SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(MARK ONE)
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file no. 001-33666
Archrock, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 74-3204509 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
9807 Katy Freeway, Suite 100, Houston, Texas77024
(Address of principal executive offices, zip code)
(281) 836-8000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ | |
| | | Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ◻
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Aggregate market value of the common stock of the registrant held by non-affiliates as of June 30, 2017 was $793,411,272.
Number of shares of the common stock of the registrant outstanding as of February 15, 2018: 70,948,5572023: 156,644,485 shares.
Portions of the registrant’s definitive proxy statement for the 20182022 Meeting of Stockholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after December 31, 2017,2022, are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
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Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | | 48 |
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Item 10. Directors, Executive Officers and Corporate Governance | | 48 |
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GLOSSARY
The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2013 Plan | | 2013 Stock Incentive Plan |
2020 Plan | | 2020 Stock Incentive Plan |
2022 Form | | Annual Report on Form |
2027 Notes | | $500.0 million of 6.875% senior notes due April 2027 |
2028 Notes | | $800.0 million of 6.25% senior notes due April 2028 |
AMNAX | | Alerian Midstream Energy Index |
AMZ | | Alerian MLP Index |
Archrock, our, we, us | | Archrock, Inc., individually and together with its |
ASU | | Accounting Standards Update |
ASU 2016–13 | | ASU issued in June 2016, Financial Instruments – Credit Losses (Topic 326): Measurement of |
ATM Agreement | | Equity Distribution Agreement, dated February 23, 2021, entered into with Wells Fargo Securities, LLC and BofA Securities, Inc., as sales agents, relating to the at–the–market offer and sale of shares of our common stock |
Bcf/d | ||
| Billion cubic feet per day | |
BoLM | | U.S. Department of the Interior’s Bureau of Land Management |
CAA | | Clean Air Act |
CERCLA | | Comprehensive Environmental Response, Compensation, and Liability Act |
Code | | Internal Revenue Code of 1986, as amended |
Congress | | U.S. Congress |
Credit Facility | | $750.0 million asset–based revolving credit facility due November |
CWA | | Clean Water Act |
Debt Agreements | | Credit Facility, 2027 Notes and 2028 Notes, collectively |
DSDP | | Directors’ Stock and Deferral Plan |
EBITDA | | Earnings before interest, taxes, depreciation and amortization |
ECOTEC | | Ecotec International Holdings, LLC |
EIA | | U.S. Energy Information Administration |
EIA Outlook | | January 2023 EIA Short Term Outlook |
EPA | | U.S. Environmental Protection Agency |
ERP | | Enterprise Resource Planning |
ESG | | Environmental, Social and Governance |
ESPP | | Employee Stock Purchase Plan |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | ||
| Financial Accounting Standards Board | |
FCA | | United Kingdom Financial Conduct Authority |
Financial Statements | | Consolidated |
GAAP | ||
| Accounting principles generally accepted in the U.S. | |
GHG | | Greenhouse gases (carbon dioxide, methane and |
Hilcorp | | Hilcorp Energy Company |
IRS | ||
| Internal Revenue Service | |
LIBOR | | London Interbank Offered Rate |
MMb/d | |
Million barrels per day | ||
NAAQS | ||
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National Ambient Air Quality Standards | ||
NOL | | Net operating loss |
NSPS | ||
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New Source Performance Standards | ||
OSHA | | Occupational Safety and Health Act |
OTC | | Over–the–counter, as related to aftermarket services parts and components |
Paris Agreement | | Resulting agreement of the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change held in Paris, France |
POTUS | | President of the United States of America |
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ppb | ||
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Parts per billion | ||
RCRA | ||
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Resource Conservation and Recovery Act | ||
ROU | | Right–of–use, as related to operating leases |
S&P 500 | | S&P 500 Composite Stock Price Index |
SEC | | U.S. Securities and Exchange Commission |
SG&A | | Selling, general and administrative |
Spin–off | | Spin–off of our international contract operations, international aftermarket services and global fabrication businesses, completed in into a standalone public company operating as Exterran Corporation |
U.S. | ||
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United States of America | ||
VOC | | Volatile organic compounds |
WACC | | Weighted average cost of capital |
Working Group | | Working Group on the Social Cost of Greenhouse Gases |
This 20172022 Form 10-K10–K contains “forward-looking“forward–looking statements” intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this 20172022 Form 10-K10–K are forward-lookingforward–looking statements within the meaning of Section 21E of the Exchange Act, including, without limitation, statements regarding the consummationeffects of the Proposed Merger, including the timingCOVID–19 pandemic on our business, operations, customers and expected effects thereof;financial condition; our business growth strategy and projected costs; future financial position; the sufficiency of available cash flows to fund continuing operations and pay dividends; the expected amount of our capital expenditures; expenditures related to the restatement of our financial statements and related matters, including sharing a portion of costs incurred by Exterran Corporation with respect to such matters, as well as reviews, investigations or other proceedings by government authorities, stockholders or other parties; anticipated cost savings; future revenue, gross margin and other financial or operational measures related to our business; the future value of our equipment; and plans and objectives of our management for our future operations. You can identify many of these statements by looking for words such as “believe,” “expect,” “intend,” “project,” “anticipate,” “estimate,” “will continue” or similar words or the negative thereof.
Such forward-lookingforward–looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this 20172022 Form 10-K.10–K. Although we believe that the expectations reflected in these forward-lookingforward–looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Known material factors that could cause our actual results to differ materially from those in these forward-lookingforward–looking statements are described below, in Part I, Item 1A (“Risk1A. “Risk Factors”) and Part II, Item 7 (“Management’s7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) of this 20172022 Form 10-K. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things:
All forward-lookingforward–looking statements included in this 20172022 Form 10-K10–K are based on information available to us on the date of this 20172022 Form 10-K.10–K. Except as required by law, we undertake no obligation to publicly update or revise any forward-lookingforward–looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-lookingforward–looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this 20172022 Form 10-K.10–K.
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We were incorporated in February 2007 as a wholly-ownedwholly–owned subsidiary of Universal Compression Holdings, Inc. In August 2007, Universal Compression Holdings, Inc. and Hanover Compressor Company merged into our wholly-ownedwholly–owned subsidiaries and we became Exterran Holdings, Inc., the parent entity of Universal Compression Holdings, Inc. and Hanover Compressor Company, named “Exterran Holdings, Inc.”Company. In November 2015, we completed the Spin-offspin–off of our international contract operations, international aftermarket services and global fabrication businessesbusiness into a standalone public company operating as Exterran Corporation, and we were renamed “Archrock, Inc.” Following the completion of the Spin-off, we and Exterran Corporation are independent, publicly-traded companies with separate public ownership, board of directors and management, and we continue to own and operate the U.S. contract operations and U.S. aftermarket services businesses that we previously owned. Additionally, we continue to hold our interests in the Partnership, which was renamed “Archrock Partners, L.P.,” including the sole general partner interest, certain limited partner interests and all of the incentive distribution rights in the Partnership.
We are an energy infrastructure company with a pure play U.S.primary focus on midstream natural gas contract operations services businesscompression and a commitment to helping our customers produce, compress and transport natural gas in a safe and environmentally responsible way. We are the leading provider of natural gas compression services to customers in the oil and natural gasenergy industry throughout the U.S., in terms of total compression fleet horsepower, and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. Our services arebusiness supports a must–run service that is essential to the production, processing, transportation and storage of natural gas and are provided primarily to producers and distributors of oil and natural gas. Our geographic business unit operating structure, technically experienced personnel and large fleet ofmission to help our customers deliver natural gas, compression equipment enable us to provide reliable contract operations services to our customers throughout the U.S.
Range of Horsepower Per Unit | Number of Units | Aggregate Horsepower (in thousands) | % of Horsepower | ||||||
0 – 1,000 | 5,386 | 1,271 | 33 | % | |||||
1,001 – 1,500 | 1,321 | 1,770 | 46 | % | |||||
1,501 and over | 410 | 806 | 21 | % | |||||
Total | 7,117 | 3,847 | 100 | % |
We operate in a relationship-driven, service-intensive industry and therefore need to provide superior customer service. We believe that our regionally-based network, local presence, experience and in-depth knowledge of our customers’ operating needs and growth plans enable us to respond to our customers’ needs and meet their evolving demands on a timely basis. In addition, we focus on achieving a high level of reliability for the services we provide in order to maximize our customers’ production levels. Our sales efforts concentrate on demonstrating our commitment to enhancing our customers’ cash flows through superior customer service and after-market support.
• | Contract Operations – Our contract operations business is comprised of our owned fleet of natural gas compression equipment that we use to provide operations services to our customers. |
• | Aftermarket Services – Our aftermarket services business provides a full range of services to support the compression needs of our customers that own compression equipment, including operations, maintenance, overhaul and reconfiguration services and sales of parts and components. |
Natural Gas Compression Industry Overview
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 also critical to minimizing flaring and reducing the waste of natural gas and natural gas liquids that results from insufficient gathering and processing capacity.
Compression is typically required several times duringthroughout 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.
Wellhead and Gathering Systems
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Processing Applications
Gas Lift Applications. Compression is used to reinject natural gas into producing oil wells to help lift liquids to the surface, which is known as natural gas lift. These applications utilize low– to mid–range horsepower compression equipment located at or near the wellhead or large horsepower compression equipment of over 1,000 horsepower for a centralized gas lift system servicing multiple wells.
Many oil and natural gas producers, transporters and processors outsource their compression services due to the benefits and flexibility of contract compression. Changing well and pipeline pressures and conditions over the life of a well often require producers to reconfigure or replace their compressor unitscompression packages to optimize the well production or gathering system efficiency.
We believe outsourcing compression operations to compression service providers such as us offers customers:
• | the ability to efficiently meet their changing compression needs over time while limiting the underutilization of their owned compression equipment; |
• | access to the compression service provider’s specialized personnel and technical skills, including engineers and field service and maintenance employees, which we believe generally leads to improved production rates and/or increased throughput; |
• | the ability to increase their profitability by transporting or producing a higher volume of natural gas and crude oil through decreased compression downtime and reduced operating, maintenance and equipment costs by allowing the compression service provider to efficiently manage their compression needs; and |
• | the flexibility to deploy their capital on projects more directly related to their primary business by reducing their compression equipment and maintenance capital requirements. |
We believe the U.S. natural gas compression services industry continues to have growth potential over time due to, among other things, increased natural gas production in the U.S. from unconventional sources, andthe aging of producing natural gas fields that will require more compression to continue producing the same volume of natural gas and expected increased demand for natural gas in the U.S. for power generation, industrial uses and exports, including liquidliquefied natural gas exports and exports of natural gas via pipeline to Mexico.
Contract Operations Overview
Compression Services
We provide comprehensive contract operations services including the personnel, equipment, tools, materials and Natural Gas Industry Cyclicality and Volatility
During the years ended December 31, 2017, 20162022, 2021 and 2015, Williams Partners accounted for 13%2020, we generated 80%, 13%83% and 12%84%, respectively, of our total revenue respectively. No other customer accounted for morefrom contract operations.
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Compression Fleet
The compressors that we own and use to provide contract operations services are predominantly large horsepower, which we define as greater than 10%1,000 horsepower per unit, and consist primarily of reciprocating compressors driven by natural gas–powered engines. Additionally, we provide a small but growing number of electric motor–driven compressors. Our fleet is largely standardized around major components and key suppliers, which minimizes our revenue during these years.
All of our compressors are designed to customer requests.
The following table summarizes the size of our natural gas compression fleet as of December 31, 2022:
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| | Number | | Horsepower | | % of | |
| | of Units | | (in thousands) | | Horsepower | |
0 — 1,000 horsepower per unit |
| 1,494 |
| 585 |
| 16 | % |
1,001 — 1,500 horsepower per unit |
| 1,361 |
| 1,840 |
| 49 | % |
Over 1,500 horsepower per unit |
| 638 |
| 1,301 |
| 35 | % |
Total |
| 3,493 |
| 3,726 |
| 100 | % |
General Terms of our Contract Operations Customer Service Agreements
We typically enter into a master service agreement with each customer that sets forth the general terms and conditions of our services, and then enter into a separate supplemental service agreement for each distinct site at which we will provide contract operations services.
Term and Termination.
Our customers typically contract for our contract operations services on aFees and Expenses.
Our customers pay a fixed monthly fee for our contract operations services, which generally is based onService Standards and Specifications.
We provide contract operations services according to the particular specifications of each job, as set forth in the applicable contract. These are typically8
Title and Risk of Loss. We own and retain title to or have an exclusive possessory interest in all compression equipment used to provide contract operations services and we generally bear risk of loss for such equipment to the extent the loss is not caused by gas conditions, our customers’ acts or omissions or the failure or collapse of the customer’s over-waterover–water job site upon which we provide the contract operations services.
Insurance.
Typically, both we and our customers are required to carry general liability, workers’ compensation, employer’s liability, automobile and excess liability insurance.Aftermarket Services Overview
Our aftermarket services business sells parts and components and provides operations, maintenance, overhaul and reconfiguration services to customers who own compression equipment. We believe that we are particularly well–qualified to provide these services because our highly experienced operating personnel have access to the Spin-off,full range of our compression services and facilities. In addition, our aftermarket services business provides opportunities to cross–sell our contract operations business. During the years ended December 31, 2022, 2021 and 2020, we fabricatedgenerated 20%, 17% and 16%, respectively, of our total revenue from aftermarket services.
Competitive Strengths
We believe we have the following key competitive strengths:
Large horsepower. We have the largest fleet of large horsepower equipment among all outsourced compression service providers in the U.S. As of December 31, 2022, 84% of our fleet, as measured by operating horsepower, was comprised of units that exceed 1,000 horsepower per unit. We believe the trends driving demand for large horsepower units will continue. These trends include (i) high levels of associated gas production from shale wells, which are generally produced at a lower initial pressure than dry gas wells, (ii) pad drilling, which brings multiple wells to a single well site with larger volumes of gas, (iii) increasing well lateral lengths, which increase natural gas flow through gas gathering systems, and production(iv) high probability drilling programs that allow for efficient infrastructure planning.
Excellent customer service. We operate in a relationship–driven, service–intensive industry and processing equipmenttherefore need to provide superior customer service. We believe that our regionally–based network, local presence, experience and in–depth knowledge of our customers’ operating needs and growth plans enable us to respond to our customers’ needs and meet their evolving demands on a timely basis. In addition, we focus on achieving a high level of reliability for the services we provide in order to maximize uptime and our customers’ production levels. We guarantee our customers 98% availability in all of our contract operations service agreements, and during the year ended December 31, 2022, our availability was 99.1%. Our sales efforts concentrate on demonstrating our commitment to enhancing our customers’ cash flows through superior customer service and after–market support.
Superior safety performance. We believe our collective safety performance is pivotal to the success of our business and is of primary importance to our customers. We have a strong safety culture and a proven ability to safely manage our business in a variety of commodity and economic environments. Our safety–centric culture has consistently produced industry–leading safety performance for many years, including a 2022 total recordable incident rate of 0.32.
Large and stable customer base. We have strong relationships with a deep base of midstream companies and natural gas and crude oil producers. Our contract operations revenue base is sourced from approximately 340 customers operating throughout all major U.S. natural gas and crude oil producing regions.
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Fee–based cash flows. We charge a fixed monthly fee for our contract operations services and to sell to third parties from components and subassemblies, mosta reduced monthly fee during periods of which we acquired from a wide range of vendors. In connection with the Spin-off, we entered into a supply agreement with Exterran Corporation under which we were required to purchase our requirements of newly-fabricated compression equipment from Exterran Corporation and its affiliates, subject to certain exceptions. This supply agreement expired in November 2017 and we have since entered into new supply agreements with multiple suppliers, including Exterran Corporation, to meet our compression equipment needs.
Diversified geographic footprint. We operate in substantially all major natural gas and crude oil producing regions in the U.S. Increased size and geographic scopedensity offer compression services providers operating and cost advantages. As the number of compression applicationslocations and size of the compression fleet increases, the number of required sales, administrative and maintenance personnel increases at a lesser rate, resulting in operational efficiencies and potential cost advantages. Additionally, broad geographic scope allows compression service providers to more efficiently provide services to all customers, particularly those with compression applications in remote locations. Our large fleet and numerous operating locations throughout the U.S., combined with our ability to efficiently move equipment among producing regions, mean that we are not dependent on production activity in any particular region. We believe our large, diverse fleet of compression equipmentsize, geographic scope and broad geographiccustomer base of operations and related operational personnel give us more flexibility in meeting our customers’ needs than many of our competitors and provide us with improved operating expertise and business development opportunities.
Long operating history. We have a long, sustained history of operating in the compression industry and a robust database of fleet financial and operating metrics that provides an advantage compared to our younger competitors. We have extensive experience working with our customers to meet their evolving needs.
Financial resilience and flexibility. We have historically shown and are committed to maintaining capital discipline and financial strength, which is critical in a cyclical industry and business such as ours. Maintaining ample liquidity and a prudent balance sheet supports our ability to continue to deliver on our long–term strategies and positions us to take advantage of future growth opportunities as they arise.
Technology Transformation. As of the end of 2021, we had completed several major phases of a process and technology transformation project that enables us to harness technology in all aspects of our business to drive operational efficiencies and enhance our value proposition to our customers. Our investments have focused on the automation of workflows, integration of digital and mobile tools for our field service technicians and expanded remote monitoring capabilities of our compressor fleets. This project, among other things, has helped us achieve increased asset uptime, improved the efficiency of our field service technicians, improved our supply chain and inventory management and reduced our emissions and carbon footprint, thereby improving our profitability as discussed further below in “Business Strategies.”
Business Strategies
We intend to continue to capitalize on our competitive strengths to meet our customers’ needs through the following key strategies:
Capitalize on the long–term fundamentals for the U.S. natural gas compression industry. We believe our ability to efficiently meet our customers’ evolving compression needs, our long–standing customer relationships and our large compression fleet will enable us to capitalize on what we believe are favorable long–term fundamentals for the U.S. natural gas compression industry. These fundamentals include significant natural gas resources in the U.S., increased unconventional oil and natural gas production, decreasing natural reservoir pressures and expected increased natural gas demand in the U.S. from the growth of liquefied natural gas exports, exports of natural gas via pipeline to Mexico, power generation and industrial uses.
Improve profitability. We are focused on increasing productivity and optimizing our processes. Between 2019 and 2021, we invested in a process and technology transformation project that replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. During 2022, our focus shifted to the integration of our process and technology transformation project into our operations, which we expect will lower our internal costs and improve our profitability over time. Implementing telematics and advanced data analysis across our fleet has enabled us to respond more quickly and optimally to downtime events, minimize prolonged troubleshooting, prevent unnecessary unit touches and stops, which are the primary cause of wear and tear of the
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equipment, and, ultimately, predict failures before they occur. We expect this will increase the number of Contents
In addition, we continue to focus on increasing the percentage of large horsepower equipment within our fleet in order to capitalize on the trends that have been driving, and that we believe will continue to drive, demand for large horsepower units. As part of this strategy, we sold approximately 341,000 and 147,000 non–core horsepower during the years ended December 31, 2022 and 2021, respectively, which drove an increase in our large operating horsepower from 77% of our fleet as of December 31, 2020, to 84% as of December 31, 2022.
Optimize our business to generate attractive returns. We plan to continue to invest in strategically growing our business both organically and through third–party acquisitions. We see opportunities to grow our contract operations business over the long term by putting idle units back to work and profitably adding new horsepower in key growth areas. In addition, because a large amount of compression equipment is owned by natural gas and crude oil producers, processors, gatherers, transporters and storage providers, we believe there will be additional opportunities for our aftermarket services business to provide services and parts to support the operation of this equipment.
Oil and Natural Gas Industry Cyclicality and Volatility
Demand for our products and services is correlated to natural gas and crude oil production. Fluctuations in energy prices can affect the levels of expenditures by our customers, production volumes and ultimately, demand for our products and services, however, we believe our contract operations business is typically less impacted by commodity prices for the following reasons:
• | fee–based contracts minimize our direct commodity price exposure; |
• | the natural gas we use as fuel for our compression packages is supplied by our customers, further reducing our direct exposure to commodity price risk; |
• | compression services are a necessary part of midstream energy infrastructure that facilitate the transportation of natural gas through gathering systems; |
• | our contract operations business is tied primarily to oil and natural gas production, transportation and consumption, which are generally less cyclical in nature than exploration and new well drilling and completion activities; |
• | the need for compression services and equipment has grown over time due to the increased production of natural gas, the natural pressure decline of natural gas–producing basins and the increased percentage of natural gas production from unconventional sources; and |
• | our compression packages operate at a customer location for an average of approximately four years, during which time our customers are generally required to pay a fixed monthly fee for our contract operations services or a reduced monthly fee during periods of limited or disrupted natural gas flows. |
Seasonal Fluctuations
Our results of operations have not historically reflected any material seasonal tendencies and we do not believe that seasonal fluctuations will have a material impact on us in the foreseeable future.
Sales and Marketing
Our marketing and client service functions are coordinated and performed by our sales and field service personnel. Salespeople, application engineers and field service personnel qualify, analyze and scope new compression applications as well as regularly visit our customers to ensure customer satisfaction, determine customer needs as to services currently being provided and ascertain potential future compression services requirements. This ongoing communication allows us to respond swiftly to customer requests.
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Customers
Our customer base consists primarily of companies engaged in all aspects of the oil and gas natural industry, including large integrated and independent oil and natural gas, processors, gatherers and transporters. We have entered into preferred vendor arrangements with some of our customers that give us preferential consideration for their compression needs. In exchange, we provide these customers with enhanced product availability, product support and favorable pricing. During the years ended December 31, 2022, 2021 and 2020, our five most significant customers collectively accounted for 32%, 31% and 28%, respectively, of our contract operations and aftermarket services revenue. No single customer accounted for 10% or more of our revenue during the years ended December 31, 2022, 2021 and 2020.
Suppliers
We have pricing agreements in place with all of our primary suppliers of compression equipment, parts and services, including Ariel Corporation, Waukesha Pearce Industries and Caterpillar, Inc. and its distributors, and work closely with these key suppliers on value engineering, to lower total lifecycle cost and improve equipment reliability. Though we rely on these suppliers to a significant degree, we believe alternative sources for compression equipment, parts and services are generally available.
Competition
The natural gas compression services business is highly competitive with low barriers to entry. Overall, we experience considerable competition from companies that may be able to more quickly adapt to changing technology within our industry and changes in economic conditions as a whole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies. We believe we are competitive with respect to price, equipment availability, customer service, flexibility in meeting customer needs, technical expertise and quality and reliability of our compression packages and related services. See “Competitive Strengths” above for further discussion.
Governmental Regulation
Environmental and Other Regulations
Our operations are subject to stringent and complex U.S. federal, state and local laws and regulations governing the discharge of materials into the environment or otherwise relating to protection of the environment and to occupational safety and health. Compliance with these environmental laws and regulations may expose us to significant costs and liabilities and cause us to incur significant capital expenditures in our operations. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, imposition of investigatory and remedial obligations and the issuance of injunctions delaying or prohibiting operations. We believe that our operations are in substantial compliance with applicable environmental, health and safety and health laws and regulations and that continued compliance with currently applicable requirements would not have a material adverse effect on us. However, the trend in environmental regulation has been to place more restrictions on activities that may affect the environment, and thus, any changes in these laws and regulations that result in more stringent and costly waste handling, storage, transport, disposal, emission or remediation requirements could have a material adverse effect on our results of operations and financial position.
The primary U.S. federal environmental laws to which our operations are subject include the CAA and regulations thereunder, which regulate air emissions; the CWA and regulations thereunder, which regulate the discharge of pollutants in industrial wastewater and storm water runoff; the RCRA and regulations thereunder, which regulate the management and disposal of hazardous and non-hazardousnon–hazardous solid wastes; and the CERCLA and regulations thereunder, known more commonly as “Superfund,” which impose liability for the remediation of releases of hazardous substances in the environment. We are also subject to regulation under the OSHA and regulations thereunder, which regulate the protection of the safety and health of workers. Analogous state and local laws and regulations may also apply.
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Air Emissions
The CAA and analogous state laws and their implementing regulations regulate emissions of air pollutants from various sources, including natural gas compressors, and also impose various monitoring and reporting requirements. Such laws and regulations may require a facility to obtain pre-approvalpre–approval for the construction or modification of certain projects or facilities expected to produce air emissions or result in the increase of existing air emissions, obtain and strictly comply with air permits containing various emissions and operational limitations, or utilize specific emission control technologies to limit emissions. Our standard contract operations agreement typically provides that the customer will assume permitting responsibilities and certain environmental risks related to site operations.
New Source Performance Standards
While the EPA published a proposed rulein 2020 adopted deregulatory amendments to stay certain portions of the June 2016 standards for two years and reevaluate the entirety of the 2016 standards, butrule that removed the EPA has not yet publishedtransmission and storage segments from the final ruleoil and asnatural gas source category and rescinded the methane–specific requirements for production and processing facilities, that 2020 rulemaking was voided by action of Congress and the President effective June 30, 2021. As a result, the June 2016 rule remainsrules became effective again immediately. Further, in effect but future implementation of the 2016 standards is uncertain at this time. It is anticipated thatNovember 2021, the EPA proposed the framework for more stringent methane rules for newer sources, along with emissions standards that will attemptfor the first time be applicable to make additional deregulatory changesexisting sources, with both a supplemental rule proposal by the EPA and a separate BoLM rule proposal addressing methane emissions on public lands issued in November 2022. Among the newly proposed methane requirements that may impact our operations broader applicability to compression equipment relative to the NSPS going forward. At this time, weexisting rules, increased work practices and inspection requirements and mandates for certain new zero–emissions equipment.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane rules that will or are anticipated to impose additional requirements on the industry and that may be effective sooner than any new EPA rules. We, together with a consortium of other Gas Compressor Association member companies, were actively involved in the rulemaking effort in New Mexico, including working directly with the New Mexico Environmental Department and participating in the New Mexico Environmental Improvement Board’s hearing in late 2021.
We do not believe that the rulecurrent rules will have a material adverse impact on our business, financial condition, results of operations or cash flows.
National Ambient Air Quality Standards
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General. New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could have a material adverse impact on our business, financial condition, results of operations and cash flows.
Climate Change Legislation
Climate change legislation and Regulatory Initiatives
Congress has previously considered legislation will become law in the near future, although energyto restrict or regulate emissions of greenhouse gases. Energy legislation and other initiatives continue to be proposed that may be relevant to greenhouse gas emissions issues. Almost half of the states, either individually or through multi-statemulti–state regional initiatives, have begun to address greenhouse gas emissions, primarily through the planned development of emission inventories or regional greenhouse gas cap and trade programs. Although most of the state-levelstate–level initiatives have to date been focused on large sources of greenhouse gas emissions, such as electric power plants, it is possible that smaller sources such as our gas-firednatural gas–powered compressors could become subject to greenhouse gas-relatedgas–related regulation. Depending on the particular program, we could be required to control emissions or to purchase and surrender allowances for greenhouse gas emissions resulting from our operations.
Independent of Congress, the EPA has promulgated regulations controlling greenhouse gas emissions under its existing CAA authority. The EPA has adopted rules requiring many facilities, including petroleum and natural gas systems, to inventory and report their greenhouse gas emissions. TheseIn 2021, we did not operate any facilities that were subject to these reporting obligations were triggered for some sites we operated in 2017.
In an executive order issued on January 20, 2021, the POTUS asked the heads of all executive departments and agencies to review and take action to address any federal regulations, orders, guidance documents, policies and any similar agency actions promulgated during the prior administration that may be inconsistent with or present obstacles to the administration’s stated goals of protecting public health and the environment, and conserving national monuments and refuges. The executive order also established an Interagency Working Group on the Social Cost of Greenhouse Gases, which is called on to, among other things, capture the full costs of greenhouse gas emissions, including the “social cost of carbon,” “social cost of nitrous oxide” and “social cost of methane,” which are “the monetized damages associated with incremental increases in greenhouse gas emissions,” including “changes in net agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.” The current administration adopted an interim social cost of carbon of $51 per ton in February 2021, with an updated cost figure of $190 per ton, as suggested by the EPA, expected to be announced by the Interagency Working Group in April 2023. That figure is intended to be used to guide federal decisions on the costs and benefits of various policies and approvals; such efforts have been the subject of a series of judicial challenges, which have been largely unsuccessful to date. At this
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time, we cannot determine whether the administration’s efforts on social cost or other interagency climate efforts will lead to any particular actions that give rise to a material adverse effect on our business, financial condition, results of operations and cash flows.
At the international level, the United StatesU.S. joined the international community at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change in Paris, France, which resulted in the Paris Agreement that requires member
Although it is not currently possible to predict how these executive orders, national commitments or any proposed or future greenhouse gas or climate change legislation or regulation promulgated by Congress, the states or multi-statemulti–state regions will impact our business, any regulation of greenhouse gas emissions that may be imposed in areas in which we conduct business could result in increased compliance costs or additional operating restrictions or reduced demand for our services, and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Water Discharges
The CWA and analogous state laws and their implementing regulations impose restrictions and strict controls with respect to the discharge of pollutants into state waters or waters of the U.S. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. In addition, the CWA regulates storm water discharges associated with industrial activities depending on a facility’s primary standard industrial classification. SeveralFour of our facilities have applied for and obtained industrial wastewater discharge permits as well asand/or have sought coverage under local wastewater ordinances. U.S. federal laws also require development and implementation of spill prevention, controls and countermeasure plans, including appropriate containment berms and similar structures to help prevent the contamination of navigable waters in the event of a petroleum hydrocarbon tank spill, rupture or leak at such facilities. The definition of “waters of the United States” and, relatedly, the scope of CWA jurisdiction, have been the subject of notable rulemaking efforts and judicial challenges over several decades. As a result of judicial and regulatory action, different approaches to the definitions adopted in 2015 and in 2020 by the EPA and the Army Corps of Engineers were stayed or vacated during 2021, with the effect of restoring to effectiveness rules and guidance from the mid–1980s. In October 2022, the U.S. Supreme Court heard arguments in a case on the appropriate scope of CWA jurisdiction; the outcome of that case may shape the administration’s approach to its ongoing jurisdictional rulemaking effort. In the meantime, in October 2022, the EPA and the Army Corps of Engineers announced a final rule intended to provide a legally durable definition of “waters of the United States” designed to clarify and stabilize the scope of the agencies’ jurisdictions. The final rule, which was published in the Federal Register in January 2023 and becomes effective on March 20, 2023, restores certain water protections that were in place prior to 2015 under the CWA for traditional navigable water, the territorial areas, interstate waters and upstream water resources that significantly affect those waters.
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Waste Management and Disposal
RCRA and analogous state laws and their implementing regulations govern the generation, transportation, treatment, storage and disposal of hazardous and non-hazardousnon–hazardous solid wastes. During the course of our operations, we generate wastes (including, but not limited to, used oil, antifreeze, used oil filters, sludges, paints, solvents and abrasive blasting materials) in quantities regulated under RCRA. The EPA and various state agencies have limited the approved methods of disposal for these types of wastes. CERCLA and analogous state laws and their implementing regulations impose strict, and under certain conditions, joint and several liability without regard to fault or the legality of the original conduct on classes of persons who are considered to be responsible for the release of a hazardous substance into the environment. These persons include current and past owners and operators of the facility or disposal site where the release occurred and any company that transported, disposed of, or arranged for the transport or disposal of the hazardous substances released at the site. Under CERCLA, such persons may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment, for damages to natural resources and for the costs of certain health studies. In addition, where contamination may be present, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury, property damage and recovery of response costs allegedly caused by hazardous substances or other pollutants released into the environment.
We currently own or lease, and in the past have owned or leased, a number of properties that have been used in support of our operations for a number of years. Although we have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons, hazardous substances, or other regulated wastes may have been disposed of or released on or under the properties owned or leased by us or on or under other locations where such materials have been taken for disposal by companies sub-contractedsub–contracted by us. In addition, many of these properties have been previously owned or operated by third parties whose treatment and disposal or release of hydrocarbons, hazardous substances or other regulated wastes was not under our control. These properties and the materials released or disposed thereon may be subject to CERCLA, RCRA and analogous state laws. Under such laws, we could be required to remove or remediate historical property contamination, or to perform certain operations to prevent future contamination. At certain of such sites, we are currently working with the prior owners who have undertaken to monitor and clean up contamination that occurred prior to our acquisition of these sites. We are not currently under any order requiring that we undertake or pay for any cleanup activities. However, we cannot provide any assurance that we will not receive any such order in the future.
Occupational Safety and Health
We are subject to the requirements of the OSHA and comparable state statutes. These laws and the implementing regulations strictly govern the protection of the safety and health of employees. The OSHAOSHA’s hazard communication standard, the EPAEPA’s community right-to-knowright–to–know regulations under Title III of CERCLA and similar state statutes require that we organize and/or disclose information about hazardous materials used or produced in our operations.
The COVID–19 pandemic has largely run its course in the U.S. While we do have comprehensive pandemic–focused procedures in place, we relaxed many of the COVID–19–specific requirements in late 2022 in light of, among other things, our COVID–19 case trends and similar relaxation of restrictions and controls by local and federal government authorities, in reliance on the latest recommendations and assessments of relevant medical experts. If conditions change, such as we see an increase in the number of new COVID–19 cases or governmental and/or medical advice changes, we will carefully consider reimplementing appropriate procedures geared toward ensuring the health, safety and well–being of our employees, customer and vendors. At this time, we do not know if or how any additional developments with the pandemic, if any, or any regulatory initiatives adopted in response to any such developments, will affect our operations. We will continue to monitor and act in accordance with applicable law and in the best interests of our employees and those with whom we interact.
Human Capital
As of December 31, 2017,2022, we hademployed approximately 1,7001,100 employees in 15 states and conducted business in 41 states. None of our employees are subject to a collective bargaining agreement.
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We consider our employees to be our greatest asset and believe that our success depends on our ability to attract, develop and retain our employees. Diversity and inclusion are foundational to our leadership approach and our focus is on how our actions and the actions of our employees foster diversity and inclusion in our everyday activities at Archrock. We support diversity in hiring, as is reflected in the diversity of our Board of Directors, of which three of our seven independent directors are female or identify as a member of an underrepresented racial/ethnic group. Similarly, one–third of our executive leadership team is female and 29% of our total workforce is ethnically diverse.
We support gender and ethnic pay equity and believe we offer competitive and comprehensive compensation benefits packages that include bonuses, an employee stock purchase plan, a 401(k) plan with employer contribution, healthcare and insurance benefits, health savings and flexible spending accounts with employer contribution, paid time off (including 16 hours per year as paid time to volunteer), family leave, an employee assistance program and tuition assistance, among many others.
We believe in the ultimate goal of serving as the best corporate citizen possible and are dedicated to inspiring and empowering our employees to operate continuously according to our core values of safety, service, integrity, respect and pride. To that end, the Governance and Sustainability Committee of our Board of Directors provides oversight of our policies, practices and programs regarding the promotion of diversity and inclusion within our company and the health and safety of our employees and communities.
Learning and Talent Development
We invest significant resources to develop the talent needed to provide our industry–leading natural gas compression services. We work closely with suppliers to develop training programs for our field service technicians. Our field service technicians are supported by a dedicated training team and collectively completed over 40,500 hours of operational and technical training during 2022. Every new hire field employee enters a program whereby they are assigned an experienced mentor, for an average of six months, under whose direct supervision they apply their classroom learning in the real world setting.
In addition, we offer a number of non–technical, targeted skills–based and career–enhancing training programs, including technical orientation for non–technical employees, supervisor coaching, performance management and conflict resolution. Our talent development programs provide employees with the resources they need to help achieve their career goals, build management skills and lead their organizations.
Safety, Health and Wellness
The success of our business is fundamentally connected to the well–being of our people and so we are committed to the safety, health and wellness of our employees.
Safety is a core value of our company, and safety performance is a key measure of success that has been included in our short–term incentive program for over 16 years. We actively promote the highest standards of safety behavior and environmental awareness and strive to meet or exceed all applicable local and national regulations. “Stop the Job” is an adopted edict that establishes the obligation of and provides the authority to all employees to stop any task or operation where they perceive that a risk to people, the environment or assets is not properly controlled. We believe that all incidents are preventable and that through proper training, planning and hazard recognition, we can achieve a workplace with zero incidents. To this end, we created the TARGET ZERO program that includes over 90 safety and environmental procedures, and their necessary tools, equipment and training, that are designed to foster a mindset that integrates safety into every work process. Through this program, we achieved excellent safety performance, with a total recordable incident rate of 0.32 in 2022. While no incidents are acceptable, the incidents we experienced were extremely minor in nature and resulted in no lost time. It will be our relations withcontinuous goal that we achieve a rate of zero in all future periods.
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We also provide our employees and their families with access to a variety of flexible and convenient health and wellness programs that support the maintenance or improvement of our employees’ physical and mental health and encourage engagement in healthy behaviors, including our employee–led RockFIT program that develops and sponsors corporate health and fitness challenges throughout the year.
Building Employee and Community Connections
We consider ourselves a member of every community in which we operate and believe that building connections between our employees, their families and our communities creates a more meaningful and enjoyable workplace. Our employees give generously and are good.
Available Information
Our annual reports on Form 10-K,10–K, quarterly reports on Form 10-Q,10–Q, current reports on Form 8-K8–K and any amendments to those reports filed or furnished to the SEC pursuant to the Exchange Act are made available free of charge on our website, without charge,www.archrock.com, as soon as reasonably practicable after they are electronically filed electronically with, or furnished to, the SEC. Our website also includes our Code of Business Conduct, our Corporate Governance Principles and the charters of our audit, compensation and nominating and corporate governance committees. Information on our website is not incorporated by reference in this 20172022 Form 10-K10–K or any of our other securities filings.
Paper copies of our filings are also available withoutfree of charge from Archrock, Inc., 9807 Katy Freeway, Suite 100, Houston, Texas 77024, Attention: Investor Relations. Alternatively, the public may read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549.
As described in Part I (“Disclosure Regarding Forward-Looking Statements”),“Forward–Looking Statements,” this 20172022 Form 10-K10–K contains forward-lookingforward–looking statements regarding us, our business and our industry. The risk factors described below, among others, could cause our actual results to differ materially from the expectations reflected in the forward-lookingforward–looking statements. If any of the following risks actually occurs,occur, our business, financial condition, results of operations and cash flows could be negatively impacted.
Industry and General Economic Risks
Pandemics and other public health crises, including the ongoing COVID–19 pandemic, may continue to conditions, including some conditions that may not be satisfied on a timely basis, if at all. Failure to complete the Proposed Merger, or significant delays in completing the Proposed Merger, could negatively affect each party’s future business and financial results and the trading prices ofdemand for our common stock and the Partnership’s common units.
Pandemics, such as the COVID–19 pandemic, or other public health crises could significantly impact public health, economic growth, supply chains and markets. While the magnitude and duration of potential social, economic and labor instability as a direct result of the COVID–19 pandemic cannot be estimated at this time, we continue to maintainclosely monitor the effects of the pandemic on commodity demands and on our customers, as well as on our operations and employees. These effects may include adverse revenue and net income effects, disruptions to our operations and supply chain, customer shutdowns of oil and gas exploration and production, employee impacts from illness, school closures and other community response measures, and temporary inaccessibility or closures of our facilities or the facilities of our customers and suppliers.
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The extent to which our operating and financial results continue to be affected by the COVID–19 pandemic and may be affected by future pandemics or other public health crises will depend on various factors and consequences beyond our control, such as the duration and scope of such pandemic or public health crisis, additional actions by businesses and governments in response to the pandemic and the speed and effectiveness of responses to combat any such pandemic or public health crisis. Any future pandemic or public health crisis may materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider to present significant risks to our operations.
An increase in inflation could have adverse effects on our results of operation.
Inflation continues to rise and has caused the Federal Reserve to raise interest rates with indications of future increases, which has created further uncertainty for the economy and for our customers. If inflationary pressures continue into 2023, this will increase our dividends following the Proposed Merger.
The conflict in order to do so, weUkraine and related price volatility and geopolitical instability could negatively impact our business.
In late February 2022, Russia launched significant military action against Ukraine. The conflict has caused, and could intensify, volatility in natural gas prices, and the Partnership may be required to comply with material restrictions or satisfy material conditions.
Business and as its overall impact is uncertain, we noteOperational Risks
Our operations entail inherent risks that the TCJA could adversely affect our business and financial condition. The impact of this tax reform legislation on holders of our common stock is also uncertainmay result in substantial liability. We do not insure against all potential losses and could be adverse.
Our operations entail inherent risks, including equipment defects, malfunctions and administrative initiativesfailures and natural disasters, which could result in uncontrollable flows of natural gas or challengeswell fluids, fires and explosions. These risks may expose us, as an equipment operator, to liability for personal injury, wrongful death, property damage, pollution and other environmental damage. The insurance we carry against many of these risks may not be adequate to cover our claims or losses. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. Additionally, we are substantially self–insured for workers’ compensation and employee group health claims in view of the relatively high per–incident deductibles we absorb under our insurance arrangements for these risks. We are also self–insured for property damage to our tax positions could adversely affectoffshore assets. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition.condition could be negatively impacted.
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We operateface significant competitive pressures that may cause us to lose market share and harm our financial performance.
Our business is highly competitive and there are low barriers to entry. Our competitors may be able to more quickly adapt to technological changes within our industry and changes in locations throughout the U.S.economic and market conditions as a result, we are subjectwhole, more readily take advantage of acquisitions and other opportunities and adopt more aggressive pricing policies. Our ability to the tax lawsrenew or replace existing contract operations service agreements with our customers at rates sufficient to maintain current revenue and regulations of U.S. federal, state and local governments. From time to time, various legislative or administrative initiatives may be proposed thatcash flows could adversely affect our tax positions. There can be no assurance that our tax provision or tax payments will not be adversely affected by these initiatives. the activities of our competitors. If our competitors substantially increase the resources they devote to the development and marketing of competitive products, equipment or services or substantially decrease the price at which they offer their products, equipment or services, we may not be able to compete effectively.
In addition, U.S. federal, statewe could face significant competition from new entrants into the compression services business. Some of our existing competitors or new entrants may expand or fabricate new compressors that would create additional competition for the services we provide to our customers. In addition, our customers may purchase and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance thatoperate their own compression fleets in lieu of using our tax positions willnatural gas compression services. We also may not be challenged by relevant tax authoritiesable to take advantage of certain opportunities or that we would be successful in any such challenge.
If this litigation is resolved against us, or if in the future we do not qualify as a Heavy Equipment Dealer ormake acquisitions on economically acceptable terms, our compressors do not qualify as Heavy Equipment because of new or revised Texas statutes, we will incur additional taxes andfuture growth could be subjectlimited.
Our ability to substantial penaltiesgrow depends, in part, on our ability to make accretive acquisitions. If we are unable to make accretive acquisitions either because we are (i) unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts with them, (ii) unable to obtain financing for these acquisitions on economically acceptable terms or (iii) outbid by competitors, then our future growth and interest, which would adversely impactability to maintain dividends could be limited. Furthermore, even if we make acquisitions that we believe will be accretive, these acquisitions may nevertheless result in a decrease in the cash generated from operations.
Any acquisition involves potential risks, including, among other things:
• | an inability to successfully integrate the businesses we acquire; |
• | the assumption of unknown liabilities; |
• | limitations on rights to indemnity from the seller; |
• | mistaken assumptions about the cash generated or anticipated to be generated by the business acquired or the overall costs of equity or debt; |
• | the diversion of management’s attention from other business concerns; |
• | unforeseen operating difficulties; and |
• | customer or key employee losses at the acquired businesses. |
If we consummate any future acquisitions, our capitalization and results of operations may change significantly and we will not have the opportunity to evaluate the economic, financial condition and cash flows.
An affiliate of Hilcorp holds a significant portion of our natural gas compressors for ad valorem tax purposes,common stock, and Hilcorp’s interest as wellan equity holder may conflict with the interests of our other shareholders or our noteholders.
Old Ocean Reserves, an affiliate of our customer Hilcorp, has the right to designate one director to serve on our Board of Directors as long as Old Ocean Reserves or it successors (together with its affiliates) owns at least 7.5% of our outstanding common stock. As of December 31, 2022, Old Ocean Reserves owned 10.8% of our outstanding common stock. Given its ownership level and board representation, Old Ocean Reserves may have some influence over our operations and strategic direction and may have interests that conflict with the location where our natural gas compressors are taxable, under revised Texas statutes.interests of other equity and debt holders.
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While we paid quarterly dividends of the new methodology, our ad valorem tax expense (which is reflected in our consolidated statements$0.145 per share of operations as a component of cost of sales (excluding depreciation and amortization)) includes a benefit of $17.5 millioncommon stock during the year ended December 31, 2017. Since the change in methodology became effective in 2012, we have recorded an aggregate benefit of $78.2 million as of December 31, 2017, of which $15.9 million has been agreed to by a number of appraisal review boards and county appraisal districts and $62.3 million has been disputed and is currently in litigation. Recognizing the similarity of the issues and that these cases will ultimately be resolved by the Texas appellate courts, we have reached, or intend to reach, agreements with some of the appraisal districts to stay or abate certain of these pending district court cases. 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, which would impact our future results of operations, financial condition and cash flows, including our ability to pay dividends in the future.
We paid quarterly cash dividends of $0.12$0.145 per share of common stock with respect to each quarter of 2017.during the year ended December 31, 2022. We cannot provide assurance that we will, at any time in the future, again generate sufficient surplus cash that would be available for distribution to the holders of our common stock as a dividend or that our Board of Directors would determine to use any such surplus orof our net profits to pay a dividend.
Future dividends may be affected by, among other factors:
• | the availability of surplus or net profits, which in turn depend on the performance of our business and operating subsidiaries; |
• | our debt service requirements and other liabilities; |
• | our ability to refinance our debt in the future or borrow funds and access capital markets; |
• | restrictions contained in our Debt Agreements; |
• | our future capital requirements, including to fund our operating expenses and other working capital needs; |
• | the rates we charge for our services; |
• | the level of demand for our services; |
• | the creditworthiness of our customers; |
• | our level of operating expenses; and |
• | changes in U.S. federal, state and local income tax laws or corporate laws. |
We cannot provide assurance that we will declare or pay dividends in any particular amountsamount or at all in the future. A decision not to pay dividends or a reduction in our dividend payments in the future could have a negative effect on our stock price.
Financial Risks
We have a substantial amount of debt that could limit our ability to fund future growth and operations and increase our exposure to risk during adverse economic conditions.
As of December 31, 20172022, we had approximately $1.4$1.5 billion in outstanding debt obligations, net of unamortized debt discountspremiums and unamortized deferred financing costs.costs, outstanding under our Credit Facility and Senior Notes. Many factors, including factors beyond our control, may affect our ability to make payments on our outstanding indebtedness. These factors include those discussed elsewhere in these Risk Factors and those listed in “Disclosure Regarding Forward-Looking Statements” included in Part I of this
Our substantial debt level and associated commitments could have important adverse consequences.consequences to our liquidity, particularly to the extent our borrowing capacity becomes covenant restricted. For example, these commitments could:
• | make it more difficult for us to satisfy contractual obligations; |
• | increase our vulnerability to general adverse economic and industry conditions; |
• | limit our ability to fund future working capital, capital expenditures, acquisitions or other corporate requirements; |
• | increase our vulnerability to interest rate fluctuations because the interest payments on a portion of our debt are based upon variable interest rates and a portion can adjust based on our credit statistics; |
• | limit our flexibility in planning for, or reacting to, changes in our business and our industry; |
• | place us at a disadvantage compared to our competitors that have less debt or less restrictive covenants in such debt; and |
• | limit our ability to incur indebtedness in the future. |
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Covenants in our business and our industry;
Our Credit Facility and the Partnership Debt Agreements contain various covenants with which we or certain of our subsidiaries or the Partnership must comply, including, but not limited to, restrictions on the use of proceeds from borrowings, limitations on the incurrence of indebtedness, investments, acquisitions, making loans, liens on assets, repurchasing equity, making distributions,dividends, transactions with affiliates, mergers, consolidations, dispositions of assets and other provisions customary in similar types of agreements. The Credit Facility and the Partnership Debt Agreements also contain various covenants requiring mandatory prepayments from the net cash proceeds of certain asset transfers. In addition, if as of any date our cash and cash equivalents (other than proceeds from a debt or equity issuance in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Credit Facility) in excess of $35.0 million, then such excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Credit Facility. If as of any date the Partnership has cash and cash equivalents (other than proceeds from a debt or equity issuance in the 30 days prior to such date reasonably expected to be used to fund an acquisition permitted under the Partnership Credit Facility) in excess of $50.0 million, then such excess amount will be used to pay down outstanding borrowings of a corresponding amount under the Partnership Credit Facility.
Our Credit Facility and the Partnership Credit Facility areis also subject to financial covenants, including the following ratios, as defined in their respective agreements:
| | |
EBITDA to Interest Expense | ||
2.5 to 1.0 | ||
Senior Secured Debt to EBITDA | 3.0 to 1.0 | |
Total Debt to EBITDA | ||
January 1, 2023 through September 30, 2023 | ||
5.50 to 1.0 | ||
Thereafter | 5.25 to 1.0 |
(1) | |
Subject to a temporary increase to |
If we or the Partnership were to anticipate non-compliancenon–compliance with these financial ratios, we or the Partnership may take actions to maintain compliance with them. These actions include reductions in our general and administrative expenses, capital expenditures or the payment of cash dividends. Actions the Partnership may take include reductions in its general and administrative expenses, capital expenditures or the payment of cash distributions. Any of these measures including a reduction in the amount of cash distributions we receive from the Partnership, may reduce the amount of cash available for payment of our debt, payment of dividends and the funding of our business requirements, which could have an adverse effect on our business, operations, cash flows or the price of our common stock.
The breach of any of the covenants under our Credit Facility, including our financial covenants,the Debt Agreements could result in a default under our Credit Facility,the Debt Agreements, which could cause our indebtedness under the Credit FacilityDebt Agreements to become due and payable. If the repayment obligations onunder the Credit FacilityDebt Agreements were to be accelerated, we may not be able to repay the debt or refinance the debt on acceptable terms and our financial position would be materially adversely affected. In addition, aA material adverse effect on our assets, liabilities, financial condition, business or operations that, taken as a whole, impacts our ability to perform the obligations under our Credit Facility could lead to a default under those agreements.
As of December 31, 2017,2022, we were in compliance with all covenants under the Credit Facility. As of December 31, 2017, the Partnership was in compliance with all covenants under the Partnership Debt Agreements.
We may be unable to access the capital and credit markets or borrow on affordable terms to obtain additional capital that we may require.
Historically, we have financed acquisitions, operating expenditures and capital expenditures with a combination of cash provided by operating and financing activities. However, to the extent we are unable to finance our operating expenditures, capital expenditures, scheduled interest and debt repayments and any future dividends with net cash provided by operating activities and borrowings under our Credit Facility and the Partnership Credit Facility, we may require additional capital. Periods of instability in the capital and credit markets (both generally and in the oil and gas industry in particular) could limit our ability to access these markets to raise debt or equity capital on affordable terms or to obtain additional financing. Among other things, our lenders may seek to increase interest rates, enact tighter lending standards, refuse to refinance existing debt at maturity at favorable terms or at all and may reduce or cease to provide funding to us. If we are unable to access the capital and credit markets on favorable terms, or if we are not successful in raising capital within the time period required or at all, we may not be able to grow or maintain our business, which could have a material adverse effect on our business, results of operations and financial condition.
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Our inability to fund purchases of additional compression equipment could be adversely affected by violations of the FCPA, similar worldwide anti-corruption laws and trade control laws.
We may not be completely effective in ensuringable to maintain or increase our compliance. Our trainingasset and compliance programcustomer base unless we have access to sufficient capital to purchase additional compression equipment. Cash flow from our operations and availability under our internal control policies and proceduresCredit Facility may not always protectprovide us from violations committedwith sufficient cash to fund our capital expenditure requirements, including any funding requirements related to acquisitions. Our ability to grow our asset and customer base could be impacted by limits on our employees or agents. Actual or alleged violationsability to access additional capital.
We may be vulnerable to interest rate increases due to our variable rate debt obligations.
Borrowings under our Credit Facility are subject to variable interest rates. Changes in economic conditions outside of these laws could disrupt our business and cause us to incur significant legal expenses, andcontrol could result in higher interest rates, thereby increasing our interest expense and reducing the funds available for capital investment, operations or other purposes. In addition, a substantial portion of our cash flow must be used to service our debt obligations. Any increase in our interest expense could negatively impact our results of operations and cash flows, including our ability to pay dividends in the future.
Our Credit Facility contains LIBOR benchmark replacement provisions. However, at this time, there can be no assurance as to whether any alternative benchmark or resulting interest rates may be more or less favorable than LIBOR or any other unforeseen impacts of the discontinuation of LIBOR. As a result, the proposals or consequences related to this transition could have a material adverse effect on our reputation, business,debt service obligations, financing costs, liquidity, financial condition, results of operations or cash flows and could impair our access to the financial conditionmarkets.
Uncertainty relating to the phasing out of LIBOR may adversely affect the market value of our current or future debt obligations, including our Credit Facility.
Borrowings under our Credit Facility bear interest at a rate per annum of either, at our election, the U.S. dollar LIBOR rate for specified interest periods or a base rate, plus an applicable margin. The publication of U.S. dollar LIBOR rates for the most common tenors (overnight and stock price. As notedone, three, six and twelve months) will cease publication on June 30, 2023. Our Credit Facility requires that we execute an amendment that establishes an alternate reference rate should the U.S. dollar LIBOR cease to be published (among other circumstances), to be agreed upon by us and the administrative agent under our Credit Facility and giving due consideration to the then-prevailing market convention for determining a rate of interest for syndicated loans in the risk factor “
The restatementFederal Reserve Board and the Federal Reserve Bank of ourNew York organized the Alternative Reference Rates Committee (“ARRC”), which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to U.S. dollar LIBOR in financial statementscontracts. There can be no assurance that SOFR or any other alternative reference rate will perform in the same way as LIBOR would have at any time, including as a result of December 31, 2015changes in interest and 2014 and foryield rates in the years ended December 31, 2015, 2014 and 2013 expose us to additional risks and uncertainties, includingmarket, market volatility or global or regional economic, financial, political, regulatory, stockholderjudicial or other actions, lossevents. Additionally, ARRC has recommended credit spread adjustments for use with SOFR due to LIBOR representing an unsecured lending rate while SOFR represents a secured lending rate. However, market acceptance of investorthe ARRC–recommended credit spread adjustments, as opposed to no or alternative credit spread adjustments, has been mixed. Accordingly, we cannot predict whether changes related to the phase–out of LIBOR, including any credit spread adjustments, insufficient liquidity in the SOFR or alternative reference rate markets or other reforms, as they occur, will have an adverse effect on the market value of, the applicable interest rate on and counterparty confidence and negative impactsthe amount of interest paid on our stock price”
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Customer and circumstances that gave rise to the restatement also includes an investigation of FCPA matters, and we and Exterran Corporation have been cooperating in the investigation. A violation of the FCPA or other anti-corruption law violations due to our own acts or omissions or due to the acts or omissions of others could result in severe civil and criminal penalties or other sanctions, which could materially harm our reputation, business, results of operations, financial condition and stock price.
The erosion of the financial condition of our customers could adversely affect our business.
Many of our customers finance their exploration and production activities through cash flow from operations, the incurrence of debt or the issuance of equity. During times when the oil or natural gas markets weaken, our customers are more likely to experience a downturn in their financial condition. Additionally, some of our midstream customers may provide their gathering, transportation and related services to a limited number of companies in the oil and gas production business. A reduction in borrowing bases under reserve-basedreserve–based credit facilities, the lack of availability of debt or equity financing or other factors that negatively impact our customers’ financial condition could result in a reduction in our customers’ spending for our products and services, which may result in their cancellation of contracts, the cancellation or delay of scheduled maintenance of their existing natural gas compression equipment, their determination not to enter into new natural gas compression service contracts or their determination to cancel or delay orders for our services. Furthermore, the loss by our midstream customers of their key customers could reduce demand for their services and result in a deterioration of their financial condition, which would in turn decrease their demand for our services. Any such action by our customers would reduce demand for our services. Reduced demand for our services could adversely affect our business, financial condition, results of operations, financial condition and cash flows. In addition, in the event of the financial failure of a customer, we could experience a loss on all or a portion of our outstanding accounts receivable associated with that customer.
The loss of any of our most significant customers would result in a decline in our revenue and cash available to pay distributionsdividends to our common unitholders.
Our five most significant customers collectively accounted for approximately 29%32%, 31% and 31%28% of our revenue for each ofrevenues during the years ended December 31, 20172022, 2021 and 2016,2020, respectively. Our services are provided to these customers pursuant to contract compression servicesoperations service agreements, which typically have an initial term of twelve-months12 to 48 months and continue thereafter until terminated by either party with 30 days’ advance notice. The loss of all or even a portion of the services we provide to these customers, as a result of competition or otherwise, could have a material adverse effect on our business, results of operations and financial condition.
Many of our contract operations services contractsservice agreements have short initial terms and are cancelable on short notice after the initial term, and we cannot be sure that such contracts will be extended or renewed after the end of the initial contractual term. Any such nonrenewals, or renewals at reduced rates or the loss of contracts with any significant customer could adversely impact our results of operations.
The length of our contract operations services contractsservice agreements with customers varies based on operating conditions and customer needs. Our initial contract terms typically are not long enough to enable us to recoup the cost of the equipment we utilize to provide contract operations services, and these contracts are typically cancelable on short notice after the initial term. We cannot be sure that a substantial number of these contracts will be extended or renewed by our customers or that any of our customers will continue to contract with us. The inability to negotiate extensions or renew a substantial portion of our contract operations services contracts, the renewal of such contracts at reduced rates, the inability to contract for additional services with our customers or the loss of all or a significant portion of our services contracts with any significant customer could lead to a reduction in revenuesrevenue and net income and could require us to record additional asset impairments. Moreover, we have limited ability to increase prices during our initial contract terms. As a result, we are unable to pass increases in the prices of the equipment, materials and services we utilize to provide contract operations services, as a result of inflation of otherwise, onto our customers, which could result in a reduction in net income. This could have a material adverse effect upon our business, financial condition, results of operations, financial condition and cash flows.
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Labor and Supply Chain Risks
Our ability to manage and grow our business effectively may be adversely affected if we lose management or operational personnel.
We believe that our ability to hire, train and retain qualified personnel will continue to be challenging and important. The supply of experienced operational and field personnel, in particular, decreases as other energy companies’ needs for the same personnel increase. Our ability to grow and to continue our current level of service to our customers will be adversely impacted if we are unable to successfully hire, train and retain these important personnel. In addition, the cost of labor has increased and may continue to increase in the future with increases in demand, which could require us to incur additional costs and negatively impact our results of operations.
We depend on particular suppliers and are vulnerable to product shortages and price increases. With respect to our suppliers of newly-fabricatednewly–fabricated compression equipment specifically, we occasionally experience long lead times, and therefore may at times make purchases in anticipation of future business. If we are unable to purchase compression equipment (oror other integral equipment, materials and services)services from third party suppliers, we may be unable to retain existing customers or compete for new customers, which could have a material adverse effect on our business, results of operations and financial condition.
Some equipment, materials and services used in our business are obtained from a single source or a limited group of suppliers. Our reliance on these suppliers involves several risks, including price increases (as a result of inflation or otherwise), inferior quality and a potential inability to obtain an adequate supply of such equipment, materials and services in a timely manner. Additionally, we occasionally experience long lead times from our suppliers of newly-fabricatednewly–fabricated compression equipment and may at times make purchases in anticipation of future business. We do not have long-termlong–term contracts with some of these suppliers, and the partial or complete loss of certain of these sourcessuppliers could have a negative impact on our results of operations and could damage our customer relationships. Further, a significant increase in the price of such equipment, materials and services could have a negative impact on our results of operations.
If we are unable to purchase compression equipment, in particular, on a timely basis to meet the demands of our customers, our existing customers may terminate their contractual relationships with us, or we may not be able to compete for business from new or existing customers, which, in each case, could have a material adverse effect on our business, results of operations and financial condition.
Information Technology and Cybersecurity Risks
We may not realize the intended benefits of our process and technology transformation project, which could have an adverse effect on our business.
In the fourth quarter of 2018, we began a process and technology transformation project, which has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. By using technology to make our systems and processes more efficient, we intend to lower our internal costs and improve our profitability over time. However, the implementation of the process and technology transformation project has required significant capital and other resources from which we may not realize the benefits we expect to realize. Any such difficulties could have an adverse effect on our business, financial condition, results of operations and ability to pay cash dividends.
Threats of cyber attackscyber-attacks or terrorism could affect our business.
We may be threatened by problems such as cyber attacks,cyber-attacks, computer viruses or terrorism that may disrupt our operations and harm our operating results. Our industry requires the continued operation of sophisticated information technology systems and network infrastructure. Despite our implementation of security measures, ourtechnology
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systems are vulnerable to disability or failures due to hacking, viruses, acts of war or terrorism and other causes. If our information technology systems were to fail and we were unable to recover in a timely way, we mightmay be unable to fulfill critical business functions, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, our assets may be targets of terrorist activities that could disrupt our ability to service our customers. We may be required by our regulators or by the future terrorist threat environment to make investments in security that we cannot currently predict. The implementation of security guidelines and measures and maintenance of insurance, to the extent available, addressing such activities could increase costs. These types of events could materially adversely affect our business and results of operations. In addition, these types of events could require significant management attention and resources and could adversely affect our reputation among customers and the public.
Tax–related Risks
Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We operate in locations throughout the U.S. and, as a result, we are subject to the tax laws and regulations of U.S. federal, state and local governments. From time to time, various legislative and regulatoryor administrative initiatives relating to hydraulic fracturing as well as governmental reviews of such activitiesmay be proposed that could result in increased costs and additional operating restrictions or delays in the completion of oil and natural gas wells and adversely affect demand for our contract operations services.
Our ability to use NOLs and interest expense limitation carryovers to offset future income may be limited.
Our ability to use any NOLs and interest expense limitation carryovers generated by us could be substantially limited if we were to experience an “ownership change” as defined under Section 382 of the Code. In general, an “ownership change” would occur if our “5–percent stockholders,” as defined under Section 382 of the Code, including certain groups of persons treated as “5–percent stockholders,” collectively increased their ownership in us by more than 50 percentage points over a rolling three–year period. An ownership change can occur as a result of a public offering of our common stock, as well as through secondary market purchases of our common stock and certain types of reorganization transactions. We have experienced ownership changes, which may result in an annual limitation on the use of its pre–ownership change NOLs (and certain other losses and/or credits) equal to the equity value of our stock immediately before the ownership change, multiplied by the long–term tax–exempt rate for the month in which the ownership change occurs. During the year ended December 31, 2019, the IRS proposed regulations that would prevent us from using unrealized built–in gains to increase this limitation. If these regulations were finalized and we experienced an ownership change our ability to use our NOLs (and certain other losses and/or credits) may be limited. Such a limitation could, for any given year, have the regulatory burden imposed on hydraulic fracturing.
Legal and certain other natural gas operations. On March 26, 2015, the BLM released a final rule that updates existing regulation of hydraulic fracturing activities on U.S. federal lands, including requirements for chemical disclosure, wellbore integrity and handling of flowback water. The final rule never went into effect dueRegulatory Risks
From time to pendingtime, we are subject to various claims, tax audits, litigation and on December 28, 2017, the BLM announced that it had rescinded the 2015 final rule, in part citing a review that found that 32 of the 32 states with federal oil and gas leases have regulations that already address hydraulic fracturing.
The size, nature and other standards for ensuring that hydraulic fracturing operations do not contaminate nearby water resources. Local governmentscomplexity of our business make us susceptible to various claims, tax audits, litigation and binding arbitration proceedings. We are currently, and may also seek to adopt ordinances within their jurisdictions regulating the time, place and manner of drilling activities in general or hydraulic fracturing activities in particular or prohibit the performance of well drilling in general or hydraulic fracturing in particular. If new or more stringent U.S. federal, state or local legal restrictions relating to the hydraulic fracturing process are adopted in areas where our natural gas exploration and production customers operate, those customers could incur potentially significant added costs to comply with such requirements, experience delays or curtailment in the pursuit of exploration, development or production activities and perhaps even be precluded from drilling wells. Any such restrictions could reduce demand for our contract operations services, and as a resultfuture become, subject to various claims, which, if not resolved within amounts we have accrued, could have a material adverse effect on our business, financial condition,position, results of operations or cash flows, including our ability to pay dividends. Similarly, any claims, even if fully indemnified or insured, could negatively impact our reputation among our customers and cash flows.the public, and make it more difficult for us to
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compete effectively or obtain adequate insurance in the future. See Part I, Item 3 “Legal Proceedings” and Note 15 to our Financial Statements for additional information regarding certain legal proceedings to which we are a party.
New regulations, proposed regulations and proposed modifications to existing regulations under the CAA, if implemented, could result in increased compliance costs.
In June 3, 2016, the EPA issued final regulations amending the NSPS for the oil and natural gas source category and applying to sources of emissions of methane and VOC from certain processes, activities and equipment that is constructed, modified or reconstructed after September 18, 2015. Specifically, the regulation contains both methane and VOC standards for several emission sources not currentlypreviously covered by the NSPS, such as fugitive emissions from compressor stations and pneumatic pumps and methane standards for certain emission sources that are already regulated for VOC, such as equipment leaks at natural gas processing plants. The amendments also establish methane standards for a subset of equipment that the current NSPS regulates, including reciprocating compressors and pneumatic controllers, and extend the current VOC standards to the remaining unregulated equipment. In June 2017,
While the EPA published a proposed rulein 2020 adopted deregulatory amendments to stay certain portions of the June 2016 standards for two years and reevaluate the entirety of the 2016 standards, butrule that removed the EPA has not yet published a final ruletransmission and asstorage segments from the oil and natural gas source category and rescinded the methane–specific requirements for production and processing facilities, that 2020 rulemaking was voided by action of Congress and the President effective June 30, 2021. As a result, the June 2016 rule remainsrules became effective again immediately. Further, in effect but future implementation of the 2016 standards is uncertain at this time. It is anticipated thatNovember 2021, the EPA proposed the framework for more stringent methane rules for newer sources, along with emissions standards that will attemptfor the first time be applicable to make additional deregulatory changesexisting sources, with both a supplemental rule proposal by the EPA and a separate BoLM rule proposal addressing methane emissions on public lands issued in November 2022. Among the newly proposed methane requirements that may impact our operations are broader applicability to compression equipment relative to the NSPS going forward. At this time, weexisting rules, increased work practices and inspection requirements and mandates to certain new zero–emission equipment.
Meanwhile, several states — including, most notably, New Mexico and Colorado — have been developing their own more stringent methane emissions rules that will or are anticipated to impose additional requirements on the industry and that may impose stricter requirements than any EPA rules.We, together with a consortium of other Gas Compressor Association member companies, were actively involved in the rulemaking effort in New Mexico, including working directly with the New Mexico Environmental Department and participating in the New Mexico Environmental Improvement Board’s hearing in late 2021.
We do not believe that the rulecurrent rules will have a material adverse impact on our business, financial condition, results of operations or cash flows.
On October 1, 2015, the EPA issued a new NAAQS ozone standard of 70 ppb, which is a reductiontightening from the 75 ppb standard set in 2008. This new standard became effective on December 28, 2015. During 2017,2015, and the states began submitting updated lists of likelyEPA completed designating attainment/non-attainmentnon–attainment regions under the revised ozone standard utilizing air quality data collected between 2014 and 2016.in 2018. In November 2017,2016, the EPA proposed its attainment/non-attainment designations based onan implementation rule for the states’ submissions,2015 NAAQS ozone standard, but notified the states in December 2017 that it will postpone finalizing those designations until the Spring of 2018 pending any additional public comment period and any air quality data from 2017 the states may wishagency has yet to submit.issue a final implementation rule. State implementation of the revised NAAQS could result in stricter permitting requirements, delay or prohibit our customers’ ability to obtain such permits and result in increased expenditures for pollution control equipment, the costs of which could be significant.
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New environmental regulations and proposals similar to these, when finalized, and any other new regulations requiring the installation of more sophisticated pollution control equipment or the adoption of other environmental protection measures, could have a material adverse impact on our business, financial condition, results of operations and cash flows.
We are subject to a variety of governmental regulations; failure to comply with these regulations may result in administrative, civil and criminal enforcement measures and changes in these regulations could increase our costs or liabilities.
We are subject to a variety of U.S. federal, state and local laws and regulations, including relating to the environment, health and safety, labor and employment and taxation. Many of these laws and regulations are complex, change frequently, are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. Failure to comply with these laws and regulations may result in a variety of administrative, civil and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements and issuance of injunctions as to future compliance. From time to time, as part of our operations, including newly acquired operations or in the future might otherwise have an opportunity to provide contract operations, we may be subject to compliance audits by regulatory authorities in the various states in which we operate.
Environmental laws and regulations may, in certain circumstances, impose strict liability for environmental contamination, which may render us liable for remediation costs, natural resource damages and other damages as a result of our conduct that was lawful at the time it occurred or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it is not uncommon for neighboring land owners and other third parties to file claims for personal injury, property damage and recovery of response costs. Remediation costs and other damages arising as a result of environmental laws and regulations, and costs associated with new information, changes in existing environmental laws and regulations or the adoption of new environmental laws and regulations could be substantial and could negatively impact our financial condition, profitability and results of operations. Moreover, failure to comply with these environmental laws and regulations may result in the imposition of administrative, civil and criminal penalties and the issuance of injunctions delaying or prohibiting operations.
We may need to apply for or amend facility permits or licenses from time to time with respect to storm water or wastewater discharges, waste handling, or air emissions relating to manufacturing activities or equipment operations, which subjects us to new or revised permitting conditions that may be onerous or costly to comply with. In addition, certain of our customer service arrangements may require us to operate, on behalf of a specific customer, petroleum storage units such as underground tanks or pipelines and other regulated units, all of which may impose additional compliance and permitting obligations.
We conduct operations at numerous facilities in a wide variety of locations across the continental U.S. The operations at many of these facilities require environmental permits or other authorizations. Additionally, natural gas compressors at many of our customers’ facilities require individual air permits or general authorizations to operate under various air regulatory programs established by rule or regulation. These permits and authorizations frequently contain numerous compliance requirements, including monitoring and reporting obligations and operational restrictions, such as emission limits. Given the large number of facilities in which we operate, and the numerous environmental permits and other authorizations that are applicable to our operations, we may occasionally identify or be notified of technical violations of certain requirements existing in various permits or other authorizations. Occasionally, we have been assessed penalties for our non-compliance,non–compliance, and we could be subject to such penalties in the future.
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We routinely deal with oil, natural gas oil and other petroleum products. Hydrocarbons or other hazardous substances or wastes may have been disposed or released on, under or from properties used by us to provide contract operations services or inactive compression storage or on or under other locations where such substances or wastes have been taken for disposal. These properties may be subject to investigatory, remediation and monitoring requirements under environmental laws and regulations.
The modification or interpretation of existing environmental laws or regulations, the more vigorous enforcement of existing environmental laws or regulations, or the adoption of new environmental laws or regulations may also negatively impact oil and natural gas exploration and production, gathering and pipeline companies, including our customers, which in turn could have a negative impact on us.
Climate change legislation, and regulatory initiatives could result in increased compliance costs.
Climate change legislation andregulatoryinitiatives may occur from avarietyofsources, includinginternational, national, regional and state levels of government and associated administrative bodies, seeking to restrict or regulate emissions of greenhousegases,suchascarbondioxideandmethane.Attheinternationallevel,theParisAgreement,whichwentintoeffectin November2016,seekstocombatclimatechangethroughtheestablishmentofindividually–determined GHGemissions reductiongoals.U.S.climatechangestrategyandimplementationofthatstrategythroughlegislationandregulationmaychange fromoneadministration tothenext,asPresident Bidenhasrecently recommitted theU.S.totheParisAgreement afterhis predecessor withdrewtheU.S.fromtheagreement. Giventhisuncertainty, U.S.companies mayneedtoremain prepared to complywithrequirementsarisingfromparticipationintheParisAgreementgoingforward.Ithasbecomeincreasinglylikelythat the U.S. willdevelop federal climate legislation in addition to existing energy legislation and other initiativesrelevant to GHGemissionsissues.ManyU.S.states,eitherindividuallyorthroughmulti–stateregionalinitiatives,havebegunto addressGHG emissions, primarilythroughtheplanneddevelopment ofemissioninventoriesorregionalGHG capandtradeprograms.Althoughmostofthestate–levelinitiativeshavetodatebeenfocusedonlargesourcesofGHG emissions, suchaselectricpowerplants,itispossiblethatsmallersourcessuchasournaturalgas–powered compressors couldbecomesubjecttoGHG–relatedregulation.Dependingontheparticularprogram,wecouldberequiredtocontrol emissionsortopurchaseandsurrenderallowancesforGHG emissionsresultingfromouroperations.
Thelegislative landscapecontinuestochange andtobemetwithlegalchallengeswithrespect toclimate–related lawsand regulations, makingitdifficulttopredictwithcertainty theultimateimpacttheywillhave on usintheaggregate. AlthoughitisnotcurrentlypossibletopredicthowanyproposedorfutureGHG legislationorregulationpromulgated attheinternational,national,stateorlocallevelswillimpactourbusiness,anyregulationofGHG emissionsthatmay beimposedinareasinwhichweconductbusinesscouldresultinincreasedcompliancecosts,additionaloperatingrestrictionsor reduceddemand for our services, and could have amaterial adverse effect onour business, financial condition, results of operationsandcashflows.
Additionally, in March 2022, the SEC proposed new rules relating to the disclosure of a range of climate–related data risks and opportunities, including financial impacts, physical and transition risks, related governance and strategy and GHG emissions, for certain public companies. We are currently assessing this rule but at this time we cannot predict the ultimate impact of the rule on our business or those of our customers. The SEC originally planned to issue a final rule by October 2022, but most commentators now expect a final rule to be issued in early 2023. To the extent this rule is finalized as proposed, we or our customers could incur increased costs related to the assessment and disclosure of climate-related risks and certain emissions metrics. In addition, enhanced climate disclosure requirements could accelerate the trend of certain stakeholders and lenders restricting or seeking more stringent conditions with respect to their investments in certain carbon intensive sectors.
In sum, any legislation, regulatory programs or social pressures related to climate change could increase our costs and require substantial capital, compliance, operating and maintenance costs, reduce demand for our services and reduce our access to financial markets. Current, as well as potential future, laws and regulations that limit GHG emissions or that otherwise promote the use of renewable energy over fossil fuel energy sources could increase the cost of our midstream services and, thereby, further reduce demand and adversely affect our sales volumes, revenues and margins.
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A climate–related decrease in demand for oil and natural gas could negatively affect our business.
Supply and demand for oil and natural gas is dependent upon a variety of factors, many of which are beyond our control. These factors include, among others, the potential adoption of new government regulations, including those related to fuel conservation measures and climate change regulations, technological advances in fuel economy and energy generation devices. For example, legislative, regulatory or executive actions intended to reduce emissions of GHGs could increase the cost of consuming crude oil and natural gas, thereby potentially causing a reduction in the demand for such products. A broader transition to alternative fuels or energy sources, whether resulting from potential new government regulation, carbon taxes or consumer preferences could result in decreased demand for crude oil, natural gas and NGLs. Any decrease in demand for these products could consequently reduce demand for our services and could have a negative effect on our business.
Also, recent activism directed at shifting funding away from companies with energy-related assets could result in a reduction of funding for the energy sector overall, which could have an adverse effect on our ability to obtain external financing as well as negatively affect the cost of, and terms for, financing to fund capital expenditures or other aspects of our business.
Climate change may increase the frequency and severity of weather events that could result in severe personal injury, property and environmental damage, which could curtail our or our customers’ operations and otherwise materially adversely affect our cash flows.
Some scientists have concluded that increasing concentrations of GHG in the Earth’s atmosphere may produce climate changes that have significant weather–related effects, such as increased frequency and severity of storms, droughts, floods and other climatic events. If any of those effects were to occur, they could have an adverse effect on our assets and operations, including damages to our or our customers’ facilities and assets from powerful wind or rising waters. We may experience increased insurance costs, or difficulty obtaining adequate insurance coverage, for our assets in areas subject to more frequent severe weather. We may not be able to recoup these increased costs through the rates we charge our customers. Extreme weather events could cause damage to property or facilities that could exceed our insurance coverage and our business, financial condition and results of operations could be adversely affected.
Another possible consequence of climate change is increased volatility in seasonal temperatures. The market for natural gas and natural gas liquids is generally impacted by periods of colder weather and warmer weather, so any changes in climate could affect the market for those fuels, and thus demand for our services. Despite the use of the term “global warming” as a shorthand for climate change, some studies indicate that climate change could cause some areas to experience temperatures substantially colder than their historical averages. As a result, it is difficult to predict how the market for our services could be affected by increased temperature volatility.
Increased environmental, social and governance scrutiny and changing expectations from stakeholders may impose additional costs or additional risks.
In recent years, increasing attention has been given to corporate activities related to ESG matters. A number of advocacy groups, both domestically and internationally, have campaigned for governmental and private action to promote change at public companies related to ESG matters, including increasing attention and demands for action related to climate change, promoting the use of substitutes to fossil fuel products and encouraging the divestment of companies in the fossil fuel industry. Companies which do not adapt to or comply with expectations and standards on ESG matters, as they continue to evolve, or which are perceived to have not responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, may suffer from reputational damage and the business, financial condition and/or stock price of such a company could be materially and adversely affected.
Our operations, projects and growth opportunities require us to have strong relationships with various key stakeholders, including our shareholders, employees, suppliers, customers, local communities and others. We may face pressures from stakeholders, many of whom are increasingly focused on climate change, to prioritize sustainable energy practices, reduce our carbon footprint and promote sustainability while at the same time remaining a successfully operating public company. If we do not successfully manage expectations across these varied stakeholder interests, it
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could erode our stakeholder trust and thereby affect our brand and reputation. Such erosion of confidence could negatively impact our business through decreased demand and growth opportunities, delays in projects, increased legal action and regulatory oversight, adverse press coverage and other adverse public statements, difficulty hiring and retaining top talent, difficulty obtaining necessary approvals and permits from governments and regulatory agencies on a timely basis and on acceptable terms, and difficulty securing investors and access to capital. The occurrence of any of the foregoing could have a material adverse effect on our business and financial condition, results of operations and cash flows.
None.
The following table describes the material facilities that we owned or leased as ofat December 31, 2017:
| | | | | | | |
Location | Status | Square Feet | Use by Segment | ||||
Houston, Texas | Leased | 75,000 | Corporate office — Contract Operations and Aftermarket Services | ||||
Brookwood, Alabama | | Leased | | 14,000 | | Contract Operations and Aftermarket Services | |
Bakersfield, California | | Leased | | 5,250 | | Aftermarket Services | |
Greeley, Colorado | | Leased | | 10,000 | | Contract | |
Broussard, Louisiana | Owned | 89,000 | Aftermarket Services | ||||
Houma, Louisiana | Owned | 60,000 | Contract | ||||
Gaylord, Michigan | Leased | 13,000 | Contract | ||||
Carlsbad, New Mexico | | Leased | | 11,200 | | Contract | |
Farmington, New Mexico | Owned | 62,000 | Aftermarket Services | ||||
Oklahoma City, Oklahoma | Leased | 41,000 | Contract | ||||
Waynoka, Oklahoma | | Owned | | 13,000 | | Contract | |
Yukon, Oklahoma | Owned | 85,000 | Contract | ||||
Tunkhannock, Pennsylvania | | Leased | | 9,000 | | Contract | |
West Alexander, Pennsylvania | | Leased | | 15,000 | | Contract | |
Asherton, Texas | Leased | 9,000 | Contract | ||||
Big Lake, Texas | | Leased | | 12,000 | | Contract | |
Brenham, Texas | Owned | 10,000 | Contract | ||||
Cleburne, Texas | | Leased | | 8,500 | | Contract | |
Bridgeport, Texas | | Leased | | 12,000 | | Contract Operations and Aftermarket Services | |
Cotulla, Texas | Leased | 10,000 | Contract Operations and Aftermarket Services | ||||
Kenedy, Texas | | Leased | | 11,000 | | Contract Operations and Aftermarket Services | |
Marshall, Texas | Leased | 11,000 | Contract Operations and Aftermarket Services | ||||
Midland, Texas | Owned | 51,000 | Contract Operations and Aftermarket Services | ||||
Pecos, Texas | Leased | 10,000 | Contract Operations and Aftermarket Services | ||||
Victoria, Texas | Owned | 23,000 | Contract Operations and Aftermarket Services | ||||
Victoria, Texas | Owned | 55,000 | Contract Operations and Aftermarket Services | ||||
Zapata, Texas | Leased | 23,500 | Contract Operations and Aftermarket Services | ||||
Evansville, Wyoming | Leased | 15,000 | Contract Operations and Aftermarket Services | ||||
Rock Springs, Wyoming | Leased | 9,000 | Contract |
Our executive office is located at 9807 Katy Freeway, Suite 100, Houston, Texas 77024 and our telephone number is (281) 836-8000.
In the ordinary course of business, we are also involved in various other pending or threatened legal actions. While management iswe are unable to predict the ultimate outcome of these actions, it believeswe believe that any ultimate liability arising from any of these other
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actions will not have a material adverse effect on our consolidated financial position, results of operations or cash flows, including our ability to pay dividends. 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 pay dividends.
Not applicable.
PART II
ITEM 5. Market for Registrant’s MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol “AROC.” The following table sets forth the range of high and low sale prices for our common stock for the periods indicated.
Price Range | |||||||
High | Low | ||||||
Year Ended December 31, 2016 | |||||||
First Quarter | $ | 8.18 | $ | 3.41 | |||
Second Quarter | 10.13 | 5.60 | |||||
Third Quarter | 13.18 | 8.28 | |||||
Fourth Quarter | 14.90 | 10.80 | |||||
Year Ended December 31, 2017 | |||||||
First Quarter | $ | 16.40 | $ | 11.56 | |||
Second Quarter | 13.65 | 9.60 | |||||
Third Quarter | 12.85 | 8.30 | |||||
Fourth Quarter | 13.01 | 9.25 |
The performance graph below shows the cumulative total stockholder return on our common stock compared with the S&P 500, AMNAX and AMZ indices over the five–year period beginning on December 31, 2017. The results are based on an investment of $100 in each of our common stock, the S&P 500, the AMNAX and the AMZ. The graph assumes reinvestment of dividends and adjusts all closing prices and dividends for stock splits.
Comparison of Five Year Cumulative Total Return
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this 2022 Form 10–K into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that we specifically incorporate this information by reference, and shall not otherwise be deemed filed under those Acts.
32
Holders
As of February 15, 2018,2023, there were approximately 1,1441,700 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by banks, brokers and other nominees.
Declaration Date | Payment Date | Dividends per Common Share | Total Dividends (in thousands) | |||||||
January 26, 2016 | February 16, 2016 | $ | 0.1875 | $ | 13,052 | |||||
May 2, 2016 | May 18, 2016 | 0.0950 | 6,711 | |||||||
July 27, 2016 | August 16, 2016 | 0.0950 | 6,698 | |||||||
October 31, 2016 | November 17, 2016 | 0.1200 | 8,459 | |||||||
January 19, 2017 | February 15, 2017 | 0.1200 | 8,458 | |||||||
April 26, 2017 | May 16, 2017 | 0.1200 | 8,534 | |||||||
July 26, 2017 | August 15, 2017 | 0.1200 | 8,536 | |||||||
October 20, 2017 | November 15, 2017 | 0.1200 | 8,536 |
Securities Authorized for Issuance under Equity Compensation Plans
For disclosures regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12 (“Security12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”) of this
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Purchases of Equity Securities
The following table summarizes our repurchasespurchases of equity securities during the three months ended December 31, 2017:
| | | | | | | | | |
| | | | | | | | | Maximum |
| | | | | | | | | Number of Shares |
| | | | | | | Total Number of | | That May Yet be |
| | | | Average | | Shares Purchased | | Purchased Under | |
| | Total Number | | Price | | as Part of Publicly | | the Publicly | |
| | of Shares | | Paid per | | Announced Plans | | Announced Plans | |
|
| Purchased (1) |
| Share |
| or Programs |
| or Programs | |
October 1, 2022 — October 31, 2022 | | — | | $ | — | | N/A | | N/A |
November 1, 2022 — November 30, 2022 |
| 6,682 | |
| 7.60 |
| N/A |
| N/A |
December 1, 2022 — December 31, 2022 |
| — | |
| — |
| N/A |
| N/A |
Total |
| 6,682 | | | 7.60 |
| N/A |
| N/A |
Period | Total Number of Shares Repurchased (1) | Average Price Paid Per Unit | Total Number of Shares Purchased as Part of Publicly-Announced Plans or Programs | Maximum Number of Shares yet to be Purchased Under the Publicly-Announced Plans or Programs | |||||||
October 1, 2017- October 31, 2017 | — | $ | — | N/A | N/A | ||||||
November 1, 2017 - November 30, 2017 | 43,788 | 10.74 | N/A | N/A | |||||||
December 1, 2017 - December 31, 2017 | 11,040 | 9.90 | N/A | N/A | |||||||
Total | 54,828 | $ | 10.57 | N/A | N/A |
(1) | |
Represents shares withheld to satisfy employees’ tax withholding obligations in connection with the vesting of restricted stock awards during the period. |
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of Contents
This section primarily discusses 2022 and 2021 items and comparisons between these years. For a discussion of changes from 2020 to 2021 and other financial information should be read together with Management’srelated to 2020, refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations” of our Annual Report on Form 10–K for the year ended December 31, 2021 filed with the SEC on February 23, 2022.
33
Overview
We are an energy infrastructure company with a pure–play focus on midstream natural gas compression. We are the leading provider of natural gas compression services to customers in the oil and natural gas industry throughout the U.S., in terms of total compression fleet horsepower, and a leading supplier of aftermarket services to customers that own compression equipment in the U.S. Our business supports a must–run service that is essential to the production, processing, transportation and storage of natural gas. The natural gas that we help transport satisfies demand from electricity generation, heating and cooking and the Financial Statements containedindustrial and manufacturing sectors. Our geographic diversity, technically experienced personnel and large fleet of natural gas compression equipment enable us to provide reliable contract operations services to our customers.
We operate in this 2017 Form 10-K (in thousands, except per share data).
Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Statement of Operations Data: | |||||||||||||||||||
Revenue | $ | 794,655 | $ | 807,069 | $ | 998,108 | $ | 959,153 | $ | 862,772 | |||||||||
Gross margin(1) | 375,733 | 427,150 | 503,062 | 454,760 | 391,794 | ||||||||||||||
Selling, general and administrative | 111,483 | 114,470 | 131,919 | 132,651 | 118,851 | ||||||||||||||
Depreciation and amortization | 188,563 | 208,986 | 229,127 | 212,268 | 187,476 | ||||||||||||||
Long-lived asset impairment(2) | 29,142 | 87,435 | 124,979 | 42,828 | 16,696 | ||||||||||||||
Restatement and other charges(3) | 4,370 | 13,470 | — | — | — | ||||||||||||||
Restructuring and other charges(4) | 1,386 | 16,901 | 4,745 | 5,394 | — | ||||||||||||||
Goodwill impairment(5) | — | — | 3,738 | — | — | ||||||||||||||
Interest expense | 88,760 | 83,899 | 107,617 | 112,273 | 112,194 | ||||||||||||||
Debt extinguishment costs (6) | 291 | — | 9,201 | — | — | ||||||||||||||
Other income, net | (5,643 | ) | (8,590 | ) | (2,079 | ) | (5,475 | ) | (22,535 | ) | |||||||||
Provision for (benefit from) income taxes | (61,083 | ) | (24,604 | ) | 53,189 | (28,066 | ) | (17,840 | ) | ||||||||||
Income (loss) from continuing operations | 18,464 | (64,817 | ) | (159,374 | ) | (17,113 | ) | (3,048 | ) | ||||||||||
Net income (loss) from discontinued operations, net of tax(7) | (54 | ) | (426 | ) | 33,677 | 105,774 | 129,654 | ||||||||||||
Net income (loss) attributable to the noncontrolling interest | (543 | ) | (10,688 | ) | 6,852 | 27,716 | 32,578 | ||||||||||||
Net income (loss) attributable to Archrock stockholders | $ | 18,953 | $ | (54,555 | ) | $ | (132,549 | ) | $ | 60,945 | $ | 94,028 | |||||||
Income (loss) from continuing operations attributable to Archrock stockholders per common share: | |||||||||||||||||||
Basic and diluted | $ | 0.26 | $ | (0.79 | ) | $ | (2.44 | ) | $ | (0.68 | ) | $ | (0.55 | ) | |||||
Weighted average common shares outstanding used in income (loss) per common share: | |||||||||||||||||||
Basic | 69,552 | 68,993 | 68,433 | 66,234 | 64,454 | ||||||||||||||
Diluted | 69,644 | 68,993 | 68,433 | 66,234 | 64,454 | ||||||||||||||
Dividends declared and paid per common share | $ | 0.4800 | $ | 0.4975 | $ | 0.6000 | $ | 0.6000 | $ | — | |||||||||
Other Financial Data: | |||||||||||||||||||
Cash capital expenditures: | |||||||||||||||||||
Growth(8) | $ | 172,453 | $ | 78,646 | $ | 154,500 | $ | 291,781 | $ | 194,727 | |||||||||
Maintenance(9) | 35,678 | 33,647 | 75,044 | 71,767 | 73,606 | ||||||||||||||
Other | 13,562 | 5,279 | 26,598 | 20,293 | 23,197 | ||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Cash and cash equivalents | $ | 10,536 | $ | 3,134 | $ | 1,563 | $ | 378 | $ | 471 | |||||||||
Working capital(10) | 90,307 | 109,157 | 150,199 | 508,531 | 434,577 | ||||||||||||||
Property, plant and equipment, net | 2,076,927 | 2,079,099 | 2,267,788 | 2,372,081 | 1,855,076 | ||||||||||||||
Total assets | 2,408,007 | 2,414,779 | 2,695,180 | 4,875,835 | 4,204,409 | ||||||||||||||
Long-term debt | 1,417,053 | 1,441,724 | 1,576,882 | 2,008,311 | 1,486,605 | ||||||||||||||
Total Archrock stockholders’ equity | 777,049 | 718,966 | 733,910 | 1,710,021 | 1,609,571 |
Significant 2022 Transactions
During the year ended December 31, 2022, we completed sales of certain contract operations customer service agreements and approximately 770 compressors, comprising approximately 172,000 horsepower, used to provide compression services under those agreements, as well as other assets used to support the operations. We recorded an aggregate gain on the sales of $28.1 million. See Note 3 to our Financial Statements for additional information about these dispositions.
In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions detection, monitoring and management. As of December 31, 2022, we own 22.7% of ECOTEC. We acquired the remaining equity interest of 2.3% in January 2023. See Note 11 to our Financial Statements for additional information about this investment.
Trends and Outlook
The key driver of our business is the production of U.S. oil and natural gas. Approximately 79% of our operating fleet is deployed for midstream natural gas gathering applications, with the remaining fleet being used in gas lift applications to enhance oil production. As our business is so closely aligned with production and is typically less directly impacted by commodity prices, we are not exposed to the volatility often faced in shorter–cycle oil field service businesses.
Domestic natural gas production generally occurs in either primarily natural gas basins, such as the Marcellus, Utica and Haynesville Shales, or in basins where natural gas is produced alongside oil, also known as “associated” gas, such as the Permian and Delaware Basins, Eagle Ford and the Mid–Continent. Relative stability in commodity prices over much of the past decade encouraged investment in domestic exploration and production and midstream infrastructure across the energy industry, particularly in the low–cost basins characterized by oil and associated natural gas production. The development of these basins producing both commodities has created additional incremental demand for natural gas compression over the recent past as it is a critical method to transport associated gas volumes or enhance oil production through gas lift.
Current Trends
According to the EIA Outlook, average U.S. oil and dry natural gas and production were as follows:
| | | | | | |
|
| Year Ended December 31, | ||||
| | 2022 |
| 2021 |
| 2020 |
Average dry natural gas production (Bcf/d) |
| 98.0 |
| 93.6 |
| 91.3 |
Average oil production (MMb/d) |
| 11.9 |
| 11.2 |
| 11.3 |
Looking back to 2021, the economic recovery from the effects of the COVID–19 pandemic brought a rebound in energy demand around the globe; however, producers limited drilling and completion activity to achieve maintenance levels of production and cash flows in the course of the pandemic. In 2022, the rebound in energy demand triggered supply constraints and price spikes for multiple commodities. That, coupled with the conflict in Ukraine, increased market uncertainty and price spikes as the market and consumers balance supply security and affordability. Even given this uncertainty in the market, oil and natural gas production in 2022 continued to rebound, particularly natural gas production. The increases in production in 2022 resulted in strong demand for our compression services and we increased our investment in new fleet units. Our contract operations revenue and total operating horsepower increased 5% and 6%, respectively in 2022. Similar increases in demand in 2022 were seen in our aftermarket services business, where we experienced an increase of 26% in aftermarket services revenue in 2022.
Outlook
The EIA Outlook forecasts the following year–over–year changes:
| | | | | | |
| | Year Ended December 31, | ||||
| | 2023 | | 2024 | | |
U.S. dry natural gas production |
| 2 | % | | 2 | % |
U.S. oil production |
| 5 | % | | 3 | % |
U.S. natural gas domestic consumption | | (2) | % | | (1) | % |
Liquefied natural gas exports |
| 13 | % | | 4 | % |
The events of 2022 drove broad realization that a more diverse energy mix is needed to satisfy global energy demand and preserve energy security, making it a rewarding time to be in the business of transporting U.S. natural gas. The EIA Outlook expects natural gas production to continue to increase primarily in the Permian region in West Texas and Southeast New Mexico and in the Haynesville region in Louisiana and East Texas due to the expected completion of new pipeline infrastructure expansions in 2023 and 2024. Although the EIA expects natural gas production to increase, natural gas consumption is expected to decrease slightly, reflecting a decrease in the usage of natural gas in the electric power generation sector, as a result of increased power generation from renewables, partially offset by increased LNG exports and exports of natural gas via pipeline to Mexico.
We believe the outlook for the energy industry in the U.S. is positive. While we anticipate that the combination of commodity prices and demand may likely have a positive impact on activity levels in both the upstream and midstream sectors, we cannot predict the ultimate magnitude of that impact on our business and expect it to be varied across our operations, depending on the region, customer, nature of our services, contract term and other factors. However, we continue to believe that overall the long–term demand for our compression services will continue given the necessity of compression in facilitating the transportation and processing of natural gas.
Regarding our aftermarket services business, the base of owned compression in the U.S. has increased over the past several years, which we believe will help sustain our aftermarket services business over the long term.
35
Key Challenges and Uncertainties
In addition to general market conditions in the oil and natural gas industry and competition in the natural gas compression industry, we believe the following represent the key challenges and uncertainties we will face in the future.
Capital Requirements and the Availability of External Sources of Capital. We have funded a significant portion of our capital expenditures and acquisitions through borrowings under our Credit Facility and have issued a substantial amount of debt, which could limit our ability to fund future planned capital expenditures. Current conditions could limit our ability to access the debt and equity markets to raise capital on affordable terms in 2023 and beyond. If we are not successful in raising capital within the time period required or at all, we may not be able to fund these capital expenditures, which could impair our ability to grow or maintain our business.
Cost Management. In order to improve our operations and further reduce operating expenses, we are investing significant resources into a process and technology transformation project that has, among other things, replaced our existing ERP, supply chain and inventory management systems and expanded the remote monitoring capabilities of our compression fleet. Cost management continues to be challenging, however, and there is no guarantee that our efforts will result in a reduction in our operating expenses. Natural gas production growth and resulting demand for our services could cause us to experience increased operating expenses as we hire employees and incur additional expenses needed to support the rebound in market demand.
Further, we depend on suppliers for the materials, parts, equipment and lube oil necessary to our operations, which exposes us to volatility in prices. Significant price increases for these inputs could adversely affect our operating profits. Supply chain disruptions could also adversely affect our ability to obtain, or increase the cost of, such items. While we generally attempt to mitigate the impact of increased prices through strategic purchasing decisions, diversification of our supplier base, where possible, and the passing along of increased costs to customers, there may be a time delay between the increased commodity prices and the ability to increase the price of our services.
Labor. We believe that our ability to hire, train and retain qualified personnel will continue to be important. Although we have been able to historically satisfy our personnel needs, retaining employees in our industry continues to be a challenge. Our ability to grow and to continue our current level of service to our customers will depend in part on our success in hiring, training and retaining our employees. Further, the cost of labor has increased and may continue to increase in the future with increases in demand, which will require us to incur additional costs.
Increasing customer focus on free cash flow. Many of our customers have begun transitioning their business model to focus on sustainable free cash flow generation rather than growth, and the COVID–19 pandemic further fueled this change in focus. We expect this transition to have a positive impact on the industry in the long term, as we anticipate the change will reduce volatility through cycles and improve the financial strength of our customers. In the near term, however, we expect this transition to result in a modest natural gas production growth rate, to which demand for our products and services is closely aligned.
Demand for natural gas-powered compression. Demand for our services is dependent on the demand for natural gas in the markets we serve. Although the EIA currently forecasts natural gas demand will grow through 2050, technological advances and accelerated adoption of renewable sources of energy could reduce demand for natural gas in our markets and have an adverse effect on our business. In addition, increased focus of our customers on reducing emissions from, or the use of, combustion engines in compression could increase demand for electric motor-driven compressors or require us to make modifications to our existing natural gas-powered units.
36
Operating Highlights
| | | | | | | |
| | Year Ended December 31, | | ||||
(horsepower in thousands) | | 2022 | | 2021 | | 2020 | |
Total available horsepower (at period end)(1) | | 3,726 |
| 3,878 |
| 4,120 | |
Total operating horsepower (at period end)(2) | | 3,448 |
| 3,247 |
| 3,388 | |
Average operating horsepower | | 3,328 |
| 3,282 |
| 3,657 | |
Horsepower utilization: | |
|
|
|
|
| |
Spot (at period end) | | 93 | % | 84 | % | 82 | % |
Average | | 87 | % | 82 | % | 86 | % |
(1) | |
(2) | |
Non–GAAP Financial Measures
Management uses a variety of financial and operating metrics to analyze our performance. These metrics are significant factors in assessing our operating results and profitability and include the non-GAAPnon–GAAP financial measure of gross margin.
We define gross margin as total revenue less cost of sales (excluding depreciation and amortization). Gross margin is included as a supplemental disclosure because it is a primary measure used by our management to evaluate the results of revenue and cost of sales (excluding depreciation and amortization), which are key components of our operations. We believe gross margin is important because it focuses on the current operating performance of our operations and excludes the impact of the prior historical costs of the assets acquired or constructed that are utilized in those operations, the indirect costs associated with our SG&A activities, the impact of our financing methods and income taxes. DepreciationIn addition, depreciation and amortization may not accurately reflect the costs required to maintain and replenish the operational usage of our assets and therefore may not portray the costs of current operating activity. As an indicator of our operating performance, gross margin should not be considered an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP. Our gross margin may not be comparable to a similarly similarly–titled measure of another companyother entities because other entities may not calculate gross margin in the same manner.
Gross margin has certain material limitations associated with its use as compared to net income (loss). These limitations are primarily due to the exclusion of interest expense,SG&A, depreciation and amortization, SG&Aimpairments, restructuring charges, interest expense, impairment charges, restatement and other charges, restructuring and other charges, debt extinguishment costs,loss, gain on sale of assets, net, other (income) expense, net, and provision for (benefit from) income taxes and other (income) loss, net.taxes. Because we intend to finance a portion of our operations through borrowings, interest expense is a necessary element of our costs and our ability to generate revenue. Additionally, because we use capital assets, depreciation expense is a necessary element of our costs and our ability to generate revenue and SG&A expense is necessary to support our operations and required corporate activities. To compensate for these limitations, management uses this non-GAAPnon–GAAP measure as a supplemental measure to other GAAP results to provide a more complete understanding of our performance.
37
The following table reconcilesreconciliation of net income (loss) to gross margin (in thousands):
Year Ended December 31, | |||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
Net income (loss) | $ | 18,410 | $ | (65,243 | ) | $ | (125,697 | ) | $ | 88,661 | $ | 126,606 | |||||||
Selling, general and administrative | 111,483 | 114,470 | 131,919 | 132,651 | 118,851 | ||||||||||||||
Depreciation and amortization | 188,563 | 208,986 | 229,127 | 212,268 | 187,476 | ||||||||||||||
Long-lived asset impairment | 29,142 | 87,435 | 124,979 | 42,828 | 16,696 | ||||||||||||||
Restatement and other charges | 4,370 | 13,470 | — | — | — | ||||||||||||||
Restructuring and other charges | 1,386 | 16,901 | 4,745 | 5,394 | — | ||||||||||||||
Goodwill impairment | — | — | 3,738 | — | — | ||||||||||||||
Interest expense | 88,760 | 83,899 | 107,617 | 112,273 | 112,194 | ||||||||||||||
Debt extinguishment costs | 291 | — | 9,201 | — | — | ||||||||||||||
Other income, net | (5,643 | ) | (8,590 | ) | (2,079 | ) | (5,475 | ) | (22,535 | ) | |||||||||
Provision for (benefit from) income taxes | (61,083 | ) | (24,604 | ) | 53,189 | (28,066 | ) | (17,840 | ) | ||||||||||
(Income) loss from discontinued operations, net of tax | 54 | 426 | (33,677 | ) | (105,774 | ) | (129,654 | ) | |||||||||||
Gross margin | $ | 375,733 | $ | 427,150 | $ | 503,062 | $ | 454,760 | $ | 391,794 |
Year Ended December 31, | ||||||||
2017 | 2016 | 2015 | ||||||
Total Available Horsepower (at period end)(1) | 3,847 | 3,819 | 4,011 | |||||
Total Operating Horsepower (at period end)(2) | 3,253 | 3,115 | 3,493 | |||||
Average Operating Horsepower | 3,152 | 3,234 | 3,620 | |||||
Horsepower Utilization: | ||||||||
Spot (at period end) | 85 | % | 82 | % | 87 | % | ||
Average | 82 | % | 81 | % | 85 | % |
| | | | | | | | | |
| | Year Ended December 31, | |||||||
(in thousands) | | 2022 |
| 2021 |
| 2020 | |||
Net income (loss) | | $ | 44,296 | | $ | 28,217 | | $ | (68,445) |
Selling, general and administrative | |
| 117,184 | |
| 107,167 | |
| 105,100 |
Depreciation and amortization | |
| 164,259 | |
| 178,946 | |
| 193,138 |
Long-lived and other asset impairment | |
| 21,442 | |
| 21,397 | |
| 79,556 |
Goodwill impairment | | | — | | | — | | | 99,830 |
Restructuring charges | | | — | | | 2,903 | | | 8,450 |
Interest expense | |
| 101,259 | |
| 108,135 | |
| 105,716 |
Debt extinguishment loss | | | — | | | — | | | 3,971 |
Gain on sale of assets, net | | | (40,494) | | | (30,258) | | | (10,643) |
Other expense (income), net | |
| 1,845 | |
| (4,707) | |
| (1,359) |
Provision for (benefit from) income taxes | |
| 16,293 | |
| 10,744 | |
| (17,537) |
Gross margin | | $ | 426,084 | | $ | 422,544 | | $ | 497,777 |
RESULTS OF OPERATIONS
Summary of Results
Revenue was $794.7 million, $807.1$845.6 million and $998.1$781.5 million during the years ended December 31, 2017, December 31, 20162022 and December 31, 2015,2021, respectively.
Net income (loss) attributable to Archrock stockholders.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Contract Operations
| | | | | | | | | |
| | | | | | ||||
| | Year Ended December 31, | | Increase | | ||||
(dollars in thousands) | | 2022 |
| 2021 |
| (Decrease) | | ||
Revenue | | $ | 677,801 | | $ | 648,311 | | 5 | % |
Cost of sales (excluding depreciation and amortization) | |
| 278,898 | |
| 244,486 | | 14 | % |
Gross margin | | $ | 398,903 | | $ | 403,825 | | (1) | % |
Gross margin percentage (1) | |
| 59 | % |
| 62 | % | (3) | % |
(1) | Defined as gross margin divided by revenue. |
Revenue in our contract operations business increased primarily due to higher rates and an increase in average operating horsepower in response to improving market conditions, partially offset by the impact of the strategic dispositions in 2022 and 2021.
38
Despite the increase in benefit from income taxes and decreases in long-lived asset impairment, depreciation and amortization, restructuring and other charges and restatement and other charges, partially offset byrevenues, the decrease in gross margin in our contract operations segment,business reflects the impact of a decrease in the net loss attributable to noncontrolling interest and an increase in interest expense.
Year Ended December 31, | Increase | |||||||||
2017 | 2016 | (Decrease) | ||||||||
Revenue | $ | 610,921 | $ | 647,828 | (6 | )% | ||||
Cost of sales (excluding depreciation and amortization) | 263,005 | 247,040 | 6 | % | ||||||
Gross margin | $ | 347,916 | $ | 400,788 | (13 | )% | ||||
Gross margin percentage(1) | 57 | % | 62 | % | (5 | )% |
Aftermarket Services
| | | | | | | | | |
| | |
| | | ||||
| | Year Ended December 31, | | Increase | | ||||
(dollars in thousands) | | 2022 |
| 2021 |
| (Decrease) | | ||
Revenue | | $ | 167,767 | | $ | 133,150 |
| 26 | % |
Cost of sales (excluding depreciation and amortization) | |
| 140,586 | |
| 114,431 |
| 23 | % |
Gross margin | | $ | 27,181 | | $ | 18,719 |
| 45 | % |
Gross margin percentage | |
| 16 | % |
| 14 | % | 2 | % |
Revenue in thousands)
Year Ended December 31, | Increase | |||||||||
2017 | 2016 | (Decrease) | ||||||||
Revenue | $ | 183,734 | $ | 159,241 | 15 | % | ||||
Cost of sales (excluding depreciation and amortization) | 155,917 | 132,879 | 17 | % | ||||||
Gross margin | $ | 27,817 | $ | 26,362 | 6 | % | ||||
Gross margin percentage | 15 | % | 17 | % | (2 | )% |
Gross margin increased during the year ended December 31, 2017 compared to the year ended December 31, 2016 primarily due to the increase in revenue mentioned above, partially offset by anthe increase in cost of sales. The increase in cost of sales resulting fromwas primarily driven by increases in the cost associated with parts and labor.
Costs and Expenses
| | | | | | |
| | Year Ended December 31, | ||||
(in thousands) |
| 2022 |
| 2021 | ||
Selling, general and administrative |
| $ | 117,184 | | $ | 107,167 |
Depreciation and amortization |
|
| 164,259 | |
| 178,946 |
Long-lived and other asset impairment |
|
| 21,442 | |
| 21,397 |
Restructuring charges | | | — | | | 2,903 |
Interest expense |
|
| 101,259 | |
| 108,135 |
Gain on sale of assets, net | | | (40,494) | | | (30,258) |
Other expense (income), net | | | 1,845 | | | (4,707) |
Selling, general and administrative. The increase in service and part sales activities and other operating costs of providing our aftermarket services.
Year Ended December 31, | Increase | |||||||||
2017 | 2016 | (Decrease) | ||||||||
Selling, general and administrative | $ | 111,483 | $ | 114,470 | (3 | )% | ||||
Depreciation and amortization | 188,563 | 208,986 | (10 | )% | ||||||
Long-lived asset impairment | 29,142 | 87,435 | (67 | )% | ||||||
Restatement and other charges | 4,370 | 13,470 | (68 | )% | ||||||
Restructuring and other charges | 1,386 | 16,901 | (92 | )% | ||||||
Interest expense | 88,760 | 83,899 | 6 | % | ||||||
Other income, net | (5,643 | ) | (8,590 | ) | (34 | )% |
Depreciation and amortization.
The decrease in depreciation and amortizationLong–lived and other asset impairment.
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The following table presents the results of our compression fleet impairment review, as recorded in our contract operations segment,segment:
| | | | | | |
| | Year Ended December 31, | ||||
(dollars in thousands) | | 2022 |
| 2021 | ||
Idle compressors retired from the active fleet | | | 145 |
| | 230 |
Horsepower of idle compressors retired from the active fleet | | | 100,000 |
| | 85,000 |
Impairment recorded on idle compressors retired from the active fleet | | $ | 21,431 | | $ | 21,208 |
Restructuring charges. Restructuring charges recorded in 2021 primarily related to reductions in headcount and costs to exit a facility no longer deemed economical for the years ended December 31, 2017 and 2016 (dollars in thousands):
Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Idle compressor units retired from the active fleet | 325 | 655 | |||||
Horsepower of idle compressor units retired from the active fleet | 100,000 | 262,000 | |||||
Impairment recorded on idle compressor units retired from the active fleet | $ | 26,287 | $ | 76,693 | |||
Additional impairment recorded on available-for-sale compressor units previously culled | $ | — | $ | 10,742 |
Interest expense.
Year Ended December 31, | Increase | |||||||||
2017 | 2016 | (Decrease) | ||||||||
Benefit from income taxes | $ | (61,083 | ) | $ | (24,604 | ) | 148 | % | ||
Effective tax rate | 143.3 | % | 27.5 | % | 116 | % |
Year Ended December 31, | Increase | |||||||||
2017 | 2016 | (Decrease) | ||||||||
Net loss attributable to the noncontrolling interest | $ | 543 | $ | 10,688 | (95 | )% |
Year Ended December 31, | Increase | |||||||||
2016 | 2015 | (Decrease) | ||||||||
Revenue | $ | 647,828 | $ | 781,166 | (17 | )% | ||||
Cost of sales (excluding depreciation and amortization) | 247,040 | 319,401 | (23 | )% | ||||||
Gross margin | $ | 400,788 | $ | 461,765 | (13 | )% | ||||
Gross margin percentage | 62 | % | 59 | % | 3 | % |
Year Ended December 31, | Increase | |||||||||
2016 | 2015 | (Decrease) | ||||||||
Revenue | $ | 159,241 | $ | 216,942 | (27 | )% | ||||
Cost of sales (excluding depreciation and amortization) | 132,879 | 175,645 | (24 | )% | ||||||
Gross margin | $ | 26,362 | $ | 41,297 | (36 | )% | ||||
Gross margin percentage | 17 | % | 19 | % | (2 | )% |
Year Ended December 31, | Increase | |||||||||
2016 | 2015 | (Decrease) | ||||||||
Selling, general and administrative | $ | 114,470 | $ | 131,919 | (13 | )% | ||||
Depreciation and amortization | 208,986 | 229,127 | (9 | )% | ||||||
Long-lived asset impairment | 87,435 | 124,979 | (30 | )% | ||||||
Restatement and other charges | 13,470 | — | n/a | |||||||
Restructuring and other charges | 16,901 | 4,745 | 256 | % | ||||||
Goodwill impairment | — | 3,738 | (100 | )% | ||||||
Interest expense | 83,899 | 107,617 | (22 | )% | ||||||
Debt extinguishment costs | — | 9,201 | (100 | )% | ||||||
Other income, net | (8,590 | ) | (2,079 | ) | 313 | % |
Year Ended December 31, | |||||||
2016 | 2015 | ||||||
Idle compressor units retired from the active fleet | 655 | 900 | |||||
Horsepower of idle compressor units retired from the active fleet | 262,000 | 371,000 | |||||
Impairment recorded on idle compressor units retired from the active fleet | $ | 76,693 | $ | 111,718 | |||
Additional impairment recorded on available-for-sale compressor units previously culled | $ | 10,742 | $ | 13,261 |
Gain on sale of assets, net. The net gain on sales of assets during 2022 was the result of $28.1 million of gains recognized on sales of certain contract operations customer service agreements and approximately 770 compressors and $12.4 million of gains recognized on other income,compression and transportation asset sales.
The net gain on the sales of assets during 2021 was primarily the result of $19.0 million of gains recognized on sales of certain contract operations customer service agreements and approximately 875 compressors, $9.3 million of gains recognized on other compression asset sales and $3.3 million of gains recognized on other transportation and shop asset sales during the year ended December 31, 2016 compared to the year ended December 31, 2015period.
Other expense (income), net.The change in other expense (income), net was primarily due to a $4.4$2.4 million increasedecrease in gain on saleinsurance proceeds related to damages to facilities and compressors caused by Hurricane Ida, a $1.9 million unrealized change in the fair value of property, plantour investment in an unconsolidated affiliate and equipment, a $2.9$0.9 million increasedecrease in indemnification income receivedexpense remitted pursuant to our tax matters agreement with Exterran Corporation, partially offset by a $0.6 million loss on non-cash consideration associated with the March 2016 Acquisition.
Provision for Income Taxes
Year Ended December 31, | Increase | |||||||||
2016 | 2015 | (Decrease) | ||||||||
Provision for (benefit from) income taxes | $ | (24,604 | ) | $ | 53,189 | (146 | )% | |||
Effective tax rate | 27.5 | % | (50.1 | )% | 77.6 | % |
| | | | | | | | | |
| | |
| | | ||||
| | Year Ended December 31, | | Increase | | ||||
(dollars in thousands) | | 2022 |
| 2021 |
| (Decrease) | | ||
Provision for income taxes | | $ | 16,293 | | $ | 10,744 |
| 52 | % |
Effective tax rate | |
| 27 | % |
| 28 | % | (1) | % |
The increase in our benefit fromthe provision for income taxes is primarily due to the tax effect of the increase in book income during the year ended December 31, 20162022 compared to the year ended December 31, 2015 was a result of a valuation allowance and write off of tax attributes recorded in 2015, which were not required in 2016. The benefit was further increased by the settlement of a state tax audit.
Year Ended December 31, | Increase (Decrease) | |||||||||
2016 | 2015 | |||||||||
Income (loss) from discontinued operations, net of tax | $ | (426 | ) | $ | 33,677 | (101 | )% |
Year Ended December 31, | Increase | |||||||||
2016 | 2015 | (Decrease) | ||||||||
Net (income) loss attributable to the noncontrolling interest | $ | 10,688 | $ | (6,852 | ) | (256 | )% |
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our ability to fund operations, finance capital expenditures and pay dividends depends on the levels of our operating cash flows and access to the capital and credit markets. Our primary sources of liquidity are cash flows generated from our operations and our borrowing availability under our Credit Facility and the Partnership Credit Facility.
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We may from time to time seek to retire or purchase our outstanding debt through cash purchases and/or exchanges for equity securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Cash Requirements
Our contract operations business is capital intensive, requiring significant investment to maintain and upgrade existing operations. Our capital spending is primarily dependent on the demand for our contract operations services and the availability of the type of compression equipment required for us to renderprovide those contract operations services to our customers. Our capital requirements have consisted primarily of, and we anticipate will continue to consist of, the following:
• | operating expenses, namely employee compensation and benefits, inventory and lube oil purchases; |
• | growth capital expenditures; |
• | maintenance capital expenditures; |
• | interest on our outstanding debt obligations; and |
• | dividend payments to our stockholders. |
Capital Expenditures
Growth Capital Expenditures. The majority of our growth capital expenditures are related to the acquisition cost of new compressors when our idle equipment cannot be reconfigured to economically fulfill a project’s requirements and the new compressor unitsis expected to generate economic returns that we add toexceed our fleet.cost of capital over the compressor’s expected useful life. In addition to the cost of newly newly–acquired compressor units,compressors, growth capital expenditures can also include the upgrading of major components on an existing compressor unitcompression package where the current configuration of the compressor unitcompression package is no longer in demand and the compressor is not likely to return to an operating status without the capital expenditures. These latter expenditures substantially modify the operating parameters of the compressor unitcompression package such that it can be used in applications for which it previously was not suited.
Growth capital expenditures were $146.3 million and $37.2 million during the years ended December 31, 2022 and 2021, respectively. The increase in growth capital expenditures from 2021 to 2022 was the result of increased investment in new compression equipment as a result of higher customer demand.
Maintenance Capital Expenditures. Maintenance capital expenditures are related to major overhauls of significant components of a compressor unit,compression package, such as the engine, compressor and cooler, which return the components to a like-newlike–new condition, but do not modify the applicationsapplication for which the compressor unitcompression package was designed.
Maintenance capital expenditures were $172.5 million, $78.6$84.2 million and $154.5$47.3 million during the years ended December 31, 2017, 20162022 and 2015,2021, respectively. The increase in growthmaintenance capital expenditures from 2021 to 2022 was the result of an increase in scheduled maintenance activities due to maintenance cycle requirements as well as additional make–ready investment as we return idle equipment to work to meet customer demand.
Projected Capital Expenditures. We currently plan to spend approximately $270.0 million to $295.0 million in capital expenditures during the year ended December 31, 20172023, primarily consisting of approximately $180.0 million to $200.0 million for growth capital expenditures and approximately $75.0 million to $80.0 million for maintenance capital expenditures. We anticipate increased 2023 capital expenditures, particularly growth capital expenditures, as compared to the year ended December 31, 2016 was primarily2022 due to increased investment in new compression equipment as a result of increasedhigher customer demanddemand.
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Dividends
On January 26, 2023, our Board of Directors declared a quarterly dividend of $0.15 per share of common stock, or approximately $23.6 million, which was paid on February 14, 2023 to stockholders of record at the close of business on February 7, 2023. Any future determinations to pay cash dividends to our stockholders will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, and credit and loan agreements in effect at that time and other factors deemed relevant by our Board of Directors.
Contractual Obligations
Our material contractual obligations as a result of improved market conditions. The decrease in growth capital expenditures during the year ended December 31, 2016 compared2022 consisted of the following:
• | Long–term debt of $1.5 billion, of which $1.3 billion is due in 2027 and 2028, with the remainder due in 2024; |
• | Estimated interest on our long–term debt of $444.0 million, consisting of annual payments of approximately $103.5 million in 2023, approximately $100.7 million in 2024, and approximately $84.4 million or less in 2025 through 2028; |
• | Purchase commitments of $210.7 million, of which $178.0 million is due in 2023, that primarily consist of commitments to purchase fleet assets and information technology–related costs; and |
• | Operating lease payments of $21.4 million that are spread relatively evenly in 2023 through 2032. |
In addition, we had $19.7 million of unrecognized tax benefits (including discontinued operations) recorded as liabilities related to the year endeduncertain tax positions and a liability of $2.1 million recorded for potential penalties and interest (including discontinued operations) related to these unrecognized tax benefits at December 31, 2015 was primarily due2022, which we are uncertain as to a decrease in investment in new compression equipment as a resultif or when such amounts may be settled.
Sources of our customers’ reduced capital spending as a result of the significant decline in oil and natural gas prices. We anticipate investing more capital in new fleet units in 2018 than we did in 2017 to take advantage of expected improvement of market conditions in 2018.
Revolving Credit Facility
During the years ended December 31, 2017, 20162022 and 2015,2021, our Credit Facility had an average daily balance of $235.4 million and $295.3 million, respectively. While maintenance capital expenditures remained relatively flat during the year ended December 31, 2017 compared to the year ended December 31, 2016, the decrease in maintenance capital expenditures during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily driven by our focus on disciplined capital spending in light of market conditions coupled with a decrease in average operating horsepower from 3.6 million during the year ended December 31, 2015 to 3.2 million during the year ended December 31, 2016. We intend to grow our business both organically and through third-party acquisitions. If we are successful in growing our business in the future, we would expect our maintenance capital expenditures to increase over the long term.
Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Credit Facility | |||||||
Weighted average annual interest rate (1) | 3.3 | % | 2.5 | % | |||
Average daily debt balance (in millions) | $ | 67.0 | $ | 130.7 | |||
Partnership Credit Facility (2) | |||||||
Weighted average annual interest rate (1) | 4.8 | % | 3.7 | % | |||
Average daily debt balance (in millions) | $ | 626.6 | $ | 723.3 |
Our $350.0 million revolving credit facilityCredit Facility matures in November 2020.2024 and has an aggregate revolving commitment of $750.0 million. Portions of the Credit Facility up to $50.0 million are available for the issuance of swing line loans and $40.0$50.0 million areis available for the issuance of letters of credit and swing line loans, respectively.credit. Subject to certain conditions, including approval by the lenders, the aggregate commitments under the Credit Facility may be increased by up to an additional $100.0 million.
Our Credit Facility agreement alsorequires that we meet certain financial ratios (see Note 14 to our Financial Statements) and contains various additional covenants including, but not limited to, mandatory prepayments from the net cash proceeds of certain asset transfers, restrictions on the use of proceeds from borrowings and limitations on the Partnership’sour 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. In addition, ifAs a result of the financial ratio requirements, $487.6 million of the $493.0 million of undrawn capacity was available for additional borrowings as of any date the Partnership has cash and cash equivalents (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 Partnership 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 Partnership Credit Facility. As of December 31, 2017, the Partnership was2022. We were in compliance with all other covenants under the Partnershipour Credit Facility.Facility agreement.
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Senior Notes
As of both December 31, 2022 and 2021, we had a principal balance of $1.3 billion of outstanding senior unsecured basis by allnotes that consisted of the Partnership’s existing subsidiaries (other than Archrock Partners Finance Corp., which is a co-issuerfollowing:
• | $800.0 million of 6.25% senior notes due in April 2028 and |
• | $500.0 million of 6.875% senior notes due in April 2027. |
See Note 14 to our Financial Statements for further details of these notes.
At–the–Market Continuous Equity Offering Program
Under our ATM Agreement, we may sell, from time to time, shares of our common stock having an aggregate offering price of up to $50.0 million. The agreement terminates upon the earlier of (i) the sale of all shares of common stock subject to the agreement or (ii) the termination of the Notes) and certainagreement by us or by each of the Partnership’s future subsidiaries. The Notes andsales agents. Any sales agent may also terminate the guarantees, respectively, areagreement but only with respect to itself. We used the Partnership’s and the guarantors’ general unsecured senior obligations, rank equally in right of payment with all of the Partnership’s and the guarantors’ other senior obligations, and are effectively subordinated to all of the Partnership’s 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. Guarantees by the Partnership’s subsidiaries are full and unconditional, subject to customary release provisions, and constitute joint and several obligations. The Partnership has no assets or operations independent of its subsidiaries and there are no significant restrictions upon its subsidiaries’ ability to distribute funds to the Partnership.
Other Sources of Cash
We received proceeds of $120.3 million and $112.9 million from business dispositions and other asset sales during the years ended December 31, 2022 and 2021, respectively. We typically use the proceeds from these sales to repay borrowings outstanding under our Credit Facility, however, we are not able to estimate the Partnership Credit Facility. In connection with this saletiming of asset sales nor the amount of proceeds to be received and as permitted under its partnership agreement, the Partnership sold 93,163 general partner units to the General Partner for netsuch, we do not rely on asset sale proceeds as a future source of $1.3 million to maintain the General Partner’s approximate 2% general partner interest in the Partnership.
Cash Flows
Cash flows from operating, investing and financing activities,provided by (used in) each type of activity were as reflected in the consolidated statements of cash flows, are summarized in the table below (in thousands):
Year Ended December 31, | |||||||
2017 | 2016 | ||||||
Net cash provided by (used in) continuing operations: | |||||||
Operating activities | $ | 201,916 | $ | 274,315 | |||
Investing activities | (174,739 | ) | (89,459 | ) | |||
Financing activities | (19,775 | ) | (183,285 | ) | |||
Net change in cash and cash equivalents | $ | 7,402 | $ | 1,571 |
| | | | | | |
| | | ||||
| | Year Ended December 31, | ||||
(in thousands) | | 2022 |
| 2021 | ||
Net cash provided by (used in): | | |
|
| |
|
Operating activities | | $ | 203,450 | | $ | 237,400 |
Investing activities | |
| (130,916) | |
| 16,107 |
Financing activities | | | (72,537) | |
| (253,035) |
Net (decrease) increase in cash and cash equivalents | | $ | (3) | | $ | 472 |
Operating Activities.
The decrease in net cash provided by operating activities from continuing operations during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to the decreaseincreased cash outflow for cost of sales, contract costs, and SG&A, as well as decreased cash inflow from accounts receivable. Partially offsetting these decreases in gross marginoperating cash were increased cash inflow from revenue and an increase in cash paid for interest, partially offset by a decrease in restructuring and other charges.
Investing Activities.
The increasechange in net cash used in investing activities from continuing operations during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to a $104.1$142.0 million increase in capital expenditures and a $14.7 million increase in our investment in unconsolidated affiliates, partially offset by a $13.8 million payment for the March 2016 Acquisition (as discussed in Note 4 (“Business Acquisitions”) to our Financial Statements) and a $5.1$7.4 million increase in proceeds from the sale of property, plantbusiness and equipment.
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Financing Activities.
The decrease in net cash used in financing activities from continuing operations during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to $16.8 million of net borrowings of long–term debt during 2022 compared with $158.5 million of net repayments of long–term debt during 2021, and a $110.3$3.1 million decrease in net repaymentspayments for settlements of long-term debt, $60.3 million of proceeds received from a public offering by the Partnership of its common units during the year ended December 31, 2017 and a $7.6 million decreaseinterest rate swaps that include financing elements.
Critical Accounting Estimates
We describe our significant accounting policies more fully in distributions to noncontrolling partners in the Partnership. These changes were partially offset by a $12.5 million increase in debt issuance costs paid and a $4.5 million decrease in contributions from Exterran Corporation.
2018 | 2019-2020 | 2021-2022 | Thereafter | Total | |||||||||||||||
Long-term debt (1): | |||||||||||||||||||
Credit Facility | $ | — | $ | 56,000 | $ | — | $ | — | $ | 56,000 | |||||||||
Partnership Credit Facility | — | — | 674,306 | — | 674,306 | ||||||||||||||
Partnership’s 6% senior notes due April 2021 (2) | — | — | 350,000 | — | 350,000 | ||||||||||||||
Partnership’s 6% senior notes due October 2022 (3) | — | — | 350,000 | — | 350,000 | ||||||||||||||
Total long-term debt | — | 56,000 | 1,374,306 | — | 1,430,306 | ||||||||||||||
Interest on long-term debt (4) | 80,511 | 160,620 | 86,760 | — | 327,891 | ||||||||||||||
Purchase commitments (5) | 96,364 | 1,062 | 664 | — | 98,090 | ||||||||||||||
Facilities and other operating leases | 4,705 | 7,777 | 4,619 | 13,016 | 30,117 | ||||||||||||||
Total contractual obligations | $ | 181,580 | $ | 225,459 | $ | 1,466,349 | $ | 13,016 | $ | 1,886,404 | |||||||||
Standby letters of credit | $ | 15,403 | $ | — | $ | — | $ | — | $ | 15,403 |
Depreciation
Property, plant and equipment are carried at cost. Depreciation is computed oncost and depreciated using the straight-linestraight–line basis usingover the estimated useful liveslife of the asset. As of December 31, 2022, property, plant and salvage values. The assumptionsequipment, net was $2.2 billion and judgments we use in determiningdepreciation expense was $155.4 million for the estimatedyear ended December 31, 2022.
Our estimate of useful lives and salvage values of our property, plantare based on assumptions and equipmentjudgments that reflect both historical experience and expectations regarding future use of our assets.assets, including wear and tear, obsolescence, technical standards, market demand and geographic location. The use of different estimates, assumptions and judgments in the establishmentcalculation of property, plant and equipment accounting policies,depreciation, especially those involving their useful lives, would likely result in significantly different net book values of our assets and results of operations.
Impairment of Assets
During the year ended December 31, 2022, we recorded long–lived and other asset impairments of $21.4 million. We review long-livedlong–lived assets, includingwhich include property, plant and equipment and identifiable intangibles assets that are being amortized, for impairment whenever events or changes in circumstances, including the removal of compressor unitscompressors from our active fleet, indicate that the carrying amount of an asset may not be recoverable. The determination thatAn impairment loss may exist when the estimated undiscounted cash flows expected from the use of the asset and its eventual disposition are less than its carrying amount. Determining whether the carrying amount of an asset may not beis recoverable requires us to make judgments regarding long-term forecasts of future revenue and costs related to the assetsasset subject to review. These forecasts are uncertain as they require significant assumptions about future market conditions. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period. Given the nature of these evaluations and their application to specific assets and specific times, it is not possible to reasonably quantify the impact of changes in these assumptions. An impairment loss exists when
For compressors that are removed from our active fleet, the fair value of a compressor is estimated undiscounted cash flowsbased on the expected net sale proceeds compared to result fromother fleet units we recently sold, a review of other units recently offered for sale by third parties or the useestimated component value of the equipment we plan to use. See Note 20 and Note 25 to our Financial Statements for further details of our fleet 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.impairments.
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Income Taxes
Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We operate in the U.S. only and, as a result, are subject to income taxes in the U.S. only. Significant judgments and estimates are required in determining consolidated income tax expense.
Deferred income taxes arise from temporary differences between the financial statements and the tax basis of assets and liabilities. In evaluating our ability to recover our deferred tax assets, within the jurisdiction from which they arise, we consider all available positive and negative evidence including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planningtax–planning strategies and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and changes in accounting policies and incorporate assumptions, including the amount of future U.S. federal and state pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax-planningtax–planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are usinguse to manage the underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Aside from the effects of the TCJA, managementManagement is not aware of any such changes that would have a material effect on the Company’sour financial position, results of operations or cash flows. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various state and local jurisdictions.
GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. In addition, guidance is provided on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities. TheseSuch differences will beare reflected as increases or decreases to income tax expense in the period in which the new information isbecomes available.
Recent Accounting Developments
See Note 2 (“Recent Accounting Developments”) to our Financial Statements.
We are exposed to market risk primarily associated with changes in the variable interest rates underrate of our financing arrangements.Credit Facility. We usehad previously used derivative instruments to minimize the risks and costs associated with financial activities by managingmanage our exposure to fluctuations in this variable interest rate fluctuations on a portion ofrate; however, our debt obligations. We do not use derivative instruments for trading or other speculative purposes.
A 1% increase in the effective interest rate on the outstanding balance under our outstanding debt subject to floating interest ratesCredit Facility at December 31, 20172022 would resulthave resulted in an annual increase in our interest expense of $2.3$2.5 million.
The financial statements and supplementary information specified by this Item areis presented in Part IV, Item 15 of this 20172022 Form 10-K.10–K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 9A. Controls and Procedures
Management’sEvaluation of Disclosure Controls and Procedures
As of the end of the period covered by this 20172022 Form 10-K,10–K, our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e)13a–15(e) of the Exchange Act), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in the rules and forms of the SEC. Based on the evaluation, as of December 31, 20172022, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Annual Report on Internal Control Over Financial Reporting
As required by Exchange Act Rules 13a-15(c)13a–15(c) and 15d-15(c)15d–15(c), our management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness as to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on the results of management’s evaluation described above, management concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of internal control over financial reporting as of December 31, 20172022 was audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report found within this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)13a–15(f) and 15d-15(f)15d–15(f)) during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersshareholders and the Board of Directors of Archrock, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, 2017,2022, based on the criteria established in
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 20172022, of the Company and our report dated February 22, 2018,2023, expressed an unqualified opinion on those financial statements and financial statement schedule and included an explanatory paragraph regarding the Company’s completed spin-off of its international contract operations, international aftermarket services, and global fabrication businesses into an independent, publicly traded company named Exterran Corporation.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 22, 20182023
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information required in Part III,by Item 10 of this 2017 Form 10-K is incorporated by reference to the sections entitled “Election of Directors,” “Corporate Governance,” “Executive Officers”“Governance” and “Beneficial Ownership of Common Stock”“Stock Ownership” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.
The information required in Part III,by Item 11 of this 2017 Form 10-K is incorporated by reference to the sections entitled “Governance” and “Compensation Discussion and Analysis” and “Information Regarding Executive Compensation” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Portions of the information required in Part III, Item 12 of this report are incorporated by reference to the section entitled “Beneficial Ownership of Common Stock”“Stock Ownership” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information as of December 31, 2017,2022, with respect to the Archrockour compensation plans under which our common stock is authorized for issuance, aggregated as follows:
| | | | | | | | | | |
| | Number of Securities | | | | | | | | |
| | to be Issued Upon | | | Weighted Average | | | Number of Securities | | |
| | Exercise of | | | Exercise Price of | | | Remaining Available for | | |
| | Outstanding Options, | | | Outstanding Options, | | | Future Issuance Under | | |
| | Warrants and Rights | | | Warrants and Rights | | | Equity Compensation Plans | | |
|
| (a) | |
| (b) | |
| (c) |
| |
Equity compensation plans approved by security holders (1) | | 508,753 | (2) | | $ | — | (3) | | 6,345,361 | |
Equity compensation plans not approved by security holders (4) | | — |
| | | — |
| | 37,771 | |
Total | | 508,753 |
| | | — |
| | 6,383,132 | |
Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options | Weighted-Average Exercise Price of Outstanding Options | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||||
Equity compensation plans approved by security holders(1) | 489,375 | $ | 12.28 | 6,415,905 | (3) | ||||||
Equity compensation plans not approved by security holders(2) | — | — | 48,022 | ||||||||
Total | 489,375 | 6,463,927 |
(1) | |
Comprised of the 2013 Plan, the |
(2) | Comprised of |
(3) | |
(4) | |
ITEM 13. Certain Relationships and Related Transactions and Director Independence
The information required in Part III,by Item 13 of this 2017 Form 10-K is incorporated by reference to the sectionssection entitled “Certain Relationships and Related Transactions” and “Corporate Governance”“Governance” in our definitive proxy statement, to be filed with the SEC within 120 days of the end of our fiscal year.Proxy Statement.
48
The information required in Part III,by Item 14 of this 2017 Form 10-K is incorporated by reference to the section entitled “Ratification of the Appointment of the Independent Registered Public Accounting Firm” in our definitive proxy statement, to be filed with the SEC within 120 daysProxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) | List of (1) Financial F–1 F–3 F–4 F–5 F–6 F–7 F–9 (2)Financial Statement Schedules All (3)Exhibits
49
50
51
52
53 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
54 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints D. Bradley Childers, Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 22, 2023.
55 To the Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Archrock, Inc. and subsidiaries (the “Company”) as of December 31, We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current–period audit of Long–Lived Asset Impairment– Refer to Note 20 to the financial statements. Critical Audit Matter Description F-1 Management’s evaluation of whether to retire compressor units from its active fleet takes into consideration the future deployment of the units that were not of the type, configuration, condition, make, or model that are cost efficient to maintain or operate. Once a compressor unit is retired from the active fleet, it is tested for impairment. As such, the timing of the identification of compressor units for removal could have a significant impact on the amount of any impairment charge. During the year ended December 31, 2022, the Company Auditing the decisions on when compressor units are retired from the active fleet required a high degree of auditor judgment and an How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management’s determination of whether to retire compressor unit from the Company’s active fleet included the following, among others:
/s/ DELOITTE & TOUCHE LLP Houston, Texas February 22, 2023 We have served as the Company’s auditor since Archrock, Inc. Consolidated Balance Sheets (
The accompanying notes are an integral part of these consolidated financial statements. Archrock, Inc. Consolidated Statements of Operations (
The accompanying notes are an integral part of these consolidated financial statements. F-4 Archrock, Inc. Consolidated Statements of Comprehensive Income (Loss) (in thousands)
The accompanying notes are an integral part of these consolidated financial statements. Archrock, Inc. Consolidated Statements of Equity (
The accompanying notes are an integral part of these consolidated financial statements. F-6 Archrock, Inc. Consolidated Statements of Cash Flows (in thousands)
F-7 Archrock, Inc. Consolidated Statements of (in thousands)
The accompanying notes are an integral part of these consolidated financial statements. Archrock, Inc. Notes to Consolidated Financial Statements NOTE 1. DESCRIPTION OF BUSINESS We are an energy infrastructure company with a NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Our Our Financial Statements are prepared in accordance with GAAP and the SEC. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported Cash and Cash Equivalents We consider all Accounts Receivable and Allowance for Credit Losses The contractual life of our trade receivables is primarily 30 days based on the payment terms specified in the contract. Contract operations We recognize an allowance for credit losses when a receivable is recorded, even when the risk of loss is remote. We utilize an aging schedule to determine our allowance for credit losses, and measure expected credit losses on a F-9 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Loss rates are separately determined for each asset pool based on the length of time a trade receivable has been outstanding. We analyze two years of internal historical loss data, including the effects of prepayments, write–offs and subsequent recoveries, to determine our future economic conditions in assessing credit risk. Inventory Inventory consists of parts used for maintenance of natural gas compression equipment. Inventory is stated at the lower of cost Property, Plant and Equipment Property, plant and equipment are recorded at cost and depreciated using the
Major improvements that extend the useful life of an asset are Leases We determine if an arrangement is a lease, or contains a lease, at inception and The lease term includes options to extend when we are reasonably certain to exercise the option. Short–term leases, those with an initial term of 12 months or Our facility leases, of which we are the lessee, contain lease and nonlease components, which we have elected to account for as a single lease component, as the nonlease components are not significant to the For contract operations service agreements in which we are F-10 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Impairment of We review Internal–Use Software Certain of our contracts have been deemed to be hosting arrangements that are service contracts, including those related to the cloud migration of our ERP system and cloud services for our new mobile workforce, telematics and inventory management tools. Certain costs incurred for the implementation of a hosting arrangement that is a service contract are capitalized and amortized on a straight–line basis over the term of the respective contract. Amortization begins for each component of the hosting arrangement when the component becomes ready for its intended use. Capitalized implementation costs are presented in other assets, the same line item in our consolidated balance sheets that a prepayment of the fees for the associated hosting arrangement would be presented. Amortization expense of the capitalized implementation costs is presented in SG&A, the same line item in our consolidated statements of operations as the expense for fees for the associated hosting arrangement. Revenue Recognition We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we are entitled to receive in exchange for those goods or services. Sales and usage–based taxes that are collected from the customer are excluded from revenue. Contract Operations Natural gas compression services. Natural gas compression services are generally satisfied over time, as the customer simultaneously receives and consumes the benefits provided by these services. Our performance obligation is a series in which the unit of service is one month, as the customer receives substantially the same benefit each month from the services regardless of the type of service activity performed, which may vary. If the transaction price is based on a fixed fee, revenue is recognized monthly on a straight–line basis over the period that we are providing services to the customer. Amounts invoiced to customers for costs associated with moving our compression assets to a customer site are also included in the transaction price and are amortized over the Variable consideration exists if customers are billed at a lesser standby rate when a unit is not running. We recognize revenue for such variable consideration monthly, as the Billable Maintenance Service. We perform billable maintenance service on our natural gas compression equipment at the customer’s request on an as–needed basis. The performance obligation is satisfied and revenue is recognized at the agreed–upon transaction price at the point in time when service is complete and the customer has accepted the work performed and can obtain the remaining benefits of the service that the unit will provide. F-11 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Aftermarket Services OTC Parts and Components Sales. For sales of OTC parts and components, the Maintenance, Overhaul and Reconfiguration Services. For our service activities, the For service provided based on a fixed monthly fee, the performance obligation is For service provided based on a Service provided based on time and materials is Contract Assets and Liabilities We recognize a contract asset when we have the right to consideration in exchange for goods or services transferred to a customer when the right is conditioned on something other than the passage of time. We recognize a contract liability when we have an obligation to transfer goods or services to a customer for which we have already received consideration. Income Taxes 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 We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, F-12 Archrock, Inc. Notes to Consolidated Financial Statements (continued) We record uncertain tax positions in accordance with the accounting standard on income taxes under a Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk consist of cash and loss. Trade accounts receivable are due from companies of varying size engaged principally in oil and natural gas activities throughout the U.S; therefore, our customers may be similarly affected by changes in economic and other conditions within the industry. We During
revenues. Accounting Standard Update In December No other new accounting pronouncements issued or effective during 2022 have had or are NOTE 3. DISPOSITIONS During 2022, we
During 2021, we completed sales of certain contract operations customer service agreements and approximately 875 compressors, comprising approximately F-13 Archrock, Inc. Notes to Consolidated Financial Statements (continued) In July 2020, we completed the sale of the turbocharger business included within our aftermarket services segment. In connection with In March 2020, we completed the
NOTE 4. ACCOUNTS RECEIVABLE, NET Accounts receivable, net is comprised of the following:
The
F-14 Archrock, Inc. Notes to Consolidated Financial Statements (continued) INVENTORY Inventory
following:
During the years ended December 31, PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net
following:
Depreciation expense was NOTE 7. LEASES We have operating leases and subleases for office space, temporary housing, storage and shops. Our leases have remaining lease terms of less than one year to approximately ten years and most include options to extend the lease term, at our discretion, for an additional six months to ten years. We are not, however, reasonably certain that we will exercise any of the options to extend and as such, they have not been included in the remaining lease terms. Financial and other supplemental information related to our operating leases is as follows:
F-15 Archrock, Inc. Notes to Consolidated Financial Statements (continued)
Remaining maturities of our lease liabilities as of December 31,
NOTE 8. INTANGIBLE ASSETS, NET Intangible assets include customer relationships associated with various business and asset acquisitions. These acquired intangible assets were recorded at fair value determined as of the date of acquisition and are being amortized over the period we expect to benefit from the assets. Intangible assets, net
F-16 Archrock, Inc. Notes to Consolidated Financial Statements (continued)
Intangible assets are amortized on a straight–line basis with estimated useful lives ranging from 15 to 25 years. Amortization Estimated
subsequent five fiscal years is expected to be as follows:
NOTE 9.
We capitalize incremental costs to obtain a contract with We also capitalize costs incurred to fulfill a contract if those costs relate directly to a contract, enhance resources that we will use in These obtainment and fulfillment costs associated with our contract operations segment are amortized based on the Costs associated with sales commissions in our F-17 Archrock, Inc. Notes to Consolidated Financial Statements (continued) NOTE 10. HOSTING ARRANGEMENTS We have hosting arrangements that are service contracts for cloud applications including our ERP, mobile workforce, telematics and inventory management tools. Capitalized implementation costs and accumulated amortization related to our hosting arrangements that are service contracts are as follows:
These costs are included in During the year ended December 31, 2020, we impaired $1.7 million of capitalized implementation costs related to the hosting arrangements of the mobile workforce component of our project due to the termination of the agreement, which was included in long–lived and other asset impairment in our consolidated statements of operations. NOTE 11. INVESTMENT IN UNCONSOLIDATED AFFILIATE Investments in which we are deemed to exert significant influence, but not control, are accounted for using the equity method of accounting, except in cases where the fair value option is elected. For such investments where we have elected the fair value option, the election is irrevocable and is applied on an investment–by–investment basis at initial recognition. In April 2022, we agreed to acquire for cash a 25% equity interest in ECOTEC, a company specializing in methane emissions detection, monitoring and management. We have elected the fair value option to account for this investment, and during the year ended December 31, 2022, we recognized an unrealized loss of $1.9 million related to the change in fair value of our investment (see Note 25). Changes in the fair value of this investment are recognized in other (income) expense, net in our consolidated statements of operations. As of December 31, 2022, our ownership interest in ECOTEC is 22.7%, which is included in other assets in our consolidated balance sheets. The remaining 2.3% interest was acquired in January 2023. NOTE 12. ACCRUED LIABILITIES Accrued liabilities are comprised of the following:
F-18 Archrock, Inc. Notes to Consolidated Financial Statements (continued) NOTE 13. CONTRACT LIABILITIES As of December 31, 2022 and 2021, our contract liabilities were $8.0 million and $4.4 million, respectively. These liabilities are included in deferred revenue and other liabilities in our consolidated balance sheets. We deferred revenue of $24.6 million and $10.2 million, respectively, and recognized $21.0 million and $10.4 million, respectively, as revenue during the years ended December 31, 2022 and 2021, respectively. The revenue recognized and deferred during the periods primarily related to freight billings and milestone billings on aftermarket services. NOTE 14. LONG–TERM DEBT Long–term debt is comprised of the following:
Credit Facility As of December 31, 2022, our The Credit Facility borrowing base consists of eligible accounts receivable, inventory and compressors, the largest of which is compressors. Borrowings under the Credit Facility are secured by substantially all of Borrowings under the Credit Facility Additionally, F-19 Archrock, Inc. Notes to Consolidated Financial Statements (continued) As a result of the As of December 31, 2022, the following consolidated financial ratios, as defined in our Credit Facility
In addition to the As of December 31, 2027 Notes and Our 2027 Notes were issued under an indenture dated March 21, 2019 and mature on April 1, 2027. The notes were issued in a private offering at 100% of their face value and have an effective interest rate of 7.9%. We received net proceeds of $491.2 million after deducting issuance costs of Our 2028 Notes were issued under an indenture dated December 20, 2019 and mature on April 1, 2028. The 2028 Notes were issued in two private offerings of $500.0 million and The net proceeds from the 2027 Notes and 2028 Notes were used to repay borrowings outstanding under our Credit Facility. Issuance costs related to operations over the terms of the notes. The 2027 Notes The 2027 Notes and F-20 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Maturities of Long–Term Debt As of December 31, 2022, the maturities of our long–term debt, excluding interest
NOTE 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. As is customary in our industry, we review our safety equipment and procedures and carry insurance against some, but not all, risks of our business. Our insurance coverage includes property damage, general liability and commercial automobile liability and other coverage we believe is appropriate. 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. Additionally, we are substantially self–insured for workers’ compensation and employee group health claims in view of the relatively high per–incident deductibles we absorb under our insurance arrangements for these risks. Losses up to the 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 During the F-21 Archrock, Inc. Notes to Consolidated Financial Statements (continued) In 2020, we settled a certain sales and use tax audit for which Litigation and Claims In the ordinary course of business, we are NOTE 16. STOCKHOLDERS’ EQUITY At–the–Market Continuous Equity Offering Program In February 2021, we entered into the ATM Agreement, pursuant to which we may offer and sell shares of our common stock from time to time for an aggregate offering price of up to $50.0 million. We use the net proceeds of these offerings, after deducting sales agent fees and offering expenses, for general corporate purposes. Offerings of common stock pursuant to the ATM Agreement will terminate upon the earlier of (i) the sale of all shares of common stock subject to the ATM Agreement or (ii) the termination of the ATM Agreement by us or by each of the sales agents. Any sales agent may also terminate the ATM Agreement but only with respect to itself. During the years ended December 31, 2022 and 2021, we sold 447,020 and 357,148 shares of common stock, respectively, for net proceeds of $4.2 million and $3.4 million, respectively, pursuant to the ATM Agreement. F-22
Archrock, Inc. Notes to Consolidated Financial Statements (continued) Cash Dividends The following table summarizes our dividends declared and paid in each of the quarterly periods of 2022, 2021 and 2020:
On January 26, 2023, our Board of Directors declared a quarterly dividend of $0.15 per share of common stock, or approximately $23.6 million, which was paid on February 14, 2023 to stockholders of record at the close of business on February 7, 2023. Accumulated Other Comprehensive Loss Components of comprehensive income (loss) are net income (loss) and all changes in equity during a period except those resulting from transactions with owners. Our accumulated other comprehensive loss consists of changes in the fair value of our interest rate swap derivative instruments, net of tax. See Note 24 for further details on our interest rate swap derivative instruments. The following table presents the changes in accumulated other comprehensive loss, net of tax:
F-23 Archrock, Inc. Notes to Consolidated Financial Statements (continued) NOTE 17. REVENUE FROM CONTRACTS WITH CUSTOMERS The following table presents our revenue from contracts with customers by segment (see Note 28) and disaggregated by revenue source:
Performance Obligations As of December 31,
We do not disclose the NOTE 18. STOCK–BASED COMPENSATION The 2020 Plan and the 2013 Plan both provide for the granting of stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, other stock–based awards and dividend equivalent rights to our employees, directors and consultants. No additional grants may be made under the 2013 Plan following the adoption of the 2020 Plan. Previous grants made under the 2013 Plan continue to be governed by that plan and the applicable award agreements. As of December 31, 2022, the maximum number of shares of common stock available for issuance under the 2020 Plan is 8,500,000, and 5.9 million shares remain available for grant. Each stock–settled award granted under the 2020 Plan reduces the number of shares available for issuance by one share. Cash–settled awards are not counted against the aggregate share limit. Shares subject to awards granted under the 2020 Plan that are subsequently canceled, terminated, settled in cash or forfeited, excluding shares withheld to satisfy tax withholding obligations or to pay the exercise price of an option, are available for future grant under the 2020 Plan. Our policy is to issue new shares when restricted stock units and performance–based restricted stock units are vested. We account for forfeitures as they occur. F-24 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Both the 2020 Plan and the 2013 Plan allow us to withhold shares upon vesting of restricted stock at the then–current market price to cover taxes required to be withheld on the vesting date. During the years ended December 31, 2022, 2021 and 2020, we withheld 283,024 shares valued at $2.4 million, 283,972 shares valued at $2.5 million and 236,752 shares valued at $1.8 million, respectively, to cover tax withholding. Restricted Stock Awards and Performance–Based Restricted Stock Units Grants of restricted stock are subject to forfeiture, restrictions on transfer and certain other conditions until vesting, which generally occurs in three equal installments following the date of grant. Compensation expense is recognized over the vesting period equal to the fair value of our common stock at the grant date. Our restricted stock includes rights to receive dividends or dividend equivalents. Grants of performance–based restricted stock units are three–year equity settled awards linked to the performance of our common stock. The awards also include dividend equivalent rights that accumulate during the vesting period. The vesting of the performance–based restricted stock units is dependent of the satisfaction of a combination of certain service–related conditions and our total shareholder return ranked against that of a predetermined peer group over a three–year performance period. The awards vest in their entirety on the date specified in the award agreement following the conclusion of the performance period. The final number of shares of common stock issuable upon vesting can range from 0% to 200% of the initial grant depending on the level of achievement as determined by the Compensation Committee of our Board of Directors. The fair value of the performance–based restricted stock units, incorporating the market condition, is estimated on the grant date using a Monte Carlo simulation model. Expected volatilities for us and each peer company utilized in the model are estimated using a historical period consistent with the awards’ remaining performance period as of the grant date. The risk–free interest rate is based on the The assumptions that were used to estimate the fair value of our performance–based stock units are as follows:
F-25 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Activity related to our restricted stock and
The grant date fair value of the As of December 31, 2022, we expect $12.7 million of unrecognized compensation cost related to Cash Settled Performance Units Grants of cash–settled performance units vest at the end of the three year vesting period and are payable in an amount of cash equivalent to the value of our common stock at the vesting date for each unit vested. These awards are subject to one of more performance conditions and are accounted for as liability awards with expense based on the fair value measured at the end of each reporting period. These awards also include dividend equivalent rights that Activity related to our cash–settled performance units is as follows:
The grant date fair value of the cash settled performance units granted during the years ended December 31, 2022, 2021 and 2020 was $2.5 million, $2.3 million and $1.8 million, respectively. Cash paid upon vesting of these cash settled performance units during the years ended December 31, 2022, 2021 and 2020 was $1.2 million, $0.6 million and $0.5 million, respectively. F-26 Archrock, Inc. Notes to Consolidated Financial Statements (continued) As of December 31, 2022, we expect $3.0 million of Employee Stock Purchase Plan Our ESPP provides employees with an opportunity to participate in our The ESPP will terminate on the date that all shares of common stock authorized for sale under the Directors’ Stock and Deferral Plan Our DSDP provides non–employee members of the Board of Directors with an opportunity to elect to receive our common stock as payment for a portion or all of their retainer. The number of shares paid each quarter is determined by dividing the There are 100,000 shares reserved under the
Stock–Based Compensation Expense Stock–based compensation expense is as
NOTE 19. RETIREMENT BENEFIT PLAN Our 401(k) retirement plan provides for optional employee contributions up to the applicable IRS annual limit and F-27 Archrock, Inc. Notes to Consolidated Financial Statements (continued) NOTE 20. LONG–LIVED AND OTHER ASSET IMPAIRMENT Compression Fleet We periodically review the future deployment of our idle compression assets for units that are not of the type, configuration, condition, make or model that are cost efficient to maintain and operate. Based on these reviews, we
In connection with our review of our idle compression assets, The following table presents the results of our compression fleet impairment review as recorded
segment:
Goodwill In the first quarter of Other Impairment During the year ended December 31, NOTE 21. RESTRUCTURING CHARGES In response to the decreased activity level of our customers that resulted from the COVID–19 pandemic, we recorded pandemic restructuring
During the year ended December 31, 2021, management approved and initiated a plan to exit a facility no longer deemed economical for our business, and we incurred $0.9 million of costs to complete the exit of the facility. We do not expect to incur additional material costs under this restructuring plan. F-28 Archrock, Inc. Notes to Consolidated Financial Statements (continued) During the year ended December 31, 2020, we completed restructuring activities to further streamline our organization and more fully align our teams to improve our customer service and profitability. We incurred severance costs of $1.7 million related to these activities during the first quarter of 2020. No additional costs will be incurred for this organizational restructuring. Management also approved a plan to dispose of certain non–core properties, and we incurred $1.5 million of costs as a result of these property disposals. No additional charges will be incurred under this restructuring plan. The following table
presents restructuring charges incurred by segment:
The following table
F-29
Archrock, Inc. Notes to Consolidated Financial Statements (continued) Our provision for (benefit from) income taxes consisted of the
The provision for (benefit from) income taxes for the years ended December 31,
F-30 Archrock, Inc. Notes to Consolidated Financial Statements (continued) 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 our temporary differences that gave rise to deferred tax assets and deferred tax liabilities were as
Both the . Tax Attributes and Valuation Allowances Changes in our valuation allowance are as follows:
Pursuant to Sections 382 and 383 of the Code, utilization of loss F-31 Archrock, Inc. Notes to We record valuation allowances when it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the appropriate taxing jurisdictions in the future. If we do not meet our expectations with respect to taxable income, we may not realize the full benefit from our deferred tax assets, which would require us to record a valuation allowance in our tax provision in future years. As of each reporting date, we consider new evidence to evaluate the realizability of our net deferred tax asset position by assessing the available positive and negative evidence. Changes to the valuation allowance are reflected in the statement of operations. The amount of our deferred tax assets considered realizable could be adjusted if projections of future taxable income are reduced or objective negative evidence in the form of a three–year cumulative loss is present or both. Should we no longer have a level of sustained profitability, excluding nonrecurring charges, we will have to rely more on our future projections of taxable income to determine if we have an adequate source of taxable income for the realization of our deferred tax assets, namely NOL, interest expense limitation and tax credit carryforwards. This may result in the need to record a valuation allowance against all or a portion of our deferred tax assets. At December 31, As of offset future taxable income. These carryforwards have no expiration. Unrecognized Tax Benefits Changes in our unrecognized tax benefits (including discontinued operations)
We had F-32 Archrock, Inc. Notes to Consolidated Financial Statements (continued) We recorded $2.1 million, 2020. Subject to the provisions of benefits in our consolidated balance sheets (see Note 26). We and our subsidiaries file consolidated and separate income tax returns in the U.S. federal jurisdiction and in numerous state jurisdictions. U.S. federal income tax returns are generally subject to examination for up to three years after filing the returns. Due to our NOL carryforwards, 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 remains subject to examination by various states for up to one year after formal notification to the states. We are not currently involved in As of December 31, Impact of New Legislation On August 16, 2022, President Biden signed into law the Inflation Reduction Act (Public Law Number 117–169). The legislation is expected to have an immaterial impact to our effective tax rate. NOTE 23. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share is computed using the two–class method, which is an earnings allocation formula that determines net income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Under the two–class method, basic net income (loss) per common share is determined by dividing net income (loss), after deducting amounts allocated to participating securities, by the weighted average number of common shares outstanding for the period. Participating securities include unvested restricted stock and stock–settled restricted stock units that have nonforfeitable rights to receive dividends or dividend equivalents, whether paid or unpaid. During periods of net loss, only distributed earnings (dividends) are allocated to participating securities, as participating securities do not have a contractual obligation to participate in our undistributed losses. Diluted net income (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental common stock equivalents attributed to outstanding options, performance–based restricted stock units and stock to be issued pursuant to our ESPP unless their effect would be anti–dilutive. F-33 Archrock, Inc. Notes to Consolidated Financial Statements (continued) The following table shows the calculations for net income (loss) attributable to common stockholders and potential shares of common stock, which is used in the calculation of basic and diluted net income (loss) per common share:
NOTE 24. DERIVATIVES AND HEDGING Prior to the expiration of our interest rate swaps in March 2022, we used derivative instruments to manage our exposure to fluctuations in the variable interest rate of our Credit Facility. We do not use derivative instruments for trading or other speculative purposes. We had entered into three interest rate swaps with an aggregate notional amount of $300.0 million to offset changes in the expected cash flows due to fluctuations in the associated variable interest rates and designated them as cash flow hedges. In 2021, we dedesignated one of the interest rate swaps with a $125.0 million notional value. At the time of dedesignation, the fair value of this interest rate swap was a liability of $1.6 million. The associated amount in accumulated other comprehensive loss related to this interest rate swap was amortized into interest expense over the remaining term of the swap through its expiration in March 2022. Changes in the fair value of this interest rate swap subsequent to dedesignation and prior to expiration were recorded in interest expense, the same consolidated statement of operations line item to which the earnings effect of the hedged item was recorded. The remaining interest rate swaps had a $175.0 million notional value and were designated as (highly effective) cash flow hedging instruments until their expiration. Changes in the fair value of these interest rate swaps were recognized as a component of other comprehensive income (loss) until the hedged transactions affected earnings. At that time, amounts were reclassified into earnings to interest expense, the same consolidated statement of operations line item to which the earnings effect of the hedged items were recorded. F-34 Archrock, Inc. Notes to Consolidated Financial Statements (continued) The effect of our derivative instruments on our consolidated balance sheet is as follows:
The effect of our derivative instruments on our consolidated statements of operations is as follows:
See Note 16 and Note 25 for further details on our derivative instruments. NOTE 25. 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:
F-35 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Assets and Liabilities Measured at Fair Value on a Recurring Basis Investment in ECOTEC As of December 31, 2022, we owned a 22.7% equity interest in ECOTEC (see Note 11). We have elected the fair value option to account for this investment. The fair value determination of this investment primarily consisted of unobservable inputs, which creates uncertainty in the measurement of fair value as of the reporting date. The significant unobservable inputs used in the fair value measurement, which was valued through an average of an income approach (discounted cash flow method) and a market approach (guideline public company method), are the WACC and the revenue multiples. Significant increases (decreases) in these inputs in isolation would result in a significantly higher (lower) fair value measurement. As of December 31, 2022, the fair value of our investment in ECOTEC is $12.8 million. This fair value measurement is classified as Level 3. The significant unobservable inputs are as follows:
The reconciliation of changes in the fair value of our investment in ECOTEC is as follows:
Interest Rate Swaps As of December 31, 2021, the fair value of our interest rate swaps was a liability of $1.3 million. Prior to their expiration in the first quarter of 2022, our interest rate swaps were valued quarterly based on the income approach (discounted cash flows) using market observable inputs, including LIBOR forward curves. These fair value measurements were classified as Level 2. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Compressors During the years ended December 31, F-36 Archrock, Inc. Notes to Consolidated Financial Statements (continued) The fair value of our compressors impaired is as follows:
The significant unobservable inputs used to develop the above fair value measurements were weighted by the relative fair value of the compressors being measured. Additional quantitative information related to our significant unobservable inputs follows:
See Note 20 for further details. Other Financial Instruments The carrying amounts of our cash, receivables and payables approximate fair value due to the short–term nature of those instruments. The carrying amount of borrowings outstanding under our Credit Facility approximates fair value due to its variable interest rate. The fair value of these outstanding borrowings is a Level 3 measurement. The fair value of our fixed rate debt is estimated using yields observable in active markets, which are Level 2 inputs, and was as follows:
NOTE 26. DISCONTINUED OPERATIONS In order to effect the Spin-off and govern our relationship with Exterran Corporation after the Spin-off, we entered into several agreements with Exterran Corporation, including a tax matters agreement, which governs the respective rights, responsibilities and obligations of Exterran Corporation and us with respect to certain tax matters. As of both December 31, 2022 and 2021, we had $7.9 million of unrecognized tax benefits (including interest and penalties) related to Exterran Corporation operations prior to the Spin-off recorded to liabilities of discontinued operations in our F-37 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Assets and liabilities of discontinued operations are as follows:
The acquisition of Exterran Corporation by Enerflex, Ltd. in October 2022 had no impact on the NOTE 27. RELATED PARTY TRANSACTIONS Old Ocean Reserves, an affiliate of our Revenue from Hilcorp and affiliates was $36.2 million, $38.2 million and $40.3 million during the years ended December 31,
NOTE28. SEGMENT INFORMATION We manage our business segments primarily based We evaluate the performance of our segments based on gross margin, defined as revenue less cost of sales (excluding depreciation and amortization) for each segment. F-38 Archrock, Inc. Notes to Consolidated Financial Statements (continued) Summarized financial information
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