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1. | Organization and Operations |
Cypress Energy Partners, L.P. (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 salt water disposal (“SWD”) 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 (“PIS”), Integrity Services (“IS”), and Water and Environmental Services (“W&ES”) segments. PIS provides pipeline inspection and other services to energy exploration and production (“E&P”) companies, public utility companies, and midstream companies and their vendors throughout the United States and Canada. The inspectors of PIS perform a variety of inspection services on midstream pipelines, gathering systems and distribution systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. IS provides independent integrity services to major natural gas and petroleum pipeline companies and to pipeline construction companies located throughout the United States. Field personnel in this segment primarily perform hydrostatic testing on newly-constructed and existing natural gas and petroleum pipelines. W&ES provides services to oil and natural gas producers and trucking companies through its ownership and operation of eight commercial SWD facilities in the Bakken Shale region of the Williston Basin in North Dakota and two SWD facilities in the Permian Basin in Texas. All of the facilities utilize specialized equipment and remote monitoring to minimize downtime and increase efficiency for peak utilization. These facilities also contain oil skimming processes that remove oil from water delivered to the sites. In addition to these SWD facilities, we provide management and staffing services for an SWD facility pursuant to a management agreement (see Note 7). We also own a 25% member interest in this managed SWD facility.
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2. | Basis of Presentation and Summary of Significant Accounting Policies |
Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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. All significant intercompany transactions and account balances have been eliminated in consolidation. The Unaudited Condensed Consolidated Balance Sheet at December 31, 2016 is derived from 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 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, 2016 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.
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, 2016 included in our Form 10-K.
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 customer's creditworthiness. The Partnership determines allowances for bad debts based on management's assessment of the creditworthiness of the customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of previously written off trade receivables are recorded when cash is received. During the quarter ended March 31, 2017, we received $0.3 million on accounts receivable previously written off which we recorded as a reduction to general and administrative expense on our Unaudited Consolidated Statements of Operations.
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 PIS segment that performs pipeline inspection services for utility customers, and Brown Integrity – PUC, LLC, a 51% owned subsidiary, 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, income taxes payable, and deferred tax liabilities in our Unaudited Condensed Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states, most notably 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 classify as “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 for each year since our 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 in net income (loss) attributable to noncontrolling interest 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 in noncontrolling interests in 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 renewals and 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 Statement of Operations.
We review property and equipment 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 value of the asset group to its fair value and record a corresponding impairment loss.
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 is managed or operated. We have determined that our PIS, IS, and W&ES 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, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Accrued payroll | $ | 8,235 | $ | 5,594 | ||||
Other | 1,809 | 1,991 | ||||||
$ | 10,044 | $ | 7,585 |
Foreign Currency Translation
Our Unaudited Condensed Consolidated Financial Statements are reported 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. We report gains and losses on foreign currency translation in other comprehensive income (loss).
Our Unaudited Condensed Consolidated Balance Sheet at March 31, 2017 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 Partners’ capital, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net income.
Subordination
With the payment of the fourth quarter distribution and the fulfillment of other requirements associated with the termination of the subordination period, the Partnership emerged from subordination on February 14, 2017, converting the 5,913,000 subordinated units into common units on a one-for-one basis.
New Accounting Standards
In 2017, the Partnership adopted the following new accounting standards issued by the Financial Accounting Standards Board (“FASB”);
The FASB issued Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensation in March 2016. This ASU gives entities the option to account for forfeitures of share-based awards when the forfeitures occur (previously, entities were required to estimate future forfeitures and reduce their share-based compensation expense accordingly). We adopted this new standard on January 1, 2017 and elected to account for forfeitures when they occur. The adoption of this ASU had no significant effect on our Unaudited Condensed Consolidated Financial Statements.
The FASB issued ASU 2017-04 – Intangibles – Goodwill and Other in January 2017. The objective of this guidance is to simplify how an entity is required to test goodwill for impairment. We adopted this new standard effective January 1, 2017 in order to simplify the measurement process for the potential impairment of goodwill. Under the new standard, we perform a goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).
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 2016-02 – 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 and this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determining the impact this guidance will have on our Unaudited Condensed Consolidated Financial Statements.
The FASB issued ASU 2014-09 – Revenue from Contracts with Customers in May 2014. ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common standard for recognizing revenue for GAAP and International Financial Reporting Standards that is applicable to all organizations. We will be required to adopt this standard in 2018 and to apply its provisions either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application (modified retrospective method). Although we continue to evaluate the financial impact of this ASU on the Partnership, we currently plan to adopt this standard utilizing the modified retrospective method and do not anticipate that the adoption of this ASU will materially impact our financial position, results of operations or cash flows.
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3. | Impairments |
During the three months ended March 31, 2017, the largest customer of TIR-Canada, the Canadian subsidiary of our PIS segment, completed a bid process and selected different service providers for its inspection projects. During the three months ended March 31, 2017, pipeline inspection services to this customer accounted for approximately $12.9 million of revenue and $0.9 million of gross margin, which represented approximately 90% of the revenues and 90% of the gross margin of our Canadian operations (and approximately 20% of our consolidated revenues and 14% of our consolidated gross margin for the three months ended March 31, 2017). In consideration of the loss of this contract, we recorded impairments to the carrying values of certain intangible assets of $1.3 million during the three months ended March 31, 2017. Of this amount, $1.1 million related to customer relationships and $0.2 million related to trade names. Based on discounted cash flow calculations, which represent Level 3 non-recurring fair value adjustments, we concluded the fair value of the customer relationships and trade names was zero, and thus, have written off the full amount. We continue to perform inspection and integrity work for customers in Canada (including integrity work for the customer referred to above).
During the three months ended March 31, 2017, we recorded an impairment of $0.7 million to the property, plant and equipment at one of our SWD facilities. We have temporarily shut down the operations at this facility in 2017 because of low volumes due to competition in the area and due to low levels of exploration and production activity near the facility. Because of the decline in revenues and the temporary shut down of the facility, we performed a discounted cash flow calculation, which represents a Level 3 non-recurring fair value adjustment, concluding that the fair value of the facility was limited to the fair value of the land. As such, we recorded an impairment to reduce the carrying value of the facility to $0.1 million at March 31, 2017, all of which is attributable to land.
During the three months ended March 31, 2017, we recorded an impairment of $1.6 million to the goodwill of our Integrity Services segment. Revenues of this segment were lower than we had expected for the three months ended March 31, 2017, especially in March. In addition, for this segment, the level of bidding activity for work is typically high in March and April, once customers have finalized their budgets for the upcoming year. While we have won bids on a number of projects and our backlog has begun to improve, the improvement in the backlog has been slower than we had originally anticipated, and accordingly, in May, we revised downward our expectations of the near-term operating results of the segment. For our goodwill impairment assessment, we calculated an estimated fair value of the Integrity Services segment using a discounted cash flow analysis. We prepared two calculations of cash flows for the next twelve months, one of which represented our estimate of the high end of the range of probable cash flows and the other of which represented our estimate of the low range of probable cash flows. We estimated cash flows for the following four years assuming a 2% increase in each succeeding year, to account for estimated inflation, and calculated a terminal value using a Gordon Growth model. We then discounted the future cash flows at a discount rate of 18%. The mid-point of the estimated fair values produced by these two calculations indicated that a full impairment of the value of the goodwill of the Integrity Services segment was warranted. These calculations represent Level 3 non-recurring fair value measurements. If anticipated operating results in this segment do not meet expectations, it is possible that finite-lived intangibles may also become impaired in the future.
In January 2017, a lightning strike at our Orla SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. As a result, we wrote off the net book value of the surface equipment ($1.3 million) of the facility and recorded a receivable in prepaid expenses and other on our Unaudited Condensed Consolidated Balance Sheet at March 31, 2017 related to a property insurance policy we carried on the property. This had no impact on our Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2017. In May 2017 we received $1.6 million of insurance proceeds. We will record a gain in the second quarter of 2017 for the difference between the proceeds received and the net book value of the property written off.
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4. | Credit Agreement |
We are party to a credit agreement (as amended, the “Credit Agreement”) that provides up to $200.0 million in borrowing capacity, subject to certain limitations. The Credit Agreement includes a working capital revolving credit facility (“Working Capital Facility”), which provides up to $75.0 million in borrowing capacity to fund working capital needs, and an acquisition revolving credit facility (“Acquisition Facility”), which provides up to $125.0 million in borrowing capacity to fund acquisitions and expansion projects. In addition, the Credit Agreement provides for an accordion feature that allows us to increase the availability under the facilities by an additional $125.0 million if lenders agree to increase their commitments. The Credit Agreement matures December 24, 2018.
Outstanding borrowings at March 31, 2017 and December 31, 2016 under the Credit Agreement were as follows:
March 31, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Working Capital Facility | $ | 48,000 | $ | 48,000 | ||||
Acquisition Facility | 88,900 | 88,900 | ||||||
Total borrowings | 136,900 | 136,900 | ||||||
Debt issuance costs | (1,054 | ) | (1,201 | ) | ||||
Long-term debt | $ | 135,846 | $ | 135,699 |
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).
Borrowings under the Working Capital Facility are limited by a monthly borrowing base calculation as defined in the Credit Agreement. If, at any time, outstanding borrowings under the Working Capital Facility exceed our calculated borrowing base, a principal payment in the amount of the excess is due upon submission of the borrowing base calculation. Available borrowings under the Acquisition Facility may be limited by certain financial covenant ratios as defined in the Credit Agreement. The obligations under our Credit Agreement are secured by a first priority lien on substantially all of our assets.
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 1.25% to 2.75% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.25% to 3.75% 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 Credit Agreement borrowings ranged between 3.90% and 4.73% for the three months ended March 31, 2017 and 3.54% and 4.19% for the three months ended March 31, 2016. 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, 2017 and 2016 was $1.6 million and $1.3 million, respectively, including commitment fees.
Our Credit Agreement contains various customary affirmative and negative covenants and restrictive provisions. Our Credit Agreement also requires maintenance of certain financial covenants, including a combined total adjusted leverage ratio (as defined in our Credit Agreement) of not more than 4.0 to 1.0 and an interest coverage ratio (as defined in our Credit Agreement) of not less than 3.0 to 1.0. At March 31, 2017, our combined total adjusted leverage ratio was 3.47 to 1.0 and our interest coverage ratio was 3.68 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 our Credit Agreement, the lenders may declare any outstanding principal of our Credit Agreement debt, together with accrued and unpaid interest, to be immediately due and payable and may exercise the other remedies set forth or referred to in our Credit Agreement. We were in compliance with all debt covenants as of March 31, 2017 and expect to remain in compliance with all of our financial debt covenants for the next twelve months following the filing of this Form 10-Q. Working capital borrowings, which are fully secured by our net working capital, are subject to a monthly borrowing base and are excluded from our debt compliance ratios.
In addition, our Credit Agreement restricts our ability to make distributions on, or redeem or repurchase, our equity interests. 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 our Credit Agreement, the borrowers and the guarantors are in compliance with the financial covenants, the borrowing base (which includes 100% of cash on hand) exceeds the amount of outstanding credit extensions under the Working Capital Facilities by at least $5.0 million, and at least $5.0 million in lender commitments are available to be drawn under the Working Capital Facility.
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5. | Income Taxes |
The income tax expense (benefit) reported in our Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 differs from the statutory tax rate of 35% due to the fact that, as a partnership, we are generally not subject to U.S. federal income taxes. Our income tax provision relates primarily to our corporate subsidiary that services public utility customers, which is subject to U.S. federal income taxes, our Canadian subsidiary, which is subject to Canadian income taxes, and to certain state income taxes, including the Texas franchise tax.
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6. | Equity Compensation |
Our General Partner has adopted a long-term incentive plan (“LTIP”) that authorizes the issuance of up to 1,182,600 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 the awards is determined based on the quoted market value of the publicly-traded common units at each grant date, adjusted for certain discounts. Compensation expense is recorded on a straight-line basis over the vesting period of the grant. We recorded expense of $0.4 million and $0.3 million during the three months ended March 31, 2017 and 2016, respectively related to the Unit awards.
The following table summarizes the LTIP Unit activity for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of Units |
Weighted Average Grant Date Fair Value / Unit |
Number of Units |
Weighted Average Grant Date Fair Value / Unit |
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Units at January 1 | 573,902 | $ | 9.86 | 361,698 | $ | 14.30 | ||||||||||
Units granted | 245,331 | $ | 7.16 | 331,098 | $ | 6.33 | ||||||||||
Units vested and issued | (26,366 | ) | $ | 15.25 | (8,208 | ) | $ | 16.71 | ||||||||
Units forfeited | (9,328 | ) | $ | 9.50 | (14,165 | ) | $ | 14.74 | ||||||||
Units at March 31 | 783,539 | $ | 8.83 | 670,423 | $ | 10.33 |
The majority of the 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. Two grants, totaling 77,495 units, vest three years from the grant dates, contingent upon the recipient meeting certain performance targets. Distributions are not paid on unvested Units during the vesting period. Total unearned compensation associated with the Unit awards was $4.9 million at March 31, 2017, and the awards had an average remaining life of 2.76 years.
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7. | 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 a quarterly administrative fee in the amount of $1.0 million to Holdings, for providing certain partnership overhead services, including certain executive management services by certain officers of our General Partner, and payroll services for substantially all employees required to manage and operate our businesses. This fee also includes the incremental general and administrative expenses we incur as a result of being a publicly traded partnership. For the quarters ended March 31, 2017 and 2016, Holdings provided sponsor support to us by waiving payment of the quarterly administrative fee; |
● | our right of first offer on Holdings’ and its subsidiaries’ assets used in, and entities primarily engaged in, providing SWD 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. |
So long as affiliates of Holdings control our General Partner, the omnibus agreement will remain in effect, unless we and Holdings agree to terminate it sooner. If affiliates of Holdings cease 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 amend the omnibus agreement; however, amendments will also require the approval of the Conflicts Committee of our Board of Directors.
Holdings incurred expenses of $0.9 million and $1.0 million on our behalf during the three months ended March 31, 2017 and 2016, respectively. These expenses are reported within general and administrative in the accompanying Unaudited Condensed Consolidated Statements of Operations and as contribution from general partner in the accompanying Unaudited Condensed Consolidated Statement of Owners’ Equity.
Alati Arnegard, LLC
We provide management services to a 25% owned entity, Alati Arnegard, LLC (“Arnegard”). Management fee revenue earned from Arnegard totaled $0.2 million for the three months ended March 31, 2017 and 2016. Accounts receivable from Arnegard were less than $0.1 million and $0.1 million at March 31, 2017 and December 31, 2016, respectively, and are included in trade accounts receivable, net in the Unaudited Condensed Consolidated Balance Sheets.
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8. | Earnings per Unit and Cash Distributions |
Our net income (loss) is attributable and allocable to several types of owners. Income attributable to noncontrolling interests represents 49% of the income of Brown and 51% of the income of CF Inspection. Income attributable to the general partner includes expenses incurred by Holdings and not charged to us. Income attributable to common and subordinated units represents the remaining net income (loss), after consideration of amounts attributable to noncontrolling interests and to the general partner; such amounts were allocated to common and subordinated units ratably based on the weighted-average number of such units outstanding during the relevant time period. In February 2017, all of the outstanding subordinated units converted to common units. Since the subordinated units did not share in the distribution of cash generated subsequent to December 31, 2016, we did not allocate any income or loss after that date to the subordinated units.
Diluted net income (loss) per common and subordinated unit includes the dilutive impact of unvested unit awards granted as share-based compensation to employees and directors. Such awards had no dilutive effect during the three months ended March 31, 2017 and 2016, as we incurred net losses attributable to limited partners during those periods.
The following table summarizes the cash distributions declared and paid to our limited partners since our IPO.
Payment Date | Per
Unit Cash Distributions | Total
Cash Distributions | Total
Cash Distributions to Affiliates (a) | |||||||||
(in thousands) | ||||||||||||
May 15, 2014 (b) | $ | 0.301389 | $ | 3,565 | $ | 2,264 | ||||||
August 14, 2014 | 0.396844 | 4,693 | 2,980 | |||||||||
November 14, 2014 | 0.406413 | 4,806 | 3,052 | |||||||||
Total 2014 Distributions | 1.104646 | 13,064 | 8,296 | |||||||||
February 14, 2015 | 0.406413 | 4,806 | 3,052 | |||||||||
May 14, 2015 | 0.406413 | 4,808 | 3,053 | |||||||||
August 14, 2015 | 0.406413 | 4,809 | 3,087 | |||||||||
November 13, 2015 | 0.406413 | 4,809 | 3,092 | |||||||||
Total 2015 Distributions | 1.625652 | 19,232 | 12,284 | |||||||||
February 12, 2016 | 0.406413 | 4,810 | 3,107 | |||||||||
May 13, 2016 | 0.406413 | 4,812 | 3,099 | |||||||||
August 12, 2016 | 0.406413 | 4,817 | 3,103 | |||||||||
November 14, 2016 | 0.406413 | 4,819 | 3,105 | |||||||||
Total 2016 Distributions | 1.625652 | 19,258 | 12,414 | |||||||||
February 13, 2017 | 0.406413 | 4,823 | 3,107 | |||||||||
May 15, 2017 (c) | 0.210000 | 2,495 | 1,606 | |||||||||
0.616413 | 7,318 | 4,713 | ||||||||||
Total Distributions (through May 15, 2017 since IPO) | $ | 4.972363 | $ | 58,872 | $ | 37,707 |
(a) | Approximately 64.4% of the Partnership’s outstanding units at March 31, 2017 were held by affiliates. |
(b) | Distribution was pro-rated from the date of our IPO through March 31, 2014. |
(c) | First quarter 2017 distribution was declared and will be paid in the second quarter of 2017. |
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9. | Commitments and Contingencies |
Security Deposits
We have various performance obligations which are secured with short-term security deposits of $0.5 million at March 31, 2017 and December 31, 2016, included in prepaid expenses and other on the Unaudited Condensed Consolidated Balance Sheets.
Employment Contract Commitments
We have employment agreements with certain executives. These agreements provide for minimum annual compensation for specified terms, after which employment will continue on an “at will” basis. Certain agreements provide for severance payments in the event of specified termination of employment. At March 31, 2017, the aggregate commitment for future compensation and severance was approximately $0.9 million.
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, 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. At March 31, 2017, the Partnership had an estimated liability of $0.1 million recorded for such contingencies.
Legal Proceedings
On July 3, 2014, a group of former minority shareholders of Tulsa Inspection Resources, Inc. (“TIR Inc.”, the predecessor of the TIR Entities), formerly an Oklahoma corporation, filed a civil action in the United States District Court for the Northern District of Oklahoma against TIR LLC, members of TIR LLC, and certain affiliates of TIR LLC’s members. TIR LLC is the successor in interest to TIR Inc., resulting from a merger between the entities. The former shareholders of TIR Inc. claim that they did not receive sufficient value for their shares and are seeking compensatory and punitive damages. We believe that the possibility of the Partnership incurring material losses as a result of this action is remote. In addition, the Partnership anticipates no disruption in its business operations related to this action.
In September 2015, Flatland Resources I, LLC and Flatland Resources II, LLC, two of our management services customers (under common ownership) initiated a civil action in the District Court for the McKenzie County District of the State of North Dakota against CES LLC. The customers claimed that CES LLC breached the management agreements and interfered with their business relationships, and sought to rescind the management agreements and recover any damages. In the first quarter of 2017, CES received a cash payment and other consideration and the parties settled the matter and dismissed all associated claims.
Internal Revenue Service Audit
In January 2016, we received notice from the Internal Revenue Service (“IRS”) that conveyed its intent to audit the consolidated income tax return of one of our predecessor entities for the 2012 tax year. Although this audit is not yet complete, we believe, based on correspondence from the IRS, that any adjustments related to this income tax audit should not be material. Additionally, based on the terms of our omnibus agreement with Holdings, Holdings would indemnify us for certain liabilities (including income tax liabilities) associated with the operation of assets that occurred prior to the closing of our IPO should any liabilities arise as a result of these audits. Because of this, we believe that the possibility of incurring material losses as a result of this IRS audit is remote.
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10. | Reportable Segments |
Our operations consist of three reportable segments: (i) Pipeline Inspection Services (“PIS”), (ii) Integrity Services (“IS”) and (iii) Water and Environmental Services (“W&ES”).
PIS – This segment represents our pipeline inspection services operations. This segment provides independent inspection and integrity services to various energy, public utility, and pipeline companies. The inspectors in this segment perform a variety of inspection services on midstream pipelines, gathering and distribution systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. Our results in this segment are driven primarily by the number and type of inspectors performing services for customers and the fees charged for those services, which depend on the nature and duration of the projects.
IS – This segment provides independent hydro-testing integrity services to major natural gas and petroleum pipeline companies, and to pipeline construction companies located throughout the United States. Field personnel in this segment primarily perform hydrostatic testing on newly-constructed and existing natural gas and petroleum pipelines. Results in this segment are driven primarily by field personnel performing services for customers and the fees charged for those services, which depend on the nature, scope, and duration of the projects.
W&ES – This segment includes the operations of ten SWD facilities and an ownership interest in one managed facility. Segment results are driven primarily by the volumes of water we inject into our SWD facilities and the fees we charge for our 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 disposed water.
Other – These amounts represent general and administrative expenses not specifically allocable to our reportable segments.
The following tables show operating income (loss) by reportable segment and a reconciliation of segment operating income (loss) to net loss before income tax expense.
PIS | IS | W&ES | Other | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Three months ended March 31, 2017 | ||||||||||||||||||||
Revenue | $ | 62,148 | $ | 696 | $ | 1,878 | $ | — | $ | 64,722 | ||||||||||
Costs of services | 56,601 | 904 | 888 | — | 58,393 | |||||||||||||||
Gross margin | 5,547 | (208 | ) | 990 | — | 6,329 | ||||||||||||||
General and administrative | 3,254 | 446 | 218 | 1,192 | 5,110 | |||||||||||||||
Depreciation, amortization and accretion | 599 | 157 | 415 | — | 1,171 | |||||||||||||||
Impairments | 1,329 | 1,581 | 688 | — | 3,598 | |||||||||||||||
Operating income (loss) | $ | 365 | $ | (2,392 | ) | $ | (331 | ) | $ | (1,192 | ) | (3,550 | ) | |||||||
Interest expense, net | (1,709 | ) | ||||||||||||||||||
Other, net | 45 | |||||||||||||||||||
Net loss before income tax expense | $ | (5,214 | ) | |||||||||||||||||
Three months ended March 31, 2016 | ||||||||||||||||||||
Revenue | $ | 66,709 | $ | 4,258 | $ | 2,507 | $ | — | $ | 73,474 | ||||||||||
Costs of services | 60,844 | 3,732 | 1,138 | — | 65,714 | |||||||||||||||
Gross margin | 5,865 | 526 | 1,369 | — | 7,760 | |||||||||||||||
General and administrative | 3,440 | 991 | 556 | 1,202 | 6,189 | |||||||||||||||
Depreciation, amortization and accretion | 617 | 159 | 449 | — | 1,225 | |||||||||||||||
Operating income (loss) | $ | 1,808 | $ | (624 | ) | $ | 364 | $ | (1,202 | ) | 346 | |||||||||
Interest expense, net | (1,618 | ) | ||||||||||||||||||
Other, net | 23 | |||||||||||||||||||
Net loss before income tax expense | $ | (1,249 | ) | |||||||||||||||||
Total Assets | ||||||||||||||||||||
March 31, 2017 | $ | 130,988 | $ | 9,396 | $ | 29,361 | $ | (7,785 | ) | $ | 161,960 | |||||||||
December 31, 2016 | $ | 124,840 | $ | 12,079 | $ | 38,141 | $ | (7,548 | ) | $ | 167,512 |
|
11. | Condensed Consolidating Financial Information |
The following financial information reflects consolidating financial information of the Partnership and its wholly owned guarantor subsidiaries and non-guarantor subsidiaries for the periods indicated. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of financial position, results of operations, or cash flows had the guarantor subsidiaries or non-guarantor subsidiaries operated as independent entities. The Partnership has not presented separate financial and narrative information for each of the guarantor subsidiaries or non-guarantor subsidiaries because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the guarantor subsidiaries and non-guarantor subsidiaries. The Partnership anticipates issuing debt securities that will be fully and unconditionally guaranteed by the guarantor subsidiaries. These debt securities will be jointly and severally guaranteed by the guarantor subsidiaries. There are no restrictions on the Partnership’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.
Condensed
Consolidating Balance Sheet
As of March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 695 | $ | 21,196 | $ | 2,888 | $ | — | $ | 24,779 | ||||||||||
Trade accounts receivable, net | — | 31,073 | 8,882 | (572 | ) | 39,383 | ||||||||||||||
Accounts receivable - affiliates | — | 11,042 | — | (11,042 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 2,450 | 43 | (38 | ) | 2,455 | ||||||||||||||
Total current assets | 695 | 65,761 | 11,813 | (11,652 | ) | 66,617 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 16,592 | 3,092 | — | 19,684 | |||||||||||||||
Less: Accumulated depreciation | — | 6,239 | 1,198 | — | 7,437 | |||||||||||||||
Total property and equipment, net | — | 10,353 | 1,894 | — | 12,247 | |||||||||||||||
Intangible assets, net | — | 23,310 | 4,273 | — | 27,583 | |||||||||||||||
Goodwill | — | 53,913 | 1,416 | — | 55,329 | |||||||||||||||
Investment in subsidiaries | 21,755 | (2,868 | ) | — | (18,887 | ) | — | |||||||||||||
Notes receivable - affiliates | — | 13,631 | — | (13,631 | ) | — | ||||||||||||||
Other assets | — | 174 | 10 | — | 184 | |||||||||||||||
Total assets | $ | 22,450 | $ | 164,274 | $ | 19,406 | $ | (44,170 | ) | $ | 161,960 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | — | $ | 1,201 | $ | 174 | $ | (591 | ) | $ | 784 | |||||||||
Accounts payable - affiliates | 8,906 | — | 5,363 | (11,042 | ) | 3,227 | ||||||||||||||
Accrued payroll and other | 38 | 8,825 | 1,200 | (19 | ) | 10,044 | ||||||||||||||
Income taxes payable | — | 923 | 77 | — | 1,000 | |||||||||||||||
Total current liabilities | 8,944 | 10,949 | 6,814 | (11,652 | ) | 15,055 | ||||||||||||||
Long-term debt | (1,054 | ) | 131,400 | 5,500 | — | 135,846 | ||||||||||||||
Notes payable - affiliates | — | — | 13,631 | (13,631 | ) | — | ||||||||||||||
Asset retirement obligations | — | 161 | — | — | 161 | |||||||||||||||
Total liabilities | 7,890 | 142,510 | 25,945 | (25,283 | ) | 151,062 | ||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 10,683 | 17,887 | (6,539 | ) | (15,010 | ) | 7,021 | |||||||||||||
Non-controlling interests | 3,877 | 3,877 | — | (3,877 | ) | 3,877 | ||||||||||||||
Total owners’ equity | 14,560 | 21,764 | (6,539 | ) | (18,887 | ) | 10,898 | |||||||||||||
Total liabilities and owners’ equity | $ | 22,450 | $ | 164,274 | $ | 19,406 | $ | (44,170 | ) | $ | 161,960 |
Condensed
Consolidating Balance Sheet
As of December 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 695 | $ | 20,251 | $ | 5,747 | $ | — | $ | 26,693 | ||||||||||
Trade accounts receivable, net | — | 33,046 | 6,125 | (689 | ) | 38,482 | ||||||||||||||
Accounts receivable - affiliates | — | 12,622 | — | (12,622 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 996 | 46 | — | 1,042 | |||||||||||||||
Total current assets | 695 | 66,915 | 11,918 | (13,311 | ) | 66,217 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 19,366 | 3,093 | — | 22,459 | |||||||||||||||
Less: Accumulated depreciation | — | 6,798 | 1,042 | — | 7,840 | |||||||||||||||
Total property and equipment, net | — | 12,568 | 2,051 | — | 14,619 | |||||||||||||||
Intangible assets, net | — | 23,875 | 5,749 | — | 29,624 | |||||||||||||||
Goodwill | — | 53,914 | 2,989 | — | 56,903 | |||||||||||||||
Investment in subsidiaries | 29,454 | (417 | ) | — | (29,037 | ) | — | |||||||||||||
Notes receivable - affiliates | — | 13,662 | — | (13,662 | ) | — | ||||||||||||||
Other assets | — | 139 | 10 | — | 149 | |||||||||||||||
Total assets | $ | 30,149 | $ | 170,656 | $ | 22,717 | $ | (56,010 | ) | $ | 167,512 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | — | $ | 1,653 | $ | 712 | $ | (675 | ) | $ | 1,690 | |||||||||
Accounts payable - affiliates | 8,860 | — | 5,400 | (12,622 | ) | 1,638 | ||||||||||||||
Accrued payroll and other | 15 | 7,082 | 503 | (15 | ) | 7,585 | ||||||||||||||
Income taxes payable | — | 967 | 44 | — | 1,011 | |||||||||||||||
Total current liabilities | 8,875 | 9,702 | 6,659 | (13,312 | ) | 11,924 | ||||||||||||||
Long-term debt | (1,201 | ) | 131,400 | 5,500 | — | 135,699 | ||||||||||||||
Notes payable - affiliates | — | — | 13,662 | (13,662 | ) | — | ||||||||||||||
Deferred tax liabilities | — | 8 | 354 | — | 362 | |||||||||||||||
Asset retirement obligations | — | 139 | — | — | 139 | |||||||||||||||
Total liabilities | 7,674 | 141,249 | 26,175 | (26,974 | ) | 148,124 | ||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 17,425 | 24,357 | (3,458 | ) | (23,986 | ) | 14,338 | |||||||||||||
Non-controlling interests | 5,050 | 5,050 | — | (5,050 | ) | 5,050 | ||||||||||||||
Total owners’ equity | 22,475 | 29,407 | (3,458 | ) | (29,036 | ) | 19,388 | |||||||||||||
Total liabilities and owners’ equity | $ | 30,149 | $ | 170,656 | $ | 22,717 | $ | (56,010 | ) | $ | 167,512 |
Condensed
Consolidating Statement of Operations
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 49,669 | $ | 16,420 | $ | (1,367 | ) | $ | 64,722 | |||||||||
Costs of services | — | 44,099 | 15,661 | (1,367 | ) | 58,393 | ||||||||||||||
Gross margin | — | 5,570 | 759 | — | 6,329 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,192 | 3,014 | 904 | — | 5,110 | |||||||||||||||
Depreciation, amortization and accretion | — | 995 | 176 | — | 1,171 | |||||||||||||||
Impairments | — | 688 | 2,910 | — | 3,598 | |||||||||||||||
Operating income (loss) | (1,192 | ) | 873 | (3,231 | ) | — | (3,550 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | (1,667 | ) | (2,498 | ) | — | 4,165 | — | |||||||||||||
Interest expense, net | (225 | ) | (1,288 | ) | (196 | ) | — | (1,709 | ) | |||||||||||
Other, net | — | 37 | 8 | — | 45 | |||||||||||||||
Net income (loss) before income tax benefit | (3,084 | ) | (2,876 | ) | (3,419 | ) | 4,165 | (5,214 | ) | |||||||||||
Income tax benefit | — | (44 | ) | (249 | ) | — | (293 | ) | ||||||||||||
Net income (loss) | (3,084 | ) | (2,832 | ) | (3,170 | ) | 4,165 | (4,921 | ) | |||||||||||
Net loss attributable to non-controlling interests | — | (1,165 | ) | — | — | (1,165 | ) | |||||||||||||
Net income (loss) attributable to controlling interests | (3,084 | ) | (1,667 | ) | (3,170 | ) | 4,165 | (3,756 | ) | |||||||||||
Net loss attributable to general partner | (921 | ) | — | — | — | (921 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | (2,163 | ) | $ | (1,667 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (2,835 | ) |
Condensed
Consolidating Statement of Operations
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 62,172 | $ | 13,884 | $ | (2,582 | ) | $ | 73,474 | |||||||||
Costs of services | — | 55,431 | 12,865 | (2,582 | ) | 65,714 | ||||||||||||||
Gross margin | — | 6,741 | 1,019 | — | 7,760 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,202 | 3,578 | 1,409 | — | 6,189 | |||||||||||||||
Depreciation, amortization and accretion | — | 1,038 | 187 | — | 1,225 | |||||||||||||||
Impairments | — | — | — | — | — | |||||||||||||||
Operating income (loss) | (1,202 | ) | 2,125 | (577 | ) | — | 346 | |||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | 468 | (749 | ) | — | 281 | — | ||||||||||||||
Interest expense, net | (218 | ) | (1,191 | ) | (209 | ) | — | (1,618 | ) | |||||||||||
Other, net | — | 19 | 4 | — | 23 | |||||||||||||||
Net income (loss) before income tax expense | (952 | ) | 204 | (782 | ) | 281 | (1,249 | ) | ||||||||||||
Income tax expense | — | 103 | 9 | — | 112 | |||||||||||||||
Net income (loss) | (952 | ) | 101 | (791 | ) | 281 | (1,361 | ) | ||||||||||||
Net loss attributable to non-controlling interests | — | (367 | ) | — | — | (367 | ) | |||||||||||||
Net income (loss) attributable to controlling interests | (952 | ) | 468 | (791 | ) | 281 | (994 | ) | ||||||||||||
Net loss attributable to general partner | (968 | ) | — | — | — | (968 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 16 | $ | 468 | $ | (791 | ) | $ | 281 | $ | (26 | ) |
Condensed
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (3,084 | ) | $ | (2,832 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (4,921 | ) | ||||||
Other comprehensive income - Foreign currency translation | — | (57 | ) | 118 | — | 61 | ||||||||||||||
Comprehensive income (loss) | $ | (3,084 | ) | $ | (2,889 | ) | $ | (3,052 | ) | $ | 4,165 | $ | (4,860 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | — | (1,165 | ) | — | — | (1,165 | ) | |||||||||||||
Comprehensive (loss) attributable to general partner | (921 | ) | — | — | — | (921 | ) | |||||||||||||
Comprehensive income (loss) attributable to controlling interests | $ | (2,163 | ) | $ | (1,724 | ) | $ | (3,052 | ) | $ | 4,165 | $ | (2,774 | ) |
Condensed
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (952 | ) | $ | 101 | $ | (791 | ) | $ | 281 | $ | (1,361 | ) | |||||||
Other comprehensive income – Foreign currency translation |
— | 192 | 396 | — | 588 | |||||||||||||||
Comprehensive income (loss) | $ | (952 | ) | $ | 293 | $ | (395 | ) | $ | 281 | $ | (773 | ) | |||||||
Comprehensive loss attributable to non-controlling interests | — | (367 | ) | — | — | (367 | ) | |||||||||||||
Comprehensive loss attributable to general partner | (968 | ) | — | — | — | (968 | ) | |||||||||||||
Comprehensive income (loss) attributable to controlling interests | $ | 16 | $ | 660 | $ | (395 | ) | $ | 281 | $ | 562 |
Condensed
Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (3,084 | ) | $ | (2,832 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (4,921 | ) | ||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 1,122 | 311 | — | 1,433 | |||||||||||||||
Impairments | — | 688 | 2,910 | — | 3,598 | |||||||||||||||
Gain (loss) on asset disposal | — | 11 | — | — | 11 | |||||||||||||||
Interest expense from debt issuance cost amortization | 146 | — | — | — | 146 | |||||||||||||||
Equity-based compensation expense | 357 | — | — | — | 357 | |||||||||||||||
Equity in earnings of investee | — | (34 | ) | — | — | (34 | ) | |||||||||||||
Equity earnings in subsidiaries | 1,667 | 2,498 | — | (4,165 | ) | — | ||||||||||||||
Deferred tax benefit, net | — | (8 | ) | (348 | ) | — | (356 | ) | ||||||||||||
Non-cash allocated expenses | 921 | — | — | — | 921 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 1,973 | (2,711 | ) | (117 | ) | (855 | ) | ||||||||||||
Receivables from affiliates | — | 1,555 | — | (1,555 | ) | — | ||||||||||||||
Prepaid expenses and other | — | (120 | ) | (6 | ) | (19 | ) | (145 | ) | |||||||||||
Accounts payable and accrued payroll and other | 70 | 1,291 | 155 | 1,691 | 3,207 | |||||||||||||||
Income taxes payable | — | (44 | ) | 33 | — | (11 | ) | |||||||||||||
Net cash provided by (used in) operating activities | 77 | 6,100 | (2,826 | ) | — | 3,351 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from fixed asset disposals | — | 2 | — | — | 2 | |||||||||||||||
Purchases of property and equipment | — | (298 | ) | — | — | (298 | ) | |||||||||||||
Net cash used in investing activities | — | (296 | ) | — | — | (296 | ) | |||||||||||||
Financing activities: | ||||||||||||||||||||
Taxes paid related to net share settlement of equity-based compensation | (77 | ) | — | — | — | (77 | ) | |||||||||||||
Distributions from subsidiaries | 4,823 | (4,815 | ) | (8 | ) | — | — | |||||||||||||
Distributions to limited partners | (4,823 | ) | — | — | — | (4,823 | ) | |||||||||||||
Distributions to non-controlling members | — | — | (8 | ) | — | (8 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (77 | ) | (4,815 | ) | (16 | ) | — | (4,908 | ) | |||||||||||
Effects of exchange rates on cash | — | (44 | ) | (17 | ) | — | (61 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 945 | (2,859 | ) | — | (1,914 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 695 | 20,251 | 5,747 | — | 26,693 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 695 | $ | 21,196 | $ | 2,888 | $ | — | $ | 24,779 | ||||||||||
Condensed
Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (952 | ) | $ | 101 | $ | (791 | ) | $ | 281 | $ | (1,361 | ) | |||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 1,119 | 314 | — | 1,433 | |||||||||||||||
Interest expense from debt issuance cost amortization | 140 | — | — | — | 140 | |||||||||||||||
Equity-based compensation expense | 317 | — | — | — | 317 | |||||||||||||||
Equity in earnings of investee | — | (17 | ) | — | — | (17 | ) | |||||||||||||
Distributions from investee | — | 63 | — | — | 63 | |||||||||||||||
Equity earnings in subsidiaries | (468 | ) | 749 | — | (281 | ) | — | |||||||||||||
Deferred tax expense, net | — | — | 36 | — | 36 | |||||||||||||||
Non-cash allocated expenses | 968 | — | — | — | 968 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 13,298 | (83 | ) | (5,654 | ) | 7,561 | |||||||||||||
Prepaid expenses and other | (115 | ) | 263 | 28 | 158 | 334 | ||||||||||||||
Accounts payable and accrued payroll and other | (61 | ) | (5,196 | ) | 1,125 | 5,461 | 1,329 | |||||||||||||
Income taxes payable | — | 69 | 75 | 35 | 179 | |||||||||||||||
Net cash provided by (used in) operating activities | (171 | ) | 10,449 | 704 | — | 10,982 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Purchases of property and equipment | — | (407 | ) | (89 | ) | — | (496 | ) | ||||||||||||
Net cash used in investing activities | — | (407 | ) | (89 | ) | — | (496 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Repayments of long-term debt | — | (4,000 | ) | — | — | (4,000 | ) | |||||||||||||
Distributions from subsidiaries | 4,810 | (4,810 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (4,810 | ) | — | — | — | (4,810 | ) | |||||||||||||
Distributions to non-controlling members | — | 383 | (750 | ) | — | (367 | ) | |||||||||||||
Net cash used in financing activities | — | (8,427 | ) | (750 | ) | — | (9,177 | ) | ||||||||||||
Effects of exchange rates on cash | — | 192 | 199 | — | 391 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | (171 | ) | 1,807 | 64 | — | 1,700 | ||||||||||||||
Cash and cash equivalents, beginning of period | 378 | 19,570 | 4,202 | — | 24,150 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 207 | $ | 21,377 | $ | 4,266 | $ | — | $ | 25,850 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Changes in accounts payable excluded from capital expenditures | $ | — | $ | 13 | $ | 54 | $ | — | $ | 67 |
|
Basis of Presentation
The Unaudited Condensed Consolidated Financial Statements as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 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. All significant intercompany transactions and account balances have been eliminated in consolidation. The Unaudited Condensed Consolidated Balance Sheet at December 31, 2016 is derived from 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 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, 2016 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.
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.
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 customer's creditworthiness. The Partnership determines allowances for bad debts based on management's assessment of the creditworthiness of the customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of previously written off trade receivables are recorded when cash is received. During the quarter ended March 31, 2017, we received $0.3 million on accounts receivable previously written off which we recorded as a reduction to general and administrative expense on our Unaudited Consolidated Statements of Operations.
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 PIS segment that performs pipeline inspection services for utility customers, and Brown Integrity – PUC, LLC, a 51% owned subsidiary, 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, income taxes payable, and deferred tax liabilities in our Unaudited Condensed Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states, most notably 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 classify as “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 for each year since our 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 in net income (loss) attributable to noncontrolling interest 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 in noncontrolling interests in 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 renewals and 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 Statement of Operations.
We review property and equipment 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 value of the asset group to its fair value and record a corresponding impairment loss.
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 is managed or operated. We have determined that our PIS, IS, and W&ES 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, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Accrued payroll | $ | 8,235 | $ | 5,594 | ||||
Other | 1,809 | 1,991 | ||||||
$ | 10,044 | $ | 7,585 |
Foreign Currency Translation
Our Unaudited Condensed Consolidated Financial Statements are reported 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. We report gains and losses on foreign currency translation in other comprehensive income (loss).
Our Unaudited Condensed Consolidated Balance Sheet at March 31, 2017 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 Partners’ capital, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net income.
Subordination
With the payment of the fourth quarter distribution and the fulfillment of other requirements associated with the termination of the subordination period, the Partnership emerged from subordination on February 14, 2017, converting the 5,913,000 subordinated units into common units on a one-for-one basis.
New Accounting Standards
In 2017, the Partnership adopted the following new accounting standards issued by the Financial Accounting Standards Board (“FASB”);
The FASB issued Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensation in March 2016. This ASU gives entities the option to account for forfeitures of share-based awards when the forfeitures occur (previously, entities were required to estimate future forfeitures and reduce their share-based compensation expense accordingly). We adopted this new standard on January 1, 2017 and elected to account for forfeitures when they occur. The adoption of this ASU had no significant effect on our Unaudited Condensed Consolidated Financial Statements.
The FASB issued ASU 2017-04 – Intangibles – Goodwill and Other in January 2017. The objective of this guidance is to simplify how an entity is required to test goodwill for impairment. We adopted this new standard effective January 1, 2017 in order to simplify the measurement process for the potential impairment of goodwill. Under the new standard, we perform a goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).
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 2016-02 – 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 and this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determining the impact this guidance will have on our Unaudited Condensed Consolidated Financial Statements.
The FASB issued ASU 2014-09 – Revenue from Contracts with Customers in May 2014. ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common standard for recognizing revenue for GAAP and International Financial Reporting Standards that is applicable to all organizations. We will be required to adopt this standard in 2018 and to apply its provisions either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application (modified retrospective method). Although we continue to evaluate the financial impact of this ASU on the Partnership, we currently plan to adopt this standard utilizing the modified retrospective method and do not anticipate that the adoption of this ASU will materially impact our financial position, results of operations or cash flows.
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Accrued payroll and other on our Unaudited Condensed Consolidated Balance Sheets includes the following:
March 31, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Accrued payroll | $ | 8,235 | $ | 5,594 | ||||
Other | 1,809 | 1,991 | ||||||
$ | 10,044 | $ | 7,585 |
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Outstanding borrowings at March 31, 2017 and December 31, 2016 under the Credit Agreement were as follows:
March 31, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Working Capital Facility | $ | 48,000 | $ | 48,000 | ||||
Acquisition Facility | 88,900 | 88,900 | ||||||
Total borrowings | 136,900 | 136,900 | ||||||
Debt issuance costs | (1,054 | ) | (1,201 | ) | ||||
Long-term debt | $ | 135,846 | $ | 135,699 |
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The following table summarizes the LTIP Unit activity for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Number of Units | Weighted Average Grant Date Fair Value / Unit | Number of Units | Weighted Average Grant Date Fair Value / Unit | |||||||||||||
Units at January 1 | 573,902 | $ | 9.86 | 361,698 | $ | 14.30 | ||||||||||
Units granted | 245,331 | $ | 7.16 | 331,098 | $ | 6.33 | ||||||||||
Units vested and issued | (26,366 | ) | $ | 15.25 | (8,208 | ) | $ | 16.71 | ||||||||
Units forfeited | (9,328 | ) | $ | 9.50 | (14,165 | ) | $ | 14.74 | ||||||||
Units at March 31 | 783,539 | $ | 8.83 | 670,423 | $ | 10.33 |
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The following table summarizes the cash distributions declared and paid to our limited partners since our IPO.
Payment Date | Per
Unit Cash Distributions | Total
Cash Distributions | Total
Cash Distributions to Affiliates (a) | |||||||||
(in thousands) | ||||||||||||
May 15, 2014 (b) | $ | 0.301389 | $ | 3,565 | $ | 2,264 | ||||||
August 14, 2014 | 0.396844 | 4,693 | 2,980 | |||||||||
November 14, 2014 | 0.406413 | 4,806 | 3,052 | |||||||||
Total 2014 Distributions | 1.104646 | 13,064 | 8,296 | |||||||||
February 14, 2015 | 0.406413 | 4,806 | 3,052 | |||||||||
May 14, 2015 | 0.406413 | 4,808 | 3,053 | |||||||||
August 14, 2015 | 0.406413 | 4,809 | 3,087 | |||||||||
November 13, 2015 | 0.406413 | 4,809 | 3,092 | |||||||||
Total 2015 Distributions | 1.625652 | 19,232 | 12,284 | |||||||||
February 12, 2016 | 0.406413 | 4,810 | 3,107 | |||||||||
May 13, 2016 | 0.406413 | 4,812 | 3,099 | |||||||||
August 12, 2016 | 0.406413 | 4,817 | 3,103 | |||||||||
November 14, 2016 | 0.406413 | 4,819 | 3,105 | |||||||||
Total 2016 Distributions | 1.625652 | 19,258 | 12,414 | |||||||||
February 13, 2017 | 0.406413 | 4,823 | 3,107 | |||||||||
May 15, 2017 (c) | 0.210000 | 2,495 | 1,606 | |||||||||
0.616413 | 7,318 | 4,713 | ||||||||||
Total Distributions (through May 15, 2017 since IPO) | $ | 4.972363 | $ | 58,872 | $ | 37,707 |
(a) | Approximately 64.4% of the Partnership’s outstanding units at March 31, 2017 were held by affiliates. |
(b) | Distribution was pro-rated from the date of our IPO through March 31, 2014. |
(c) | First quarter 2017 distribution was declared and will be paid in the second quarter of 2017. |
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The following tables show operating income (loss) by reportable segment and a reconciliation of segment operating income (loss) to net loss before income tax expense.
PIS | IS | W&ES | Other | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Three months ended March 31, 2017 | ||||||||||||||||||||
Revenue | $ | 62,148 | $ | 696 | $ | 1,878 | $ | — | $ | 64,722 | ||||||||||
Costs of services | 56,601 | 904 | 888 | — | 58,393 | |||||||||||||||
Gross margin | 5,547 | (208 | ) | 990 | — | 6,329 | ||||||||||||||
General and administrative | 3,254 | 446 | 218 | 1,192 | 5,110 | |||||||||||||||
Depreciation, amortization and accretion | 599 | 157 | 415 | — | 1,171 | |||||||||||||||
Impairments | 1,329 | 1,581 | 688 | — | 3,598 | |||||||||||||||
Operating income (loss) | $ | 365 | $ | (2,392 | ) | $ | (331 | ) | $ | (1,192 | ) | (3,550 | ) | |||||||
Interest expense, net | (1,709 | ) | ||||||||||||||||||
Other, net | 45 | |||||||||||||||||||
Net loss before income tax expense | $ | (5,214 | ) | |||||||||||||||||
Three months ended March 31, 2016 | ||||||||||||||||||||
Revenue | $ | 66,709 | $ | 4,258 | $ | 2,507 | $ | — | $ | 73,474 | ||||||||||
Costs of services | 60,844 | 3,732 | 1,138 | — | 65,714 | |||||||||||||||
Gross margin | 5,865 | 526 | 1,369 | — | 7,760 | |||||||||||||||
General and administrative | 3,440 | 991 | 556 | 1,202 | 6,189 | |||||||||||||||
Depreciation, amortization and accretion | 617 | 159 | 449 | — | 1,225 | |||||||||||||||
Operating income (loss) | $ | 1,808 | $ | (624 | ) | $ | 364 | $ | (1,202 | ) | 346 | |||||||||
Interest expense, net | (1,618 | ) | ||||||||||||||||||
Other, net | 23 | |||||||||||||||||||
Net loss before income tax expense | $ | (1,249 | ) | |||||||||||||||||
Total Assets | ||||||||||||||||||||
March 31, 2017 | $ | 130,988 | $ | 9,396 | $ | 29,361 | $ | (7,785 | ) | $ | 161,960 | |||||||||
December 31, 2016 | $ | 124,840 | $ | 12,079 | $ | 38,141 | $ | (7,548 | ) | $ | 167,512 |
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Condensed
Consolidating Balance Sheet
As of March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 695 | $ | 21,196 | $ | 2,888 | $ | — | $ | 24,779 | ||||||||||
Trade accounts receivable, net | — | 31,073 | 8,882 | (572 | ) | 39,383 | ||||||||||||||
Accounts receivable - affiliates | — | 11,042 | — | (11,042 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 2,450 | 43 | (38 | ) | 2,455 | ||||||||||||||
Total current assets | 695 | 65,761 | 11,813 | (11,652 | ) | 66,617 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 16,592 | 3,092 | — | 19,684 | |||||||||||||||
Less: Accumulated depreciation | — | 6,239 | 1,198 | — | 7,437 | |||||||||||||||
Total property and equipment, net | — | 10,353 | 1,894 | — | 12,247 | |||||||||||||||
Intangible assets, net | — | 23,310 | 4,273 | — | 27,583 | |||||||||||||||
Goodwill | — | 53,913 | 1,416 | — | 55,329 | |||||||||||||||
Investment in subsidiaries | 21,755 | (2,868 | ) | — | (18,887 | ) | — | |||||||||||||
Notes receivable - affiliates | — | 13,631 | — | (13,631 | ) | — | ||||||||||||||
Other assets | — | 174 | 10 | — | 184 | |||||||||||||||
Total assets | $ | 22,450 | $ | 164,274 | $ | 19,406 | $ | (44,170 | ) | $ | 161,960 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | — | $ | 1,201 | $ | 174 | $ | (591 | ) | $ | 784 | |||||||||
Accounts payable - affiliates | 8,906 | — | 5,363 | (11,042 | ) | 3,227 | ||||||||||||||
Accrued payroll and other | 38 | 8,825 | 1,200 | (19 | ) | 10,044 | ||||||||||||||
Income taxes payable | — | 923 | 77 | — | 1,000 | |||||||||||||||
Total current liabilities | 8,944 | 10,949 | 6,814 | (11,652 | ) | 15,055 | ||||||||||||||
Long-term debt | (1,054 | ) | 131,400 | 5,500 | — | 135,846 | ||||||||||||||
Notes payable - affiliates | — | — | 13,631 | (13,631 | ) | — | ||||||||||||||
Asset retirement obligations | — | 161 | — | — | 161 | |||||||||||||||
Total liabilities | 7,890 | 142,510 | 25,945 | (25,283 | ) | 151,062 | ||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 10,683 | 17,887 | (6,539 | ) | (15,010 | ) | 7,021 | |||||||||||||
Non-controlling interests | 3,877 | 3,877 | — | (3,877 | ) | 3,877 | ||||||||||||||
Total owners’ equity | 14,560 | 21,764 | (6,539 | ) | (18,887 | ) | 10,898 | |||||||||||||
Total liabilities and owners’ equity | $ | 22,450 | $ | 164,274 | $ | 19,406 | $ | (44,170 | ) | $ | 161,960 |
Condensed
Consolidating Balance Sheet
As of December 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 695 | $ | 20,251 | $ | 5,747 | $ | — | $ | 26,693 | ||||||||||
Trade accounts receivable, net | — | 33,046 | 6,125 | (689 | ) | 38,482 | ||||||||||||||
Accounts receivable - affiliates | — | 12,622 | — | (12,622 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 996 | 46 | — | 1,042 | |||||||||||||||
Total current assets | 695 | 66,915 | 11,918 | (13,311 | ) | 66,217 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 19,366 | 3,093 | — | 22,459 | |||||||||||||||
Less: Accumulated depreciation | — | 6,798 | 1,042 | — | 7,840 | |||||||||||||||
Total property and equipment, net | — | 12,568 | 2,051 | — | 14,619 | |||||||||||||||
Intangible assets, net | — | 23,875 | 5,749 | — | 29,624 | |||||||||||||||
Goodwill | — | 53,914 | 2,989 | — | 56,903 | |||||||||||||||
Investment in subsidiaries | 29,454 | (417 | ) | — | (29,037 | ) | — | |||||||||||||
Notes receivable - affiliates | — | 13,662 | — | (13,662 | ) | — | ||||||||||||||
Other assets | — | 139 | 10 | — | 149 | |||||||||||||||
Total assets | $ | 30,149 | $ | 170,656 | $ | 22,717 | $ | (56,010 | ) | $ | 167,512 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | — | $ | 1,653 | $ | 712 | $ | (675 | ) | $ | 1,690 | |||||||||
Accounts payable - affiliates | 8,860 | — | 5,400 | (12,622 | ) | 1,638 | ||||||||||||||
Accrued payroll and other | 15 | 7,082 | 503 | (15 | ) | 7,585 | ||||||||||||||
Income taxes payable | — | 967 | 44 | — | 1,011 | |||||||||||||||
Total current liabilities | 8,875 | 9,702 | 6,659 | (13,312 | ) | 11,924 | ||||||||||||||
Long-term debt | (1,201 | ) | 131,400 | 5,500 | — | 135,699 | ||||||||||||||
Notes payable - affiliates | — | — | 13,662 | (13,662 | ) | — | ||||||||||||||
Deferred tax liabilities | — | 8 | 354 | — | 362 | |||||||||||||||
Asset retirement obligations | — | 139 | — | — | 139 | |||||||||||||||
Total liabilities | 7,674 | 141,249 | 26,175 | (26,974 | ) | 148,124 | ||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 17,425 | 24,357 | (3,458 | ) | (23,986 | ) | 14,338 | |||||||||||||
Non-controlling interests | 5,050 | 5,050 | — | (5,050 | ) | 5,050 | ||||||||||||||
Total owners’ equity | 22,475 | 29,407 | (3,458 | ) | (29,036 | ) | 19,388 | |||||||||||||
Total liabilities and owners’ equity | $ | 30,149 | $ | 170,656 | $ | 22,717 | $ | (56,010 | ) | $ | 167,512 |
Condensed
Consolidating Statement of Operations
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 49,669 | $ | 16,420 | $ | (1,367 | ) | $ | 64,722 | |||||||||
Costs of services | — | 44,099 | 15,661 | (1,367 | ) | 58,393 | ||||||||||||||
Gross margin | — | 5,570 | 759 | — | 6,329 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,192 | 3,014 | 904 | — | 5,110 | |||||||||||||||
Depreciation, amortization and accretion | — | 995 | 176 | — | 1,171 | |||||||||||||||
Impairments | — | 688 | 2,910 | — | 3,598 | |||||||||||||||
Operating income (loss) | (1,192 | ) | 873 | (3,231 | ) | — | (3,550 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | (1,667 | ) | (2,498 | ) | — | 4,165 | — | |||||||||||||
Interest expense, net | (225 | ) | (1,288 | ) | (196 | ) | — | (1,709 | ) | |||||||||||
Other, net | — | 37 | 8 | — | 45 | |||||||||||||||
Net income (loss) before income tax benefit | (3,084 | ) | (2,876 | ) | (3,419 | ) | 4,165 | (5,214 | ) | |||||||||||
Income tax benefit | — | (44 | ) | (249 | ) | — | (293 | ) | ||||||||||||
Net income (loss) | (3,084 | ) | (2,832 | ) | (3,170 | ) | 4,165 | (4,921 | ) | |||||||||||
Net loss attributable to non-controlling interests | — | (1,165 | ) | — | — | (1,165 | ) | |||||||||||||
Net income (loss) attributable to controlling interests | (3,084 | ) | (1,667 | ) | (3,170 | ) | 4,165 | (3,756 | ) | |||||||||||
Net loss attributable to general partner | (921 | ) | — | — | — | (921 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | (2,163 | ) | $ | (1,667 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (2,835 | ) |
Condensed
Consolidating Statement of Operations
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 62,172 | $ | 13,884 | $ | (2,582 | ) | $ | 73,474 | |||||||||
Costs of services | — | 55,431 | 12,865 | (2,582 | ) | 65,714 | ||||||||||||||
Gross margin | — | 6,741 | 1,019 | — | 7,760 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,202 | 3,578 | 1,409 | — | 6,189 | |||||||||||||||
Depreciation, amortization and accretion | — | 1,038 | 187 | — | 1,225 | |||||||||||||||
Impairments | — | — | — | — | — | |||||||||||||||
Operating income (loss) | (1,202 | ) | 2,125 | (577 | ) | — | 346 | |||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | 468 | (749 | ) | — | 281 | — | ||||||||||||||
Interest expense, net | (218 | ) | (1,191 | ) | (209 | ) | — | (1,618 | ) | |||||||||||
Other, net | — | 19 | 4 | — | 23 | |||||||||||||||
Net income (loss) before income tax expense | (952 | ) | 204 | (782 | ) | 281 | (1,249 | ) | ||||||||||||
Income tax expense | — | 103 | 9 | — | 112 | |||||||||||||||
Net income (loss) | (952 | ) | 101 | (791 | ) | 281 | (1,361 | ) | ||||||||||||
Net loss attributable to non-controlling interests | — | (367 | ) | — | — | (367 | ) | |||||||||||||
Net income (loss) attributable to controlling interests | (952 | ) | 468 | (791 | ) | 281 | (994 | ) | ||||||||||||
Net loss attributable to general partner | (968 | ) | — | — | — | (968 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 16 | $ | 468 | $ | (791 | ) | $ | 281 | $ | (26 | ) |
Condensed
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (3,084 | ) | $ | (2,832 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (4,921 | ) | ||||||
Other comprehensive income - Foreign currency translation | — | (57 | ) | 118 | — | 61 | ||||||||||||||
Comprehensive income (loss) | $ | (3,084 | ) | $ | (2,889 | ) | $ | (3,052 | ) | $ | 4,165 | $ | (4,860 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | — | (1,165 | ) | — | — | (1,165 | ) | |||||||||||||
Comprehensive (loss) attributable to general partner | (921 | ) | — | — | — | (921 | ) | |||||||||||||
Comprehensive income (loss) attributable to controlling interests | $ | (2,163 | ) | $ | (1,724 | ) | $ | (3,052 | ) | $ | 4,165 | $ | (2,774 | ) |
Condensed
Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (952 | ) | $ | 101 | $ | (791 | ) | $ | 281 | $ | (1,361 | ) | |||||||
Other comprehensive income – Foreign currency translation |
— | 192 | 396 | — | 588 | |||||||||||||||
Comprehensive income (loss) | $ | (952 | ) | $ | 293 | $ | (395 | ) | $ | 281 | $ | (773 | ) | |||||||
Comprehensive loss attributable to non-controlling interests | — | (367 | ) | — | — | (367 | ) | |||||||||||||
Comprehensive loss attributable to general partner | (968 | ) | — | — | — | (968 | ) | |||||||||||||
Comprehensive income (loss) attributable to controlling interests | $ | 16 | $ | 660 | $ | (395 | ) | $ | 281 | $ | 562 |
Condensed
Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2017
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (3,084 | ) | $ | (2,832 | ) | $ | (3,170 | ) | $ | 4,165 | $ | (4,921 | ) | ||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 1,122 | 311 | — | 1,433 | |||||||||||||||
Impairments | — | 688 | 2,910 | — | 3,598 | |||||||||||||||
Gain (loss) on asset disposal | — | 11 | — | — | 11 | |||||||||||||||
Interest expense from debt issuance cost amortization | 146 | — | — | — | 146 | |||||||||||||||
Equity-based compensation expense | 357 | — | — | — | 357 | |||||||||||||||
Equity in earnings of investee | — | (34 | ) | — | — | (34 | ) | |||||||||||||
Equity earnings in subsidiaries | 1,667 | 2,498 | — | (4,165 | ) | — | ||||||||||||||
Deferred tax benefit, net | — | (8 | ) | (348 | ) | — | (356 | ) | ||||||||||||
Non-cash allocated expenses | 921 | — | — | — | 921 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 1,973 | (2,711 | ) | (117 | ) | (855 | ) | ||||||||||||
Receivables from affiliates | — | 1,555 | — | (1,555 | ) | — | ||||||||||||||
Prepaid expenses and other | — | (120 | ) | (6 | ) | (19 | ) | (145 | ) | |||||||||||
Accounts payable and accrued payroll and other | 70 | 1,291 | 155 | 1,691 | 3,207 | |||||||||||||||
Income taxes payable | — | (44 | ) | 33 | — | (11 | ) | |||||||||||||
Net cash provided by (used in) operating activities | 77 | 6,100 | (2,826 | ) | — | 3,351 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from fixed asset disposals | — | 2 | — | — | 2 | |||||||||||||||
Purchases of property and equipment | — | (298 | ) | — | — | (298 | ) | |||||||||||||
Net cash used in investing activities | — | (296 | ) | — | — | (296 | ) | |||||||||||||
Financing activities: | ||||||||||||||||||||
Taxes paid related to net share settlement of equity-based compensation | (77 | ) | — | — | — | (77 | ) | |||||||||||||
Distributions from subsidiaries | 4,823 | (4,815 | ) | (8 | ) | — | — | |||||||||||||
Distributions to limited partners | (4,823 | ) | — | — | — | (4,823 | ) | |||||||||||||
Distributions to non-controlling members | — | — | (8 | ) | — | (8 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (77 | ) | (4,815 | ) | (16 | ) | — | (4,908 | ) | |||||||||||
Effects of exchange rates on cash | — | (44 | ) | (17 | ) | — | (61 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | — | 945 | (2,859 | ) | — | (1,914 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 695 | 20,251 | 5,747 | — | 26,693 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 695 | $ | 21,196 | $ | 2,888 | $ | — | $ | 24,779 | ||||||||||
Condensed
Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2016
(in thousands)
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (952 | ) | $ | 101 | $ | (791 | ) | $ | 281 | $ | (1,361 | ) | |||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 1,119 | 314 | — | 1,433 | |||||||||||||||
Interest expense from debt issuance cost amortization | 140 | — | — | — | 140 | |||||||||||||||
Equity-based compensation expense | 317 | — | — | — | 317 | |||||||||||||||
Equity in earnings of investee | — | (17 | ) | — | — | (17 | ) | |||||||||||||
Distributions from investee | — | 63 | — | — | 63 | |||||||||||||||
Equity earnings in subsidiaries | (468 | ) | 749 | — | (281 | ) | — | |||||||||||||
Deferred tax expense, net | — | — | 36 | — | 36 | |||||||||||||||
Non-cash allocated expenses | 968 | — | — | — | 968 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 13,298 | (83 | ) | (5,654 | ) | 7,561 | |||||||||||||
Prepaid expenses and other | (115 | ) | 263 | 28 | 158 | 334 | ||||||||||||||
Accounts payable and accrued payroll and other | (61 | ) | (5,196 | ) | 1,125 | 5,461 | 1,329 | |||||||||||||
Income taxes payable | — | 69 | 75 | 35 | 179 | |||||||||||||||
Net cash provided by (used in) operating activities | (171 | ) | 10,449 | 704 | — | 10,982 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Purchases of property and equipment | — | (407 | ) | (89 | ) | — | (496 | ) | ||||||||||||
Net cash used in investing activities | — | (407 | ) | (89 | ) | — | (496 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Repayments of long-term debt | — | (4,000 | ) | — | — | (4,000 | ) | |||||||||||||
Distributions from subsidiaries | 4,810 | (4,810 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (4,810 | ) | — | — | — | (4,810 | ) | |||||||||||||
Distributions to non-controlling members | — | 383 | (750 | ) | — | (367 | ) | |||||||||||||
Net cash used in financing activities | — | (8,427 | ) | (750 | ) | — | (9,177 | ) | ||||||||||||
Effects of exchange rates on cash | — | 192 | 199 | — | 391 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | (171 | ) | 1,807 | 64 | — | 1,700 | ||||||||||||||
Cash and cash equivalents, beginning of period | 378 | 19,570 | 4,202 | — | 24,150 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 207 | $ | 21,377 | $ | 4,266 | $ | — | $ | 25,850 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Changes in accounts payable excluded from capital expenditures | $ | — | $ | 13 | $ | 54 | $ | — | $ | 67 |
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With the payment of the fourth quarter distribution and the fulfillment of other requirements associated with the termination of the subordination period, the Partnership emerged from subordination on February 14, 2017, converting the 5,913,000 subordinated units into common units on a one-for-one basis.
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(i) a base rate plus a margin of 1.25% to 2.75% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.25% to 3.75% per annum (“LIBOR Borrowings”).
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vest three years from the grant dates, contingent upon the recipient meeting certain performance targets
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a group of former minority shareholders of Tulsa Inspection Resources, Inc. (“TIR Inc.”, the predecessor of the TIR Entities)
Flatland Resources I, LLC and Flatland Resources II, LLC
TIR LLC, members of TIR LLC, and certain affiliates of TIR LLC’s members
CES LLC
The former shareholders of TIR Inc. claim that they did not receive sufficient value for their shares in the TIR Merger and are seeking rescission of the TIR Merger or, alternatively, compensatory and punitive damages.
The customers claim that CES LLC breached the management agreements and interfered with their business relationships, and seek to rescind the management agreements and recover any damages.
The Partnership is not named as a defendant in this civil action.
United States District Court for the Northern District of Oklahoma
District Court for the McKenzie County District of the State of North Dakota
In the first quarter of 2017, CES received a cash payment and other consideration and the parties settled the matter and dismissed all associated claims.
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