inventories consist primarily of compressor unit components and
parts, and are stated at the lower of cost or market.
Inventories are accounted for using the average cost method.
Property, plant and equipment are stated at cost. Expenditures
that increase the useful lives of assets are capitalized. The
cost of repairs and maintenance (including compressor unit
overhaul cost) is charged to operations as incurred. Compressors
include compressor units currently placed in service and
available for service. Depreciation is computed using the
straight-line method based on the following estimated useful
lives:
|
|
|
Compressors
|
|
12 years
|
Equipment and other property
|
|
5 to 8 years
|
Vehicles
|
|
3 years
|
Information systems
|
|
3 years
|
Leasehold improvements are depreciated over the shorter of the
remaining term of the associated building lease or their useful
lives. Depreciation expense for the years ended
December 31, 2008, 2009, and 2010 was $12.0 million,
$13.7 million and $13.1 million, respectively.
Impairment
of Long-Lived Assets
Impairments of long-lived assets are determined periodically
when indicators of impairment are present. If such indicators
are present, the determination of the amount of impairment is
based on our judgments as to the future undiscounted operating
cash flows to be generated from these assets throughout their
estimated useful lives. If these undiscounted cash flows are
less than the carrying amount of the related asset, an
impairment is recognized for the excess of the carrying value
over its fair value.
F-7
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Goodwill
Goodwill represents the excess of the cost TETRA paid to acquire
our predecessor over the fair value of our predecessors
net assets at the date of acquisition. Our predecessor performs
a goodwill impairment test on an annual basis or whenever
indicators of impairment are present. Our predecessor performs
the annual test of goodwill impairment following the fourth
quarter of each year. The goodwill impairment test consists of a
comparison of the net parent equity to the estimation of the
fair value of our predecessor. If the net parent equity exceeds
its estimated fair value, an impairment loss is calculated by
comparing the carrying amount of our predecessors goodwill
to an implied fair value of that goodwill. In this second step,
the estimated fair value from the first step is used as the
purchase price in a hypothetical acquisition of the reporting
unit. Purchase business combination accounting rules are
followed to determine the implied purchase price allocation to
the reporting units assets and liabilities. The residual
amount of goodwill that results from this hypothetical purchase
price allocation is compared to the recorded amount of goodwill
for the reporting unit, and the recorded amount is written down
to the implied amount, if lower.
Our predecessors management must apply judgment in
determining the estimated fair value for purposes of performing
the goodwill impairment test. Management uses all available
information to make these fair value determinations, including
the present value of expected future cash flows using discount
rates commensurate with the risks involved in the assets. We
have determined that there is no impairment of the goodwill
recorded as of December 31, 2009 or 2010. As of
December 31, 2009 and 2010, goodwill totaled
$72.2 million, and has not changed significantly since our
predecessor was acquired by TETRA in July 2004.
Other
Intangible Assets
Patents, customer relationships, and other intangible assets are
recorded on the basis of the allocated fair value when we were
acquired by TETRA. Intangible assets with definitive lives are
amortized on a straight-line basis over their estimated useful
lives, ranging from 3 to 7 years. Amortization expense
related to these intangible assets was $88,000, $88,000 and
$88,000 for the twelve months ended December 31, 2008, 2009
and 2010, respectively, and is included in depreciation and
amortization. The estimated future annual amortization expense
of patents, trademarks, and other intangible assets is as
follows:
|
|
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
|
|
(In thousands)
|
|
|
2011
|
|
$
|
88
|
|
2012
|
|
|
14
|
|
2013
|
|
|
|
|
2014
|
|
|
|
|
2015
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
102
|
|
|
|
|
|
|
Revenue
Recognition
Our predecessor recognizes revenue using the following criteria:
(a) persuasive evidence of an exchange arrangement exists;
(b) delivery has occurred or services have been rendered;
(c) the buyers price is fixed or determinable; and
(d) collectability is reasonably assured. Our
predecessors compressor units and services are provided
pursuant to contract terms ranging from two weeks to one month.
As of December 31, 2010, all monthly agreements are
cancellable with 30 days written notice by the customer.
Operating costs incurred during customer trial periods are
expensed as incurred.
F-8
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
Our predecessors operations are currently included in
TETRAs consolidated U.S. federal tax return.
Following the initial public offering of the Partnership, its
operations will be treated as a partnership for
U.S. federal tax purposes with each partner being
separately taxed on its share of taxable income. However, a
portion of the Partnerships business will be conducted
through a taxable U.S. corporate subsidiary. In addition,
certain of our predecessors operations are located outside
of the United States, including operations in Canada and Mexico,
and the Partnership will be responsible for income taxes in
these countries. Accordingly, Compressco has included a
provision for U.S. federal income taxes, these
international income taxes, along with certain U.S. state
income taxes, in the accompanying combined financial statements.
Environmental
Liabilities
The costs to remediate and monitor environmental matters are
accrued when such liabilities are considered probable and a
reasonable estimate of such costs is determinable.
Accumulated
Other Comprehensive Income
Our predecessors Canadian and Mexican operations maintain
their accounting records in their local currencies, Canadian
Dollars and Mexican Pesos, respectively, which are also their
functional currencies. The functional currency financial
statements are converted to United States Dollar equivalents
with the effect of the foreign currency translation adjustment
reflected as a component of accumulated other comprehensive
income. Accumulated other comprehensive income is included in
Net Parent Equity in the accompanying combined balance sheets
and consists of the cumulative currency translation adjustments
associated with our predecessors international operations.
Activity within accumulated other comprehensive income during
the two year period ended December 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
739
|
|
|
$
|
120
|
|
|
$
|
537
|
|
Foreign currency translation adjustment, net of taxes of $(323)
in 2008, $224 in 2009 and $(201) in 2010
|
|
|
(619
|
)
|
|
|
417
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
120
|
|
|
$
|
537
|
|
|
$
|
495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently
Issued Accounting Pronouncements
The accounting treatment required by Financial Accounting
Standards Board, or FASB, Accounting Standards
Codification, or ASC, Topic 260 affects how a master
limited partnership, or MLP, allocates income
between the limited partners and its general partner, which
typically holds incentive distribution rights along with its
general partner interest. It is not uncommon for MLPs to
experience timing differences between the recognition of income
and partnership distributions. The amount of incentive
distributions is typically calculated based on the amount of
distributions paid to the MLPs partners. When current
period earnings are in excess of cash distributions, the
undistributed earnings should be allocated to the holders of the
general partner interest, the holders of the limited partner
interest and the holders of incentive distribution rights, based
upon the terms of the partnership agreement. Under this
scenario, contractual limitations on distributions to holders of
incentive distribution rights should be considered when
determining the amount of earnings to allocate to them. That is,
undistributed earnings should not be considered available cash
for purposes of allocating earnings to the holders of incentive
distribution rights. Conversely, when cash distributions are in
excess of earnings, net income (or loss) should be reduced
(increased) by the distributions made to the holders of the
general partner interest, the holders of the limited partner
interest and the holders of incentive
F-9
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
distribution rights. The resulting net loss should then be
allocated to the holders of the general partner interest, and
the holders of the limited partner interest, based on their
respective sharing of the losses based upon the terms of the
partnership agreement. This accounting treatment is required on
all financial statements presented for fiscal years beginning
after December 15, 2008 and interim periods within those
fiscal years. We do not expect the impact of the adoption of
this item on our presentation of earnings per unit to be
significant.
|
|
NOTE B
|
RELATED-PARTY
TRANSACTIONS
|
Our predecessors parent company, TETRA, provides
centralized corporate functions such as legal, accounting and
financial reporting, treasury, insurance administration, claims
processing, risk management, health, safety and environmental,
information technology, human resources, credit, payroll, taxes
and other corporate services and the use of facilities that
support these functions. The portion of TETRAs cost of
providing these services that can be directly or indirectly
attributable to our operations has been allocated to our
predecessor and is included in the accompanying combined
financial statements. Such allocation is calculated based on
allocation factors, such as the estimated percentage of time and
costs spent by TETRA to perform these administrative services on
our predecessors behalf, which our predecessors
management believes are reasonable.
Our predecessors consolidated balance sheets contain
minimal amounts of cash, as all payments made on our behalf,
such as direct costs, indirect costs, and capital expenditures,
are paid by TETRA and have been recorded as increases in net
parent equity. All payments received on our predecessors
behalf by TETRA, such as receipts for revenue earned or sales of
assets, are received by TETRA and have been recorded as
decreases in net parent equity.
Long-term debt of our predecessor consists of a revolving credit
promissory note payable (the Affiliate Note) to an affiliate of
TETRA. The Affiliate Note was issued in August 2004 and was
scheduled to mature on December 31, 2010. Pursuant to the
Affiliate Note, our predecessor may borrow up to
$150 million, with interest accruing at 9.0% per annum, due
and payable at December 31 of each year. Under the terms of the
Affiliate Note, unpaid interest may be added to the note
balance, subject to the maximum principal balance allowable.
Amounts outstanding under the Affiliate Note as of
December 31, 2009 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
9.0% Affiliate Note
|
|
$
|
145,085
|
|
|
$
|
145,085
|
|
Less current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
145,085
|
|
|
$
|
145,085
|
|
|
|
|
|
|
|
|
|
|
In December 2010, the Affiliate Note was refinanced, whereby its
maximum face amount was increased to $250 million, the
interest rate was changed to 7.5% and its scheduled maturity
date was extended to December 31, 2020.
TETRA has entered into certain debt agreements that contain
customary covenants and other restrictions limiting TETRA and
its subsidiaries ability to buy, sell, or dispose of
assets. TETRAs debt agreements are unsecured. The
accompanying combined financial statements include no provision
for allocated debt service costs incurred on TETRAs debt
agreements.
F-10
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Certain of our predecessors operations are currently
included in TETRAs consolidated U.S. federal tax
return, and no intercompany tax sharing arrangements exist
between TETRA and its subsidiaries, including those included in
our predecessor. Following the initial public offering of the
Partnership, its operations will be treated as a partnership for
federal tax purposes with each partner being separately taxed on
its share of taxable income. However, a portion of the
Partnerships business will be conducted through a taxable
U.S. corporate subsidiary. Accordingly, a U.S. federal
and state income tax provision has been reflected in the
accompanying statements of operations. Certain of our
predecessors operations are located outside of the U.S.,
including operations in Canada and Mexico, and the Partnership
will also be responsible for income taxes in these countries.
Accordingly, our predecessor has also included the provision for
these international income taxes, calculated on a separate
return basis, in the accompanying combined financial statements.
The income tax provision attributable to our predecessors
operations for the years ended December 31, 2008, 2009, and
2010 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,446
|
)
|
|
$
|
606
|
|
|
$
|
648
|
|
State
|
|
|
(44
|
)
|
|
|
269
|
|
|
|
162
|
|
Foreign
|
|
|
2,055
|
|
|
|
2,043
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
|
2,918
|
|
|
|
2,064
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,787
|
|
|
$
|
1,123
|
|
|
$
|
(829
|
)
|
State
|
|
|
573
|
|
|
|
80
|
|
|
|
(88
|
)
|
Foreign
|
|
|
(79
|
)
|
|
|
40
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,281
|
|
|
|
1,243
|
|
|
|
(895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
6,846
|
|
|
$
|
4,161
|
|
|
$
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes attributable
to continuing operations, computed by applying the federal
statutory rate for the years ended December 31, 2008, 2009,
and 2010 to income before income taxes and the reported income
taxes, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Income tax provision computed at statutory federal income tax
rates
|
|
$
|
6,344
|
|
|
$
|
3,745
|
|
|
$
|
975
|
|
State income taxes (net of federal benefit)
|
|
|
344
|
|
|
|
227
|
|
|
|
48
|
|
Nondeductible expenses
|
|
|
158
|
|
|
|
189
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
6,846
|
|
|
$
|
4,161
|
|
|
$
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
Income before income tax provision includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
12,653
|
|
|
$
|
5,333
|
|
|
$
|
4,550
|
|
International
|
|
|
5,474
|
|
|
|
5,367
|
|
|
|
(1,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,127
|
|
|
$
|
10,700
|
|
|
$
|
2,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TETRA files U.S. federal, state, and foreign income tax
returns on behalf of all of its consolidated subsidiaries,
including those entities which comprise our predecessor. TETRA
believes it has justification for the tax positions utilized in
the various tax returns it files. With few exceptions, TETRA is
no longer subject to U.S. federal, state, local, or
non-U.S. income
tax examinations by tax authorities for years prior to 2002.
TETRA files tax returns in the U.S. and in various state,
local and
non-U.S. jurisdictions.
The following table summarizes the earliest tax years that
remain subject to examination by taxing authorities in any major
jurisdiction in which our predecessor operates:
|
|
|
|
|
|
|
Earliest Open
|
Jurisdiction
|
|
Tax Period
|
|
United States Federal
|
|
|
2008
|
|
United States State and Local
|
|
|
2002
|
|
Non-U.S.
jurisdictions
|
|
|
2006
|
|
Our predecessor uses the liability method for reporting income
taxes, under which current and deferred tax assets and
liabilities are recorded in accordance with enacted tax laws and
rates. Under this method, at the end of each period, the amounts
of deferred tax assets and liabilities are determined using the
tax rate expected to be in effect when the taxes are actually
paid or recovered. Our predecessor will establish a valuation
allowance to reduce the deferred tax assets when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. While our predecessor has
considered future taxable income and ongoing tax planning
strategies in assessing the need for the valuation allowance,
there can be no guarantee that our predecessor will be able to
realize all of its deferred tax assets. Significant components
of our predecessors deferred tax assets and liabilities as
of December 31, 2009 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Deferred Tax Assets:
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Accruals
|
|
$
|
86
|
|
|
$
|
326
|
|
Net operating losses
|
|
|
281
|
|
|
|
269
|
|
Tax credits
|
|
|
323
|
|
|
|
0
|
|
Equity-based compensation
|
|
|
504
|
|
|
|
504
|
|
Bad debt reserve
|
|
|
178
|
|
|
|
57
|
|
All other
|
|
|
471
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
1,843
|
|
|
|
1,597
|
|
Valuation allowance
|
|
|
(51
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,792
|
|
|
$
|
1,535
|
|
|
|
|
|
|
|
|
|
|
F-12
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Deferred Tax Liabilities:
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Excess book over tax basis in property, plant and equipment
|
|
$
|
19,189
|
|
|
$
|
18,468
|
|
All other
|
|
|
1,582
|
|
|
|
1,368
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
20,771
|
|
|
|
19,836
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
18,979
|
|
|
$
|
18,301
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, our predecessor had approximately
$0.1 million of foreign net operating loss carryforwards
and approximately $5.2 million of state net operating loss
carryforwards. In those states and foreign jurisdictions in
which net operating losses are subject to an expiration period,
our predecessors loss carryforwards, if not utilized, will
expire at various dates from 2011 through 2029.
Our predecessor adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (now incorporated into FASB ACT 740, Income
Taxes), on January 1, 2007. The standard provides
guidance on measurement and recognition in accounting for income
tax uncertainties and provides related guidance on
derecognition, classification, disclosure, interest, and
penalties.
Under this standard our predecessor has not accrued taxes,
interest or penalties. Our predecessor does not expect a
significant change to the unrecognized tax benefits during the
next twelve months.
Our predecessor leases various warehouse and office facility
locations in Oklahoma, Texas, New Mexico, Colorado, Louisiana,
California, Canada and Argentina. In addition, our predecessor
leases certain vehicles with original terms ranging up to two
years.
As of December 31, 2010, future annual minimum lease
payments under noncancellable operating leases with initial or
remaining terms greater than one year were approximately
$506,000 for 2011, $405,000 for 2012, $342,000 for 2013, $81,000
for 2014, $20,000 for 2015 and $0 thereafter.
Rent expense under all operating leases was approximately
$708,000, $878,000 and $951,000 for the years ended
December 31, 2008, 2009 and 2010, respectively.
Through December 31, 2007, our predecessor provided the
majority of its production enhancement services under a
different form of contract. Subsequent to December 31,
2007, our predecessor began providing its production enhancement
services to certain customers under new production enhancement
services agreements. Total compressor equipment as of
December 31, 2009 and 2010 is approximately
$114.6 million and $75.2 million, respectively. Future
minimum payments as of December 31, 2010 are not considered
material, as our predecessors services arrangements are
typically on a
month-to-month
basis.
|
|
NOTE F
|
COMMITMENTS
AND CONTINGENCIES
|
Compressco is a named defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of lawsuits
against Compressco cannot be predicted with certainty,
management does not expect these matters to have a material
adverse impact on our predecessors financial statements.
F-13
COMPRESSCO
PARTNERS PREDECESSOR
NOTES TO
COMBINED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE G
|
EQUITY-BASED
COMPENSATION
|
TETRA grants stock options and restricted stock to designated
employees, including certain of our predecessors
employees. The Black-Scholes option-pricing model was used to
estimate the option fair values, using the following assumptions
during the periods presented:
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2009
|
|
2010
|
|
Expected stock price volatility
|
|
32% to 57%
|
|
65% to 73%
|
|
72% to 73%
|
Expected life of options
|
|
4.4 to 4.8 years
|
|
4.7 years
|
|
4.7 years
|
Risk free interest rate
|
|
1.5% to 3.9%
|
|
1.9% to 2.6%
|
|
1.3% to 2.8%
|
Expected dividend yield
|
|
|
|
|
|
|
Stock-based compensation expense incurred by TETRA associated
with our predecessors employees is a direct cost of our
predecessors operations. During 2008, 2009 and 2010,
stock-based compensation expense totaled $722,000, $360,000 and
$392,000, respectively. Total estimated unrecognized stock-based
compensation expense from unvested stock options and restricted
stock as of December 31, 2010 was approximately $800,000
and is expected to be amortized over the remaining vesting
period of 1.8 years.
|
|
NOTE H
|
BUSINESS
SEGMENTS
|
Nearly all of our predecessors operations consist of
production enhancement services. Accordingly, our predecessor
operates as a single reportable business segment. All of our
revenues are from external customers.
Compressco is domiciled in the United States of America, with
significant operations in Canada and Mexico and an established
presence in other countries located in South America, Eastern
Europe and the Asia-Pacific region. We attribute revenue to the
countries based on the location of customers. Long-lived assets
consist primarily of compressor units and are attributed to the
countries based on the physical location of the compressor units
at a given year-end. Information by geographic area is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Revenues from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
77,135
|
|
|
$
|
68,233
|
|
|
$
|
62,257
|
|
Canada
|
|
|
7,165
|
|
|
|
6,008
|
|
|
|
4,926
|
|
Mexico
|
|
|
15,494
|
|
|
|
15,145
|
|
|
|
11,251
|
|
Other
|
|
|
150
|
|
|
|
1,187
|
|
|
|
2,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,944
|
|
|
$
|
90,573
|
|
|
$
|
81,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
196,311
|
|
|
$
|
186,166
|
|
|
$
|
176,506
|
|
Canada
|
|
|
4,412
|
|
|
|
2,868
|
|
|
|
6,564
|
|
Mexico
|
|
|
10,721
|
|
|
|
11,575
|
|
|
|
10,162
|
|
Other
|
|
|
723
|
|
|
|
1,889
|
|
|
|
3,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
212,167
|
|
|
$
|
202,498
|
|
|
$
|
196,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
COMPRESSCO
PARTNERS, L.P.
UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements of Compressco
Partners, L.P. (the Partnership) as of December 31, 2010
and the year ended December 31, 2010 are based on the
historical combined balance sheet and results of operations of
our predecessor. Upon the closing of the initial public
offering, substantially all of our predecessors production
enhancement services business, operations and related assets and
liabilities will be owned by the Partnership. The contribution
of these operations to the Partnership will be recorded at
historical cost. The unaudited pro forma financial statements of
the Partnership have been derived from the historical combined
financial statements of our predecessor included elsewhere in
the Prospectus and are qualified in their entirety by reference
to such historical combined financial statements and related
notes contained therein. The unaudited pro forma financial
statements have been prepared on the basis that we will be
treated as a partnership for U.S. federal income tax
purposes, although a portion of the Partnerships business
will be conducted through a taxable U.S. corporation. In
addition, the Partnerships international operations will
also be taxable. The unaudited pro forma financial statements
should be read in conjunction with the accompanying notes and
with the historical combined financial statements and related
notes of our predecessor.
The unaudited pro forma financial statements reflect the
following transactions:
|
|
|
|
|
The contribution to the Partnership of substantially all of the
predecessors business and operations, including
(1) all of Compresscos business, operations and
related assets and liabilities and (2) substantially all of
the wellhead compression-based and certain other production
enhancement services performed in Mexico by certain other
subsidiaries of TETRA and the related equipment and other assets
utilized to provide those services;
|
|
|
|
The issuance by the Partnership of common units to the public,
Compressco Partners GP Inc. and TETRA International
Incorporated, subordinated units to Compressco Partners GP Inc.
and TETRA International Incorporated, a 2.0% general partner
interest and incentive distribution rights to Compressco
Partners GP Inc., and restricted units to certain directors,
executive officers and other employees of Compressco Partners GP
Inc., TETRA and the Partnership; and
|
|
|
|
The use of proceeds of the offering by the Partnership to pay
underwriting commissions and other expenses of the offering, to
retire indebtedness owed to TETRA and to fund the
Partnerships working capital requirements.
|
The unaudited pro forma balance sheet and results of operations
were derived by adjusting the historical combined financial
statements of our predecessor. The adjustments are based on
currently available information and certain estimates and
assumptions; therefore, actual adjustments will differ from pro
forma adjustments. However, management believes that the
assumptions provide a reasonable basis for presenting the
significant effects of the transaction as contemplated and the
pro forma adjustments give appropriate effect to those
assumptions and are properly applied in the pro forma financial
information.
The unaudited pro forma financial statements are not necessarily
indicative of the results that actually would have occurred if
the Partnership had owned the production enhancement services
agreements and related equipment that will be owned by the
Partnership as of the closing of the initial public offering on
the dates indicated or which would have obtained in the future.
F-15
COMPRESSCO
PARTNERS, L.P.
UNAUDITED
PRO FORMA BALANCE SHEET
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
Predecessor
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6,629
|
|
|
$
|
50,000
|
(a)
|
|
$
|
16,554
|
|
|
|
|
|
|
|
|
(8,575
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
(31,500
|
)(c)
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
|
|
|
9,241
|
|
|
|
(219
|
)(d)
|
|
|
9,022
|
|
Inventories
|
|
|
17,731
|
|
|
|
|
|
|
|
17,731
|
|
Deferred tax asset
|
|
|
580
|
|
|
|
(482
|
)(e)
|
|
|
98
|
|
Prepaid expenses and other current assets
|
|
|
1,361
|
|
|
|
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
35,542
|
|
|
|
|
|
|
|
44,766
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
|
2,143
|
|
|
|
|
|
|
|
2,143
|
|
Compressors and other equipment
|
|
|
142,091
|
|
|
|
(390
|
)(d)
|
|
|
141,701
|
|
Less accumulated depreciation
|
|
|
(55,892
|
)
|
|
|
131
|
(d)
|
|
|
(55,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
88,342
|
|
|
|
|
|
|
|
88,083
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
72,161
|
|
|
|
|
|
|
|
72,161
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangibles and other assets
|
|
|
521
|
|
|
|
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
72,682
|
|
|
|
|
|
|
|
72,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
196,566
|
|
|
|
|
|
|
$
|
205,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS CAPITAL/NET PARENT EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,939
|
|
|
|
|
|
|
$
|
1,939
|
|
Accrued liabilities and other
|
|
|
4,660
|
|
|
|
|
|
|
|
4,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,599
|
|
|
|
|
|
|
|
6,599
|
|
Note payable to TETRA
|
|
|
145,085
|
|
|
|
(113,585
|
)(f)
|
|
|
|
|
|
|
|
|
|
|
|
(31,500
|
)(c)
|
|
|
|
|
Deferred tax liabilities
|
|
|
18,881
|
|
|
|
(15,332
|
)(e)
|
|
|
3,549
|
|
Other long-term liabilities
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
Net parent equity
|
|
|
25,953
|
|
|
|
(478
|
)(d)
|
|
|
|
|
|
|
|
|
|
|
|
14,850
|
(e)
|
|
|
|
|
|
|
|
|
|
|
|
113,585
|
(f)
|
|
|
|
|
|
|
|
|
|
|
|
(153,910
|
)(g)
|
|
|
|
|
Common unitholders public
|
|
|
|
|
|
|
50,000
|
(a)
|
|
|
41,425
|
|
|
|
|
|
|
|
|
(8,575
|
)(b)
|
|
|
|
|
Common unitholders TETRA affiliates
|
|
|
|
|
|
|
77,011
|
(g)
|
|
|
77,011
|
|
Subordinated unitholders TETRA affiliates
|
|
|
|
|
|
|
73,237
|
(g)
|
|
|
73,237
|
|
General partner interest
|
|
|
|
|
|
|
3,662
|
(g)
|
|
|
3,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and partners capital/net parent
equity
|
|
$
|
196,566
|
|
|
|
|
|
|
$
|
205,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma financial
statements.
F-16
COMPRESSCO
PARTNERS, L.P.
UNAUDITED
PRO FORMA STATEMENT OF OPERATIONS
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership
|
|
|
|
Predecessor
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands, except unit and per unit data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compression and other services
|
|
$
|
77,395
|
|
|
|
(480
|
)(h)
|
|
$
|
76,915
|
|
Sales of compressors and parts
|
|
|
4,017
|
|
|
|
|
|
|
|
4,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,412
|
|
|
|
|
|
|
$
|
80,932
|
|
Cost of revenues (excluding depreciation and amortization
expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of compression and other services
|
|
|
35,423
|
|
|
|
(218
|
)(h)
|
|
|
35,205
|
|
Cost of compressors and parts sales
|
|
|
2,554
|
|
|
|
|
|
|
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
37,977
|
|
|
|
|
|
|
|
37,759
|
|
Selling, general and administrative expense
|
|
|
14,328
|
|
|
|
(33
|
)(h)
|
|
|
14,295
|
|
Depreciation and amortization expense
|
|
|
13,112
|
|
|
|
(42
|
)(i)
|
|
|
13,070
|
|
Interest expense
|
|
|
13,096
|
|
|
|
(13,058
|
)(j)
|
|
|
38
|
|
Other (income) expense, net
|
|
|
113
|
|
|
|
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
2,786
|
|
|
|
|
|
|
|
15,657
|
|
Provision for income taxes
|
|
|
1,169
|
|
|
|
536
|
(k)
|
|
|
1,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding (basic and diluted)
|
|
|
|
|
|
|
|
|
|
|
9,097,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average subordinated units outstanding (basic and
diluted)
|
|
|
|
|
|
|
|
|
|
|
6,273,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common unit (basic and diluted)
|
|
|
|
|
|
|
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma financial
statements.
F-17
COMPRESSCO
PARTNERS, L.P.
|
|
A.
|
Basis of
Presentation, the Offering and Other Transactions
|
The historical financial information is derived from the
historical combined financial statements of our predecessor. The
pro forma adjustments have been prepared as if the 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 statements of operations for the year ended
December 31, 2010.
The unaudited pro forma financial statements reflect the
following transactions:
|
|
|
|
|
The contribution to the Partnership of substantially all of the
predecessors business and operations, including
(1) all of Compresscos business, operations and
related assets and liabilities and (2) substantially all of
the wellhead compression-based and certain other production
enhancement services performed in Mexico by certain other
subsidiaries of TETRA and the related equipment and other assets
utilized to provide those services;
|
|
|
|
The issuance by the Partnership of common units to the public,
Compressco Partners GP Inc. and TETRA International
Incorporated, subordinated units to Compressco Partners GP Inc.
and TETRA International Incorporated, a 2.0% general partner
interest and incentive distribution rights to Compressco
Partners GP Inc., and restricted units to certain directors,
executive officers and other employees of Compressco Partners GP
Inc., TETRA and the Partnership; and
|
|
|
|
The use of proceeds of the offering by the Partnership to pay
underwriting commissions and other expenses of the offering, to
retire indebtedness owed to TETRA and to fund the
Partnerships working capital requirements.
|
Upon completion of this offering, the Partnership anticipates
incurring incremental 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, financial
statement audit, 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. The unaudited pro forma financial statements do
not reflect this anticipated incremental general and
administrative expense.
|
|
B.
|
Pro Forma
Adjustments and Assumptions
|
(a) Reflects the gross proceeds to the Partnership of
$50.0 million from the issuance and sale of 2,500,000
common units at an assumed initial public offering price of
$20.00 per unit.
(b) Reflects the payment of estimated underwriting
commissions and other expenses of the offering of
$8.6 million, which will be allocated to the public common
units.
(c) Reflects repayment of a note payable to TETRA from the
net proceeds of the initial public offering.
(d) Reflects assets of our predecessor associated with
certain Mexico contracts which are not being transferred to the
Partnership.
(e) Reflects the tax adjustments to reflect the
Partnerships being treated as a partnership for
U.S. federal income tax purposes, except for the following:
|
|
|
|
|
certain assets and operations of the Partnership which will be
contributed into and conducted through a taxable
U.S. corporation; and
|
|
|
|
the Partnerships taxable international operations.
|
F-18
COMPRESSCO
PARTNERS, L.P.
NOTES TO
UNAUDITED PRO FORMA FINANCIAL
STATEMENTS (Continued)
(f) Reflects contribution of the Affiliate Note and
associated accrued interest as part of the initial capital
contribution of the assets and operations to the Partnership.
(g) Reflects the conversion of the adjusted net parent
equity of $153.9 million from net parent equity to limited
partner equity of the Partnership and our general partners
general partner interest in the Partnership. The conversion is
allocated as follows:
|
|
|
|
|
$80.7 million for 6,597,257 parent common units and a 2.0%
general partner interest
|
|
|
|
$73.2 million for 6,273,970 parent subordinated units
|
After the conversion, the equity amounts of the public common
unitholders are 21.2% of total equity, with the remaining 78.8%
equity representing the parent and the 2.0% general partner
interest.
(h) Reflects revenue and cost of revenues (excluding
depreciation and amortization expense) and selling, general and
administrative expenses of our predecessor that relates to
certain Mexican production enhancement services agreements that
are not being transferred by our predecessor.
|
|
|
|
|
Selling, general and administrative expenses associated with the
non-transferrable Mexican contracts were calculated based on the
selling, general and administrative expenses of our
predecessors Mexican operations as a percentage of
predecessors Mexican revenues multiplied by the amount of
excluded Mexican revenues.
|
(i) Reflects depreciation expense of our predecessor that
relates to certain Mexican assets associated with production
enhancement service agreements that are not being transferred by
our predecessor.
(j) Reflects adjustment of interest expense associated with
the contribution of the note payable to an affiliate of TETRA as
part of the initial capital contribution to the Partnership and
the repayment of the remaining portion of the note payable from
proceeds of the initial public offering.
(k) Reflects the adjustment to the income tax provision of
our predecessor that relates to the portion of the
Partnerships operations that will not be subject to
U.S. federal or state income tax.
|
|
C.
|
Pro Forma
Net Income Per Limited Partner Unit
|
Pro forma net income per limited partner unit is determined by
dividing the pro forma net income that would have been allocated
to the common unitholders, which is 59.2% of the pro forma net
income for the common unitholders and 40.8% of the pro forma net
income for the subordinated unitholders, by the number of common
units expected to be outstanding at the closing of the offering.
For purposes of this calculation, the number of common units
assumed to be outstanding was 9,097,257 and the number of
subordinated units assumed to be outstanding was 6,273,970. All
units were assumed to have been outstanding since
January 1, 2010. Basic and diluted pro forma net income per
unit are equivalent as there are no dilutive units at the date
of closing of the initial public offering of the common units of
the Partnership. Pursuant to the partnership agreement, to the
extent that the quarterly distributions exceed certain targets,
our general partner is entitled to receive certain incentive
distributions that will result in more net income
proportionately being allocated to our general partner than to
the holders of common and subordinated units. The pro forma net
income per unit calculations for the year ended
December 31, 2010 assume that no incentive distributions
were made to our general partner because no such distribution
would have been paid upon the pro forma available cash from
operating surplus for the period.
|
|
D.
|
Pro Forma
Taxable Income Per Limited Partner Unit
|
The unaudited pro forma financial information does not reflect
U.S. federal income taxes, except for taxes associated with
certain domestic operations contributed to a taxable
U.S. corporate subsidiary of the Partnership and for Texas
Margin Tax. U.S. income taxes on the majority of the
Partnerships operations will
F-19
COMPRESSCO
PARTNERS, L.P.
NOTES TO
UNAUDITED PRO FORMA FINANCIAL
STATEMENTS (Continued)
be the responsibility of our unitholders and not the
Partnership. Our predecessors operations are currently
included in TETRAs combined U.S. federal tax return.
The historical taxable income of our predecessor bears no
material relationship to the amount of federal taxable income
that the Partnership will allocate to our unitholders. Among
other considerations, depreciation allocable to our unitholders
will significantly exceed the historical depreciation on the
assets because our unitholders effectively will have
stepped-up
basis in their share of at least a large part of the assets of
the Partnership. Please read Material Tax
Consequences Tax Consequences of Unit
Ownership Allocation of Income, Gain, Loss and
Deduction. The Partnership estimates that through the
twelve months ended June 30, 2014, purchasers of units in
this offering will be allocated, on a cumulative basis, an
amount of federal taxable income that will
be % or less of the cash
distributed to them. For example, if the Partnership pays an
annual distribution of $1.55 per unit, the Partnership estimates
that a unitholder would be allocated no more than
$ per unit of federal taxable
income for that annual period. Please read Material Tax
Consequences Tax Consequences of Unit
Ownership Allocation of Income, Gain, Loss and
Deduction.
In addition to the U.S. federal income taxes to be paid on
certain operations contributed to a taxable corporation
subsidiary, certain of the Partnerships operations are
located outside of the United States, including operations in
Canada and Mexico, and the Partnership will be responsible for
income taxes in these countries. Accordingly, the Partnership
has included the provision for these international income taxes,
along with certain U.S. state income taxes, in the
accompanying pro forma statements of operations.
F-20
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partners of Compressco Partners, L.P.:
We have audited the accompanying balance sheets of Compressco
Partners, L.P., or the Partnership, as of
December 31, 2010 and 2009. These balance sheets are the
responsibility of the Partnerships management. Our
responsibility is to express an opinion on these balance sheets
based on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free
of material misstatement. We were not engaged to perform an
audit of the Partnerships internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Partnerships internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet
presentation. We believe that our audits of the balance sheets
provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present
fairly, in all material respects, the financial position of
Compressco Partners, L.P. as of December 31, 2010 and 2009,
in conformity with U.S. generally accepted accounting
principles.
Houston, Texas
April 12, 2011
F-21
COMPRESSCO
PARTNERS, L.P.
BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Partners Equity
|
|
|
|
|
|
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|
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Limited partners interest
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|
$
|
999
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|
|
$
|
999
|
|
General partner interest
|
|
|
1
|
|
|
|
1
|
|
Receivable from partners
|
|
|
(1,000
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying note to balance sheet.
F-22
|
|
NOTE A
|
NATURE OF
OPERATIONS
|
Compressco Partners, L.P., or the Partnership, is a
Delaware limited partnership that was formed in October 2008 to
acquire certain natural gas wellhead compression-based
production enhancement service business, operations and related
assets and liabilities from Compressco Partners Predecessor. The
Partnership has two direct operating subsidiaries:
(1) Compressco Partners Operating, LLC, a limited liability
company that will, directly and through its subsidiaries,
conduct business that generates qualifying income under
Section 7704 of the Internal Revenue Code and
(2) Compressco Partners Sub, Inc., a corporation that will
conduct business that will not generate qualifying income under
Section 7704 of the Internal Revenue Code.
On October 31, 2008, Compressco Partners GP Inc. and
Compressco Field Services, Inc., each a wholly owned subsidiary
of TETRA Technologies, Inc., contributed to the Partnership
$1,000 in exchange for an aggregate 100% ownership interest.
Compressco Partners GP Inc. owns a 0.1% general partner interest
in the Partnership and Compressco Field Services, Inc. owns a
99.9% limited partner interest in the Partnership.
The Partnership intends to offer common units representing
limited partner interests in the Partnership pursuant to a
public offering. Immediately prior to the closing of the
offering, the Partnership shall redeem the 99.9% initial limited
partner interest in the Partnership and the 0.1% initial general
partner interest in the Partnership and refund and distribute
the initial capital contributions made by Compressco Field
Services, Inc. and Compressco Partners GP Inc., along with any
interest or other profit that resulted from the investment or
other use of such initial capital contributions. Compressco
Partners GP Inc. and TETRA International Incorporated, a wholly
owned subsidiary of TETRA Technologies, Inc., will concurrently
contribute certain natural gas wellhead compression-based
production enhancement service business, operations and related
assets and liabilities to the Partnership and, in exchange for
these contributions, the Partnership will issue common units and
subordinated units representing limited partner interests in the
Partnership to Compressco Partners GP Inc. and TETRA
International Incorporated, an aggregate 2.0% general partner
interest in the Partnership to Compressco Partners GP Inc.,
incentive distribution rights to Compressco Partners GP Inc.,
and restricted units to certain directors, executive officers
and other employees of Compressco Partners GP Inc., TETRA and
the Partnership, who will manage and conduct the
Partnerships operations.
F-23
APPENDIX A
FIRST
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
COMPRESSCO PARTNERS, L.P.
TABLE OF
CONTENTS
|
|
|
|
|
|
|
ARTICLE I
DEFINITIONS
|
|
|
|
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|
Section 1.1
|
|
Definitions
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|
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A-1
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|
Section 1.2
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|
Construction
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|
|
A-18
|
|
|
ARTICLE II
ORGANIZATION
|
|
|
|
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Section 2.1
|
|
Formation
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|
|
A-18
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|
Section 2.2
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|
Name
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|
|
A-18
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|
Section 2.3
|
|
Registered Office; Registered Agent; Principal Office; Other
Offices
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|
|
A-19
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|
Section 2.4
|
|
Purpose and Business
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|
|
A-19
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|
Section 2.5
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|
Powers
|
|
|
A-19
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|
Section 2.6
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|
Term
|
|
|
A-19
|
|
Section 2.7
|
|
Title to Partnership Assets
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|
|
A-19
|
|
|
ARTICLE III
RIGHTS OF LIMITED PARTNERS
|
|
|
|
|
|
|
|
Section 3.1
|
|
Limitation of Liability
|
|
|
A-20
|
|
Section 3.2
|
|
Management of Business
|
|
|
A-20
|
|
Section 3.3
|
|
Outside Activities of the Limited Partners
|
|
|
A-20
|
|
Section 3.4
|
|
Rights of Limited Partners
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|
|
A-20
|
|
|
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP
INTERESTS; REDEMPTION OF PARTNERSHIP INTERESTS
|
|
|
|
|
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|
|
Section 4.1
|
|
Certificates
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|
|
A-21
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|
Section 4.2
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|
Mutilated, Destroyed, Lost or Stolen Certificates
|
|
|
A-21
|
|
Section 4.3
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|
Record Holders
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|
|
A-22
|
|
Section 4.4
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|
Transfer Generally
|
|
|
A-22
|
|
Section 4.5
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|
Registration and Transfer of Limited Partner Interests
|
|
|
A-22
|
|
Section 4.6
|
|
Transfer of the General Partners General Partner Interest
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|
|
A-23
|
|
Section 4.7
|
|
Restrictions on Transfers
|
|
|
A-24
|
|
|
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP
INTERESTS
|
|
|
|
|
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|
|
Section 5.1
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|
Organizational Contributions
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|
|
A-25
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|
Section 5.2
|
|
Contributions by the General Partner and its Affiliates
|
|
|
A-25
|
|
Section 5.3
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|
Contributions by Initial Limited Partners
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|
|
A-25
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|
Section 5.4
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|
Interest and Withdrawal
|
|
|
A-25
|
|
Section 5.5
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|
Capital Accounts
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|
|
A-26
|
|
Section 5.6
|
|
Issuances of Additional Partnership Interests
|
|
|
A-28
|
|
Section 5.7
|
|
Conversion of Subordinated Units
|
|
|
A-28
|
|
Section 5.8
|
|
Limited Preemptive Right
|
|
|
A-29
|
|
Section 5.9
|
|
Splits and Combinations
|
|
|
A-29
|
|
Section 5.10
|
|
Fully Paid and Non-Assessable Nature of Limited Partner Interests
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|
|
A-29
|
|
Section 5.11
|
|
Issuance of Common Units in Connection with Reset of Incentive
Distribution Rights
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A-29
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A-i
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|
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|
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ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
|
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Section 6.1
|
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Allocations for Capital Account Purposes
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A-31
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|
Section 6.2
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|
Allocations for Tax Purposes
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|
|
A-38
|
|
Section 6.3
|
|
Requirement and Characterization of Distributions; Distributions
to Record Holders
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|
|
A-39
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|
Section 6.4
|
|
Distributions of Available Cash from Operating Surplus
|
|
|
A-39
|
|
Section 6.5
|
|
Distributions of Available Cash from Capital Surplus
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|
|
A-41
|
|
Section 6.6
|
|
Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels
|
|
|
A-41
|
|
Section 6.7
|
|
Special Provisions Relating to the Holders of Subordinated Units
|
|
|
A-41
|
|
Section 6.8
|
|
Special Provisions Relating to the Holders of Incentive
Distribution Rights
|
|
|
A-42
|
|
Section 6.9
|
|
Entity-Level Taxation
|
|
|
A-42
|
|
|
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
|
|
|
|
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|
|
Section 7.1
|
|
Management
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|
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A-42
|
|
Section 7.2
|
|
Certificate of Limited Partnership
|
|
|
A-44
|
|
Section 7.3
|
|
Restrictions on the General Partners Authority
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|
|
A-44
|
|
Section 7.4
|
|
Reimbursement of the General Partner
|
|
|
A-44
|
|
Section 7.5
|
|
Outside Activities
|
|
|
A-45
|
|
Section 7.6
|
|
Loans from the General Partner; Loans or Contributions from the
Partnership or Group Members
|
|
|
A-46
|
|
Section 7.7
|
|
Indemnification
|
|
|
A-47
|
|
Section 7.8
|
|
Liability of Indemnitees
|
|
|
A-48
|
|
Section 7.9
|
|
Resolution of Conflicts of Interest; Standards of Conduct and
Modification of Duties
|
|
|
A-48
|
|
Section 7.10
|
|
Other Matters Concerning the General Partner
|
|
|
A-50
|
|
Section 7.11
|
|
Purchase or Sale of Partnership Interests
|
|
|
A-50
|
|
Section 7.12
|
|
Registration Rights of the General Partner and its Affiliates
|
|
|
A-50
|
|
Section 7.13
|
|
Reliance by Third Parties
|
|
|
A-52
|
|
|
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
|
|
|
|
|
|
|
|
Section 8.1
|
|
Records and Accounting
|
|
|
A-52
|
|
Section 8.2
|
|
Fiscal Year
|
|
|
A-53
|
|
Section 8.3
|
|
Reports
|
|
|
A-53
|
|
|
ARTICLE IX
TAX MATTERS
|
|
|
|
|
|
|
|
Section 9.1
|
|
Tax Returns and Information
|
|
|
A-53
|
|
Section 9.2
|
|
Tax Elections
|
|
|
A-53
|
|
Section 9.3
|
|
Tax Controversies
|
|
|
A-54
|
|
Section 9.4
|
|
Withholding; Tax Payments
|
|
|
A-54
|
|
|
ARTICLE X
ADMISSION OF PARTNERS
|
|
|
|
|
|
|
|
Section 10.1
|
|
Admission of Limited Partners
|
|
|
A-54
|
|
Section 10.2
|
|
Admission of Substituted Limited Partners
|
|
|
A-55
|
|
Section 10.3
|
|
Admission of Successor General Partner
|
|
|
A-55
|
|
Section 10.4
|
|
Amendment of Agreement and Certificate of Limited Partnership
|
|
|
A-55
|
|
A-ii
|
|
|
|
|
|
|
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
|
|
|
|
|
|
|
|
Section 11.1
|
|
Withdrawal of the General Partner
|
|
|
A-56
|
|
Section 11.2
|
|
Removal of the General Partner
|
|
|
A-57
|
|
Section 11.3
|
|
Interest of Departing General Partner and Successor General
Partner
|
|
|
A-57
|
|
Section 11.4
|
|
Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages
|
|
|
A-58
|
|
Section 11.5
|
|
Withdrawal of Limited Partners
|
|
|
A-59
|
|
|
ARTICLE XII
DISSOLUTION AND LIQUIDATION
|
|
|
|
|
|
|
|
Section 12.1
|
|
Dissolution
|
|
|
A-59
|
|
Section 12.2
|
|
Continuation of the Business of the Partnership After Dissolution
|
|
|
A-59
|
|
Section 12.3
|
|
Liquidator
|
|
|
A-60
|
|
Section 12.4
|
|
Liquidation
|
|
|
A-60
|
|
Section 12.5
|
|
Cancellation of Certificate of Limited Partnership
|
|
|
A-61
|
|
Section 12.6
|
|
Return of Contributions
|
|
|
A-61
|
|
Section 12.7
|
|
Waiver of Partition
|
|
|
A-61
|
|
Section 12.8
|
|
Capital Account Restoration
|
|
|
A-61
|
|
|
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
|
|
|
|
|
|
|
|
Section 13.1
|
|
Amendments to be Adopted Solely by the General Partner
|
|
|
A-61
|
|
Section 13.2
|
|
Amendment Procedures
|
|
|
A-62
|
|
Section 13.3
|
|
Amendment Requirements
|
|
|
A-62
|
|
Section 13.4
|
|
Special Meetings
|
|
|
A-63
|
|
Section 13.5
|
|
Notice of a Meeting
|
|
|
A-63
|
|
Section 13.6
|
|
Record Date
|
|
|
A-63
|
|
Section 13.7
|
|
Adjournment
|
|
|
A-64
|
|
Section 13.8
|
|
Waiver of Notice; Approval of Meeting; Approval of Minutes
|
|
|
A-64
|
|
Section 13.9
|
|
Quorum and Voting
|
|
|
A-64
|
|
Section 13.10
|
|
Conduct of a Meeting
|
|
|
A-64
|
|
Section 13.11
|
|
Action Without a Meeting
|
|
|
A-65
|
|
Section 13.12
|
|
Right to Vote and Related Matters
|
|
|
A-65
|
|
Section 13.13
|
|
Voting of Incentive Distribution Rights
|
|
|
A-65
|
|
|
ARTICLE XIV
MERGER, CONSOLIDATION OR CONVERSION
|
|
|
|
|
|
|
|
Section 14.1
|
|
Authority
|
|
|
A-66
|
|
Section 14.2
|
|
Procedure for Merger, Consolidation or Conversion
|
|
|
A-66
|
|
Section 14.3
|
|
Approval by Limited Partners
|
|
|
A-67
|
|
Section 14.4
|
|
Certificate of Merger
|
|
|
A-68
|
|
Section 14.5
|
|
Effect of Merger, Consolidation or Conversion
|
|
|
A-68
|
|
|
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
|
|
|
|
|
|
|
|
Section 15.1
|
|
Right to Acquire Limited Partner Interests
|
|
|
A-69
|
|
A-iii
|
|
|
|
|
|
|
|
|
ARTICLE XVI
GENERAL PROVISIONS
|
|
|
|
|
|
|
|
|
|
|
|
Section 16.1
|
|
Addresses and Notices; Written Communications
|
|
|
A-70
|
|
Section 16.2
|
|
Further Action
|
|
|
A-71
|
|
Section 16.3
|
|
Binding Effect
|
|
|
A-71
|
|
Section 16.4
|
|
Integration
|
|
|
A-71
|
|
Section 16.5
|
|
Creditors
|
|
|
A-71
|
|
Section 16.6
|
|
Waiver
|
|
|
A-71
|
|
Section 16.7
|
|
Third-Party Beneficiaries
|
|
|
A-71
|
|
Section 16.8
|
|
Counterparts
|
|
|
A-71
|
|
Section 16.9
|
|
Applicable Law; Forum, Venue and Jurisdiction
|
|
|
A-71
|
|
Section 16.10
|
|
Invalidity of Provisions
|
|
|
A-72
|
|
Section 16.11
|
|
Consent of Partners
|
|
|
A-72
|
|
Section 16.12
|
|
Facsimile Signatures
|
|
|
A-72
|
|
Exhibit A
|
|
Certificate Evidencing Common Units Representing Limited Partner
Interests in Compressco Partners, L.P.
|
|
|
A-74
|
|
A-iv
FIRST
AMENDED AND RESTATED AGREEMENT
OF LIMITED PARTNERSHIP OF COMPRESSCO PARTNERS, L.P.
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF COMPRESSCO PARTNERS, L.P., a Delaware limited partnership
(the Partnership), dated as of
[ ],
2011, is entered into by Compressco Partners GP Inc., a Delaware
corporation, in its capacity as the general partner of the
Partnership, together with any other Persons who become Partners
in the Partnership or parties hereto as provided herein.
WHEREAS, on October 31, 2008, the Partnership was formed as
a Delaware limited partnership pursuant to and in accordance
with the Delaware Act, and, on November 25, 2008, the
General Partner and the Organizational Limited Partner entered
into an Agreement of Limited Partnership of the Partnership (the
Original Partnership
Agreement); and
WHEREAS, the General Partner desires to amend and restate the
Original Partnership Agreement in its entirety as provided
herein, in accordance with Article IX of the Original
Partnership Agreement.
NOW, THEREFORE, in consideration of the agreements and
obligations set forth herein and for other good and valuable
consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. The
following definitions shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
Acquisition means any transaction in which
any Group Member acquires (through an asset acquisition, merger,
stock acquisition or other form of investment) control over all
or a portion of the assets, properties or business of another
Person for the purpose of increasing or expanding, for a period
exceeding the short-term, the operating capacity or operating
income of the Partnership Group from the operating capacity or
operating income of the Partnership Group existing immediately
prior to such transaction. For purposes of this definition, the
short-term generally refers to a period not exceeding
12 months.
Additional Book Basis means the portion of
any remaining Carrying Value of an Adjusted Property that is
attributable to positive adjustments made to such Carrying Value
as a result of
Book-Up
Events. For purposes of determining the extent that Carrying
Value constitutes Additional Book Basis:
(a) Any negative adjustment made to the Carrying Value of
an Adjusted Property as a result of either a Book-Down Event or
a Book-Up
Event shall first be deemed to offset or decrease that portion
of the Carrying Value of such Adjusted Property that is
attributable to any prior positive adjustments made thereto
pursuant to a
Book-Up
Event or Book-Down Event.
(b) If Carrying Value that constitutes Additional Book
Basis is reduced as a result of a Book-Down Event and the
Carrying Value of other property is increased as a result of
such Book-Down Event, an allocable portion of any such increase
in Carrying Value shall be treated as Additional Book Basis;
provided, that the amount treated as Additional Book
Basis pursuant hereto as a result of such Book-Down Event shall
not exceed the amount by which the Aggregate Remaining Net
Positive Adjustments after such Book-Down Event exceeds the
remaining Additional Book Basis attributable to all of the
Partnerships Adjusted Property after such Book-Down Event
(determined without regard to the application of this
clause (b) to such Book-Down Event).
Additional Book Basis Derivative Items means
any Book Basis Derivative Items that are computed with reference
to Additional Book Basis. To the extent that the Additional Book
Basis attributable to all of the Partnerships Adjusted
Property as of the beginning of any taxable period exceeds the
Aggregate Remaining Net Positive Adjustments as of the beginning
of such period (the Excess Additional Book
Basis), the Additional Book Basis Derivative Items
for such period shall be reduced by the amount that bears the
same
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ratio to the amount of Additional Book Basis Derivative Items
determined without regard to this sentence as the Excess
Additional Book Basis bears to the Additional Book Basis as of
the beginning of such period. With respect to a Disposed of
Adjusted Property, the Additional Book Basis Derivative items
shall be the amount of Additional Book Basis taken into account
in computing gain or loss from the disposition of such Disposed
of Adjusted Property.
Adjusted Capital Account means the Capital
Account maintained for each Partner as of the end of each
taxable period of the Partnership, (a) increased by any
amounts that such Partner is obligated to restore under the
standards set by Treasury
Regulation Section 1.704-1(b)(2)(ii)(c)
(or is deemed obligated to restore under Treasury
Regulation Sections 1.704-2(g)
and 1.704-2(i)(5)) and (b) decreased by (i) the amount
of all losses and deductions that, as of the end of such taxable
period, are reasonably expected to be allocated to such Partner
in subsequent taxable periods under Sections 704(e)(2) and
706(d) of the Code and Treasury
Regulation Section 1.751-1(b)(2)(ii),
and (ii) the amount of all distributions that, as of the
end of such taxable period, are reasonably expected to be made
to such Partner in subsequent taxable periods in accordance with
the terms of this Agreement or otherwise to the extent they
exceed offsetting increases to such Partners Capital
Account that are reasonably expected to occur during (or prior
to) the taxable period in which such distributions are
reasonably expected to be made (other than increases as a result
of a minimum gain chargeback pursuant to Section 6.1(d)(i)
or 6.1(d)(ii)). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The
Adjusted Capital Account of a Partner in respect of
any Partnership Interest shall be the amount that such Adjusted
Capital Account would be if such Partnership Interest were the
only interest in the Partnership held by such Partner from and
after the date on which such Partnership Interest was first
issued.
Adjusted Operating Surplus means, with
respect to any period, (a) Operating Surplus generated with
respect to such period; (b) less (i) the amount of any
net increase in Working Capital Borrowings (or the
Partnerships proportionate share of any net increase in
Working Capital Borrowings in the case of Subsidiaries that are
not wholly owned) with respect to that period; and (ii) the
amount of any net decrease in cash reserves (or the
Partnerships proportionate share of any net decrease in
cash reserves in the case of Subsidiaries that are not wholly
owned) for Operating Expenditures with respect to such period
not relating to an Operating Expenditure made with respect to
such period; and (c) plus (i) the amount of any net
decrease in Working Capital Borrowings (or the
Partnerships proportionate share of any net decrease in
Working Capital Borrowings in the case of Subsidiaries that are
not wholly owned) with respect to that period; (ii) the
amount of any net increase in cash reserves (or the
Partnerships proportionate share of any net increase in
cash reserves in the case of Subsidiaries that are not wholly
owned) for Operating Expenditures with respect to such period
required by any debt instrument for the repayment of principal,
interest or premium; and (iii) 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 in Adjusted Operating
Surplus in subsequent periods pursuant to clause (b)(ii) above.
Adjusted Operating Surplus does not include that portion of
Operating Surplus included in clause (a)(i) of the definition of
Operating Surplus.
Adjusted Property means any property the
Carrying Value of which has been adjusted pursuant to
Section 5.5(d)(i) or 5.5(d)(ii).
Affiliate means, with respect to any Person,
any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with, the Person in question. As used herein, the term
control means the possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
Aggregate Quantity of IDR Reset Common Units
is defined in Section 5.11(a).
Aggregate Remaining Net Positive Adjustments
means, as of the end of any taxable period, the sum of the
Remaining Net Positive Adjustments of all the Partners.
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Agreed Allocation means any allocation, other
than a Required Allocation, of an item of income, gain, loss or
deduction pursuant to the provisions of Section 6.1,
including a Curative Allocation (if appropriate to the context
in which the term Agreed Allocation is used).
Agreed Value of any Contributed Property
means the fair market value of such property at the time of
contribution and in the case of an Adjusted Property, the fair
market value of such Adjusted Property on the date of the
revaluation event as described in Section 5.5(d), in both
cases as determined by the General Partner. In making such
determination, the General Partner shall use such method as it
determines to be appropriate.
Agreement means this First Amended and
Restated Agreement of Limited Partnership of Compressco
Partners, L.P., as it may be amended, supplemented or restated
from time to time.
Assignee means a Person to whom one or more
Limited Partner Interests have been transferred in a manner
permitted under this Agreement, but who has not been admitted as
a Substituted Limited Partner.
Associate means, when used to indicate a
relationship with any Person, (a) any corporation or
organization of which such Person is a director, officer,
manager, general partner or managing member or is, directly or
indirectly, the owner of 20% or more of any class of voting
stock or other voting interest; (b) any trust or other
estate in which such Person has at least a 20% beneficial
interest or as to which such Person serves as trustee or in a
similar fiduciary capacity; and (c) any relative or spouse
of such Person, or any relative of such spouse, who has the same
principal residence as such Person.
Available Cash means, with respect to any
Quarter ending prior to the Liquidation Date:
(a) the sum of (i) all cash and cash equivalents
(including amounts available for working capital purposes under
a credit facility, commercial paper facility or other similar
financing arrangement) of the Partnership Group (or the
Partnerships proportionate share of cash and cash
equivalents in the case of Subsidiaries that are not wholly
owned) on hand at the end of such Quarter, and (ii) if the
General Partner so determines, all or any portion of any
additional cash and cash equivalents of the Partnership Group
(or the Partnerships proportionate share of cash and cash
equivalents in the case of Subsidiaries that are not wholly
owned) on hand on the date of determination of Available Cash
with respect to such Quarter resulting from Working Capital
Borrowings made subsequent to the end of such Quarter, less
(b) the amount of any cash reserves established by the
General Partner (or the Partnerships proportionate share
of cash reserves in the case of Subsidiaries that are not wholly
owned) to (i) provide for the proper conduct of the
business of the Partnership Group (including reserves for future
capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter,
(ii) comply with applicable law or any loan agreement,
security agreement, mortgage, debt instrument or other agreement
or obligation to which any Group Member is a party or by which
it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect
of any one or more of the next four Quarters;
provided, however, that the General Partner may
not establish cash reserves pursuant to clause (iii) above
if the effect of such reserves would be that the Partnership is
unable to distribute the Minimum Quarterly Distribution on all
Common Units, plus any Cumulative Common Unit Arrearage on all
Common Units, with respect to such Quarter; and, provided
further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such
Quarter but on or before the date of determination of Available
Cash with respect to such Quarter shall be deemed to have been
made, established, increased or reduced, for purposes of
determining Available Cash, within such Quarter if the General
Partner so determines.
Notwithstanding the foregoing, Available Cash with
respect to the Quarter in which the Liquidation Date occurs and
any subsequent Quarter shall equal zero.
Board of Directors means, with respect to the
General Partner, its board of directors or board of managers, as
applicable, if a corporation or limited liability company, or if
a limited partnership, the board of directors or board of
managers of the general partner of the General Partner.
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Book Basis Derivative Items means any item of
income, deduction, gain or loss that is computed with reference
to the Carrying Value of an Adjusted Property (e.g.,
depreciation, depletion, or gain or loss with respect to an
Adjusted Property).
Book-Down Event means an event that triggers
a negative adjustment to the Capital Accounts of the Partners
pursuant to Section 5.5(d).
Book-Tax Disparity means with respect to any
item of Contributed Property or Adjusted Property, as of the
date of any determination, the difference between the Carrying
Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of
such date. A Partners share of the Partnerships
Book-Tax Disparities in all of its Contributed Property and
Adjusted Property will be reflected by the difference between
such Partners Capital Account balance as maintained
pursuant to Section 5.5 and the hypothetical balance of
such Partners Capital Account computed as if it had been
maintained strictly in accordance with federal income tax
accounting principles.
Book-Up
Event means an event that triggers a positive
adjustment to the Capital Accounts of the Partners pursuant to
Section 5.5(d).
Business Day means Monday through Friday of
each week, except that a legal holiday recognized as such by the
government of the United States of America or the State of
Oklahoma shall not be regarded as a Business Day.
Capital Account means the capital account
maintained for a Partner pursuant to Section 5.5. The
Capital Account of a Partner in respect of any
Partnership Interest shall be the amount that such Capital
Account would be if such Partnership Interest were the only
interest in the Partnership held by such Partner from and after
the date on which such Partnership Interest was first issued.
Capital Contribution means any cash, cash
equivalents or the Net Agreed Value of Contributed Property that
a Partner contributes to the Partnership or that is contributed
or deemed contributed to the Partnership on behalf of a Partner
(including, in the case of an underwritten offering of Units,
the amount of any underwriting discounts or commissions).
Capital Improvement means any
(a) addition or improvement to the capital assets owned by
any Group Member, (b) acquisition of existing, or the
construction of new or the improvement or replacement of
existing, capital assets or (c) capital contribution by a
Group Member to a Person that is not a Subsidiary in which a
Group Member has an equity interest, or after such capital
contribution will have an equity interest, to fund such Group
Members pro rata share of the cost of the addition or
improvement to or the acquisition of existing, or the
construction of new or the improvement or replacement of
existing, capital assets by such Person, in each case if such
addition, improvement, replacement, acquisition or construction
is made to increase for a period longer than the short-term the
operating capacity of the Partnership Group, in the case of
clauses (a) and (b), or such Person, in the case of clause
(c), from the operating capacity of the Partnership Group or
such Person, as the case may be, existing immediately prior to
such addition, improvement, replacement, acquisition or
construction. For purposes of this definition, the short-term
generally refers to a period not exceeding 12 months.
Capital Surplus means Available Cash
distributed by the Partnership in excess of Operating Surplus,
as described in Section 6.3(a).
Carrying Value means (a) with respect to
a Contributed Property or Adjusted Property, the Agreed Value of
such property reduced (but not below zero) by all depreciation,
amortization and cost recovery deductions charged to the
Partners and Assignees Capital Accounts in respect
of such property, and (b) with respect to any other
Partnership property, the adjusted basis of such property for
federal income tax purposes, all as of the time of
determination; provided that the Carrying Value of any
property shall be adjusted from time to time in accordance with
Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect changes,
additions or other adjustments to the Carrying Value for
dispositions and acquisitions of Partnership properties, as
deemed appropriate by the General Partner.
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Cause means a court of competent jurisdiction
has entered a final, non-appealable judgment finding the General
Partner liable for actual fraud or willful misconduct in its
capacity as a general partner of the Partnership.
Certificate means (a) a certificate
(i) substantially in the form of Exhibit A to this
Agreement, (ii) issued in global form in accordance with
the rules and regulations of the Depositary or (iii) in
such other form as may be adopted by the General Partner, issued
by the Partnership evidencing ownership of one or more Common
Units or (b) a certificate, in such form as may be adopted
by the General Partner, issued by the Partnership evidencing
ownership of one or more other Partnership Interests.
Certificate of Limited Partnership means the
Certificate of Limited Partnership of the Partnership filed with
the Secretary of State of the State of Delaware as referenced in
Section 7.2, as such Certificate of Limited Partnership may
be amended, supplemented or restated from time to time.
claim (as used in Section 7.12(c)) is
defined in Section 7.12(c).
Closing means the time at which Common Units
are sold by the Partnership to the Underwriters pursuant to the
provisions of the Underwriting Agreement.
Closing Date means the first date on which
Common Units are sold by the Partnership to the Underwriters
pursuant to the provisions of the Underwriting Agreement.
Closing Price means, in respect of any class
of Limited Partner Interests, as of the date of determination,
the last sale price on such day, regular way, or in case no such
sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading
on the principal National Securities Exchange on which the
respective Limited Partner Interests are listed or admitted to
trading or, if such Limited Partner Interests are not listed or
admitted to trading on any National Securities Exchange, the
last quoted price on such day or, if not so quoted, the average
of the high bid and low asked prices on such day in the
over-the-counter
market, as reported by the primary reporting system then in use
in relation to such Limited Partner Interests of such class, or,
if on any such day such Limited Partner Interests of such class
are not quoted by any such organization, the average of the
closing bid and asked prices on such day as furnished by a
professional market maker making a market in such Limited
Partner Interests of such class selected by the General Partner,
or if on any such day no market maker is making a market in such
Limited Partner Interests of such class, the fair value of such
Limited Partner Interests on such day as determined by the
General Partner.
Code means the Internal Revenue Code of 1986,
as amended and in effect from time to time. Any reference herein
to a specific section or sections of the Code shall be deemed to
include a reference to any corresponding provision of any
successor law.
Combined Interest is defined in
Section 11.3(a).
Commences Commercial Service means the date a
Capital Improvement is first put into commercial service
following completion of construction, acquisition, development
and testing, as applicable.
Commission means the United States Securities
and Exchange Commission.
Common Unit means a Partnership Interest
representing a fractional part of the Partnership Interests of
all Limited Partners and Assignees, and having the rights and
obligations specified with respect to Common Units in this
Agreement. The term Common Unit does not refer to or
include any Subordinated Unit prior to its conversion into a
Common Unit pursuant to the terms hereof or any Incentive
Distribution Right.
Common Unit Arrearage means, with respect to
any Common Unit, whenever issued, with respect to any Quarter
within the Subordination Period, the excess, if any, of
(a) the Minimum Quarterly Distribution with respect to a
Common Unit in respect of such Quarter over (b) the sum of
all Available Cash distributed with respect to a Common Unit in
respect of such Quarter pursuant to Section 6.4(a)(i).
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Conflicts Committee means a committee of the
Board of Directors of the General Partner composed entirely of
two or more directors, each of whom (a) is not an officer
or employee of the General Partner or an officer, director or
employee of any Person controlling the General Partner,
(b) is not a holder of any ownership interest in the
General Partner or its Affiliates or the Partnership Group,
other than Common Units and other awards that are granted to
such director under the LTIP and (c) meets the independence
standards required of directors who serve on an audit committee
of a board of directors established by the Securities Exchange
Act and the rules and regulations of the Commission thereunder
and by the National Securities Exchange on which any class of
Partnership Interests is listed or admitted to trading.
Contributed Property means each property or
other asset, in such form as may be permitted by the Delaware
Act, but excluding cash, contributed to the Partnership. Once
the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no longer
constitute a Contributed Property, but shall be deemed an
Adjusted Property.
Contribution Agreement that certain
Contribution, Conveyance and Assumption Agreement, dated as of
the Closing Date, among Compressco, Inc., a Delaware
corporation, Compressco Field Services, Inc., an Oklahoma
corporation, Compressco Canada, Inc., an Alberta corporation,
Compressco Leasing, LLC, a Delaware limited liability company,
Compressco Mexico Investment I, LLC, a Delaware limited
liability company, Compressco Mexico Investment II, LLC, a
Delaware limited liability company, Compressco de Mexico, S. de
R.L. de C.V., a Mexican limited liability corporation of
variable capital, Compressco Partners GP Inc., a Delaware
corporation, Compressco Partners, L.P., a Delaware limited
partnership, Compressco Partners Operating, LLC, a Delaware
limited liability company, Compressco International, LLC, a
Delaware limited liability company, Compressco Field Services
International, LLC, a Delaware limited liability company,
Compressco de Argentina S.R.L., an Argentine entity, Compressco
Netherlands B.V., a Netherlands private limited liability
company, Compressco Partners Holding, LLC, a Delaware limited
liability company, Compressco Coöperatief U.A., a
Netherlands coöperatief, Compressco Partners Sub, Inc., a
Delaware corporation and TETRA International Incorporated, a
Delaware corporation, together with the additional conveyance
documents and instruments contemplated or referenced thereunder,
as such may be amended, supplemented or restated from time to
time.
Cumulative Common Unit Arrearage means, with
respect to any Common Unit, whenever issued, and as of the end
of any Quarter, the excess, if any, of (a) the sum of the
Common Unit Arrearages with respect to an Initial Common Unit
for each of the Quarters within the Subordination Period ending
on or before the last day of such Quarter over (b) the sum
of any distributions theretofore made pursuant to
Section 6.4(a)(ii) and the second sentence of
Section 6.5 with respect to an Initial Common Unit
(including any distributions to be made in respect of the last
of such Quarters).
Curative Allocation means any allocation of
an item of income, gain, deduction, loss or credit pursuant to
the provisions of Section 6.1(d)(xi).
Current Market Price means, in respect of any
class of Limited Partner Interests, as of the date of
determination, the average of the daily Closing Prices per
Limited Partner Interest of such class for the 20 consecutive
Trading Days immediately prior to such date.
Deferred Issuance and Distribution means both
(a) the issuance by the Partnership of a number of
additional Common Units that is equal to the excess, if any, of
(i) 375,000 Common Units minus (ii) the aggregate
number, if any, of Common Units actually purchased by and issued
to the Underwriters pursuant to the Over-Allotment Option on the
Option Closing Date(s), and (b) the payment of
consideration for assets contributed in an amount equal to the
total amount of cash, if any, contributed by the Underwriters to
the Partnership on or in connection with any Option Closing Date
with respect to Common Units issued by the Partnership upon the
applicable exercise of the Over-Allotment Option in accordance
with Section 5.3(b), if any.
Delaware Act means the Delaware Revised
Uniform Limited Partnership Act, 6 Del C.
Section 17-101,
et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing General Partner means a former
General Partner from and after the effective date of any
withdrawal or removal of such former General Partner pursuant to
Section 11.1 or 11.2.
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Depositary means, with respect to any Units
issued in global form, The Depository Trust Company and its
successors and permitted assigns.
Disposed of Adjusted Property has the meaning
assigned to such term in Section 6.1(d)(xii)(B).
Economic Risk of Loss has the meaning set
forth in Treasury
Regulation Section 1.752-2(a).
Estimated Incremental Quarterly Tax Amount is
defined in Section 6.9.
Estimated Maintenance Capital Expenditures
means an estimate made in good faith by the Board of Directors
(with the concurrence of the Conflicts Committee) of the average
quarterly Maintenance Capital Expenditures that the Partnership
will need to incur over the long term to maintain the operating
capacity of the Partnership Group (including the
Partnerships proportionate share of the average quarterly
Maintenance Capital Expenditures of its Subsidiaries that are
not wholly owned) existing at the time the estimate is made. The
Board of Directors (with the concurrence of the Conflicts
Committee) will be permitted to make such estimate in any manner
it determines reasonable. The estimate will be made at least
annually and whenever an event occurs that is likely to result
in a material adjustment to the amount of future Estimated
Maintenance Capital Expenditures. The Partnership shall disclose
to its Partners any change in the amount of Estimated
Maintenance Capital Expenditures in its reports made in
accordance with Section 8.3 to the extent not previously
disclosed. Any adjustments to Estimated Maintenance Capital
Expenditures shall be prospective only.
Event of Withdrawal is defined in
Section 11.1(a).
Excess Distribution is defined in
Section 6.1(d)(iii)(A).
Excess Distribution Unit is defined in
Section 6.1(d)(iii)(A).
Expansion Capital Expenditures means cash
expenditures for Acquisitions or Capital Improvements, and shall
not include Maintenance Capital Expenditures or Investment
Capital Expenditures. Expansion Capital Expenditures shall
include interest (and related fees) on debt incurred to finance
the construction of a Capital Improvement and paid in respect of
the period beginning on the date that a Group Member enters into
a binding obligation to commence construction of a Capital
Improvement and ending on the earlier to occur of the date that
such Capital Improvement Commences Commercial Service and the
date that such Capital Improvement is abandoned or disposed of.
Debt incurred to fund such construction period interest payments
or to fund distributions on equity issued (including incremental
Incentive Distributions related thereto) to fund the
construction of a Capital Improvement as described in clause
(a)(iv) of the definition of Operating Surplus shall also be
deemed to be debt incurred to finance the construction of a
Capital Improvement. Where capital expenditures are made in part
for Expansion Capital Expenditures and in part for other
purposes, the General Partner shall determine the allocation
between the amounts paid for each.
Final Subordinated Units is defined in
Section 6.1(d)(x)(A).
First Liquidation Target Amount is defined in
Section 6.1(c)(i)(D).
First Target Distribution means $0.445625 per
Unit per Quarter (or, with respect to periods of less than a
full fiscal quarter, it means the product of such amount
multiplied by a fraction of which the numerator is the number of
days in such period, and the denominator is the total number of
days in such quarter), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
Fully Diluted Weighted Average Basis means,
when calculating the number of Outstanding Units for any period,
a basis that includes (1) the weighted average number of
Outstanding Units plus (2) all Partnership Interests and
options, rights, warrants, phantom units and appreciation rights
relating to an equity interest in the Partnership (a) that
are convertible into or exercisable or exchangeable for Units or
for which Units are issuable, each case that are senior to or
pari passu with the Subordinated Units, (b) whose
conversion, exercise or exchange price is less than the Current
Market Price on the date of such calculation, (c) that may
be converted into or exercised or exchanged for such Units prior
to or during the Quarter immediately following the end of the
period for which the calculation is being made without the
satisfaction of any contingency beyond the control of the holder
other than the payment of consideration and the compliance with
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administrative mechanics applicable to such conversion, exercise
or exchange and (d) that were not converted into or
exercised or exchanged for such Units during the period for
which the calculation is being made; provided,
however, that for purposes of determining the number of
Outstanding Units on a Fully Diluted Weighted Average Basis when
calculating whether the Subordination Period has ended or the
Subordinated Units are entitled to convert into Common Units
pursuant to Section 5.7, such Partnership Interests,
options, rights, warrants and appreciation rights shall be
deemed to have been Outstanding Units only for the four Quarters
that comprise the last four Quarters of the measurement period;
provided, further, that if consideration will be
paid to any Group Member in connection with such conversion,
exercise or exchange, the number of Units to be included in such
calculation shall be that number equal to the difference between
(i) the number of Units issuable upon such conversion,
exercise or exchange and (ii) the number of Units that such
consideration would purchase at the Current Market Price.
General Partner means Compressco Partners GP
Inc., a Delaware corporation, and its successors and permitted
assigns that are admitted to the Partnership as general partner
of the Partnership, in its capacity as general partner of the
Partnership (except as the context otherwise requires).
General Partner Interest means the ownership
interest of the General Partner in the Partnership (in its
capacity as a general partner without reference to any Limited
Partner Interest held by it). For the avoidance of doubt, the
General Partner Interest does not include any Common Units,
Subordinated Units or Incentive Distribution Rights held by the
General Partner and includes any and all benefits to which the
General Partner is entitled as provided in this Agreement,
together with all obligations of the General Partner to comply
with the terms and provisions of this Agreement.
GP Contribution has the meaning assigned in
the Contribution Agreement.
Gross Liability Value means, with respect to
any Liability of the Partnership described in Treasury
Regulation Section 1.752-7(b)(3)(i),
the amount of cash that a willing assignor would pay to a
willing assignee to assume such Liability in an
arms-length transaction.
Group means a Person that with or through any
of its Affiliates or Associates has any contract, arrangement,
understanding or relationship for the purpose of acquiring,
holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent
solicitation made to 10 or more Persons), exercising investment
power or disposing of any Partnership Interests with any other
Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Interests.
Group Member means a member of the
Partnership Group.
Group Member Agreement means the partnership
agreement of any Group Member, other than the Partnership, that
is a limited or general partnership, the limited liability
company agreement of any Group Member that is a limited
liability company, the certificate of incorporation and bylaws
or similar organizational documents of any Group Member that is
a corporation, the joint venture agreement or similar governing
document of any Group Member that is a joint venture and the
governing or organizational or similar documents of any other
Group Member that is a Person other than a limited or general
partnership, limited liability company, corporation or joint
venture, as such may be amended, supplemented or restated from
time to time.
Holder as used in Section 7.12, is
defined in Section 7.12(a).
IDR Reset Common Unit has the meaning
assigned to such term in Section 5.11(a).
IDR Reset Election is defined in
Section 5.11(a).
Incentive Distribution Right means a
non-voting Limited Partner Interest that will confer upon the
holder thereof only the rights and obligations specifically
provided in this Agreement with respect to Incentive
Distribution Rights (and no other rights otherwise available to
or other obligations of a holder of a Partnership Interest).
Notwithstanding anything in this Agreement to the contrary, the
holder of an Incentive Distribution
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Right shall not be entitled to vote such Incentive Distribution
Right on any Partnership matter except as may otherwise be
required by law.
Incentive Distributions means any amount of
cash distributed to the holders of the Incentive Distribution
Rights pursuant to Section 6.4.
Incremental Income Taxes is defined in
Section 6.9.
Indemnified Persons is defined in
Section 7.12(c).
Indemnitee means (a) any General
Partner, (b) any Departing General Partner, (c) any
Person who is or was an Affiliate of the General Partner or any
Departing General Partner, (d) any Person who is or was a
manager, managing member, director, officer, employee, agent,
fiduciary or trustee of any Group Member, a General Partner, any
Departing General Partner or any of their respective Affiliates,
(e) any Person who is or was serving at the request of a
General Partner, any Departing General Partner or any of their
respective Affiliates as an officer, director, manager, managing
member, employee, agent, fiduciary or trustee of another Person
owing a fiduciary duty to any Group Member; provided that
a Person shall not be an Indemnitee by reason of providing, on a
fee-for-services
basis, trustee, fiduciary or custodial services, (f) any
Person who controls a General Partner or Departing General
Partner and (g) any Person the General Partner designates
as an Indemnitee for purposes of this Agreement
because such Persons service, status or relationship
exposes such Person to potential claims, demands, actions, suits
or proceedings relating to the Partnership Groups business
and affairs.
Initial Common Units means the Common Units
sold in the Initial Offering.
Initial Limited Partners means the General
Partner (with respect to the Common Units, Subordinated Units
and Incentive Distribution Rights owned by the General Partner),
TII and the Underwriters, in each case upon being admitted to
the Partnership in accordance with Section 10.1.
Initial Offering means the initial offering
and sale of Common Units to the public, as described in the
Registration Statement, including any Common Units issued
pursuant to the exercise of the Over-Allotment Option.
Initial Unit Price means (a) with
respect to the Common Units and the Subordinated Units, the
initial public offering price per Common Unit at which the
Underwriters offered the Common Units to the public for sale as
set forth on the cover page of the prospectus included as part
of the Registration Statement and first issued at or after the
time the Registration Statement first became effective or
(b) with respect to any other class or series of Units, the
price per Unit at which such class or series of Units is
initially sold by the Partnership, as determined by the General
Partner, in each case adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision or combination of Units.
Interim Capital Transactions means the
following transactions if they occur prior to the Liquidation
Date: (a) borrowings, refinancings or refundings of
indebtedness (other than Working Capital Borrowings and other
than for items purchased on open account or for a deferred
purchase price in the ordinary course of business) by any Group
Member and sales of debt securities of any Group Member;
(b) sales of equity interests of any Group Member
(including the Common Units sold to the Underwriters in the
Initial Offering or pursuant to the exercise of the
Over-Allotment Option), (c) sales or other voluntary or
involuntary dispositions of any assets of any Group Member other
than (i) sales or other dispositions of inventory, accounts
receivable and other assets in the ordinary course of business,
and (ii) sales or other dispositions of assets as part of
normal retirements or replacements and (d) capital
contributions received.
Investment Capital Expenditures means capital
expenditures other than Maintenance Capital Expenditures and
Expansion Capital Expenditures.
Liability means any liability or obligation
of any nature, whether accrued, contingent or otherwise.
Limited Partner means, unless the context
otherwise requires, (a) each Initial Limited Partner, each
additional Person that becomes a Limited Partner pursuant to the
terms of this Agreement and any Departing General Partner upon
the change of its status from General Partner to Limited Partner
pursuant to Section 11.3, in each case, in such
Persons capacity as a limited partner of the Partnership
and (b) solely for
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purposes of Articles V, VI, VII, IX and XII, each Assignee;
provided, however, that when the term
Limited Partner is used herein in the context of any
vote or other approval, including Articles XIII and XIV,
such term shall not, solely for such purpose, include any holder
of an Incentive Distribution Right (solely with respect to its
Incentive Distribution Rights and not with respect to any other
Limited Partner Interest held by such Person) except as may
otherwise be required by law.
Limited Partner Interest means the ownership
interest of a Limited Partner or Assignee in the Partnership,
which may be evidenced by Common Units, Subordinated Units,
Incentive Distribution Rights or other Partnership Interests or
a combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner or Assignee is
entitled as provided in this Agreement, together with all
obligations of such Limited Partner or Assignee to comply with
the terms and provisions of this Agreement; provided,
however, that when the term Limited Partner
Interest is used herein in the context of any vote or
other approval, including Articles XIII and XIV, such term
shall not, solely for such purpose, include any Incentive
Distribution Right except as may otherwise be required by law.
Liquidation Date means (a) in the case
of an event giving rise to the dissolution of the Partnership of
the type described in clauses (a) and (b) of the first
sentence of Section 12.2, the date on which the applicable
time period during which the holders of Outstanding Units have
the right to elect to continue the business of the Partnership
has expired without such an election being made, and (b) in
the case of any other event giving rise to the dissolution of
the Partnership, the date on which such event occurs.
Liquidator means one or more Persons selected
by the General Partner to perform the functions described in
Section 12.4 as liquidating trustee of the Partnership
within the meaning of the Delaware Act.
LTIP means the Long-Term Incentive Plan of
the General Partner, as may be amended, or any equity
compensation plan successor thereto.
Maintenance Capital Expenditures means cash
expenditures (including expenditures for the addition or
improvement to or replacement of the capital assets owned by any
Group Member or for the acquisition of existing, or the
construction or development of new, capital assets) if such
expenditures are made to maintain, including for a period longer
than the short-term, the operating capacity and/or operating
income of the Partnership Group. Maintenance Capital
Expenditures shall not include (a) Expansion Capital
Expenditures or (b) Investment Capital Expenditures.
Maintenance Capital Expenditures shall include interest (and
related fees) on debt incurred and distributions on equity
issued, other than equity issued on the Closing Date or the
Option Closing Date, in each case, to finance the construction
or development of a replacement asset and paid during the period
beginning on the date that a Group Member enters into a binding
obligation to commence constructing or developing a replacement
asset and ending on the earlier to occur of the date that such
replacement asset Commences Commercial Service and the date that
such replacement asset is abandoned or disposed of. Debt
incurred to pay or equity issued, other than equity issued on
the Closing Date or the Option Closing Date, to fund
construction or development period interest payments, or such
construction or development period distributions on equity,
shall also be deemed to be debt or equity, as the case may be,
incurred to finance the construction or development of a
replacement asset and the incremental Incentive Distributions
paid relating to newly issued equity shall be deemed to be
distributions paid on equity issued to finance the construction
or development of a replacement asset. For purposes of this
definition, the short-term generally refers to a period not
exceeding 12 months.
Merger Agreement is defined in
Section 14.1.
Minimum Quarterly Distribution means $0.3875
per Unit per Quarter (or with respect to periods of less than a
full fiscal quarter, it means the product of such amount
multiplied by a fraction of which the numerator is the number of
days in such period and the denominator is the total number of
days in such quarter), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
National Securities Exchange means an
exchange registered with the Commission under Section 6(a)
of the Securities Exchange Act (or any successor to such
Section) and any other securities exchange (whether or not
registered with the Commission under Section 6(a) (or
successor to such Section) of the Securities
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Exchange Act) that the General Partner shall designate as a
National Securities Exchange for purposes of this Agreement.
Net Agreed Value means, (a) in the case
of any Contributed Property, the Agreed Value of such property
reduced by any Liabilities either assumed by the Partnership
upon such contribution or to which such property is subject when
contributed and (b) in the case of any property distributed
to a Partner or Assignee by the Partnership, the
Partnerships Carrying Value of such property (as adjusted
pursuant to Section 5.5(d)(ii)) at the time such property
is distributed, reduced by any Liability either assumed by such
Partner or Assignee upon such distribution or to which such
property is subject at the time of distribution.
Net Income means, for any taxable period, the
excess, if any, of the Partnerships items of income and
gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnerships items of loss
and deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period. The items included in the calculation of
Net Income shall be determined in accordance with
Section 5.5(b) and shall not include any items specially
allocated under Section 6.1(d); provided, that the
determination of the items that have been specially allocated
under Section 6.1(d) shall be made without regard to any
reversal of such items under Section 6.1(d)(xii).
Net Loss means, for any taxable period, the
excess, if any, of the Partnerships items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period over the Partnerships items of income
and gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable period. The items included in the calculation of
Net Loss shall be determined in accordance with
Section 5.5(b) and shall not include any items specially
allocated under Section 6.1(d); provided, that the
determination of the items that have been specially allocated
under Section 6.1(d) shall be made without regard to any
reversal of such items under Section 6.1(d)(xii).
Net Positive Adjustments means, with respect
to any Partner, the excess, if any, of the total positive
adjustments over the total negative adjustments made to the
Capital Account of such Partner pursuant to
Book-Up
Events and Book-Down Events.
Net Termination Gain means, for any taxable
period, the sum, if positive, of all items of income, gain, loss
or deduction (determined in accordance with Section 5.5(b))
that are (a) recognized (i) after the Liquidation Date
or (ii) upon the sale, exchange or other disposition of all
or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (excluding any disposition to a member of the
Partnership Group), or (b) deemed recognized by the
Partnership pursuant to Section 5.5(d); provided,
however, the items included in the determination of Net
Termination Gain shall not include any items of income, gain or
loss specially allocated under Section 6.1(d).
Net Termination Loss means, for any taxable
period, the sum, if negative, of all items of income, gain, loss
or deduction (determined in accordance with Section 5.5(b))
that are (a) recognized (i) after the Liquidation Date
or (ii) upon the sale, exchange or other disposition of all
or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions (excluding any disposition to a member of the
Partnership Group), or (b) deemed recognized by the
Partnership pursuant to Section 5.5(d); provided,
however, items included in the determination of Net
Termination Loss shall not include any items of income, gain or
loss specially allocated under Section 6.1(d).
Nonrecourse Built-in Gain means with respect
to any Contributed Properties or Adjusted Properties that are
subject to a mortgage or pledge securing a Nonrecourse
Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to Section 6.2(b) if
such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other
consideration.
Nonrecourse Deductions means any and all
items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(b),
are attributable to a Nonrecourse Liability.
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Nonrecourse Liability has the meaning set
forth in Treasury
Regulation Section 1.752-1(a)(2).
Notice of Election to Purchase is defined in
Section 15.1(b).
Notional General Partner Units means notional
units used solely to calculate the General Partners
Percentage Interest. Notional General Partner Units shall not
constitute Units for any purpose of this Agreement.
There shall initially be 304,202 Notional General Partner Units
(resulting in the General Partners Percentage Interest
being 2% after giving effect to any exercise of the
Over-Allotment Option and the Deferred Issuance and
Distribution). If the General Partner makes additional Capital
Contributions pursuant to Section 5.2(b) to maintain its
Percentage Interest, the number of Notional General Partner
Units shall be increased proportionally to reflect the
maintenance of such Percentage Interest.
Omnibus Agreement means the Omnibus
Agreement, dated as of the Closing Date, among the General
Partner, the Partnership and TETRA Technologies, Inc., a
Delaware corporation.
Operating Expenditures means all Partnership
Group cash expenditures (or the Partnerships proportionate
share of expenditures in the case of Subsidiaries that are not
wholly owned), including, but not limited to, taxes,
reimbursements of expenses of the General Partner and its
Affiliates, officer compensation, repayment of Working Capital
Borrowings, debt service payments and Estimated Maintenance
Capital Expenditures, subject to the following:
(a) repayments of Working Capital Borrowings deducted from
Operating Surplus pursuant to clause (b)(iii) of the definition
of Operating Surplus shall not constitute Operating
Expenditures when actually repaid;
(b) payments (including prepayments and prepayment
penalties) of principal of and premium on indebtedness other
than Working Capital Borrowings shall not constitute Operating
Expenditures; and
(c) Operating Expenditures shall not include
(i) Expansion Capital Expenditures, (ii) actual
Maintenance Capital Expenditures, (iii) Investment Capital
Expenditures, (iv) payment of transaction expenses
(including taxes) relating to Interim Capital Transactions,
(v) distributions to Partners (including distributions in
respect of our incentive distribution rights), or
(vi) repurchases of Partnership Interests, other than
repurchases of Partnership Interests to satisfy obligations
under employee benefit plans, or reimbursements of expenses of
the General Partner for such purchases. Where capital
expenditures are made in part for Maintenance Capital
Expenditures and in part for other purposes, the General Partner
shall determine the allocation between the amounts paid for each.
Operating Surplus means, with respect to any
period ending prior to the Liquidation Date, on a cumulative
basis and without duplication,
(a) the sum of (i) $15 million, (ii) all
cash receipts of the Partnership Group (or the
Partnerships proportionate share of cash receipts in the
case of Subsidiaries that are not wholly owned) for the period
beginning on the Closing Date and ending on the last day of such
period, but excluding cash receipts from Interim Capital
Transactions, (iii) all cash receipts of the Partnership
Group (or the Partnerships proportionate share of cash
receipts in the case of Subsidiaries that are not wholly owned)
after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period
resulting from Working Capital Borrowings, and (iv) the
amount of cash distributions paid (including incremental
Incentive Distributions) on equity issued, other than equity
issued on the Closing Date or the Option Closing Date, to
finance all or a portion of the construction, acquisition or
improvement of a Capital Improvement or replacement of a capital
asset and paid in respect of the period beginning on the date
that the Group Member enters into a binding obligation to
commence the construction, acquisition or improvement of a
Capital Improvement or replacement of a capital asset and ending
on the earlier to occur of the date the Capital Improvement or
replacement capital asset Commences Commercial Service and the
date that it is abandoned or disposed of (equity issued, other
than equity issued on the Closing Date or the Option Closing
Date, to fund the construction period interest payments on debt
incurred, or construction period distributions on equity issued,
to finance the construction, acquisition or improvement of a
Capital Improvement or replacement of a
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capital asset shall also be deemed to be equity issued to
finance the construction, acquisition or improvement of a
Capital Improvement or replacement of a capital asset for
purposes of this clause (iv)), less
(b) the sum of (i) Operating Expenditures for the
period beginning on the Closing Date and ending on the last day
of such period; (ii) the amount of cash reserves
established by the General Partner (or the Partnerships
proportionate share of cash reserves in the case of Subsidiaries
that are not wholly owned) to provide funds for future Operating
Expenditures; (iii) all Working Capital Borrowings not
repaid within twelve months after having been incurred and
(iv) any cash loss realized on disposition of an Investment
Capital Expenditure; provided, however, that
disbursements made (including contributions to a Group Member or
disbursements on behalf of a Group Member) or cash reserves
established, increased or reduced after the end of such period
but on or before the date of determination of Available Cash
with respect to such period shall be deemed to have been made,
established, increased or reduced, for purposes of determining
Operating Surplus, within such period if the General Partner so
determines.
Notwithstanding the foregoing, Operating
Surplus with respect to the Quarter in which the
Liquidation Date occurs and any subsequent Quarter shall equal
zero. Cash receipts from an Investment Capital Expenditure shall
be treated as cash receipts only to the extent they are a return
on principal, but in no event shall a return of principal be
treated as cash receipts.
Opinion of Counsel means a written opinion of
counsel (who may be regular counsel to the Partnership or the
General Partner or any of its Affiliates) acceptable to the
General Partner.
Option Closing Date means the date or dates
on which any Common Units are sold by the Partnership to the
Underwriters upon exercise of the Over-Allotment Option.
Original Partnership Agreement is defined in
the Recitals to this Agreement.
Organizational Limited Partner means
Compressco Field Services, Inc., an Oklahoma corporation, in its
capacity as the organizational limited partner of the
Partnership, pursuant to the Original Partnership Agreement.
Outstanding means, with respect to
Partnership Interests, all Partnership Interests that are issued
by the Partnership and reflected as outstanding on the
Partnerships books and records as of the date of
determination; provided, however, that if at any
time any Person or Group (other than the General Partner or its
Affiliates) beneficially owns 20% or more of the Outstanding
Partnership Interests of any class then Outstanding, none of the
Partnership Interests owned by such Person or Group shall be
voted on any matter and shall not be considered to be
Outstanding when sending notices of a meeting of Limited
Partners to vote on any matter (unless otherwise required by
law), calculating required votes, determining the presence of a
quorum or for other similar purposes under this Agreement,
except that Partnership Interests so owned shall be considered
to be Outstanding for purposes of Section 11.1(b)(iv) (such
Partnership Interests shall not, however, be treated as a
separate class of Partnership Interests for purposes of this
Agreement or the Delaware Act); provided, further,
that the foregoing limitation shall not apply to (i) any
Person or Group who acquired 20% or more of the Outstanding
Partnership Interests of any class then Outstanding directly
from the General Partner or its Affiliates (other than the
Partnership), (ii) any Person or Group who acquired 20% or
more of the Outstanding Partnership Interests of any class then
Outstanding directly or indirectly from a Person or Group
described in clause (i) provided that, at or prior
to such acquisition, the General Partner shall have notified
such Person or Group in writing that such limitation shall not
apply, or (iii) any Person or Group who acquired 20% or
more of any Partnership Interests issued by the Partnership
provided that, at or prior to such acquisition, the
General Partner shall have notified such Person or Group in
writing that such limitation shall not apply.
Over-Allotment Option means the
over-allotment option granted to the Underwriters by the
Partnership pursuant to the Underwriting Agreement.
Partner Nonrecourse Debt has the meaning set
forth in Treasury
Regulation Section 1.704-2(b)(4).
Partner Nonrecourse Debt Minimum Gain has the
meaning set forth in Treasury
Regulation Section 1.704-2(i)(2).
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Partner Nonrecourse Deductions means any and
all items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(i),
are attributable to a Partner Nonrecourse Debt.
Partners means the General Partner and the
Limited Partners.
Partnership is defined in the Preamble to
this Agreement.
Partnership Group means the Partnership and
its Subsidiaries treated as a single consolidated entity.
Partnership Interest means any class or
series of equity interest in the Partnership (but excluding any
options, rights, warrants and appreciation rights relating to an
equity interest in the Partnership), including Common Units,
Subordinated Units and Incentive Distribution Rights.
Partnership Minimum Gain means that amount
determined in accordance with the principles of Treasury
Regulation Sections 1.704-2(b)(2)
and 1.704-2(d).
Percentage Interest means as of any date of
determination (a) as to the General Partner, with respect
to the General Partner Interest (calculated based upon a number
of Notional General Partner Units), and as to any Unitholder
with respect to Units, the product obtained by multiplying
(i) 100% less the percentage applicable to clause (b)
below by (ii) the quotient obtained by dividing
(A) the number of Notional General Partner Units deemed
held by the General Partner or the number of Units held by such
Unitholder, as the case may be, by (B) the total number of
Outstanding Units and Notional General Partner Units, and
(b) as to the holders of other Partnership Interests issued
by the Partnership in accordance with Section 5.6, the
percentage established as a part of such issuance. The
Percentage Interest with respect to an Incentive Distribution
Right shall at all times be zero.
Person means an individual or a corporation,
firm, limited liability company, partnership, joint venture,
trust, unincorporated organization, association, government
agency or political subdivision thereof or other entity.
Per Unit Capital Amount means, as of any date
of determination, the Capital Account, stated on a per Unit
basis, underlying any class of Units held by a Person other than
the General Partner or any Affiliate of the General Partner who
holds Units.
Plan of Conversion is defined in
Section 14.1.
Pro Rata means (a) when used with
respect to Units or any class thereof, apportioned equally among
all designated Units in accordance with their relative
Percentage Interests, (b) when used with respect to
Partners and Assignees or Record Holders, apportioned among all
Partners and Assignees or Record Holders in accordance with
their relative Percentage Interests and (c) when used with
respect to holders of Incentive Distribution Rights, apportioned
equally among all holders of Incentive Distribution Rights in
accordance with the relative number or percentage of Incentive
Distribution Rights held by each such holder.
Purchase Date means the date determined by
the General Partner as the date for purchase of all Outstanding
Limited Partner Interests of a certain class (other than Limited
Partner Interests owned by the General Partner and its
Affiliates) pursuant to Article XV.
Quarter means, unless the context requires
otherwise, a fiscal quarter of the Partnership, or, with respect
to the fiscal quarter of the Partnership that includes the
Closing Date, the portion of such fiscal quarter after the
Closing Date.
Recapture Income means any gain recognized by
the Partnership (computed without regard to any adjustment
required by Section 734 or Section 743 of the Code)
upon the disposition of any property or asset of the
Partnership, which gain is characterized as ordinary income
because it represents the recapture of deductions previously
taken with respect to such property or asset.
Record Date means the date established by the
General Partner or otherwise in accordance with this Agreement
for determining (a) the identity of the Record Holders
entitled to notice of, or to vote at, any meeting of Limited
Partners or entitled to vote by ballot or give approval of
Partnership action in writing
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without a meeting or entitled to exercise rights in respect of
any lawful action of Limited Partners or (b) the identity
of Record Holders entitled to receive any report or distribution
or to participate in any offer.
Record Holder means (a) with respect to
Partnership Interests of any class of Partnership Interests for
which a Transfer Agent has been appointed, the Person in whose
name a Partnership Interest of such class is registered on the
books of the Transfer Agent as of the opening of business on a
particular Business Day, or (b) with respect to other
classes of Partnership Interests, the Person in whose name any
such other Partnership Interest is registered on the books that
the General Partner has caused to be kept as of the opening of
business on such Business Day.
Registration Statement means the Registration
Statement on
Form S-1
(Registration
No. 333-155260)
as it has been or as it may be amended or supplemented from time
to time, filed by the Partnership with the Commission under the
Securities Act to register the offering and sale of the Common
Units in the Initial Offering.
Remaining Net Positive Adjustments means as
of the end of any taxable period, (i) with respect to the
Unitholders holding Common Units or Subordinated Units, the
excess of (a) the Net Positive Adjustments of the
Unitholders holding Common Units or Subordinated Units as of the
end of such period over (b) the sum of those Partners
Share of Additional Book Basis Derivative Items for each prior
taxable period, (ii) with respect to the General Partner
(as holder of the General Partner Interest), the excess of
(a) the Net Positive Adjustments of the General Partner as
of the end of such period over (b) the sum of the General
Partners Share of Additional Book Basis Derivative Items
with respect to the General Partner Interest for each prior
taxable period, and (iii) with respect to the holders of
Incentive Distribution Rights, the excess of (a) the Net
Positive Adjustments of the holders of Incentive Distribution
Rights as of the end of such period over (b) the sum of the
Share of Additional Book Basis Derivative Items of the holders
of the Incentive Distribution Rights for each prior taxable
period.
Required Allocations means any allocation of
an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), Section 6.1(d)(ii),
Section 6.1(d)(iv), Section 6.1(d)(v),
Section 6.1(d)(vi), Section 6.1(d)(vii) or
Section 6.1(d)(ix).
Reset MQD is defined in Section 5.11(a).
Reset Notice is defined in
Section 5.11(b).
Second Liquidation Target Amount is defined
in Section 6.1(c)(i)(E).
Second Target Distribution means $0.484375
per Unit per Quarter (or, with respect to periods of less than a
full fiscal quarter, it means the product of such amount
multiplied by a fraction of which the numerator is the number of
days in such period, and the denominator is the total number of
days in such quarter), subject to adjustment in accordance with
Section 5.11, Section 6.6 and Section 6.9.
Securities Act means the Securities Act of
1933, as amended, supplemented or restated from time to time and
any successor to such statute.
Securities Exchange Act means the Securities
Exchange Act of 1934, as amended, supplemented or restated from
time to time and any successor to such statute.
Share of Additional Book Basis Derivative
Items means in connection with any allocation of
Additional Book Basis Derivative Items for any taxable period,
(i) with respect to the Unitholders holding Common Units or
Subordinated Units, the amount that bears the same ratio to such
Additional Book Basis Derivative Items as the Unitholders
Remaining Net Positive Adjustments as of the end of such taxable
period bears to the Aggregate Remaining Net Positive Adjustments
as of that time, (ii) with respect to the General Partner
(in respect of the General Partner Interest), the amount that
bears the same ratio to such Additional Book Basis Derivative
Items as the General Partners Remaining Net Positive
Adjustments as of the end of such taxable period bears to the
Aggregate Remaining Net Positive Adjustment as of that time, and
(iii) with respect to the Partners holding Incentive
Distribution Rights, the amount that bears the same ratio to
such Additional Book Basis Derivative Items as the Remaining Net
Positive Adjustments of the Partners holding
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the Incentive Distribution Rights as of the end of such period
bears to the Aggregate Remaining Net Positive Adjustments as of
that time.
Special Approval means approval by a majority
of the members of the Conflicts Committee acting in good faith.
Subordinated Unit means a Partnership
Interest representing a fractional part of the Partnership
Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated
Units in this Agreement. The term Subordinated Unit
does not refer to or include a Common Unit. A Subordinated Unit
that is convertible into a Common Unit shall not constitute a
Common Unit until such conversion occurs.
Subordination Period means the period
commencing on the Closing Date and ending on the first to occur
of the following dates:
(a) the first Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter beginning with the Quarter ending
June 30, 2014 in respect of which (i)
(A) distributions of Available Cash from Operating Surplus
on each of (I) the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units, and (II) the General Partner Interest, in each case
with respect to each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on
(I) all Outstanding Common Units and Subordinated Units and
any other Outstanding Units that are senior or equal in right of
distribution to the Subordinated Units and (II) the General
Partner Interest, in each case in respect of such periods and
(B) the Adjusted Operating Surplus for each of the three
consecutive, non-overlapping four-Quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum
Quarterly Distribution on all of the (I) Common Units,
Subordinated Units and any other Units that are senior or equal
in right of distribution to the Subordinated Units and
(II) General Partner Interest, in each case that were
Outstanding during such periods on a Fully Diluted Weighted
Average Basis, and (ii) there are no Cumulative Common Unit
Arrearages;
(b) the first Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of any Quarter beginning with the Quarter ending
June 30, 2014 in respect of which (i)
(A) distributions of Available Cash from Operating Surplus
on each of (I) the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units, and (II) the General Partner Interest, in each case
with respect to the four-Quarter period immediately preceding
such date equaled or exceeded 150% of the Minimum Quarterly
Distribution on all of (I) the Outstanding Common Units and
Subordinated Units and any other Outstanding Units that are
senior or equal in right of distribution to the Subordinated
Units and (II) the General Partner Interest, in each case
in respect of such period, and (B) the Adjusted Operating
Surplus for the four-Quarter period immediately preceding such
date equaled or exceeded 150% of the sum of the Minimum
Quarterly Distribution on all of (I) the Common Units and
Subordinated Units and any other Units that are senior or equal
in right of distribution to the Subordinated Units,
(II) the General Partner Interest, in each case that were
Outstanding during such period on a Fully Diluted Weighted
Average Basis and (III) the corresponding Incentive
Distributions and (ii) there are no Cumulative Common Unit
Arrearages;
(c) the first date on which there are no longer outstanding
any Subordinated Units due to the conversion of Subordinated
Units into Common Units pursuant to Section 5.7 or
otherwise; and
(d) the date on which the General Partner is removed as
general partner of the Partnership upon the requisite vote by
holders of Outstanding Units under circumstances where Cause
does not exist and no Units held by the General Partner and its
Affiliates are voted in favor of such removal.
Subsidiary means, with respect to any Person,
(a) a corporation of which more than 50% of the voting
power of shares entitled (without regard to the occurrence of
any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or
indirectly, at the date of
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determination, by such Person, by one or more Subsidiaries of
such Person or a combination thereof, (b) a partnership
(whether general or limited) in which such Person or a
Subsidiary of such Person is, at the date of determination, a
general or limited partner of such partnership, but only if more
than 50% of the partnership interests of such partnership
(considering all of the partnership interests of the partnership
as a single class) is owned, directly or indirectly, at the date
of determination, by such Person, by one or more Subsidiaries of
such Person, or a combination thereof, or (c) any other
Person (other than a corporation or a partnership) in which such
Person, one or more Subsidiaries of such Person, or a
combination thereof, directly or indirectly, at the date of
determination, has (i) at least a majority ownership
interest or (ii) the power to elect or direct the election
of a majority of the directors or other governing body of such
Person.
Substituted Limited Partner means a Person
who is admitted as a Limited Partner to the Partnership pursuant
to Section 10.2 with all the rights of a Limited Partner
and who is shown as a Limited Partner on the books and records
of the Partnership.
Surviving Business Entity is defined in
Section 14.2(b)(ii).
Target Distribution means, collectively, the
First Target Distribution, Second Target Distribution and Third
Target Distribution.
Third Target Distribution means $0.581250 per
Unit per Quarter (or, with respect to periods of less than a
full fiscal quarter, it means the product of such amount
multiplied by a fraction of which the numerator is the number of
days in such period, and the denominator is the total number of
days in such quarter), subject to adjustment in accordance with
Sections 5.11, 6.6 and 6.9.
TII means TETRA International Incorporated, a
Delaware corporation.
TII Contribution has the meaning assigned in
the Contribution Agreement.
Trading Day means, for the purpose of
determining the Current Market Price of any class of Limited
Partner Interests, a day on which the principal National
Securities Exchange on which such class of Limited Partner
Interests is listed or admitted to trading is open for the
transaction of business or, if Limited Partner Interests of a
class are not listed or admitted to trading on any National
Securities Exchange, a day on which banking institutions in New
York City generally are open.
transfer is defined in Section 4.4(a).
Transfer Agent means such bank, trust company
or other Person (including the General Partner or one of its
Affiliates) as may be appointed from time to time by the
Partnership to act as registrar and transfer agent for any class
of Partnership Interests; provided, that if no Transfer
Agent is specifically designated for any class of Partnership
Interests, the General Partner shall act in such capacity.
Transfer Application means an application and
agreement for transfer of Units in the form set forth on the
back of a Certificate or in a form substantially to the same
effect in a separate instrument.
Underwriter means each Person named as an
underwriter in Schedule I to the Underwriting Agreement who
purchases Common Units pursuant thereto.
Underwriting Agreement means that certain
Underwriting Agreement, dated as of
[ ]
[ ], 2011, among the Underwriters, the
Partnership, the General Partner and other parties thereto,
providing for the purchase of Common Units by the Underwriters.
Unit means a Partnership Interest that is
designated as a Unit and shall include Common Units
and Subordinated Units but shall not include (i) the
General Partner Interest or (ii) Incentive Distribution
Rights.
Unitholders means the holders of Units.
Unit Majority means (i) during the
Subordination Period, at least a majority of the Outstanding
Common Units (excluding Common Units owned by the General
Partner and its Affiliates), voting as a class, and at least a
majority of the Outstanding Subordinated Units, voting as a
class, and (ii) after the end of the Subordination Period,
at least a majority of the Outstanding Common Units, voting as a
single class.
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Unpaid MQD is defined in
Section 6.1(c)(i)(B).
Unrealized Gain attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the fair market value of such
property as of such date (as determined under
Section 5.5(d)) over (b) the Carrying Value of such
property as of such date (prior to any adjustment to be made
pursuant to Section 5.5(d) as of such date).
Unrealized Loss attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the Carrying Value of such property
as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair
market value of such property as of such date (as determined
under Section 5.5(d)).
Unrecovered Initial Unit Price means at any
time, with respect to a Unit, the Initial Unit Price less the
sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the Net Agreed Value of any
distributions in kind) in connection with the dissolution and
liquidation of the Partnership theretofore made in respect of an
Initial Common Unit, adjusted as the General Partner determines
to be appropriate to give effect to any distribution,
subdivision, combination or reorganization of such Units.
Unrestricted Person means (a) each
Indemnitee, (b) each Partner, (c) each Person who is
or was a member, partner, director, officer, employee or agent
of any Group Member, a General Partner or any Departing General
Partner or any Affiliate of any Group Member, a General Partner
or any Departing General Partner and (d) any Person the
General Partner designates as an Unrestricted Person
for purposes of this Agreement.
U.S. GAAP means United States generally
accepted accounting principles, as in effect from time to time,
consistently applied.
Withdrawal Opinion of Counsel is defined in
Section 11.1(b).
Working Capital Borrowings means borrowings
used solely for working capital purposes or to pay distributions
to Partners, made pursuant to a credit facility, commercial
paper facility or other similar financing arrangement;
provided that when incurred it is the intent of the
borrower to repay such borrowings within 12 months from
sources other than additional Working Capital Borrowings.
Section 1.2 Construction. Unless
the context requires otherwise: (a) any pronoun used in
this Agreement shall include the corresponding masculine,
feminine or neuter forms; (b) references to Articles and
Sections refer to Articles and Sections of this Agreement;
(c) the terms include, includes,
including or words of like import shall be deemed to
be followed by the words without limitation; and
(d) the terms hereof, herein or
hereunder refer to this Agreement as a whole and not
to any particular provision of this Agreement. Headings
contained in this Agreement are for reference purposes only, and
shall not affect in any way the meaning or interpretation of
this Agreement.
ARTICLE II
ORGANIZATION
Section 2.1 Formation. In
accordance with Article IX of the Original Partnership
Agreement, the General Partner hereby amends and restates the
Original Partnership Agreement in its entirety. This amendment
and restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this
Agreement, the rights, duties (including fiduciary duties),
liabilities and obligations of the Partners and the
administration, dissolution and termination of the Partnership
shall be governed by the Delaware Act. All Partnership Interests
shall constitute personal property of the owner thereof for all
purposes.
Section 2.2 Name. The
name of the Partnership shall be Compressco Partners,
L.P. The Partnerships business may be conducted
under any other name or names as determined by the General
Partner, including the name of the General Partner. The words
Limited Partnership, L.P.,
Ltd. or similar
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words or letters shall be included in the Partnerships
name where necessary for the purpose of complying with the laws
of any jurisdiction that so requires. The General Partner may
change the name of the Partnership at any time and from time to
time and shall notify the Limited Partners of such change in the
next regular communication to the Limited Partners.
Section 2.3 Registered
Office; Registered Agent; Principal Office; Other
Offices. Unless and until changed by the General
Partner, the registered office of the Partnership in the State
of Delaware shall be located at 1209 Orange Street, New Castle
County, Wilmington, Delaware, 19801, and the registered agent
for service of process on the Partnership in the State of
Delaware at such registered office shall be Corporation
Trust Company. The principal office of the Partnership
shall be located at 101 Park Avenue, Suite 1200, Oklahoma
City, Oklahoma, 73102, or such other place as the General
Partner may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other
place or places within or outside the State of Delaware as the
General Partner determines to be necessary or appropriate. The
address of the General Partner shall be 101 Park Avenue,
Suite 1200, Oklahoma City, Oklahoma, 73102, or such other
place as the General Partner may from time to time designate by
notice to the Limited Partners.
Section 2.4 Purpose
and Business. The purpose and nature of the
business to be conducted by the Partnership shall be to
(a) engage directly in, or enter into or form, hold and
dispose of any corporation, partnership, joint venture, limited
liability company or other arrangement to engage indirectly in,
any business activity that is approved by the General Partner,
in its sole discretion, and that lawfully may be conducted by a
limited partnership organized pursuant to the Delaware Act and,
in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements
relating to such business activity, and (b) do anything
necessary or appropriate to the foregoing, including the making
of capital contributions or loans to a Group Member;
provided, however, that the General Partner shall
not cause the Partnership to engage, directly or indirectly, in
any business activity that the General Partner determines would
be reasonably likely to cause the Partnership to be treated as
an association taxable as a corporation or otherwise taxable as
an entity for federal income tax purposes. To the fullest extent
permitted by law, the General Partner shall have no duty or
obligation to propose or approve, and may, in its sole
discretion, decline to propose or approve, the conduct by the
Partnership of any business.
Section 2.5 Powers. The
Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or
convenient for the furtherance and accomplishment of the
purposes and business described in Section 2.4 and for the
protection and benefit of the Partnership.
Section 2.6 Term. The
term of the Partnership commenced upon the filing of the
Certificate of Limited Partnership in accordance with the
Delaware Act and shall continue in existence until the
dissolution of the Partnership in accordance with the provisions
of Article XII. The existence of the Partnership as a
separate legal entity shall continue until the cancellation of
the Certificate of Limited Partnership as provided in the
Delaware Act.
Section 2.7 Title
to Partnership Assets. Title to Partnership
assets, whether real, personal or mixed and whether tangible or
intangible, shall be deemed to be owned by the Partnership as an
entity and/or its Subsidiaries, and no Partner or Assignee,
individually or collectively, shall have any ownership interest
in such Partnership assets or any portion thereof. Title to any
or all of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates
or one or more nominees, as the General Partner may determine.
The General Partner hereby declares and warrants that any
Partnership assets for which record title is held in the name of
the General Partner or one or more of its Affiliates or one or
more nominees shall be held by the General Partner or such
Affiliate or nominee for the use and benefit of the Partnership
in accordance with the provisions of this Agreement;
provided, however, that the General Partner shall
use reasonable efforts to cause record title to such assets
(other than those assets in respect of which the General Partner
determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be
vested in the Partnership as soon as reasonably practicable;
provided, further, that, prior to the withdrawal
or removal of the General Partner or as soon thereafter as
practicable, the General Partner shall use reasonable efforts to
effect the transfer of record title to the Partnership and,
prior to any such transfer, will provide for the use of such
assets in a manner satisfactory to the General Partner. All
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Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name
in which record title to such Partnership assets is held.
ARTICLE III
RIGHTS OF
LIMITED PARTNERS
Section 3.1 Limitation
of Liability. The Limited Partners and the
Assignees shall have no liability under this Agreement except as
expressly provided in this Agreement or the Delaware Act.
Section 3.2 Management
of Business. No Limited Partner or Assignee, in
its capacity as such, shall participate in the operation,
management or control (within the meaning of the Delaware Act)
of the Partnerships business, transact any business in the
Partnerships name or have the power to sign documents for
or otherwise bind the Partnership. Any action taken by any
Affiliate of the General Partner or any officer, director,
employee, manager, member, general partner, agent or trustee of
the General Partner or any of its Affiliates, or any officer,
director, employee, manager, member, general partner, agent or
trustee of a Group Member, in its capacity as such, shall not be
deemed to be participating in the control of the business of the
Partnership by a limited partner of the Partnership (within the
meaning of
Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
Section 3.3 Outside
Activities of the Limited Partners. Subject to
the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of
whether such Persons shall also be Limited Partners or
Assignees, any Limited Partner or Assignee shall be entitled to
and may have business interests and engage in business
activities in addition to those relating to the Partnership,
including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership
nor any of the other Partners or Assignees shall have any rights
by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
Section 3.4 Rights
of Limited Partners
(a) In addition to other rights provided by this Agreement
or by applicable law, and except as limited by
Section 3.4(b), each Limited Partner shall have the right,
for a purpose reasonably related to such Limited Partners
interest as a Limited Partner in the Partnership, the
reasonableness of which having been determined by the General
Partner, upon reasonable written demand stating the purpose of
such demand, and at such Limited Partners own expense:
(i) to obtain true and full information regarding the
status of the business and financial condition of the
Partnership;
(ii) promptly after its becoming available, to obtain a
copy of the Partnerships federal, state and local income
tax returns for each year;
(iii) to obtain a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to obtain a copy of this Agreement and the Certificate
of Limited Partnership and all amendments thereto, together with
copies of the executed copies of all powers of attorney pursuant
to which this Agreement, the Certificate of Limited Partnership
and all amendments thereto have been executed;
(v) to obtain true and full information regarding the
amount of cash and a description and statement of the Net Agreed
Value of any other Capital Contribution by each Partner and that
each Partner has agreed to contribute in the future, and the
date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs
of the Partnership as is just and reasonable.
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(b) The General Partner may keep confidential from the
Limited Partners, for such period of time as the General Partner
deems reasonable, (i) any information that the General
Partner reasonably believes to be in the nature of trade secrets
or (ii) other information the disclosure of which the
General Partner believes (A) is not in the best interests
of the Partnership Group, (B) could damage the Partnership
Group or its business or (C) that any Group Member is
required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the
Partnership the primary purpose of which is to circumvent the
obligations set forth in this Section 3.4).
ARTICLE IV
CERTIFICATES;
RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
Section 4.1 Certificates. Notwithstanding
anything otherwise to the contrary herein, unless the General
Partner shall determine otherwise in respect of some or all of
any or all classes of Partnership Interests, Partnership
Interests shall not be evidenced by certificates. Certificates
that may be issued shall be executed on behalf of the
Partnership by the Chairman of the Board, President or any
Executive Vice President or Vice President and the Chief
Financial Officer or the Secretary or any Assistant Secretary of
the General Partner. If a Transfer Agent has been appointed for
a class of Partnership Interests, no Certificate for such class
of Partnership Interests shall be valid for any purpose until it
has been countersigned by the Transfer Agent; provided,
however, that if the General Partner elects to cause the
Partnership to issue Partnership Interests of such class in
global form, the Certificate shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the
Partnership Interests have been duly registered in accordance
with the directions of the Partnership. Subject to the
requirements of Section 6.7(c), if Common Units are
evidenced by Certificates, on or after the date on which
Subordinated Units are converted into Common Units pursuant to
the terms of Section 5.7, the Record Holders of such
Subordinated Units (a) if the Subordinated Units are
evidenced by Certificates, may exchange such Certificates for
Certificates evidencing Common Units or (b) if the
Subordinated Units are not evidenced by Certificates, shall be
issued Certificates evidencing Common Units.
Section 4.2 Mutilated,
Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the
Transfer Agent, the appropriate officers of the General Partner
on behalf of the Partnership shall execute, and the Transfer
Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number and type of Partnership
Interests as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on
behalf of the Partnership shall execute and deliver, and the
Transfer Agent shall countersign, a new Certificate in place of
any Certificate previously issued if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance
satisfactory to the General Partner, that a previously issued
Certificate has been lost, destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
General Partner has notice that the Certificate has been
acquired by a purchaser for value in good faith and without
notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the
General Partner a bond, in form and substance satisfactory to
the General Partner, with surety or sureties and with fixed or
open penalty as the General Partner may direct to indemnify the
Partnership, the Partners, the General Partner and the Transfer
Agent against any claim that may be made on account of the
alleged loss, destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by
the General Partner.
If a Limited Partner or Assignee fails to notify the General
Partner within a reasonable period of time after such Limited
Partner or Assignee has notice of the loss, destruction or theft
of a Certificate, and a
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transfer of the Limited Partner Interests represented by the
Certificate is registered before the Partnership, the General
Partner or the Transfer Agent receives such notification, the
Limited Partner or the Assignee shall be precluded from making
any claim against the Partnership, the General Partner or the
Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate
under this Section 4.2, the General Partner may require the
payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the
Transfer Agent) reasonably connected therewith.
Section 4.3 Record
Holders. The Partnership shall be entitled to
recognize the Record Holder as the Partner or Assignee with
respect to any Partnership Interest and, accordingly, shall not
be bound to recognize any equitable or other claim to, or
interest in, such Partnership Interest on the part of any other
Person, regardless of whether the Partnership shall have actual
or other notice thereof, except as otherwise provided by law or
any applicable rule, regulation, guideline or requirement of any
National Securities Exchange on which such Partnership Interests
are listed or admitted to trading. Without limiting the
foregoing, when a Person (such as a broker, dealer, bank, trust
company or clearing corporation or an agent of any of the
foregoing) is acting as nominee, agent or in some other
representative capacity for another Person in acquiring
and/or
holding Partnership Interests, as between the Partnership on the
one hand, and such other Persons on the other, such
representative Person shall be (a) the Record Holder of
such Partnership Interest and (b) bound by this Agreement
and shall have the rights and obligations of a Partner or
Assignee, as the case may be, hereunder as, and to the extent,
provided herein.
Section 4.4 Transfer
Generally.
(a) The term transfer, when used in this
Agreement with respect to a Partnership Interest, shall mean a
transaction (i) by which the General Partner assigns its
General Partner Interest to another Person, and includes a sale,
assignment, gift, pledge, encumbrance, hypothecation, mortgage,
exchange or any other disposition by law or otherwise or
(ii) by which the holder of a Limited Partner Interest
assigns such Limited Partner Interest to another Person who is
or becomes a Limited Partner or an Assignee, and includes a
sale, assignment, gift, exchange or any other disposition by law
or otherwise, excluding a pledge, encumbrance, hypothecation or
mortgage but including any transfer upon foreclosure of any
pledge, encumbrance, hypothecation or mortgage.
(b) No Partnership Interest shall be transferred, in whole
or in part, except in accordance with the terms and conditions
set forth in this Article IV. Any transfer or purported
transfer of a Partnership Interest not made in accordance with
this Article IV shall be, to the fullest extent permitted
by law, null and void.
(c) Nothing contained in this Agreement shall be construed
to prevent a disposition by any stockholder, member, partner or
other owner of the General Partner or any Limited Partner of any
or all of the shares of stock, membership interests, partnership
interests or other ownership interests in the General Partner or
Limited Partner and the term transfer shall not mean
any such disposition.
Section 4.5 Registration
and Transfer of Limited Partner Interests.
(a) The General Partner shall keep or cause to be kept on
behalf of the Partnership a register in which, subject to such
reasonable regulations as it may prescribe and subject to the
provisions of Section 4.5(b), the Partnership will provide
for the registration and transfer of Limited Partner Interests.
(b) The Partnership shall not recognize any transfer of
Limited Partner Interests evidenced by Certificates until the
Certificates evidencing such Limited Partner Interests are
surrendered for registration of transfer and any such
Certificates are accompanied by a Transfer Application, properly
completed, duly executed by the transferee (or the
transferees attorney-in-fact duly authorized in writing).
No charge shall be imposed by the General Partner for such
transfer; provided, that as a condition to the issuance
of any new Certificate under this Section 4.5, the General
Partner may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed with
respect thereto. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests
evidenced by a Certificate, and subject to the provisions
hereof, the
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appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and in the case of
Certificates evidencing Limited Partner Interests for which a
Transfer Agent has been appointed, the Transfer Agent shall
countersign and deliver, in the name of the holder or the
designated transferee or transferees, as required pursuant to
the holders instructions, one or more new Certificates
evidencing the same aggregate number and type of Limited Partner
Interests as was evidenced by the Certificate so surrendered.
(c) By acceptance of the transfer of any Limited Partner
Interests in accordance with this Section 4.5, each
transferee of a Limited Partner Interest (including any nominee
holder or an agent or representative acquiring such Limited
Partner Interests for the account of another Person)
(i) shall be deemed to have requested admission as a
Substituted Limited Partner if such transferee has duly
completed and delivered a Transfer Application, (ii) shall
become bound, and shall be deemed to have agreed to be bound, by
the terms of this Agreement, (iii) represents that the
transferee has the capacity, power and authority to enter into
this Agreement and (iv) makes the consents,
acknowledgements and waivers contained in this Agreement, all
with or without execution of this Agreement by such Person. The
transfer of any Limited Partner Interests and the admission of
any new Limited Partner shall not constitute an amendment to
this Agreement.
(d) Until admitted as a Substituted Limited Partner
pursuant to Section 10.2, the permitted transferee of a
Limited Partner Interest shall be an Assignee in respect of such
Limited Partner Interest; provided, however, that the
Partnership may, in its sole discretion, treat such transferee
as the absolute owner of such Limited Partner Interest for all
purposes, except as otherwise required by law or stock exchange
regulations. Limited Partners may include custodians, nominees
or any other individual or entity in its own or any
representative capacity.
(e) Subject to (i) the foregoing provisions of this
Section 4.5, (ii) Section 4.3,
(iii) Section 4.7, (iv) with respect to any class
or series of Limited Partner Interests, the provisions of any
statement of designations or an amendment to this Agreement
establishing such class or series, (v) any contractual
provisions binding on any Limited Partner and
(vi) provisions of applicable law including the Securities
Act, Limited Partner Interests (other than the Incentive
Distribution Rights) shall be freely transferable.
(f) The General Partner and its Affiliates shall have the
right at any time to transfer their Subordinated Units, Common
Units and Incentive Distribution Rights to one or more Persons,
except that the General Partner and its Affiliates may not
transfer Subordinated Units to the Partnership during the
Subordination Period.
Section 4.6 Transfer
of the General Partners General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to
June 30, 2021, the General Partner shall not transfer all
or any part of its General Partner Interest to a Person unless
such transfer (i) has been approved by the prior written
consent or vote of the holders of at least a majority of the
Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates) or (ii) is of all, but
not less than all, of its General Partner Interest to
(A) an Affiliate of the General Partner (other than an
individual) or (B) another Person (other than an
individual) in connection with the merger or consolidation of
the General Partner with or into such other Person or the
transfer by the General Partner of all or substantially all of
its assets to such other Person.
(b) Subject to Section 4.6(c) below, on or after
June 30, 2021, the General Partner may at its option
transfer all or any part of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no
transfer by the General Partner of all or any part of its
General Partner Interest to another Person shall be permitted
unless (i) the transferee agrees to assume the rights and
duties of the General Partner under this Agreement and to be
bound by the provisions of this Agreement, (ii) the
Partnership receives an Opinion of Counsel that such transfer
would not result in the loss of limited liability under the
Delaware Act of any Limited Partner or cause the Partnership to
be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already so treated or taxed) and
(iii) such transferee also agrees to purchase all (or the
appropriate portion thereof, if applicable) of the partnership
or membership interest held by the General Partner as the
general partner or managing member, if any, of each other Group
Member. In the case of a transfer pursuant to and in compliance
with this Section 4.6, the transferee or successor (as the
case may be) shall, subject to compliance with the terms of
Section 10.3, be admitted to the Partnership as the General
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Partner effective immediately prior to the transfer of the
General Partner Interest, and the business of the Partnership
shall continue without dissolution.
Section 4.7 Restrictions
on Transfers.
(a) Except as provided in Section 4.7(d) below, but
notwithstanding the other provisions of this Article IV, no
transfer of any Partnership Interests shall be made if such
transfer would (i) violate the then applicable federal or
state securities laws or rules and regulations of the
Commission, any state securities commission or any other
governmental authority with jurisdiction over such transfer,
(ii) terminate the existence or qualification of the
Partnership under the laws of the jurisdiction of its formation,
or (iii) cause the Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not
already so treated or taxed).
(b) The General Partner may impose restrictions on the
transfer of Partnership Interests if it determines, with the
advice of counsel, that such restrictions are necessary or
advisable to (i) avoid a significant risk of the
Partnership becoming taxable as a corporation or otherwise
becoming taxable as an entity for federal income tax purposes or
(ii) preserve the uniformity of the Limited Partner
Interests (or any class or classes thereof). The General Partner
may impose such restrictions by amending this Agreement;
provided, however, that any amendment that would
result in the delisting or suspension of trading of any class of
Limited Partner Interests on the principal National Securities
Exchange on which such class of Limited Partner Interests is
then listed or admitted to trading must be approved, prior to
such amendment being effected, by the holders of at least a
majority of the Outstanding Limited Partner Interests of such
class.
(c) The transfer of a Subordinated Unit that has converted
into a Common Unit shall be subject to the restrictions imposed
by Section 6.7.
(d) Nothing contained in this Article IV, or elsewhere
in this Agreement, shall preclude the settlement of any
transactions involving Partnership Interests entered into
through the facilities of any National Securities Exchange on
which such Partnership Interests are listed or admitted to
trading.
(e) Each certificate evidencing Partnership Interests shall
bear a conspicuous legend in substantially the following form:
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
COMPRESSCO PARTNERS, L.P. THAT THIS SECURITY MAY NOT BE SOLD,
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH
TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR
STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION
OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR
QUALIFICATION OF COMPRESSCO PARTNERS, L.P. UNDER THE LAWS OF THE
STATE OF DELAWARE, OR (C) CAUSE COMPRESSCO PARTNERS, L.P.
TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR
OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX
PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED).
COMPRESSCO PARTNERS GP INC., THE GENERAL PARTNER OF COMPRESSCO
PARTNERS, L.P., MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE
TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL
THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK
OF COMPRESSCO PARTNERS, L.P. BECOMING TAXABLE AS A CORPORATION
OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME
TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT
PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS
SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL
SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED
TO TRADING.
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ARTICLE V
CAPITAL
CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
Section 5.1 Organizational
Contributions. In connection with the formation
of the Partnership under the Delaware Act, the General Partner
made an initial Capital Contribution to the Partnership in the
amount of $1.00 in exchange for a General Partner Interest equal
to a 0.1% Percentage Interest and was admitted as the General
Partner of the Partnership. The Organizational Limited Partner
made an initial Capital Contribution to the Partnership in the
amount of $999.00 in exchange for a Limited Partner Interest
equal to a 99.9% Percentage Interest and was admitted as a
Limited Partner of the Partnership. On the Closing Date, the
Organizational Limited Partner transferred all of its Limited
Partner Interest to the General Partner, as provided in the
Contribution Agreement, and, effective with the admission of
another Limited Partner to the Partnership, the Limited Partner
Interest and General Partner Interest were redeemed, as provided
in the Contribution Agreement, and the initial Capital
Contributions in respect of such Limited Partner Interest and
General Partner Interest were thereupon refunded. Any interest
or other profit that may have resulted from the investment or
other use of such initial Capital Contributions was allocated
and distributed to the General Partner.
Section 5.2 Contributions
by the General Partner and its Affiliates.
(a) On the Closing Date and pursuant to the Contribution
Agreement: (i) the General Partner contributed to the
Partnership, as a Capital Contribution, the GP Contribution (as
defined in the Contribution Agreement), in exchange for
(A) a General Partner Interest equal to a 2% Percentage
Interest (after giving effect to any exercise of the
Over-Allotment Option and the Deferred Issuance and
Distribution), subject to all of the rights, privileges and
duties of the General Partner under this Agreement; (B)
[ ]
Common Units and
[ ]
Subordinated Units; and (C) the right to receive the
Deferred Issuance and Distribution; (ii) the Partnership
issued to the General Partner the Incentive Distribution Rights
as an incentive fee to incentivize the General Partner to expand
the profitability of the business of the Partnership Group and
to increase distributions to Limited Partners; and
(iii) TII contributed to the Partnership, as a Capital
Contribution, the TII Contribution (as defined in the
Contribution Agreement) in exchange for
[ ]
Common Units and
[ ]
Subordinated Units.
(b) Upon the issuance of any additional Limited Partner
Interests by the Partnership (other than the Common Units issued
in the Initial Offering, the Common Units, Subordinated Units
and Incentive Distribution Rights issued pursuant to
Section 5.2(a) (including any Common Units issued pursuant
to the Deferred Issuance and Distribution), the Common Units
issued upon conversion of the Subordinated Units and any Common
Units issued pursuant to Section 5.11), the General Partner
may, in order to maintain its Percentage Interest, make
additional Capital Contributions in an amount equal to the
product obtained by multiplying (i) the quotient determined
by dividing (A) the General Partners Percentage
Interest by (B) 100% less the General Partners
Percentage Interest times (ii) the amount contributed to
the Partnership by the Limited Partners in exchange for such
additional Limited Partner Interests. Except as set forth in
Section 12.8, the General Partner shall not be obligated to
make any additional Capital Contributions to the Partnership.
Section 5.3 Contributions
by Initial Limited Partners.
(a) On the Closing Date and pursuant to the Underwriting
Agreement, each Underwriter contributed cash to the Partnership
in exchange for the issuance by the Partnership of Common Units
to each Underwriter, all as set forth in the Underwriting
Agreement.
(b) Upon the exercise, if any, of the Over-Allotment
Option, each Underwriter contributed cash to the Partnership in
exchange for the issuance by the Partnership of Common Units to
each Underwriter, all as set forth in the Underwriting Agreement.
(c) No Limited Partner will be required to make any
additional Capital Contribution to the Partnership pursuant to
this Agreement.
Section 5.4 Interest
and Withdrawal. No interest shall be paid by the
Partnership on Capital Contributions. No Partner shall be
entitled to the withdrawal or return of its Capital
Contribution, except to the
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extent, if any, that distributions made pursuant to this
Agreement or upon liquidation of the Partnership may be
considered as such by law and then only to the extent provided
for in this Agreement. Except to the extent expressly provided
in this Agreement, no Partner shall have priority over any other
Partner either as to the return of Capital Contributions or as
to profits, losses or distributions. Any such return shall be a
compromise to which all Partners agree within the meaning of
Section 17-502(b)
of the Delaware Act.
Section 5.5 Capital
Accounts.
(a) The Partnership shall maintain for each Partner (or a
beneficial owner of Partnership Interests held by a nominee in
any case in which the nominee has furnished the identity of such
owner to the Partnership in accordance with Section 6031(c)
of the Code or any other method acceptable to the General
Partner) owning a Partnership Interest a separate Capital
Account with respect to such Partnership Interest in accordance
with the rules of Treasury
Regulation Section 1.704-1(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount
of all Capital Contributions made to the Partnership with
respect to such Partnership Interest and (ii) all items of
Partnership income and gain (including income and gain exempt
from tax) computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest pursuant to
Section 6.1, and decreased by (A) the amount of cash
or Net Agreed Value of all actual and deemed distributions of
cash or property made with respect to such Partnership Interest
and (B) all items of Partnership deduction and loss
computed in accordance with Section 5.5(b) and allocated
with respect to such Partnership Interest pursuant to
Section 6.1.
(b) For purposes of computing the amount of any item of
income, gain, loss or deduction that is to be allocated pursuant
to Article VI and is to be reflected in the Partners
Capital Accounts, the determination, recognition and
classification of any such item shall be the same as its
determination, recognition and classification for federal income
tax purposes (including any method of depreciation, cost
recovery or amortization used for that purpose),
provided, that:
(i) Solely for purposes of this Section 5.5, the
Partnership shall be treated as owning directly its
proportionate share (as determined by the General Partner based
upon the provisions of the applicable Group Member Agreement) of
all property owned by (A) any other Group Member that is
classified as a partnership for federal income tax purposes and
(B) any other partnership, limited liability company,
unincorporated business or other entity classified as a
partnership for federal income tax purposes of which a Group
Member is, directly or indirectly, a partner, member or other
equity holder.
(ii) All fees and other expenses incurred by the
Partnership to promote the sale of (or to sell) a Partnership
Interest that can neither be deducted nor amortized under
Section 709 of the Code, if any, shall, for purposes of
Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall
be allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
the computation of all items of income, gain, loss and deduction
shall be made without regard to any election under
Section 754 of the Code that may be made by the Partnership
and, as to those items described in Section 705(a)(1)(B) or
705(a)(2)(B) of the Code, without regard to the fact that such
items are not includable in gross income or are neither
currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis
of any Partnership asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into
account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item
of gain or loss.
(iv) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as
if the adjusted basis of such property as of such date of
disposition were equal in amount to the Partnerships
Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of
Section 704(b) of the Code, any deductions for
depreciation, cost recovery or amortization attributable to any
Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property.
Upon an adjustment pursuant to Section 5.5(d) to the
Carrying Value of
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any Partnership property subject to depreciation, cost recovery
or amortization, any further deductions for such depreciation,
cost recovery or amortization attributable to such property
shall be determined under the rules prescribed by Treasury
Regulation Section 1.704-3(d)(2)
as if the adjusted basis of such property were equal to the
Carrying Value of such property immediately following such
adjustment.
(vi) The Gross Liability Value of each Liability of the
Partnership described in Treasury
Regulation Section 1.752-7(b)(3)(i)
shall be adjusted at such times as provided in this Agreement
for an adjustment to Carrying Values. The amount of any such
adjustment shall be treated for purposes hereof as an item of
loss (if the adjustment increases the Carrying Value of such
Liability of the Partnership) or an item of gain (if the
adjustment decreases the Carrying Value of such Liability of the
Partnership).
(c) (i) A transferee of a Partnership Interest shall
succeed to a pro rata portion of the Capital Account of the
transferor relating to the Partnership Interest so transferred.
(ii) Subject to Section 6.7(c), immediately prior to
the transfer of a Subordinated Unit or of a Subordinated Unit
that has converted into a Common Unit pursuant to
Section 5.7 by a holder thereof (other than a transfer to
an Affiliate unless the General Partner elects to have this
subparagraph 5.5(c)(ii) apply), the Capital Account maintained
for such Person with respect to its Subordinated Units or
converted Subordinated Units will (A) first, be allocated
to the Subordinated Units or converted Subordinated Units to be
transferred in an amount equal to the product of (1) the
number of such Subordinated Units or converted Subordinated
Units to be transferred and (2) the Per Unit Capital Amount
for a Common Unit, and (B) second, any remaining balance in
such Capital Account will be retained by the transferor,
regardless of whether it has retained any Subordinated Units or
converted Subordinated Units. Following any such allocation, the
transferors Capital Account, if any, maintained with
respect to the retained Subordinated Units or retained converted
Subordinated Units, if any, will have a balance equal to the
amount allocated under clause (B) hereinabove, and the
transferees Capital Account established with respect to
the transferred Subordinated Units or transferred converted
Subordinated Units will have a balance equal to the amount
allocated under clause (A) hereinabove.
(d) (i) Consistent with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Interests for cash or
Contributed Property, the issuance of Partnership Interests as
consideration for the provision of services, or the conversion
of the General Partners Combined Interest to Common Units
pursuant to Section 11.3(b), the Carrying Value of each
Partnership property immediately prior to such issuance shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, and
any such Unrealized Gain or Unrealized Loss shall be treated,
for purposes of maintaining Capital Accounts, as if it had been
recognized on an actual sale of each such property for an amount
equal to its fair market value immediately prior to such
issuance and had been allocated among the Partners at such time
pursuant to Section 6.1 in the same manner as any item of
gain or loss actually recognized following an event giving rise
to the dissolution of the Partnership would have been allocated;
provided, however, that in the event of an
issuance of Partnership Interests for a de minimis amount of
cash or Contributed Property, or in the event of an issuance of
a de minimis amount of Partnership Interests as consideration
for the provision of services, the General Partner may determine
that such adjustments are unnecessary for the proper
administration of the Partnership. In determining such
Unrealized Gain or Unrealized Loss, the aggregate fair market
value of all Partnership property (including cash or cash
equivalents) immediately prior to the issuance of additional
Partnership Interests shall be determined by the General Partner
using such method of valuation as it may adopt. In making its
determination of the fair market values of individual
properties, the General Partner may determine that it is
appropriate to first determine an aggregate value for the
Partnership, based on the current trading price of the Common
Units, and taking fully into account the fair market value of
the Partnership Interests of all Partners at such time, and then
allocate such aggregate value among the individual properties of
the Partnership (in such manner as it determines appropriate).
(ii) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a
Partner of any Partnership property (other than a distribution
of cash that is not in redemption or retirement of a Partnership
Interest), the Carrying Value of all Partnership property shall
be
A-27
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, and
any such Unrealized Gain or Unrealized Loss shall be treated,
for purposes of maintaining Capital Accounts, as if it had been
recognized on an actual sale of each such property immediately
prior to such distribution for an amount equal to its fair
market value, and had been allocated among the Partners, at such
time, pursuant to Section 6.1 in the same manner as any item of
gain or loss actually recognized following an event giving rise
to the dissolution of the Partnership would have been allocated.
In determining such Unrealized Gain or Unrealized Loss the
aggregate fair market value of all Partnership property
(including cash or cash equivalents) immediately prior to a
distribution shall (A) in the case of an actual
distribution that is not made pursuant to Section 12.4 or
in the case of a deemed distribution, be determined in the same
manner as that provided in Section 5.5(d)(i) or (B) in the
case of a liquidating distribution pursuant to
Section 12.4, be determined by the Liquidator using such
method of valuation as it may adopt.
Section 5.6 Issuances
of Additional Partnership Interests.
(a) The Partnership may issue additional Partnership
Interests and options, rights, warrants and appreciation rights
relating to the Partnership Interests (including as described in
Section 7.4(c)) for any Partnership purpose at any time and
from time to time to such Persons for such consideration and on
such terms and conditions as the General Partner shall
determine, all without the approval of any Limited Partners.
(b) Each additional Partnership Interest authorized to be
issued by the Partnership pursuant to Section 5.6(a) may be
issued in one or more classes, or one or more series of any such
classes, with such designations, preferences, rights, powers and
duties (which may be senior to existing classes and series of
Partnership Interests), as shall be fixed by the General
Partner, including (i) the right to share in Partnership
profits and losses or items thereof; (ii) the right to
share in Partnership distributions; (iii) the rights upon
dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon which, the
Partnership may or shall be required to redeem the Partnership
Interest (including sinking fund provisions); (v) whether
such Partnership Interest is issued with the privilege of
conversion or exchange and, if so, the terms and conditions of
such conversion or exchange; (vi) the terms and conditions
upon which each Partnership Interest will be issued, evidenced
by certificates and assigned or transferred; (vii) the
method for determining the Percentage Interest as to such
Partnership Interest; and (viii) the right, if any, of each
such Partnership Interest to vote on Partnership matters,
including matters relating to the relative rights, preferences
and privileges of such Partnership Interest.
(c) The General Partner shall take all actions that it
determines to be necessary or appropriate in connection with
(i) each issuance of Partnership Interests and options,
rights, warrants and appreciation rights relating to Partnership
Interests pursuant to this Section 5.6, including Common
Units issued in connection with the Deferred Issuance and
Distribution, (ii) the conversion of the Combined Interest
into Units pursuant to the terms of this Agreement,
(iii) the issuance of Common Units pursuant to
Section 5.11, (iv) reflecting admission of such
additional Limited Partners in the books and records of the
Partnership as the Record Holder of such Limited Partner
Interest and (v) all additional issuances of Partnership
Interests. The General Partner shall determine the relative
rights, powers and duties of the holders of the Units or other
Partnership Interests being so issued. The General Partner shall
do all things necessary to comply with the Delaware Act and is
authorized and directed to do all things that it determines to
be necessary or appropriate in connection with any future
issuance of Partnership Interests or in connection with the
conversion of the Combined Interest into Units pursuant to the
terms of this Agreement, including compliance with any statute,
rule, regulation or guideline of any federal, state or other
governmental agency or any National Securities Exchange on which
the Units or other Partnership Interests are listed or admitted
to trading.
(d) No fractional Units shall be issued by the Partnership.
Section 5.7 Conversion
of Subordinated Units.
(a) All of the Subordinated Units shall convert into Common
Units on a
one-for-one
basis on the first Business Day following the distribution of
Available Cash to Partners pursuant to Section 6.3(a) in
respect of the final Quarter of the Subordination Period.
A-28
(b) Notwithstanding any other provision of this Agreement,
all the then Outstanding Subordinated Units may convert into
Common Units on a
one-for-one
basis as set forth in, and pursuant to the terms of,
Section 11.4.
(c) A Subordinated Unit that has converted into a Common
Unit shall be subject to the provisions of Section 6.7.
Section 5.8 Limited
Preemptive Right. Except as provided in this
Section 5.8 and in Section 5.2 or as otherwise
provided in a separate agreement by the Partnership, no Person
shall have any preemptive, preferential or other similar right
with respect to the issuance of any Partnership Interest,
whether unissued, held in the treasury or hereafter created. The
General Partner shall have the right, which it may from time to
time assign in whole or in part to any of its Affiliates or the
beneficial owners thereof, to purchase Partnership Interests
from the Partnership whenever, and on the same terms that, the
Partnership issues Partnership Interests to Persons other than
the General Partner and its Affiliates or such beneficial
owners, to the extent necessary to maintain the Percentage
Interests of the General Partner and its Affiliates and such
beneficial owners equal to that which existed immediately prior
to the issuance of such Partnership Interests.
Section 5.9 Splits
and Combinations.
(a) Subject to Section 5.9(d), Section 6.6 and
Section 6.9 (dealing with adjustments of distribution
levels), the Partnership may make a Pro Rata distribution of
Partnership Interests to all Record Holders or may effect a
subdivision or combination of Partnership Interests so long as,
after any such event, each Partner shall have the same
Percentage Interest in the Partnership as before such event, and
any amounts calculated on a per Unit basis (including any Common
Unit Arrearage or Cumulative Common Unit Arrearage) or stated as
a number of Units are proportionately adjusted retroactive to
the beginning of the Partnership.
(b) Whenever such a distribution, subdivision or
combination of Partnership Interests is declared, the General
Partner shall select a Record Date as of which the distribution,
subdivision or combination shall be effective and shall send
notice thereof at least 20 days prior to such Record Date
to each Record Holder as of a date not less than 10 days
prior to the date of such notice. The General Partner also may
cause a firm of independent public accountants selected by it to
calculate the number of Partnership Interests to be held by each
Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be
entitled to rely on any certificate provided by such firm as
conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision
or combination, the Partnership may issue Certificates to the
Record Holders of Partnership Interests as of the applicable
Record Date representing the new number of Partnership Interests
held by such Record Holders, or the General Partner may adopt
such other procedures that it determines to be necessary or
appropriate to reflect such changes. If any such combination
results in a smaller total number of Partnership Interests
Outstanding, the Partnership shall require, as a condition to
the delivery to a Record Holder of such new Certificate, the
surrender of any Certificate held by such Record Holder
immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon
any distribution, subdivision or combination of Units. If a
distribution, subdivision or combination of Units would result
in the issuance of fractional Units but for the provisions of
Section 5.6(d) and this Section 5.9(d), each
fractional Unit shall be rounded to the nearest whole Unit (and
a 0.5 Unit shall be rounded to the next higher Unit).
Section 5.10 Fully
Paid and Non-Assessable Nature of Limited Partner
Interests. All Limited Partner Interests issued
pursuant to, and in accordance with the requirements of, this
Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such
non-assessability may be affected by
Sections 17-303,
17-607 and
17-804 of
the Delaware Act.
Section 5.11 Issuance
of Common Units in Connection with Reset of Incentive
Distribution Rights.
(a) Subject to the provisions of this Section 5.11,
the holder of the Incentive Distribution Rights (or, if there is
more than one holder of the Incentive Distribution Rights, the
holders of a majority in interest of the Incentive Distribution
Rights) shall have the right, at any time when there are no
Subordinated Units
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outstanding and the Partnership has made a distribution pursuant
to Section 6.4(b)(v) for each of the four most recently
completed Quarters and the amount of each such distribution did
not exceed Adjusted Operating Surplus for such Quarter, to make
an election (the IDR Reset Election)
to cause the Minimum Quarterly Distribution and the Target
Distributions to be reset in accordance with the provisions of
Section 5.11(e) and, in connection therewith, the holder or
holders of the Incentive Distribution Rights will become
entitled to receive their respective proportionate share of a
number of Common Units (the IDR Reset Common
Units) derived by dividing (i) the average
amount of cash distributions made by the Partnership for the two
full Quarters immediately preceding the giving of the Reset
Notice (as defined in Section 5.11(b)) in respect of the
Incentive Distribution Rights by (ii) the average of the
cash distributions made by the Partnership in respect of each
Common Unit for the two full Quarters immediately preceding the
giving of the Reset Notice (the Reset
MQD) (the number of Common Units determined by
such quotient is referred to herein as the Aggregate
Quantity of IDR Reset Common Units). The
Percentage Interest of the General Partner after the issuance of
the Aggregate Quantity of IDR Reset Common Units shall equal the
Percentage Interest of the General Partner prior to the issuance
of the Aggregate Quantity of IDR Reset Common Units and the
General Partner shall not be obligated to make any additional
Capital Contribution to the Partnership in order to maintain its
Percentage Interest in connection therewith. The making of the
IDR Reset Election in the manner specified in
Section 5.11(b) shall cause the Minimum Quarterly
Distribution and the Target Distributions to be reset in
accordance with the provisions of Section 5.11(e) and, in
connection therewith, the holder or holders of the Incentive
Distribution Rights will become entitled to receive Common Units
on the basis specified above, without any further approval
required by the General Partner or the Unitholders, at the time
specified in Section 5.11(c) unless the IDR Reset Election
is rescinded pursuant to Section 5.11(d).
(b) To exercise the right specified in
Section 5.11(a), the holder of the Incentive Distribution
Rights (or, if there is more than one holder of the Incentive
Distribution Rights, the holders of a majority in interest of
the Incentive Distribution Rights) shall deliver a written
notice (the Reset Notice) to the
Partnership. Within 10 Business Days after the receipt by the
Partnership of such Reset Notice, the Partnership shall deliver
a written notice to the holder or holders of the Incentive
Distribution Rights of the Partnerships determination of
the aggregate number of Common Units that each holder of
Incentive Distribution Rights will be entitled to receive.
(c) The holder or holders of the Incentive Distribution
Rights will be entitled to receive the Aggregate Quantity of IDR
Reset Common Units on the fifteenth Business Day after receipt
by the Partnership of the Reset Notice; provided,
however, that the issuance of Common Units to the holder
or holders of the Incentive Distribution Rights shall not occur
prior to the approval of the listing or admission for trading of
such Common Units by the principal National Securities Exchange
upon which the Common Units are then listed or admitted for
trading if any such approval is required pursuant to the rules
and regulations of such National Securities Exchange.
(d) If the principal National Securities Exchange upon
which the Common Units are then traded has not approved the
listing or admission for trading of the Common Units to be
issued pursuant to this Section 5.11 on or before the
30th calendar day following the Partnerships receipt
of the Reset Notice and such approval is required by the rules
and regulations of such National Securities Exchange, then the
holder of the Incentive Distribution Rights (or, if there is
more than one holder of the Incentive Distribution Rights, the
holders of a majority in interest of the Incentive Distribution
Rights) shall have the right to either rescind the IDR Reset
Election or elect to receive other Partnership Interests having
such terms as the General Partner may approve, with the approval
of the Conflicts Committee, that will provide (i) the same
economic value, in the aggregate, as the Aggregate Quantity of
IDR Reset Common Units would have had at the time of the
Partnerships receipt of the Reset Notice, as determined by
the General Partner, and (ii) for the subsequent conversion
(on terms acceptable to the National Securities Exchange upon
which the Common Units are then traded) of such Partnership
Interests into Common Units within not more than 12 months
following the Partnerships receipt of the Reset Notice
upon the satisfaction of one or more conditions that are
reasonably acceptable to the holder of the Incentive
Distribution Rights (or, if there is more than one holder of the
Incentive Distribution Rights, the holders of a majority in
interest of the Incentive Distribution Rights).
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(e) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution shall be adjusted at the time of the issuance of
Common Units or other Partnership Interests pursuant to this
Section 5.11 such that (i) the Minimum Quarterly
Distribution shall be reset to equal to the Reset MQD,
(ii) the First Target Distribution shall be reset to equal
115% of the Reset MQD, (iii) the Second Target Distribution
shall be reset to equal 125% of the Reset MQD and (iv) the
Third Target Distribution shall be reset to equal 150% of the
Reset MQD.
(f) Upon the issuance of IDR Reset Common Units pursuant to
Section 5.11(a), the Capital Account maintained with
respect to the Incentive Distribution Rights shall
(i) first, be allocated to IDR Reset Common Units in an
amount equal to the product of (A) the Aggregate Quantity
of IDR Reset Common Units and (B) the Per Unit Capital
Amount for an Initial Common Unit, and (ii) second, any
remaining balance in such Capital Account will be retained by
the holder of the Incentive Distributions Rights. In the event
that there is not a sufficient Capital Account associated with
the Incentive Distribution Rights to allocate the full Per Unit
Capital Amount for an Initial Common Unit to the IDR Reset
Common Units in accordance with clause (i) of this
Section 5.11(f), the IDR Reset Common Units shall be
subject to Section 6.1(d)(x)(B) and (C).
ARTICLE VI
ALLOCATIONS
AND DISTRIBUTIONS
Section 6.1 Allocations
for Capital Account Purposes. For purposes of
maintaining the Capital Accounts and in determining the rights
of the Partners among themselves, the Partnerships items
of income, gain, loss and deduction (computed in accordance with
Section 5.5(b)) for each taxable period shall be allocated
among the Partners as provided herein below.
(a) Net Income. Net Income for each
taxable period and all items of income, gain, loss and deduction
taken into account in computing Net Income for such taxable
period shall be allocated as follows:
(i) First, to the General Partner until the
aggregate of the Net Income allocated to the General Partner
pursuant to this Section 6.1(a)(i) and the Net Termination
Gain allocated to the General Partner pursuant to
Section 6.1(c)(i)(A) or Section 6.1(c)(iv)(A) for the
current and all previous taxable periods is equal to the
aggregate of the Net Loss allocated to the General Partner
pursuant to Section 6.1(b)(ii) for all previous taxable
periods and the Net Termination Loss allocated to the General
Partner pursuant to Section 6.1(c)(ii)(D) or
Section 6.1(c)(iii)(B) for the current and all previous
taxable periods; and
(ii) The balance, if any, (A) to the General Partner
in accordance with its Percentage Interest, and (B) to all
Unitholders, Pro Rata, a percentage equal to 100% less the
percentage applicable to subclause (A).
(b) Net Loss. Net Loss for each taxable
period and all items of income, gain, loss and deduction taken
into account in computing Net Loss for such taxable period shall
be allocated as follows:
(i) First, to the General Partner and the
Unitholders, Pro Rata; provided, that Net Losses shall
not be allocated pursuant to this Section 6.1(b)(i) to the
extent that such allocation would cause any Unitholder to have a
deficit balance in its Adjusted Capital Account at the end of
such taxable period (or increase any existing deficit balance in
its Adjusted Capital Account); and
(ii) The balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. Net
Termination Gain or Net Termination Loss (including a pro rata
part of each item of income, gain, loss and deduction taken into
account in computing Net Termination Gain or Net Termination
Loss) for such taxable period shall be allocated in the manner
set forth in this Section 6.1(c). All allocations under
this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided
under this Section 6.1 and after all distributions of
Available
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Cash provided under Section 6.4 and Section 6.5 have
been made; provided, however, that solely for
purposes of this Section 6.1(c), Capital Accounts shall not
be adjusted for distributions made pursuant to Section 12.4.
(i) Except as provided in Section 6.1(c)(iv), Net
Termination Gain (including a pro rata part of each item of
income, gain, loss, and deduction taken into account in
computing Net Termination Gain) shall be allocated:
(A) First, to the General Partner until the
aggregate of the Net Termination Gain allocated to the General
Partner pursuant to this Section 6.1(c)(i)(A) or
Section 6.1(c)(iv)(A) and the Net Income allocated to the
General Partner pursuant to Section 6.1(a)(i) for the
current and all previous taxable periods is equal to the
aggregate of the Net Loss allocated to the General Partner
pursuant to Section 6.1(b)(ii) for all previous taxable periods
and the Net Termination Loss allocated to the General Partner
pursuant to Section 6.1(c)(ii)(D) or
Section 6.1(c)(iii)(B) for all previous taxable periods;
(B) Second, (1) to the General Partner in
accordance with its Percentage Interest and (2) to all
Unitholders holding Common Units, Pro Rata, a percentage equal
to 100% less the General Partners Percentage Interest,
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (aa) its Unrecovered Initial
Unit Price, (bb) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(i) or
Section 6.4(b)(i) with respect to such Common Unit for such
Quarter (the amount determined pursuant to this clause (bb) is
hereinafter referred to as the Unpaid
MQD) and (cc) any then existing Cumulative
Common Unit Arrearage;
(C) Third, if such Net Termination Gain is
recognized (or is deemed to be recognized) prior to the
conversion of the last Outstanding Subordinated Unit into a
Common Unit, (1) to the General Partner in accordance with
its Percentage Interest and (2) to all Unitholders holding
Subordinated Units, Pro Rata, a percentage equal to 100% less
the General Partners Percentage Interest, until the
Capital Account in respect of each Subordinated Unit then
Outstanding equals the sum of (aa) its Unrecovered Initial Unit
Price, determined for the taxable period (or portion thereof) to
which this allocation of gain relates, and (bb) the Minimum
Quarterly Distribution for the Quarter during which the
Liquidation Date occurs, reduced by any distribution pursuant to
Section 6.4(a)(iii) with respect to such Subordinated Unit
for such Quarter;
(D) Fourth, 100% to the General Partner and all
Unitholders, Pro Rata, until the Capital Account in respect of
each Common Unit then Outstanding is equal to the sum of
(1) its Unrecovered Initial Unit Price, (2) the Unpaid
MQD, (3) any then existing Cumulative Common Unit
Arrearage, and (4) the excess of (aa) the First Target
Distribution less the Minimum Quarterly Distribution for each
Quarter of the Partnerships existence over (bb) the
cumulative per Unit amount of any distributions of Available
Cash that is deemed to be Operating Surplus made pursuant to
Section 6.4(a)(iv) and Section 6.4(b)(ii) (the sum of
(1), (2), (3) and (4) is hereinafter referred to as
the First Liquidation Target Amount);
(E) Fifth, (1) to the General Partner in
accordance with its Percentage Interest, (2) 13% to the
holders of the Incentive Distribution Rights, Pro Rata, and
(3) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (1) and (2) of this clause (E), until the
Capital Account in respect of each Common Unit then Outstanding
is equal to the sum of (aa) the First Liquidation Target Amount,
and (bb) the excess of (i) the Second Target Distribution
less the First Target Distribution for each Quarter of the
Partnerships existence over (i) the cumulative per
Unit amount of any distributions of Available Cash that is
deemed to be Operating Surplus made pursuant to Section
6.4(a)(v) and Section 6.4(b)(iii) (the sum of (1) and
(2) is hereinafter referred to as the Second
Liquidation Target Amount);
(F) Sixth, (1) to the General Partner in
accordance with its Percentage Interest, (2) 23% to the
holders of the Incentive Distribution Rights, Pro Rata, and
(3) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (1) and (2) of this clause (F), until the
Capital Account in respect of each Common Unit then Outstanding
is equal to the sum of (aa) the Second Liquidation Target
Amount, and (bb) the excess of (i) the Third Target
Distribution less the
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Second Target Distribution for each Quarter of the
Partnerships existence over (ii) the cumulative per
Unit amount of any distributions of Available Cash that is
deemed to be Operating Surplus made pursuant to
Section 6.4(a)(vi) and Section 6.4(b)(iv); and
(G) Finally, (1) to the General Partner in
accordance with its Percentage Interest, (2) 48% to the
holders of the Incentive Distribution Rights, Pro Rata, and
(3) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (1) and (2) of this clause (G).
(ii) Except as otherwise provided by
Section 6.1(c)(iii) Net Termination Loss (including a pro
rata part of each item of income, gain, loss, and deduction
taken into account in computing Net Termination Loss) shall be
allocated:
(A) First, if Subordinated Units remain Outstanding,
(1) to the General Partner in accordance with its
Percentage Interest and (2) to all Unitholders holding
Subordinated Units, Pro Rata, a percentage equal to 100% less
General Partners Percentage Interest, until the Capital
Account in respect of each Subordinated Unit then Outstanding
has been reduced to zero;
(B) Second, (1) to the General Partner in
accordance with its Percentage Interest and (2) to all
Unitholders holding Common Units, Pro Rata, a percentage equal
to 100% less the General Partners Percentage Interest,
until the Capital Account in respect of each Common Unit then
Outstanding has been reduced to zero;
(C) Third, to the General Partner and the
Unitholders, Pro Rata; provided that Net Termination Loss
shall not be allocated pursuant to this
Section 6.1(c)(ii)(C) to the extent such allocation would
cause any Unitholder to have a deficit balance in its Adjusted
Capital Account (or increase any existing deficit in its
Adjusted Capital Account); and
(D) Fourth, the balance, if any, 100% to the General
Partner.
(iii) Any Net Termination Loss deemed recognized pursuant
to Section 5.5(d) prior to a Liquidation Date shall be
allocated:
(A) First, to the General Partner and the Unitholders, Pro
Rata; provided that Net Termination Loss shall not be
allocated pursuant to this Section 6.1(c)(iii)(A) to the
extent such allocation would cause any Unitholder to have a
deficit balance in its Adjusted Capital Account at the end of
such taxable period (or increase any existing deficit in its
Adjusted Capital Account); and
(B) The balance, if any, to the General Partner.
(iv) If a Net Termination Loss has been allocated pursuant
to Section 6.1(c)(iii), subsequent Net Termination Gain
deemed recognized pursuant to Section 5.5(d) prior to a
Liquidation Date shall be allocated:
(A) First, to the General Partner until the aggregate Net
Termination Gain allocated to the General Partner pursuant to
this Section 6.1(c)(iv)(A) is equal to the aggregate Net
Termination Loss previously allocated pursuant to Section
6.1(c)(iii)(B);
(B) Second, to the General Partner and the Unitholders, Pro
Rata, until the aggregate Net Termination Gain allocated
pursuant to this Section 6.1(c)(iv)(B) is equal to the
aggregate Net Termination Loss previously allocated pursuant to
Section 6.1(c)(iii)(A); and
(C) The balance, if any, pursuant to the provisions of
Section 6.1(c)(i).
(d) Special Allocations. Notwithstanding
any other provision of this Section 6.1, the following
special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain
Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease
in Partnership Minimum Gain during any Partnership taxable
period, each Partner shall be allocated items of Partnership
income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(f)(6),
1.704-2(g)(2) and
1.704-2(j)(2)(i),
or any successor provision. For purposes of this
Section 6.1(d), each Partners Adjusted
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Capital Account balance shall be determined, and the allocation
of income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this
Section 6.1(d) with respect to such taxable period (other
than an allocation pursuant to Section 6.1(d)(vi) and
Section 6.1(d)(vii)). This Section 6.1(d)(i) is
intended to comply with the Partnership Minimum Gain chargeback
requirement in Treasury
Regulation Section 1.704-2(f)
and shall be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of
this Section 6.1 (other than Section 6.1(d)(i)),
except as provided in Treasury
Regulation Section 1.704-2(i)(4),
if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning
of such taxable period shall be allocated items of Partnership
income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(i)(4)
and 1.704-2(j)(2)(ii), or any successor provisions. For purposes
of this Section 6.1(d), each Partners Adjusted
Capital Account balance shall be determined, and the allocation
of income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this
Section 6.1(d), other than Section 6.1(d)(i) and other
than an allocation pursuant to Section 6.1(d)(vi) and
Section 6.1(d)(vii), with respect to such taxable period.
This Section 6.1(d)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury
Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any
property distributed (except cash or property distributed
pursuant to Section 12.4) with respect to a Unit exceeds
the amount of cash or the Net Agreed Value of property
distributed with respect to another Unit (the amount of the
excess, an Excess Distribution and the
Unit with respect to which the greater distribution is paid, an
Excess Distribution Unit), then
(1) there shall be allocated gross income and gain to each
Unitholder receiving an Excess Distribution with respect to the
Excess Distribution Unit until the aggregate amount of such
items allocated with respect to such Excess Distribution Unit
pursuant to this Section 6.1(d)(iii)(A) for the current
taxable period and all previous taxable periods is equal to the
amount of the Excess Distribution; and (2) the General
Partner shall be allocated gross income and gain with respect to
each such Excess Distribution in an amount equal to the product
obtained by multiplying (aa) the quotient determined by dividing
(i) the General Partners Percentage Interest at the
time when the Excess Distribution occurs by (ii) a
percentage equal to 100% less the General Partners
Percentage Interest at the time when the Excess Distribution
occurs, times (bb) the total amount allocated in clause (1)
above with respect to such Excess Distribution.
(B) After the application of Section 6.1(d)(iii)(A),
all or any portion of the remaining items of Partnership gross
income or gain for the taxable period, if any, shall be
allocated (1) to the holders of Incentive Distribution
Rights, Pro Rata, until the aggregate amount of such items
allocated to the holders of Incentive Distribution Rights
pursuant to this Section 6.1(d)(iii)(B) for the current
taxable period and all previous taxable periods is equal to the
cumulative amount of all Incentive Distributions made to the
holders of Incentive Distribution Rights from the Closing Date
to a date 45 days after the end of the current taxable
period; and (2) to the General Partner an amount equal to
the product of (aa) an amount equal to the quotient determined
by dividing (i) the General Partners Percentage
Interest by (ii) the sum of 100 less the General
Partners Percentage Interest times (bb) the sum of the
amounts allocated in clause (1) above.
(iv) Qualified Income Offset. In
the event any Partner unexpectedly receives any adjustments,
allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5),
or 1.704-1(b)(2)(ii)(d)(6), items of Partnership gross income
and gain shall be specially allocated to such Partner in an
amount and manner sufficient to eliminate, to the extent
required by the Treasury Regulations promulgated under
Section 704(b) of the Code, the deficit balance, if any, in
its Adjusted Capital Account created by such adjustments,
allocations or distributions as quickly as possible;
provided, that an allocation pursuant to this
Section 6.1(d)(iv) shall be made only if and to the extent
that such Partner would have a deficit balance in its Adjusted
Capital Account as adjusted after all
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other allocations provided for in this Section 6.1 have
been tentatively made as if this Section 6.1(d)(iv) were
not in this Agreement.
(v) Gross Income Allocation. In
the event any Partner has a deficit balance in its Capital
Account at the end of any taxable period in excess of the sum of
(A) the amount such Partner is required to restore pursuant
to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury
Regulation Sections 1.704-2(g) and 1.704-2(i)(5), such
Partner shall be specially allocated items of Partnership gross
income and gain in the amount of such excess as quickly as
possible; provided, that an allocation pursuant to this
Section 6.1(d)(v) shall be made only if and to the extent
that such Partner would have a deficit balance in its Capital
Account as adjusted after all other allocations provided for in
this Section 6.1 have been tentatively made as if Section
6.1(d)(iv) and this Section 6.1(d)(v) were not in this
Agreement.
(vi) Nonrecourse
Deductions. Nonrecourse Deductions for any
taxable period shall be allocated to the Partners Pro Rata. If
the General Partner determines that the Partnerships
Nonrecourse Deductions should be allocated in a different ratio
to satisfy the safe harbor requirements of the Treasury
Regulations promulgated under Section 704(b) of the Code,
the General Partner is authorized, upon notice to the other
Partners, to revise the prescribed ratio to the numerically
closest ratio that does satisfy such requirements.
(vii) Partner Nonrecourse
Deductions. Partner Nonrecourse Deductions
for any taxable period shall be allocated 100% to the Partner
that bears the Economic Risk of Loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable in accordance with Treasury
Regulation Section 1.704-2(i).
If more than one Partner bears the Economic Risk of Loss with
respect to a Partner Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be allocated between or
among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse
Liabilities. For purposes of Treasury
Regulation Section 1.752-3(a)(3), the Partners agree that
Nonrecourse Liabilities of the Partnership in excess of the sum
of (A) the amount of Partnership Minimum Gain and
(B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners Pro Rata.
(ix) Code Section 754
Adjustments. To the extent an adjustment to
the adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant
to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such
basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity; Changes in Law.
(A) At the election of the General Partner with respect to
any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after
taking into account allocations pursuant to
Section 6.1(d)(iii), shall be allocated 100% to each
Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period (Final
Subordinated Units) in the proportion of the
number of Final Subordinated Units held by such Partner to the
total number of Final Subordinated Units then Outstanding, until
each such Partner has been allocated an amount of gross income
or gain that increases the Capital Account maintained with
respect to such Final Subordinated Units to an amount that after
taking into account the other allocations of income, gain, loss
and deduction to be made with respect to such taxable period
will equal the product of (1) the number of Final
Subordinated Units held by such Partner and (2) the Per
Unit Capital Amount for a Common Unit. The purpose of this
allocation is to establish uniformity between the Capital
Accounts underlying Final Subordinated Units and the Capital
Accounts underlying Common Units held by Persons other than the
General Partner and its Affiliates immediately prior to the
conversion of such Final Subordinated Units
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into Common Units. This allocation method for establishing such
economic uniformity will be available to the General Partner
only if the method for allocating the Capital Account maintained
with respect to the Subordinated Units between the transferred
and retained Subordinated Units pursuant to
Section 5.5(c)(ii) does not otherwise provide such economic
uniformity to the Final Subordinated Units.
(B) With respect to an event triggering an adjustment to
the Carrying Value of Partnership property pursuant to
Section 5.5(d) during any taxable period of the Partnership
ending upon, or after, the issuance of IDR Reset Common Units
pursuant to Section 5.11, after the application of
Section 6.1(d)(x)(A), any Unrealized Gains and Unrealized
Losses shall be allocated among the Partners in a manner that to
the nearest extent possible results in the Capital Accounts
maintained with respect to such IDR Reset Common Units issued
pursuant to Section 5.11 equaling the product of (1) the
Aggregate Quantity of IDR Reset Common Units and (2) the
Per Unit Capital Amount for an Initial Common Unit.
(C) With respect to any taxable period during which an IDR
Reset Unit is transferred to any Person who is not an Affiliate
of the transferor, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period shall
be allocated 100% to the transferor Partner of such transferred
IDR Reset Unit until such transferor Partner has been allocated
an amount of gross income or gain that increases the Capital
Account maintained with respect to such transferred IDR Reset
Unit to an amount equal to the Per Unit Capital Amount for an
Initial Common Unit.
(D) For the proper administration of the Partnership and
for the preservation of uniformity of the Limited Partner
Interests (or any class or classes thereof), the General Partner
shall (1) adopt such conventions as it deems appropriate in
determining the amount of depreciation, amortization and cost
recovery deductions; (2) make special allocations of
income, gain, loss, deduction, Unrealized Gain or Unrealized
Loss; and (3) amend the provisions of this Agreement as
appropriate (aa) to reflect the proposal or promulgation of
Treasury Regulations under Section 704(b) or
Section 704(c) of the Code or (bb) otherwise to preserve or
achieve uniformity of the Limited Partner Interests (or any
class or classes thereof). The General Partner may adopt such
conventions, make such allocations and make such amendments to
this Agreement as provided in this Section 6.1(d)(x)(D)
only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of
any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this
Section 6.1, other than the Required Allocations, the
Required Allocations shall be taken into account in making the
Agreed Allocations so that, to the extent possible, the net
amount of items of gross income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations
and the Agreed Allocations, together, shall be equal to the net
amount of such items that would have been allocated to each such
Partner under the Agreed Allocations had the Required
Allocations and the related Curative Allocation not otherwise
been provided in this Section 6.1. In exercising its
discretion under this Section 6.1(d)(xi)(A), the General
Partner may take into account future Required Allocations that,
although not yet made, are likely to offset other Required
Allocations previously made. Allocations pursuant to this
Section 6.1(d)(xi)(A) shall only be made with respect to
Required Allocations to the extent the General Partner
determines that such allocations will otherwise be inconsistent
with the economic agreement among the Partners.
(B) The General Partner shall, with respect to each taxable
period, (1) apply the provisions of
Section 6.1(d)(xi)(A) in whatever order is most likely to
minimize the economic distortions that might otherwise result
from the Required Allocations, and (2) divide all
allocations pursuant to Section 6.1(d)(xi)(A) among the
Partners in a manner that is likely to minimize such economic
distortions.
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(xii) Corrective and Other
Allocations. In the event of any allocation
of Additional Book Basis Derivative Items or any Book-Down Event
or any recognition of a Net Termination Loss, the following
rules shall apply:
(A) Except as provided in Section 6.1(d)(xii)(B), in
the case of any allocation of Additional Book Basis Derivative
Items (other than an allocation of Unrealized Gain or Unrealized
Loss under Section 5.5(d) hereof), the General Partner
shall allocate such Additional Book Basis Derivative Items to
(1) the holders of Incentive Distribution Rights and the
General Partner to the same extent that the Unrealized Gain or
Unrealized Loss giving rise to such Additional Book Basis
Derivative Items was allocated to them pursuant to
Section 5.5(d) and (2) all Unitholders, Pro Rata, to
the extent that the Unrealized Gain or Unrealized Loss giving
rise to such Additional Book Basis Derivative Items was
allocated to any Unitholders pursuant to Section 5.5(d).
(B) In the case of any allocation of Additional Book Basis
Derivative Items (other than an allocation of Unrealized Gain or
Unrealized Loss under Section 5.5(d) hereof or an
allocation of Net Termination Gain or Net Termination Loss
pursuant to Section 6.1(c) hereof) as a result of a sale or
other taxable disposition of any Partnership asset that is an
Adjusted Property (Disposed of Adjusted
Property), the General Partner shall allocate
(1) additional items of gross income and gain (aa) away
from the holders of Incentive Distribution Rights and (bb) to
the Unitholders, or (2) additional items of deduction and
loss (aa) away from the Unitholders and (bb) to the holders of
Incentive Distribution Rights, to the extent that the Additional
Book Basis Derivative Items allocated to the Unitholders exceed
their Share of Additional Book Basis Derivative Items with
respect to such Disposed of Adjusted Property. Any allocation
made pursuant to this Section 6.1(d)(xii)(B) shall be made
after all of the other Agreed Allocations have been made as if
this Section 6.1(d)(xii) were not in this Agreement and, to
the extent necessary, shall require the reallocation of items
that have been allocated pursuant to such other Agreed
Allocations.
(C) In the case of any negative adjustments to the Capital
Accounts of the Partners resulting from a Book-Down Event or
from the recognition of a Net Termination Loss, such negative
adjustment (1) shall first be allocated, to the extent of
the Aggregate Remaining Net Positive Adjustments, in such a
manner, as determined by the General Partner, that to the extent
possible the aggregate Capital Accounts of the Partners will
equal the amount that would have been the Capital Account
balances of the Partners if no prior
Book-Up
Events had occurred, and (2) any negative adjustment in
excess of the Aggregate Remaining Net Positive Adjustments shall
be allocated pursuant to Section 6.1(c) hereof.
(D) For purposes of this Section 6.1(d)(xii), the
Unitholders shall be treated as being allocated Additional Book
Basis Derivative Items to the extent that such Additional Book
Basis Derivative Items have reduced the amount of income that
would otherwise have been allocated to the Unitholders under
this Agreement. In making the allocations required under this
Section 6.1(d)(xii), the General Partner may apply whatever
conventions or other methodology it determines will satisfy the
purpose of this Section 6.1(d)(xii). Without limiting the
foregoing, if an Adjusted Property is contributed by the
Partnership to another entity classified as a partnership for
federal income tax purposes (the lower tier
partnership), the General Partner may make allocations
similar to those described in Section 6.1(d)(xii)(A)
(C) to the extent the General Partner determines such
allocations are necessary to account for the Partnerships
allocable share of income, gain, loss and deduction of the lower
tier partnership that relate to the contributed Adjusted
Property in a manner that is consistent with the purpose of this
Section 6.1(d)(xii).
(xiii) Special Curative Allocation in Event of
Liquidation Prior to End of Subordination
Period. Notwithstanding any other provision
of this Section 6.1 (other than the Required Allocations),
if the Liquidation Date occurs prior to the conversion of the
last Outstanding Subordinated Unit, then items of income, gain,
loss and deduction for the taxable period that includes the
Liquidation Date (and, if necessary, items arising in previous
taxable periods to the extent the General Partner determines
such items may be so allocated), shall be specially allocated
among the Partners in the manner determined
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appropriate by the General Partner so as to cause, to the
maximum extent possible, the Capital Account in respect of each
Common Unit to equal the amount such Capital Account would have
been if all prior allocations of Net Termination Gain and Net
Termination Loss had been made pursuant to
Section 6.1(c)(i) or Section 6.1(c)(ii), as applicable.
Section 6.2 Allocations
for Tax Purposes.
(a) Except as otherwise provided herein, for federal income
tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its
correlative item of book income, gain, loss or
deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities
attributable to a Contributed Property or Adjusted Property,
items of income, gain, loss, depreciation, amortization and cost
recovery deductions shall be allocated for federal income tax
purposes among the Partners in the manner provided under
Section 704(c) of the Code, and the Treasury Regulations
promulgated under Section 704(b) and 704(c) of the Code, as
determined appropriate by the General Partner (taking into
account the General Partners discretion under
Section 6.1(d)(x)(D)); provided, that the General
Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d)
in all events.
(c) The General Partner may determine to depreciate or
amortize the portion of an adjustment under Section 743(b)
of the Code attributable to unrealized appreciation in any
Adjusted Property (to the extent of the unamortized Book-Tax
Disparity) using a predetermined rate derived from the
depreciation or amortization method and useful life applied to
the unamortized Book-Tax Disparity of such property, despite any
inconsistency of such approach with Treasury
Regulation Section 1.167(c)-1(a)(6)
or any successor regulations thereto. If the General Partner
determines that such reporting position cannot reasonably be
taken, the General Partner may adopt depreciation and
amortization conventions under which all purchasers acquiring
Limited Partner Interests in the same month would receive
depreciation and amortization deductions, based upon the same
applicable rate as if they had purchased a direct interest in
the Partnerships property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may
use any other depreciation and amortization conventions to
preserve the uniformity of the intrinsic tax characteristics of
any Limited Partner Interests, so long as such conventions would
not have a material adverse effect on the Limited Partners or
the Record Holders of any class or classes of Limited Partner
Interests.
(d) In accordance with Treasury
Regulation Sections 1.1245-1(e)
and 1.1250-1(f), any gain allocated to the Partners upon the
sale or other taxable disposition of any Partnership asset
shall, to the extent possible, after taking into account other
required allocations of gain pursuant to this Section 6.2,
be characterized as Recapture Income in the same proportions and
to the same extent as such Partners (or their predecessors in
interest) have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as
Recapture Income.
(e) All items of income, gain, loss, deduction and credit
recognized by the Partnership for federal income tax purposes
and allocated to the Partners in accordance with the provisions
hereof shall be determined without regard to any election under
Section 754 of the Code that may be made by the
Partnership; provided, however, that such
allocations, once made, shall be adjusted (in the manner
determined by the General Partner) to take into account those
adjustments permitted or required by Sections 734 and 743
of the Code.
(f) Each item of Partnership income, gain, loss and
deduction shall, for federal income tax purposes, be determined
for each taxable period and prorated on a monthly basis and
shall be allocated to the Partners as of the opening of the
National Securities Exchange on which the Partnership Interests
are listed or admitted to trading on the first Business Day of
each month; provided, however, such items for the
period beginning on the Closing Date and ending on the last day
of the month in which the Over-Allotment Option is exercised in
full or the expiration of the Over-Allotment Option occurs shall
be allocated to the Partners as of the opening of the National
Securities Exchange on which the Partnership Interests are
listed or admitted to trading on the first Business Day of the
next succeeding month; and provided, further, that
gain or loss on a sale or other disposition of any assets of the
Partnership or any other extraordinary item of income, gain,
loss or deduction as determined by the General Partner, shall be
allocated to the Partners as of the opening of the National
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Securities Exchange on which the Partnership Interests are
listed or admitted to trading on the first Business Day of the
month in which such item is recognized for federal income tax
purposes. The General Partner may revise, alter or otherwise
modify such methods of allocation to the extent permitted or
required by Section 706 of the Code and the regulations or
rulings promulgated thereunder.
(g) Allocations that would otherwise be made to a Limited
Partner under the provisions of this Article VI shall
instead be made to the beneficial owner of Limited Partner
Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other
method determined by the General Partner.
Section 6.3 Requirement
and Characterization of Distributions; Distributions to Record
Holders.
(a) Within 45 days following the end of each Quarter
commencing with the Quarter ending on June 30, 2011 an
amount equal to 100% of Available Cash with respect to such
Quarter shall be distributed in accordance with this
Article VI by the Partnership to Partners as of the Record
Date selected by the General Partner. All amounts of Available
Cash distributed by the Partnership on any date from any source
shall be deemed to be Operating Surplus until the sum of all
amounts of Available Cash theretofore distributed by the
Partnership to the Partners pursuant to Section 6.4 equals
the Operating Surplus from the Closing Date through the close of
the immediately preceding Quarter. Any remaining amounts of
Available Cash distributed by the Partnership on such date
shall, except as otherwise provided in Section 6.5, be
deemed to be Capital Surplus. All
distributions required to be made under this Agreement shall be
made subject to
Sections 17-607
and 17-804
of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of
the dissolution and liquidation of the Partnership, all cash
received during or after the Quarter in which the Liquidation
Date occurs, other than from Working Capital Borrowings, shall
be applied and distributed solely in accordance with, and
subject to the terms and conditions of, Section 12.4.
(c) Each distribution in respect of a Partnership Interest
shall be paid by the Partnership, directly or through any
Transfer Agent or through any other Person or agent, only to the
Record Holder of such Partnership Interest as of the Record Date
set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnerships liability in
respect of such payment, regardless of any claim of any Person
who may have an interest in such payment by reason of an
assignment or otherwise.
Section 6.4 Distributions
of Available Cash from Operating Surplus.
(a) During Subordination
Period. Available Cash with respect to any
Quarter within the Subordination Period that is deemed to be
Operating Surplus pursuant to the provisions of Section 6.3
or 6.5 shall be distributed as follows, except as otherwise
contemplated by Section 5.6(b) in respect of other
Partnership Interests issued pursuant thereto:
(i) First, (A) to the General Partner in
accordance with its Percentage Interest and (B) to the
Unitholders holding Common Units, Pro Rata, a percentage equal
to 100% less the General Partners Percentage Interest,
until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, (A) to the General Partner in
accordance with its Percentage Interest and (B) to the
Unitholders holding Common Units, Pro Rata, a percentage equal
to 100% less the General Partners Percentage Interest,
until there has been distributed in respect of each Common Unit
then Outstanding an amount equal to the Cumulative Common Unit
Arrearage existing with respect to such Quarter;
(iii) Third, (A) to the General Partner in
accordance with its Percentage Interest and (B) to the
Unitholders holding Subordinated Units, Pro Rata, a percentage
equal to 100% less the General Partners Percentage
Interest, until there has been distributed in respect of each
Subordinated Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
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(iv) Fourth, to the General Partner and all
Unitholders, Pro Rata, until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
excess of the First Target Distribution over the Minimum
Quarterly Distribution for such Quarter;
(v) Fifth, (A) to the General Partner in
accordance with its Percentage Interest; (B) 13% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (v) until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, (A) to the General Partner in
accordance with its Percentage Interest, (B) 23% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (vi), until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such
Quarter; and
(vii) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest; (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (vii);
provided, however, if the Minimum Quarterly
Distribution, the First Target Distribution, the Second Target
Distribution and the Third Target Distribution have been reduced
to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be
Operating Surplus with respect to any Quarter will be made
solely in accordance with Section 6.4(a)(vii).
(b) After Subordination Period. Available
Cash with respect to any Quarter after the Subordination Period
that is deemed to be Operating Surplus pursuant to the
provisions of Section 6.3 or Section 6.5 shall be
distributed as follows, except as otherwise contemplated by
Section 5.6(b) in respect of additional Partnership
Interests issued pursuant thereto:
(i) First, 100% to the General Partner and the
Unitholders, Pro Rata, until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
Minimum Quarterly Distribution for such Quarter;
(ii) Second, 100% to the General Partner and the
Unitholders, Pro Rata, until there has been distributed in
respect of each Unit then Outstanding an amount equal to the
excess of the First Target Distribution over the Minimum
Quarterly Distribution for such Quarter;
(iii) Third, (A) to the General Partner in
accordance with its Percentage Interest; (B) 13% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (iii), until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, (A) to the General Partner in
accordance with its Percentage Interest; (B) 23% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (iv), until
there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such
Quarter; and
(v) Thereafter, (A) to the General Partner in
accordance with its Percentage Interest; (B) 48% to the
holders of the Incentive Distribution Rights, Pro Rata; and
(C) to all Unitholders, Pro Rata, a percentage equal to
100% less the sum of the percentages applicable to
subclauses (A) and (B) of this clause (v);
provided, however, if the Minimum Quarterly
Distribution, the First Target Distribution, the Second Target
Distribution and the Third Target Distribution have been reduced
to zero pursuant to the second sentence of
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Section 6.6(a), the distribution of Available Cash that is
deemed to be Operating Surplus with respect to any Quarter will
be made solely in accordance with Section 6.4(b)(v).
Section 6.5 Distributions
of Available Cash from Capital Surplus. Available
Cash that is deemed to be Capital Surplus pursuant to the
provisions of Section 6.3(a) shall be distributed, unless
the provisions of Section 6.3 require otherwise, 100% to
the General Partner and the Unitholders, Pro Rata, until the
Minimum Quarterly Distribution has been reduced to zero pursuant
to the second sentence of Section 6.6(a). Available Cash
that is deemed to be Capital Surplus shall then be distributed
(a) to the General Partner in accordance with its
Percentage Interest and (b) to all Unitholders holding
Common Units, Pro Rata, a percentage equal to 100% less the
General Partners Percentage Interest, until there has been
distributed in respect of each Common Unit then Outstanding an
amount equal to the Cumulative Common Unit Arrearage.
Thereafter, all Available Cash shall be distributed as if it
were Operating Surplus and shall be distributed in accordance
with Section 6.4.
Section 6.6 Adjustment
of Minimum Quarterly Distribution and Target Distribution
Levels.
(a) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution, Third Target
Distribution, Common Unit Arrearages and Cumulative Common Unit
Arrearages shall be proportionately adjusted in the event of any
distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other
Partnership Interests in accordance with Section 5.9. In
the event of a distribution of Available Cash that is deemed to
be from Capital Surplus, the then applicable Minimum Quarterly
Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be reduced in
the same proportion that the distribution had to the fair market
value of the Common Units immediately prior to the announcement
of the distribution. If the Common Units are publicly traded on
a National Securities Exchange, the fair market value will be
the Current Market Price before the ex-dividend date. If the
Common Units are not publicly traded, the fair market value will
be determined by the Board of Directors.
(b) The Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution, shall also be subject to adjustment pursuant to
Section 5.11 and Section 6.9.
Section 6.7 Special
Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve
matters requiring the vote or approval of a percentage of the
holders of Outstanding Common Units and the right to participate
in allocations of income, gain, loss and deduction and
distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations
of a Unitholder holding Common Units hereunder; provided,
however, that immediately upon the conversion of
Subordinated Units into Common Units pursuant to
Section 5.7, the Unitholder holding a Subordinated Unit
shall possess all of the rights and obligations of a Unitholder
holding Common Units hereunder with respect to such converted
Subordinated Units, including the right to vote as a Common
Unitholder and the right to participate in allocations of
income, gain, loss and deduction and distributions made with
respect to Common Units; provided, however, that
such converted Subordinated Units shall remain subject to the
provisions of Sections 5.5(c)(ii), 6.1(d)(x), 6.7(b) and
6.7(c).
(b) A Unitholder shall not be permitted to transfer a
Subordinated Unit or a Subordinated Unit that has converted into
a Common Unit pursuant to Section 5.7 (other than a
transfer to an Affiliate) if the remaining balance in the
transferring Unitholders Capital Account with respect to
the retained Subordinated Units or retained converted
Subordinated Units would be negative after giving effect to the
allocation under Section 5.5(c)(ii)(B).
(c) The Unitholder holding a Common Unit that has resulted
from the conversion of a Subordinated Unit pursuant to
Section 5.7 shall not be issued a Common Unit Certificate
pursuant to Section 4.1, if the Common Units are evidenced
by Certificates, and shall not be permitted to transfer such
Common Unit to a Person that is not an Affiliate of the holder
until such time as the General Partner determines, based on
advice of counsel, that each such Common Unit should have, as a
substantive matter, like intrinsic economic and federal income
tax characteristics, in all material respects, to the intrinsic
economic and federal income tax characteristics of an Initial
Common Unit. In connection with the condition imposed by this
Section 6.7(c), the General Partner
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may take whatever steps are required to provide economic
uniformity to such Common Units in preparation for a transfer of
such Common Units, including the application of
Sections 5.5(c)(ii), 6.1(d)(x) and 6.7(b); provided,
however, that no such steps may be taken that would have
a material adverse effect on the Unitholders holding Common
Units.
Section 6.8 Special
Provisions Relating to the Holders of Incentive Distribution
Rights. Notwithstanding anything to the contrary
set forth in this Agreement, the holders of the Incentive
Distribution Rights (a) shall (i) possess the rights
and obligations provided in this Agreement with respect to a
Limited Partner pursuant to Article III and
Article VII and (ii) have a Capital Account as a
Partner pursuant to Section 5.5 and all other provisions
related thereto and (b) shall not (i) be entitled to
vote on any matters requiring the approval or vote of the
holders of Outstanding Units, except as provided by law,
(ii) be entitled to any distributions other than as
provided in Sections 6.4 and 12.4 or (iii) be
allocated items of income, gain, loss or deduction other than as
specified in this Article VI.
Section 6.9 Entity-Level Taxation. If
legislation is enacted or the official interpretation of
existing legislation is modified by a governmental authority,
which after giving effect to such enactment or modification,
results in a Group Member becoming subject to federal, state or
local or
non-U.S. income
or withholding taxes in excess of the amount of such taxes due
from the Group Member prior to such enactment or modification
(including, for the avoidance of doubt, any increase in the rate
of such taxation applicable to the Group Member), then the
General Partner may, in its sole discretion, reduce the Minimum
Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution by the amount of
income or withholding taxes that are payable by reason of any
such new legislation or interpretation (the
Incremental Income Taxes), or any
portion thereof selected by the General Partner, in the manner
provided in this Section 6.9. If the General Partner elects
to reduce the Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target
Distribution for any Quarter with respect to all or a portion of
any Incremental Income Taxes, the General Partner shall estimate
for such Quarter the Partnership Groups aggregate
liability (the Estimated Incremental Quarterly Tax
Amount) for all (or the relevant portion of) such
Incremental Income Taxes; provided that any difference
between such estimate and the actual liability for Incremental
Income Taxes (or the relevant portion thereof) for such Quarter
may, to the extent determined by the General Partner, be taken
into account in determining the Estimated Incremental Quarterly
Tax Amount with respect to each Quarter in which any such
difference can be determined. For each such Quarter, the Minimum
Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, shall be the product
obtained by multiplying (a) the amounts therefor that are
set out herein prior to the application of this Section 6.9
times (b) the quotient obtained by dividing
(i) Available Cash with respect to such Quarter by
(ii) the sum of Available Cash with respect to such Quarter
and the Estimated Incremental Quarterly Tax Amount for such
Quarter, as determined by the General Partner. For purposes of
the foregoing, Available Cash with respect to a Quarter will be
deemed reduced by the Estimated Incremental Quarterly Tax Amount
for that Quarter.
ARTICLE VII
MANAGEMENT
AND OPERATION OF BUSINESS
Section 7.1 Management.
(a) The General Partner shall conduct, direct and manage
all activities of the Partnership. Except as otherwise expressly
provided in this Agreement, all management powers over the
business and affairs of the Partnership shall be exclusively
vested in the General Partner, and no Limited Partner shall have
any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law
or that are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to
Section 7.3, shall have full power and authority to do all
things and on such terms as it determines to be necessary or
appropriate to
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conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set
forth in Section 2.4, including the following:
(i) the making of any expenditures, the lending or
borrowing of money, the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the
issuance of evidences of indebtedness, including indebtedness
that is convertible or exchangeable into Partnership Interests,
and the incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership or the merger or other combination of
the Partnership with or into another Person (the matters
described in this clause (iii) being subject, however, to
any prior approval that may be required by Section 7.3 or
Article XIV);
(iv) the use of the assets of the Partnership (including
cash on hand) for any purpose consistent with the terms of this
Agreement, including the financing of the conduct of the
operations of the Partnership Group; subject to
Section 7.6(a), the lending of funds to other Persons
(including other Group Members); the repayment or guarantee of
obligations of any Group Member; and the making of capital
contributions to any Group Member;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including
instruments that limit the liability of the Partnership under
contractual arrangements to all or particular assets of the
Partnership, with the other party to the contract to have no
recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership
than would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection, employment, retention and dismissal of
employees (including employees having titles such as
president, vice president,
secretary and treasurer) and agents,
outside attorneys, accountants, consultants and contractors of
the General Partner or the Partnership Group and the
determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of insurance for the benefit of the
Partnership Group, the Partners and Indemnitees;
(ix) the formation of, or acquisition of an interest in,
and the contribution of property and the making of loans to, any
further limited or general partnerships, joint ventures,
corporations, limited liability companies or other Persons
(including the acquisition of interests in, and the
contributions of property to, any Group Member from time to
time) subject to the restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and
obligations of the Partnership, including the bringing and
defending of actions at law or in equity and otherwise engaging
in the conduct of litigation, arbitration or mediation and the
incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any
National Securities Exchange and the delisting of some or all of
the Limited Partner Interests from, or requesting that trading
be suspended on, any such exchange (subject to any prior
approval that may be required under Section 4.7);
(xiii) the purchase, sale or other acquisition or
disposition of Partnership Interests, or the issuance of
options, rights, warrants and appreciation rights relating to
Partnership Interests;
(xiv) the undertaking of any action in connection with the
Partnerships participation in any Group Member; and
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(xv) the entering into of agreements with any of its
Affiliates to render services to a Group Member or to itself in
the discharge of its duties as General Partner of the
Partnership.
(b) Notwithstanding any other provision of this Agreement,
any Group Member Agreement, the Delaware Act or any applicable
law, rule or regulation, each of the Partners and each other
Person who may acquire an interest in Partnership Interests or
is otherwise bound by this Agreement hereby (i) approves,
ratifies and confirms the execution, delivery and performance by
the parties thereto of this Agreement, the Underwriting
Agreement, the Contribution Agreement, the Omnibus Agreement and
the other agreements described in or filed as exhibits to the
Registration Statement that are related to the transactions
contemplated by the Registration Statement (in each case other
than this Agreement, without giving effect to any amendments,
supplements or restatements after the date hereof);
(ii) agrees that the General Partner (on its own or on
behalf of the Partnership) is authorized to execute, deliver and
perform the agreements referred to in clause (i) of this
sentence and the other agreements, acts, transactions and
matters described in or contemplated by the Registration
Statement on behalf of the Partnership without any further act,
approval or vote of the Partners or the other Persons who may
acquire an interest in Partnership Interests or is otherwise
bound by this Agreement; and (iii) agrees that the
execution, delivery or performance by the General Partner, any
Group Member or any Affiliate of any of them of this Agreement
or any agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate
of the General Partner of the rights accorded pursuant to
Article XV) shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under
this Agreement (or any other agreements) or of any duty existing
at law, in equity or otherwise.
Section 7.2 Certificate
of Limited Partnership. The General Partner has
caused the Certificate of Limited Partnership to be filed with
the Secretary of State of the State of Delaware as required by
the Delaware Act. The General Partner shall use all reasonable
efforts to cause to be filed such other certificates or
documents that the General Partner determines to be necessary or
appropriate for the formation, continuation, qualification and
operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of
Delaware or any other state in which the Partnership may elect
to do business or own property. To the extent the General
Partner determines such action to be necessary or appropriate,
the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to
maintain the Partnership as a limited partnership (or a
partnership or other entity in which the limited partners have
limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do
business or own property. Subject to the terms of
Section 3.4(a), the General Partner shall not be required,
before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document
or any amendment thereto to any Limited Partner.
Section 7.3 Restrictions
on the General Partners Authority. Except
as provided in Article XII and Article XIV, the
General Partner may not sell, exchange or otherwise dispose of
all or substantially all of the assets of the Partnership Group,
taken as a whole, in a single transaction or a series of related
transactions without the approval of holders of a Unit Majority;
provided, however, that this provision shall not
preclude or limit the General Partners ability to
mortgage, pledge, hypothecate or grant a security interest in
all or substantially all of the assets of the Partnership Group
and shall not apply to any forced sale of any or all of the
assets of the Partnership Group pursuant to the foreclosure of,
or other realization upon, any such encumbrance.
Section 7.4 Reimbursement
of the General Partner.
(a) Except as provided in this Section 7.4 and
elsewhere in this Agreement, the General Partner shall not be
compensated for its services as a general partner or managing
member of any Group Member.
(b) The General Partner shall be reimbursed on a monthly
basis, or such other basis as the General Partner may determine,
for (i) all direct and indirect expenses it incurs or
payments it makes on behalf of the Partnership Group (including
salary, bonus, incentive compensation, employment benefits and
other amounts paid to any Person, including Affiliates of the
General Partner, to perform services for the Partnership Group
or for the General Partner in the discharge of its duties to the
Partnership Group), and (ii) all other expenses
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allocable to the Partnership Group or otherwise incurred by the
General Partner in connection with operating the Partnership
Groups business (including expenses allocated to the
General Partner by its Affiliates). The General Partner shall
determine in good faith the expenses that are allocable to the
General Partner or the Partnership Group. Reimbursements
pursuant to this Section 7.4 shall be in addition to any
reimbursement to the General Partner as a result of
indemnification pursuant to Section 7.7.
(c) The General Partner, without the approval of the
Limited Partners (who shall have no right to vote in respect
thereof), may propose and adopt on behalf of the Partnership
benefit plans, programs and practices (including plans, programs
and practices involving the issuance of Partnership Interests or
options to purchase or rights, warrants or appreciation rights
or phantom or tracking interests relating to Partnership
Interests), or cause the Partnership to issue Partnership
Interests in connection with, or pursuant to, any benefit plan,
program or practice maintained or sponsored by the General
Partner or any of its Affiliates, in each case for the benefit
of employees and directors of the General Partner or any of its
Affiliates, in respect of services performed, directly or
indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or
any of its Affiliates any Partnership Interests that the General
Partner or such Affiliates are obligated to provide to any
employees and directors pursuant to any such benefit plans,
programs or practices. Expenses incurred by the General Partner
in connection with any such plans, programs and practices
(including the net cost to the General Partner or such
Affiliates of Partnership Interests purchased by the General
Partner or such Affiliates, from the Partnership, to fulfill
options or awards under such plans, programs and practices)
shall be reimbursed in accordance with Section 7.4(b). Any
and all obligations of the General Partner under any benefit
plans, programs or practices adopted by the General Partner as
permitted by this Section 7.4(c) shall constitute
obligations of the General Partner hereunder and shall be
assumed by any successor General Partner approved pursuant to
Section 11.1 or Section 11.2 or the transferee of or
successor to all of the General Partners General Partner
Interest pursuant to Section 4.6.
(d) The General Partner and its Affiliates may charge any
member of the Partnership Group a management fee to the extent
necessary to allow the Partnership Group to reduce the amount of
any state franchise or income tax or any tax based upon the
revenues or gross margin of any member of the Partnership Group
if the tax benefit produced by the payment of such management
fee or fees exceeds the amount of such fee or fees.
Section 7.5 Outside
Activities.
(a) The General Partner, for so long as it is the General
Partner of the Partnership (i) agrees that its sole
business will be to act as a general partner or managing member,
as the case may be, of the Partnership and any other partnership
or limited liability company of which the Partnership is,
directly or indirectly, a partner or member and to undertake
activities that are ancillary or related thereto (including
being a Limited Partner in the Partnership) and (ii) shall
not engage in any business or activity or incur any debts or
liabilities except in connection with or incidental to
(A) its performance as general partner or managing member,
if any, of one or more Group Members or as described in or
contemplated by the Registration Statement, (B) the
acquiring, owning or disposing of debt securities or equity
interests in any Group Member or (C) the guarantee of, and
mortgage, pledge, or encumbrance of any or all of its assets in
connection with, any indebtedness of any Affiliate of the
General Partner.
(b) Each Unrestricted Person (other than the General
Partner) shall have the right to engage in businesses of every
type and description and other activities for profit and to
engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged
in or anticipated to be engaged in by any Group Member,
independently or with others, including business interests and
activities in direct competition with the business and
activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty otherwise
existing at law, in equity or otherwise, to any Group Member or
any Partner. None of any Group Member, any Limited Partner or
any other Person shall have any rights by virtue of this
Agreement, any Group Member Agreement, or the partnership
relationship established hereby in any business ventures of any
Unrestricted Person.
(c) Subject to the terms of Sections 7.5(a) and (b),
but otherwise notwithstanding anything to the contrary in this
Agreement, (i) the engaging in competitive activities by
any Unrestricted Person (other than
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the General Partner) in accordance with the provisions of this
Section 7.5 is hereby approved by the Partnership and all
Partners, (ii) it shall be deemed not to be a breach of any
fiduciary duty or any other obligation of any type whatsoever of
the General Partner or any other Unrestricted Person for the
Unrestricted Persons (other than the General Partner) to engage
in such business interests and activities in preference to or to
the exclusion of the Partnership and (iii) the Unrestricted
Persons shall have no obligation hereunder or as a result of any
duty otherwise existing at law, in equity or otherwise, to
present business opportunities to the Partnership.
Notwithstanding anything to the contrary in this Agreement, the
doctrine of corporate opportunity, or any analogous doctrine,
shall not apply to any Unrestricted Person (including the
General Partner). No Unrestricted Person (including the General
Partner) who acquires knowledge of a potential transaction,
agreement, arrangement or other matter that may be an
opportunity for the Partnership, shall have any duty to
communicate or offer such opportunity to the Partnership, and
such Unrestricted Person (including the General Partner) shall
not be liable to the Partnership, to any Limited Partner or any
other Person for breach of any fiduciary or other duty by reason
of the fact that such Unrestricted Person (including the General
Partner) pursues or acquires for itself, directs such
opportunity to another Person or does not communicate such
opportunity or information to the Partnership; provided such
Unrestricted Person does not engage in such business or activity
as a result of or using confidential or proprietary information
provided by or on behalf of the Partnership to such Unrestricted
Person.
(d) The General Partner and each of its Affiliates may
acquire Units or other Partnership Interests in addition to
those acquired on the Closing Date and, except as otherwise
provided in this Agreement, shall be entitled to exercise, at
their option, all rights relating to all Units
and/or other
Partnership Interests acquired by them. The term
Affiliates when used in this Section 7.5(d)
with respect to the General Partner shall not include any Group
Member.
(e) Notwithstanding anything to the contrary in this
Agreement, (i) to the extent that any provision of this
Agreement purports or is interpreted to have the effect of
restricting the fiduciary duties that might otherwise, as a
result of Delaware or other applicable law, be owed by the
General Partner to the Partnership and the Limited Partners, or
to constitute a waiver or consent by the Limited Partners to any
such restriction, such provisions shall be deemed to have been
approved by the Partners and (ii) nothing in this Agreement
shall limit or otherwise affect any separate contractual
obligations outside of this Agreement of any Person (including
any Unrestricted Person) to the Partnership or any of its
Affiliates.
Section 7.6 Loans
from the General Partner; Loans or Contributions from the
Partnership or Group Members.
(a) The General Partner or any of its Affiliates may, but
shall be under no obligation to, lend to any Group Member, and
any Group Member may borrow from the General Partner or any of
its Affiliates, funds needed or desired by the Group Member for
such periods of time and in such amounts as the General Partner
may determine; provided, however, that in any such
case the lending party may not charge the borrowing party
interest at a rate greater than the rate that would be charged
the borrowing party or impose terms less favorable to the
borrowing party than would be charged or imposed on the
borrowing party by unrelated lenders on comparable loans made on
an arms-length basis (without reference to the lending
partys financial abilities or guarantees), all as
determined by the General Partner. The borrowing party shall
reimburse the lending party for any costs (other than any
additional interest costs) incurred by the lending party in
connection with the borrowing of such funds. For purposes of
this Section 7.6(a) and Section 7.6(b), the term
Group Member shall include any Affiliate of a Group
Member that is controlled by the Group Member.
(b) The Partnership may lend or contribute to any Group
Member, and any Group Member may borrow from the Partnership,
funds on terms and conditions determined by the General Partner.
No Group Member may lend funds to the General Partner or any of
its Affiliates (other than another Group Member).
(c) No borrowing by any Group Member or the approval
thereof by the General Partner shall be deemed to constitute a
breach of any duty hereunder or otherwise existing at law, in
equity or otherwise, of the General Partner or its Affiliates to
the Partnership or the Limited Partners by reason of the fact
that the purpose or effect of such borrowing is directly or
indirectly to (i) enable distributions to the General
Partner or its Affiliates (including in their capacities as
Limited Partners) to exceed the General Partners
Percentage
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Interest of the total amount distributed to all Partners or
(ii) hasten the expiration of the Subordination Period or
the conversion of any Subordinated Units into Common Units.
Section 7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement, all
Indemnitees shall be indemnified and held harmless by the
Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including
legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all
threatened, pending or completed claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, and whether formal or informal and including
appeals, in which any Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, by reason of
its status as an Indemnitee and acting (or refraining to act) in
such capacity on behalf of or the benefit of the Partnership;
provided, that the Indemnitee shall not be indemnified
and held harmless pursuant to this Agreement if there has been a
final and non-appealable judgment entered by a court of
competent jurisdiction determining that, in respect of the
matter for which the Indemnitee is seeking indemnification
pursuant to this Agreement, the Indemnitee acted in bad faith or
engaged in fraud, willful misconduct or, in the case of a
criminal matter, acted with knowledge that the Indemnitees
conduct was unlawful; provided, further, no
indemnification pursuant to this Section 7.7 shall be
available to any Affiliate of the General Partner (other than a
Group Member) with respect to any such Affiliates
obligations pursuant to the Underwriting Agreement, the Omnibus
Agreement and the Contribution Agreement. Any indemnification
pursuant to this Section 7.7 shall be made only out of the
assets of the Partnership, it being agreed that the General
Partner shall not be personally liable for such indemnification
and shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate such
indemnification.
(b) To the fullest extent permitted by law, expenses
(including legal fees and expenses) incurred by an Indemnitee
who is indemnified pursuant to Section 7.7(a) in defending
any claim, demand, action, suit or proceeding shall, from time
to time, be advanced by the Partnership prior to a final and
non-appealable judgment entered by a court of competent
jurisdiction determining that, in respect of the matter for
which the Indemnitee is seeking indemnification pursuant to this
Section 7.7, the Indemnitee is not entitled to be
indemnified upon receipt by the Partnership of any undertaking
by or on behalf of the Indemnitee to repay such amount if it
shall be ultimately determined that the Indemnitee is not
entitled to be indemnified as authorized by this
Section 7.7.
(c) The indemnification provided by this Section 7.7
shall be in addition to any other rights to which an Indemnitee
may be entitled under any agreement, pursuant to any vote of the
holders of Outstanding Limited Partner Interests, as a matter of
law, in equity or otherwise, both as to actions in the
Indemnitees capacity as an Indemnitee and as to actions in
any other capacity (including any capacity under the
Underwriting Agreement), and shall continue as to an Indemnitee
who has ceased to serve in such capacity and shall inure to the
benefit of the heirs, successors, assigns and administrators of
the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse
the General Partner or its Affiliates for the cost of)
insurance, on behalf of the General Partner, its Affiliates and
such other Persons as the General Partner shall determine,
against any liability that may be asserted against, or expense
that may be incurred by, such Person in connection with the
Partnerships activities or such Persons activities
on behalf of the Partnership, regardless of whether the
Partnership would have the power to indemnify such Person
against such liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the Partnership
shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance
by it of its duties to the Partnership also imposes duties on,
or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed
on an Indemnitee with respect to an employee benefit plan
pursuant to applicable law shall constitute fines
within the meaning of Section 7.7(a); and action taken or
omitted by it with respect to any employee benefit plan in the
performance of its duties for a purpose reasonably believed by
it to be in the best interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
that is in the best interests of the Partnership.
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(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification
provisions set forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to
which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the
benefit of the Indemnitees and their heirs, successors, assigns,
executors and administrators and shall not be deemed to create
any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this
Section 7.7 or any provision hereof shall in any manner
terminate, reduce or impair the right of any past, present or
future Indemnitee to be indemnified by the Partnership, nor the
obligations of the Partnership to indemnify any such Indemnitee
under and in accordance with the provisions of this
Section 7.7 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
Section 7.8 Liability
of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in
this Agreement, no Indemnitee shall be liable for monetary
damages to the Partnership, the Limited Partners or any other
Persons who have acquired interests in the Partnership
Interests, for losses sustained or liabilities incurred as a
result of any act or omission of an Indemnitee unless there has
been a final and non-appealable judgment entered by a court of
competent jurisdiction determining that, in respect of the
matter in question, the Indemnitee acted in bad faith or engaged
in fraud, willful misconduct or, in the case of a criminal
matter, acted with knowledge that the Indemnitees conduct
was criminal.
(b) Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General Partner
may exercise any of the powers granted to it by this Agreement
and perform any of the duties imposed upon it hereunder either
directly or by or through its agents, and the General Partner
shall not be responsible for any misconduct or negligence on the
part of any such agent appointed by the General Partner in good
faith.
(c) To the extent that, at law or in equity, an Indemnitee
has duties (including fiduciary duties) and liabilities relating
thereto to the Partnership or to the Partners, the General
Partner and any other Indemnitee acting in connection with the
Partnerships business or affairs shall not be liable to
the Partnership or to any Partner for its good faith reliance on
the provisions of this Agreement.
(d) Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective
only and shall not in any way affect the limitations on the
liability of the Indemnitees under this Section 7.8 as in
effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise
or be asserted.
Section 7.9 Resolution
of Conflicts of Interest; Standards of Conduct and Modification
of Duties.
(a) Unless otherwise expressly provided in this Agreement
or any Group Member Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of
its Affiliates, on the one hand, and the Partnership, any Group
Member or any Partner, on the other, any resolution or course of
action by the General Partner or its Affiliates in respect of
such conflict of interest shall be permitted and deemed approved
by all Partners, and shall not constitute a breach of this
Agreement, of any Group Member Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied
by law or equity, if the resolution or course of action in
respect of such conflict of interest is (i) approved by
Special Approval, (ii) approved by the vote of a majority
of the Common Units (excluding Common Units owned by the General
Partner and its Affiliates), (iii) on terms no less
favorable to the Partnership than those generally being provided
to or available from unrelated third parties or (iv) fair
and reasonable to the Partnership, taking into account the
totality of the relationships between the parties involved
(including other transactions that may be particularly favorable
or advantageous to the Partnership). The General Partner shall
be authorized but
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not required in connection with its resolution of such conflict
of interest to seek Special Approval or Unitholder approval of
such resolution, and the General Partner may also adopt a
resolution or course of action that has not received Special
Approval or Unitholder approval. If Special Approval is sought,
then it shall be presumed that, in making its decision, the
Conflicts Committee acted in good faith, and if neither Special
Approval nor Unitholder approval is sought and the Board of
Directors determines that the resolution or course of action
taken with respect to a conflict of interest satisfies either of
the standards set forth in clauses (iii) or
(iv) above, then it shall be presumed that, in making its
decision, the Board of Directors acted in good faith, and in any
proceeding brought by any Limited Partner or by or on behalf of
such Limited Partner or any other Limited Partner or the
Partnership challenging such approval, the Person bringing or
prosecuting such proceeding shall have the burden of overcoming
such presumption. Notwithstanding anything to the contrary in
this Agreement or any duty otherwise existing at law or equity,
the existence of the conflicts of interest described in the
Registration Statement are hereby approved by all Partners and
shall not constitute a breach of this Agreement or of any duty
hereunder or existing at law, in equity or otherwise.
(b) Whenever the General Partner, or any committee of the
Board of Directors (including the Conflicts Committee), makes a
determination or takes or declines to take any other action, or
any of its Affiliates causes the General Partner to do so, in
its capacity as the general partner of the Partnership as
opposed to in its individual capacity, whether under this
Agreement, any Group Member Agreement or any other agreement
contemplated hereby or otherwise, then, unless another express
standard is provided for in this Agreement, the General Partner,
such committee or such Affiliates causing the General Partner to
do so, shall make such determination or take or decline to take
such other action in good faith and shall not be subject to any
other or different standards (including fiduciary standards)
imposed by this Agreement, any Group Member Agreement, any other
agreement contemplated hereby or under the Delaware Act or any
other law, rule or regulation or at equity. In order for a
determination or other action to be in good faith
for purposes of this Agreement, the Person or Persons making
such determination or taking or declining to take such other
action must believe that the determination or other action is in
the best interests of the Partnership or the holders of Common
Units.
(c) Whenever the General Partner makes a determination or
takes or declines to take any other action, or any of its
Affiliates causes it to do so, in its individual capacity as
opposed to in its capacity as the general partner of the
Partnership, whether under this Agreement, any Group Member
Agreement or any other agreement contemplated hereby or
otherwise, then the General Partner, or such Affiliates causing
it to do so, are entitled, to the fullest extent permitted by
law, to make such determination or to take or decline to take
such other action free of any duty (including any fiduciary
duty) or obligation whatsoever to the Partnership, any Limited
Partner and any other Person bound by this Agreement, and the
General Partner, or such Affiliates causing it to do so, shall
not, to the fullest extent permitted by law, be required to act
in good faith or pursuant to any other standard imposed by this
Agreement, any Group Member Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. By way of illustration and not
of limitation, whenever the phrases, at the option of the
General Partner, in its sole discretion or
some variation of those phrases, are used in this Agreement, it
indicates that the General Partner is acting in its individual
capacity. For the avoidance of doubt, whenever the General
Partner votes or transfers its Partnership Interests, or
refrains from voting or transferring its Partnership Interests,
it shall be acting in its individual capacity.
(d) The General Partners organizational documents may
provide that determinations to take or decline to take any
action in its individual, rather than representative, capacity
may or shall be determined by its members, if the General
Partner is a limited liability company, stockholders, if the
General Partner is a corporation, or the members or stockholders
of the General Partners general partner, if the General
Partner is a partnership.
(e) Notwithstanding anything to the contrary in this
Agreement, the General Partner and its Affiliates shall have no
duty or obligation, express or implied, to (i) sell or
otherwise dispose of any asset of the Partnership Group other
than in the ordinary course of business or (ii) permit any
Group Member to use any facilities or assets of the General
Partner and its Affiliates, except as may be provided in
contracts entered into from time to time specifically dealing
with such use. Any determination by the General Partner or any
of its Affiliates to enter into such contracts shall be in its
sole discretion.
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(f) Except as expressly set forth in this Agreement or the
Delaware Act, neither the General Partner nor any other
Indemnitee shall have any duties or liabilities, including
fiduciary duties, to the Partnership or any Limited Partner and
the provisions of this Agreement, to the extent that they
restrict, eliminate or otherwise modify the duties and
liabilities, including fiduciary duties, of the General Partner
or any other Indemnitee otherwise existing at law or in equity,
are agreed by the Partners to replace such other duties and
liabilities of the General Partner or such other Indemnitee.
(g) The Unitholders hereby authorize the General Partner,
on behalf of the Partnership as a partner or member of a Group
Member, to approve of actions by the general partner or managing
member of such Group Member similar to those actions permitted
to be taken by the General Partner pursuant to this
Section 7.9.
Section 7.10 Other
Matters Concerning the General Partner.
(a) The General Partner may rely upon, and shall be
protected in acting or refraining from acting upon, any
resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, bond, debenture or other paper
or document believed by it to be genuine and to have been signed
or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment
bankers and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the advice
or opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be
within such Persons professional or expert competence
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such advice or opinion.
(c) The General Partner shall have the right, in respect of
any of its powers or obligations hereunder, to act through any
of its duly authorized officers, a duly appointed attorney or
attorneys-in-fact or the duly authorized officers of the
Partnership.
Section 7.11 Purchase
or Sale of Partnership Interests. The General
Partner may cause the Partnership to purchase or otherwise
acquire Partnership Interests; provided that, the General
Partner may not cause any Group Member to purchase Subordinated
Units during the Subordination Period. As long as Partnership
Interests are held by any Group Member, such Partnership
Interests shall not be considered Outstanding for any purpose,
except as otherwise provided herein. The General Partner or any
Affiliate of the General Partner may also purchase or otherwise
acquire and sell or otherwise dispose of Partnership Interests
for its own account, subject to the provisions of
Articles IV and X.
Section 7.12 Registration
Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the
General Partner (including for purposes of this
Section 7.12, any Person that is an Affiliate of the
General Partner at the date hereof notwithstanding that it may
later cease to be an Affiliate of the General Partner) holds
Partnership Interests that it desires to sell and
(ii) Rule 144 of the Securities Act (or any successor
rule or regulation to Rule 144) or another exemption
from registration is not available to enable such holder of
Partnership Interests (the Holder) to
dispose of the number of Partnership Interests it desires to
sell at the time it desires to do so without registration under
the Securities Act, then at the option and upon the request of
the Holder, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use
all commercially reasonable efforts to cause to become effective
and remain effective for a period of not less than six months
following its effective date or such shorter period as shall
terminate when all Partnership Interests covered by such
registration statement have been sold, a registration statement
under the Securities Act registering the offering and sale of
the number of Partnership Interests specified by the Holder;
provided, however, that the Partnership shall not
be required to effect more than three registrations pursuant to
this Section 7.12(a); and provided further,
however, that if the Conflicts Committee determines that
a postponement of the requested registration would be in the
best interests of the Partnership and its Partners due to a
pending transaction, investigation or other event, the filing of
such registration statement or the effectiveness thereof may be
deferred for up to six months, but not thereafter. In connection
with any registration pursuant to the immediately preceding
sentence, the Partnership shall (A) promptly prepare and
file (1) such documents as
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may be necessary to register or qualify the securities subject
to such registration under the securities laws of such states as
the Holder shall reasonably request; provided,
however, that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Partnership
would become subject to general service of process or to
taxation or qualification to do business as a foreign
corporation or partnership doing business in such jurisdiction
solely as a result of such registration, and (2) such
documents as may be necessary to apply for listing or to list
the Partnership Interests subject to such registration on such
National Securities Exchange as the Holder shall reasonably
request, and (B) do any and all other acts and things that
may be necessary or appropriate to enable the Holder to
consummate a public sale of such Partnership Interests in such
states. Except as set forth in Section 7.12(c), all costs
and expenses of any such registration and offering (other than
the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a
registration statement under the Securities Act for an offering
of Partnership Interests for cash (other than an offering
relating solely to a benefit plan), the Partnership shall use
all commercially reasonable efforts to include such number or
amount of Partnership Interests held by any Holder in such
registration statement as the Holder shall request;
provided, that the Partnership is not required to make
any effort or take any action to so include the Partnership
Interests of the Holder once the registration statement becomes
or is declared effective by the Commission, including any
registration statement providing for the offering from time to
time of Partnership Interests pursuant to Rule 415 of the
Securities Act. If the proposed offering pursuant to this
Section 7.12(b) shall be an underwritten offering, then, in
the event that the managing underwriter or managing underwriters
of such offering advise the Partnership and the Holder in
writing that in their opinion the inclusion of all or some of
the Holders Partnership Interests would adversely and
materially affect the timing or success of the offering, the
Partnership shall include in such offering only that number or
amount, if any, of Partnership Interests held by the Holder
that, in the opinion of the managing underwriter or managing
underwriters, will not so adversely and materially affect the
offering. Except as set forth in Section 7.12(c), all costs
and expenses of any such registration and offering (other than
the underwriting discounts and commissions) shall be paid by the
Partnership, without reimbursement by the Holder.
(c) If underwriters are engaged in connection with any
registration referred to in this Section 7.12, the
Partnership shall provide indemnification, representations,
covenants, opinions and other assurance to the underwriters in
form and substance reasonably satisfactory to such underwriters.
Further, in addition to and not in limitation of the
Partnerships obligation under Section 7.7, the
Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the Holder, its officers, directors
and each Person who controls the Holder (within the meaning of
the Securities Act) and any agent thereof (collectively,
Indemnified Persons) from and against
any and all losses, claims, damages, liabilities, joint or
several, expenses (including legal fees and expenses),
judgments, fines, penalties, interest, settlements or other
amounts arising from any and all claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnified Person may be involved,
or is threatened to be involved, as a party or otherwise, under
the Securities Act or otherwise (hereinafter referred to in this
Section 7.12(c) as a claim and in the plural as
claims) based upon, arising out of or resulting from
any untrue statement or alleged untrue statement of any material
fact contained in any registration statement under which any
Partnership Interests were registered under the Securities Act
or any state securities or Blue Sky laws, in any preliminary
prospectus (if used prior to the effective date of such
registration statement), or in any summary or final prospectus
or free writing prospectus or in any amendment or supplement
thereto (if used during the period the Partnership is required
to keep the registration statement current), or arising out of,
based upon or resulting from the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not
be liable to any Indemnified Person to the extent that any such
claim arises out of, is based upon or results from an untrue
statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary,
summary or final prospectus or free writing prospectus or such
amendment or supplement, in reliance upon and in conformity with
written information furnished to the Partnership by or on behalf
of such Indemnified Person specifically for use in the
preparation thereof.
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(d) The provisions of Section 7.12(a) and
Section 7.12(b) shall continue to be applicable with
respect to the General Partner (and any of the General
Partners Affiliates) after it ceases to be a general
partner of the Partnership, during a period of two years
subsequent to the effective date of such cessation and for so
long thereafter as is required for the Holder to sell all of the
Partnership Interests with respect to which it has requested
during such two-year period inclusion in a registration
statement otherwise filed or that a registration statement be
filed; provided, however, that the Partnership
shall not be required to file successive registration statements
covering the same Partnership Interests for which registration
was demanded during such two-year period. The provisions of
Section 7.12(c) shall continue in effect thereafter.
(e) The rights to cause the Partnership to register
Partnership Interests pursuant to this Section 7.12 may be
assigned (but only with all related obligations) by a Holder to
a transferee or assignee of such Partnership Interests,
provided (i) the Partnership is, within a reasonable
time after such transfer, furnished with written notice of the
name and address of such transferee or assignee and the
Partnership Interests with respect to which such registration
rights are being assigned; and (ii) such transferee or
assignee agrees in writing to be bound by and subject to the
terms set forth in this Section 7.12.
(f) Any request to register Partnership Interests pursuant
to this Section 7.12 shall (i) specify the Partnership
Interests intended to be offered and sold by the Person making
the request, (ii) express such Persons present intent
to offer such Partnership Interests for distribution,
(iii) describe the nature or method of the proposed offer
and sale of Partnership Interests, and (iv) contain the
undertaking of such Person to provide all such information and
materials and take all action as may be required in order to
permit the Partnership to comply with all applicable
requirements in connection with the registration of such
Partnership Interests.
Section 7.13 Reliance
by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any
Person dealing with the Partnership shall be entitled to assume
that the General Partner and any officer of the General Partner
authorized by the General Partner to act on behalf of and in the
name of the Partnership has full power and authority to
encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any authorized contracts on
behalf of the Partnership, and such Person shall be entitled to
deal with the General Partner or any such officer as if it were
the Partnerships sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives, to the fullest
extent permitted by law, any and all defenses or other remedies
that may be available against such Person to contest, negate or
disaffirm any action of the General Partner or any such officer
in connection with any such dealing. In no event shall any
Person dealing with the General Partner or any such officer or
its representatives be obligated to ascertain that the terms of
this Agreement have been complied with or to inquire into the
necessity or expedience of any act or action of the General
Partner or any such officer or its representatives. Each and
every certificate, document or other instrument executed on
behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and
every Person relying thereon or claiming thereunder that
(a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full
force and effect, (b) the Person executing and delivering
such certificate, document or instrument was duly authorized and
empowered to do so for and on behalf of the Partnership and
(c) such certificate, document or instrument was duly
executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
BOOKS,
RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records
and Accounting. The General Partner shall keep or
cause to be kept at the principal office of the Partnership
appropriate books and records with respect to the
Partnerships business, including all books and records
necessary to provide to the Limited Partners any information
required to be provided pursuant to Section 3.4(a). Any
books and records maintained by or on behalf of the Partnership
in the regular course of its business, including the record of
the Record Holders of Units or other Partnership Interests,
books of account and records of Partnership proceedings, may be
kept on, or be in the form of, computer disks, hard drives,
magnetic tape, photographs, micrographics or any other
information storage
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device; provided, that the books and records so
maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership
shall be maintained, for tax and financial reporting purposes,
on an accrual basis in accordance with U.S. GAAP. The
Partnership shall not be required to keep books maintained on a
cash basis and the General Partner shall be permitted to
calculate cash-based measures, including Operating Surplus and
Adjusted Operating Surplus, by making such adjustments to its
accrual basis books to account for non-cash items and other
adjustments as the General Partner determines to be necessary or
appropriate.
Section 8.2 Fiscal
Year. The fiscal year of the Partnership shall be
a fiscal year ending December 31.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than
120 days after the close of each fiscal year of the
Partnership, the General Partner shall cause to be mailed or
made available, by any reasonable means, to each Record Holder
of a Unit as of a date selected by the General Partner, an
annual report containing financial statements of the Partnership
for such fiscal year of the Partnership, presented in accordance
with U.S. GAAP, including a balance sheet and statements of
operations, Partnership equity and cash flows, such statements
to be audited by a firm of independent public accountants
selected by the General Partner.
(b) As soon as practicable, but in no event later than
90 days after the close of each Quarter except the last
Quarter of each fiscal year, the General Partner shall cause to
be mailed or made available, by any reasonable means to each
Record Holder of a Unit, as of a date selected by the General
Partner, a report containing unaudited financial statements of
the Partnership and such other information as may be required by
applicable law, regulation or rule of any National Securities
Exchange on which the Units are listed or admitted to trading,
or as the General Partner determines to be necessary or
appropriate.
(c) The General Partner shall be deemed to have made a
report available to each Record Holder as required by this
Section 8.3 if it has either (i) filed such report
with the Commission via its Electronic Data Gathering, Analysis
and Retrieval system and such report is publicly available on
such system or (ii) made such report available on any
publicly available website maintained by the Partnership.
ARTICLE IX
TAX MATTERS
Section 9.1 Tax
Returns and Information. The Partnership shall
timely file all returns of the Partnership that are required for
federal, state and local income tax purposes on the basis of the
accrual method and the taxable period or years that it is
required by law to adopt, from time to time, as determined by
the General Partner. In the event the Partnership is required to
use a taxable period other than a year ending on
December 31, the General Partner shall use reasonable
efforts to change the taxable period of the Partnership to a
year ending on December 31. The tax information reasonably
required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable period shall be
furnished to them within 90 days of the close of the
calendar year in which the Partnerships taxable period
ends. The classification, realization and recognition of income,
gain, losses and deductions and other items shall be on the
accrual method of accounting for federal income tax purposes.
Section 9.2 Tax
Elections.
(a) The Partnership shall make the election under
Section 754 of the Code in accordance with applicable
regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the General
Partners determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other
provision herein contained, for the purposes of computing the
adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of a Limited
Partner Interest will be deemed to be the lowest quoted closing
price of the Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are
listed or admitted to trading during the calendar month in which
such transfer is deemed to occur pursuant to Section 6.2(f)
without regard to the actual price paid by such transferee.
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(b) Except as otherwise provided herein, the General
Partner shall determine whether the Partnership should make any
other elections permitted by the Code.
Section 9.3 Tax
Controversies. Subject to the provisions hereof,
the General Partner is designated as the Tax Matters Partner (as
defined in the Code) and is authorized and required to represent
the Partnership (at the Partnerships expense) in
connection with all examinations of the Partnerships
affairs by tax authorities, including resulting administrative
and judicial proceedings, and to expend Partnership funds for
professional services and costs associated therewith. Each
Partner agrees to cooperate with the General Partner and to do
or refrain from doing any or all things reasonably required by
the General Partner to conduct such proceedings.
Section 9.4 Withholding;
Tax Payments.
(a) The General Partner may treat taxes paid by the
Partnership on behalf of, all or less than all of the Partners,
either as a distribution of cash to such Partners or as a
general expense of the Partnership, as determined appropriate
under the circumstances by the General Partner
(b) Notwithstanding any other provision of this Agreement,
the General Partner is authorized to take any action that may be
required to cause the Partnership and other Group Members to
comply with any withholding requirements established under the
Code or any other federal, state or local law including pursuant
to Sections 1441, 1442, 1445 and 1446 of the Code. To the
extent that the Partnership is required or elects to withhold
and pay over to any taxing authority any amount resulting from
the allocation or distribution of income to any Partner
(including by reason of Section 1446 of the Code), the
General Partner may treat the amount withheld as a distribution
of cash pursuant to Section 6.3 in the amount of such
withholding from such Partner.
ARTICLE X
ADMISSION OF
PARTNERS
Section 10.1 Admission
of Limited Partners.
(a) Upon the issuance by the Partnership of Common Units,
Subordinated Units and Incentive Distribution Rights to the
General Partner, TII and the Underwriters as described in
Article V in connection with the Initial Offering, such
parties shall be automatically admitted to the Partnership as
Initial Limited Partners in respect of the Common Units,
Subordinated Units or Incentive Distribution Rights issued to
them.
(b) By acceptance of the transfer of any Limited Partner
Interests in accordance with Article IV or the acceptance
of any Limited Partner Interests issued pursuant to
Article V or pursuant to a merger or consolidation or
conversion pursuant to Article XIV, each transferee of, or
other such Person acquiring, a Limited Partner Interest
(including any nominee holder or an agent or representative
acquiring such Limited Partner Interests for the account of
another Person) (i) shall be admitted to the Partnership as
a Limited Partner with respect to the Limited Partner Interests
so transferred or issued to such Person when any such transfer
or admission is reflected in the books and records of the
Partnership and such Limited Partner becomes the Record Holder
of the Limited Partner Interests so transferred, (ii) shall
become bound, and shall be deemed to have agreed to be bound, by
the terms of this Agreement, (iii) represents that the
transferee or other recipient has the capacity, power and
authority to enter into this Agreement and (iv) makes the
consents, acknowledgements and waivers contained in this
Agreement, all with or without execution of this Agreement by
such Person. The transfer of any Limited Partner Interests and
the admission of any new Limited Partner shall not constitute an
amendment to this Agreement. A Person may become a Limited
Partner or Record Holder of a Limited Partner Interest without
the consent or approval of any of the Partners. A Person may not
become a Limited Partner without acquiring a Limited Partner
Interest and until such Person is reflected in the books and
records of the Partnership as the Record Holder of such Limited
Partner Interest.
(c) The name and mailing address of each Limited Partner
shall be listed on the books and records of the Partnership
maintained for such purpose by the Partnership or the Transfer
Agent. The General Partner shall update the books and records of
the Partnership from time to time as necessary to reflect
accurately the
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information therein (or shall cause the Transfer Agent to do so,
as applicable). A Limited Partner Interest may be represented by
a Certificate, as provided in Section 4.1.
(d) Any transfer of a Limited Partner Interest shall not
entitle the transferee to share in the profits and losses, to
receive distributions, to receive allocations of income, gain,
loss, deduction or credit or any similar item or to any other
rights to which the transferor was entitled until the transferee
becomes a Limited Partner pursuant to Section 10.1(b).
Section 10.2 Admission
of Substituted Limited Partners. By transfer of a
Limited Partner Interest in accordance with Article IV, the
transferor shall have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the
conditions of, and in the manner permitted under, this
Agreement. Notwithstanding any other provision of this
Agreement, a permitted transferee of a Limited Partner Interest
who does not duly execute and deliver a Transfer Application
shall not be admitted as a Limited Partner and shall have only
the rights of an Assignee hereunder, which rights shall include
(a) the right to transfer such Limited Partner Interest to
a purchaser or other transferee and (b) the right to
transfer the right to request admission as a Substituted Limited
Partner to such purchaser or other transferee in respect of the
transferred Limited Partner Interests; provided, however, that
the Partnership may, in its sole discretion, treat such
transferee as the absolute owner of such Limited Partner
Interest for all purposes, except as otherwise required by law
or stock exchange regulations. No transferor of a Limited
Partner Interest or other Person shall have any obligation or
responsibility to provide a Transfer Application to a transferee
or to assist or participate in any way with respect to or to
ensure the completion or delivery thereof or have any liability
or responsibility if the transferee neglects or chooses not to
execute and deliver a properly completed Transfer Application.
Each transferee of a Limited Partner Interest (including any
nominee holder or an agent acquiring such Limited Partner
Interest for the account of another Person) who executes and
delivers a properly completed Transfer Application shall, by
virtue of such execution and delivery, be admitted to the
Partnership as a Substituted Limited Partner with respect to the
Limited Partner Interests so transferred to such Person at such
time as such transfer is recorded in the books and records of
the Partnership. The General Partner shall periodically, but no
less frequently than on the first Business Day of each calendar
quarter, cause any unrecorded transfers of Limited Partner
Interests, with respect to which a properly completed, duly
executed and delivered Transfer Application has been received,
to be recorded in the books and records of the Partnership. With
respect to voting rights hereunder attributable to Limited
Partner Interests that are held by Assignees, the General
Partner shall be deemed to be the Limited Partner with respect
thereto and shall, in exercising the voting rights in respect of
such Limited Partner Interests on any matter, vote such Limited
Partner Interests at the written direction of the Assignee who
is the Record Holder of such Limited Partner Interests. If no
such written direction is received, such Limited Partner
Interests will not be voted. Except as expressly provided in
this Agreement, an Assignee shall have no other rights of a
Limited Partner hereunder, under the Delaware Act, at law, in
equity or otherwise.
Section 10.3 Admission
of Successor General Partner. A successor General
Partner approved pursuant to Section 11.1 or
Section 11.2 or the transferee of or successor to all of
the General Partner Interest pursuant to Section 4.6 who is
proposed to be admitted as a successor General Partner shall be
admitted to the Partnership as the General Partner, effective
immediately prior to the withdrawal or removal of the
predecessor or transferring General Partner, pursuant to
Section 11.1 or 11.2 or the transfer of the General Partner
Interest pursuant to Section 4.6, provided,
however, that no such successor shall be admitted to the
Partnership until compliance with the terms of Section 4.6
has occurred and such successor has executed and delivered such
other documents or instruments as may be required to effect such
admission. Any such successor shall, subject to the terms
hereof, carry on the business of the members of the Partnership
Group without dissolution.
Section 10.4 Amendment
of Agreement and Certificate of Limited
Partnership. To effect the admission to the
Partnership of any Partner, the General Partner shall take all
steps necessary or appropriate under the Delaware Act to amend
the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to
this Agreement and, if required by law, the General Partner
shall prepare and file an amendment to the Certificate of
Limited Partnership.
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ARTICLE XI
WITHDRAWAL
OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal
of the General Partner.
(a) The General Partner shall be deemed to have withdrawn
from the Partnership upon the occurrence of any one of the
following events (each such event herein referred to as an
Event of Withdrawal);
(i) The General Partner voluntarily withdraws from the
Partnership by giving written notice to the other Partners;
(ii) The General Partner transfers all of its General
Partner Interest pursuant to Section 4.6;
(iii) The General Partner is removed pursuant to
Section 11.2;
(iv) The General Partner (A) makes a general
assignment for the benefit of creditors; (B) files a
voluntary bankruptcy petition for relief under Chapter 7 of
the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar
relief (but not a reorganization) under any law; (D) files
an answer or other pleading admitting or failing to contest the
material allegations of a petition filed against the General
Partner in a proceeding of the type described in clauses (A)-(C)
of this Section 11.1(a)(iv); or (E) seeks, consents to
or acquiesces in the appointment of a trustee (but not a
debtor-in-possession),
receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) A final and non-appealable order of relief under
Chapter 7 of the United States Bankruptcy Code is entered
by a court with appropriate jurisdiction pursuant to a voluntary
or involuntary petition by or against the General
Partner; or
(vi) (A) in the event the General Partner is a
corporation, a certificate of dissolution or its equivalent is
filed for the General Partner, or 90 days expire after the
date of notice to the General Partner of revocation of its
charter without a reinstatement of its charter, under the laws
of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General
Partner; (C) in the event the General Partner is acting in
such capacity by virtue of being a trustee of a trust, the
termination of the trust; (D) in the event the General
Partner is a natural person, his death or adjudication of
incompetency; and (E) otherwise in the event of the
termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv),
(v) or (vi)(A), (B), (C) or (E) occurs, the
withdrawing General Partner shall give notice to the Limited
Partners within 30 days after such occurrence. The Partners
hereby agree that only the Events of Withdrawal described in
this Section 11.1 shall result in the withdrawal of the
General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall not
constitute a breach of this Agreement under the following
circumstances: (i) at any time during the period beginning
on the Closing Date and ending at 11:59 pm, prevailing Central
Time, on June 30, 2021, the General Partner voluntarily
withdraws by giving at least 90 days advance notice
of its intention to withdraw to the Limited Partners;
provided, that prior to the effective date of such
withdrawal, the withdrawal is approved by Unitholders holding at
least a majority of the Outstanding Common Units (excluding
Common Units held by the General Partner and its Affiliates) and
the General Partner delivers to the Partnership an Opinion of
Counsel (Withdrawal Opinion of
Counsel) that such withdrawal (following the
selection of the successor General Partner) would not result in
the loss of the limited liability under the Delaware Act of any
Limited Partner or cause any Group Member to be treated as an
association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not
already so treated or taxed); (ii) at any time after 11:59
pm, prevailing Central Time, on June 30, 2021, the General
Partner voluntarily withdraws by giving at least
90 days advance notice to the Unitholders, such
withdrawal to take effect on the date specified in such notice;
(iii) at any time that the General Partner ceases to be the
General Partner pursuant to Section 11.1(a)(ii) or is
removed pursuant to Section 11.2; or
(iv) notwithstanding clause (i) of this sentence, at
any time that the
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General Partner voluntarily withdraws by giving at least
90 days advance notice of its intention to withdraw
to the Limited Partners, such withdrawal to take effect on the
date specified in the notice, if at the time such notice is
given one Person and its Affiliates (other than the General
Partner and its Affiliates) own beneficially or of record or
control at least 50% of the Outstanding Units. The withdrawal of
the General Partner from the Partnership upon the occurrence of
an Event of Withdrawal shall also constitute the withdrawal of
the General Partner as general partner or managing member, if
any, to the extent applicable, of the other Group Members. If
the General Partner gives a notice of withdrawal pursuant to
Section 11.1(a)(i), the holders of a Unit Majority, may,
prior to the effective date of such withdrawal, elect a
successor General Partner. The Person so elected as successor
General Partner shall automatically become the successor general
partner or managing member, to the extent applicable, of the
other Group Members of which the General Partner is a general
partner or a managing member. If, prior to the effective date of
the General Partners withdrawal pursuant to
Section 11.1(a)(i), a successor is not selected by the
Unitholders as provided herein or the Partnership does not
receive a Withdrawal Opinion of Counsel, the Partnership shall
be dissolved in accordance with Section 12.1 unless the
business of the Partnership is continued pursuant to
Section 12.2. Any successor General Partner elected in
accordance with the terms of this Section 11.1 shall be
subject to the provisions of Section 10.3.
Section 11.2 Removal
of the General Partner. The General Partner may
be removed if such removal is approved by the Unitholders
holding at least
662/3%
of the Outstanding Units (including Units held by the General
Partner and its Affiliates) voting as a single class. Any such
action by such holders for removal of the General Partner must
also provide for the election of a successor General Partner by
the Unitholders holding a majority of the outstanding Common
Units, voting as a class, and a majority of the outstanding
Subordinated Units, voting as a class (including, in each case,
Units held by the General Partner and its Affiliates). Such
removal shall be effective immediately following the admission
of a successor General Partner pursuant to Section 10.3.
The removal of the General Partner shall also automatically
constitute the removal of the General Partner as general partner
or managing member, to the extent applicable, of the other Group
Members of which the General Partner is a general partner or a
managing member. If a Person is elected as a successor General
Partner in accordance with the terms of this Section 11.2,
such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing
member, to the extent applicable, of the other Group Members of
which the General Partner is a general partner or a managing
member. The right of the holders of Outstanding Units to remove
the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters
covered by a Withdrawal Opinion of Counsel. Any successor
General Partner elected in accordance with the terms of this
Section 11.2 shall be subject to the provisions of
Section 10.3.
Section 11.3 Interest
of Departing General Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General
Partner under circumstances where such withdrawal does not
violate this Agreement or (ii) removal of the General
Partner by the holders of Outstanding Units under circumstances
where Cause does not exist, if the successor General Partner is
elected in accordance with the terms of Section 11.1 or
Section 11.2, the Departing General Partner shall have the
option, exercisable prior to the effective date of the
withdrawal or removal of such Departing General Partner, to
require its successor to purchase its General Partner Interest
and its or its Affiliates general partner interest (or
equivalent interest), if any, in the other Group Members and all
of its or its Affiliates Incentive Distribution Rights
(collectively, the Combined Interest)
in exchange for an amount in cash equal to the fair market value
of such Combined Interest, such amount to be determined and
payable as of the effective date of its withdrawal or removal.
If the General Partner is removed by the Unitholders under
circumstances where Cause exists or if the General Partner
withdraws under circumstances where such withdrawal violates
this Agreement, and if a successor General Partner is elected in
accordance with the terms of Section 11.1 or
Section 11.2 (or if the business of the Partnership is
continued pursuant to Section 12.2 and the successor
General Partner is not the former General Partner), such
successor shall have the option, exercisable prior to the
effective date of the withdrawal or removal of such Departing
General Partner (or, in the event the business of the
Partnership is continued, prior to the date the business of the
Partnership is continued), to purchase the Combined Interest for
such fair market value of such Combined Interest. In either
event, the Departing General Partner shall be entitled to
receive all reimbursements due such Departing General Partner
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pursuant to Section 7.4, including any employee-related
liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the
Departing General Partner or its Affiliates (other than any
Group Member) for the benefit of the Partnership or the other
Group Members.
For purposes of this Section 11.3(a), the fair market value
of the Combined Interest shall be determined by agreement
between the Departing General Partner and its successor or,
failing agreement within 30 days after the effective date
of such Departing General Partners withdrawal or removal,
by an independent investment banking firm or other independent
expert selected by the Departing General Partner and its
successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If
such parties cannot agree upon one independent investment
banking firm or other independent expert within 45 days
after the effective date of such withdrawal or removal, then the
Departing General Partner shall designate an independent
investment banking firm or other independent expert, the
Departing General Partners successor shall designate an
independent investment banking firm or other independent expert,
and such firms or experts shall mutually select a third
independent investment banking firm or independent expert, which
third independent investment banking firm or other independent
expert shall determine the fair market value of the Combined
Interest. In making its determination, such third independent
investment banking firm or other independent expert may consider
the value of the Units, including the then current trading price
of Units on any National Securities Exchange on which Units are
then listed or admitted to trading, the value of the
Partnerships assets, the rights and obligations of the
Departing General Partner, the value of the Incentive
Distribution Rights and the General Partner Interest and other
factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner
set forth in Section 11.3(a), the Departing General Partner
(or its transferee) shall become a Limited Partner and the
Combined Interest shall be converted into Common Units pursuant
to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a),
without reduction in such Partnership Interest (but subject to
proportionate dilution by reason of the admission of its
successor). Any successor General Partner shall indemnify the
Departing General Partner (or its transferee) as to all debts
and liabilities of the Partnership arising on or after the date
on which the Departing General Partner (or its transferee)
becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest to Common Units will be
characterized as if the Departing General Partner (or its
transferee) contributed the Combined Interest to the Partnership
in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance
with the terms of Section 11.1 or Section 11.2 (or if
the business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is not the
former General Partner) and the option described in
Section 11.3(a) is not exercised by the party entitled to
do so, the successor General Partner shall, at the effective
date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to the product of
(i) the quotient obtained by dividing (A) the
Percentage Interest of the General Partner Interest of the
Departing General Partner by (B) a percentage equal to 100%
less the Percentage Interest of the General Partner Interest of
the Departing General Partner and (ii) the Net Agreed Value
of the Partnerships assets on such date. In such event,
such successor General Partner shall, subject to the following
sentence, be entitled to its Percentage Interest of all
Partnership allocations and distributions to which the Departing
General Partner was entitled. In addition, the successor General
Partner shall cause this Agreement to be amended to reflect
that, from and after the date of such successor General
Partners admission, the successor General Partners
interest in all Partnership distributions and allocations shall
be its Percentage Interest.
Section 11.4 Termination
of Subordination Period, Conversion of Subordinated Units and
Extinguishment of Cumulative Common Unit
Arrearages. Notwithstanding any provision of this
Agreement, if the General Partner is removed as general partner
of the Partnership under circumstances where Cause does not
exist:
(a) the Subordinated Units held by any Person will
immediately and automatically convert into Common Units on a
one-for-one
basis, provided (i) neither such Person nor any of
its Affiliates voted any
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of its Units in favor of the removal and (ii) such Person
is not an Affiliate of the successor General Partner; and
(b) if all of the Subordinated Units convert into Common
Units pursuant to Section 11.4(a), all Cumulative Common
Unit Arrearages on the Common Units will be extinguished and the
Subordination Period will end;
provided, however, that such converted
Subordinated Units shall remain subject to the provisions of
Sections 5.5(c)(ii), 6.1(d)(x) and 6.7.
Section 11.5 Withdrawal
of Limited Partners. No Limited Partner shall
have any right to withdraw from the Partnership;
provided, however, that when a transferee of a
Limited Partners Limited Partner Interest becomes a Record
Holder of the Limited Partner Interest so transferred, such
transferring Limited Partner shall cease to be a Limited Partner
with respect to the Limited Partner Interest so transferred.
ARTICLE XII
DISSOLUTION
AND LIQUIDATION
Section 12.1 Dissolution. The
Partnership shall not be dissolved by the admission of
Substituted Limited Partners or additional Limited Partners or
by the admission of a successor General Partner in accordance
with the terms of this Agreement. Upon the removal or withdrawal
of the General Partner, if a successor General Partner is
elected pursuant to Section 11.1, 11.2 or 12.2, the
Partnership shall not be dissolved and such successor General
Partner is hereby authorized to, and shall, continue the
business of the Partnership. Subject to Section 12.2, the
Partnership shall dissolve, and its affairs shall be wound up,
upon:
(a) an Event of Withdrawal of the General Partner as
provided in Section 11.1(a) (other than
Section 11.1(a)(ii)), unless a successor is elected and
such successor is admitted to the Partnership pursuant to this
Agreement;
(b) an election to dissolve the Partnership by the General
Partner that is approved by the holders of a Unit Majority;
(c) the entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Delaware
Act; or
(d) at any time there are no Limited Partners, unless the
Partnership is continued without dissolution in accordance with
the Delaware Act.
Section 12.2 Continuation
of the Business of the Partnership After
Dissolution. Upon (a) an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as
provided in Section 11.1(a)(i) or (iii) and the
failure of the Partners to select a successor to such Departing
General Partner pursuant to Section 11.1 or
Section 11.2, then within 90 days thereafter, or
(b) an event constituting an Event of Withdrawal as defined
in Section 11.1(a)(iv), (v) or (vi), then, to the
maximum extent permitted by law, within 180 days
thereafter, the holders of a Unit Majority may elect to continue
the business of the Partnership on the same terms and conditions
set forth in this Agreement by appointing as a successor General
Partner a Person approved by the holders of a Unit Majority.
Unless such an election is made within the applicable time
period as set forth above, the Partnership shall conduct only
activities necessary to wind up its affairs. If such an election
is so made, then:
(i) the Partnership shall continue without dissolution
unless earlier dissolved in accordance with this
Article XII;
(ii) if the successor General Partner is not the former
General Partner, then the interest of the former General Partner
shall be treated in the manner provided in Section 11.3; and
(iii) the successor General Partner shall be admitted to
the Partnership as General Partner, effective as of the Event of
Withdrawal, by agreeing in writing to be bound by this
Agreement; provided, that the right of the holders of a
Unit Majority to approve a successor General Partner and to
continue the
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business of the Partnership shall not exist and may not be
exercised unless the Partnership has received an Opinion of
Counsel that (A) the exercise of the right would not result
in the loss of limited liability under the Delaware Act of any
Limited Partner and (B) neither the Partnership nor any
Group Member would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue
(to the extent not already so treated or taxed).
Section 12.3 Liquidator. Upon
dissolution of the Partnership, unless the business of the
Partnership is continued pursuant to Section 12.2, the
General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner)
shall be entitled to receive such compensation for its services
as may be approved by holders of at least a majority of the
Outstanding Common Units and Subordinated Units, voting as a
single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days
prior notice and may be removed at any time, with or without
cause, by notice of removal approved by holders of at least a
majority of the Outstanding Common Units and Subordinated Units,
voting as a single class. Upon dissolution, removal or
resignation of the Liquidator, a successor and substitute
Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days
thereafter be approved by holders of at least a majority of the
Outstanding Common Units and Subordinated Units, voting as a
single class. The right to approve a successor or substitute
Liquidator in the manner provided herein shall be deemed to
refer also to any such successor or substitute Liquidator
approved in the manner herein provided. Except as expressly
provided in this Article XII, the Liquidator approved in
the manner provided herein shall have and may exercise, without
further authorization or consent of any of the parties hereto,
all of the powers conferred upon the General Partner under the
terms of this Agreement (but subject to all of the applicable
limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in
Section 7.3) necessary or appropriate to carry out the
duties and functions of the Liquidator hereunder for and during
the period of time required to complete the winding up and
liquidation of the Partnership as provided for herein.
Section 12.4 Liquidation. The
Liquidator shall proceed to dispose of the assets of the
Partnership, discharge its liabilities, and otherwise wind up
its affairs in such manner and over such period as determined by
the Liquidator, subject to
Section 17-804
of the Delaware Act and the following:
(a) The assets may be disposed of by public or private sale
or by distribution in kind to one or more Partners on such terms
as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the
property shall be deemed for purposes of Section 12.4(c) to
have received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must
be made to the other Partners. The Liquidator may defer
liquidation or distribution of the Partnerships assets for
a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnerships assets
would be impractical or would cause undue loss to the Partners.
The Liquidator may distribute the Partnerships assets, in
whole or in part, in kind if it determines that a sale would be
impractical or would cause undue loss to the Partners.
(b) Liabilities of the Partnership include amounts owed to
the Liquidator as compensation for serving in such capacity
(subject to the terms of Section 12.3) and amounts to
Partners otherwise than in respect of their distribution rights
under Article VI. With respect to any liability that is
contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for
such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment. When paid, any
unused portion of the reserve shall be distributed as additional
liquidation proceeds.
(c) All property and all cash in excess of that required to
discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the
extent of, the positive balances in their respective Capital
Accounts, as determined after taking into account all Capital
Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for the
taxable period of the Partnership during which the liquidation
of the Partnership occurs (with such date of occurrence being
determined pursuant to Treasury
Regulation Section 1.704-1(b)(2)(ii)(g)),
and such
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distribution shall be made by the end of such taxable period
(or, if later, within 90 days after said date of such
occurrence).
Section 12.5 Cancellation
of Certificate of Limited Partnership. Upon the
completion of the distribution of Partnership cash and property
as provided in Section 12.4 in connection with the
liquidation of the Partnership, the Certificate of Limited
Partnership and all qualifications of the Partnership as a
foreign limited partnership in jurisdictions other than the
State of Delaware shall be canceled and such other actions as
may be necessary to terminate the Partnership shall be taken.
Section 12.6 Return
of Contributions. The General Partner shall not
be personally liable for, and shall have no obligation to
contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions
of the Limited Partners or Unitholders, or any portion thereof,
it being expressly understood that any such return shall be made
solely from Partnership assets.
Section 12.7 Waiver
of Partition. To the maximum extent permitted by
law, each Partner hereby waives any right to partition of the
Partnership property.
Section 12.8 Capital
Account Restoration. No Limited Partner shall
have any obligation to restore any negative balance in its
Capital Account upon liquidation of the Partnership. The General
Partner shall be obligated to restore any negative balance in
its Capital Account upon liquidation of its interest in the
Partnership by the end of the taxable period of the Partnership
during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
ARTICLE XIII
AMENDMENT OF
PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendments
to be Adopted Solely by the General Partner. Each
Partner agrees that the General Partner, without the approval of
any Partner or Assignee, may amend any provision of this
Agreement and execute, swear to, acknowledge, deliver, file and
record whatever documents may be required in connection
therewith, to reflect:
(a) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the
registered agent of the Partnership or the registered office of
the Partnership;
(b) admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
(c) a change that the General Partner determines to be
necessary or appropriate to qualify or continue the
qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability
under the laws of any state or to ensure that the Group Members
will not be treated as associations taxable as corporations or
otherwise taxed as entities for federal income tax purposes;
(d) a change that the General Partner determines
(i) does not adversely affect the Limited Partners
(including any particular class of Partnership Interests as
compared to other classes of Partnership Interests) in any
material respect, (ii) to be necessary or appropriate to
(A) satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or
contained in any federal or state statute (including the
Delaware Act) or (B) facilitate the trading of the Units
(including the division of any class or classes of Outstanding
Units into different classes to facilitate uniformity of tax
consequences within such classes of Units) or comply with any
rule, regulation, guideline or requirement of any National
Securities Exchange on which the Units are or will be listed or
admitted to trading, (iii) to be necessary or appropriate
in connection with action taken by the General Partner pursuant
to Section 5.9 or (iv) is required to effect the
intent expressed in the Registration Statement or the intent of
the provisions of this Agreement or is otherwise contemplated by
this Agreement;
(e) a change in the fiscal year or taxable period of the
Partnership and any other changes that the General Partner
determines to be necessary or appropriate as a result of a
change in the fiscal year or
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taxable period of the Partnership including, if the General
Partner shall so determine, a change in the definition of
Quarter and the dates on which distributions are to
be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of
Counsel, to prevent the Partnership, or the General Partner or
its directors, officers, trustees or agents from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or plan asset regulations adopted under the
Employee Retirement Income Security Act of 1974, as amended,
regardless of whether such are substantially similar to plan
asset regulations currently applied or proposed by the United
States Department of Labor;
(g) an amendment that the General Partner determines to be
necessary or appropriate in connection with the creation,
authorization or issuance of any class or series of Partnership
Interests and options, rights, warrants and appreciation rights
relating to the Partnership Interests pursuant to
Section 5.6;
(h) any amendment expressly permitted in this Agreement to
be made by the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by
a Merger Agreement approved in accordance with Section 14.3;
(j) an amendment that the General Partner determines to be
necessary or appropriate to reflect and account for the
formation by the Partnership of, or investment by the
Partnership in, any corporation, partnership, joint venture,
limited liability company or other entity, in connection with
the conduct by the Partnership of activities permitted by the
terms of Section 2.4 or 7.1(a);
(k) an amendment necessary to require Limited Partners to
provide a statement, certification or other evidence to the
Partnership regarding whether such Limited Partner is subject to
United States federal income taxation on the income generated by
the Partnership;
(l) a merger, conveyance or conversion pursuant to
Section 14.3(d); or
(m) any other amendments substantially similar to the
foregoing.
Section 13.2 Amendment
Procedures. Amendments to this Agreement may be
proposed only by the General Partner. To the fullest extent
permitted by law, the General Partner shall have no duty or
obligation to propose or approve any amendment to this Agreement
and may decline to do so in its sole discretion, and, in
declining to propose or approve an amendment, to the fullest
extent permitted by law shall not be required to act in good
faith or pursuant to any other standard imposed by this
Agreement, any Group Member Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. An amendment shall be effective
upon its approval by the General Partner and, except as
otherwise provided by Section 13.1 or 13.3, the holders of
a Unit Majority, unless a greater or different percentage is
required under this Agreement or by Delaware law. Each proposed
amendment that requires the approval of the holders of a
specified percentage of Outstanding Units shall be set forth in
a writing that contains the text of the proposed amendment. If
such an amendment is proposed, the General Partner shall seek
the written approval of the requisite percentage of Outstanding
Units or call a meeting of the Unitholders to consider and vote
on such proposed amendment. The General Partner shall notify all
Record Holders upon final adoption of any amendments. The
General Partner shall be deemed to have notified all Record
Holders as required by this Section 13.2 if it has either
(a) filed such amendment with the Commission via its
Electronic Data Gathering, Analysis and Retrieval system and
such amendment is publicly available on such system or
(b) made such amendment available on any publicly available
website maintained by the Partnership
Section 13.3 Amendment
Requirements.
(a) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no provision of this Agreement that
establishes a percentage of Outstanding Units (including Units
deemed owned by the General Partner) required to take any action
shall be amended, altered, changed, repealed or rescinded in any
respect that would have the effect of (i) in the case of
any provision of this Agreement other than Section 11.2 or
Section 13.4, reducing such percentage or (ii) in the
case of Section 11.2 or Section 13.4, increasing such
percentage, unless
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such amendment is approved by the written consent or the
affirmative vote of holders of Outstanding Units whose aggregate
Outstanding Units constitute not less than the voting
requirement sought to be reduced or increased, as applicable.
(b) Notwithstanding the provisions of Section 13.1 and
Section 13.2, no amendment to this Agreement may
(i) enlarge the obligations of (including requiring any
holder of a class of Partnership Interests to make additional
Capital Contributions to the Partnership) any Limited Partner
without its consent, unless such shall be deemed to have
occurred as a result of an amendment approved pursuant to
Section 13.3(c), or (ii) enlarge the obligations of,
restrict, change or modify in any way any action by or rights
of, or reduce in any way the amounts distributable, reimbursable
or otherwise payable to, the General Partner or any of its
Affiliates without its consent, which consent may be given or
withheld at its option.
(c) Except as provided in Section 14.3 or
Section 13.1, any amendment that would have a material
adverse effect on the rights or preferences of any class of
Partnership Interests in relation to other classes of
Partnership Interests must be approved by the holders of not
less than a majority of the Outstanding Partnership Interests of
the class affected. If the General Partner determines an
amendment does not satisfy the requirements of
Section 13.1(d)(i) because it adversely affects one or more
classes of Partnership Interests, as compared to other classes
of Partnership Interests, in any material respect, such
amendment shall only be required to be approved by the adversely
affected class or classes.
(d) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1 and except
as otherwise provided by Section 14.3(b), no amendments
shall become effective without the approval of the holders of at
least 90% of the Outstanding Units voting as a single class
unless the Partnership obtains an Opinion of Counsel to the
effect that such amendment will not affect the limited liability
of any Limited Partner under applicable partnership law of the
state under whose laws the Partnership is organized.
(e) Except as provided in Section 13.1, this
Section 13.3 shall only be amended with the approval of the
holders of at least 90% of the Outstanding Units.
Section 13.4 Special
Meetings. All acts of Limited Partners to be
taken pursuant to this Agreement shall be taken in the manner
provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by
Limited Partners owning 20% or more of the Outstanding Units of
the class or classes for which a meeting is proposed. Limited
Partners shall call a special meeting by delivering to the
General Partner one or more requests in writing stating that the
signing Limited Partners wish to call a special meeting and
indicating the general or specific purposes for which the
special meeting is to be called. Within 60 days after
receipt of such a call from Limited Partners or within such
greater time as may be reasonably necessary for the Partnership
to comply with any statutes, rules, regulations, listing
agreements or similar requirements governing the holding of a
meeting or the solicitation of proxies for use at such a
meeting, the General Partner shall send a notice of the meeting
to the Limited Partners either directly or indirectly through
the Transfer Agent. A meeting shall be held at a time and place
determined by the General Partner on a date not less than
10 days nor more than 60 days after the time notice of
the meeting is given as provided in Section 16.1. Limited
Partners shall not vote on matters that would cause the Limited
Partners to be deemed to be taking part in the management and
control of the business and affairs of the Partnership so as to
jeopardize the Limited Partners limited liability under
the Delaware Act or the law of any other state in which the
Partnership is qualified to do business.
Section 13.5 Notice
of a Meeting. Notice of a meeting called pursuant
to Section 13.4 shall be given to the Record Holders of the
class or classes of Units for which a meeting is proposed in
writing by mail or other means of written communication in
accordance with Section 16.1. The notice shall be deemed to
have been given at the time when deposited in the mail or sent
by other means of written communication.
Section 13.6 Record
Date. For purposes of determining the Limited
Partners entitled to notice of or to vote at a meeting of the
Limited Partners or to give approvals without a meeting as
provided in Section 13.11 the General Partner may set a
Record Date, which shall not be less than 10 nor more than
60 days before (a) the date of the meeting (unless
such requirement conflicts with any rule, regulation, guideline
or
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requirement of any National Securities Exchange on which the
Units are listed or admitted to trading or U.S. federal
securities laws, in which case the rule, regulation, guideline
or requirement of such National Securities Exchange or
U.S. federal securities laws shall govern) or (b) in
the event that approvals are sought without a meeting, the date
by which Limited Partners are requested in writing by the
General Partner to give such approvals. If the General Partner
does not set a Record Date, then (i) the Record Date for
determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners shall be the close of
business on the day next preceding the day on which notice is
given, and (ii) the Record Date for determining the Limited
Partners entitled to give approvals without a meeting shall be
the date the first written approval is deposited with the
Partnership in care of the General Partner in accordance with
Section 13.11.
Section 13.7 Adjournment. When
a meeting is adjourned to another time or place, notice need not
be given of the adjourned meeting and a new Record Date need not
be fixed, if the time and place thereof are announced at the
meeting at which the adjournment is taken, unless such
adjournment shall be for more than 45 days. At the
adjourned meeting, the Partnership may transact any business
that might have been transacted at the original meeting. If the
adjournment is for more than 45 days or if a new Record
Date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given in accordance with this
Article XIII.
Section 13.8 Waiver
of Notice; Approval of Meeting; Approval of
Minutes. The transactions of any meeting of
Limited Partners, however called and noticed, and whenever held,
shall be as valid as if it had occurred at a meeting duly held
after regular call and notice, if a quorum is present either in
person or by proxy. Attendance of a Limited Partner at a meeting
shall constitute a waiver of notice of the meeting, except when
the Limited Partner attends the meeting for the express purpose
of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully
called or convened; and except that attendance at a meeting is
not a waiver of any right to disapprove the consideration of
matters required to be included in the notice of the meeting,
but not so included, if the disapproval is expressly made at the
meeting.
Section 13.9 Quorum
and Voting. The holders of a majority of the
Outstanding Units of the class or classes for which a meeting
has been called (including Outstanding Units deemed owned by the
General Partner) represented in person or by proxy shall
constitute a quorum at a meeting of Limited Partners of such
class or classes unless any such action by the Limited Partners
requires approval by holders of a greater percentage of such
Units, in which case the quorum shall be such greater
percentage. At any meeting of the Limited Partners duly called
and held in accordance with this Agreement at which a quorum is
present, the act of Limited Partners holding Outstanding Units
that in the aggregate represent a majority of the Outstanding
Units entitled to vote and be present in person or by proxy at
such meeting shall be deemed to constitute the act of all
Limited Partners, unless a greater or different percentage is
required with respect to such action under the provisions of
this Agreement, in which case the act of the Limited Partners
holding Outstanding Units that in the aggregate represent at
least such greater or different percentage shall be required.
The Limited Partners present at a duly called or held meeting at
which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough
Limited Partners to leave less than a quorum, if any action
taken (other than adjournment) is approved by the required
percentage of Outstanding Units specified in this Agreement
(including Outstanding Units deemed owned by the General
Partner). In the absence of a quorum any meeting of Limited
Partners may be adjourned from time to time by the affirmative
vote of holders of at least a majority of the Outstanding Units
entitled to vote at such meeting (including Outstanding Units
deemed owned by the General Partner) represented either in
person or by proxy, but no other business may be transacted,
except as provided in Section 13.7.
Section 13.10 Conduct
of a Meeting. The General Partner shall have full
power and authority concerning the manner of conducting any
meeting of the Limited Partners or solicitation of approvals in
writing, including the determination of Persons entitled to
vote, the existence of a quorum, the satisfaction of the
requirements of Section 13.4, the conduct of voting, the
validity and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or
during the meeting or voting. The General Partner shall
designate a Person to serve as chairman of any meeting and shall
further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Partnership
maintained by the General Partner. The General Partner may make
such other regulations
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consistent with applicable law and this Agreement as it may deem
advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including
regulations in regard to the appointment of proxies, the
appointment and duties of inspectors of votes and approvals, the
submission and examination of proxies and other evidence of the
right to vote, and the revocation of approvals in writing.
Section 13.11 Action
Without a Meeting. If authorized by the General
Partner, any action that may be taken at a meeting of the
Limited Partners may be taken without a meeting, without a vote
and without prior notice, if an approval in writing setting
forth the action so taken is signed by Limited Partners owning
not less than the minimum percentage of the Outstanding Units
(including Outstanding Units deemed owned by the General
Partner) that would be necessary to authorize or take such
action at a meeting at which all the Limited Partners were
present and voted (unless such provision conflicts with any
rule, regulation, guideline or requirement of any National
Securities Exchange on which the Units are listed or admitted to
trading, in which case the rule, regulation, guideline or
requirement of such National Securities Exchange shall govern).
Prompt notice of the taking of action without a meeting shall be
given to the Limited Partners who have not approved in writing.
The General Partner may specify that any written ballot, if any,
submitted to Limited Partners for the purpose of taking any
action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot
returned to the Partnership does not vote all of the Units held
by the Limited Partners, the Partnership shall be deemed to have
failed to receive a ballot for the Units that were not voted. If
approval of the taking of any action by the Limited Partners is
solicited by any Person other than by or on behalf of the
General Partner, the written approvals shall have no force and
effect unless and until (a) they are deposited with the
Partnership in care of the General Partner and (b) an
Opinion of Counsel is delivered to the General Partner to the
effect that the exercise of such right and the action proposed
to be taken with respect to any particular matter (i) will
not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners
limited liability, and (ii) is otherwise permissible under
the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners. Nothing
contained in this Section 13.11 shall be deemed to require
the General Partner to solicit all Limited Partners in
connection with a matter approved by the holders of the
requisite percentage of Units acting by written consent without
a meeting.
Section 13.12 Right
to Vote and Related Matters. Only those Record
Holders of the Outstanding Units on the Record Date set pursuant
to Section 13.6 (and also subject to the limitations
contained in the definition of
Outstanding) shall be entitled to
notice of, and to vote at, a meeting of Limited Partners or to
act with respect to matters as to which the holders of the
Outstanding Units have the right to vote or to act. All
references in this Agreement to votes of, or other acts that may
be taken by, the Outstanding Units shall be deemed to be
references to the votes or acts of the Record Holders of such
Outstanding Units.
(b) With respect to Units that are held for a Persons
account by another Person (such as a broker, dealer, bank, trust
company or clearing corporation, or an agent of any of the
foregoing), in whose name such Units are registered, such other
Person shall, in exercising the voting rights in respect of such
Units on any matter, and unless the arrangement between such
Persons provides otherwise, vote such Units in favor of, and at
the direction of, the Person who is the beneficial owner, and
the Partnership shall be entitled to assume it is so acting
without further inquiry. The provisions of this
Section 13.12(b) (as well as all other provisions of this
Agreement) are subject to the provisions of Section 4.3.
Section 13.13 Voting
of Incentive Distribution Rights.
(a) For so long as a majority of the Incentive Distribution
Rights are held by the General Partner and its Affiliates, the
holders of the Incentive Distribution Rights shall not be
entitled to vote such Incentive Distribution Rights on any
Partnership matter except as may otherwise be required by law
and the holders of the Incentive Distribution Rights, in their
capacity as such, shall be deemed to have approved any matter
approved by the General Partner.
(b) If less than a majority of the Incentive Distribution
Rights are held by the General Partner and its Affiliates, the
Incentive Distribution Rights will be entitled to vote on all
matters submitted to a vote of Unitholders, other than
amendments and other matters that the General Partner determines
do not adversely
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affect the holders of the Incentive Distribution Rights in any
material respect. On any matter in which the holders of
Incentive Distribution Rights are entitled to vote, such holders
will vote together with the Subordinated Units, prior to the end
of the Subordination Period, or together with the Common Units,
thereafter, in either case as a single class except as otherwise
required by Section 13.3(c). The relative voting power of
the Incentive Distribution Rights and the Subordinated Units or
Common Units, as applicable, will be set in the same proportion
as cumulative cash distributions, if any, in respect of the
Incentive Distribution Rights for the four consecutive Quarters
prior to the record date for the vote bears to the cumulative
cash distributions in respect of such class of Units for such
four Quarters.
(c) In connection with any equity financing, or anticipated
equity financing, by the Partnership of an Expansion Capital
Expenditure, the General Partner may, without the approval of
the holders of the Incentive Distribution Rights, temporarily or
permanently reduce the amount of Incentive Distributions that
would otherwise be distributed to such holders, provided
that in the judgment of the General Partner, such reduction
will be in the long-term best interest of such holders.
ARTICLE XIV
MERGER,
CONSOLIDATION OR CONVERSION
Section 14.1 Authority. The
Partnership may merge or consolidate with or into one or more
corporations, limited liability companies, statutory trusts or
associations, real estate investment trusts, common law trusts
or unincorporated businesses, including a partnership (whether
general or limited (including a limited liability partnership))
or convert into any such entity, whether such entity is formed
under the laws of the State of Delaware or any other state of
the United States of America, pursuant to a written plan of
merger or consolidation (Merger
Agreement) or a written plan of conversion
(Plan of Conversion), as the case may
be, in accordance with this Article XIV.
Section 14.2 Procedure
for Merger, Consolidation or Conversion.
(a) Merger, consolidation or conversion of the Partnership
pursuant to this Article XIV requires the prior consent of
the General Partner, provided, however, that, to
the fullest extent permitted by law, the General Partner shall
have no duty or obligation to consent to any merger,
consolidation or conversion of the Partnership and may decline
to do so free of any fiduciary duty or obligation whatsoever to
the Partnership, any Limited Partner or Assignee and, in
declining to consent to a merger, consolidation or conversion,
shall not be required to act in good faith or pursuant to any
other standard imposed by this Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity.
(b) If the General Partner shall determine to consent to
the merger or consolidation, the General Partner shall approve
the Merger Agreement, which shall set forth:
(i) the name and jurisdiction of formation or organization
of each of the business entities proposing to merge or
consolidate;
(ii) the name and jurisdiction of formation or organization
of the business entity that is to survive the proposed merger or
consolidation (the Surviving Business
Entity);
(iii) the terms and conditions of the proposed merger or
consolidation;
(iv) the manner and basis of exchanging or converting the
equity interests of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the Surviving Business Entity; and (A) if
any interests, securities or rights of any constituent business
entity are not to be exchanged or converted solely for, or into,
cash, property or interests, rights, securities or obligations
of the Surviving Business Entity, then the cash, property or
interests, rights, securities or obligations of any general or
limited partnership, corporation, trust, limited liability
company, unincorporated business or other entity (other than the
Surviving Business Entity) that the holders of such interests,
securities or rights are to receive in exchange for, or upon
conversion of their interests, securities or rights, and
(B) in the case of equity interests represented by
certificates, upon the surrender of such certificates, which
cash,
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property or interests, rights, securities or obligations of the
Surviving Business Entity or any general or limited partnership,
corporation, trust, limited liability company, unincorporated
business or other entity (other than the Surviving Business
Entity), or evidences thereof, are to be delivered;
(v) a statement of any changes in the constituent documents
or the adoption of new constituent documents (the articles or
certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership,
certificate of formation or limited liability company agreement
or other similar charter or governing document) of the Surviving
Business Entity to be effected by such merger or consolidation;
(vi) the effective time of the merger, which may be the
date of the filing of the certificate of merger pursuant to
Section 14.4 or a later date specified in or determinable
in accordance with the Merger Agreement (provided, that
if the effective time of the merger is to be later than the date
of the filing of such certificate of merger, the effective time
shall be fixed at a date or time certain and stated in the
certificate of merger); and
(vii) such other provisions with respect to the proposed
merger or consolidation that the General Partner determines to
be necessary or appropriate.
(c) If the General Partner shall determine to consent to
the conversion, the General Partner shall approve the Plan of
Conversion, which shall set forth:
(i) the name of the converting entity and the converted
entity;
(ii) a statement that the Partnership is continuing its
existence in the organizational form of the converted entity;
(iii) a statement as to the type of entity that the
converted entity is to be and the state or country under the
laws of which the converted entity is to be incorporated, formed
or organized;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the converted entity or another entity, or for
the cancellation of such equity securities;
(v) in an attachment or exhibit, the certificate of limited
partnership of the Partnership; and
(vi) in an attachment or exhibit, the certificate of
limited partnership, articles of incorporation, or other
organizational documents of the converted entity;
(vii) the effective time of the conversion, which may be
the date of the filing of the articles of conversion or a later
date specified in or determinable in accordance with the Plan of
Conversion (provided, that if the effective time of the
conversion is to be later than the date of the filing of such
articles of conversion, the effective time shall be fixed at a
date or time certain and stated in such articles of
conversion); and
(viii) such other provisions with respect to the proposed
conversion that the General Partner determines to be necessary
or appropriate.
Section 14.3 Approval
by Limited Partners.
(a) Except as provided in Section 14.3(d), the General
Partner, upon its approval of the Merger Agreement or the Plan
of Conversion, as the case may be, shall direct that the Merger
Agreement or the Plan of Conversion and the merger,
consolidation or conversion contemplated thereby, as applicable,
be submitted to a vote of Limited Partners, whether at a special
meeting or by written consent, in either case in accordance with
the requirements of Article XIII. A copy or a summary of
the Merger Agreement or the Plan of Conversion, as the case may
be, shall be included in or enclosed with the notice of a
special meeting or the written consent.
(b) Except as provided in Sections 14.3(d) and
14.3(e), the Merger Agreement or Plan of Conversion, as the case
may be, shall be approved upon receiving the affirmative vote or
consent of the holders of a Unit
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Majority unless the Merger Agreement or Plan of Conversion, as
the case may be, contains any provision that, if contained in an
amendment to this Agreement, the provisions of this Agreement or
the Delaware Act would require for its approval the vote or
consent of a greater percentage of the Outstanding Units or of
any class of Limited Partners, in which case such greater
percentage vote or consent shall be required for approval of the
Merger Agreement or the Plan of Conversion, as the case may be.
(c) Except as provided in Sections 14.3(d) and
14.3(e), after such approval by vote or consent of the Limited
Partners, and at any time prior to the filing of the certificate
of merger or certificate of conversion pursuant to
Section 14.4, the merger, consolidation or conversion may
be abandoned pursuant to provisions therefor, if any, set forth
in the Merger Agreement or Plan of Conversion, as the case may
be.
(d) Notwithstanding anything else contained in this
Article XIV or in this Agreement, the General Partner is
permitted, without Limited Partner approval, to convert the
Partnership or any Group Member into a new limited liability
entity, to merge the Partnership or any Group Member into, or
convey all of the Partnerships assets to, another limited
liability entity that shall be newly formed and shall have no
assets, liabilities or operations at the time of such
conversion, merger or conveyance other than those it receives
from the Partnership or other Group Member if (i) the
General Partner has received an Opinion of Counsel that the
conversion, merger or conveyance, as the case may be, would not
result in the loss of the limited liability under the Delaware
Act of any Limited Partner or cause the Partnership or any Group
Member to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already treated as such),
(ii) the sole purpose of such conversion, merger, or
conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity and
(iii) the governing instruments of the new entity provide
the Limited Partners and the General Partner with substantially
the same rights and obligations as are herein contained.
(e) Additionally, notwithstanding anything else contained
in this Article XIV or in this Agreement, the General
Partner is permitted, without Limited Partner approval, to merge
or consolidate the Partnership with or into another entity if
(i) the General Partner has received an Opinion of Counsel
that the merger or consolidation, as the case may be, would not
result in the loss of the limited liability under the Delaware
Act of any Limited Partner or cause the Partnership or any Group
Member to be treated as an association taxable as a corporation
or otherwise to be taxed as an entity for federal income tax
purposes (to the extent not already treated as such),
(ii) the merger or consolidation would not result in an
amendment to this Agreement, other than any amendments that
could be adopted pursuant to Section 13.1, (iii) the
Partnership is the Surviving Business Entity in such merger or
consolidation, (iv) each Unit outstanding immediately prior
to the effective date of the merger or consolidation is to be an
identical Unit of the Partnership after the effective date of
the merger or consolidation, and (v) the number of
Partnership Interests to be issued by the Partnership in such
merger or consolidation does not exceed 20% of the Partnership
Interests (other than Incentive Distribution Rights) Outstanding
immediately prior to the effective date of such merger or
consolidation.
(f) Pursuant to
Section 17-211(g)
of the Delaware Act, an agreement of merger or consolidation
approved in accordance with this Article XIV may
(i) effect any amendment to this Agreement or
(ii) effect the adoption of a new partnership agreement for
the Partnership if it is the Surviving Business Entity. Any such
amendment or adoption made pursuant to this Section 14.3
shall be effective at the effective time or date of the merger
or consolidation.
Section 14.4 Certificate
of Merger. Upon the required approval by the
General Partner and the Unitholders of a Merger Agreement or the
Plan of Conversion, as the case may be, a certificate of merger
or certificate of conversion, as applicable, shall be executed
and filed with the Secretary of State of the State of Delaware
in conformity with the requirements of the Delaware Act.
Section 14.5 Effect
of Merger, Consolidation or Conversion.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of
those business entities and all other things and causes of
action belonging to each of those business entities, shall be
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vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business
entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the merger
or consolidation;
(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business
entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity
and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contracted
by it.
(b) At the effective time of the certificate of conversion,
for all purposes of the laws of the State of Delaware:
(i) the Partnership shall continue to exist, without
interruption, but in the organizational form of the converted
entity rather than in its prior organizational form;
(ii) all rights, title, and interests to all real estate
and other property owned by the Partnership shall remain vested
in the converted entity in its new organizational form without
reversion or impairment, without further act or deed, and
without any transfer or assignment having occurred, but subject
to any existing liens or other encumbrances thereon;
(iii) all liabilities and obligations of the Partnership
shall continue to be liabilities and obligations of the
converted entity in its new organizational form without
impairment or diminution by reason of the conversion;
(iv) all rights of creditors or other parties with respect
to or against the prior interest holders or other owners of the
Partnership in their capacities as such in existence as of the
effective time of the conversion will continue in existence as
to those liabilities and obligations and are enforceable against
the converted entity by such creditors and obligees to the same
extent as if the liabilities and obligations had originally been
incurred or contracted by the converted entity;
(v) the Partnership Interests that are to be converted into
partnership interests, shares, evidences of ownership, or other
rights or securities in the converted entity or cash as provided
in the plan of conversion shall be so converted, and Partners
shall be entitled only to the rights provided in the Plan of
Conversion.
ARTICLE XV
RIGHT TO
ACQUIRE LIMITED PARTNER INTERESTS
Section 15.1 Right
to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement,
if at any time the General Partner and its Affiliates hold more
than 90% of the total Limited Partner Interests of any class
then Outstanding, the General Partner shall then have the right,
which right it may assign and transfer in whole or in part to
the Partnership or any Affiliate of the General Partner,
exercisable in its sole discretion, to purchase all, but not
less than all, of such Limited Partner Interests of such class
then Outstanding held by Persons other than the General Partner
and its Affiliates, at the greater of (i) the Current
Market Price as of the date three days prior to the date that
the notice described in Section 15.1(b) is mailed and
(ii) the highest price paid by the General Partner or any
of its Affiliates for any such Limited Partner Interest of such
class purchased during the
90-day
period preceding the date that the notice described in
Section 15.1(b) is mailed.
(b) If the General Partner, any Affiliate of the General
Partner or the Partnership elects to exercise the right to
purchase Limited Partner Interests granted pursuant to
Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the
Notice of Election to Purchase) and
shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of
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Limited Partner Interests of such class (as of a Record Date
selected by the General Partner) at least 10, but not more than
60, days prior to the Purchase Date. Such Notice of Election to
Purchase shall also be published for a period of at least three
consecutive days in at least two daily newspapers of general
circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to
Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at which
Limited Partner Interests will be purchased and state that the
General Partner, its Affiliate or the Partnership, as the case
may be, elects to purchase such Limited Partner Interests, upon
surrender of Certificates representing such Limited Partner
Interests in the case of Limited Partner Interests evidenced by
Certificates, in exchange for payment, at such office or offices
of the Transfer Agent as the Transfer Agent may specify, or as
may be required by any National Securities Exchange on which
such Limited Partner Interests are listed or admitted to
trading. Any such Notice of Election to Purchase mailed to a
Record Holder of Limited Partner Interests at his address as
reflected in the records of the Transfer Agent shall be
conclusively presumed to have been given regardless of whether
the owner receives such notice. On or prior to the Purchase
Date, the General Partner, its Affiliate or the Partnership, as
the case may be, shall deposit with the Transfer Agent cash in
an amount sufficient to pay the aggregate purchase price of all
of such Limited Partner Interests to be purchased in accordance
with this Section 15.1. If the Notice of Election to
Purchase shall have been duly given as aforesaid at least
10 days prior to the Purchase Date, and if on or prior to
the Purchase Date the deposit described in the preceding
sentence has been made for the benefit of the holders of Limited
Partner Interests subject to purchase as provided herein, then
from and after the Purchase Date, notwithstanding that any
Certificate shall not have been surrendered for purchase, all
rights of the holders of such Limited Partner Interests
(including any rights pursuant to Article III,
Article IV, Article V, Article VI, and
Article XII) shall thereupon cease, except the right
to receive the purchase price (determined in accordance with
Section 15.1(a)) for Limited Partner Interests therefor,
without interest, upon surrender to the Transfer Agent of the
Certificates representing such Limited Partner Interests in the
case of Limited Partner Interests evidenced by Certificates, and
such Limited Partner Interests shall thereupon be deemed to be
transferred to the General Partner, its Affiliate or the
Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the General Partner or
any Affiliate of the General Partner, or the Partnership, as the
case may be, shall be deemed to be the owner of all such Limited
Partner Interests from and after the Purchase Date and shall
have all rights as the owner of such Limited Partner Interests
(including all rights as owner of such Limited Partner Interests
pursuant to Article III, Article IV, Article V,
Article VI and Article XII).
(c) In the case of Limited Partner Interests evidenced by
Certificates, at any time from and after the Purchase Date, a
holder of an Outstanding Limited Partner Interest subject to
purchase as provided in this Section 15.1 may surrender his
Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest thereon.
ARTICLE XVI
GENERAL
PROVISIONS
Section 16.1 Addresses
and Notices; Written Communications.
(a) Any notice, demand, request, report or proxy materials
required or permitted to be given or made to a Partner or
Assignee under this Agreement shall be in writing and shall be
deemed given or made when delivered in person or when sent by
first class United States mail or by other means of written
communication to the Partner or Assignee at the address
described below. Any notice, payment or report to be given or
made to a Partner or Assignee hereunder shall be deemed
conclusively to have been given or made, and the obligation to
give such notice or report or to make such payment shall be
deemed conclusively to have been fully satisfied, upon sending
of such notice, payment or report to the Record Holder of such
Partnership Interests at his address as shown on the records of
the Transfer Agent or as otherwise shown on the records of the
Partnership, regardless of any claim of any Person who may have
an interest in such Partnership Interests by reason of any
assignment or otherwise. Notwithstanding the foregoing, if
(i) a Partner shall consent to receiving notices, demands,
requests, reports or proxy materials via electronic mail or by
the Internet or
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(ii) the rules of the Commission shall permit any report or
proxy materials to be delivered electronically or made available
via the Internet, any such notice, demand, request, report or
proxy materials shall be deemed given or made when delivered or
made available via such mode of delivery. An affidavit or
certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1
executed by the General Partner, the Transfer Agent or the
mailing organization shall be prima facie evidence of the giving
or making of such notice, payment or report. If any notice,
payment or report given or made in accordance with the
provisions of this Section 16.1 is returned marked to
indicate that such notice, payment or report was unable to be
delivered, such notice, payment or report and, in the case of
notices, payments or reports returned by the United States
Postal Service (or other physical mail delivery mail service
outside the United States of America), any subsequent notices,
payments and reports shall be deemed to have been duly given or
made without further mailing (until such time as such Record
Holder or another Person notifies the Transfer Agent or the
Partnership of a change in his address) or other delivery if
they are available for the Partner or Assignee at the principal
office of the Partnership for a period of one year from the date
of the giving or making of such notice, payment or report to the
other Partners and Assignees. Any notice to the Partnership
shall be deemed given if received by the General Partner at the
principal office of the Partnership designated pursuant to
Section 2.3. The General Partner may rely and shall be
protected in relying on any notice or other document from a
Partner, Assignee or other Person if believed by it to be
genuine.
(b) The terms in writing, written
communications, written notice and words of
similar import shall be deemed satisfied under this Agreement by
use of
e-mail and
other forms of electronic communication.
Section 16.2 Further
Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from
taking action as may be necessary or appropriate to achieve the
purposes of this Agreement.
Section 16.3 Binding
Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs,
executors, administrators, successors, legal representatives and
permitted assigns.
Section 16.4 Integration. Except
for agreements with Affiliates of the General Partner, this
Agreement constitutes the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersedes
all prior agreements and understandings pertaining thereto.
Section 16.5 Creditors. None
of the provisions of this Agreement shall be for the benefit of,
or shall be enforceable by, any creditor of the Partnership.
Section 16.6 Waiver. No
failure by any party to insist upon the strict performance of
any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof
shall constitute waiver of any such breach of any other
covenant, duty, agreement or condition.
Section 16.7 Third-Party
Beneficiaries. Each Partner agrees that
(a) any Indemnitee shall be entitled to assert rights and
remedies hereunder as a third-party beneficiary hereto with
respect to those provisions of this Agreement affording a right,
benefit or privilege to such Indemnitee and (b) any
Unrestricted Person shall be entitled to assert rights and
remedies hereunder as a third-party beneficiary hereto with
respect to those provisions of this Agreement affording a right,
benefit or privilege to such Unrestricted Person.
Section 16.8 Counterparts. This
Agreement may be executed in counterparts, all of which together
shall constitute an agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound
by this Agreement immediately upon affixing its signature hereto
or, in the case of a Person acquiring a Limited Partner
Interest, pursuant to Section 10.1(a) without execution
hereof.
Section 16.9 Applicable
Law; Forum, Venue and Jurisdiction.
(a) This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without
regard to the principles of conflicts of law.
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(b) Each of the Partners and each Person holding any
beneficial interest in the Partnership (whether through a
broker, dealer, bank, trust company or clearing corporation or
an agent of any of the foregoing or otherwise):
(i) irrevocably agrees that any claims, suits, actions or
proceedings (A) arising out of or relating in any way to
this Agreement (including any claims, suits or actions to
interpret, apply or enforce the provisions of this Agreement or
the duties, obligations or liabilities among Partners or of
Partners to the Partnership, or the rights or powers of, or
restrictions on, the Partners or the Partnership),
(B) brought in a derivative manner on behalf of the
Partnership, (C) asserting a claim of breach of a fiduciary
duty owed by any director, officer, or other employee of the
Partnership or the General Partner, or owed by the General
Partner, to the Partnership or the Partners, (D) asserting
a claim arising pursuant to any provision of the Delaware Act or
(E) asserting a claim governed by the internal affairs
doctrine shall be exclusively brought in the Court of Chancery
of the State of Delaware, in each case regardless of whether
such claims, suits, actions or proceedings sound in contract,
tort, fraud or otherwise, are based on common law, statutory,
equitable, legal or other grounds, or are derivative or direct
claims;
(ii) irrevocably submits to the exclusive jurisdiction of
the Court of Chancery of the State of Delaware in connection
with any such claim, suit, action or proceeding;
(iii) agrees not to, and waives any right to, assert in any
such claim, suit, action or proceeding that (A) it is not
personally subject to the jurisdiction of the Court of Chancery
of the State of Delaware or of any other court to which
proceedings in the Court of Chancery of the State of Delaware
may be appealed, (B) such claim, suit, action or proceeding
is brought in an inconvenient forum, or (C) the venue of
such claim, suit, action or proceeding is improper;
(iv) expressly waives any requirement for the posting of a
bond by a party bringing such claim, suit, action or
proceeding; and
(v) consents to process being served in any such claim,
suit, action or proceeding by mailing, certified mail, return
receipt requested, a copy thereof to such party at the address
in effect for notices hereunder, and agrees that such services
shall constitute good and sufficient service of process and
notice thereof; provided, nothing in clause (v)
hereof shall affect or limit any right to serve process in any
other manner permitted by law.
Section 16.10 Invalidity
of Provisions. If any provision or part of a
provision of this Agreement is or becomes for any reason,
invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions and part
thereof contained herein shall not be affected thereby and this
Agreement shall, to the fullest extent permitted by law, be
reformed and construed as if such invalid, illegal or
unenforceable provision, or part of a provision, had never been
contained herein, and such provision or part reformed so that it
would be valid, legal and enforceable to the maximum extent
possible.
Section 16.11 Consent
of Partners. Each Partner hereby expressly
consents and agrees that, whenever in this Agreement it is
specified that an action may be taken upon the affirmative vote
or consent of less than all of the Partners, such action may be
so taken upon the concurrence of less than all of the Partners
and each Partner shall be bound by the results of such action.
Section 16.12 Facsimile
Signatures. The use of facsimile signatures
affixed in the name and on behalf of the transfer agent and
registrar of the Partnership on Certificates representing Units
is expressly permitted by this Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the General Partner has executed this
Agreement as of the date first written above.
GENERAL PARTNER:
COMPRESSCO PARTNERS GP INC.
Name:
Title:
Signature Page
Compressco Partners, L.P.
First Amended and
Restated Agreement of Limited Partnership
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EXHIBIT A
to the First Amended and Restated
Agreement of Limited Partnership of
Compressco Partners, L.P.
Certificate
Evidencing Common Units
Representing Limited Partner Interests in
Compressco Partners, L.P.
No.
Common Units
In accordance with Section 4.1 of the First Amended and
Restated Agreement of Limited Partnership of Compressco
Partners, L.P., as amended, supplemented or restated from time
to time (the Partnership Agreement),
Compressco Partners, L.P., a Delaware limited partnership (the
Partnership), hereby certifies
that
(the Holder) is the registered owner
of
Common Units representing limited partner interests in the
Partnership (the Common Units)
transferable on the books of the Partnership, in person or by
duly authorized attorney, upon surrender of this Certificate
properly endorsed. The rights, preferences and limitations of
the Common Units are set forth in, and this Certificate and the
Common Units represented hereby are issued and shall in all
respects be subject to the terms and provisions of, the
Partnership Agreement. Copies of the Partnership Agreement are
on file at, and will be furnished without charge on delivery of
written request to the Partnership at, the principal office of
the Partnership located at 101 Park Avenue, Suite 1200,
Oklahoma City, Oklahoma 73102. Capitalized terms used herein but
not defined shall have the meanings given them in the
Partnership Agreement.
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
COMPRESSCO PARTNERS, L.P. THAT THIS SECURITY MAY NOT BE SOLD,
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH
TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR
STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION
OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR
QUALIFICATION OF COMPRESSCO PARTNERS, L.P. UNDER THE LAWS OF THE
STATE OF DELAWARE, OR (C) CAUSE COMPRESSCO PARTNERS, L.P.
TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR
OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX
PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED).
COMPRESSCO PARTNERS GP INC., THE GENERAL PARTNER OF COMPRESSCO
PARTNERS, L.P., MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE
TRANSFER OF THIS SECURITY IF IT RECEIVES AN OPINION OF COUNSEL
THAT SUCH RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK
OF COMPRESSCO PARTNERS, L.P. BECOMING TAXABLE AS A CORPORATION
OR OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME
TAX PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT
PRECLUDE THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS
SECURITY ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL
SECURITIES EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED
TO TRADING.
The Holder, by accepting this Certificate, is deemed to have
(i) requested admission as, and agreed to become, a Limited
Partner and to have agreed to comply with and be bound by and to
have executed the Partnership Agreement, (ii) represented
and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the
Partnership Agreement and (iii) made the waivers and given
the consents and approvals contained in the Partnership
Agreement.
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This Certificate shall not be valid for any purpose unless it
has been countersigned and registered by the Transfer Agent and
Registrar. This Certificate shall be governed by and construed
in accordance with the laws of the State of Delaware.
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Dated:
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Compressco Partners, L.P.
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Countersigned and Registered by:
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By: Compressco Partners GP Inc.
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Computershare Trust Company, N.A.,
As Transfer Agent and Registrar
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By:
Name:
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Title:
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By:
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Name:
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Title:
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[Reverse
of Certificate]
ABBREVIATIONS
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as follows
according to applicable laws or regulations:
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TEN COM as tenants in common
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UNIF GIFT/TRANSFERS MIN ACT
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TEN ENT as tenants by the entireties
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__________ Custodian _________
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JT TEN as joint tenants with right of
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(Cust) (Minor)
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survivorship and not as tenants in common
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Under Uniform Gifts/Transfers to CD Minors Act (State)
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Additional abbreviations, though not in the above list, may also
be used.
ASSIGNMENT
OF COMMON UNITS OF
COMPRESSCO PARTNERS, L.P.
FOR VALUE
RECEIVED,
hereby assigns, conveys, sells and transfers unto
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(Please print or typewrite name and address of assignee)
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(Please insert Social Security or other identifying number of
assignee)
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Common Units representing limited partner interests evidenced by
this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and
appoint
as its attorney-in-fact with full power of substitution to
transfer the same on the books of Compressco Partners, L.P.
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Date:
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NOTE: The signature to any endorsement hereon must correspond
with the name as written upon the face of this Certificate in
every particular, without alteration, enlargement or change.
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THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C.
RULE 17Ad-15
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(Signature)
(Signature)
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No transfer of the Common Units evidenced hereby will be
registered on the books of the Partnership, unless the
Certificate evidencing the Common Units to be transferred is
surrendered for registration or transfer.
A-76
APPLICATION
FOR TRANSFER OF COMMON UNITS
Transferees of Common Units must execute and deliver this
application to Compressco Partners, L.P., 101 Park Avenue,
Suite 1200, Oklahoma City, Oklahoma 73102; Attention: Chief
Financial Officer, to be admitted as limited partners to
Compressco Partners, L.P.
The undersigned (Assignee) hereby applies for
transfer to the name of the Assignee of the Common Units
evidenced hereby.
The Assignee (a) requests admission as a Substituted
Limited Partner and agrees to comply with and be bound by, and
hereby executes, the First Amended and Restated Agreement of
Limited Partnership of the Partnership, as amended, supplemented
or restated to the date hereof (the Partnership
Agreement), (b) represents and warrants that the
Assignee has all right, power and authority and, if an
individual, the capacity necessary to enter into the Partnership
Agreement, and (c) makes the waivers and gives the consents
and approvals contained in the Partnership Agreement.
Capitalized terms not defined herein have the meanings assigned
to such terms in the Partnership Agreement. This application
constitutes a Citizenship Certification, as defined in the
Partnership Agreement.
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Date:
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Social Security or other identifying number
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Signature of Assignee
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Purchase Price including commissions, if any
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Name and Address of Assignee
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Type of Entity (check one):
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o Individual
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o
Partnership
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o
Corporation
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o Trust
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o Other
(specify)
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Nationality (check one):
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o U.S. Citizen, Resident or Domestic Entity
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o
Non-resident
Alien
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o Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is
checked, the following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986,
as amended (the Code), the Partnership must
withhold tax with respect to certain transfers of property if a
holder of an interest in the Partnership is a foreign person. To
inform the Partnership that no withholding is required with
respect to the undersigned interestholders interest in it,
the undersigned hereby certifies the following (or, if
applicable, certifies the following on behalf of the
interestholder).
Complete
Either A or B:
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A.
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Individual
Interestholder
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1. I am not a non-resident alien for purposes of
U.S. income taxation.
2. My U.S. taxpayer identification number (Social
Security Number) is
.
3. My home address is
.
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B.
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Partnership,
Corporation or Other Interestholder
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1.
is not a foreign corporation, foreign partnership, foreign trust
(Name of Interestholder) or foreign estate (as those terms are
defined in the Code and Treasury Regulations).
A-77
2. The interestholders U.S. employer
identification number is
.
3. The interestholders office address and place of
incorporation (if applicable) is
.
The interestholder agrees to notify the Partnership within sixty
(60) days of the date the interestholder becomes a foreign
person.
The interestholder understands that this certificate may be
disclosed to the Internal Revenue Service by the Partnership and
that any false statement contained herein could be punishable by
fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and, to the best of my knowledge and belief, it is
true, correct and complete and, if applicable, I further declare
that I have authority to sign this document on behalf of:
Name of Interestholder
Signature and Date
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company,
clearing corporation, other nominee holder or an agent of any of
the foregoing, and is holding for the account of any other
person, this application should be completed by an officer
thereof or, in the case of a broker or dealer, by a registered
representative who is a member of a registered national
securities exchange or a member of the National Association of
Securities Dealers, Inc., or, in the case of any other nominee
holder, a person performing a similar function. If the Assignee
is a broker, dealer, bank, trust company, clearing corporation,
other nominee owner or an agent of any of the foregoing, the
above certification as to any person for whom the Assignee will
hold the Common Units shall be made to the best of the
Assignees knowledge.
A-78
2,500,000 Common
Units
Representing Limited Partner
Interests
PROSPECTUS
RAYMOND JAMES
J.P. MORGAN
,
2011
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
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Item 13.
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Other
Expenses of Issuance and Distribution.
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Set forth below are the expenses expected to be incurred in
connection with the issuance and distribution of the securities
registered hereby. With the exception of the Securities and
Exchange Commission registration fee, the FINRA filing fee and
the NASDAQ Stock Market LLC listing fee, the amounts set forth
below are estimates.
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SEC registration fee
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$
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2,161.50
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FINRA filing fee
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$
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NASDAQ Stock Market LLC listing fee*
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$
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Printing and engraving expenses*
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$
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Accounting fees and expenses*
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$
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Legal fees and expenses*
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$
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Transfer agent and registrar fees*
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$
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Miscellaneous*
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$
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Total*
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$
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* |
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To be provided by amendment. |
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Item 14.
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Indemnification
of Directors, Executive Officers and other
Persons.
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We intend to fully indemnify each director and officer of
Compressco Partners GP Inc. and our subsidiaries for actions
associated with being a director or officer of our general
partner or our subsidiaries, to the extent permitted under
Delaware law and the partnership agreement.
Subject to any terms, conditions or restrictions set forth in
our partnership agreement,
Section 17-108
of the Delaware Revised Uniform Limited Partnership Act empowers
a Delaware limited partnership to indemnify and hold harmless
any partner or other person from and against all claims and
demands whatsoever. The section of the prospectus entitled
The Partnership Agreement
Indemnification is incorporated herein by this reference.
Section 145(a) of the General Corporation Law of the State
of Delaware (the DGCL), inter alia, provides that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such
action, suit or proceeding if the person acted in good faith and
in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe the persons conduct was unlawful.
Section 145(b) of the DGCL provides that a corporation may
indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys fees)
actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation
II-1
unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem
proper. To the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred
to in subsections (a) and (b) of Section 145 of
the DGCL, or in defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including
attorneys fees) actually and reasonably incurred by such
person in connection therewith.
Any indemnification under subsections (a) and (b) of
Section 145 of the DGCL (unless ordered by a court) shall
be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the present or
former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard
of conduct set forth in subsections (a) and (b) of
Section 145. Such determination shall be made, with respect
to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who
are not parties to such action, suit or proceeding, even though
less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less
than a quorum, or (3) if there are no such directors, or if
such directors so direct, by independent legal counsel in a
written opinion, or (4) by the stockholders. Expenses
(including attorneys fees) incurred by an officer or
director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it
shall ultimately be determined that such person is not entitled
to be indemnified by the corporation as authorized in this
section. Such expenses (including attorneys fees) incurred
by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate. The indemnification and
advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of
expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in such persons official capacity and as to action
in another capacity while holding such office.
Section 145 of the DGCL also empowers a corporation to
purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person
and incurred by such person in any such capacity, or arising out
of such persons status as such, whether or not the
corporation would have the power to indemnify such person
against such liability under Section 145.
The certificate of incorporation of Compressco Partners GP Inc.
provides that a director will not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (1) for any breach
of the directors duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith
or which involved intentional misconduct or a knowing violation
of the law, (3) under section 174 of the DGCL for
unlawful payment of dividends or improper redemption of stock or
(4) for any transaction from which the director derived an
improper personal benefit. The certificate of incorporation and
bylaws of Compressco Partners GP Inc. also provide that the
corporation will indemnify, hold harmless, and advance expenses
to, any officer or director to the fullest extent authorized by
the DGCL, as the DGCL exists or may hereafter be amended (but,
in case of any such amendment, only to the extent that such
amendment permits the corporation to provide broader
indemnification rights than the DGCL permitted the corporation
to provide prior to such amendment), against all expense,
liability or loss reasonably incurred or suffered by them in
their capacities as officers and directors, and such
indemnification shall continue as to a person who has ceased to
be a director or officer and shall inure to the benefit of his
or her heirs, executors and administrators. The certificate of
incorporation and bylaws also provide for the indemnification of
directors and officers who serve at the request of the company
as directors, officers, employees or agents of any other
enterprise against certain liabilities under certain
circumstances. Further, the certificate of incorporation and
bylaws also provide that the corporation may maintain insurance,
at its expense, on behalf
II-2
of the officers and directors against any expense, liability or
loss, whether or not the corporation would have the power to
indemnify such officer or director against such expense,
liability or loss under the DGCL.
We also intend to enter into individual indemnification
agreements with each director and officer of Compressco Partners
GP Inc. and our subsidiaries for actions associated with being a
director or officer of our general partner or our subsidiaries,
in order to enhance the indemnification rights provided under
Delaware law and our partnership agreement. Reference is made to
the Form of Indemnification Agreement filed as Exhibit 10.4
to this registration statement. We expect that the individual
indemnification agreements will provide each such director or
officer with indemnification rights to receive his or her costs
of defense if the individual is a party or witness to any
proceeding that is brought by or in the right of, or other than
by or in the right of, us, provided that such director or
officer has not acted in bad faith or engaged in fraud with
respect to the action that gave rise to his or her participation
in the proceeding.
Each director will also be covered under directors and
officers liability insurance in customary and reasonable
amounts during the period of time the director provides services
to us in such a capacity.
Reference is also made to the Underwriting Agreement filed as
Exhibit 1.1 to this registration statement.
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Item 15.
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Recent
Sales of Unregistered Securities.
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On October 31, 2008, in connection with the formation of
Compressco Partners, or the Partnership, the
Partnership issued to (i) Compressco Partners GP Inc. the
0.1% general partner interest in the Partnership and
(ii) to Compressco Field Services, Inc. a 99.9% limited
partner interest in the Partnership in an offering exempt from
registration under Section 4(2) of the Securities Act.
There have been no other sales of unregistered securities within
the past three years.
II-3
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Item 16.
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Exhibits
and Financial Statement Schedules.
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(a) The following documents are filed as exhibits to this
registration statement:
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Exhibit
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Number
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Description
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1
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.1*
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Form of Underwriting Agreement
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3
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.1**
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Certificate of Limited Partnership of Compressco Partners, L.P.
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3
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.2
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Form of Amended and Restated Agreement of Limited Partnership of
Compressco Partners, L.P. (included as Appendix A to the
Prospectus)
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3
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.3**
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Certificate of Incorporation of Compressco Partners GP Inc.
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3
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.4
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Bylaws of Compressco Partners GP Inc.
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3
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.5**
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Certificate of Correction of the Certificate of Limited
Partnership of Compressco Partners, L.P.
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4
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.1
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Specimen Unit Certificate representing Common Units
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5
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.1*
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Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered
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8
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.1*
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Opinion of Vinson & Elkins L.L.P. relating to tax
matters
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10
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.1
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Form of Contribution, Conveyance and Assumption Agreement
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10
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.2
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Form of Omnibus Agreement
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10
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.3
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Form of Long-Term Incentive Plan of Compressco Partners, L.P.
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10
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.4*
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Form of Indemnification Agreement
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21
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.1
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List of subsidiaries of Compressco Partners, L.P.
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23
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.1
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Consent of Ernst & Young LLP
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23
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.2*
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Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1)
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23
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.3*
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Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 8.1)
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24
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.1**
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Powers of Attorney (included on the signature page to the
Registration Statement on
Form S-1
filed with the SEC on November 10, 2008)
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* |
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To be filed by amendment. |
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** |
|
Previously filed. |
(b) Financial Statement Schedules. Financial statement
schedules are omitted because they are not required or the
required information is shown in our financial statements or
notes thereto.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
II-4
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining liability under the
Securities Act to any purchaser, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
first use, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such date of first use.
(2) For the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
i. Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
ii. Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
iii. The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
iv. Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(3) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(4) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to send to each
limited partner, at least on an annual basis, a detailed
statement of any transactions with Compressco Partners GP or its
affiliates, and of fees, commissions, compensation and other
benefits paid, or accrued to Compressco Partners GP or its
affiliates for the fiscal year completed, showing the amount
paid or accrued to each recipient and the services performed.
The undersigned registrant hereby undertakes to provide to the
limited partners the financial statements required by
Form 10-K
for the first full fiscal year of operations of the registrant.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Oklahoma City, Oklahoma on
April 12, 2011.
COMPRESSCO PARTNERS, L.P.
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By:
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Compressco Partners GP Inc.
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its General Partner
Ronald J. Foster
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by
the following persons in the capacities and on April 12,
2011.
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Signature
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Title
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/s/ Ronald
J. Foster
Ronald
J. Foster
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President
(Principal Executive Officer)
and Director
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*
Gary
McBride
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Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
and Corporate Secretary
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*
Geoffrey
M. Hertel
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Director
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*
Stuart
M. Brightman
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Director
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*
William
D. Sullivan
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Director
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*By: /s/ Ronald
J. Foster
Ronald
J. Foster
Attorney-in-fact
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II-6
EXHIBIT INDEX
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Exhibit
|
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Number
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|
Description
|
|
|
1
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.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1**
|
|
Certificate of Limited Partnership of Compressco Partners, L.P.
|
|
3
|
.2
|
|
Form of Amended and Restated Agreement of Limited Partnership of
Compressco Partners, L.P. (included as Appendix A to the
Prospectus)
|
|
3
|
.3**
|
|
Certificate of Incorporation of Compressco Partners GP Inc.
|
|
3
|
.4
|
|
Bylaws of Compressco Partners GP Inc.
|
|
3
|
.5**
|
|
Certificate of Correction of the Certificate of Limited
Partnership of Compressco Partners, L.P.
|
|
4
|
.1
|
|
Specimen Unit Certificate representing Common Units
|
|
5
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. as to the legality
of the securities being registered
|
|
8
|
.1*
|
|
Opinion of Vinson & Elkins L.L.P. relating to tax
matters
|
|
10
|
.1
|
|
Form of Contribution, Conveyance and Assumption Agreement
|
|
10
|
.2
|
|
Form of Omnibus Agreement
|
|
10
|
.3
|
|
Form of Long-Term Incentive Plan of Compressco Partners, L.P.
|
|
10
|
.4*
|
|
Form of Indemnification Agreement
|
|
21
|
.1
|
|
List of subsidiaries of Compressco Partners, L.P.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP
|
|
23
|
.2*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1)
|
|
23
|
.3*
|
|
Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 8.1)
|
|
24
|
.1**
|
|
Powers of Attorney (included on the signature page to the
Registration Statement on
Form S-1
filed with the SEC on November 10, 2008)
|
|
|
|
* |
|
To be filed by amendment. |
|
** |
|
Previously filed. |