NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
We are a publicly-held Delaware limited partnership formed in June 2006 to provide natural gas contract operations services to customers throughout the U.S.
In November 2015, Exterran Holdings, Inc. completed the Spin-off through the distribution of all of the outstanding shares of common stock of Exterran Corporation. Upon the completion of the Spin-off, Exterran Holdings, Inc. was renamed “Archrock, Inc.” and the ticker symbol for Archrock’s common stock on the New York Stock Exchange was changed to “AROC.” Also effective in November 2015, we were renamed “Archrock Partners, L.P.” and the ticker symbol for our common units on the Nasdaq Global Select Market was changed to “APLP.”
Our General Partner is an indirect wholly-owned subsidiary of Archrock. Our General Partner is a limited partnership, its general partner, Archrock GP, conducts our business and operations and the board of directors and officers of Archrock GP, which we refer to herein as our board of directors and our officers, make decisions on our behalf.
As of
December 31, 2017
, public unitholders held a
57%
ownership interest in us and Archrock owned our remaining equity interests, including the general partner interests and all of the incentive distribution rights.
Proposed Merger
On January 1, 2018, we entered into the Merger Agreement pursuant to which Merger Sub will be merged with and into the Partnership with the Partnership surviving as an indirect wholly owned subsidiary of Archrock. Under the terms of the Proposed Merger Agreement, at the effective time of the Proposed Merger, each of our common units not owned by Archrock will be converted into the right to receive
1.40
shares of Archrock common stock and all of the Partnership’s incentive distribution rights, which are owned indirectly by Archrock, will be canceled and will cease to exist.
Completion of the Proposed Merger is subject to certain customary conditions, including, among others: (i) approval of the Merger Agreement by holders of a majority of the outstanding common units of the Partnership; (ii) approval of the Archrock Share Issuance by a majority of the shares of Archrock common stock present in person or represented by proxy at the special meeting of Archrock stockholders; (iii) expiration or termination of applicable waiting periods under the HSR Act (early termination of the waiting period under the HSR Act was granted on February 9, 2018); (iv) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (v) the effectiveness of a registration statement on Form S-4 relating to the Archrock Share Issuance; (vi) approval for listing on the New York Stock Exchange of the shares of Archrock common stock issuable pursuant to the Archrock Share Issuance; (vii) subject to specified materiality standards, the accuracy of certain representations and warranties of the other party; and (viii) compliance by the other party in all material respects with its covenants.
As a result of the completion of the Proposed Merger, our common units will no longer be publicly traded. All of our outstanding debt is expected to remain outstanding. We and Archrock expect to issue, to the extent not already in place, guarantees of the indebtedness of Archrock and the Partnership. Subject to the satisfaction or waiver of certain conditions, including the approval of the Merger Agreement by our unitholders and approval of the issuance of Archrock common stock in connection with the Proposed Merger by Archrock stockholders, the Proposed Merger is expected to close in the second quarter of 2018.
See Note 17 (“Proposed Merger”) for details of the Proposed Merger.
Nature of Operations
Natural gas compression is a mechanical process whereby the pressure of a given volume of natural gas is increased to a desired higher pressure for transportation from one point to another. It is essential to the production and transportation of natural gas. Compression is typically required several times during the natural gas production and transportation cycle, including (i) at the wellhead, (ii) throughout gathering and distribution systems, (iii) into and out of processing and storage facilities and (iv) along intrastate and interstate pipelines.
We consider and report all of our operations as
one
segment and operate solely within the U.S.
Principles of Consolidation
The accompanying consolidated financial statements include us and our subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year presentation.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date. Management believes that the estimates and assumptions used are reasonable.
Revenue Recognition
Contract operations revenue is recognized when earned, which generally occurs monthly when service is provided under our customer contracts.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist of trade accounts receivable. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S. We review the financial condition of customers prior to extending credit and generally do not obtain collateral for trade receivables. Payment terms are on a short-term basis and in accordance with industry practice. We consider this credit risk to be limited due to these companies’ financial resources, the nature of services we provide and the terms of our contract operations customer service agreements.
During the years ended
December 31, 2017
,
2016
and
2015
, Williams Partners accounted for approximately
16%
,
17%
and
16%
of our revenue, respectively. Additionally, during each of the years ended
December 31, 2017
,
2016
and
2015
, Anadarko accounted for
10%
of our revenue.
No
other single customer accounted for more than
10%
of our revenue during these years. As of
December 31, 2017
, trade receivables outstanding from Williams Partners and Anadarko were
22%
and
13%
, respectively, of our total trade accounts receivable balance. As of
December 31, 2016
, trade receivables outstanding from Williams Partners and Anadarko were
20%
and
15%
, respectively, of our total trade accounts receivable balance.
Outstanding accounts receivable are reviewed regularly for non-payment indicators and allowances for doubtful accounts are recorded based upon management’s estimate of collectability at each balance sheet date. During the years ended
December 31, 2017
,
2016
and
2015
, we recorded bad debt expense of
$4.1 million
,
$2.7 million
and
$2.3 million
, respectively.
Property, Plant and Equipment
Property, plant and equipment includes compression equipment that is recorded at cost and depreciated using the straight-line method over their estimated useful lives. For compression equipment, depreciation begins with the first compression service. The estimated useful life for compression equipment is
15
to
30
years. Repairs and maintenance are expensed as incurred. Major improvements that extend the useful life of compressor units are capitalized and depreciated over the estimated useful life, up to
7
years. When property, plant and equipment is sold, retired or otherwise disposed of, the gain or loss is recorded in other (income) loss, net.
Depreciation expense during the years ended
December 31, 2017
,
2016
and
2015
was
$127.9 million
,
$138.0 million
and
$141.2 million
, respectively.
Long-Lived Assets
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable. An impairment loss exists when estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. When necessary, an impairment loss is recognized and represents the excess of the asset’s carrying value as compared to its estimated fair value and is charged to the period in which the impairment occurred. Identifiable intangibles are amortized over the assets’ estimated useful lives.
Goodwill
Goodwill acquired in connection with business combinations represent the excess of consideration over the fair value of tangible and identifiable intangible net assets acquired. Certain assumptions and estimates were employed in determining the fair value of assets acquired and liabilities assumed.
We reviewed the carrying value of our goodwill for potential impairment in the fourth quarter of every year, or whenever events or other circumstances indicated that we may not be able to recover the carrying amount. We first assessed qualitative factors to evaluate whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount as the basis for determining whether it was necessary to perform the two-step goodwill impairment test.
If a two-step goodwill impairment test is elected or required, the first step is to compare the implied fair value of our reporting unit with its carrying value (including the goodwill). If the implied fair value of the reporting unit is higher than the carrying value, no impairment is deemed to exist and no further testing was required. If the implied fair value of the reporting unit is below the recorded carrying value, then a second step must be performed to determine the goodwill impairment required, if any. We calculate the implied fair value of the reporting unit goodwill by allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss for that excess amount.
Determining the fair value of a reporting unit under the first step of the goodwill impairment test is judgmental in nature and involves the use of significant estimates and assumptions, which have a significant impact on the fair value determined. We determine the fair value of our reporting unit using both the expected present value of future cash flows and a market approach. Each approach is weighted
50%
in determining our calculated fair value. The present value of future cash flows is estimated using our most recent forecast and the weighted average cost of capital. The market approach uses a market multiple on the earnings before interest expense, provision for income taxes and depreciation and amortization of comparable peer companies. Significant estimates for our reporting unit included in our impairment analysis are our cash flow forecasts, our estimate of the market’s weighted average cost of capital and market multiples.
In the fourth quarter of 2015, energy markets experienced an accelerated decline in oil and natural gas prices which impacted our future cash flow forecasts, our market capitalization and the market capitalization of peer companies. We identified these conditions as a triggering event and performed a two-step goodwill impairment test as of December 31, 2015, which resulted in a full impairment of our remaining goodwill of
$127.8 million
.
Due To/From Affiliates, Net
We have receivables and payables with Archrock. A valid right of offset exists related to the receivables and payables with our affiliates and as a result, we present such amounts on a net basis in our consolidated balance sheets.
The transactions reflected in due to/from affiliates, net, primarily consist of centralized cash management activities between us and Archrock. Because these balances are treated as short-term borrowings between us and Archrock, serve as a financing and cash management tool to meet our short-term operating needs, are large, turn over quickly and are payable on demand, we present borrowings and repayments with our affiliates on a net basis within the consolidated statements of cash flows. Net receivables from our affiliates are considered advances and changes are presented as investing activities in the consolidated statements of cash flows. Net payables due to our affiliates are considered borrowings and changes are presented as financing activities in the consolidated statements of cash flows.
Income Taxes
As a partnership, all income, gains, losses, expenses, deductions and tax credits we generate generally flow through to our unitholders. However, some states impose an entity-level income tax on partnerships, including us. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We record uncertain tax positions in accordance with the accounting standard on income taxes under a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Comprehensive Income (Loss)
Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with our limited partners or General Partner. Our accumulated other comprehensive income (loss) consists only of derivative instruments. Changes in accumulated other comprehensive income (loss) represent changes in the fair value of derivative instruments that are designated as cash flow hedges to the extent the hedge is effective and amortization of terminated interest rate swaps. See
Note 10
(“Derivatives”)
for additional disclosures related to comprehensive income (loss).
Hedging and Use of Derivative Instruments
We use derivative instruments to minimize the risks and costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative instruments for trading or other speculative purposes. We record interest rate swaps on the balance sheet as either derivative assets or derivative liabilities measured at their fair value. The fair value of our derivatives is based on the income approach (discounted cash flow) using market observable inputs, including forward LIBOR curves. Changes in the fair value of the swaps designated as cash flow hedges are deferred in accumulated other comprehensive income (loss) to the extent the contracts are effective as hedges until settlement of the underlying hedged transaction. To qualify for hedge accounting treatment, we must formally document, designate and assess the effectiveness of the transactions. If the necessary correlation ceases to exist or if the anticipated transaction is no longer probable, we would discontinue hedge accounting and apply mark-to-market accounting. Amounts paid or received from interest rate swap agreements are charged or credited to interest expense and matched with the cash flows and interest expense of the debt being hedged, resulting in an adjustment to the effective interest rate.
Income (Loss) Per Common Unit
Income (loss) per common unit is computed using the two-class method. Under the two-class method, basic income (loss) per common unit is determined by dividing net income (loss) allocated to the common units after deducting the amounts allocated to our General Partner (including distributions to our General Partner on its incentive distribution rights) and participating securities, by the weighted average number of outstanding common units excluding the weighted average number of outstanding participating securities during the period. Participating securities include unvested phantom units with nonforfeitable tandem distribution equivalent rights to receive cash distributions in the quarter in which distributions are paid on common units. During periods of net loss, no effect is given to participating securities because they do not have a contractual obligation to participate in our losses.
When computing income (loss) per common unit in periods when distributions are greater than income (loss), the amount of the actual incentive distribution rights, if any, is deducted from net income (loss) and allocated to our General Partner for the corresponding period. The remaining amount of net income (loss), after deducting distributions to participating securities, is allocated between the general partner and common units based on how our Partnership Agreement allocates net losses.
When computing income per common unit in periods when income is greater than distributions, income is allocated to the General Partner, participating securities and common units based on how our Partnership Agreement would allocate income if the full amount of income for the period had been distributed. This allocation of net income does not impact our total net income, consolidated results of operations or total cash distributions (including actual incentive distribution rights); however, it may result in our General Partner being allocated additional incentive distributions for purposes of our income per unit calculation, which could reduce net income per common unit. However, as required by our Partnership Agreement, we determine cash distributions based on available cash and determine the actual incentive distributions allocable to our General Partner based on actual distributions.
The following table reconciles net loss used in the calculation of basic and diluted loss per common unit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net loss
|
$
|
(421
|
)
|
|
$
|
(10,757
|
)
|
|
$
|
(84,025
|
)
|
Less: General partner incentive distribution rights
|
—
|
|
|
—
|
|
|
(17,853
|
)
|
Less: General partner 2% ownership interest
|
9
|
|
|
213
|
|
|
2,021
|
|
Common unitholder interest in net loss
|
(412
|
)
|
|
(10,544
|
)
|
|
(99,857
|
)
|
Less: Net income attributable to participating securities
|
(203
|
)
|
|
(226
|
)
|
|
(184
|
)
|
Net loss used in basic and diluted loss per common unit
|
$
|
(615
|
)
|
|
$
|
(10,770
|
)
|
|
$
|
(100,041
|
)
|
The following table shows the potential common units that were included in computing diluted loss per common unit (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Weighted average common units outstanding including participating securities
|
67,412
|
|
|
60,628
|
|
|
58,610
|
|
Less: Weighted average participating securities outstanding
|
(175
|
)
|
|
(178
|
)
|
|
(71
|
)
|
Weighted average common units outstanding — used in basic loss per common unit
|
67,237
|
|
|
60,450
|
|
|
58,539
|
|
Net dilutive potential common units issuable:
|
|
|
|
|
|
Phantom units
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common units and dilutive potential common units — used in diluted loss per common unit
|
67,237
|
|
|
60,450
|
|
|
58,539
|
|
2. Recent Accounting Developments
Accounting Standards Updates Implemented
On January 1, 2017 we adopted Update 2016-09 which simplifies several aspects of the accounting for share-based payment transactions. Update 2016-09 allows companies to make an accounting policy election to either estimate forfeitures or account for forfeitures as they occur. We have elected to account for forfeitures as they occur. There was no material impact to the consolidated financial statements as a result of the adoption of this standard.
Accounting Standards Updates Not Yet Implemented
In August 2017, the FASB issued Update 2017-12 which expands and refines hedge accounting for both nonfinancial and financial risk components, aligns the recognition and presentation of the effects of the hedging instrument and hedged item in the financial statements and makes certain targeted improvements to simplify the application of hedge accounting guidance. Update 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities will apply Update 2017-12 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted; amended presentation and disclosure guidance will be required only prospectively. Early adoption is permitted. We are currently evaluating the impact of Update 2017-12 on our consolidated financial statements, including the impact of an early adoption as permitted in the guidance.
In August 2016, the FASB issued Update 2016-15 which addresses diversity in practice and simplifies several elements of cash flow classification including how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Update 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Update 2016-15 will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. We have evaluated Update 2016-15 and do not expect a material impact on our consolidated financial statements.
In June 2016, the FASB issued Update 2016-13 that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. Update 2016-13 is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted. Entities will apply Update 2016-13 provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently evaluating the impact of Update 2016-13 on our consolidated financial statements.
In February 2016, the FASB issued Update 2016-02 that establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Under the new guidance, lessor accounting is largely unchanged. Update 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. In November 2017, the FASB tentatively decided to amend certain aspects of 2016-02 to allow entities the option to elect not to restate comparative periods when transitioning to the new standard and to elect not to separate lease and non-lease components when certain conditions are met. We are in the initial phase of our assessment which includes identifying potential contracts and transactions subject to the provisions of the standard such that we can assess the impacts on our consolidated financial statements.
From May 2014 through May 2016, the FASB issued the Revenue Recognition Update that outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes the most current revenue recognition guidance, including industry-specific guidance. The core principle of the Revenue Recognition Update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Revenue Recognition Update also requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Revenue Recognition Update will be effective for reporting periods beginning after December 15, 2017, including interim periods within the reporting period. Early adoption is permitted for reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach.
Under current guidance, contract operations revenue is recognized when earned, which generally occurs monthly when the service is provided under our customer service agreements. We anticipate the timing of revenue recognized will be impacted by contractual provisions for availability guarantees for our services and re-billable costs associated with moving compressor equipment to a customer site. We have concluded that these changes will not result in a material difference from current practice.
The Revenue Recognition Update provides guidance on contract costs that should be recognized as assets and amortized over the period that the related goods or services transfer to the customer. Certain costs such as sales commissions and freight charges to transport compressor assets, currently expensed as incurred, will be deferred and amortized.
We will adopt the Revenue Recognition Update effective January 1, 2018, using the modified retrospective transition method applied to those contracts which are not complete as of that date, which will result in a cumulative-effect adjustment to decrease retained deficit by an amount ranging from
$10 million
to
$14 million
dollars, net of tax.
We anticipate significant changes to our disclosures based on the requirements prescribed by the Revenue Recognition Update.
Prior to our adoption of the Revenue Recognition Update effective January 1, 2018, we established a transition team, with representation from all functional areas of our businesses that were expected to be impacted in order to implement the required changes. Processes to capture and verify the quality of information needed, including identifying and implementing changes to our information technology systems, were developed and tested. We are also updating our accounting policies and documenting operational procedures for recognizing revenue under the new guidance.
We are finalizing changes to our internal control structure and upon adoption plan to implement new controls to address the risks associated with recognizing revenue under the new guidance. We have modified certain controls effective in the fourth quarter of 2017 to take into consideration the new criteria for recognizing revenue, specifically identifying promises within the contract that give rise to performance obligations, and evaluating the impact of variable consideration on the transaction price. We will continue to evaluate our business processes, systems and controls to ensure the accuracy and timeliness of the recognition and disclosure requirements under the new revenue guidance.
3. Business Acquisitions
November 2016 Contract Operations Acquisition
In November 2016, we completed the November 2016 Contract Operations Acquisition whereby we acquired from Archrock contract operations customer service agreements with
63
customers and a fleet of
262
compressor units used to provide compression services under those agreements, comprising approximately
147,000
horsepower, or approximately
4%
(of then-available horsepower) of the combined U.S. contract operations business of Archrock and us. At the acquisition date, the acquired fleet assets had a net book value of
$66.6 million
, net of accumulated depreciation of
$55.6 million
. Total consideration for the transaction was
$85.0 million
, excluding transaction costs. In connection with the acquisition, we issued approximately
5.5 million
common units to Archrock and
111,040
general partner units to our General Partner. During the year ended December 31, 2016, we incurred transaction costs of approximately
$0.4 million
related to this acquisition, which is reflected in other (income) loss, net, in our consolidated statement of operations.
In connection with this acquisition, we were allocated
$1.1 million
finite life intangible assets associated with customer relationships of Archrock’s contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Archrock’s contract operations segment. These intangible assets are being amortized through 2024, based on the present value of income expected to be realized from these intangible assets.
Because Archrock and we are considered entities under common control, GAAP requires that we record the assets acquired and liabilities assumed from Archrock in connection with the November 2016 Contract Operations Acquisition using Archrock’s historical cost basis in the assets and liabilities. The difference between the historical cost basis of the assets acquired and liabilities assumed and the purchase price is treated as either a capital contribution or distribution. As a result, we recorded a capital distribution of
$17.3 million
for the November 2016 Contract Operations Acquisition during the year ended December 31, 2016.
An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the November 2016 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenue and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.
March 2016 Acquisition
In March 2016, we completed the March 2016 Acquisition whereby we acquired contract operations customer service agreements with
four
customers and a fleet of
19
compressor units used to provide compression services under those agreements comprising approximately
23,000
horsepower. The
$18.8 million
purchase price was funded with
$13.8 million
in borrowings under our Former Credit Facility, a non-cash exchange of
24
compressor units for
$3.2 million
, and the issuance of
257,000
common units for
$1.8 million
. In connection with this acquisition, we issued and sold
5,205
general partner units to our General Partner so it could maintain its approximate
2%
general partner interest in us. During the year ended
December 31, 2016
, we incurred transaction costs of
$0.2 million
related to the March
2016 Acquisition, which is reflected in other (income) loss, net, in our consolidated statement of operations.
We accounted for the March
2016 Acquisition using the acquisition method, which requires, among other things, assets acquired to be recorded at their fair value on the acquisition date. The following table summarizes the purchase price allocation based on estimated fair values of the acquired assets as of the acquisition date (in thousands):
|
|
|
|
|
|
Fair Value
|
Property, plant and equipment
|
$
|
14,929
|
|
Intangible assets
|
3,839
|
|
Purchase price
|
$
|
18,768
|
|
Property, Plant and Equipment and Intangible Assets Acquired
Property, plant and equipment is comprised of compressor units that will be depreciated on a straight-line basis over an estimated average remaining useful life of
15 years
.
The amount of finite life intangible assets, and their associated average useful lives, was determined based on the period which the assets are expected to contribute directly or indirectly to our future cash flows, and consisted of the following:
|
|
|
|
|
|
|
|
Amount
(in thousands)
|
|
Average
Useful Life
|
Contract based
|
$
|
3,839
|
|
|
2.3 years
|
The results of operations attributable to the assets acquired in the March
2016 Acquisition have been included in our consolidated financial statements since the date of acquisition.
April 2015 Contract Operations Acquisition
In April 2015, we completed the April 2015 Contract Operations Acquisition whereby we acquired from Archrock contract operations customer service agreements with
60
customers and a fleet of
238
compressor units used to provide compression services under those agreements, comprising approximately
148,000
horsepower, or
3%
(of then-available horsepower) of the combined contract operations business of Archrock and us . The acquired assets also included
179
compressor units, comprising approximately
66,000
horsepower, previously leased from Archrock to us. At the acquisition date, the acquired fleet assets had a net book value of
$108.8 million
, net of accumulated depreciation of
59.9 million
. Total consideration for the transaction was approximately
102.3 million
, excluding transaction costs. In connection with this acquisition, we issued approximately
4.0 million
common units to Archrock and
80,341
general partner units to our General Partner. Based on the terms of the contribution, conveyance and assumption agreement, the common units and general partner units, including incentive distribution rights, we issued for this acquisition were not entitled to receive a cash distribution relating to the quarter ended March 31, 2015.
In connection with this acquisition, we were allocated
$1.1 million
finite life intangible assets associated with customer relationships of Archrock’s contract operations segment. The amounts allocated were based on the ratio of fair value of the net assets transferred to us to the total fair value of Archrock’s contract operations segment. These intangible assets are being amortized through 2024, based on the present value of income expected to be realized from these intangible assets.
Because Archrock and we are considered entities under common control, GAAP requires that we record the assets acquired and liabilities assumed from Archrock in connection with the April 2015 Contract Operations Acquisition using Archrock’s historical cost basis in the assets and liabilities. The difference between the historical cost basis of the assets acquired and liabilities assumed and the purchase price is treated as either a capital contribution or distribution. As a result, we recorded a capital contribution of
$7.6 million
for the April 2015 Contract Operations Acquisition during the year ended
December 31, 2015
.
An acquisition of a business from an entity under common control is generally accounted for under GAAP by the acquirer with retroactive application as if the acquisition date was the beginning of the earliest period included in the financial statements. Retroactive effect to the April 2015 Contract Operations Acquisition was impracticable because such retroactive application would have required significant assumptions in a prior period that cannot be substantiated. Accordingly, our financial statements include the assets acquired, liabilities assumed, revenue and direct operating expenses associated with the acquisition beginning on the date of such acquisition. However, the preparation of pro forma financial information allows for certain assumptions that do not meet the standards of financial statements prepared in accordance with GAAP.
Unaudited Pro Forma Financial Information
Pro forma financial information is not presented for the March
2016 Acquisition as it is immaterial to our reported results.
The unaudited pro forma financial information for the years ended
December 31, 2016
and
2015
have been included to give effect to the additional assets acquired in the November 2016 Contract Operations Acquisition and the April 2015 Contract Operations Acquisition. The November 2016 Contract Operations Acquisition is presented in the unaudited pro forma financial information as though this transaction occurred as of
January 1, 2015
. The April 2015 Contract Operations Acquisition is presented in the unaudited pro forma financial information as though this transaction occurred as of January 1, 2014. The unaudited pro forma financial information reflects the following transactions:
As related to the November 2016 Contract Operations Acquisition:
|
|
•
|
our acquisition of certain contract operations customer service agreements, compression equipment and identifiable intangible assets from Archrock; and
|
|
|
•
|
our issuance of approximately
5.5 million
common units to Archrock and
111,040
general partner units to our General Partner.
|
As related to the April 2015 Contract Operations Acquisition:
|
|
•
|
our acquisition of certain contract operations customer service agreements, compression equipment and identifiable intangible assets from Archrock; and
|
|
|
•
|
our issuance of approximately
4.0 million
common units to Archrock and
80,341
general partner units to our General Partner.
|
The pro forma financial information below is presented for informational purposes only and is not necessarily indicative of our results of operations that would have occurred had the transaction been consummated at the beginning of the period presented, nor is it necessarily indicative of future results. The pro forma financial information below was derived by adjusting our historical financial statements.
The following table shows pro forma financial information for the years ended
December 31, 2016
and
2015
(in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
Revenue
|
$
|
589,494
|
|
|
$
|
699,687
|
|
Net income (loss)
|
$
|
552
|
|
|
$
|
(72,438
|
)
|
Basic and diluted income (loss) per common unit
|
$
|
—
|
|
|
$
|
(1.39
|
)
|
Pro forma net income (loss) per common unit is determined by dividing the pro forma net income (loss) that would have been allocated to our common unitholders by the weighted average number of common units outstanding after the completion of the transactions included in the pro forma financial information. Pursuant to our 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 our common unitholders. No pro forma incentive distributions to our General Partner nor a reduction to net income (loss) allocable to our common unitholders was included in our pro forma net income (loss) per common unit calculation for the year ended
December 31, 2016
, as there were no incentive distributions issued related to the 2016 annual period. The pro forma net income (loss) per common unit calculations include pro forma incentive distributions to our General Partner and a reduction of net income allocable to our common unitholders of
$1.9 million
for the year ended
December 31, 2015
which reflects the amount of additional incentive distributions that would have occurred during this period.
4. Related Party Transactions
On January 1, 2018, we entered into the Merger Agreement pursuant to which Archrock will acquire all of our outstanding common units not already owned by Archrock. See Note 17 (“Proposed Merger”) for further details.
Omnibus Agreement
Our Omnibus Agreement with Archrock, our General Partner and others includes, among other things:
|
|
•
|
certain agreements not to compete between Archrock and its affiliates, on the one hand, and us and our affiliates, on the other hand;
|
|
|
•
|
Archrock’s obligation to provide all operational staff, corporate staff and support services reasonably necessary to operate our business and our obligation to reimburse Archrock for such services;
|
|
|
•
|
the terms under which we, Archrock, and our respective affiliates may transfer, exchange or lease compression equipment among one another;
|
|
|
•
|
Archrock’s grant to us of a license to use certain intellectual property, including our logo; and
|
|
|
•
|
Archrock’s and our obligations to indemnify each other for certain liabilities.
|
The Omnibus Agreement will terminate upon a change of control of Archrock GP, our General Partner or us, and certain provisions of the Omnibus Agreement will terminate upon a change of control of Archrock.
Non-competition
Under the Omnibus Agreement, subject to the provisions described below, Archrock has agreed not to offer or provide compression services to our contract operations services customers that are not also contract operations services customers of Archrock. Compression services include natural gas contract compression services, but exclude fabrication of compression equipment, sales of compression equipment or material, parts or equipment that are components of compression equipment, leasing of compression equipment without also providing related compression equipment service, gas processing operations services and operation, maintenance, service, repairs or overhauls of compression equipment owned by third parties. Similarly, we have agreed not to offer or provide compression services to Archrock’s contract operations services customers that are not also our contract operations services customers.
Some of our customers are also Archrock’s contract operations services customers, which we refer to as overlapping customers. We and Archrock have agreed, subject to the exceptions described below, not to provide contract operations services to an overlapping customer at any site at which the other was providing such services to an overlapping customer on the date of the most recent amendment to the Omnibus Agreement, each being referred to as a “Partnership site” or an “Archrock site”, as applicable. Pursuant to the Omnibus Agreement, if an overlapping customer requests contract operations services at a Partnership site or an Archrock site, whether in addition to or in replacement of the equipment existing at such site on the date of the most recent amendment to the Omnibus Agreement, we may provide contract operations services if such overlapping customer is a Partnership overlapping customer, and Archrock will be entitled to provide such contract operations services if such overlapping customer is an Archrock overlapping customer. Additionally, any additional contract operations services provided to a Partnership overlapping customer will be provided by us and any additional services provided to an Archrock overlapping customer will be provided by Archrock.
Archrock also has agreed that new customers for contract compression services are for our account unless the new customer is unwilling to contract with us under our form of compression services agreement. In that case, Archrock may provide compression services to the new customer. If we or Archrock enter into a compression services contract with a new customer, either we or Archrock, as applicable, will receive the protection of the applicable non-competition arrangements described above in the same manner as if such new customer had been a compression services customer of either us or Archrock on the date of the Omnibus Agreement.
Unless the Omnibus Agreement is terminated earlier due to a change of control of Archrock GP, our General Partner or us, the non-competition provisions of the Omnibus Agreement will terminate on December 31, 2018 or on the date on which a change of control of Archrock occurs, whichever event occurs first. If a change of control of Archrock occurs, and neither the Omnibus Agreement nor the non-competition arrangements have already terminated, Archrock will agree for the remaining term of the non-competition arrangements not to provide contract operations services to our customers at any site where we are providing contract operations services at the time of the change of control.
Indemnification for Environmental and Other Liabilities
Under the Omnibus Agreement, Archrock has agreed to indemnify us, for a
three
-year period following each applicable asset acquisition from Archrock, against certain potential environmental claims, losses and expenses associated with the ownership and operation of the acquired assets that occur before the acquisition date. Archrock’s maximum liability for environmental indemnification obligations under the Omnibus Agreement cannot exceed
$5.0 million
, and Archrock will not have any obligation under the environmental or any other indemnification until our aggregate losses exceed
$250,000
. Archrock will have no indemnification obligations with respect to environmental claims made as a result of additions to or modifications of environmental laws promulgated after such acquisition date. We have agreed to indemnify Archrock against environmental liabilities occurring on or after the applicable acquisition date related to our assets to the extent Archrock is not required to indemnify us.
Additionally, Archrock will indemnify us for losses attributable to title defects, retained assets and income taxes attributable to pre-closing operations. We will indemnify Archrock for all losses attributable to the post-closing operations of the assets contributed to us, to the extent not subject to Archrock indemnification obligations. For the years ended
December 31, 2017
,
2016
and
2015
, there were
no
requests for indemnification by either party.
Common Control Transactions
Transactions between us and Archrock and its affiliates are transactions between entities under common control. Under GAAP, transfers of assets and liabilities between entities under common control are to be initially recorded on the books of the receiving entity at the carrying value of the transferor. Any difference between consideration given and the carrying value of the assets or liabilities is treated as a capital distribution or contribution.
Purchase of New Compression Equipment from Archrock
In connection with the Spin-off, we entered into a supply agreement with Exterran Corporation under which we were obligated, until November 2017, to purchase our requirements of newly-fabricated compression equipment from Exterran Corporation and its affiliates, subject to certain exceptions. Prior to the Spin-off, we were able to purchase newly-fabricated compression equipment from Archrock or its affiliates at Archrock’s cost to fabricate such equipment plus a fixed margin. During the year ended
December 31, 2015
, we purchased
$171.7 million
of newly-fabricated compression equipment from Archrock.
The purchased equipment was recorded in our consolidated balance sheet as property, plant and equipment of
$159.0 million
, which represents the carrying value of the Archrock affiliates that sold it to us, and a distribution of equity of
$12.7 million
which represents the fixed margin we paid above the carrying value in accordance with the Omnibus Agreement.
Transfer, Exchange or Lease of Compression Equipment with Archrock
If Archrock determines in good faith that we or Archrock’s contract operations services business need to transfer, exchange or lease compression equipment between Archrock and us, the Omnibus Agreement permits such equipment to be transferred, exchanged or leased if it will not cause us to breach any existing contracts, suffer a loss of revenue under an existing compression services contract or incur any unreimbursed costs. In consideration for such transfer, exchange or lease of compression equipment, the transferee will either (i) transfer to the transferor compression equipment equal in value to the appraised value of the compression equipment transferred to it, (ii) agree to lease such compression equipment from the transferor or (iii) pay the transferor an amount in cash equal to the appraised value of the compression equipment transferred to it.
Transfer and Exchange of Overhauls.
During the years ended
December 31, 2017
,
2016
and
2015
, Archrock contributed to us
$5.2 million
,
$1.2 million
and
$9.6 million
, respectively, primarily related
to the completion of overhauls on compression equipment that was exchanged with us or contributed to us and where overhauls were in progress on the date of exchange or contribution.
Other Exchanges.
The following table summarizes the transfer activity between Archrock and us (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transferred to Archrock
|
|
Transferred from Archrock
|
|
Year Ended December 31,
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Compressor units
|
249
|
|
|
462
|
|
|
349
|
|
|
251
|
|
|
339
|
|
|
260
|
|
Horsepower
|
156,600
|
|
|
205,000
|
|
|
112,800
|
|
|
145,000
|
|
|
154,000
|
|
|
99,600
|
|
Net book value
|
$
|
78,856
|
|
|
$
|
92,382
|
|
|
$
|
54,703
|
|
|
$
|
74,874
|
|
|
$
|
96,216
|
|
|
$
|
46,784
|
|
During the years ended
December 31, 2017
,
2016
and
2015
, we recorded capital
distributions
of
$4.0 million
, capital contributions of
$3.8 million
and capital distributions of
$7.9 million
, respectively, related to the differences in net book value on the exchanged compression equipment.
No
customer contracts were included in the transfers.
Leases.
The following table summarizes the aggregate cost and accumulated depreciation of equipment on lease to Archrock (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Aggregate cost
|
$
|
3,560
|
|
|
$
|
4,326
|
|
Accumulated depreciation
|
272
|
|
|
692
|
|
The following table summarizes the revenue from Archrock related to the lease of our compression equipment and the cost of sales related to the lease of Archrock compression equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Revenue
|
$
|
708
|
|
|
$
|
123
|
|
|
$
|
201
|
|
Cost of sales
|
1,008
|
|
|
270
|
|
|
1,679
|
|
Reimbursement of Operating and SG&A Expense
Archrock provides all operational staff, corporate staff and support services reasonably necessary to run our business. These services may include, without limitation, operations, marketing, maintenance and repair, periodic overhauls of compression equipment, inventory management, legal, accounting, treasury, insurance administration and claims processing, risk management, health, safety and environmental, information technology, human resources, credit, payroll, internal audit, taxes, facilities management, investor relations, enterprise resource planning system, training, executive, sales, business development and engineering.
Archrock charges us for costs that are directly attributable to us. Costs that are indirectly attributable to us and Archrock’s other operations are allocated among Archrock’s other operations and us. The allocation methodologies vary based on the nature of the charge and have included, among other things, headcount and horsepower. We believe that the allocation methodologies used to allocate indirect costs to us are reasonable.
Included in our cost of sales during the years ended
December 31, 2017
,
2016
and
2015
were
$17.3 million
,
$4.8 million
and
$4.1 million
, respectively, of indirect costs incurred by Archrock. Included in SG&A during the years ended
December 31, 2017
,
2016
and
2015
were
$68.7 million
,
$68.8 million
and
$75.6 million
, respectively, of indirect costs incurred by Archrock.
5. Intangible Assets, net
Intangible assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Customer related (9-25 year life)
|
$
|
56,707
|
|
|
$
|
(22,713
|
)
|
|
$
|
56,707
|
|
|
$
|
(19,284
|
)
|
Contract based (5-9 year life)
|
68,395
|
|
|
(41,642
|
)
|
|
68,395
|
|
|
(29,155
|
)
|
Intangible assets
|
$
|
125,102
|
|
|
$
|
(64,355
|
)
|
|
$
|
125,102
|
|
|
$
|
(48,439
|
)
|
Amortization of intangible assets totaled
$15.9 million
,
$15.8 million
and
$14.6 million
during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Estimated future intangible amortization expense is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
14,908
|
|
2019
|
11,623
|
|
2020
|
8,286
|
|
2021
|
3,541
|
|
2022
|
2,472
|
|
Thereafter
|
19,917
|
|
Total
|
$
|
60,747
|
|
6. Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Accrued income and other taxes
(1)
|
$
|
5,675
|
|
|
$
|
2,902
|
|
Accrued other liabilities
|
3,221
|
|
|
1,550
|
|
Accrued liabilities
|
$
|
8,896
|
|
|
$
|
4,452
|
|
——————
|
|
(1)
|
Represents accruals for taxes including accruals for ad valorem tax, sales tax and use tax.
|
7. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Credit Facility
|
$
|
674,306
|
|
|
$
|
—
|
|
Former revolving credit facility
|
—
|
|
|
509,500
|
|
|
|
|
|
Former term loan facility
|
—
|
|
|
150,000
|
|
Less: Deferred financing costs, net of amortization
|
—
|
|
|
(353
|
)
|
|
—
|
|
|
149,647
|
|
|
|
|
|
6% senior notes due April 2021
|
350,000
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
(2,523
|
)
|
|
(3,213
|
)
|
Less: Deferred financing costs, net of amortization
|
(3,338
|
)
|
|
(4,366
|
)
|
|
344,139
|
|
|
342,421
|
|
|
|
|
|
6% senior notes due October 2022
|
350,000
|
|
|
350,000
|
|
Less: Debt discount, net of amortization
|
(3,441
|
)
|
|
(4,076
|
)
|
Less: Deferred financing costs, net of amortization
|
(3,951
|
)
|
|
(4,768
|
)
|
|
342,608
|
|
|
341,156
|
|
Long-term debt
|
$
|
1,361,053
|
|
|
$
|
1,342,724
|
|
Credit Facility
On
March 30, 2017
, we entered into the Credit Facility, a
five
-year,
$1.1 billion
asset-based revolving credit facility. The Credit Facility will mature on
March 30, 2022
, except that if any portion of our
6%
senior notes due April 2021 are outstanding as of
December 2, 2020
, then the Credit Facility will instead mature on
December 2, 2020
. We incurred
$14.9 million
in transaction costs related to the Credit Facility, which were included in other long-term assets in our consolidated balance sheets and are being amortized over the term of the Credit Facility. Concurrent with entering into the Credit Facility, we terminated our Former Credit Facility and repaid
$648.4 million
in borrowings and accrued and unpaid interest and fees outstanding. All commitments under the Former Credit Facility have been terminated. As a result of the termination, we expensed
$0.6 million
of unamortized deferred financing costs associated with the
$825.0 million
revolving credit facility, which was included in interest expense in our consolidated statements of operations. Additionally, we recorded a loss of
$0.3 million
related to the extinguishment of the
$150.0 million
term loan.
As of
December 31, 2017
, we had
$674.3 million
in outstanding borrowings and
no
outstanding letters of credit under the Credit Facility.
Subject to certain conditions, including the approval by the lenders, we are able to increase the aggregate commitments under the Credit Facility by up to an additional
$250.0 million
. Portions of the Credit Facility up to
$25.0 million
and
$50.0 million
will be available for the issuance of letters of credit and swing line loans, respectively.
The Credit Facility bears interest at a base rate or LIBOR, at our option, plus an applicable margin. Depending on our leverage ratio, the applicable margin varies (i) in the case of LIBOR loans, from
2.00%
to
3.25%
and (ii) in the case of base rate loans, from
1.00%
to
2.25%
. The base rate is the highest of (i) the prime rate announced by JPMorgan Chase Bank, (ii) the Federal Funds Effective Rate plus
0.50%
and (iii) one-month LIBOR plus
1.00%
. At
December 31, 2017
, the applicable margin on amounts outstanding was
3.2%
. The weighted average annual interest rate at
December 31, 2017
and
2016
on the outstanding balance under the Credit Facility and the Former Credit Facility, respectively, excluding the effect of interest rate swaps, was
4.8%
and
3.7%
, respectively.
Additionally, we are required to pay commitment fees based on the daily unused amount of the Credit Facility in an amount, depending on our leverage ratio, ranging from
0.375%
to
0.50%
. We incurred
$2.1 million
in commitment fees on the daily unused amount of the Credit Facility and
$1.4 million
and
$1.8 million
in commitment fees on the daily unused amount of the Former Credit Facility during the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressor units. The largest component is eligible compressor units.
Borrowings under the Credit Facility are secured by substantially all of the personal property assets of us and our Significant Domestic Subsidiaries (as defined in the Credit Facility agreement), including all of the membership interests of our Domestic Subsidiaries (as defined in the Credit Facility agreement).
The Credit Facility agreement contains various covenants including, but not limited to, restrictions on the use of proceeds from borrowings and limitations on our ability to incur additional indebtedness, engage in transactions with affiliates, merge or consolidate, sell assets, make certain investments and acquisitions, make loans, grant liens, repurchase equity and pay distributions. The Credit Facility agreement also contains various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. In addition, if as of any date we have cash (other than proceeds from a debt or equity issuance received in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Credit Facility agreement) in excess of
$50.0 million
, then such excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility.
We must maintain the following consolidated financial ratios, as defined in the Credit Facility agreement:
|
|
|
EBITDA to Interest Expense
|
2.5 to 1.0
|
Senior Secured Debt to EBITDA
|
3.5 to 1.0
|
Total Debt to EBITDA
|
|
Through fiscal year 2017
|
5.95 to 1.0
|
Through fiscal year 2018
|
5.75 to 1.0
|
Through second quarter of 2019
|
5.50 to 1.0
|
Thereafter
(1)
|
5.25 to 1.0
|
——————
|
|
(1)
|
Subject to a temporary increase to
5.5
to 1.0 for any quarter during which an acquisition meeting certain thresholds is completed and for the following two quarters after the quarter in which the acquisition closes.
|
As of
December 31, 2017
, we had undrawn capacity of
$425.7 million
under the Credit Facility. As a result of the financial ratio requirements discussed above,
$128.4 million
of the
$425.7 million
of undrawn capacity was available for additional borrowings as of
December 31, 2017
.
A material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform our obligations under the Credit Facility agreement, could lead to a default under that agreement. A default under one of our debt agreements would trigger cross-default provisions under our other debt agreements, which would accelerate our obligation to repay our indebtedness under those agreements. As of
December 31, 2017
, we were in compliance with all covenants under the Credit Facility.
During the years ended December 31, 2016 and 2015, we incurred transaction costs of
$1.7 million
and
$1.3 million
, respectively, related to amendments to the Former Credit Facility which were reflected in other long-term assets in our consolidated balance sheets and are being amortized over the term of the Former Credit Facility. During the year ended December 31, 2016, we expensed
$0.4 million
of unamortized deferred financing costs as a result of an amendment to the Former Credit Facility, which was reflected in interest expense in our consolidated statement of operations.
The Notes
The Notes are guaranteed on a senior unsecured basis by all of our existing subsidiaries (other than Archrock Partners Finance Corp., which is a co-issuer of the Notes) and certain of our future subsidiaries. The Notes and the guarantees, respectively, are our and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of our and the guarantors’ other senior obligations, and are effectively subordinated to all of our and the guarantors’ existing and future secured debt to the extent of the value of the collateral securing such indebtedness. In addition, the Notes and guarantees are effectively subordinated to all existing and future indebtedness and other liabilities of any future non-guarantor subsidiaries. All of our subsidiaries are
100%
owned, directly or indirectly, by us and guarantees by our subsidiaries are full and unconditional and constitute joint and several obligations. We have
no
assets or operations independent of our subsidiaries and there are no significant restrictions upon our subsidiaries’ ability to distribute funds to us. Archrock Partners Finance Corp. has no operations and does not have revenue other than as may be incidental as co-issuer of the Notes. Because we have no independent operations, the guarantees are full and unconditional (subject to customary release provisions) and constitute joint and several obligations of our subsidiaries other than Archrock Partners Finance Corp., and as a result we have not included consolidated financial information of our subsidiaries.
The Partnership’s
6%
Senior Notes Due April 2021
In March 2013, the Partnership issued
$350.0 million
aggregate principal amount of
6%
senior notes due April 2021. These notes were issued at an original issuance discount of
$5.5 million
, which is being amortized at an effective interest rate of
6.25%
over their term. In January 2014, holders of these notes exchanged their notes for registered notes with the same terms.
The Partnership may redeem all or a part of these notes at redemption prices (expressed as percentages of principal amount) equal to
103.00%
for the twelve-month period beginning on April 1, 2017,
101.500%
for the twelve-month period beginning on April 1, 2018 and
100.00%
for the twelve-month period beginning on April 1, 2019 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date.
The Partnership’s
6%
Senior Notes Due October 2022
In April 2014, the Partnership issued
$350.0 million
aggregate principal amount of
6%
senior notes due October 2022. These notes were issued at an original issuance discount of
$5.7 million
, which is being amortized at an effective interest rate of
6.25%
over their term. In February 2015, holders of these notes exchanged their notes for registered notes with the same terms.
Prior to April 1, 2018, the Partnership may redeem all or a part of these notes at a redemption price equal to the sum of (i) the principal amount thereof, plus (ii) a make-whole premium at the redemption date, plus accrued and unpaid interest, if any, to the redemption date. On or after April 1, 2018, the Partnership may redeem all or a part of these notes at redemption prices (expressed as percentages of principal amount) equal to
103.00%
for the twelve-month period beginning on April 1, 2018,
101.500%
for the twelve-month period beginning on April 1, 2019 and
100.00%
for the twelve-month period beginning on April 1, 2020 and at any time thereafter, plus accrued and unpaid interest, if any, to the applicable redemption date.
Long-Term Debt Maturity Schedule
Contractual maturities of long-term debt (excluding interest to be accrued thereon) at
December 31, 2017
are as follows (in thousands):
|
|
|
|
|
|
December 31, 2017
|
2018
|
$
|
—
|
|
2019
|
—
|
|
2020
|
—
|
|
2021
(1)
|
350,000
|
|
2022
(1)
|
1,024,306
|
|
Total debt
(1)
|
$
|
1,374,306
|
|
——————
|
|
(1)
|
Include the full face value of the Notes and have not been reduced by the aggregate unamortized discount of
$6.0 million
and the aggregate unamortized deferred financing costs of
$7.3 million
as of
December 31, 2017
.
|
8. Partners' Capital
Unit Transactions
In August 2017, we sold, pursuant to a public underwritten offering,
4,600,000
common units, including
600,000
common units pursuant to an over-allotment option. We received net proceeds of
$60.3 million
, after deducting underwriting discounts, commissions and offering expenses, which we used to repay borrowings outstanding under our revolving credit facility. In connection with this sale and as permitted under our Partnership Agreement, we sold
93,163
general partner units to our General Partner so it could maintain its approximate
2%
general partner interest in us. We received net proceeds of
$1.3 million
from the General Partner contribution.
During the year ended
December 31, 2017
, we issued and sold
94,803
general partner units, including the
93,163
units sold in the offering discussed above, to our General Partner so it could maintain its approximate
2%
general partner interest in us.
As of
December 31, 2017
, Archrock owned
29,064,637
common units and
1,421,768
general partner units, collectively representing an approximate
43%
interest in us.
Cash Distributions
We make distributions of available cash (as defined in our Partnership Agreement) from operating surplus in the following manner:
|
|
•
|
first
,
98%
to all common unitholders, pro rata, and
2%
to our General Partner, until each unit has received a distribution of
$0.4025
;
|
|
|
•
|
second
,
85%
to all common unitholders, pro rata, and
15%
to our General Partner, until each unit has received a distribution of
$0.4375
;
|
|
|
•
|
third
,
75%
to all common unitholders, pro rata, and
25%
to our General Partner, until each unit has received a total of
$0.5250
; and
|
|
|
•
|
thereafter
,
50%
to all common unitholders, pro rata, and
50%
to our General Partner.
|
The general partner units also have the right to receive incentive distributions of cash in excess of the minimum quarterly distributions.
The following table summarizes our distributions per unit for
2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Covering
|
|
Payment Date
|
|
Distribution per
Common Unit
|
|
Total Distribution
(in thousands)
|
1/1/2015 — 3/31/2015
|
|
May 15, 2015
|
|
$
|
0.5625
|
|
|
$
|
35,903
|
|
(1)
|
4/1/2015 — 6/30/2015
|
|
August 14, 2015
|
|
0.5675
|
|
|
39,084
|
|
(1)
|
7/1/2015 — 9/30/2015
|
|
November 13, 2015
|
|
0.5725
|
|
|
39,680
|
|
(1)
|
10/1/2015 — 12/31/2015
|
|
February 12, 2016
|
|
0.5725
|
|
|
39,680
|
|
(1)
|
1/1/2016 — 3/31/2016
|
|
May 13, 2016
|
|
0.2850
|
|
|
17,513
|
|
|
4/1/2016 — 6/30/2016
|
|
August 15, 2016
|
|
0.2850
|
|
|
17,513
|
|
|
7/1/2016 — 9/30/2016
|
|
November 14, 2016
|
|
0.2850
|
|
|
17,513
|
|
|
10/1/2016 — 12/31/2016
|
|
February 14, 2017
|
|
0.2850
|
|
|
19,107
|
|
|
1/1/2017 — 3/31/2017
|
|
May 15, 2017
|
|
0.2850
|
|
|
19,124
|
|
|
4/1/2017 — 6/30/2017
|
|
August 14, 2017
|
|
0.2850
|
|
|
20,459
|
|
|
7/1/2017 — 9/30/2017
|
|
November 14, 2017
|
|
0.2850
|
|
|
20,459
|
|
|
10/01/2017 — 12/31/2017
|
|
February 13, 2018
|
|
0.2850
|
|
|
20,455
|
|
|
——————
|
|
(1)
|
Incentive distributions to our General Partner on its incentive distribution rights.
|
9. Unit-Based Compensation
During the years ended
December 31, 2017
,
2016
and
2015
, we recognized
$1.1 million
,
$1.2 million
and
$1.1 million
of unit-based compensation expense, respectively, which excludes unit-based compensation expense that was charged back to Archrock of
$0.5 million
,
$0.6 million
and
$1.2 million
, respectively.
Long-Term Incentive Plan
In April 2017, we adopted the 2017 LTIP to provide for the benefit of the employees, directors and consultants of us, Archrock and our respective affiliates.
Two million
common units have been authorized for issuance with respect to awards under the 2017 LTIP. The 2017 LTIP provides for the issuance of unit options, unit appreciation rights, restricted units, phantom units, performance awards, bonus awards, distribution equivalent rights, cash awards and other unit-based awards. The 2017 LTIP will be administered by the compensation committee of our board of directors. The 2006 LTIP expired in 2016 and, as such, no further grants can be made under that plan. Previous grants made under the 2006 LTIP will continue to be governed by the 2006 LTIP and the applicable award agreements.
Phantom units are notional units that entitle the grantee to receive common units upon the vesting of such phantom units or, at the discretion of the Plan Administrator, cash equal to the fair market value of the underlying common units. Because we grant phantom units to non-employees, we are required to remeasure the fair value of these phantom units, which is based on the fair value of our common units, each period and record a cumulative adjustment of the expense previously recognized. During the years ended
December 31, 2017
and
2016
, we recorded an immaterial reduction to SG&A expense related to the fair value remeasurement of phantom units. During the year ended
December 31, 2015
, we recorded a reduction to SG&A expense of
$0.3 million
, related to the fair value remeasurement of phantom units.
Phantom units granted under the 2017 LTIP may include nonforfeitable tandem distribution equivalent rights to receive cash distributions on unvested phantom units in the quarter in which distributions are paid on common units. Phantom units granted generally vest one-third per year on dates as specified in the applicable award agreements subject to continued service through the applicable vesting date.
Phantom Units
The following table presents phantom unit activity during the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Phantom
Units
(in thousands)
|
|
Weighted
Average
Grant Date
Fair Value
per Unit
|
Phantom units outstanding, January 1, 2017
|
197
|
|
|
$
|
11.60
|
|
Granted
|
81
|
|
|
16.28
|
|
Vested
|
(104
|
)
|
|
14.75
|
|
Canceled
|
(21
|
)
|
|
9.76
|
|
Phantom units outstanding, December 31, 2017
|
153
|
|
|
12.19
|
|
As of
December 31, 2017
, we expect
$1.2 million
of unrecognized compensation cost related to unvested phantom units to be recognized over the weighted-average period of
1.8
years.
10. Derivatives
We are exposed to market risks associated with changes in interest rates. We use derivative instruments to minimize the risks and costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative instruments for trading or other speculative purposes.
Interest Rate Risk
At
December 31, 2017
, we were a party to the following interest rate swaps, which were entered into to offset changes in expected cash flows due to fluctuations in the associated variable interest rates:
|
|
|
|
|
|
Expiration Date
|
|
Notional Value
(in millions)
|
May 2019
|
|
$
|
100
|
|
May 2020
|
|
100
|
|
March 2022
|
|
300
|
|
|
|
$
|
500
|
|
As of
December 31, 2017
, the weighted average effective fixed interest rate on our interest rate swaps was
1.8%
. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. As the swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. We recorded
$0.6 million
of interest expense, an immaterial amount of interest income and
$0.4 million
of interest income during the years ended
December 31, 2017
,
2016
and 2015, respectively, due to ineffectiveness related to interest rate swaps. We estimate that
$0.5 million
of deferred gain attributable to interest rate swaps and included in our accumulated other comprehensive income (loss) at
December 31, 2017
, will be reclassified into earnings as interest income at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions, unless the derivative contract contains a significant financing element; in this case, the cash settlements for these derivatives are classified as cash flows from financing activities in our condensed consolidated statements of cash flows.
In August 2017, the Partnership amended the terms of certain of its interest rate swap agreements, designated as cash flow hedges against the variability of future interest payments due under the Credit Facility, with a notional value of
$300.0 million
. The amended terms adjusted the fixed interest rate and extended the maturity dates to March 2022. These amendments effectively created new derivative contracts and terminated the old derivative contracts. As a result, as of the amendment date we discontinued the original cash flow hedge relationships on a prospective basis, and designated the amended interest rate swaps under new cash flow hedge relationships based on the amended terms. The fair value of the interest rate swaps immediately prior to the execution of the amendments was a liability of
$0.7 million
. The associated amount in accumulated other comprehensive income (loss) is being amortized into interest expense over the original terms of the interest rate swaps through May 2018.
The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Asset (Liability)
|
|
Balance Sheet Location
|
|
December 31, 2017
|
|
December 31, 2016
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps
|
Current portion of interest rate swaps
|
|
$
|
186
|
|
|
$
|
—
|
|
Interest rate swaps
|
Other long-term assets
|
|
4,490
|
|
|
413
|
|
Interest rate swaps
|
Current portion of interest rate swaps
|
|
(134
|
)
|
|
(3,226
|
)
|
Interest rate swaps
|
Other long-term liabilities
|
|
—
|
|
|
(377
|
)
|
Total derivatives
|
|
|
$
|
4,542
|
|
|
$
|
(3,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
Recognized in Other
Comprehensive
Income (Loss) on
Derivatives
|
|
Location of Loss
Reclassified
from Accumulated
Other Comprehensive
Income (Loss) into
Income (Loss)
|
|
Loss
Reclassified from
Accumulated Other
Comprehensive
Income (Loss) into
Income (Loss)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
$
|
5,553
|
|
|
Interest expense
|
|
$
|
(3,093
|
)
|
Year ended December 31, 2016
|
(3,069
|
)
|
|
Interest expense
|
|
(4,457
|
)
|
Year ended December 31, 2015
|
(8,901
|
)
|
|
Interest expense
|
|
(6,781
|
)
|
The counterparties to our derivative agreements are major financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments.
11. Fair Value Measurements
The accounting standard for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value into the following three categories:
|
|
•
|
Level 1
— Quoted unadjusted prices for identical instruments in active markets to which we have access at the date of measurement.
|
|
|
•
|
Level 2
— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 2 inputs are those in markets for which there are few transactions, the prices are not current, little public information exists or prices vary substantially over time or among brokered market makers.
|
|
|
•
|
Level 3
— Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are those inputs that reflect our own assumptions regarding how market participants would price the asset or liability based on the best available information.
|
Asset and Liabilities Measured at Fair Value on a Recurring Basis
On a quarterly basis, our interest rate swaps are valued based on the income approach (discounted cash flow) using market observable inputs, including forward LIBOR curves.
The following table presents our interest rate swaps asset and liability measured at fair value on a recurring basis as of
December 31, 2017
and
2016
, with pricing levels as of the date of valuation (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Interest rate swaps asset
|
$
|
4,676
|
|
|
$
|
413
|
|
Interest rate swaps liability
|
(134
|
)
|
|
(3,603
|
)
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
During the years ended
December 31, 2017
and
2016
, we recorded non-recurring fair value measurements related to our idle and previously-culled compressor units. Our estimate of the compressor units’ fair value was primarily based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use. We discounted the expected proceeds, net of selling and other carrying costs, using a weighted average disposal period of
four years
. These fair value measurements were classified as Level 3. The fair value of our impaired compressor units was
$1.8 million
and
$3.6 million
at
December 31, 2017
and
2016
, respectively. See
Note 12
(“Long-Lived Asset Impairment”)
for further details.
Other Financial Instruments
The carrying amounts of our cash, receivables and payables approximate fair value due to the short-term nature of those instruments.
The carrying amounts of borrowings outstanding under our Credit Facility approximate fair value due to their variable interest rates. The fair value of these outstanding borrowings was estimated using a discounted cash flow analysis based on interest rates offered on loans with similar terms to borrowers of similar credit quality, which are Level 3 inputs.
The fair value of our fixed rate debt was estimated based on quoted prices in inactive markets and is considered a Level 2 measurement. The following table summarizes the carrying amount and fair value of our fixed rate debt as of
December 31, 2017
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
December 31, 2016
|
Carrying amount of fixed rate debt
(1)
|
$
|
686,747
|
|
|
$
|
683,577
|
|
Fair value of fixed rate debt
|
702,000
|
|
|
686,000
|
|
——————
|
|
(1)
|
Carrying amounts are shown net of unamortized debt discounts and unamortized deferred financing costs. See
Note 7
(“Long-Term Debt”)
for further details.
|
12. Long-Lived Asset Impairment
We review long-lived assets, including property, plant and equipment and identifiable intangibles that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor units from our active fleet, indicate that the carrying amount of an asset may not be recoverable.
During the years ended
December 31, 2017
,
2016
and
2015
we reviewed the future deployment of our idle compression assets for units that were not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we determined that certain idle compressor units would be retired from the active fleet. The retirement of these units from the active fleet triggered a review of these assets for impairment, and as a result of our review, we recorded an asset impairment to reduce the book value of each unit to its estimated fair value. The fair value of each unit was estimated based on either the expected net sale proceeds compared to other fleet units we recently sold and/or a review of other units recently offered for sale by third parties, or the estimated component value of the equipment we plan to use.
In connection with our review of our idle compression assets during the years ended
December 31, 2017
,
2016
and
2015
we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale. Based upon that review, we reduced the expected proceeds from disposition for certain of the remaining units and recorded additional impairment to reduce the book value of each unit to its estimated fair value.
The following table presents the results of our impairment review for the years ended
December 31, 2017
,
2016
and
2015
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Idle compressor units retired from the active fleet
|
230
|
|
|
430
|
|
|
330
|
|
Horsepower of idle compressor units retired from the active fleet
|
71,000
|
|
|
155,000
|
|
|
115,000
|
|
Impairment recorded on idle compressor units retired from the active fleet
|
$
|
17,959
|
|
|
$
|
42,460
|
|
|
$
|
35,332
|
|
Additional impairment recorded on available-for-sale compressor units previously culled
|
$
|
—
|
|
|
$
|
3,798
|
|
|
$
|
3,655
|
|
In addition to the impairment discussed above,
$1.1 million
of property, plant and equipment, including
5,000
horsepower of idle compressor units, was impaired during the year ended
December 31, 2017
as the result of physical asset observations and other events that indicated the assets’ carrying values were not recoverable.
13. Restructuring Charges
In the first quarter of 2016, Archrock determined to undertake a cost reduction program to reduce its on-going operating expenses, including workforce reductions and closure of certain make-ready shops. These actions were the result of Archrock’s review of its business and efforts to efficiently manage cost and maintain its business in line with current and expected activity levels and anticipated make-ready demand in the U.S. market. During the year ended
December 31, 2016
, we incurred
$7.3 million
, respectively, of restructuring charges comprised of an allocation of expenses related to severance benefits and consulting fees associated with this cost reduction plan from Archrock to us pursuant to the terms of the Omnibus Agreement based on horsepower and other factors. These charges are reflected as restructuring charges in our condensed consolidated statements of operations. Archrock’s cost reduction program under this plan was completed during the fourth quarter of 2016.
14. Income Taxes
Tax Cuts and Jobs Act
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act that significantly reforms the Code. The TCJA, among other things, contains significant changes to the determination of partnership taxable income, including: (i) a partial limitation on the deductibility of business interest expense, (ii) immediate deductions for certain new investments instead of deductions for depreciation expense over time, (iii) the cessation of like-kind exchange treatment for exchanges of tangible personal property, (iv) the cessation of technical terminations and (v) the modification or repeal of many business deductions and credits.
For U.S. federal income tax purposes we are treated as a partnership and are not subject to U.S. federal income tax at the entity level. As such, the corporate tax rate change is not applicable to us and no remeasurement of our deferred tax liabilities was necessary.
Current and Deferred Tax Provision
As a partnership, we are generally not subject to income taxes at the entity level because our income is included in the tax returns of our partners. However, certain states impose an entity-level income tax on partnerships.
The provision for state income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Current tax provision:
|
|
|
|
|
|
State
|
$
|
(2
|
)
|
|
$
|
(32
|
)
|
|
$
|
1,195
|
|
Total current
|
(2
|
)
|
|
(32
|
)
|
|
1,195
|
|
Deferred tax provision:
|
|
|
|
|
|
|
|
|
State
|
3,384
|
|
|
1,444
|
|
|
(160
|
)
|
Total deferred
|
3,384
|
|
|
1,444
|
|
|
(160
|
)
|
Provision for income taxes
|
$
|
3,382
|
|
|
$
|
1,412
|
|
|
$
|
1,035
|
|
Deferred income tax balances are the direct effect of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the taxes are actually paid or recovered.
The tax effects of temporary differences that give rise to deferred tax liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
(1)
|
$
|
—
|
|
|
$
|
2,500
|
|
Total deferred tax liabilities
|
—
|
|
|
2,500
|
|
Net deferred tax liabilities
|
$
|
—
|
|
|
$
|
2,500
|
|
——————
|
|
(1)
|
We released
$2.5 million
of our deferred state tax liability in 2017 due to the remeasurement of our uncertain tax positions.
|
Unrecognized Tax Benefit
A reconciliation of the beginning and ending amount of unrecognized tax benefits is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
1,882
|
|
|
$
|
1,962
|
|
|
$
|
1,650
|
|
Additions based on tax positions related to current year
|
1,625
|
|
|
121
|
|
|
312
|
|
Additions based on tax positions related to prior years
|
3,395
|
|
|
—
|
|
|
—
|
|
Reductions based on settlement with government authority
|
—
|
|
|
(201
|
)
|
|
—
|
|
Ending balance
|
$
|
6,902
|
|
|
$
|
1,882
|
|
|
$
|
1,962
|
|
Appellate court decisions in 2017 required us to remeasure certain of our uncertain tax positions and increase our unrecognized tax benefit for these positions during the year ended
December 31, 2017
. We had
$6.9 million
,
$1.9 million
and
$2.0 million
of unrecognized tax benefits at
December 31, 2017
,
2016
and
2015
, respectively, of which
$3.6 million
,
$1.9 million
and
$2.0 million
, respectively, would affect the effective tax rate if recognized.
We recorded
$1.0 million
and
$0.1 million
of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions during the years ended
December 31, 2017
and
2016
, respectively, in our consolidated balance sheets. To the extent interest and penalties are not assessed with respect to uncertain tax positions, amounts accrued will be reduced and reflected as reductions in income tax expense. During the years ended
December 31, 2017
and
2016
, we recorded
$0.9 million
and
$0.1 million
of potential interest expense and penalties in our consolidated statements of operations. We recorded immaterial amounts of potential interest expense and penalties related to unrecognized tax benefits associated with uncertain tax positions as of and during the year ended
December 31, 2015
.
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. State income tax returns are generally subject to examination for a period of three to five years after filing the returns. However, the state impact of any U.S. federal audit adjustments and amendments remain subject to examination by various states for up to one year after formal notification to the states. We are currently involved in several state audits. During 2016, we settled certain years of a state audit, which resulted in a refund of
$1.2 million
and a reduction of
$0.2 million
of previously accrued uncertain tax benefits. As of
December 31, 2017
, we did not have any federal or state audits underway that would have a material impact on our financial position or results of operations.
U.S. Federal Tax Considerations
Exterran Holdings, Inc. completed an internal restructuring on November 3, 2015 in connection with the Spin-off which we believe, when combined with the sale or exchange of Partnership units during the 12 months prior to the Spin-off, resulted in a technical termination of the Partnership for U.S. federal income tax purposes on the date of the Spin-off. The 2015 Technical Termination did not affect our consolidated financial statements nor did it affect our classification as a partnership or otherwise affect the nature or extent of our “qualifying income” for U.S. federal income tax purposes. Our taxable year for all unitholders ended on November 3, 2015 and resulted in a deferral of depreciation deductions that were otherwise allowable in computing the taxable income of our unitholders. This deferral of depreciation deductions may have resulted in increased taxable income (or reduced taxable loss) to certain of our unitholders in 2015.
The following table reconciles net loss to our U.S. federal partnership taxable income (loss) (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Net loss
|
$
|
(421
|
)
|
|
$
|
(10,757
|
)
|
|
$
|
(84,025
|
)
|
Book/tax depreciation and amortization adjustment
|
(179,330
|
)
|
(1)
|
(289,694
|
)
|
(1)
|
17,468
|
|
Book/tax goodwill impairment
|
—
|
|
|
—
|
|
|
127,757
|
|
Book/tax long-lived asset impairment
|
19,107
|
|
|
46,258
|
|
|
38,987
|
|
Book/tax adjustment for unit-based compensation expense
|
835
|
|
|
978
|
|
|
754
|
|
Book/tax adjustment for interest rate swap terminations
|
2,410
|
|
|
364
|
|
|
1,233
|
|
Other temporary differences
|
(13,781
|
)
|
|
(5,390
|
)
|
|
(15,907
|
)
|
Other permanent differences
|
3,422
|
|
|
1,796
|
|
|
(155
|
)
|
U.S. federal partnership taxable income (loss)
|
$
|
(167,758
|
)
|
|
$
|
(256,445
|
)
|
|
$
|
86,112
|
|
——————
|
|
(1)
|
Represents the excess of tax depreciation and amortization over book depreciation and amortization, which increased in connection with the 2015 Technical Termination.
|
The following allocations and adjustments (which are not reflected in the reconciliation because they do not affect our total taxable income) may affect the amount of taxable income or loss allocated to a unitholder:
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|
•
|
IRC Section 704(c) Allocations:
We make special allocations under IRC Section 704(c) to eliminate the disparity between a unitholder’s U.S. GAAP capital account (credited with the fair market value of contributed property or the investment) and tax capital account (credited with the investor’s tax basis). The effect of such allocations will be to either increase or decrease a unitholder’s share of depreciation, amortization and/or gain or loss on the sale of assets.
|
|
|
•
|
IRC Section 743(b) Basis Adjustments:
Because we have made the election provided by IRC Section 754, we adjust each unitholder’s basis in our assets (inside basis) pursuant to IRC Section 743(b) to reflect their purchase price (outside basis). The Section 743(b) adjustment belongs to a particular unitholder and not to other unitholders. Basis adjustments such as this give rise to income and deductions by reference to the portion of each transferee unitholder’s purchase price attributable to each of our assets. The effect of such adjustments will be to either increase or decrease a unitholder’s share of depreciation, amortization and/or gain or loss on sale of assets.
|
|
|
•
|
Gross Income and Loss Allocations:
To maintain the uniformity of the economic and tax characteristics of our units, we will sometimes make a special allocation of income or loss to a unitholder. Any such allocations of income or loss will decrease or increase, respectively, our distributive taxable income.
|
The net tax basis in our assets and liabilities is less than the reported amounts on the financial statements by approximately
$700 million
as of
December 31, 2017
.
15. Commitments and Contingencies
Insurance Matters
Our business can be hazardous, involving unforeseen circumstances such as uncontrollable flows of natural gas or well fluids and fires or explosions. Archrock insures our property and operations against many, but not all, of these risks. We believe that our insurance coverage is customary for the industry and adequate for our business; however, losses and liabilities not covered by insurance would increase our costs.
In addition, Archrock is substantially self-insured for worker’s compensation, employer’s liability, property, auto liability, general liability and employee group health claims in view of the relatively high per-incident deductibles it absorbs under its insurance arrangements for these risks. Losses up to the deductible amounts are estimated and accrued based upon known facts, historical trends and industry averages.
Tax Matters
We are subject to a number of state and local taxes that are not income-based. As many of these taxes are subject to audit by the taxing authorities, it is possible that an audit could result in additional taxes due. We accrue for such additional taxes when we determine that it is probable that we have incurred a liability and we can reasonably estimate the amount of the liability. As of
December 31, 2017
and
2016
, we accrued
$1.6 million
and
$1.5 million
, respectively, for the outcomes of non-income based tax audits. We do not expect that the ultimate resolutions of these audits will result in a material variance from the amounts accrued. We do not accrue for unasserted claims for tax audits unless we believe the assertion of a claim is probable, it is probable that it will be determined that the claim is owed and we can reasonably estimate the claim or range of the claim. We believe the likelihood is remote that the impact of potential unasserted claims from non-income based tax audits could be material to our consolidated financial position, but it is possible that the resolution of future audits could be material to our consolidated results of operations or cash flows for the period in which the resolution occurs.
Litigation and Claims
In 2011, the Texas Legislature enacted changes related to the appraisal of natural gas compressors for ad valorem tax purposes by expanding the definitions of “Heavy Equipment Dealer” and “Heavy Equipment” effective from the beginning of 2012. Under the revised Heavy Equipment Statutes, we believe we are a Heavy Equipment Dealer, that our natural gas compressors are Heavy Equipment and that we, therefore, are required to file our ad valorem taxes under this new methodology. We further believe that our natural gas compressors are taxable under the Heavy Equipment Statutes in the counties where we maintain a business location and keep natural gas compressors instead of where the compressors may be located on January 1 of a tax year. As a result of this new methodology, our ad valorem tax expense (which is reflected in our consolidated statements of operations as a component of cost of sales (excluding depreciation and amortization)) includes a benefit of
$16.1 million
during the year ended
December 31, 2017
. Since the change in methodology became effective in 2012, we have recorded an aggregate benefit of
$66.2 million
as of
December 31, 2017
, of which
$13.1 million
has been agreed to by a number of appraisal review boards and county appraisal districts and
$53.1 million
has been disputed and is currently in litigation. A large number of appraisal review boards denied our position, although some accepted it, and we filed
82
petitions for review in the appropriate district courts with respect to the 2012 tax year,
93
petitions for review in the appropriate district courts with respect to the 2013 tax year,
103
petitions for review in the appropriate district courts with respect to the 2014 tax year,
111
petitions for review in the appropriate district courts with respect to the 2015 tax year,
105
petitions for review in the appropriate district courts with respect to the 2016 tax year and
105
petitions for review in the appropriate district courts with respect to the 2017 tax year.
To date, only
five
cases have advanced to the point of trial or submission of summary judgment motions on the merits, and only
three
cases have been decided, with
two
of the decisions having been rendered by the same presiding judge. All
three
of those decisions were appealed, and all
three
of the appeals have been decided by intermediate appellate courts.
On October 17, 2013, the 143rd Judicial District Court of Loving County, Texas ruled in
EXLP Leasing LLC & EES Leasing LLC v. Loving County Appraisal District
that our wholly-owned subsidiary, Archrock Partners Leasing LLC, formerly known as EXLP Leasing, and Archrock’s subsidiary, Archrock Services Leasing LLC, formerly known as EES Leasing, are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the district court further held that the Heavy Equipment Statutes were unconstitutional as applied to EXLP Leasing’s and EES Leasing’s compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Eighth Court of Appeals in El Paso, Texas. On September 23, 2015, the Eighth Court of Appeals ruled in EXLP Leasing’s and EES Leasing’s favor by overruling the 143rd District Court’s constitutionality ruling. The Eighth Court of Appeals also ruled, however, that EXLP Leasing’s and EES Leasing’s natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue.
On October 28, 2013, the 143rd Judicial District Court of Ward County, Texas ruled in
EES Leasing LLC & EXLP Leasing LLC v. Ward County Appraisal District
that EXLP Leasing and EES Leasing are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the court held that the Heavy Equipment Statutes were unconstitutional as applied to their compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Eighth Court of Appeals in El Paso, Texas, and the Ward County Appraisal District cross-appealed the district court’s rulings that EXLP Leasing’s and EES Leasing’s compressors qualify as Heavy Equipment. On September 23, 2015, the Eighth Court of Appeals ruled in EXLP Leasing’s and EES Leasing’s favor by overruling the 143rd District Court’s constitutionality ruling and affirming its ruling that EXLP Leasing’s and EES Leasing’s compressors qualify as Heavy Equipment. The Eighth Court of Appeals also ruled, however, that EXLP Leasing’s and EES Leasing’s natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue.
The Ward County Appraisal District and Loving County Appraisal District each filed (on January 27, 2016 and February 10, 2016, respectively) a petition asking the Texas Supreme Court to review its respective Eighth Court of Appeals decision. On March 11, 2016, EXLP Leasing and EES Leasing filed responses to the appraisal districts’ petitions and cross-petitions for review in each case asking the Texas Supreme Court to also review the Eighth Court of Appeals’ determination that natural gas compressors are taxable in the counties where they were located on January 1 of the tax year at issue. The Ward County Appraisal District filed its response to EXLP Leasing’s and EES Leasing’s cross-petition on June 6, 2016, and EXLP Leasing and EES Leasing filed their reply on June 21, 2016. The Loving County Appraisal District filed its response to EXLP Leasing’s and EES Leasing’s cross-petition on May 27, 2016, and EXLP Leasing and EES Leasing filed their reply on June 10, 2016.
On March 18, 2014, the 10th Judicial District Court of Galveston, Texas ruled in
EXLP Leasing LLC & EES Leasing LLC v. Galveston Central Appraisal District
that EXLP Leasing and EES Leasing are Heavy Equipment Dealers and that their compressors qualify as Heavy Equipment, but the court held the Heavy Equipment Statutes unconstitutional as applied to their compressors. EXLP Leasing and EES Leasing appealed the district court’s constitutionality holding to the Fourteenth Court of Appeals in Houston, Texas. On August 25, 2015, the Fourteenth Court of Appeals issued a ruling stating that EXLP Leasing’s and EES Leasing’s compressors are taxable in the counties where they were located on January 1 of the tax year at issue, and it remanded the case to the district court for further evidence on the issue of whether the Heavy Equipment Statutes are constitutional as applied to EXLP Leasing’s and EES Leasing’s compressors. On November 24, 2015, EXLP Leasing and EES Leasing filed a petition asking the Texas Supreme Court to review this decision. On March 21, 2016, the Galveston Central Appraisal District filed a response to EXLP Leasing’s and EES Leasing’s petition for review, and EXLP Leasing and EES Leasing filed their reply on April 26, 2016.
In
EES Leasing v. Irion County Appraisal District
, EES Leasing and the appraisal district each filed motions for summary judgment in the 51st District Court concerning the applicability and constitutionality of the Heavy Equipment Statutes. On May 20, 2014, the district court entered an order denying both motions for summary judgment, holding that a fact issue existed as to the applicability of the Heavy Equipment Statutes to the one compressor at issue. The presiding judge for the 51st District Court has since consolidated the 2012 tax year case with EES Leasing’s 2013 tax year case, which also included EXLP Leasing as a party. On August 27, 2015, the presiding judge abated the combined case,
EES Leasing LLC and EXLP Leasing LLC v. Irion County Appraisal District
, until the final resolution of the appellate cases considering the constitutionality of the Heavy Equipment Statutes, or further order of the court.
EXLP Leasing and EES Leasing also filed a motion for summary judgment in
EES Leasing LLC & EXLP Leasing LLC v. Harris County Appraisal District
, pending in the 189th Judicial District Court of Harris County, Texas. The court heard arguments on the motion on December 6, 2013 but has yet to rule. No trial date has been set.
On June 3, 2015, the Fourth Court of Appeals in San Antonio, Texas issued a decision reversing the 406th District Court’s dismissal of EXLP Leasing’s and EES Leasing’s tax appeals for want of jurisdiction. In
EXLP Leasing LLC et. al v. Webb County Appraisal District
, United Independent School District (“United ISD”) intervened as a party in interest and sought to dismiss the lawsuit arguing that the district court was without jurisdiction to hear the appeal. Under Section 42.08(b) of the Texas Tax Code, a property owner must pay before the delinquency date the lesser of (1) the amount of taxes due on the portion of the taxable value of the property that is not in dispute or (2) the amount of taxes due on the property under the order from which the appeal is taken. EXLP Leasing and EES Leasing paid zero taxes to Webb County because the entire amount of tax assessed by Webb County was in dispute. Instead, as required by the Heavy Equipment Statutes and Texas Comptroller forms, EXLP Leasing and EES Leasing paid taxes on the compressors at issue to Victoria County, where they maintain their place of business and keep natural gas compressors. The Webb County Appraisal District and United ISD contested EXLP Leasing’s and EES Leasing’s position that the Heavy Equipment Statutes contain situs provisions requiring that taxes be paid where the dealer has a business location and keeps its natural gas compressors, instead arguing that taxes are payable to the county where each compressor is located as of January 1 of the tax year at issue. The district court granted United ISD’s motion to dismiss on April 1, 2014 and declined EXLP Leasing’s and EES Leasing’s motion to reconsider. The Fourth Court of Appeals reversed, holding that, based on the plain meaning of Section 42.08(b)(1), and because the entire amount was in dispute, EXLP Leasing and EES Leasing were not required to prepay disputed taxes to invoke the trial court’s jurisdiction. The Fourth Court of Appeals denied United ISD’s request for a rehearing. On September 29, 2015, United ISD filed a petition for review in the Texas Supreme Court. On December 4, 2015, the Texas Supreme Court denied United ISD’s petition for review.
United ISD has
four
delinquency lawsuits pending against EXLP Leasing and EES Leasing in the 49th District Court of Webb County, Texas. The cases have been abated pending the resolution of EXLP Leasing’s and EES Leasing’s 2012 tax year case pending in the 406th Judicial District Court of Webb County, Texas.
On September 2, 2016, the Texas Supreme Court requested that consolidated merits briefs be filed in EXLP Leasing’s and EES Leasing’s cases against the Loving County Appraisal District, Ward County Appraisal District, and Galveston Central Appraisal District, as well as two similar cases involving different taxpayers. On September 19, 2016, the Supreme Court entered a consolidated briefing schedule for the
five
cases. Consolidated briefing was completed on February 7, 2017.
On March 10, 2017, the Texas Supreme Court granted EXLP Leasing’s and EES Leasing’s petition for review in
EXLP Leasing LLC & EES Leasing LLC v. Galveston Central Appraisal District
. The case was argued before the Texas Supreme Court on October 10, 2017.
We continue to believe that the revised statutes are constitutional as applied to natural gas compressors and that under the revised statutes our natural gas compressors are taxable in the counties where we maintain a business location and keep natural gas compressors. Recognizing the similarity of the issues and that these cases will ultimately be resolved by the Texas appellate courts, most of the remaining 2012-2017 district court cases have been formally or effectively abated pending a decision from the Texas Supreme Court.
If we are unsuccessful in our litigation, we would be required to pay ad valorem taxes up to the aggregate benefit we have recorded, and the additional ad valorem tax payments may also be subject to substantial penalties and interest. In addition, while we do not expect the ultimate determination of the issue of where the natural gas compressors are taxable under the Heavy Equipment Statutes would have an impact on the amount of taxes due, we could be subject to substantial penalties if we are unsuccessful on this issue. Also, if we are unsuccessful in our litigation, or if legislation is enacted in Texas that repeals or alters the Heavy Equipment Statutes such that in the future we do not qualify as a Heavy Equipment Dealer or our compressors do not qualify as Heavy Equipment, then we would likely be required to pay these ad valorem taxes under the old methodology going forward, which would increase our quarterly cost of sales expense up to approximately the amount of our then most recent quarterly benefit recorded. If this litigation is resolved against us in whole or in part, or if in the future we do not qualify as a Heavy Equipment Dealer or our compressors do not qualify as Heavy Equipment because of new or revised Texas statutes, we will incur additional taxes and could be subject to substantial penalties and interest, which would impact our future results of operations, financial position and cash flows, including our cash available for distribution.
In the ordinary course of business, we are also involved in various other pending or threatened legal actions. While management is unable to predict the ultimate outcome of these actions, it believes that any ultimate liability arising from any of these other actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to make cash distributions to our unitholders. However, because of the inherent uncertainty of litigation and arbitration proceedings, we cannot provide assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to make cash distributions to our unitholders.
16. Selected Quarterly Financial Data (Unaudited)
In management’s opinion, the summarized quarterly financial data below (in thousands, except per unit amounts) contains all appropriate adjustments, all of which are normally recurring adjustments, considered necessary to present fairly our financial position and results of operations for the respective periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
(1)
|
|
June 30,
2017
(2)
|
|
September 30
2017
(3)
|
|
December 31
2017
(4)
|
Revenue
|
$
|
137,295
|
|
|
$
|
138,255
|
|
|
$
|
140,191
|
|
|
$
|
141,762
|
|
Gross profit
(9)
|
41,909
|
|
|
48,880
|
|
|
40,420
|
|
|
49,901
|
|
Net income (loss)
|
(4,316
|
)
|
|
5,275
|
|
|
(4,013
|
)
|
|
2,633
|
|
Income (loss) per common unit — basic and diluted
|
(0.07
|
)
|
|
0.08
|
|
|
(0.06
|
)
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
(5)
|
|
June 30,
2016
(6)
|
|
September 30
2016
(7)
|
|
December 31
2016
(8)
|
Revenue
|
$
|
151,424
|
|
|
$
|
140,052
|
|
|
$
|
135,478
|
|
|
$
|
135,406
|
|
Gross profit
(9)
|
51,744
|
|
|
47,844
|
|
|
42,629
|
|
|
26,836
|
|
Net income (loss)
|
520
|
|
|
3,311
|
|
|
(567
|
)
|
|
(14,021
|
)
|
Income (loss) per common unit — basic and diluted
|
0.01
|
|
|
0.05
|
|
|
(0.01
|
)
|
|
(0.22
|
)
|
——————
|
|
(1)
|
During the first quarter of
2017
, we recorded
$6.2 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
) and
$0.3 million
of debt extinguishment costs.
|
|
|
(2)
|
During the second quarter of
2017
, we recorded
$3.1 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
).
|
|
|
(3)
|
During the third quarter of
2017
, we recorded
$5.4 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
).
|
|
|
(4)
|
During the fourth quarter of
2017
, we recorded
$4.4 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
).
|
|
|
(5)
|
During the first quarter of
2016
, we completed the March 2016 Acquisition (see
Note 3
(“Business Acquisitions”)
). Additionally, we recorded
$6.3 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
) and
$4.1 million
of restructuring charges (see
Note 13
(“Restructuring Charges”)
).
|
|
|
(6)
|
During the second quarter of
2016
, we recorded
$8.3 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
) and
$1.2 million
of restructuring charges (see
Note 13
(“Restructuring Charges”)
).
|
|
|
(7)
|
During the third quarter of
2016
, we recorded
$7.9 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
) and
$1.9 million
of restructuring charges (see
Note 13
(“Restructuring Charges”)
).
|
|
|
(8)
|
During the fourth quarter of
2016
, we completed the November 2016 Contract Operations Acquisition (see
Note 3
(“Business Acquisitions”)
). Additionally, we recorded
$23.8 million
of long-lived asset impairments (see
Note 12
(“Long-Lived Asset Impairment”)
) and
$0.1 million
of restructuring charges (see
Note 13
(“Restructuring Charges”)
).
|
|
|
(9)
|
Gross profit is defined as revenue less cost of sales, direct depreciation and amortization and long-lived asset impairment charges.
|
17. Proposed Merger
On January 1, 2018, we entered into the Merger Agreement pursuant to which Merger Sub will be merged with and into the Partnership with the Partnership surviving as an indirect wholly owned subsidiary of Archrock. Under the terms of the Proposed Merger Agreement, at the effective time of the Proposed Merger, each of our common units not owned by Archrock will be converted into the right to receive
1.40
shares of Archrock common stock and all of the Partnership’s incentive distribution rights, which are owned indirectly by Archrock, will be canceled and will cease to exist.
Completion of the Proposed Merger is subject to certain customary conditions, including, among others: (i) approval of the Merger Agreement by holders of a majority of the outstanding common units of the Partnership; (ii) approval of the Archrock Share Issuance by a majority of the shares of Archrock common stock present in person or represented by proxy at the special meeting of Archrock stockholders; (iii) expiration or termination of applicable waiting periods under HSR Act (early termination of the waiting period under the HSR Act was granted on February 9, 2018); (iv) there being no law or injunction prohibiting consummation of the transactions contemplated under the Merger Agreement; (v) the effectiveness of a registration statement on Form S-4 relating to the Archrock Share Issuance; (vi) approval for listing on the New York Stock Exchange of the shares of Archrock common stock issuable pursuant to the Archrock Share Issuance; (vii) subject to specified materiality standards, the accuracy of certain representations and warranties of the other party; and (viii) compliance by the other party in all material respects with its covenants.
As a result of the completion of the Proposed Merger, our common units will no longer be publicly traded. All of our outstanding debt is expected to remain outstanding. We and Archrock expect to issue, to the extent not already in place, guarantees of the indebtedness of Archrock and the Partnership. Subject to the satisfaction or waiver of certain conditions, including the approval of the Merger Agreement by our unitholders and approval of the issuance of Archrock common stock in connection with the Proposed Merger by Archrock stockholders, the Proposed Merger is expected to close in the second quarter of 2018.
ARCHROCK PARTNERS, L.P.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Balance at
Beginning
of Period
|
|
Charged to
Costs and
Expenses
|
|
Deductions
(1)
|
|
Balance at
End of
Period
|
Allowance for doubtful accounts deducted from accounts receivable in the balance sheet:
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
$
|
1,398
|
|
|
$
|
4,104
|
|
|
$
|
4,206
|
|
1,398,000
|
|
$
|
1,296
|
|
December 31, 2016
|
|
2,463
|
|
|
2,672
|
|
|
3,737
|
|
2,463,000
|
|
1,398
|
|
December 31, 2015
|
|
1,253
|
|
|
2,255
|
|
|
1,045
|
|
1,253,000
|
|
2,463
|
|
——————
|
|
(1)
|
Uncollectible accounts written off.
|