Notes to the Unaudited Condensed Consolidated Financial Statements
1. Organization and Operations
Cypress Energy Partners, L.P. (“we”, “us”, “our”, or the “Partnership”) is a Delaware limited partnership formed in 2013 to provide independent pipeline inspection and integrity services to producers, public utility companies, and pipeline companies and to provide saltwater disposal and other water and environmental services to U.S. onshore oil and natural gas producers and trucking companies. Trading of our common units began January 15, 2014 on the New York Stock Exchange under the symbol “CELP”. Our business is organized into the Pipeline Inspection Services (“Pipeline Inspection”), Pipeline & Process Services (“Pipeline & Process Services”), and Water and Environmental Services (“Water Services”) segments.
The Pipeline Inspection segment generates revenue primarily by providing essential inspection and integrity services on a variety of infrastructure assets including midstream pipelines, gathering systems, and distribution systems. Services include non-destructive examination, mechanical integrity, in-line inspection support, pig tracking, survey, data gathering, and supervision of third-party contractors. Our results in this segment are driven primarily by the number of inspectors that perform services for our customers and the fees that we charge for those services, which depend on the type, skills, technology, equipment, and number of inspectors used on a particular project, the nature of the project, and the duration of the project. The number of inspectors engaged on projects is driven by the type of project, prevailing market rates, the age and condition of customers’ assets including pipelines, gas plants, compression stations, storage facilities, and gathering and distribution systems including the legal and regulatory requirements relating to the inspection and maintenance of those assets. Our customers are also billed for per diem charges, mileage, and other reimbursement items. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity, considering that many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, inspection work throughout the United States during the winter months (especially in the northern states) may be hampered or delayed due to inclement weather.
The Pipeline & Process Services segment (formerly our Integrity Services segment) generates revenue primarily by providing essential midstream services including hydrostatic testing services and chemical cleaning to energy companies and pipeline construction companies of newly-constructed and existing pipelines and related infrastructure. We generally charge our customers in this segment on a fixed-bid basis, depending on the size and length of the pipeline being tested, the complexity of services provided, and the utilization of our work force and equipment. Our results in this segment are driven primarily by the number of field personnel that perform services for our customers and the fees that we charge for those services, which depend on the type and number of field personnel used on a particular project, the type of equipment used and the fees charged for the utilization of that equipment, and the nature and duration of the project.
The Water Services segment owns and operates nine (9) Environmental Protection Agency Class II saltwater disposal facilities in the Williston Basin region of North Dakota. Eight (8) of the facilities are wholly-owned and we have ten (10) pipelines from multiple E&P customers connected to these saltwater disposal facilities, including two (2) that we developed and own. Our saltwater disposal facilities provide essential midstream services to oil and natural gas upstream producers and their transportation companies. All of the saltwater disposal facilities utilize specialized equipment and remote monitoring to minimize the facilities’ downtime and increase the facilities’ efficiency for peak utilization. These facilities also utilize oil skimming and recovery processes that remove residual oil from water delivered to our saltwater disposal facilities via pipeline or truck. We sell the oil recovered from these skimming processes, which contributes to our revenues. In addition to these saltwater disposal facilities, we provide management and staffing services to a saltwater disposal facility in which we own a 25% ownership interest (see Note 6).
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2019 and 2018 include our accounts and those of our controlled subsidiaries. Investments over which we exercise significant influence, but do not control, are accounted for using the equity method of accounting. Intercompany transactions and account balances have been eliminated in consolidation. The Unaudited Condensed Consolidated Balance Sheet at December 31, 2018 is derived from our audited financial statements.
The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Unaudited Condensed Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2018 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. Certain previously-reported amounts have been reclassified to conform to the current presentation.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Use of Estimates in the Preparation of Financial Statements
The preparation of the Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
Significant Accounting Policies
Our significant accounting policies are consistent with those disclosed in Note 2 to our audited financial statements as of and for the year ended December 31, 2018 included in our Form 10-K, except for the adoption of Accounting Standards Update (“ASU”) 2016-02 –
Leases
on January 1, 2019. We adopted the new standard on the effective date of January 1, 2019 and used a modified retrospective approach as permitted under ASU 2018-11. See Note 9 for lease disclosures. The effects of implementing ASU 2016-02 were material to our Consolidated Balance Sheets with the addition of right-of-use assets and associated lease liabilities, but immaterial to our Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
Accounts Receivable and Allowance for Bad Debts
We grant unsecured credit to customers under normal industry standards and terms, and have established policies and procedures that allow for an evaluation of each of our customer’s creditworthiness. We typically receive payment from our customers 45 to 90 days after the services have been performed. We determine allowances for bad debts based on management’s assessment of the creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received.
Pacific Gas and Electric Bankruptcy
PG&E Corporation and its wholly-owned subsidiary Pacific Gas and Electric Company (collectively, “PG&E”) filed for bankruptcy protection on January 29, 2019. PG&E is a significant customer that accounted for $43.4 million of the revenue and $6.4 million of the gross margin of our Pipeline Inspection segment during the year ended December 31, 2018. As of December 31, 2018, the assets on our Consolidated Balance Sheet included $10.3 million of accounts receivable from PG&E. We collected $1.0 million of this balance in January 2019 prior to PG&E’s bankruptcy filing. We generated $2.8 million of revenue from PG&E during the period from January 1, 2019 through January 28, 2019, bringing the total accounts receivable from PG&E to $12.1 million as of the date of the bankruptcy filing.
We have continued to provide services to PG&E after the bankruptcy filing and began receiving payment for such services. We have not recorded an allowance against the accounts receivable from PG&E at March 31, 2019, as we do not believe it is probable that we will ultimately be unable to collect the full balance of the pre-petition receivables. However, due to uncertainties associated with the bankruptcy process, we cannot make assurances regarding the ultimate collection of these receivables nor can we make assurances regarding the timing of any such collections.
Revenue Recognition
Under Accounting Standards Codification (“ASC”) 606 -
Revenue from Contracts with Customers
, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Based on this accounting guidance, our revenue is earned and recognized through the service offerings of our three reportable business segments. Our sales contracts generally have terms of less than one year. As such, we have used the practical expedient contained within the accounting guidance which exempts us from the requirement to disclose the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract with an original expected duration of one year or less. We apply judgment in determining whether we are the principal or the agent in instances where we utilize subcontractors to perform all or a portion of the work under our contracts. Based on the criteria in ASC 606, we have determined we are principal in all such circumstances. See Note 10 for disaggregated revenue reported by segment.
Pipeline Inspection
- We generate revenue in the Pipeline Inspection segment primarily by providing inspection services on midstream pipelines, gathering systems and distributions systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. We charge our customers on a per-inspector basis, including per diem charges, mileage, and other reimbursement items. Generally, revenues are recognized when the services are performed.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Pipeline & Process Services
- We generate revenue in the Pipeline & Process Services segment primarily by providing hydrostatic testing services to major natural gas and petroleum companies and pipeline construction companies of newly-constructed and existing natural gas and petroleum pipelines. We generally charge our customers in this segment on a fixed-bid basis, depending on the size and length of the pipeline being inspected, the complexity of services provided, and the utilization of our work force and equipment. Generally, revenues are recognized when the services are performed.
Water Services
- We generate revenue in the Water Services segment primarily by treating flowback and produced water and injecting the saltwater into our saltwater disposal facilities. Our results are driven primarily by the volumes of produced water and flowback water we inject into our saltwater disposal facilities and the fees we charge for these services. These fees are charged on a per-barrel basis and vary based on the quantity and type of saltwater disposed, competitive dynamics, and operating costs. In addition, for minimal marginal cost, we generate revenue by selling residual oil we recover from the water. We also generate revenue managing a saltwater disposal facility for a fee. Water disposal revenues are recognized upon receipt of the wastewater at our disposal facilities. Revenues from sales of oil that is recovered in the process of treating wastewater are recognized when the oil is delivered to the customer. Management fee revenue is recorded when the services are performed.
Income Taxes
As a limited partnership, we generally are not subject to federal, state, or local income taxes. The tax on our net income is generally borne by the individual partners. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) of the partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.
The income of Tulsa Inspection Resources – Canada, ULC, our Canadian subsidiary, is taxable in Canada. Tulsa Inspection Resources – PUC, LLC, a subsidiary of our Pipeline Inspection segment that performs pipeline inspection services for utility customers, and Brown Integrity – PUC, LLC, a subsidiary in which we own a 51% membership interest, have elected to be taxed as corporations for U.S. federal income tax purposes, and therefore, these subsidiaries are subject to U.S. federal and state income tax. The amounts recognized as income tax expense (benefit), income taxes payable, and deferred tax assets / liabilities in our Unaudited Condensed Consolidated Financial Statements include the Canadian income taxes and U.S. federal and state income taxes referred to above, as well as partnership-level taxes levied by various states, which primarily include franchise taxes assessed by the state of Texas.
As a publicly-traded partnership, we are subject to a statutory requirement that 90% of our total gross income represent “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements), determined on a calendar-year basis. If our qualifying income does not meet this statutory requirement, we could be taxed as a corporation for federal and state income tax purposes. Our income has met the statutory qualifying income requirement each year since our initial public offering (“IPO”).
Noncontrolling Interest
We own a 51% interest in Brown Integrity, LLC (“Brown”) and a 49% interest in CF Inspection Management, LLC (“CF Inspection”). The accounts of these subsidiaries are included in our Unaudited Condensed Consolidated Financial Statements. The portion of the net income (loss) of these entities that is attributable to outside owners is reported as
net income (loss) attributable to noncontrolling interests
in our Unaudited Condensed Consolidated Statements of Operations, and the portion of the net assets of these entities that is attributable to outside owners is reported as
noncontrolling interests
on our Unaudited Condensed Consolidated Balance Sheets.
Property and Equipment
Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, computer and office equipment, and vehicles. We record property and equipment at cost. Costs of improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. We depreciate property and equipment on a straight-line basis over the estimated useful lives of the assets. Upon retirement or disposition of an asset, we remove the cost and related accumulated depreciation from the balance sheet and report the resulting gain or loss, if any, in the Unaudited Condensed Consolidated Statements of Operations.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
We assess property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments, and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of the carrying value of the asset over its estimated fair value. Determinations as to whether and how much an asset is impaired involve management estimates on highly uncertain matters such as future commodity prices, the effects of inflation on operating expenses, and the outlook for national or regional market supply and demand for the services we provide.
Identifiable Intangible Assets
Our intangible assets consist primarily of customer relationships, trade names, and our database of inspectors. We recorded these intangible assets as part of our accounting for the acquisitions of businesses, and we amortize these assets on a straight-line basis over their estimated useful lives, which typically range from 5 – 20 years.
We review our intangible assets for impairment whenever events or circumstances indicate that the asset group to which they relate may be impaired. To perform an impairment assessment, we first determine whether the cash flows expected to be generated from the asset group exceed the carrying value of the asset group. If such estimated cash flows do not exceed the carrying value of the asset group, we reduce the carrying values of the assets to their fair values and record a corresponding impairment loss.
Goodwill
Goodwill is not amortized, but is subject to an annual review for impairment on November 1 (or at other dates if events or changes in circumstances indicate that the carrying value of goodwill may be impaired) at a reporting unit level. The reporting units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business that relates to the applicable goodwill is managed or operated. We have determined that our Pipeline Inspection, Pipeline & Process Services, and Water Services segments are the appropriate reporting units for testing goodwill impairment.
To perform a goodwill impairment assessment, we perform an analysis to assess whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. If we determine that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we reduce the carrying value of goodwill and record a corresponding impairment expense.
Accrued Payroll and Other
Accrued payroll and other
on our Unaudited Condensed Consolidated Balance Sheets includes the following:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
$
|
14,445
|
|
|
$
|
9,468
|
|
Customer deposits
|
|
|
1,202
|
|
|
|
1,202
|
|
Other
|
|
|
1,230
|
|
|
|
1,606
|
|
|
|
$
|
16,877
|
|
|
$
|
12,276
|
|
Foreign Currency Translation
Our Unaudited Condensed Consolidated Financial Statements are reported in U.S. dollars. We translate our Canadian-dollar-denominated assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate our Canadian-dollar-denominated revenues and expenses into U.S. dollars at the average exchange rate in effect during the period in which the applicable revenues and expenses were recorded.
Our Unaudited Condensed Consolidated Balance Sheet at March 31, 2019 includes $2.5 million of
accumulated other comprehensive loss
associated with accumulated currency translation adjustments, all of which relate to our Canadian operations. If at some point in the future we were to sell or substantially liquidate our Canadian operations, we would reclassify the balance in
accumulated other comprehensive loss
to other accounts within
partners’ capital
, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net income. Our Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated subsidiaries are eliminated on our Consolidated Balance Sheets. We report currency translation adjustments on these intercompany payables and receivables within
foreign currency gains (losses)
in our Consolidated Statements of Operations.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
New Accounting Standards
In 2019, we adopted the following new accounting standard issued by the Financial Accounting Standards Board (“FASB”);
The FASB issued ASU 2016-02 –
Leases
in February 2016. This guidance attempts to increase transparency and comparability among organizations by recognizing certain lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP methodology and the method used in this new guidance is the recognition on the balance sheet of lease assets and lease liabilities by lessees for certain operating leases.
We made accounting policy elections to not capitalize leases with a lease term of twelve months or less and to not separate lease and non-lease components for all asset classes. We also elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases, but did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
In July 2018, the FASB issued ASU 2018-11 –
Targeted Improvements
which provided entities with a transition option to not restate the comparative periods for the effects of applying the new leasing standard (i.e. comparative periods presented in the Consolidated Financial Statements will continue to be in accordance with Accounting Standards Codification 840). We adopted the new standard on the effective date of January 1, 2019 and used a modified retrospective approach as permitted under ASU 2018-11. The effects of implementing ASU 2016-02 were material to our Consolidated Balance Sheets with the addition of right-of-use assets and associated lease liabilities, but immaterial to our Consolidated Statements of Operations and Consolidated Statements of Cash Flows. Upon adoption, we recorded operating lease right-of-use assets of $3.5 million and current and noncurrent operating lease obligations of $0.5 million and $3.0 million, respectively. Liabilities recorded as a result of this standard are excluded from the definition of indebtedness under our credit facility, and therefore do not adversely impact the leverage ratio under our credit facility.
Other accounting guidance proposed by the FASB that may impact our Unaudited Condensed Consolidated Financial Statements, which we have not yet adopted include:
The FASB issued ASU 2016-13 –
Financial Instruments – Credit Losses
in June 2016, which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss” methodology. This guidance affects trade receivables, financial assets and certain other instruments that are not measured at fair value through net income. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact this ASU will have on our Unaudited Condensed Consolidated Financial Statements.
3. Debt
On May 29, 2018, we entered into an amended and restated credit agreement (as amended and restated, the “Credit Agreement”) that provides up to $90.0 million in borrowing capacity, subject to certain limitations, and contains an accordion feature that allows us to increase the borrowing capacity to $110.0 million if the lenders agree to increase their commitments in the future or if other lenders join the facility. The three-year Credit Agreement matures May 29, 2021. The obligations under the Credit Agreement are secured by a first priority lien on substantially all of our assets. The credit agreement as it existed prior to the May 29, 2018 amendment will hereinafter be referred to as the “Previous Credit Agreement” or, together with the Credit Agreement, as the “Credit Agreements”.
Outstanding borrowings at March 31, 2019 and December 31, 2018 were $83.1 million and $76.1 million, respectively, and are reflected as
long-term debt
on the Unaudited Condensed Consolidated Balance Sheets. Debt issuance costs are reported as
debt issuance costs, net
on the Unaudited Condensed Consolidated Balance Sheets and total $1.1 million and $1.3 million at March 31, 2019 and December 31, 2018, respectively. The carrying value of our long-term debt approximates fair value, as the borrowings under the Credit Agreement are considered to be priced at market for debt instruments having similar terms and conditions (Level 2 of the fair value hierarchy).
We incurred certain debt issuance costs associated with the Previous Credit Agreement, which we were amortizing on a straight-line basis over the life of the Previous Credit Agreement. Upon amending the Credit Agreement in May 2018, we wrote off $0.1 million of these debt issuance costs, which represented the portion of the unamortized debt issuance costs attributable to lenders who are no longer participating in the credit facility subsequent to the amendment. The remaining debt issuance costs associated with the Previous Credit Agreement, along with $1.3 million of debt issuance costs associated with the amended and restated Credit Agreement, are being amortized on a straight-line basis over the three-year term of the Credit Agreement.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
All borrowings under the Credit Agreement bear interest, at our option, on a leveraged based grid pricing at (i) a base rate plus a margin of 1.5% to 3.0% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.5% to 4.0% per annum (“LIBOR Borrowings”). The applicable margin is determined based on the leverage ratio of the Partnership, as defined in the Credit Agreement.
Generally, the interest rate on our borrowings ranged between 5.98% and 6.02% for the three months ended March 31, 2019 and 4.74% and 5.63% for the three months ended March 31, 2018. Interest on Base Rate Borrowings is payable monthly. Interest on LIBOR Borrowings is paid upon maturity of the underlying LIBOR contract, but no less often than quarterly. Commitment fees are charged at a rate of 0.50% on any unused credit and are payable quarterly. Interest paid during the three months ended March 31, 2019 and 2018 was $1.2 million and $1.8 million respectively, including commitment fees.
The Credit Agreement contains various customary covenants and restrictive provisions. The Credit Agreement also requires maintenance of certain financial covenants, including a leverage ratio (as defined in the Credit Agreement) of not more than 4.0 to 1.0 and an interest coverage ratio (as defined in the Credit Agreement) of not less than 3.0 to 1.0. At March 31, 2019, our leverage ratio was 3.4 to 1.0 and our interest coverage ratio was 4.8 to 1.0, pursuant to the Credit Agreement. Upon the occurrence and during the continuation of an event of default, subject to the terms and conditions of the Credit Agreement, the lenders may declare any outstanding principal, together with any accrued and unpaid interest, to be immediately due and payable and may exercise the other remedies set forth or referred to in the Credit Agreement. We were in compliance with all debt covenants as of March 31, 2019.
In addition, the Credit Agreement restricts our ability to make distributions on, or redeem or repurchase, our equity interests, with certain exceptions detailed in the Credit Agreement. However, we may make distributions of available cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under the Credit Agreement, we are in compliance with the financial covenants in the Credit Agreement, and we have at least $5.0 million of unused capacity on the Credit Agreement at the time of the distribution.
In April 2019, we borrowed $0.8 million, increasing our total outstanding borrowings to $83.9 million as of May 13, 2019.
4. Income Taxes
The
income tax expense
reported in our Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 differs from the statutory tax rate of 21% in 2018 and 2019 due to the fact that, as a partnership, we are generally not subject to U.S. federal or state income taxes. Our income tax provision relates primarily to (1) our U.S. corporate subsidiaries that provide services to public utility customers, which may not fit within the definition of qualified income as it is defined in the Internal Revenue Code, Regulations, and other guidance, which subjects this income to U.S. federal and state income taxes, (2) our Canadian subsidiary, which is subject to Canadian federal and provincial income taxes, and (3) certain other state income taxes, including the Texas franchise tax.
5. Equity
Series A Preferred Units
On May 29, 2018 (the “Closing Date”), we entered into a Series A Preferred Unit Purchase Agreement (the “Preferred Unit Purchase Agreement”) with an entity controlled by Charles C. Stephenson, Jr. (the “Purchaser”), an affiliate of our General Partner, where we issued and sold in a private placement 5,769,231 Series A Preferred Units representing limited partner interests in the Partnership (the “Preferred Units”) to the Purchaser for a cash purchase price of $7.54 per Preferred Unit, resulting in gross proceeds to the Partnership of $43.5 million. We used proceeds from the transaction to reduce outstanding borrowings on our revolving credit facility. Concurrent with the closing of this transaction, we entered into an amended and restated Credit Agreement dated as of May 29, 2018, to amend and restate the terms of our credit facility, as more fully described in Note 3.
The Preferred Unit Purchase Agreement contains customary representations, warranties, and covenants of the Partnership and the Purchaser. The Partnership and the Purchaser agreed to indemnify each other and their respective officers, directors, managers, employees, agents, counsel, accountants, investment bankers, and other representatives against certain losses resulting from breaches of their respective representations, warranties, and covenants, subject to certain negotiated limitations and survival periods set forth in the Preferred Unit Purchase Agreement.
Pursuant to the Preferred Unit Purchase Agreement, and in connection with the closing of this transaction, our General Partner executed the First Amendment to First Amended and Restated Agreement of Limited Partnership of the Partnership, which authorizes and establishes the rights and preferences of the Preferred Units. The Preferred Units have voting rights that are identical to the voting rights of the common units into which such Preferred Units would be converted at the then-applicable conversion rate.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
The Purchaser is entitled to receive quarterly distributions that represent an annual return of 9.5% on the Preferred Units. Of this 9.5% annual return, we are required to pay at least 2.5% in cash and will have the option to pay the remaining 7.0% in kind (in the form of issuing additional preferred units) for the first twelve quarters after the Closing Date.
After the third anniversary of the Closing Date, the Purchaser will have the option to convert the Preferred Units into common units on a one-for-one basis. If certain conditions are met after the third anniversary of the Closing Date, we will have the option to cause the Preferred Units to convert to common units. After the third anniversary of the Closing Date, we will also have the option to redeem the Preferred Units. The Partnership may redeem the Preferred Units (a) at any time after the third anniversary of the closing date and on or prior to the fourth anniversary of the closing date at a redemption price equal to 105% of the issue price, and (b) at any time after the fourth anniversary of the closing date at a redemption price equal to 101% of the issue price.
Earnings Per Unit
Our
net income
is attributable and allocable to three ownership groups: (1) our preferred unitholder, (2) the noncontrolling interests in certain subsidiaries, and (3) our common unitholders.
Income attributable to our preferred unitholder
represents the 9.5% annual return to which the owner of the Preferred Units is entitled.
Net income (loss) attributable to noncontrolling interests
represent 49% of the income (loss) generated by Brown and 51% of the income (loss) generated by CF Inspection.
Net income attributable to common unitholders
represents our remaining net income, after consideration of amounts attributable to our preferred unitholder and the noncontrolling interests.
Basic net income per common limited partner unit
is calculated as
net income attributable to common unitholders
divided by the basic weighted average common units outstanding.
Diluted net income per common limited partner unit
include the dilutive effect of the unvested equity-based compensation. The following summarizes the calculation of the
basic net income per common limited partner unit
for the periods presented:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands, except per unit data)
|
|
Net income attributable to common unitholders
|
|
$
|
567
|
|
|
$
|
725
|
|
Weighted average common units outstanding
|
|
|
11,971
|
|
|
|
11,899
|
|
Basic net income per common limited partner unit
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
The following summarizes the calculation of the
diluted net income per common limited partner unit
for the periods presented:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands, except per unit data)
|
|
Net income attributable to common unitholders
|
|
$
|
567
|
|
|
$
|
725
|
|
|
|
|
|
|
|
|
|
|
Weighted average common units outstanding
|
|
|
11,971
|
|
|
|
11,899
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Weighted average preferred units outstanding (a)
|
|
|
—
|
|
|
|
—
|
|
Long-term incentive plan unvested units
|
|
|
384
|
|
|
|
85
|
|
Diluted weighted average common units outstanding
|
|
|
12,355
|
|
|
|
11,984
|
|
Diluted net income per common limited partner unit
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
(a)
|
For the three months ended March 31, 2019, the preferred units would have been antidilutive and therefore, were excluded from the computation of
diluted net income per limited partner unit
.
|
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Distributions
The following table summarizes the cash distributions declared and paid, or expected to be paid, to our common partners for 2018 and 2019:
Payment Date
|
|
Per Unit Cash Distributions
|
|
|
Total Cash Distributions
|
|
|
Total Cash Distributions to Affiliates (a)
|
|
|
|
|
|
|
(in thousands)
|
|
February 14, 2018
|
|
$
|
0.21
|
|
|
$
|
2,498
|
|
|
$
|
1,599
|
|
May 15, 2018
|
|
|
0.21
|
|
|
|
2,506
|
|
|
|
1,604
|
|
August 14, 2018
|
|
|
0.21
|
|
|
|
2,506
|
|
|
|
1,604
|
|
November 14, 2018
|
|
|
0.21
|
|
|
|
2,509
|
|
|
|
1,606
|
|
Total 2018 Distributions
|
|
$
|
0.84
|
|
|
$
|
10,019
|
|
|
$
|
6,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 14, 2019
|
|
$
|
0.21
|
|
|
$
|
2,510
|
|
|
$
|
1,606
|
|
May 15, 2019 (b)
|
|
|
0.21
|
|
|
|
2,531
|
|
|
|
1,622
|
|
Total 2019 Distributions (to date)
|
|
$
|
0.42
|
|
|
$
|
5,041
|
|
|
$
|
3,228
|
|
(a)
|
64% of the Partnership's outstanding common units at March 31, 2019 were held by affiliates.
|
(b)
|
First quarter 2019 distribution was declared and will be paid in the second quarter of 2019.
|
The following table summarizes the distributions paid to our preferred unitholder for 2018 and 2019:
Payment Date
|
|
Total Cash Distributions
|
|
|
Total Paid-in-Kind Distributions
|
|
|
Total Distributions
|
|
|
|
|
|
|
(in thousands)
|
|
November 14, 2018 (a)
|
|
$
|
1,412
|
|
|
$
|
—
|
|
|
$
|
1,412
|
|
Total 2018 Distributions
|
|
$
|
1,412
|
|
|
$
|
—
|
|
|
$
|
1,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 14, 2019
|
|
$
|
1,033
|
|
|
$
|
—
|
|
|
$
|
1,033
|
|
May 15, 2019 (b)
|
|
|
1,033
|
|
|
|
—
|
|
|
|
1,033
|
|
Total 2019 Distributions (to date)
|
|
$
|
2,066
|
|
|
$
|
—
|
|
|
$
|
2,066
|
|
(a)
|
This distribution represents the period from May 29, 2018 (date of preferred unit issuance) through September 30, 2018.
|
(b)
|
First quarter 2019 distribution will be paid in the second quarter of 2019.
|
Equity Compensation
Our General Partner has adopted a long-term incentive plan (“LTIP”) that authorizes the issuance of up to 2.5 million common units. Certain directors and employees of the Partnership have been awarded Phantom Restricted Units (“Units”) under the terms of the LTIP. The fair value of each award is determined based on the quoted market value of the publicly-traded common units at the grant date, adjusted for a discount to reflect the fact that distributions are not paid on the Units during the vesting period. Compensation expense is recognized on a straight-line basis over the vesting period of the grant. We account for forfeitures of share-based awards when the forfeitures occur. We recorded expense of $0.3 million and $0.2 million during the three months ended March 31, 2019 and 2018, respectively, related to the unit awards. We have historically granted annual LTIP awards to key employees in the second quarter of each year.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following table summarizes the LTIP Unit activity for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Number of Units
|
|
|
Weighted Average Grant Date Fair
Value / Unit
|
|
|
Number of Units
|
|
|
Weighted Average Grant Date Fair
Value / Unit
|
|
Units at January 1
|
|
|
974,709
|
|
|
$
|
5.76
|
|
|
|
664,509
|
|
|
$
|
8.42
|
|
Units granted
|
|
|
—
|
|
|
|
|
|
|
|
16,668
|
|
|
$
|
4.76
|
|
Units vested
|
|
|
(127,505
|
)
|
|
$
|
8.74
|
|
|
|
(54,306
|
)
|
|
$
|
13.14
|
|
Units forfeited
|
|
|
(35,872
|
)
|
|
$
|
5.82
|
|
|
|
(13,971
|
)
|
|
$
|
6.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units at March 31
|
|
|
811,332
|
|
|
$
|
5.29
|
|
|
|
612,900
|
|
|
$
|
8.00
|
|
The majority of the Unit awards vest in three tranches, with one-third of the units vesting three years from the grant date, one-third vesting four years from the grant date, and one-third vesting five years from the grant date. However, certain of the awards have different, and typically shorter, vesting periods. One grant, totaling 72,046 units, vests three years from the grant date, contingent upon the recipient meeting certain performance targets. Total unearned compensation associated with the LTIP at March 31, 2019 was $2.7 million with an average remaining life of 2.2 years.
6. Related-Party Transactions
Omnibus Agreement
We are party to an omnibus agreement with Holdings and other related parties. The omnibus agreement governs the following matters, among other things:
|
●
|
our payment of an annual administrative fee in the amount of $4.5 million (or approximately $1.1 million per quarter) to Holdings, for providing certain partnership overhead services, including executive management services by certain officers of our General Partner. This fee also includes the incremental general and administrative expenses we incur as a result of being a publicly traded partnership;
|
|
●
|
our right of first offer on Holdings’ and its subsidiaries’ assets used in, and entities primarily engaged in, providing saltwater disposal and other water and environmental services; and
|
|
●
|
indemnification of us by Holdings for certain environmental and other liabilities, including events and conditions associated with the operation of assets that occurred prior to the closing of the IPO and our obligation to indemnify Holdings for events and conditions associated with the operation of our assets that occur after the closing of the IPO and for environmental liabilities related to our assets to the extent Holdings is not required to indemnify us.
|
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
So long as Holdings controls our General Partner, the omnibus agreement will remain in full force and effect, unless we and Holdings agree to terminate it sooner. If Holdings ceases to control our General Partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms. We and Holdings may agree to further amend the omnibus agreement; however, amendments that the General Partner determines are adverse to our unitholders will also require the approval of the Conflicts Committee of our Board of Directors. As part of our new Credit Agreement, Holdings agreed to waive the omnibus fee to support us in the event our leverage ratio were to exceed 3.75 times our trailing twelve-month Adjusted EBITDA at any quarter-end during the term of the facility.
Alati Arnegard, LLC
The Partnership provides management services to a 25% owned company, Alati Arnegard, LLC (“Arnegard”). We recorded earnings from this investment of less than $0.1 million for each of the three months ended March 31, 2019 and 2018. These earnings are recorded in
other, net
in the Consolidated Statements of Operations and
equity in earnings of investee
in the Consolidated Statements of Cash Flows. Management fee revenue earned from Arnegard is included in
revenue
in the Consolidated Statements of Operations and totaled less than $0.1 million for each of the three months ended March 31, 2019 and 2018. Accounts receivable from Arnegard totaled $0.1 million at both March 31, 2019 and December 31, 2018, and is included in
trade accounts receivable, net
on the Consolidated Balance Sheets. Our investment in Arnegard totaled $0.3 million at both March 31, 2019 and December 31, 2018, and is included in
other assets
on the Consolidated Balance Sheets.
CF Inspection Management, LLC
We have also entered into a joint venture with CF Inspection, a nationally-qualified woman-owned inspection firm affiliated with one of Holdings’ owners. CF Inspection allows us to offer various services to clients that require the services of an approved Women’s Business Enterprise (“WBE”), as CF Inspection is certified as a Women’s Business Enterprise by the Supplier Clearinghouse in California and as a National Women’s Business Enterprise by the Women’s Business Enterprise National Council. We own 49% of CF Inspection and Cynthia A. Field, an affiliate of Holdings and a Director of our Partnership, owns the remaining 51% of CF Inspection. For the three months ended March 31, 2019, CF Inspection represented approximately 2.6% of our consolidated revenue.
Sale of Preferred Equity
As described in Note 5, we issued and sold $43.5 million of preferred equity to an affiliate in May 2018.
7. Commitments and Contingencies
Security Deposits
The Partnership has various performance obligations which are secured with short-term security deposits (reflected as restricted cash equivalents in our Consolidated Statements of Cash Flows) totaling $0.6 million at March 31, 2019 and December 31, 2018. These amounts are included in
prepaid expenses and other
on the Consolidated Balance Sheets.
Compliance Audit Contingencies
Certain customer master service agreements (“MSA’s”) offer our customers the opportunity to perform periodic compliance audits, which include the examination of the accuracy of our invoices. Should our invoices be determined to be inconsistent with the MSA, or inaccurate, the MSA’s may provide the customer the right to receive a credit or refund for any overcharges identified. At any given time, we may have multiple audits ongoing. As of March 31, 2019 and December 31, 2018, we established a reserve of $0.1 million for potential liabilities related to these compliance audit contingencies.
Legal Proceedings
Fithian v. TIR LLC
On October 5, 2017, a former inspector for TIR LLC and Cypress Energy Management – TIR, LLC (“CEM TIR”) filed a putative collective action lawsuit alleging that TIR LLC, CEM TIR and Cypress Energy Partners – Texas, LLC failed to pay a class of workers overtime in compliance with the Fair Labor Standards Act (“FLSA”) titled James Fithian, et al v. TIR LLC, et al in the United States District Court for the Western District of Texas, Midland Division. The plaintiff subsequently withdrew his action and filed a similar action in Oklahoma State Court, District of Tulsa County. The plaintiff alleges he was a non-exempt employee of TIR LLC and that he and other potential class members were not paid overtime in compliance with the FLSA. The plaintiff seeks to proceed as a collective action and to receive unpaid overtime and other monetary damages, including attorney’s fees. No estimate of potential loss can be determined at this time and the Partnership, TIR LLC, CEM TIR and Cypress Energy Partners – Texas, LLC deny the claims. The defendants plan to continue to vigorously defend these claims and have stayed a counterclaim against the named plaintiff.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
On March 28, 2018, the court granted a joint stipulation of dismissal without prejudice in regard to TIR LLC and Cypress Energy Partners – Texas, LLC, as neither of those parties were employers of the plaintiff or the putative class members during the time period that is the subject of the lawsuit. On July 26, 2018, the plaintiff filed a motion for conditional class certification. CEM-TIR subsequently filed pleadings opposing the motion. On January 25, 2019, the court denied the plaintiff’s motion for conditional class certification. The court is in the process of rescheduling a hearing on defendant’s motion for a scheduling order and compel mediation.
Sun Mountain LLC v. TIR-PUC
On February 27, 2019, Sun Mountain LLC (“Sun Mountain”), a subcontractor of TIR-PUC, filed a lawsuit alleging that TIR-PUC failed to pay invoices amounting to approximately $3.5 million for services subcontracted to Sun Mountain under TIR-PUC’s agreement to provide services to Pacific Gas and Electric Company. Sun Mountain filed the action in Federal District Court for the Northern District of Oklahoma. TIR-PUC denies that such amounts are owed, as conditions to TIR-PUC’s obligation to make the payments have not been met. The full amount of these invoices is included within
accounts payable
on the accompanying Consolidated Balance Sheets at March 31, 2019 and December 31, 2018. No estimate of potential loss can be determined at this time and TIR-PUC denies the claims.
Other
From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of business. Like other organizations, our operations are subject to extensive and rapidly changing federal and state environmental, health and safety and other laws and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities.
We are not a party to any other material pending or overtly threatened legal or governmental proceedings, other than proceedings and claims that arise in the ordinary course and are incidental to our business.
8. Sale of Saltwater Disposal Facility
In January 2018, we sold our subsidiary Cypress Energy Partners – Pecos SWD, LLC (“Pecos”), which owns a saltwater disposal facility in Pecos, Texas, to an unrelated party for $4.0 million of cash proceeds and a royalty interest in the future revenues of the facility. We concluded this represented the sale of a business and we record the royalties in the periods in which they are received. We recorded a gain on this transaction of $1.8 million, which represents the excess of the cash proceeds over the net book value of assets sold. This gain is reported within
gain on asset disposals, net
in our Consolidated Statement of Operations. The net book value of the assets sold included $2.0 million of allocated goodwill, calculated based on the estimated fair value of the Pecos facility relative to the estimated fair value of the Water Services reporting unit as a whole. This calculation is considered Level 3 and the fair values included in this calculation were determined utilizing estimated discounted cash flows of the Pecos facility and the Water Services reporting unit as a whole as of the date of sale.
In May 2018, we sold our subsidiary Cypress Energy Partners – Orla SWD, LLC (“Orla”), which owns a saltwater disposal facility in Orla, Texas, to an unrelated party for $8.2 million of cash proceeds.
The Pecos and Orla facilities generated revenues of $0.1 million and an operating loss of approximately $0.1 million during the three months ended March 31, 2018.
9. Leases
We determine if an agreement contains a lease at the inception of the arrangement. If an arrangement is determined to contain a lease, we classify the lease as an operating lease or a finance lease depending on the terms of the arrangement. Right-of-use (“ROU”) assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate, unless the implicit rate is readily determinable. Lease assets also include any upfront lease payments made and exclude lease incentives. The lease terms of our leases include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.
Practical Expedients and Accounting Policy Elections
We made accounting policy elections to not capitalize leases with a lease term of twelve months or less and to not separate lease and non-lease components for all asset classes. We also elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases, but did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Discount Rate
Our lease agreements do not generally provide an implicit interest rate. As a result, we are required to use our incremental borrowing rate as the discount rate in calculating the present value of the lease payments. The incremental borrowing rate is the estimated rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Operating Leases
Our operating leases include leases for office space and land lease agreements for four of our salt water disposal facilities. Our lease for our office space headquarters constitutes $3.1 million of our Operating ROU asset at March 31, 2019 of $3.3 million. The lease expires in November of 2024 unless terminated earlier with a payment of a penalty under certain circumstances specified in our lease. In the determination of the lease term for this lease, we concluded the lease term would go through November 2024 as it was not reasonably certain at the inception of the agreement that we would exercise any of the termination options in the agreement. As of March 31, 2019, the weighted average remaining lease term and weighted average discount rate for our operating leases was 5.8 years and 6.1%, respectively. Our operating leases are reflected as
operating lease right-of-use assets
within noncurrent assets and
operating lease obligations
within current and noncurrent liabilities on our Consolidated Balance Sheet at March 31, 2019.
Our operating lease obligations at March 31, 2019 with terms that are greater than one year mature as follows (in thousands):
Remainder of 2019
|
|
$
|
455
|
|
2020
|
|
|
680
|
|
2021
|
|
|
679
|
|
2022
|
|
|
679
|
|
2023
|
|
|
679
|
|
Thereafter
|
|
|
720
|
|
Total lease payments
|
|
$
|
3,892
|
|
Less imputed interest
|
|
|
(640
|
)
|
Total operating lease obligations
|
|
$
|
3,252
|
|
Finance Leases
Our finance leases primarily include leases for vehicles. As of March 31, 2019, the weighted average remaining lease term and weighted average discount rate for our finance leases was 3.6 years and 6.0%, respectively. Our finance leases are reflected as
finance lease right-of-use assets, net
within noncurrent assets and
finance lease obligations
within current and noncurrent liabilities on our Consolidated Balance Sheet at March 31, 2019.
Our finance lease obligations at March 31, 2019 with terms that are greater than one year mature as follows (in thousands):
Remainder of 2019
|
|
$
|
148
|
|
2020
|
|
|
182
|
|
2021
|
|
|
173
|
|
2022
|
|
|
114
|
|
2023
|
|
|
24
|
|
Thereafter
|
|
|
—
|
|
Total lease payments
|
|
$
|
641
|
|
Less imputed interest
|
|
|
(63
|
)
|
Total finance lease obligations
|
|
$
|
578
|
|
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Lease Expense Components
During the three months ended March 31, 2019, our lease expense consists of the following components (in thousands):
|
|
Three Months Ended
March 31, 2019
|
|
Finance lease expense:
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
32
|
|
Interest on lease liabilities
|
|
|
6
|
|
Operating lease expense
|
|
|
168
|
|
Short-term lease expense - general and administrative
|
|
|
22
|
|
Short-term lease expense - costs of services (a)
|
|
|
471
|
|
Variable lease expense
|
|
|
118
|
|
Sublease income - related parties
|
|
|
(10
|
)
|
Total lease expense
|
|
$
|
807
|
|
|
(a)
|
These short-term lease expenses are included in
costs of services
within our Consolidated Statement of Operations. The nature of these expenses includes the rental of compressors, dryers, vehicles, frac tanks, launchers, receivers and various other types of equipment. These rentals have lease terms of one year or less.
|
10. Reportable Segments
The Partnership’s operations consist of three reportable segments: (i) Pipeline Inspection Services (“Pipeline Inspection”), (ii) Pipeline & Process Services and (iii) Water and Environmental Services (“Water Services”).
Pipeline Inspection –
We generate revenue in this segment primarily by providing essential inspection and integrity services on a variety of infrastructure assets including midstream pipelines, gathering systems, and distribution systems. Services include non-destructive examination, mechanical integrity, inline support, pig tracking, survey, data gathering and supervision of third-party contractors. Our results in this segment are driven primarily by the number of inspectors that perform services for our customers and the fees that we charge for those services, which depend on the type, skills, technology, equipment, and number of inspectors used on a particular project, the nature of the project, and the duration of the project. The number of inspectors engaged on projects is driven by the type of project, prevailing market rates, the age and condition of customers’ assets including pipelines, gas plants, compression stations, storage facilities, and gathering and distribution systems including the legal and regulatory requirements relating to the inspection and maintenance of those assets. Our customers are also billed for per diem charges, mileage, and other reimbursement items. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity, considering that many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, inspection work throughout the United States during the winter months (especially in the northern states) may be hampered or delayed due to inclement weather, thus affecting our revenue and costs. We have constrained recognition of certain revenue until the expiration of a contract provision that gives a customer the opportunity to reopen negotiation of the fees paid for certain services. As of March 31, 2019 and December 31, 2018, we recognized a refund liability of $0.4 million for revenue associated with such variable consideration.
Pipeline & Process Services
– This segment provides essential midstream services including hydrostatic testing services and chemical cleaning to energy companies and pipeline construction companies of newly-constructed and existing pipelines and related infrastructure. We generally charge our customers in this segment on a fixed-bid basis, depending on the size and length of the pipeline being tested, the complexity of services provided, and the utilization of our work force and equipment. Our results in this segment are driven primarily by the number of field personnel that perform services for our customers and the fees that we charge for those services, which depend on the type and number of field personnel used on a particular project, the type of equipment used and the fees charged for the utilization of that equipment, and the nature and duration of the project. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity, considering that many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, field work during the winter months may be hampered or delayed due to inclement weather. Revenue during the three months ended March 31, 2018 included $0.3 million associated with additional billings on a project that we completed in the fourth quarter of 2017 (we recognized the revenue upon receipt of customer acknowledgment of the additional fees).
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
Water Services –
This segment owns and operates nine (9) Environmental Protection Agency Class II saltwater disposal facilities in the Williston Basin region of North Dakota. Eight (8) of the facilities are wholly-owned and we have ten (10) pipelines from multiple E&P customers connected to these saltwater disposal facilities, including two (2) that were developed and are owned by the Partnership. During the three months ended March 31, 2019, approximately 98% of our disposal water was produced water that is generated during production life of an oil and gas well and approximately 52% of our water was delivered via pipeline to our saltwater disposal facilities. Our saltwater disposal facilities provide essential midstream services to oil and natural gas upstream producers and their transportation companies. All of the saltwater disposal facilities utilize specialized equipment and remote monitoring to minimize the facilities’ downtime and increase the facilities’ efficiency for peak utilization. These facilities also utilize oil skimming and recovery processes that remove residual oil from water delivered to our saltwater disposal facilities via pipeline or truck. We sell the oil recovered from these skimming processes, which contributes to our revenues. In addition to these saltwater disposal facilities, we provide management and staffing services to a saltwater disposal facility in which we own a 25% ownership interest. Segment results are driven primarily by the volumes of water we inject into our saltwater disposal facilities and the fees we charge for transporting water in our two pipelines connected to these facilities. These fees are charged on a per-barrel basis and vary based on the quantity and type of saltwater disposed, competitive dynamics, and operating costs. In addition, for minimal marginal cost, we generate revenue by selling residual oil we recover from the disposed water. Revenue and costs in this segment may be subject to seasonal fluctuations and interim activity may not be indicative of yearly activity, given that our saltwater disposal facilities are located in North Dakota and weather conditions there (especially winter weather conditions) can affect drilling, operations, and trucking activity, and ultimately, our volumes, revenues, and costs.
Other
– These amounts represent corporate and overhead items not specifically allocable to the other reportable segments.
CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements
The following tables show operating income (loss) by reportable segment and a reconciliation of segment operating income (loss) to net income before income tax expense.
|
|
Pipeline Inspection
|
|
|
Pipeline & Process Services
|
|
|
Water Services
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Three months ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
86,229
|
|
|
$
|
1,974
|
|
|
$
|
2,173
|
|
|
$
|
—
|
|
|
$
|
90,376
|
|
Costs of services
|
|
|
77,858
|
|
|
|
1,719
|
|
|
|
776
|
|
|
|
—
|
|
|
|
80,353
|
|
Gross margin
|
|
|
8,371
|
|
|
|
255
|
|
|
|
1,397
|
|
|
|
—
|
|
|
|
10,023
|
|
General and administrative
|
|
|
4,606
|
|
|
|
596
|
|
|
|
766
|
|
|
|
263
|
|
|
|
6,231
|
|
Depreciation, amortization and accretion
|
|
|
555
|
|
|
|
143
|
|
|
|
402
|
|
|
|
4
|
|
|
|
1,104
|
|
Gains on asset disposals, net
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(21
|
)
|
Operating income (loss)
|
|
$
|
3,210
|
|
|
$
|
(463
|
)
|
|
$
|
229
|
|
|
$
|
(267
|
)
|
|
|
2,709
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,311
|
)
|
Gains on foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Net income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
57,967
|
|
|
$
|
4,350
|
|
|
$
|
2,509
|
|
|
$
|
—
|
|
|
$
|
64,826
|
|
Costs of services
|
|
|
52,480
|
|
|
|
3,157
|
|
|
|
1,060
|
|
|
|
—
|
|
|
|
56,697
|
|
Gross margin
|
|
|
5,487
|
|
|
|
1,193
|
|
|
|
1,449
|
|
|
|
—
|
|
|
|
8,129
|
|
General and administrative
|
|
|
3,759
|
|
|
|
545
|
|
|
|
836
|
|
|
|
315
|
|
|
|
5,455
|
|
Depreciation, amortization and accretion
|
|
|
573
|
|
|
|
158
|
|
|
|
403
|
|
|
|
—
|
|
|
|
1,134
|
|
Gains on asset disposals, net
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,709
|
)
|
|
|
—
|
|
|
|
(1,709
|
)
|
Operating income (loss)
|
|
$
|
1,155
|
|
|
$
|
490
|
|
|
$
|
1,919
|
|
|
$
|
(315
|
)
|
|
|
3,249
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,956
|
)
|
Losses on foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(334
|
)
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
Net income before income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
$
|
133,078
|
|
|
$
|
8,660
|
|
|
$
|
22,737
|
|
|
$
|
3,931
|
|
|
$
|
168,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
$
|
116,239
|
|
|
$
|
10,972
|
|
|
$
|
24,281
|
|
|
$
|
1,361
|
|
|
$
|
152,853
|
|