UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 


FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM            TO          
 
COMMISSION FILE NUMBER 1-13455


TETRA Technologies, Inc.
 (Exact name of registrant as specified in its charter)
 
Delaware
74-2148293
(State of incorporation)
(I.R.S. Employer Identification No.)
   
24955 Interstate 45 North
  
The Woodlands, Texas
77380
(Address of principal executive offices)
(zip code)

(281) 367-1983
(Registrant’s telephone number, including area code)

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 [ X ]  No [   ]

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [   ]  No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ X ]
Accelerated filer [   ]
Non-accelerated filer [   ] (Do not check if a smaller reporting company)
Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]  No [ X ]

As of May 5, 2010, there were 75,677,752 shares outstanding of the Company’s Common Stock, $0.01 par value per share.

 
 
 


PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
             
Revenues:
            
   Product sales
   $ 103,193     $ 90,658  
   Services and rentals
     102,700       104,593  
      Total revenues
     205,893       195,251  
                 
Cost of revenues:
                
   Cost of product sales
     64,932       48,688  
   Cost of services and rentals
     69,033       66,934  
   Depreciation, depletion, amortization, and accretion
     36,834       36,259  
      Total cost of revenues
     170,799       151,881  
         Gross profit
     35,094       43,370  
                 
General and administrative expense
     22,777       24,569  
   Operating income
     12,317       18,801  
                 
Interest expense, net
     4,028       3,177  
Other (income) expense, net
     (183 )     (2,511 )
Income before taxes and discontinued operations
     8,472       18,135  
Provision for income taxes
     3,016       6,765  
Income before discontinued operations
     5,456       11,370  
Income (loss) from discontinued operations, net of taxes
     (29 )     (208 )
                 
   Net income
   $ 5,427     $ 11,162  
                 
Basic net income per common share:
                
   Income before discontinued operations
   $ 0.07     $ 0.15  
   Income (loss) from discontinued operations
     (0.00 )     (0.00 )
   Net income
   $ 0.07     $ 0.15  
                 
Average shares outstanding
     75,376       74,925  
                 
Diluted net income per common share:
                
   Income before discontinued operations
   $ 0.07     $ 0.15  
   Income (loss) from discontinued operations
     (0.00 )     (0.00 )
   Net income
   $ 0.07     $ 0.15  
                 
Average diluted shares outstanding
     76,781       74,997  
 

See Notes to Consolidated Financial Statements

 
1
 
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
   
March 31, 2010
    
December 31, 2009
  
   
(Unaudited)
        
ASSETS
            
Current assets:
            
   Cash and cash equivalents
   $ 74,410     $ 33,394  
   Restricted cash
     358       266  
   Trade accounts receivable, net of allowances for doubtful
                
     accounts of $2,317 in 2010 and $5,007 in 2009
     164,530       181,038  
   Inventories
     117,325       122,274  
   Derivative assets
     23,753       19,926  
   Prepaid expenses and other current assets
     41,754       33,905  
   Assets of discontinued operations
     378       15  
   Total current assets
     422,508       390,818  
                 
Property, plant, and equipment
                
   Land and building
     78,352       77,246  
   Machinery and equipment
     461,389       458,675  
   Automobiles and trucks
     42,563       42,432  
   Chemical plants
     176,586       94,767  
   Oil and gas producing assets (successful efforts method)
     666,582       676,692  
   Construction in progress
     14,419       95,470  
      1,439,891       1,445,282  
Less accumulated depreciation and depletion
     (660,548 )     (628,908 )
   Net property, plant, and equipment
     779,343       816,374  
                 
Other assets:
                
   Goodwill
     99,005       99,005  
   Patents, trademarks and other intangible assets, net of accumulated
          
     amortization of $19,735 in 2010 and $18,997 in 2009
     12,881       13,198  
   Deferred tax assets
     1,180       1,342  
   Other assets
     27,183       26,862  
   Total other assets
     140,249       140,407  
    $ 1,342,100     $ 1,347,599  


 
See Notes to Consolidated Financial Statements

 
2
 
 
TETRA Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
 
   
March 31, 2010
    
December 31, 2009
  
   
(Unaudited)
        
LIABILITIES AND STOCKHOLDERS' EQUITY
            
Current liabilities:
            
   Trade accounts payable
   $ 47,686     $ 57,418  
   Accrued liabilities
     73,070       84,638  
   Decommissioning and other asset retirement obligations, current
     74,019       77,891  
   Deferred tax liabilities
     19,156       19,893  
   Derivative liabilities
     3,788       2,618  
   Liabilities of discontinued operations
     54       17  
   Total current liabilities
     217,773       242,475  
                 
Long-term debt, net
     307,709       310,132  
Deferred income taxes
     56,669       56,125  
Decommissioning and other asset retirement obligations, net
     162,399       146,219  
Derivative liabilities
     537       -  
Other liabilities
     15,363       16,154  
      542,677       528,630  
Commitments and contingencies
                
                 
Stockholders' equity:
                
   Common stock, par value $0.01 per share; 100,000,000 shares
          
     authorized; 77,129,617, shares issued at March 31, 2010,
                
     and 77,039,628 shares issued at December 31, 2009
     771       770  
   Additional paid-in capital
     195,783       193,718  
   Treasury stock, at cost; 1,501,780 shares held at March 31, 2010,
          
     and 1,497,346 shares held at December 31, 2009
     (8,326 )     (8,310 )
   Accumulated other comprehensive income
     24,501       26,822  
   Retained earnings
     368,921       363,494  
   Total stockholders' equity
     581,650       576,494  
    $ 1,342,100     $ 1,347,599  


 

See Notes to Consolidated Financial Statements

 
3
 

TETRA Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
Operating activities:
            
   Net income
   $ 5,427     $ 11,162  
   Reconciliation of net income to cash provided by operating activities:
          
     Depreciation, depletion, amortization, and accretion
     36,267       35,855  
     Impairments of long-lived assets
     567       404  
     Provision for deferred income taxes
     343       4,759  
     Stock compensation expense
     1,549       1,884  
     Provision for doubtful accounts
     (1,318 )     602  
     (Gain) loss on sale of property, plant, and equipment
     93       (2,522 )
     Other non-cash charges and credits
     (2,977 )     1,762  
     Proceeds from insurance settlements and claims
     39,772       943  
     Changes in operating assets and liabilities, net of assets acquired:
          
       Accounts receivable
     4,493       16,306  
       Inventories
     3,583       4,449  
       Prepaid expenses and other current assets
     (5,832 )     21  
       Trade accounts payable and accrued expenses
     (23,796 )     (27,939 )
       Decommissioning liabilities
     (6,992 )     (8,296 )
       Operating activities of discontinued operations
     (326 )     84  
       Other
     999       382  
       Net cash provided by operating activities
     51,852       39,856  
                 
Investing activities:
                
   Purchases of property, plant, and equipment
     (10,846 )     (55,570 )
   Proceeds from sale of property, plant, and equipment
     64       168  
   Other investing activities
     (188 )     1,389  
       Net cash used in investing activities
     (10,970 )     (54,013 )
                 
Financing activities:
                
   Proceeds from long-term debt
     35       62,450  
   Principal payments on long-term debt
     -       (39,950 )
   Proceeds from exercise of stock options
     392       13  
   Excess tax benefit from exercise of stock options
     124       -  
       Net cash provided by financing activities
     551       22,513  
                 
Effect of exchange rate changes on cash
     (417 )     (133 )
                 
Increase in cash and cash equivalents
     41,016       8,223  
Cash and cash equivalents at beginning of period
     33,394       3,882  
Cash and cash equivalents at end of period
   $ 74,410     $ 12,105  
                 
Supplemental cash flow information:
                
   Interest paid
   $ 2,297     $ 3,035  
   Income taxes paid
     13,314       2,266  
                 
Supplemental disclosure of non-cash investing and financing activities:
          
   Adjustment of fair value of decommissioning liabilities
                
     capitalized (credited) to oil and gas properties
   $ 1,322     $ 2,950  
 

See Notes to Consolidated Financial Statements

 
4
 

TETRA Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
 
NOTE A – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We are a geographically diversified oil and gas services company focused on completion fluids and other products, production testing, wellhead compression, and selected offshore services including well plugging and abandonment, decommissioning, and diving, with a concentrated domestic exploration and production business. Unless the context requires otherwise, when we refer to “we,” “us,” and “our,” we are describing TETRA Technologies, Inc. and its consolidated subsidiaries on a consolidated basis.

The consolidated financial statements include the accounts of our wholly owned subsidiaries. Investments in unconsolidated joint ventures in which we participate are accounted for using the equity method. Our interests in oil and gas properties are proportionately consolidated. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission (SEC) and do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information furnished reflects all normal recurring adjustments, which are, in the opinion of management, necessary to provide a fair statement of the results for the interim periods. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2009.

Certain previously reported financial information has been reclassified to conform to the current year period’s presentation. The impact of such reclassifications was not significant to the prior year period’s overall presentation.

Cash Equivalents

We consider all highly liquid cash investments, with a maturity of three months or less when purchased, to be cash equivalents.

Restricted Cash

Restricted cash reflected on our balance sheet as of March 31, 2010, includes funds related to agreed repairs to be expended at one of our former Fluids Division facility locations. This cash will remain restricted until such time as the associated project is completed, which we expect to occur during the next twelve months.

Inventories

Inventories are stated at the lower of cost or market value and consist primarily of finished goods. Cost is determined using the weighted average method. Significant components of inventories as of March 31, 2010, and December 31, 2009, are as follows:
 
   
March 31, 2010
    
December 31, 2009
  
   
(In Thousands)
  
             
Finished goods
   $ 85,354     $ 88,704  
Raw materials
     3,271       3,436  
Parts and supplies
     26,696       26,060  
Work in progress
     2,004       4,074  
    $ 117,325     $ 122,274  

 
5
 
 
Repair Costs and Insurance Recoveries

Hurricane damage repair efforts consist of the repair of damaged facilities and equipment, the well intervention, abandonment, decommissioning, and debris removal associated with destroyed offshore platforms, the construction of replacement platforms and facilities, and the redrilling of destroyed wells. Primarily with regard to Maritech’s six offshore platforms which were destroyed in the 2005 and 2008 hurricanes, through March 31, 2010, we have expended approximately $80.4 million for work performed. For certain of the destroyed platforms, however, a significant amount of such work remains to be completed. We estimate that future well intervention, abandonment, decommissioning, debris removal, platform reconstruction, and well redrill efforts associated with the destroyed platforms will cost approximately $95 to $110 million net to our interest before any insurance recoveries. Approximately $50 to $60 million of this cost relates to platforms destroyed by Hurricane Ike. Actual costs could greatly exceed these estimates. Approximately $70 million of this amount has been accrued as part of Maritech’s decommissioning liability, and an additional $25 to $40 million relates primarily to the estimated cost to construct a new offshore platform at Maritech’s East Cameron 328 field and redrill several wells at this location.

In the past, we have maintained insurance protection which we believe to be customary and in amounts sufficient to reimburse us for casualty losses, including for a majority of the repair, well intervention, abandonment, decommissioning, and debris removal costs associated with the damages incurred from hurricanes and other damages, such as the value of lost inventory and the cost to replace a sunken transport barge which was lost in 2009. Such insurance coverage is subject to certain coverage limits. For our Maritech hurricane damages caused by Hurricane Ike during 2008, we anticipate that we will exceed these coverage limits. With regard to costs incurred that we believe will qualify for coverage under our various insurance policies, we recognize anticipated insurance recoveries when collection is deemed probable. Any recognition of anticipated insurance recoveries is used to offset the original charge to which the insurance relates. The amount of anticipated insurance recoveries is included either in accounts receivable or as an offset to Maritech’s decommissioning liabilities in the accompanying consolidated balance sheets. During the first quarter of 2010, Maritech collected approximately $39.8 million of insurance proceeds associated with Hurricane Ike, which included the settlement of certain coverage at an amount less than the applicable coverage. This amount collected was greater than the covered hurricane repair, well intervention, and abandonment costs incurred to date, with the excess representing an advance payment of costs anticipated to be incurred in the future. The collection of these settlement proceeds resulted in the extinguishment of all of Maritech’s insurance receivables, the reversal of the future decommissioning costs previously capitalized to the applicable oil and gas properties, the reversal of anticipated insurance recoveries that had been netted against decommissioning liabilities, and approximately $2.2 million of pre-tax insurance gains that were credited to earnings during the quarter. Following the collection of the $39.8 million insurance settlement proceeds during the first quarter of 2010, Maritech has additional maximum remaining coverage available of approximately $29.5 million.

 The changes in anticipated insurance recoveries, including recoveries associated with a sunken transport barge and other non-hurricane related claims, during the three months ended March 31, 2010, are as follows:
 
   
Three Months Ended
  
   
March 31, 2010
  
   
(In Thousands)
  
       
Beginning balance
   $ 26,992  
         
Activity in the period:
        
   Claim related expenditures
     199  
   Insurance reimbursements
     (24,007 )
   Contested insurance recoveries
     -  
Ending balance at March 31, 2010
   $ 3,184  
 
Anticipated insurance recoveries that have been reflected as a reduction of our decommissioning liabilities were $0 at March 31, 2010, and $10.3 million at December 31, 2009. Anticipated insurance recoveries that have been reflected as insurance receivables were $3.2 million and $16.7 million at March 31, 2010 and December 31, 2009, respectively. In April 2010, we collected an additional $2.0 million of insurance recoveries related to insured damages from the sunken transport barge.

 
6
 

Net Income per Share

The following is a reconciliation of the weighted average number of common shares outstanding with the number of shares used in the computations of net income per common and common equivalent share:
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
             
Number of weighted average common shares outstanding
     75,375,557       74,924,810  
Assumed exercise of stock options
     1,405,093       71,974  
Average diluted shares outstanding
     76,780,650       74,996,784  
 
In applying the treasury stock method to determine the dilutive effect of the stock options outstanding during the first three months of 2010, we used the average market price of our common stock of $11.61. For the three months ended March 31, 2010 and 2009, the calculations of the average diluted shares outstanding excludes the impact of 2,151,398 and 4,204,086 outstanding stock options, respectively, that have exercise prices in excess of the average market price, as the inclusion of these shares would have been antidilutive.

Environmental Liabilities

Environmental expenditures which result in additions to property and equipment are capitalized, while other environmental expenditures are expensed. Environmental remediation liabilities are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. Estimates of future environmental remediation expenditures often consist of a range of possible expenditure amounts, a portion of which may be in excess of amounts of liabilities recorded. In this instance, we disclose the full range of amounts reasonably possible of being incurred. Any changes or developments in environmental remediation efforts are accounted for and disclosed each quarter as they occur.  Any recoveries of environmental remediation costs from other parties are recorded as assets when their receipt is deemed probable.

Complexities involving environmental remediation efforts can cause the estimates of the associated liability to be imprecise. Factors which cause uncertainties regarding the estimation of future expenditures include, but are not limited to, the effectiveness of the anticipated work plans in achieving targeted results and changes in the desired remediation methods and outcomes as prescribed by regulatory agencies. Uncertainties associated with environmental remediation contingencies are pervasive and often result in wide ranges of reasonably possible outcomes. Estimates developed in the early stages of remediation can vary significantly. Normally, a finite estimate of cost does not become fixed and determinable at a specific point in time. Rather, the costs associated with environmental remediation become estimable as the work is performed and the range of ultimate cost becomes more defined. It is possible that cash flows and results of operations could be materially affected by the impact of the ultimate resolution of these contingencies.

Fair Value Measurements

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date” within an entity’s principal market, if any. The principal market is the market in which the reporting entity would sell the asset or transfer the liability with the greatest volume and level of activity, regardless of whether it is the market in which the entity will ultimately transact for a particular asset or liability, or if a different market is potentially more advantageous. Accordingly, this exit price concept may result in a fair value that may differ from the transaction price or market price of the asset or liability.

Under generally accepted accounting principles, the fair value hierarchy prioritizes inputs to valuation techniques used to measure fair value. Fair value measurements should maximize the use of observable inputs and minimize the use of unobservable inputs, where possible. Observable inputs are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs may be needed to measure fair value in situations where there is little or no market activity for the asset or liability at the measurement date and are developed based on the best information available in the circumstances, which could include the reporting entity’s own judgments about the assumptions market participants would utilize in pricing the asset or liability.

 
7
 

We utilize fair value measurements to account for certain items and account balances within our consolidated financial statements. Fair value measurements are utilized in the allocation of purchase consideration for acquisition transactions to the assets and liabilities acquired, including intangible assets and goodwill. In addition, we utilize fair value measurements in the initial recording of our decommissioning and other asset retirement obligations. Fair value measurements may also be utilized on a nonrecurring basis, such as for the impairment of long-lived assets, including goodwill. The fair value of our financial instruments, which may include cash, temporary investments, accounts receivable, short-term borrowings, and long-term debt pursuant to our bank credit agreement, approximate their carrying amounts. The fair value of our long-term Senior Notes at March 31, 2010, was approximately $334.2 million compared to a carrying amount of approximately $307.7 million, as current rates are more favorable than the Senior Note interest rates. We calculate the fair value of our Senior Notes internally, using current market conditions and average cost of debt. We have not calculated or disclosed recurring fair value measurements of non-financial assets and non-financial liabilities.

We also utilize fair value measurements on a recurring basis in the accounting for our derivative contracts used to hedge a portion of our oil and gas production cash flows. For these fair value measurements, we utilize both a market approach and income approach, as we compare forward oil and natural gas pricing data from published sources over the remaining derivative contract term to the contract swap price and calculate a fair value using market discount rates. We have historically had no transfers of recurring fair value measurements between hierarchy levels. A summary of these fair value measurements as of March 31, 2010, and December 31, 2009, is as follows:
 
         
Fair Value Measurements as of March 31, 2010 Using
  
         
Quoted Prices in
              
         
Active Markets for
    
Significant Other
    
Significant
  
         
Identical Assets
    
Observable
    
Unobservable
  
   
Total as of
    
or Liabilities
    
Inputs
    
Inputs
  
Description
  
March 31, 2010
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
   
(In Thousands)
  
Asset for natural gas
                        
   swap contracts
   $ 23,753     $ -     $ 23,753     $ -  
Liability for oil swap contracts
     (4,325 )     -       (4,325 )     -  
Total
   $ 19,428                          


         
Fair Value Measurements as of December 31, 2009 Using
  
         
Quoted Prices in
              
         
Active Markets for
    
Significant Other
    
Significant
  
         
Identical Assets
    
Observable
    
Unobservable
  
   
Total as of
    
or Liabilities
    
Inputs
    
Inputs
  
Description
  
December 31, 2009
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
   
(In Thousands)
  
Asset for natural gas
                        
   swap contracts
   $ 19,926     $ -     $ 19,926     $ -  
Liability for oil swap contracts
     (2,618 )     -       (2,618 )     -  
Total
   $ 17,308                          

New Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) published Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605), Multiple Deliverable Revenue Arrangements” which establishes the accounting and reporting guidance for arrangements under which service providers will perform multiple revenue-generating activities. Specifically, this guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. Additional disclosures of multiple deliverable arrangements will also be required. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The adoption of the accounting and disclosure requirements of this ASU will not have a significant impact on our financial statements.

 
8
 

In January 2010, the FASB published ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements” which requires new disclosures about transfers in and out of fair value hierarchy levels, more detailed disclosures about activity in Level 3 fair value measurements, and clarifies existing disclosure requirements about asset and liability aggregation, inputs, and valuation techniques. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure requirements of activity in Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of the disclosure requirements of this ASU will not have a significant impact on our financial statements.

NOTE B – LONG-TERM DEBT AND OTHER BORROWINGS

Long-term debt consists of the following:
 
     
March 31, 2010
    
December 31, 2009
  
     
(In Thousands)
  
 
Scheduled Maturity
            
Bank revolving line of credit facility
June 26, 2011
   $ -     $ -  
5.07% Senior Notes, Series 2004-A
September 30, 2011
     55,000       55,000  
4.79% Senior Notes, Series 2004-B
September 30, 2011
     37,674       40,132  
5.90% Senior Notes, Series 2006-A
April 30, 2016
     90,000       90,000  
6.30% Senior Notes, Series 2008-A
April 30, 2013
     35,000       35,000  
6.56% Senior Notes, Series 2008-B
April 30, 2015
     90,000       90,000  
European bank credit facility
       -       -  
Other
       35       -  
        307,709       310,132  
Less current portion
       -       -  
     Total long-term debt
     $ 307,709     $ 310,132  
 
NOTE C – DECOMMISSIONING AND OTHER ASSET RETIREMENT OBLIGATIONS

The large majority of our asset retirement obligations consists of the future well abandonment and decommissioning costs for offshore oil and gas properties and platforms owned by our Maritech subsidiary, including the remaining well intervention, abandonment, decommissioning, and debris removal costs associated with offshore platforms destroyed by hurricanes. The amount of decommissioning liabilities recorded by Maritech is reduced by amounts allocable to joint interest owners, anticipated insurance recoveries, and any contractual amount to be paid by the previous owner of the oil and gas property when the liabilities are satisfied.

The changes in the asset retirement obligations during the three months ended March 31, 2010 and 2009 are as follows:
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
   
(In Thousands)
  
Beginning balance for the period, as reported
   $ 224,110     $ 248,725  
Activity in the period:
                
   Accretion of liability
     1,348       2,281  
   Retirement obligations incurred
     -       -  
   Revisions in estimated cash flows
     17,282       3,562  
   Settlement of retirement obligations
     (6,322 )     (10,872 )
                 
Ending balance as of March 31
   $ 236,418     $ 243,696  
 
    The majority of the first quarter 2010 increase in estimated cash flows for decommissioning liabilities and other asset retirement obligations relates primarily to Maritech’s offshore platforms that were destroyed by hurricanes and resulted from the collection of anticipated insurance recoveries that had been previously netted against Maritech’s decommissioning liabilities.

 
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NOTE D – HEDGE CONTRACTS

We are exposed to financial and market risks that affect our businesses. We have market risk exposure in the sales prices we receive for our oil and gas production. We have currency exchange rate risk exposure related to specific transactions denominated in a foreign currency as well as to investments in certain of our international operations. As a result of our variable rate bank credit facility, to the extent we have debt outstanding, we face market risk exposure related to changes in applicable interest rates. We have concentrations of credit risk as a result of trade receivables from companies in the energy industry. Our financial risk management activities involve, among other measures, the use of derivative financial instruments, such as swap and collar agreements, to hedge the impact of market price risk exposures for a significant portion of our oil and gas production and for certain foreign currency transactions. We are exposed to the volatility of oil and gas prices for the portion of our oil and gas production that is not hedged. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives, our strategies for undertaking various hedge transactions, and our methods for assessing and testing correlation and hedge ineffectiveness. All hedging instruments are linked to the hedged asset, liability, firm commitment, or forecasted transaction. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in these hedging transactions are highly effective in offsetting changes in cash flows of the hedged items.

Derivative Hedge Contracts

As of March 31, 2010, we had the following cash flow hedging swap contracts outstanding relating to a portion of our Maritech subsidiary’s oil and gas production:

Derivative Contracts
  
Aggregate
Daily Volume
  
Weighted Average Contract Price
  
Contract Year
  
March 31, 2010
              
Oil swap contracts
  
3,000 barrels/day
  
$80.77/barrel
   2010  
Oil swap contracts   1,000 barrels/day    $84.20/barrel   2011  
               
Natural gas swap contracts
  
20,000 MMBtu/day
  
$8.147/MMBtu
   2010  

In April 2010, we entered into an additional oil swap contract for 1,000 barrels/day of 2011 production at a contract price of $91.15/barrel.

We believe that our swap agreements are “highly effective cash flow hedges,” in managing the volatility of future cash flows associated with our oil and gas production. The effective portion of the change in the derivative’s fair value (i.e., that portion of the change in the derivative’s fair value that offsets the corresponding change in the cash flows of the hedged transaction) is initially reported as a component of accumulated other comprehensive income, which is classified within stockholders’ equity. This component of accumulated other comprehensive income associated with cash flow hedge derivative contracts, including those derivative contracts which have been liquidated, will be subsequently reclassified into product sales revenues, utilizing the specific identification method, when the hedged exposure affects earnings (i.e., when hedged oil and gas production volumes are reflected in revenues). As of March 31, 2010, substantially all of the total balance (approximately $21.8 million) of accumulated other comprehensive income associated with cash flow hedge derivatives is expected to be reclassified into product sales revenue during 2010. Any “ineffective” portion of the change in the derivative’s fair value is recognized in earnings immediately.

The fair value of hedging instruments reflects our best estimates and is based upon exchange or over-the-counter quotations, whenever they are available. Quoted valuations may not be available. Where quotes are not available, we utilize other valuation techniques or models to estimate fair values. These modeling techniques require us to make estimations of future prices, price correlation, and market volatility and liquidity. The actual results may differ from these estimates, and these differences can be positive or negative. The fair value of our oil and natural gas swap contracts as of March 31, 2010, and December 31, 2009, is as follows:

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Derivatives designated
Balance Sheet
  
Fair Value at
  
as hedging instruments
Location
  
March 31, 2010
    
December 31,2009
  
     
(In Thousands)
  
               
Natural gas swap contracts
Current assets
   $ 23,753     $ 19,926  
Oil swap contracts
Current liabilities
     (3,788 )     (2,618 )
Oil swap contracts
Long-term liabilities
     (537 )     -  
Total derivatives designated as hedging instruments
   $ 19,428     $ 17,308  

Oil and natural gas swap assets that are classified as current assets or current liabilities relate to the portion of the derivative contracts associated with hedged oil and gas production to occur over the next twelve month period. None of the oil and natural gas swap contracts contain credit risk related contingent features that would require us to post assets as collateral for contracts that are classified as liabilities. Pretax gains and losses associated with oil and gas derivative swap contracts for the three month periods ended March 31, 2010 and 2009 are summarized below:
 
   
Three Months Ended March 31, 2010
  
Derivative Swap Contracts
  
Oil
    
Natural Gas
    
Total
  
   
(In Thousands)
  
Amount of pretax gain reclassified from accumulated other comprehensive
              
  income into product sales revenue (effective portion)
   $ 5,081     $ 4,500     $ 9,581  
Amount of pretax gain (loss) from change in derivative fair value
                        
  recognized in other comprehensive income
     (1,483 )     8,408       6,925  
Amount of pretax gain (loss) recognized in other income (expense)
                        
  (ineffective portion)
     (294 )     250       (44 )


   
Three Months Ended March 31, 2009
  
Derivative Swap Contracts
  
Oil
    
Natural Gas
    
Total
  
   
(In Thousands)
  
Amount of pretax gain reclassified from accumulated other comprehensive
              
  income into product sales revenue (effective portion)
   $ 4,521     $ 7,391     $ 11,912  
Amount of pretax gain (loss) from change in derivative fair value
                        
  recognized in other comprehensive income
     2,196       17,546       19,742  
Amount of pretax gain (loss) recognized in other income (expense)
                        
  (ineffective portion)
     (241 )     (638 )     (879 )

Other Hedge Contracts

Our long-term debt includes borrowings that are designated as a hedge of our net investment in our European calcium chloride operations. The hedge is considered to be effective, since the debt balance designated as the hedge is less than or equal to the net investment in the foreign operation. At March 31, 2010, we had 28 million euros (approximately $37.7 million) designated as a hedge of our net investment in this foreign operation. Changes in the foreign currency exchange rate have resulted in a cumulative change to the cumulative translation adjustment account of $3.1 million, net of taxes, at March 31, 2010, with no ineffectiveness recorded.

 
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NOTE E – COMPREHENSIVE INCOME

Comprehensive income for the three month periods ended March 31, 2010 and 2009 is as follows:
 
   
Three Months Ended March 31,
  
   
2010
    
2009
  
   
(In Thousands)
  
             
Net income
   $ 5,427     $ 11,162  
Net change in derivative fair value, net of taxes of $2,576
                
  and $7,344, respectively
     4,349       12,398  
Reclassification of derivative fair value into product sales
                
  revenues, net of taxes of $(3,564) and $(4,431), respectively
     (6,017 )     (7,481 )
Foreign currency translation adjustment, net of taxes of
                
  $(536) and $(1,197), respectively
     (653 )     (1,428 )
Comprehensive income
   $ 3,106     $ 14,651  
 
NOTE F – COMMITMENTS AND CONTINGENCIES

Litigation

We are named defendants in several lawsuits and respondents in certain governmental proceedings, arising in the ordinary course of business. While the outcome of lawsuits or other proceedings against us cannot be predicted with certainty, management does not reasonably expect these matters to have a material adverse impact on the financial statements.

Class Action Lawsuit - Between March 27, 2008, and April 30, 2008, two putative class action complaints were filed in the United States District Court for the Southern District of Texas (Houston Division) against us and certain former officers by certain stockholders on behalf of themselves and other stockholders who purchased our common stock between January 3, 2007, and October 16, 2007. The complaints assert claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The complaints allege that the defendants violated the federal securities laws during the period by, among other things, disseminating false and misleading statements and/or concealing material facts concerning our current and prospective business and financial results. The complaints also allege that, as a result of these actions, our stock price was artificially inflated during the class period, which enabled our insiders to sell their personally-held shares for a substantial gain. The complaints seek unspecified compensatory damages, costs, and expenses. On May 8, 2008, the Court consolidated these complaints as In re TETRA Technologies, Inc. Securities Litigation, No. 4:08-cv-0965 (S.D. Tex.). On August 27, 2008, Lead Plaintiff Fulton County Employees’ Retirement System filed its Amended Consolidated Complaint. On October 28, 2008, we filed a motion to dismiss the federal class action. On July 9, 2009, the Court issued an opinion dismissing, without prejudice, most of the claims in this lawsuit but permitting plaintiffs to proceed on their allegations regarding disclosures pertaining to the collectability of certain insurance receivables.

Derivative Lawsuit - Between May 28, 2008, and June 27, 2008, two petitions were filed by alleged stockholders in the District Courts of Harris County, Texas, 133rd and 113th Judicial Districts, purportedly on our behalf. The suits name our directors and certain officers as defendants. The factual allegations in these lawsuits mirror those in the class action lawsuit, and the claims are for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets. The petitions seek disgorgement, costs, expenses, and unspecified equitable relief. On September 22, 2008, the 133rd District Court consolidated these complaints as In re TETRA Technologies, Inc. Derivative Litigation, Cause No. 2008-23432 (133rd Dist. Ct., Harris County, Tex.), and appointed Thomas Prow and Mark Patricola as Co-Lead Plaintiffs. This lawsuit was stayed by agreement of the parties pending the Court’s ruling on our motion to dismiss the federal class action. On September 8, 2009, the plaintiffs in this state court action filed a consolidated petition which makes factual allegations similar to the surviving allegations in the federal lawsuit. On April 19, 2010, the Court granted our motion to abate the suit, based on plaintiff’s inability to demonstrate derivative standing.

 
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At this stage, it is impossible to predict the outcome of these proceedings or their impact upon us. We currently believe that the allegations made in the federal complaints and state petitions are without merit, and we intend to seek dismissal of and vigorously defend against these actions. While a successful outcome cannot be guaranteed, we do not reasonably expect these lawsuits to have a material adverse effect. In addition, we maintain director and officer insurance coverage, and our insurer has been notified and is participating in the claims.

Environmental

One of our subsidiaries, TETRA Micronutrients, Inc. (TMI), previously owned and operated a production facility located in Fairbury, Nebraska. TMI is subject to an Administrative Order on Consent issued to American Microtrace, Inc. (n/k/a/ TETRA Micronutrients, Inc.) in the proceeding styled In the Matter of American Microtrace Corporation, EPA I.D. No. NED00610550, Respondent, Docket No. VII-98-H-0016, dated September 25, 1998 (the Consent Order), with regard to the Fairbury facility. TMI is liable for future remediation costs and ongoing environmental monitoring at the Fairbury facility under the Consent Order; however, the current owner of the Fairbury facility is responsible for costs associated with the closure of that facility.

In August of 2009, the Environmental Protection Agency (EPA), pursuant to Sections 308 and 311 of the Clean Water Act (CWA), served a request for information with regard to a release of our zinc bromide that occurred from one of our transport barges on the Mississippi River on March 11, 2009. We timely filed a response to that request for information in August 2009. In January 2010, the EPA issued a Notice of Violation and Opportunity to Show Cause related to the spill. We met with the EPA in April 2010 to discuss potential violations and penalties. It has been agreed that no injunctive relief will be required. Though penalties have not yet been assessed, we expect any penalties to be covered by insurance.

NOTE G – INDUSTRY SEGMENTS

We manage our operations through five operating segments: Fluids, Offshore Services, Maritech, Production Testing, and Compressco.

Our Fluids Division manufactures and markets clear brine fluids, additives, and other associated products and services to the oil and gas industry for use in well drilling, completion, and workover operations both in the United States and in certain regions of Latin America, Europe, Asia, the Middle East, and Africa. The Division also markets liquid and dry calcium chloride, including product manufactured at its production facilities, to a variety of markets outside the energy industry.

Our Offshore Division consists of two operating segments: Offshore Services and Maritech, an oil and gas exploration, exploitation, and production segment. The Offshore Services segment provides (1) downhole and subsea services such as plugging and abandonment, workover, and wireline services, (2) construction and decommissioning services, including hurricane damage remediation, utilizing heavy lift barges and cutting technologies in the construction or decommissioning of offshore oil and gas production platforms and pipelines, and (3) diving services involving conventional and saturated air diving and the operation of several dive support vessels.
 
 
The Maritech segment consists of our Maritech subsidiary, which is an oil and gas exploration, exploitation, and production company focused in the offshore and onshore U.S. Gulf of Mexico region. Maritech periodically acquires oil and gas properties in order to replenish or expand its production operations and to provide additional development and exploitation opportunities. The Offshore Division’s Offshore Services segment performs a significant portion of the well abandonment and decommissioning services required by Maritech.
 
 
Our Production Enhancement Division consists of two operating segments: Production Testing and Compressco. The Production Testing segment provides production testing services in many of the major oil and gas basins in the United States, as well as onshore basins in Latin America, Northern Africa, the Middle East, and other international markets.

The Compressco segment provides wellhead compression-based production enhancement services and products throughout many of the onshore producing regions of the United States, as well as
 
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basins in Canada, Mexico, South America, Europe, Asia, and other international locations. These compression services can improve the value of natural gas and oil wells by increasing daily production and total recoverable reserves.

We generally evaluate performance and allocate resources based on profit or loss from operations before income taxes and nonrecurring charges, return on investment, and other criteria. Transfers between segments, as well as geographic areas, are priced at the estimated fair value of the products or services as negotiated between the operating units. “Corporate overhead” includes corporate general and administrative expenses, corporate depreciation and amortization, interest income and expense, and other income and expense.

Summarized financial information concerning the business segments from continuing operations is as follows: