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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 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.” At our Initial Public Offering (“IPO”), 4,312,500 of our common units were made available to the general public at $20.00 per common unit ($18.70 per common unit, net of underwriting discounts, commissions and fees). We received net proceeds of $80.2 million from the IPO, after deducting underwriting discounts and structuring fees. The net proceeds from the IPO were distributed to Cypress Energy Holdings II, LLC as reimbursement for certain capital expenditures it incurred with respect to assets contributed to us.
Total deferred offering costs of $2.9 million, including costs incurred during the year ended December 31, 2014 of $0.3 million, were charged against the proceeds of the IPO. In addition, the Partnership incurred $0.4 million of offering costs during the year ended December 31, 2014 that were expensed as incurred. These non-recurring costs are reflected as offering costs in the Partnership’s Consolidated Statement of Operations.
Our business is organized into the Pipeline Inspection Services (“PIS”), Integrity Services (“IS”) and Water and Environmental Services (“W&ES”) reportable segments. PIS provides pipeline inspection and other services to energy exploration and production (“E&P”), public utility companies (“PUC’s”), 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 hydrotesting integrity services to pipeline owners, as well as 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 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 a third-party SWD facility pursuant to a management agreement (see Note 12). We also own a 25% interest in this facility.
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2. | Basis of Presentation and Significant Accounting Policies |
Basis of Presentation
The accompanying Consolidated Financial Statements include our accounts and those of our controlled subsidiaries. All intercompany transactions and account balances have been eliminated. We have made certain reclassifications to the prior period financial statements to conform with classification methods used in the current fiscal year. These reclassifications have had the effect of reducing previously reported total assets and total liabilities, as the adoption of required accounting guidance from the Financial Accounting Standards Board (“FASB”) necessitated changes in the presentation of certain assets and liabilities, including the presentation of deferred tax assets and liabilities as noncurrent and the netting of debt issuance costs with its associated debt.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Partnership’s Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Areas requiring the use of assumptions, judgments, and estimates include amounts of expected future cash flows used in determining possible impairments of long-lived assets, the determination of fair values of assets acquired and liabilities assumed in business combinations, and future asset retirement obligations. Certain estimates are inherently imprecise and may change as future information becomes available. The use of alternative judgments and/or assumptions could result in different outcomes.
Fair Value Measurement
The Partnership utilizes fair value measurements to measure assets in a business combination or assess impairment of property and equipment, intangible assets, and goodwill. Fair value is the amount received from the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant. The Partnership uses market data or assumptions that it believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. The Partnership applies both market and income approaches for fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy prioritizes the inputs used to measure fair value, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Partnership classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
● | Level 1 – Quoted prices for identical assets or liabilities in active markets that management has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
● | Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured. |
● | Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. |
Contributions Attributable to General Partner
During the years ended December 31, 2016, 2015, and 2014, Holdings incurred overhead expenses on behalf of the Partnership totaling $3.8 million, $0.6 million and $0.5 million, respectively. These costs represent amounts incurred by Holdings in excess of amounts charged to the Partnership under our omnibus agreement. These expenses are reflected as general and administrative in the Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014 and as contributions attributable to General Partner in the Consolidated Statement of Owners’ Equity.
In addition to incurring the expenses described above, Holdings provided the Partnership with additional temporary financial support by making cash contributions of $2.5 million in 2016 as a reimbursement for certain expenditures incurred by the Partnership. These payments are reflected as a contribution attributable to general partner in the Consolidated Statement of Owners’ Equity and as a component of the net loss attributable to the general partner in the Consolidated Statements of Operations for the year ended December 31, 2016.
Cash and Cash Equivalents
The Partnership considers all investments purchased with initial maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of investments in highly-liquid securities. The carrying amounts of cash and cash equivalents reported in the balance sheet approximate fair value.
As of December 31, 2016, U.S. cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per financial institution. Canadian cash balances are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 (Canadian Dollars) per financial institution. At times, cash balances may be in excess of the FDIC or CDIC insurance limits. We periodically assess the financial condition of the institutions where we deposit funds, and, we believe our credit risk related to these funds was minimal at December 31, 2016.
Property and Equipment
Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and equipment, computer and office equipment, and vehicles. The Partnership records 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. Depreciation for these assets is computed using the straight-line method over the estimated useful lives of the assets. Upon retirement, impairment, or disposition of an asset, the cost and related accumulated depreciation are removed from the balance sheet and the resultant gain or loss, if any, is reflected in the Consolidated Statement of Operations.
Debt Issuance Costs
Debt issuance costs represent fees and expenses associated with securing the Partnership’s Credit Agreement (see Note 7). Amortization of the capitalized debt issuance costs is computed using the effective interest method over the term of the Credit Agreement.
Income Taxes
As a limited partnership, we generally are not subject to federal, state or local income taxes. The tax on the net income of the Partnership is generally borne by the individual partners. Net income for financial statement purposes may differ significantly from taxable income 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 TIR Entities that have Canadian activity are taxable in Canada. In addition, the Partnership owns three subsidiaries, Tulsa Inspection Resources – PUC, LLC (“TIR-PUC”), Brown Integrity - PUC, LLC, and Cypress Energy Finance Corporation, that have elected to be taxed as corporations for U.S. federal income tax purposes. The amounts recognized as income tax expense, income taxes payable, and deferred tax liabilities in the 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 our “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements) exceed 90% of our total gross income, 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.
The Partnership evaluates uncertain tax positions for recognition and measurement in the Consolidated Financial Statements. To recognize a tax position, the Partnership determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Partnership had no uncertain tax positions that required recognition in the financial statements at December 31, 2016 or 2015. Any interest or penalties would be recognized as a component of income tax expense.
Revenue Recognition
Revenues are recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenues related to pipeline inspection and integrity services are recognized when the services are performed. Water disposal revenues are recognized upon receipt of the wastewater at our disposal facilities. Revenues from sales of oil that is recovered in the process of treasing wastewater are recognized when the oil is delivered to the customer.
Unit-Based Compensation
Our General Partner adopted a long-term incentive plan (“LTIP”) under which the Partnership grants equity-based compensation to employees and directors. The cost of such equity-based compensation is measured based on the grant-date fair value of those instruments. That cost is recognized on a straight-line basis over the requisite service period, as described in Note 11.
Net Income (Loss) Per Unit
We utilize the two-class method in calculating basic and diluted income (loss) per common and subordinated unit. Net income (loss) attributable to partners / controlling interests is allocated to the general partner and limited partners in accordance with their respective partnership ownership percentages, after giving effect to any specifically allocated items.
For the year ended December 31, 2016, there were 155,877 dilutive phantom restricted units. For the year ended December 31, 2015, there were no dilutive phantom restricted units. For the year ended December 31, 2014, there were 14,520 phantom restricted units; however, as we were in a net loss position, they were excluded from the net income per unit calculation.
Accounts Receivable and Concentration of Credit Risk
We operate in the United States and Canada. 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 accounts receivable allowances based on management’s assessment of the creditworthiness of the customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Partnership does not typically charge interest on past due trade receivables and does not require collateral for its trade receivables. The Partnership had an allowance for doubtful accounts of $0.6 million and $0.7 million at December 31, 2016 and 2015, respectively, and recorded bad debt expense of approximately $0.0 million, $0.1 million and $0.1 million in the years ended December 31, 2016, 2015 and 2014, respectively.
We had three customers that each represented more than 10% of total accounts receivable as of December 31, 2016 and 2015. If one or more of these customers were to default on their payment obligations, we may not be able to replace any of these customers in a timely fashion, on favorable terms, or at all. In addition, any downgrade of our customers’ receivables from investment grade (defined as BBB- or higher by S&P or Baa3 or higher by Moody’s) could reduce our borrowing capacity or potentially place the Partnership at risk of default on the working capital revolving credit facility of our Credit Agreement. The result of downgrades of our customers’ receivables could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
The majority of our revenues are generated in the United States. Total revenues generated in Canada were $31.2 million, $27.5 million, and $32.4 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Accrued Payroll and Other
Included in accrued payroll and other is $5.6 million and $5.8 million of payroll costs as of December 31, 2016 and 2015, respectively. The remaining amounts relate to various other accrued liabilities.
Fair Value of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents; trade accounts receivable, net; prepaid expenses and other; accounts payable; accounts payable – affiliates; accrued payroll and other; and income taxes payable approximate their fair values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in the Partnership’s Consolidated Balance Sheets. The following methods and assumptions were used to estimate the fair values:
Impairments of Property and Equipment
The Partnership reviews its property and equipment for impairment whenever events or changes in circumstances indicate, in the judgment of management, that a decline in the recoverability of their carrying value may have occurred. When an indicator of impairment exists, the Partnership compares its estimate of undiscounted cash flows attributable to the assets to the carrying value of the assets to determine whether an impairment has occurred. If the estimate of undiscounted cash flows is less than the carrying value of the asset group, the Partnership determines the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and records a loss for the amount by which the carrying value exceeds the estimated fair value. Assets are grouped for impairment purposes at each SWD facility in the W&ES segment, as these asset groups represent the lowest level as which cash flows are separately identifiable. The Partnership recorded impairment losses to property, plant, and equipment of $2.1 million, $6.6 million, and $12.8 million for the years ended December 31, 2016, 2015 and 2014, respectively (see Note 4). Unfavorable changes in the future are reasonably possible, and therefore it is possible that we may incur additional impairment charges in the future.
Goodwill
At December 31, 2016 and 2015, the Partnership had $56.9 million and $65.3 million of goodwill, respectively. Goodwill is not amortized, but is subject to annual reviews on November 1 for impairment 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 operating segments are the appropriate reporting units for testing goodwill impairment. The accounting estimate relative to assessing the impairment of goodwill is a critical accounting estimate for each of our operating segments.
For our PIS reporting unit, we performed qualitative assessments to determine whether the fair value of the reporting unit was less than its carrying value. Our evaluations consisted of assessing various qualitative factors including current and projected future earnings, capitalization, current customer relationships and projects, and the impact of lower crude oil prices on our earnings. The qualitative assessment on this reporting unit indicated that there was no need to conduct further quantitative testing for goodwill impairment. Different judgments from those we used in our qualitative analysis could have resulted in the requirement to perform a quantitative goodwill impairment analysis.
During 2016, for our IS and W&ES segments, after giving consideration to certain qualitative factors, including trends in the energy industry and recorded impairments of property and equipment, we elected to perform quantitative goodwill impairment analyses. We computed the fair values of the reporting units using multiple valuation methodologies, including market approaches (market price multiples of comparable companies) and income approaches (discounted cash flow analyses). These approaches are consistent with the requirement to utilize all appropriate valuation techniques as described in ASC 820-10-35-24 “Fair Value Measurements and Disclosures.” Given recent declines in the price of crude oil and the related impact on the valuations of energy related companies, relevant market data was difficult to obtain and was of limited usefulness. Accordingly, we relied heavily on the use of the income approach for the valuations of the reporting units.
Based on our valuation, we determined that the goodwill in our IS segment was impaired as of June 30, 2016 by $8.4 million (see Note 5). During 2014, we determined that the carrying value of the W&ES reporting unit exceeded the fair value of the reporting unit, resulting in a goodwill impairment charge of $19.8 million. Further unfavorable changes in the future are reasonably possible, and therefore it is possible that we may incur additional impairment charges in the future.
Intangible Assets
Intangible assets include acquired customer relationships, trade names, and certain other intangibles acquired via various acquisitions and have been recorded utilizing various assumptions to determine fair market value including, but not limited to, replacement costs, liquidation values, future cash flows on a discounted basis of the net assets acquired, pay-off values, and average royalty rates. Due to the unobservable nature of these assumptions, these fair value measurements are considered to be Level 3 fair value estimates. Amortization of intangible assets is computed utilizing the straight-line method over their estimated useful lives, typically 5 – 20 years (see Note 6).
We review our intangible assets for impairment whenever events or changes in circumstances indicate we should assess the recoverability of the carrying amount of the intangible asset. We recognized no impairments for other intangible assets in 2016 or 2015.
Should we continue to experience a continued, prolonged energy market down turn resulting in further declines in revenues and cash flows, we could incur additional impairment charges associated with our property and equipment, goodwill, or intangible assets.
Non-controlling Interest
The non-controlling interests shown in our Consolidated Financial Statements reflect interests in consolidated subsidiaries that we own less than 100% of, but over which we exercise control.
Business Combinations
The Partnership evaluates all potential acquisitions and changes in control to determine whether it has purchased or acquired control of a business. If the acquired or newly-controlled assets meet the definition of a business, the transaction is accounted for as a business combination; otherwise it is accounted for as an asset acquisition. Transactions discussed in Note 3 were accounted for as business combinations for the periods described.
Foreign Currency Translation
The reporting currency is the U.S. dollar. Non-U.S. dollar denominated monetary items are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Non-U.S. dollar denominated non-monetary items are translated to U.S. dollars at the exchange rate in effect when the transactions occur. Revenues and expenses denominated in foreign currencies are translated at the exchange rate in effect during the period. Foreign exchange gains or losses on translation are included in other comprehensive income.
New Accounting Standards
In 2016 the Partnership has adopted the following new accounting standards issued by the Financial Accounting Standards Board (“FASB”);
The FASB issued Accounting Standards Update (“ASU”) 2015-17 – Income Taxes in November 2015. ASU 2015-17 was issued as a part of the FASB’s initiative to reduce complexity in accounting standards. The Partnership adopted this guidance beginning January 1, 2016. The guidance simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent in a classified consolidated balance sheet. Therefore, the Partnership’s deferred tax assets and liabilities have been classified as noncurrent in the Consolidated Balance Sheets for the periods presented.
The FASB issued ASU 2015-03 – Interest – Imputation of Interest in April 2015. This guidance requires certain debt issuance costs to be presented on the balance sheet as a reduction of the carrying amount of the long-term debt. The Partnership has adopted this guidance beginning January 1, 2016. As a result of the adoption of this ASU, netted debt issuance costs against long-term debt for all periods presented, moving the debt issuance costs from noncurrent assets to noncurrent liabilities on the Partnership’s Consolidated Balance Sheets.
The FASB issued ASU 2014-15 – Presentation of Financial Statements – Going Concern in August 2014. ASU 2014-15 applies to all entities and is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter and will be applied prospectively. Early application is permitted. This standard requires the Partnership’s management to assess our ability to continue as a going concern. The amendments (1) require an evaluation every reporting period (including interim periods), (2) provide principles for considering the mitigating effect of management’s plans, (3) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (4) require an express statement and other disclosures when substantial doubt is not alleviated, and (5) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This guidance is intended to reduce diversity in the timing and content of footnote disclosures related to an entity’s going concern. The adoption of this guidance did not affect our financial position, results of operations or cash flows.
Other accounting guidance proposed by the FASB that may have some impact on the Consolidated Financial Statements of the Partnership, but have not yet been adopted by the Partnership include:
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 by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, the Partnership will be required to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. In the event the carrying amount exceeds the reporting unit’s fair value, a goodwill impairment charge for the excess will be recorded (not exceeding the recorded amount of the reporting unit’s goodwill). The Partnership will be required to adopt the amendments in this ASU for its annual goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Partnership is currently evaluating whether to early adopt this guidance and the potential effects adoption may have on our financial position, results of operations and cash flows.
Also in January 2017, the FASB issued ASU 2017-01 – Business Combinations. The intent of this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Partnership will be required to apply the provisions in the ASU to acquisitions occurring in annual periods beginning after December 15, 2017 and should be applied prospectively. Early application is allowed. The Partnership anticipates that the adoption of this guidance will not materially affect our financial position, results of operations or cash flows.
The FASB issued ASU 2016-15 – Statement of Cash Flows in August 2016. This guidance was issued to address diversity in practice of how cash receipts and cash payments are presented and classified in the statement of cash flows. It specifically addresses eight cash flow issues with the objective of reducing the current existing diversity in practice. Specific portions of the guidance that may apply directly to the Partnership include (1) the classification of debt prepayment or debt extinguishment costs, (2) classification of contingent consideration payments made after a business combination, (3) classification of distributions received from equity method investees, and potentially (4) the classification of separately identifiable cash flows and application of the predominance principle. Current GAAP is either unclear or does not include specific guidance on the classification issues addressed in this ASU. These amendments are effective for fiscal years beginning after December 15, 2017 and interim periods with those fiscal years and will be retrospectively applied to each period presented. The Partnership has not yet determined the impact this guidance may have on the Consolidated Financial Statements, but since the ASU addresses classification issues, the Partnership does not expect the adoption of this guidance to materially affect our financial position, results of operations or cash flows.
The FASB issued ASU 2016-09 – Compensation – Stock Compensation in March 2016. The purpose of the guidance is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and all interim periods within that year. Amendments are to be applied retrospectively or prospectively, depending on the specific provision included in the ASU. We will adopt this guidance in the first quarter of 2017 and are still assessing whether to account for forfeitures when they occur or continue to record expense based on estimates of future forfeitures. Should we make the policy election to account for forfeitures as they occur, we would be required to record a cumulative-effect adjustment to owners’ equity as of the beginning of 2017, which would reduce partners’ capital by approximately $0.3 million.
The FASB issued ASU 2016-02 – Leases in February 2016. This guidance was proposed in an attempt to increase transparency and comparability among organizations by recognizing 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 lease assets and lease liabilities by lessees for leases that have been 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 and will be retrospectively applied to each period presented. Early application is permitted. We are currently assessing the impact this guidance will have on our 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. The Partnership will be required to adopt this standard in 2018 and to apply its provisions retrospectively to each prior reporting period presented or retrospectively 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. | Business Combinations |
2015 Business Combinations
Brown Integrity, LLC
On May 6, 2015, the Partnership acquired a 51% interest in Brown, a pipeline integrity services business focused on hydrostatic testing. The purchase price was $10.4 million (net of cash acquired) and was financed through the Partnership’s credit facilities. The Partnership also has the right, but not the obligation, to acquire the remaining 49% of Brown commencing May 1, 2017 pursuant to a formula that would yield a maximum additional purchase price of $28.0 million in any combination of cash and Partnership units. The effective date of the transaction was May 1, 2015.
The acquisition of Brown was accounted for under the acquisition method of accounting. We recognized amounts for assets acquired and liabilities assumed at their estimated acquisition date fair values based on discounted cash flow projections, estimated replacement cost and other valuation techniques. The Partnership used an estimate of replacement cost, based on comparable market prices, to value the acquired property and equipment and utilized discounted cash flows to value the intangible assets. Key assumptions used in the valuations included projections of future operating results and the Partnership’s estimated weighted-average cost of capital. Due to the unobservable nature of these inputs, these estimates are considered Level 3 fair value estimates.
The estimated fair values of the assets acquired and liabilities assumed as of the purchase date were as follows:
(in thousands) | ||||
Cash | $ | 175 | ||
Accounts receivable | 3,229 | |||
Other current assets | 108 | |||
Property and equipment | 2,578 | |||
Intangible assets: | ||||
Customer relationships | 3,128 | |||
Trade names and trademarks | 2,049 | |||
Non-compete agreements | 143 | |||
Goodwill | 9,992 | |||
21,402 | ||||
Current liabilities | 1,294 | |||
Non-controlling interests | 9,497 | |||
Net assets acquired | $ | 10,611 |
Intangible assets are amortized on a straight-line basis over periods ranging from 5 – 10 years. Goodwill represented the excess of the purchase price and the fair value of non-controlling interests over the fair value of identified tangible and intangible assets less the fair value of liabilities assumed. The Partnership believed that the locations, synergies created, and the projected future cash flows of Brown merited the recognition of this asset. The goodwill is fully deductible for income tax purposes by our partners.
The operating results of Brown are included in our Integrity Services segment which was created during the second quarter of 2015 in conjunction with the Brown acquisition (see Note 14).
TIR Entities
Effective February 1, 2015, the Partnership acquired the remaining 49.9% interest in the TIR Entities previously held by affiliates of Holdings for $52.6 million. We financed this acquisition with borrowings under our acquisition revolving credit facility (see Note 7). The amount paid in excess of the previously recorded non-controlling interest in the TIR Entities has been reflected in the Consolidated Statement of Owners’ Equity as a reduction to the General Partner’s capital.
2014 Business Combination
SWD Acquisition
Effective December 1, 2014, we acquired a recently-constructed commercial SWD facility from SBG Energy (a related party at the time) for a total purchase price of approximately $1.7 million. The facility had minimal operating activity prior to the acquisition. The acquisition was accounted for under the acquisition method of accounting. Accordingly, we recognized amounts for assets acquired and liabilities assumed at their estimated acquisition date fair values. The Partnership used various assumptions to determine fair value including, but not limited to, replacement costs, liquidation values, and future cash flows on a discounted basis.
The estimated fair values of the assets acquired and liabilities assumed as of the purchase date were as follows:
(in thousands) | ||||
Current assets | $ | 50 | ||
Property and equipment | 1,837 | |||
Intangible assets: | ||||
Contracts | 241 | |||
2,128 | ||||
Current liabilities | 386 | |||
Asset retirement obligation | 1 | |||
Net assets acquired | $ | 1,741 |
In addition to the amounts reflected above, the Partnership incurred additional capital costs of approximately $0.4 million to complete the SWD facility.
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4. | Property and Equipment |
Property and equipment consist of the following, recorded at cost, as of December 31, 2016 and 2015:
December 31, | ||||||||||||
Asset Category | Useful Lives (years) | 2016 | 2015 | |||||||||
(in thousands) | ||||||||||||
Land | $ | 1,278 | $ | 2,114 | ||||||||
Land improvements | 15 | 698 | 848 | |||||||||
Buildings and leasehold improvements | 30 - 39 | 1,242 | 1,396 | |||||||||
Facilities, wells, and equipment | 5 - 15 | 17,563 | 17,711 | |||||||||
Computer and office equipment | 3 - 9 | 1,268 | 1,213 | |||||||||
Vehicles and other | 3 - 5 | 410 | 424 | |||||||||
22,459 | 23,706 | |||||||||||
Less accumulated depreciation | (7,840 | ) | (5,369 | ) | ||||||||
Net property and equipment | $ | 14,619 | $ | 18,337 |
Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense was $2.9 million, $3.1 million and $4.1 million for the Partnership for the years ended December 31, 2016, 2015 and 2014, respectively, of which $0.9 million, $0.6 million and $0.2 million was included as a component of costs of services for the years ended December 31, 2016, 2015 and 2014, respectively. As a result of our impairment analyses, we wrote down the value of certain property and equipment which resulted in a decreases in accumulated depreciation of $0.3 million, $1.3 million $4.3 million in 2016, 2015 and 2014, respectively.
During 2016, 2015 and 2014, the Partnership recognized impairments of property and equipment at a number of its SWD facilities. At each of these facilities, the Partnership has experienced revenue and volume decreases due to lower commodity pricing and increasing competition and has forecasted decreases in drilling activity affecting volumes and revenues over the remaining life of the underlying assets. Given these indicators of impairment, the Partnership compared its estimates of undiscounted future cash flows from the facilities to the carrying amounts of the long-lived assets of the facilities, and determined they were no longer recoverable and were impaired. The Partnership recognized impairments on the facilities totaling $2.1 million, $6.6 million and $12.8 million, included in the impairments caption on the Consolidated Statement of Operations for the years ended December 31, 2016, 2015 and 2014, respectfully
The following table summarizes the impaired property and equipment in our W&ES segment for the years ended December 31, 2016, 2015 and 2014:
Asset Category | 2016 | 2015 | 2014 | |||||||||
(in thousands) | ||||||||||||
Land | $ | 1,000 | $ | 587 | $ | 1,527 | ||||||
Land improvements | 157 | 385 | 2,034 | |||||||||
Buildings and leasehold improvements | 136 | 568 | 1,054 | |||||||||
Facilities, wells and equipment | 1,726 | 6,951 | 19,679 | |||||||||
Computer and office equipment | — | 4 | 5 | |||||||||
Vehicles and other | 5 | 5 | 10 | |||||||||
3,024 | 8,500 | 24,309 | ||||||||||
Less accumulated depreciation | (289 | ) | (1,268 | ) | (4,296 | ) | ||||||
Net book value of impaired properties prior to impairment | 2,735 | 7,232 | 20,013 | |||||||||
Estimated fair market value of impaired properties as of date of impairment | 616 | 587 | 7,241 | |||||||||
Impairments | $ | 2,119 | $ | 6,645 | $ | 12,772 |
Fair value was determined using expected future cash flows, which is a Level 3 input as defined in ASC 820, Fair Value Measurement. The cash flows are those expected to be generated by the market participants, discounted at the Partnership’s estimated cost of capital. Because of the uncertainties surrounding the SWD facilities and the market conditions, including the Partnership’s ability to generate and maintain sufficient revenues to operate the facilities profitably, our estimate of expected future cash flows may change in the future resulting in the need to further adjust our determinations of fair value.
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5. | Goodwill |
Goodwill represents the excess of cost over fair value of the assets and liabilities of businesses acquired. Changes in goodwill are as follows:
PIS | IS | W&ES | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance - December 31, 2014 | $ | 40,470 | $ | — | $ | 15,075 | $ | 55,545 | ||||||||
Goodwill from business combination | — | 9,992 | — | $ | 9,992 | |||||||||||
Foreign currency translation | (264 | ) | — | — | $ | (264 | ) | |||||||||
Balance - December 31, 2015 | 40,206 | 9,992 | 15,075 | 65,273 | ||||||||||||
Impairments | — | (8,411 | ) | — | (8,411 | ) | ||||||||||
Foreign currency translation | 41 | — | — | 41 | ||||||||||||
Balance - December 31, 2016 | $ | 40,247 | $ | 1,581 | $ | 15,075 | $ | 56,903 |
Goodwill is not amortized, but is subject to annual reviews on November 1 for impairment at a reporting unit level. In accordance with ASC 350 “Intangibles — Goodwill and Other”, we have assessed the reporting unit definitions and determined that the PIS, IS and W&ES operating segments are the appropriate reporting units for testing goodwill for impairment. The accounting estimate relative to assessing the impairment of goodwill is a critical accounting estimate for each of our reporting segments.
For our PIS reporting unit, we performed qualitative assessments to determine whether the fair value of the reporting unit was more likely than not less than its carrying value. Our evaluations consisted of assessing various qualitative factors including current and projected future earnings, capitalization, current customer relationships and projects, and the impact of lower crude oil prices on our earnings. The qualitative assessments on this reporting unit indicated that there was no need to conduct further quantitative testing for goodwill impairment. Different judgments from those we used in our qualitative analyses could result in the requirement to perform quantitative goodwill impairment analyses.
For our IS and W&ES segments, after giving consideration to certain qualitative factors including trends in the energy industry, we elected to perform quantitative goodwill impairment analyses. We computed the fair value of the reporting units employing multiple valuation methodologies, including a market approaches (market price multiples of comparable companies) and a income approaches (discounted cash flow analysis). These approaches are consistent with the requirement to utilize all appropriate valuation techniques as described in ASC 820-10-35-24 “Fair Value Measurements and Disclosures.” Given recent declines in the price of crude oil and the related impact on the valuations of energy related companies, relevant market data was difficult to obtain and was of limited usefulness. Accordingly, we relied heavily on the use of the income approaches for the valuations of the reporting units.
In the IS segment, we experienced declining revenues in 2016 due to the overall depressed energy economy, including decreased new infrastructure construction, postponement of inspection and integrity activity by our E&P customers and reduced revenues and margins on completed contracts due to increased competition, among other things. Given these indicators of impairment, we determined a triggering event occurred in the second quarter of 2016 and thus, performed an interim impairment assessment of the approximately $10.0 million of goodwill related to our IS segment. We estimated the fair value of the reporting unit utilizing the income approach (discounted cash flows) valuation method, which is a Level 3 input as defined in ASC 820, Fair Value Measurement. Significant inputs in the valuation included projections of future revenues, anticipated operating costs and appropriate discount rates. To estimate the fair value of the reporting unit and the implied fair value of goodwill under a hypothetical acquisition of the reporting unit, we assumed a tax structure where a buyer would obtain a step-up in the tax basis of the net assets acquired. Significant assumptions used in valuing the reporting unit included revenue growth rates ranging from 2% to 5% annually and a discount rate of 17.5%. In our assessment, the carrying value of the reporting unit, including goodwill, exceeded its estimated fair value. We then determined through our hypothetical acquisition analysis that the fair value of goodwill was impaired. As a result, we recorded an impairment loss of $8.4 million in our IS segment and reduced the value of recorded goodwill to $1.6 million in the second quarter of 2016. This impairment is included in impairments on the Consolidated Statement of operations for the year ended December 31, 2016.
The W&ES segment has experienced increased competition in the regions in which we operate which has resulted in declining volumes and increased pricing pressure. Steady and continued declines in oil prices have intensified competitive pressures and had a direct impact on our revenues. Many of our customers have announced significantly reduced drilling programs in the Bakken. The decline in drilling will directly impact the amount of flowback and produced water that we process and dispose. The energy downturn is also expected to continue to negatively impact our pricing as our customers look for ways to reduce costs. In addition, as we process lower water volumes, in particular flowback water volumes directly attributable to drilling, we will recover less skim oil. SWD property and equipment were impaired in the second quarter of 2016 and in the fourth quarter of 2015 due to continued declines in disposed volumes and depressed prices. Based on our analyses, we determined that the carrying value of the W&ES reporting unit was less than the estimated fair market value and therefore, there was no goodwill impairment adjustment for 2016 or 2015. However, in 2014, we determined that the carrying value of the W&ES reporting unit exceeded the fair value of the reporting unit resulting in a goodwill impairment charge of $19.8 million. Additionally, further unfavorable changes in the future are reasonably possible, and therefore, it is possible that we may incur additional impairment charges in the future.
During the fourth quarter 2016, we performed qualitative assessments on each of our reporting units to determine whether the fair values of the reporting units were more likely than not to be lower than their respective carrying values. Our evaluation consisted of assessing various qualitative factors, including projected future earnings, recent trends in earnings, market capitalization, current customer relationships and projects, and current economic conditions. In addition, as we continued to monitor the value of our IS segment (Brown) through the end of 2016, we performed additional quantitative calculations to determine if the IS goodwill may be impaired beyond that which was recorded in the second quarter of 2016. The qualitative and quantitative assessments in these reporting units indicated the fair values of the reporting units exceeded their carrying values and the goodwill of the reporting units was not impaired as of November 1 or December 31, 2016. Our IS reporting unit experienced a downward trend in revenues during 2016. Our estimate of the fair value of the IS segment assumes that our revenues in future years will be higher than in 2016, which we believe to be a reasonable estimate based on historical results, management’s plans for growing revenues of the segment, and management’s economic outlook for the industry. While we believe we have made reasonable estimates and assumptions to estimate the fair values of our reporting units, it is reasonably possible that changes could occur that would require a goodwill impairment charge in the near future.
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6. | Intangible Assets |
Intangible assets consist of the following at December 31, 2016 and 2015:
December 31, | ||||||||||||
Asset Category | Useful Lives (years) | 2016 | 2015 | |||||||||
(in thousands) | ||||||||||||
Customer relationships | 5 - 20 | $ | 24,261 | $ | 24,257 | |||||||
Contracts | 3 | 241 | 241 | |||||||||
Non-compete agreements | 3 | 143 | 143 | |||||||||
Trademarks and trade names | 10 | 12,079 | 12,067 | |||||||||
Inspector database | 10 | 2,080 | 2,080 | |||||||||
38,804 | 38,788 | |||||||||||
Less accumulated amortization | (9,180 | ) | (6,302 | ) | ||||||||
Net intangibles | $ | 29,624 | $ | 32,486 |
Amortization expense for the years ended December 31, 2016, 2015 and 2014 was $2.9 million, $2.8 million and $2.4 million respectively.
Future amortization expense of our intangible assets is estimated to be as follows:
Year ending December 31, | (in thousands) | |||
2017 | $ | 2,917 | ||
2018 | 2,829 | |||
2019 | 2,807 | |||
2020 | 2,786 | |||
2021 | 2,778 | |||
Thereafter | 15,507 | |||
$ | 29,624 |
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7. | Credit Agreement |
The Partnership is 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 contains 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 on December 24, 2018.
Outstanding borrowings at December 31, 2016 and 2015 under the Credit Agreement were as follows:
December 31, | ||||||||
2016 | 2015 | |||||||
(in thousands) | ||||||||
Working capital facility | $ | 48,000 | $ | 52,000 | ||||
Acquisition facility | 88,900 | 88,900 | ||||||
Total borrowings | 136,900 | 140,900 | ||||||
Debt issuance costs | 1,201 | 1,771 | ||||||
Long-term debt | $ | 135,699 | $ | 139,129 |
The carrying value of the partnership’s 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 the Partnership’s 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 assets of the Partnership.
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 3.54% and 4.52% for the year ended December 31, 2016, 2.68% and 4.17% for the year ended December 31, 2015 and 2.65% and 3.50% for the year ended December 31, 2014. 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.
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 December 31, 2016, our combined total adjusted leverage ratio was 3.41 to 1.0 and our interest coverage ratio was 3.78 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 December 31, 2016 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-K. Working capital borrowings, which are fully secured by the Partnership’s net working capital, are subject to a monthly borrowing base and are excluded from the Partnership’s 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.
The following table reflects the changes in long-term debt during the year:
Working Capital | Acquisition | |||||||||||
Long-term debt | Facility | Facility | Total | |||||||||
(in thousands, except %’s) | ||||||||||||
Balance - December 31, 2015 | $ | 52,000 | $ | 88,900 | $ | 140,900 | ||||||
Payments | 4,000 | — | 4,000 | |||||||||
Balance - December 31, 2016 | $ | 48,000 | $ | 88,900 | $ | 136,900 | ||||||
Weighted average interest rate at December 31, 2016 | 3.91 | % | 4.48 | % |
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8. | Income Taxes |
As a limited partnership, we generally are not subject to federal, state or local income taxes. The tax on the net income of the Partnership is generally borne by the individual partners. We have Canadian activity that is taxable in Canada. In addition, we own three entities which have elected to be taxed as corporations for U.S. federal income tax purposes. The amounts recognized as income tax expense, income taxes payable, and deferred tax liabilities in the Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states (primarily Texas).
Significant components of income tax expense (benefit) are as follows for the years ended December 31:
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Current tax expense (benefit) | ||||||||||||
U.S. federal | $ | 527 | $ | (123 | ) | $ | 38 | |||||
State | 690 | 501 | 332 | |||||||||
Canadian | 3 | 6 | 100 | |||||||||
Total | 1,220 | 384 | 470 | |||||||||
Deferred tax expense (benefit) | ||||||||||||
U.S. federal | (27 | ) | 45 | (12 | ) | |||||||
State | (8 | ) | 13 | (3 | ) | |||||||
Canadian | 10 | 10 | 13 | |||||||||
Total | (25 | ) | 68 | (2 | ) | |||||||
Total income tax expense | $ | 1,195 | $ | 452 | $ | 468 |
The increase in total income tax expense from 2015 to 2016 is primarily attributable to improved operating results of Tulsa Inspection Resources – PUC, LLC, an entity that has elected to be taxable as a corporation for federal and state income tax purposes. Revenues and net taxable income of this entity have increased from the year ended December 31, 2015 to the year ended December 31, 2016.
Non-current deferred tax liabilities of $0.4 million are primarily attributable to the recorded unamortized portion of book intangible assets in our Canadian subsidiary.
The following table reconciles the differences between the U.S. federal statutory rate of 35% to the Partnership’s income tax expense on the Consolidated Statements of Operations for the years ended December 31:
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Tax (benefit) computed at statutory rate | $ | (2,788 | ) | $ | 1,590 | $ | (5,149 | ) | ||||
(Income) loss not subject to federal tax | 3,336 | (1,790 | ) | 5,274 | ||||||||
State income taxes, net of federal benefit | 644 | 514 | 326 | |||||||||
Other | 3 | 138 | 17 | |||||||||
$ | 1,195 | $ | 452 | $ | 468 |
The Internal Revenue Service began an income tax audit of the 2012 Tulsa Inspection Resources, Inc. (the predecessor of the TIR Entities) federal income tax return beginning in January 2016. The Omnibus Agreement described in Note 12 provides that Holdings will indemnify us for certain liabilities associated with operations prior to the closing of the IPO should they arise in the course of this examination. To date, there have been no audit adjustments made to that corporate income tax return as filed. Tax years that remain subject to examination by various taxing authorities for each of our consolidated entities include the years 2012 through 2016. It is the Partnership’s policy to recognize tax-related interest and penalties as a component of income tax expense in the year incurred. Tax-related interest and penalties were insignificant in the years ended December 31, 2016, 2015 and 2014.
As of December 31, 2016, the Partnership had no significant unrecognized tax benefits. During the next twelve months, we do not expect that the ultimate resolution of any uncertain tax positions will result in a significant increase or decrease of an unrecognized tax benefit.
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9. | Parent Net Investment and Owners’ Equity |
Parent Net Investment
For the periods prior to the IPO, the net equity of the contributed entities is included in parent net investment attributable to controlling interest in the Consolidated Statement of Owners’ Equity as of December 31, 2013. Also, prior to the IPO, CEP LLC provided treasury and accounts payable services for Holdings and other affiliates. Amounts paid on behalf of Holdings and its affiliates, net of cash transfers from Holdings, are included as a component of parent net equity. Cumulative advances for the periods prior to the IPO were $0.2 million.
Common Units and Subordinated Units
As of December 31, 2016, there are 5,945,348 common units and 5,913,000 subordinated units outstanding. Items of income (loss) are allocated to common units and subordinated units equally. The common unitholders had the right to receive the minimum quarterly cash distributions of $0.3875 per common unit, plus any arrearages in the payment of the minimum quarterly distributions on the common units from prior quarters, before any distributions of available cash could be made on the subordinated units. The subordinated units converted to common units on February 14, 2017 upon satisfaction of the requirements as outlined in our partnership agreement. For the years ended December 31, 2016, 2015, and 2014, there were no limitations or arrearages related to the quarterly distributions made by the Partnership.
Incentive Distribution Rights
Our General Partner owns a 0.0% non-economic general partnership interest in the Partnership, which does not entitle it to receive cash distributions. Affiliates of our General Partner hold incentive distribution rights (“IDRs”), which represent the right to receive an increasing percentage (15%, 25%, and 50%) of quarterly distributions of available cash from operating surplus after specified target distribution levels have been achieved. Affiliates of the General Partner would begin receiving incentive distribution payments when the quarterly cash distribution exceeds $0.445625 per unit. There were no incentive distribution payments in 2016, 2015, or 2014.
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10. | Major Customers |
For the year ended December 31, 2016, 2015 and 2014, three customers individually exceeded 10% of our consolidated total revenues: Enbridge Energy Partners, Pacific Gas and Electric Company and Plains All America Pipeline in 2016 and Enbridge Energy Partners, Enterprise Products Partners and Plains All America Pipeline in 2015 and 2014. No other customer accounted for more than 10% of our consolidated revenues during these years. Revenues from these customers resulted from inspection operations, which are activities conducted by our PIS segment.
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11. | Equity Compensation |
Partnership Long-Term Incentive Plan (“LTIP”)
Effective at the closing of the IPO, our General Partner adopted an LTIP that authorized up to 1,182,600 units, representing 10% of the initial outstanding 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 issued is determined based on the quoted market value of the publicly-traded common units at each grant date, adjusted for a forfeiture rate and other discounts attributable to the units awarded. Compensation expense is recognized straight-line over the vesting period of the grant. Prior to 2015, Holdings reimbursed the Partnership for the direct expense of the awards and allocated the expense to us through the annual administrative fee provided for under the terms of our amended and restated omnibus agreement (see Note 12). For the years ended December 31, 2016, 2015 and 2014, compensation expense of $1.1 million, $1.2 million and $0.5 million, respectively was recorded under the LTIP (including expense associated with subordinated unit awards described below). The following table sets forth the units granted and forfeitured under the LTIP for the years ended December 31, 2016, 2015 and 2014:
Weighted Average | ||||||||
Number | Grant Date Fair | |||||||
of Units | Value / Unit | |||||||
Units at January 1, 2014 | — | |||||||
Units granted | 178,264 | $ | 17.96 | |||||
Units forfeited | (19,911 | ) | $ | 16.78 | ||||
Units at December 31, 2014 | 158,353 | $ | 18.11 | |||||
Units granted | 230,310 | $ | 12.08 | |||||
Units vested and issued | (7,467 | ) | $ | 19.72 | ||||
Units forfeited | (19,498 | ) | $ | 16.92 | ||||
Units at December 31, 2015 | 361,698 | $ | 14.30 | |||||
Units granted | 346,999 | $ | 6.32 | |||||
Units vested and issued | (36,505 | ) | $ | 16.17 | ||||
Units forfeited | (98,290 | ) | $ | 11.38 | ||||
Units at December 31, 2016 | 573,902 | $ | 9.86 |
The majority of the common unit awards vest in three tranches, with one-third of the units vesting three years from the grant date, one-third vesting four years from the grant date, and one-third vesting five years from the grant date. However, certain of the awards have different, and typically shorter, vesting periods. Two grants, totaling 77,495 units, vest three years from the grant dates, contingent upon the recipient meeting certain performance targets. Total unearned compensation associated with the LTIP at December 31, 2016 and 2015 was $3.8 million and $3.8 million, respectively, with an average remaining life of 2.4 years and 3.3 years, respectively.
In conjunction with the IPO, phantom profits interest units previously issued under a previous LTIP were exchanged for 44,250 Units under the Partnership’s LTIP. Vesting under all of the exchanged awards was retroactive to the initial grant date. The awards are considered for all purposes to have been granted under the Partnership’s LTIP. In addition, at IPO, certain profits interest units previously issued were converted into 44,451 subordinated units of the Partnership outside of the LTIP. Vesting for the subordinated units is retroactive to the initial grant date. Compensation expense associated with the subordinated units was $0.1 million, $0.1 million and $0.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. The exchange of the phantom profits interest units and the profits interest units resulted in the reversal of the existing equity compensation liability of $0.1 million in the first quarter of 2014 as the new awards were accounted for as equity. The unearned compensation related to the subordinated units at December 31, 2016 was $0.4 million with an average remaining life of 1.0 years.
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12. | Related-Party Transactions |
Omnibus Agreement
Effective as of the closing of the IPO, we entered into an omnibus agreement with Holdings and other related parties. The omnibus agreement, as amended in February 2015, governs the following matters, among other things:
● | our payment of an annual administrative fee in the amount of $4.0 million ($1.0 million per quarter that was pro-rated in 2014 from the IPO date) 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 year ended December 31, 2016, Holdings provided sponsor support to the Partnership by waiving payment of this 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 income tax 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 Holdings controls our General Partner, the omnibus agreement will remain in full force and effect, unless we and Holdings agree to terminate it sooner. If Holdings ceases to control our General Partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms. We and Holdings may agree to further amend the omnibus agreement; however, amendments that the General Partner determines are adverse to our unitholders will also require the approval of the Conflicts Committee of our Board of Directors.
The amount charged by Holdings under the omnibus agreement for the years ended December 31, 2015 and 2014 was $4.0 million and $3.8 million (2014 amount pro-rated from the IPO date) and is reflected in general and administrative in the Consolidated Statements of Operations. As noted above, Holdings provided sponsor support to the Partnership by waiving payment of this fee for the year ended December 31, 2016 and as a result, no payments were made in 2016.
To the extent that Holdings incurs expenses on behalf of the Partnership in excess of administrative expense amounts paid under the omnibus agreement (including executive management services, payroll services, general and administrative costs incurred as a result of being a publicly traded partnership, and other allocated costs), the excess is allocated to the Partnership as non-cash allocated costs. The non-cash allocated amounts are reflected as general and administrative expenses in the Consolidated Statement of Operations and as a contribution attributable to general partner in the Consolidated Statement of Owners’ Equity. These costs are included as a component of net loss attributable to general partner in the Consolidated Statements of Operations. Non-cash allocated costs reflected in the Partnership’s financial statements were $3.8 million, $0.6 million and $0.5 million, respectively, for the years ended December 31, 2016, 2015 and 2014. The allocation methods utilized in determining the non-cash allocated costs represent a reasonable allocation of costs incurred by Holdings on behalf of the Partnership.
In addition to funding certain general and administrative expenses on our behalf, Holdings provided the Partnership with additional temporary financial support by contributing a total of $2.5 million for the year ended December 31, 2016 in cash, as a reimbursement of certain expenditures incurred by the Partnership. These payments are reflected as a contribution attributable to general partner in the Consolidated Statement of Owners’ Equity and as a component of the net loss attributable to the general partner in the Consolidated Statement of Operations for the year ended December 31, 2016.
Other Related Party Transactions
A former board member had ownership interests in entities with which the Partnership transacts business including:
● | Creek Energy Services, LLC (“Creek,” – formerly Rud Transportation, LLC) – Total revenue recognized by the Partnership from Creek while it was considered a related party was $1.1 million and $2.1 million for the years ended December 31, 2015 and 2014, respectively. Accounts receivable from Creek was $0.1 million at December 31, 2015 and is included in trade accounts receivable, net in the Consolidated Balance Sheets. |
● | SBG Pipeline SW 3903, LLC (“3903”) – Total revenue recognized by the Partnership from 3903 while it was considered a related party was $0.6 million for the year ended December 31, 2015, prior to the sale of the ownership interest to an unrelated third party effective June 30, 2015. There were no revenues received from 3903 for the year ended December 31, 2014. |
● | Effective June 1, 2015, an affiliate of SBG Energy assigned and transferred its 49% membership interest in Cypress Energy Services, LLC (“CES LLC”) to the Partnership for one dollar (the “CES Transaction”). As a result, the Partnership, as of that date, owns 100% of CES LLC. Because we already controlled and consolidated CES LLC in our Consolidated Financial Statements, the previously recorded non-controlling interest in CES LLC has been reflected in the Consolidated Statement of Owners’ Equity as an increase in equity of $0.9 million for our common and subordinated unitholders. | |
The CES Transaction was completed in conjunction with another transaction with SBG Energy effective July 1, 2015. On that date, the Partnership waived its rights to purchase and its rights of first refusal related to certain SWD assets pursuant to a previous option agreement with SBG Energy in exchange for $1.0 million. The $1.0 million payment has been reflected in gain on waiver of right of purchase and other, net on the Consolidated Statements of Operations for the year ended December 31, 2015. |
The Partnership provides management services to a 25% owned company, Alati Arnegard, LLC (“Arnegard”). Management fee revenue earned from Arnegard is included in revenues on the Consolidated Statements of Operations and totaled $0.6 million, $0.7 million and $0.6 million for the years ended December 31, 2016, 2015 and 2014, respectively. Accounts receivable from Arnegard totaled $0.1 million at December 31, 2016 and 2015 and is included in trade accounts receivable, net on the Consolidated Balance Sheets.
The Partnership outsources staffing and payroll services to an affiliated entity, Cypress Energy Management – Bakken Operations, LLC (“CEM-Brown”). CEM-Brown was owned 49% by SBG Energy. Effective June 1, 2015, Holdings acquired the 49% ownership interest of CEM-Brown and now owns 100% of CEM-Brown. Total employee related costs paid to CEM-Brown prior to the acquisition of the 49% ownership interest on June 1, 2015 were $1.2 million and $3.0 million for the years ended December 31, 2015 and 2014, respectively. There were no staffing or payroll services provided to the Partnership by CEM-Brown in the year ended December 31, 2016. There were no accounts payable due CEM-Brown at December 31, 2016 or 2015.
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13. | Commitments and Contingencies |
Security Deposits
The Partnership has various performance obligations which are secured with short-term security deposits totaling $0.5 million at December 31, 2016 and 2015. These amounts are included in prepaid expenses and other on the Consolidated Balance Sheets.
Employment Contract Commitments
The Partnership has employment agreements with certain executives. The executive employment agreements are effective for a term of three-to-five years from the commencement date, after which time they will continue on an “at-will” basis. These agreements provide for minimum annual compensation, adjusted for annual increases as authorized by the Board of Directors. Certain agreements provide for severance payments in the event of specified termination of employment. At December 31, 2016 and 2015, the aggregate commitment for future compensation and severance was approximately $1.0 million and $1.4 million, respectively.
Compliance Audit Contingencies
Certain customer master service agreements (“MSA’s”) offer our customers the opportunity to perform periodic compliance audits, which include the examination of the accuracy of our invoices. Should our invoices be determined to be inconsistent with the MSA, or inaccurate, the MSA’s may provide the customer the right to receive a credit or refund for any overcharges identified. At any given time, we may have multiple audits ongoing. At December 31, 2016 and 2015, the Partnership had contingent liabilities of $0.1 million associated with the potential settlement of customer audits. The contingent liability is reflected in accrued payroll and other on the Consolidated Balance Sheets as of December 31, 2016 and 2015.
Management Service Contracts
The Partnership has historically provided management services for non-owned SWD facilities under contractual arrangements. Principals of two of these management services contract customers (under common control) approached the Partnership about selling their interest in the managed SWD facilities to the Partnership. Due to a number of factors, including the depressed energy economy and the proposed asking price for these facilities, the Partnership was unwilling to enter into a purchase agreement for the facilities. Subsequently, in May 2015, the Partnership was notified by these principals that they were terminating the management contracts related to these two facilities. While management of the Partnership believes that the parties did not have the right to terminate the agreements pursuant to the terms of the agreements, the termination of these agreements resulted in a reduction of management fee revenue and corresponding labor costs associated with staffing the facilities. Management fee revenues related to these contracts totaled $0.3 million and $1.5 million for the years ended December 31, 2015 and 2014, respectively, prior to the customer’s improper termination of the agreements. After settlement discussions failed, the Partnership commenced litigation proceedings regarding the improper termination of these agreements. In the first quarter of 2017, the parties agreed to a settlement. See Legal Proceedings.
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 that closed in December 2013 (the “TIR Merger”). 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 Partnership is not named as a defendant in this civil action. 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 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 customers initiated this lawsuit upon dismissal from federal court due to lack of jurisdiction of CES LLC’s lawsuit against the customers seeking to enforce the management agreements. CES LLC subsequently filed an answer and counterclaims, as well as a third party complaint against the principal of the customers seeking to enforce the management agreements and other injunctive relief, as well as monetary damages. The court subsequently granted CES’s motion to transfer venue to the Grand Forks County District Court. 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 Audits
In January 2016, the Partnership received notices from the Internal Revenue Service (“IRS”) that conveyed its intent to audit the consolidated income tax return of TIR, Inc. for the 2012 tax year and audit payroll and payroll tax filings of TIR Inc. for the 2013 tax year. The 2013 payroll audit has completed with a no-change letter. Although the TIR, Inc. income tax audit for the 2012 tax year is not yet complete, the Partnership believes, 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 the Partnership’s omnibus agreement with Holdings, Holdings would indemnify the Partnership 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, the Partnership believes that the possibility of incurring material losses as a result of these IRS audits is remote.
Leases
The Partnership has entered into land lease agreements on four of its SWD facilities. The leases generally provide for initial terms of 15 – 20 years with renewal options. The Partnership also maintains various office leases in the U.S. and Canada, with its corporate offices in Tulsa, OK. Lease expense under these operating leases was $1.0 million, $0.8 million $0.1 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Minimum annual lease commitments under the current office lease and other operating leases at December 31, 2016 follows:
(in thousands) | ||||
2017 | $ | 865 | ||
2018 | 151 | |||
2019 | 25 | |||
2020 | 25 | |||
2021 | 25 | |||
Thereafter | 507 | |||
Total | $ | 1,598 |
|
14. | Segment Disclosures |
The Partnership’s operations consist of three reportable segments: (i) Pipeline Inspection Services (“PIS”), (ii) Integrity Services (“IS”) and (iii) Water and Environmental Services (“W&ES”). In conjunction with the Brown acquisition (Note 3) in the second quarter of 2015, we created the IS segment. The economic characteristics of Brown were sufficiently dissimilar from our existing Pipeline Inspection and Integrity Services segment resulting in the creation of a new segment. As a result, the Pipeline Inspection and Integrity Services segment was renamed Pipeline Inspection Services.
PIS – This segment represents our pipeline inspection services operations. We aggregate these operating entities for reporting purposes as they have similar economic characteristics, including centralized management and processing. 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 systems 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 project.
IS – This segment includes the acquired operations of Brown (Note 3). This segment provides independent hydro-testing integrity services to major natural gas and petroleum pipeline companies, as well as 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 project.
W&ES – This segment includes the operations of ten SWD facilities, fees related to the management of third party SWD facilities, as well as an equity ownership in one managed facility. We aggregate these operating entities for reporting purposes as they have similar economic characteristics and have centralized management and processing. Segment results are driven primarily by the volumes of produced water and flowback 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 corporate and overhead items not specifically allocable to the other reportable segments.
The following table outlines segment operating income and a reconciliation of total segment operating income to net income before income tax expense.
PIS | IS | W&ES | Other | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Year ended December 31, 2016 | ||||||||||||||||||||
Revenue | $ | 275,171 | $ | 13,884 | $ | 8,942 | $ | — | $ | 297,997 | ||||||||||
Costs of services | 247,214 | 11,542 | 3,761 | — | 262,517 | |||||||||||||||
Gross margin | 27,957 | 2,342 | 5,181 | — | 35,480 | |||||||||||||||
General and administrative | 12,521 | 2,829 | 1,866 | 4,637 | (a) | 21,853 | ||||||||||||||
Depreciation, amortization and accretion | 2,439 | 658 | 1,764 | — | 4,861 | |||||||||||||||
Impairments | — | 8,411 | 2,119 | — | 10,530 | |||||||||||||||
Operating income (loss) | $ | 12,997 | $ | (9,556 | ) | $ | (568 | ) | $ | (4,637 | ) | (1,764 | ) | |||||||
Interest expense, net | (6,559 | ) | ||||||||||||||||||
Other, net | 356 | |||||||||||||||||||
Net loss before income tax expense | $ | (7,967 | ) |
(a) | Amount includes $3.8 million that Holdings could have charged the Partnership under the omnibus agreement. Since Holdings elected to waive this omnibus fee for the year ended December 31, 2016, none of this expense is reflected in the operating results of the individual segments. |
Year ended December 31, 2015 | ||||||||||||||||||||
Revenue | $ | 341,929 | $ | 14,614 | $ | 14,648 | $ | — | $ | 371,191 | ||||||||||
Costs of services | 309,584 | 10,398 | 6,279 | — | 326,261 | |||||||||||||||
Gross margin | 32,345 | 4,216 | 8,369 | — | 44,930 | |||||||||||||||
General and administrative | 16,672 | 2,490 | 3,351 | 1,282 | (b) | 23,795 | ||||||||||||||
Depreciation, amortization and accretion | 2,512 | 421 | 2,494 | — | 5,427 | |||||||||||||||
Impairments | — | — | 6,645 | — | 6,645 | |||||||||||||||
Operating income (loss) | $ | 13,161 | $ | 1,305 | $ | (4,121 | ) | $ | (1,282 | ) | 9,063 | |||||||||
Interest expense, net | (5,656 | ) | ||||||||||||||||||
Gain on waiver of right of purchase and other, net | 1,136 | |||||||||||||||||||
Net loss before income tax expense | $ | 4,543 |
(b) | Amount includes $0.6 million of expenses incurred by Holdings in excess of the omnibus fee. |
Year ended December 31, 2014 | ||||||||||||||||||||
Revenue | $ | 382,002 | $ | — | $ | 22,416 | $ | — | $ | 404,418 | ||||||||||
Costs of services | 346,738 | — | 8,617 | — | 355,355 | |||||||||||||||
Gross margin | 35,264 | — | 13,799 | — | 49,063 | |||||||||||||||
General and administrative | 17,734 | — | 3,090 | 497 | 21,321 | |||||||||||||||
Depreciation, amortization and accretion | 2,539 | — | 3,806 | — | 6,345 | |||||||||||||||
Impairments | — | — | 32,546 | — | 32,546 | |||||||||||||||
Operating income (loss) | $ | 14,991 | $ | — | $ | (25,643 | ) | $ | (497 | ) | (11,149 | ) | ||||||||
Interest expense, net | (3,208 | ) | ||||||||||||||||||
Offering costs | (446 | ) | ||||||||||||||||||
Other, net | 92 | |||||||||||||||||||
Net loss before income tax expense | $ | (14,711 | ) | |||||||||||||||||
Total Assets | ||||||||||||||||||||
December 31, 2016 | $ | 124,840 | $ | 12,079 | $ | 38,141 | $ | (7,548 | ) | $ | 167,512 | |||||||||
December 31, 2015 (as adjusted) | $ | 130,623 | $ | 23,097 | $ | 38,418 | $ | (1,256 | ) | $ | 190,882 |
|
15. | Distributions |
The following table summarizes the cash distributions declared and paid by the Partnership 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 (c) | 0.406413 | 4,823 | 3,107 | |||||||||
Total Distributions (through February 13, 2017 since IPO) | $ | 4.762363 | $ | 56,377 | $ | 36,101 |
(a) | Approximately 64.3% of the Partnership’s outstanding units at December 31, 2016 were held by affiliates. | |||
(b) | Distribution was pro-rated from the date of our IPO through March 31, 2014. | |||
(c) | Fourth quarter 2016 distribution was declared and paid in the first quarter of 2017. |
|
16. | Subsequent Events |
Canadian Subsidiary
In early 2017, the largest customer of our Canadian subsidiary (PIS segment) completed a bid process and selected different service providers for its major projects (we continue to perform certain services for this customer, such as integrity services). During the year ended December 31, 2016, pipeline inspection services to this customer accounted for approximately $25.0 million of revenue and $1.7 million of gross margin, which represented approximately 81% of the revenues and 81% of the gross margin of our Canadian operations (and approximately 8.4% of our consolidated revenues and 4.9% of our consolidated gross margin for the year ended December 31, 2016).
Our Consolidated Balance Sheet at December 31, 2016 includes customer relationship intangible assets with a net book value of $1.2 million and trade names with a net book value of $0.2 million that were initially recorded upon the acquisition of the Canadian business. Given the change in circumstances, we will evaluate these intangible assets for impairment, and may record impairments on these intangible assets in the three months ending March 31, 2017.
In addition, our Consolidated Balance Sheet at December 31, 2016 includes $2.5 million of accumulated other comprehensive losses associated with currency translation adjustments, all of which relate to our Canadian subsidiary. A portion of this balance relates to U.S.-dollar denominated intercompany payables from our Canadian subsidiary to U.S.-based entities within our consolidated group of entities. We have reported our Canadian subsidiary’s currency translation losses on these intercompany balances to other comprehensive income (as translation adjustments), rather than as a reduction to net income (as translation losses), based on the intent that our investment in Canada (including intercompany loans) has been considered a long-term investment. Given the change in circumstances, in March of 2017, we have begun to evaluate our options related to the future of this subsidiary. It is possible that, during 2017, we may reclassify some or all of the $2.5 million balance in accumulated other comprehensive loss to Partners’ Capital, which would be reported in the Consolidated Statement of Operations as a reduction to net income.
Orla Lightning Strike and Fire
In January 2017, a lightning strike at our Orla SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. Due to the aftereffects of the fire, we were required to perform some environmental remediation and reclamation at the facility. All appropriate governmental agencies were contacted and informed of our remediation procedures. Temporary operations were established within 11 days of the incident in order to minimize the disruption of business at this facility. We are currently working with our insurance providers to complete remediation and reconstruct the SWD facility (we have minimal deductibles related to our pollution and property coverage at this facility). Currently, we anticipate that the facility will be rebuilt by the third quarter of 2017.
Subordination
Effective February 14, 2017, 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, therefore converting the subordinated units to common units at that time.
|
17. | 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 relative 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.
The presentation of our Consolidating Balance Sheet as of December 31, 2015, our Consolidating Statement of Comprehensive Income (Loss) for the years ended December 31, 2015 and 2014, and our Consolidating Statement of Cash Flows for the year ended December 31, 2015 and 2014 have been updated to reflect adjustments between the Guarantors and Eliminations. These adjustments have (i) reduced the Guarantors’ notes receivable - affiliates and total partners’ capital and the Parent’s investment in the Guarantors and the total partners’ capital by $1.0 million, with the offset to Eliminations on the Consolidating Balance Sheet; (ii) reduced the Guarantor’s comprehensive income by $0.6 million and ’0.3 million for the year ended December 31, 2015 and 2014, respectively, with the offset to Eliminations on the Consolidating Statement of Comprehensive Income (Loss) and (iii) adjusted various offsetting items in working capital for the Guarantors and Eliminations in the Consolidating Statement of Cash Flows. These changes have had no impact on the consolidated results as previously reported.
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 | ||||||||||||||
Commitments and contingencies - Note 13 | ||||||||||||||||||||
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 |
Consolidating Balance Sheet |
As of December 31, 2015 |
(as adjusted - in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 378 | $ | 19,570 | $ | 4,202 | $ | — | $ | 24,150 | ||||||||||
Trade accounts receivable, net | — | 40,029 | 8,289 | (53 | ) | 48,265 | ||||||||||||||
Accounts receivable - affiliates | — | 5,601 | — | (5,601 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 2,078 | 286 | (35 | ) | 2,329 | ||||||||||||||
Total current assets | 378 | 67,278 | 12,777 | (5,689 | ) | 74,744 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 20,790 | 2,916 | — | 23,706 | |||||||||||||||
Less: Accumulated depreciation | — | 4,941 | 428 | — | 5,369 | |||||||||||||||
Total property and equipment, net | — | 15,849 | 2,488 | — | 18,337 | |||||||||||||||
Intangible assets, net | — | 26,135 | 6,351 | — | 32,486 | |||||||||||||||
Goodwill | — | 53,914 | 11,359 | — | 65,273 | |||||||||||||||
Investment in subsidiaries | 42,034 | 10,465 | — | (52,499 | ) | — | ||||||||||||||
Notes receivable - affiliates | — | 13,527 | — | (13,527 | ) | — | ||||||||||||||
Other assets | — | 32 | 10 | — | 42 | |||||||||||||||
Total assets | $ | 42,412 | $ | 187,200 | $ | 32,985 | $ | (71,715 | ) | $ | 190,882 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 6 | $ | 467 | $ | 1,732 | $ | — | $ | 2,205 | ||||||||||
Accounts payable - affiliates | 1,237 | 912 | 4,042 | (5,278 | ) | 913 | ||||||||||||||
Accrued payroll and other | — | 6,855 | 293 | (53 | ) | 7,095 | ||||||||||||||
Income taxes payable | — | 385 | — | (35 | ) | 350 | ||||||||||||||
Total current liabilities | 1,243 | 8,619 | 6,067 | (5,366 | ) | 10,563 | ||||||||||||||
Long-term debt | (1,771 | ) | 135,400 | 5,500 | — | 139,129 | ||||||||||||||
Notes payable - affiliates | — | — | 13,850 | (13,850 | ) | — | ||||||||||||||
Deferred tax liabilities | — | 43 | 328 | — | 371 | |||||||||||||||
Asset retirement obligations | — | 117 | — | — | 117 | |||||||||||||||
Total liabilities | (528 | ) | 144,179 | 25,745 | (19,216 | ) | 150,180 | |||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 32,967 | 33,048 | 7,240 | (42,526 | ) | 30,729 | ||||||||||||||
Non-controlling interests | 9,973 | 9,973 | — | (9,973 | ) | 9,973 | ||||||||||||||
Total owners’ equity | 42,940 | 43,021 | 7,240 | (52,499 | ) | 40,702 | ||||||||||||||
Total liabilities and owners’ equity | $ | 42,412 | $ | 187,200 | $ | 32,985 | $ | (71,715 | ) | $ | 190,882 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 252,955 | $ | 58,694 | $ | (13,652 | ) | $ | 297,997 | |||||||||
Costs of services | — | 222,067 | 54,102 | (13,652 | ) | 262,517 | ||||||||||||||
Gross margin | — | 30,888 | 4,592 | — | 35,480 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 4,637 | 12,625 | 4,591 | — | 21,853 | |||||||||||||||
Depreciation, amortization and accretion | — | 4,091 | 770 | — | 4,861 | |||||||||||||||
Impairments | — | 2,119 | 8,411 | — | 10,530 | |||||||||||||||
Operating (loss) | (4,637 | ) | 12,053 | (9,180 | ) | — | (1,764 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | 862 | (10,020 | ) | — | 9,158 | — | ||||||||||||||
Interest expense, net | (889 | ) | (4,854 | ) | (816 | ) | — | (6,559 | ) | |||||||||||
Other, net | — | 334 | 22 | — | 356 | |||||||||||||||
Net income (loss) before income tax expense | (4,664 | ) | (2,487 | ) | (9,974 | ) | 9,158 | (7,967 | ) | |||||||||||
Income tax expense | — | 1,150 | 45 | — | 1,195 | |||||||||||||||
Net income (loss) | (4,664 | ) | (3,637 | ) | (10,019 | ) | 9,158 | (9,162 | ) | |||||||||||
Net (loss) attributable to non-controlling interests | — | (4,499 | ) | — | — | (4,499 | ) | |||||||||||||
Net income (loss) attributable to partners / controlling interests | (4,664 | ) | 862 | (10,019 | ) | 9,158 | (4,663 | ) | ||||||||||||
Net (loss) attributable to general partner | (6,298 | ) | — | — | — | (6,298 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 1,634 | $ | 862 | $ | (10,019 | ) | $ | 9,158 | $ | 1,635 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 329,086 | $ | 54,708 | $ | (12,603 | ) | $ | 371,191 | |||||||||
Costs of services | — | 290,524 | 48,340 | (12,603 | ) | 326,261 | ||||||||||||||
Gross margin | — | 38,562 | 6,368 | — | 44,930 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,282 | 18,180 | 4,333 | — | 23,795 | |||||||||||||||
Depreciation, amortization and accretion | — | 4,832 | 595 | — | 5,427 | |||||||||||||||
Impairments | — | 6,645 | — | — | 6,645 | |||||||||||||||
Operating income (loss) | (1,282 | ) | 8,905 | 1,440 | — | 9,063 | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings in subsidiaries | 6,115 | 1,010 | — | (7,125 | ) | — | ||||||||||||||
Interest expense, net | (902 | ) | (4,115 | ) | (639 | ) | — | (5,656 | ) | |||||||||||
Other, net | — | 1,116 | 20 | — | 1,136 | |||||||||||||||
Net income (loss) before income tax expense | 3,931 | 6,916 | 821 | (7,125 | ) | 4,543 | ||||||||||||||
Income tax expense | — | 372 | 80 | — | 452 | |||||||||||||||
Net income (loss) | 3,931 | 6,544 | 741 | (7,125 | ) | 4,091 | ||||||||||||||
Net income (loss) attributable to non-controlling interests | 143 | 429 | — | 27 | 599 | |||||||||||||||
Net income (loss) attributable to partners / controlling interests | 3,788 | 6,115 | 741 | (7,152 | ) | 3,492 | ||||||||||||||
Net (loss) attributable to general partner | (648 | ) | — | — | — | (648 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 4,436 | $ | 6,115 | $ | 741 | $ | (7,152 | ) | $ | 4,140 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2014 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 370,081 | $ | 34,337 | $ | — | $ | 404,418 | ||||||||||
Costs of services | — | 323,821 | 31,534 | — | 355,355 | |||||||||||||||
Gross margin | — | 46,260 | 2,803 | — | 49,063 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | — | 19,257 | 2,064 | — | 21,321 | |||||||||||||||
Depreciation, amortization and accretion | — | 6,136 | 209 | — | 6,345 | |||||||||||||||
Impairments | — | 32,546 | — | — | 32,546 | |||||||||||||||
Operating income (loss) | — | (11,679 | ) | 530 | — | (11,149 | ) | |||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings in subsidiaries | (14,134 | ) | — | — | 14,134 | — | ||||||||||||||
Interest expense, net | (983 | ) | (1,892 | ) | (333 | ) | — | (3,208 | ) | |||||||||||
Offering costs, net | (446 | ) | — | — | — | (446 | ) | |||||||||||||
Other, net | — | 84 | 8 | — | 92 | |||||||||||||||
Net income (loss) before income tax expense | (15,563 | ) | (13,487 | ) | 205 | 14,134 | (14,711 | ) | ||||||||||||
Income tax expense | — | 356 | 112 | — | 468 | |||||||||||||||
Net income (loss) | (15,563 | ) | (13,843 | ) | 93 | 14,134 | (15,179 | ) | ||||||||||||
Net income (loss) attributable to non-controlling interests | 4,646 | 291 | — | 36 | 4,973 | |||||||||||||||
Net income (loss) attributable to partners / controlling interests | (20,209 | ) | (14,134 | ) | 93 | 14,098 | (20,152 | ) | ||||||||||||
Net income attributable to general partner | 149 | — | — | — | 149 | |||||||||||||||
Net income (loss) attributable to limited partners | $ | (20,358 | ) | $ | (14,134 | ) | $ | 93 | $ | 14,098 | $ | (20,301 | ) |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (4,664 | ) | $ | (3,637 | ) | $ | (10,019 | ) | $ | 9,158 | $ | (9,162 | ) | ||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | 71 | 182 | — | 253 | |||||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | (4,664 | ) | $ | (3,566 | ) | $ | (9,837 | ) | $ | 9,158 | $ | (8,909 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | — | (4,499 | ) | — | — | (4,499 | ) | |||||||||||||
Comprehensive (loss) attributable to general partner | (6,298 | ) | — | — | — | (6,298 | ) | |||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | 1,634 | $ | 933 | $ | (9,837 | ) | $ | 9,158 | $ | 1,888 |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | 3,931 | $ | 6,544 | $ | 741 | $ | (7,125 | ) | $ | 4,091 | |||||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | (564 | ) | (1,178 | ) | - | (1,742 | ) | ||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | 3,931 | $ | 5,980 | $ | (437 | ) | $ | (7,125 | ) | $ | 2,349 | ||||||||
Comprehensive (loss) attributable to non-controlling interests | 143 | 429 | — | (430 | ) | 142 | ||||||||||||||
Comprehensive (loss) attributable to general partner | (648 | ) | — | — | — | (648 | ) | |||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | 4,436 | $ | 5,551 | $ | (437 | ) | $ | (6,695 | ) | $ | 2,855 |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2014 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (15,563 | ) | $ | (13,843 | ) | $ | 93 | $ | 14,134 | $ | (15,179 | ) | |||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | (316 | ) | (621 | ) | — | (937 | ) | ||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | (15,563 | ) | $ | (14,159 | ) | $ | (528 | ) | $ | 14,134 | $ | (16,116 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | 4,646 | 291 | — | (279 | ) | 4,658 | ||||||||||||||
Comprehensive income attributable to general partner | 149 | — | — | — | 149 | |||||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | (20,358 | ) | $ | (14,450 | ) | $ | (528 | ) | $ | 14,413 | $ | (20,923 | ) |
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (4,664 | ) | $ | (3,637 | ) | $ | (10,019 | ) | $ | 9,158 | $ | (9,162 | ) | ||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 4,495 | 1,293 | — | 5,788 | |||||||||||||||
Impairments | — | 2,119 | 8,411 | — | 10,530 | |||||||||||||||
Gain (loss) on asset disposal | — | (12 | ) | (7 | ) | — | (19 | ) | ||||||||||||
Interest expense from debt issuance cost amortization | 570 | — | — | — | 570 | |||||||||||||||
Equity-based compensation expense | 1,086 | — | — | — | 1,086 | |||||||||||||||
Equity in earnings of investee | — | (309 | ) | — | — | (309 | ) | |||||||||||||
Distributions from investee | — | 200 | — | — | 200 | |||||||||||||||
Equity earnings in subsidiaries | (862 | ) | 10,020 | — | (9,158 | ) | — | |||||||||||||
Deferred tax benefit, net | — | (35 | ) | 11 | — | (24 | ) | |||||||||||||
Non-cash allocated expenses | 3,798 | — | — | — | 3,798 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 6,983 | 2,252 | 636 | 9,871 | |||||||||||||||
Receivables from affiliates | — | (7,021 | ) | — | 7,021 | — | ||||||||||||||
Prepaid expenses and other | — | 941 | 308 | 101 | 1,350 | |||||||||||||||
Accounts payable and accrued payroll and other | 7,632 | 507 | 132 | (7,793 | ) | 478 | ||||||||||||||
Income taxes payable | — | 582 | 45 | 35 | 662 | |||||||||||||||
Net cash provided by (used in) operating activities | 7,560 | 14,833 | 2,426 | — | 24,819 | |||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from fixed asset disposals | — | 26 | 20 | — | 46 | |||||||||||||||
Purchases of property and equipment | — | (1,066 | ) | (310 | ) | — | (1,376 | ) | ||||||||||||
Net cash used in investing activities | — | (1,040 | ) | (290 | ) | — | (1,330 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Repayments of long-term debt | — | (4,000 | ) | — | — | (4,000 | ) | |||||||||||||
Taxes paid related to net share settlement of equity-based compensation | (107 | ) | — | — | — | (107 | ) | |||||||||||||
Contributions from general partner | 2,500 | — | — | — | 2,500 | |||||||||||||||
Distributions from subsidiaries | 9,622 | (9,239 | ) | (383 | ) | — | — | |||||||||||||
Distributions to limited partners | (19,258 | ) | — | — | — | (19,258 | ) | |||||||||||||
Distributions to non-controlling members | — | — | (424 | ) | — | (424 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (7,243 | ) | (13,239 | ) | (807 | ) | — | (21,289 | ) | |||||||||||
Effects of exchange rates on cash | — | 127 | 216 | — | 343 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 317 | 681 | 1,545 | — | 2,543 | |||||||||||||||
Cash and cash equivalents, beginning of period | 378 | 19,570 | 4,202 | — | 24,150 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 695 | $ | 20,251 | $ | 5,747 | $ | — | $ | 26,693 | ||||||||||
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | 3,931 | $ | 6,544 | $ | 741 | $ | (7,125 | ) | $ | 4,091 | |||||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 5,102 | 902 | — | 6,004 | |||||||||||||||
Impairments | — | 6,645 | — | — | 6,645 | |||||||||||||||
Loss on asset disposals | — | — | (1 | ) | — | (1 | ) | |||||||||||||
Interest expense from debt issuance cost amortization | 547 | — | — | — | 547 | |||||||||||||||
Equity-based compensation expense | 1,167 | — | — | — | 1,167 | |||||||||||||||
Equity in earnings of investee | — | (102 | ) | — | — | (102 | ) | |||||||||||||
Distributions from investee | — | 100 | — | — | 100 | |||||||||||||||
Equity earnings in subsidiaries | (6,115 | ) | (1,010 | ) | — | 7,125 | — | |||||||||||||
Deferred tax benefit, net | — | 58 | (90 | ) | — | (32 | ) | |||||||||||||
Non-cash allocated expenses | 648 | — | — | — | 648 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 9,540 | (546 | ) | 45 | 9,039 | ||||||||||||||
Receivables from affiliates | 22 | 3,208 | — | (3,230 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 267 | (69 | ) | 35 | 233 | ||||||||||||||
Accounts payable and accrued payroll and other | 1,203 | (1,074 | ) | (4,536 | ) | 3,185 | (1,222 | ) | ||||||||||||
Income taxes payable | — | (122 | ) | (39 | ) | (35 | ) | (196 | ) | |||||||||||
Net cash provided by (used in) operating activities | 1,403 | 29,156 | (3,638 | ) | — | 26,921 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from disposals of property and equipment | — | 2 | — | — | 2 | |||||||||||||||
Cash paid for acquisition of 49.9% interest in the TIR Entities | — | (52,588 | ) | — | — | (52,588 | ) | |||||||||||||
Cash paid for acquisition of 51% of Brown Integrity, LLC, net of cash acquired of $175 | — | (10,436 | ) | — | — | (10,436 | ) | |||||||||||||
Purchases of property and equipment | — | (1,607 | ) | (250 | ) | — | (1,857 | ) | ||||||||||||
Net cash (used in) investing activities | — | (64,629 | ) | (250 | ) | — | (64,879 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Advances on long-term debt | — | 63,300 | 5,500 | — | 68,800 | |||||||||||||||
Repayments of long-term debt | — | (5,500 | ) | — | — | (5,500 | ) | |||||||||||||
Distributions from subsidiaries | 17,225 | (17,225 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (19,232 | ) | — | — | — | (19,232 | ) | |||||||||||||
Distributions to non-controlling members | — | (1,567 | ) | — | — | (1,567 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (2,007 | ) | 39,008 | 5,500 | — | 42,501 | ||||||||||||||
Effects of exchange rates on cash | — | (563 | ) | (587 | ) | — | (1,150 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (604 | ) | 2,972 | 1,025 | — | 3,393 | ||||||||||||||
Cash and cash equivalents, beginning of period | 982 | 16,598 | 3,177 | — | 20,757 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 378 | $ | 19,570 | $ | 4,202 | $ | — | $ | 24,150 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Accrued capital expenditures | $ | — | $ | 6 | $ | 94 | $ | — | $ | 100 |
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2014 |
(in thousands) |
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (15,563 | ) | $ | (13,843 | ) | $ | 93 | $ | 14,134 | $ | (15,179 | ) | |||||||
Adjustments to reconcile net income (loss) to cash provided by | ||||||||||||||||||||
(used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 6,304 | 209 | — | 6,513 | |||||||||||||||
Impairments | — | 32,546 | — | — | 32,546 | |||||||||||||||
Loss on asset disposals | — | 3 | — | — | 3 | |||||||||||||||
Interest expense from debt issuance cost amortization | 714 | — | — | — | 714 | |||||||||||||||
Equity-based compensation expense | 785 | — | — | — | 785 | |||||||||||||||
Equity in earnings of investee | — | (46 | ) | — | — | (46 | ) | |||||||||||||
Distributions from investee | — | 55 | — | — | 55 | |||||||||||||||
Equity earnings in subsidiaries | 14,134 | — | — | (14,134 | ) | — | ||||||||||||||
Deferred tax benefit, net | — | (22 | ) | 9 | — | (13 | ) | |||||||||||||
Non-cash allocated expenses | — | 497 | — | — | 497 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 4,115 | 2,527 | 8 | 6,650 | |||||||||||||||
Receivables from affiliates | (22 | ) | (9,604 | ) | 795 | 8,831 | — | |||||||||||||
Prepaid expenses and other | (285 | ) | (248 | ) | (400 | ) | — | (933 | ) | |||||||||||
Accounts payable and accrued payroll and other | 21 | 6,513 | (659 | ) | (8,839 | ) | (2,964 | ) | ||||||||||||
Income taxes payable | — | (14,481 | ) | (1,131 | ) | — | (15,612 | ) | ||||||||||||
Net cash provided by (used in) operating activities | (216 | ) | 11,789 | 1,443 | — | 13,016 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Acquisitions of businesses | — | (1,769 | ) | — | — | (1,769 | ) | |||||||||||||
Purchases of property and equipment | — | (483 | ) | (34) | — | (517 | ) | |||||||||||||
Net cash (used in) investing activities | — | (2,252 | ) | (34 | ) | — | (2,286 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Proceeds from initial public offering | 80,213 | — | — | — | 80,213 | |||||||||||||||
Distribution of initial public offering proceeds to Cypress Energy Holdings, LLC |
(80,213 | ) | — | — | — | (80,213 | ) | |||||||||||||
Payment of offering costs | (314 | ) | — | — | — | (314 | ) | |||||||||||||
Advances on long-term debt | — | 7,600 | — | — | 7,600 | |||||||||||||||
Repayments of long-term debt | — | (5,000 | ) | — | — | (5,000 | ) | |||||||||||||
Payment of debt issuance costs | — | (883 | ) | — | — | (883 | ) | |||||||||||||
Distributions to members prior to IPO | (279 | ) | 111 | — | — | (168 | ) | |||||||||||||
Contribution from general partner | 314 | 168 | — | — | 482 | |||||||||||||||
Distributions from subsidiaries | 14,541 | (14,541 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (13,064 | ) | — | — | — | (13,064 | ) | |||||||||||||
Distributions to non-controlling members | — | (4,683 | ) | — | — | (4,683 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 1,198 | (17,228 | ) | — | — | (16,030 | ) | |||||||||||||
Effects of exchange rates on cash | — | (317 | ) | (316 | ) | — | (633 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 982 | (8,008 | ) | 1,093 | — | (5,933 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | — | 24,606 | 2,084 | — | 26,690 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 982 | $ | 16,598 | $ | 3,177 | $ | — | $ | 20,757 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Accrued capital expenditures | $ | — | $ | 756 | $ | — | $ | — | $ | 756 |
|
18. Quarterly Financial Information Unaudited)
The following table sets forth certain unaudited financial data for each quarter during 2016 and 2015. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown.
2016 | Quarter Ended, | |||||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Revenues | $ | 73,474 | $ | 72,311 | $ | 81,806 | $ | 70,406 | ||||||||
Gross margin | 7,760 | 7,365 | 9,926 | 10,429 | ||||||||||||
Impairments | — | 10,530 | — | — | ||||||||||||
Net income (loss) | (1,361 | ) | (11,616 | ) | 1,998 | 1,817 | ||||||||||
Net income (loss) attributable to partners / controlling interests | (994 | ) | (7,004 | ) | 1,917 | 1,418 | ||||||||||
Net income (loss) per common limited partner unit - basic | (0.00 | ) | (0.34 | ) | 0.28 | 0.20 | ||||||||||
Net income (loss) per common limited partner unit - diluted | (0.00 | ) | (0.34 | ) | 0.27 | 0.19 | ||||||||||
Net income (loss) per subordinated limited partner unit - basic and diluted | (0.00 | ) | (0.34 | ) | 0.28 | 0.20 |
Revenues and gross margin for the quarter ended December 31, 2016 include $1.2 million related to a price increase on work we performed during preceding quarters. We recognized this revenue upon receipt during the fourth quarter of a signed contract formally evidencing the customer’s agreement to the new pricing.
2015 | Quarter Ended, | |||||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Revenues | $ | 94,066 | $ | 90,953 | $ | 96,408 | $ | 89,764 | ||||||||
Gross margin | 10,549 | 10,763 | 12,101 | 11,517 | ||||||||||||
Impairments | — | — | 5,567 | 1,078 | ||||||||||||
Net income (loss) | 2,826 | 1,859 | (1,640 | ) | 1,046 | |||||||||||
Net income (loss) attributable to partners / controlling interests | 2,659 | 1,936 | (1,809 | ) | 706 | |||||||||||
Net income (loss) per common limited partner unit - basic and diluted | 0.22 | 0.18 | (0.15 | ) | 0.10 | |||||||||||
Net income (loss) per subordinated limited partner unit - basic and diluted | 0.22 | 0.18 | (0.15 | ) | 0.10 |
|
Basis of Presentation
The accompanying Consolidated Financial Statements include our accounts and those of our controlled subsidiaries. All intercompany transactions and account balances have been eliminated. We have made certain reclassifications to the prior period financial statements to conform with classification methods used in the current fiscal year. These reclassifications have had the effect of reducing previously reported total assets and total liabilities, as the adoption of required accounting guidance from the Financial Accounting Standards Board (“FASB”) necessitated changes in the presentation of certain assets and liabilities, including the presentation of deferred tax assets and liabilities as noncurrent and the netting of debt issuance costs with its associated debt.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the periods presented.
Use of Estimates in the Preparation of Financial Statements
The preparation of the Partnership’s Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.
Areas requiring the use of assumptions, judgments, and estimates include amounts of expected future cash flows used in determining possible impairments of long-lived assets, the determination of fair values of assets acquired and liabilities assumed in business combinations, and future asset retirement obligations. Certain estimates are inherently imprecise and may change as future information becomes available. The use of alternative judgments and/or assumptions could result in different outcomes.
Fair Value Measurement
The Partnership utilizes fair value measurements to measure assets in a business combination or assess impairment of property and equipment, intangible assets, and goodwill. Fair value is the amount received from the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant. The Partnership uses market data or assumptions that it believes market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. The Partnership applies both market and income approaches for fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy prioritizes the inputs used to measure fair value, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Partnership classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
● | Level 1 – Quoted prices for identical assets or liabilities in active markets that management has the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
● | Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured. |
● | Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. |
Contributions Attributable to General Partner
During the years ended December 31, 2016, 2015, and 2014, Holdings incurred overhead expenses on behalf of the Partnership totaling $3.8 million, $0.6 million and $0.5 million, respectively. These costs represent amounts incurred by Holdings in excess of amounts charged to the Partnership under our omnibus agreement. These expenses are reflected as general and administrative in the Consolidated Statements of Operations for the years ended December 31, 2016, 2015, and 2014 and as contributions attributable to General Partner in the Consolidated Statement of Owners’ Equity.
In addition to incurring the expenses described above, Holdings provided the Partnership with additional temporary financial support by making cash contributions of $2.5 million in 2016 as a reimbursement for certain expenditures incurred by the Partnership. These payments are reflected as a contribution attributable to general partner in the Consolidated Statement of Owners’ Equity and as a component of the net loss attributable to the general partner in the Consolidated Statements of Operations for the year ended December 31, 2016.
Cash and Cash Equivalents
The Partnership considers all investments purchased with initial maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of investments in highly-liquid securities. The carrying amounts of cash and cash equivalents reported in the balance sheet approximate fair value.
As of December 31, 2016, U.S. cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per financial institution. Canadian cash balances are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 (Canadian Dollars) per financial institution. At times, cash balances may be in excess of the FDIC or CDIC insurance limits. We periodically assess the financial condition of the institutions where we deposit funds, and, we believe our credit risk related to these funds was minimal at December 31, 2016.
Property and Equipment
Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and equipment, computer and office equipment, and vehicles. The Partnership records 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. Depreciation for these assets is computed using the straight-line method over the estimated useful lives of the assets. Upon retirement, impairment, or disposition of an asset, the cost and related accumulated depreciation are removed from the balance sheet and the resultant gain or loss, if any, is reflected in the Consolidated Statement of Operations.
Debt Issuance Costs
Debt issuance costs represent fees and expenses associated with securing the Partnership’s Credit Agreement (see Note 7). Amortization of the capitalized debt issuance costs is computed using the effective interest method over the term of the Credit Agreement.
Income Taxes
As a limited partnership, we generally are not subject to federal, state or local income taxes. The tax on the net income of the Partnership is generally borne by the individual partners. Net income for financial statement purposes may differ significantly from taxable income 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 TIR Entities that have Canadian activity are taxable in Canada. In addition, the Partnership owns three subsidiaries, Tulsa Inspection Resources – PUC, LLC (“TIR-PUC”), Brown Integrity - PUC, LLC, and Cypress Energy Finance Corporation, that have elected to be taxed as corporations for U.S. federal income tax purposes. The amounts recognized as income tax expense, income taxes payable, and deferred tax liabilities in the 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 our “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements) exceed 90% of our total gross income, 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.
The Partnership evaluates uncertain tax positions for recognition and measurement in the Consolidated Financial Statements. To recognize a tax position, the Partnership determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Partnership had no uncertain tax positions that required recognition in the financial statements at December 31, 2016 or 2015. Any interest or penalties would be recognized as a component of income tax expense.
Revenue Recognition
Revenues are recognized when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenues related to pipeline inspection and integrity services are recognized when the services are performed. Water disposal revenues are recognized upon receipt of the wastewater at our disposal facilities. Revenues from sales of oil that is recovered in the process of treasing wastewater are recognized when the oil is delivered to the customer.
Unit-Based Compensation
Our General Partner adopted a long-term incentive plan (“LTIP”) under which the Partnership grants equity-based compensation to employees and directors. The cost of such equity-based compensation is measured based on the grant-date fair value of those instruments. That cost is recognized on a straight-line basis over the requisite service period, as described in Note 11.
Net Income (Loss) Per Unit
We utilize the two-class method in calculating basic and diluted income (loss) per common and subordinated unit. Net income (loss) attributable to partners / controlling interests is allocated to the general partner and limited partners in accordance with their respective partnership ownership percentages, after giving effect to any specifically allocated items.
For the year ended December 31, 2016, there were 155,877 dilutive phantom restricted units. For the year ended December 31, 2015, there were no dilutive phantom restricted units. For the year ended December 31, 2014, there were 14,520 phantom restricted units; however, as we were in a net loss position, they were excluded from the net income per unit calculation.
Accounts Receivable and Concentration of Credit Risk
We operate in the United States and Canada. 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 accounts receivable allowances based on management’s assessment of the creditworthiness of the customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Partnership does not typically charge interest on past due trade receivables and does not require collateral for its trade receivables. The Partnership had an allowance for doubtful accounts of $0.6 million and $0.7 million at December 31, 2016 and 2015, respectively, and recorded bad debt expense of approximately $0.0 million, $0.1 million and $0.1 million in the years ended December 31, 2016, 2015 and 2014, respectively.
We had three customers that each represented more than 10% of total accounts receivable as of December 31, 2016 and 2015. If one or more of these customers were to default on their payment obligations, we may not be able to replace any of these customers in a timely fashion, on favorable terms, or at all. In addition, any downgrade of our customers’ receivables from investment grade (defined as BBB- or higher by S&P or Baa3 or higher by Moody’s) could reduce our borrowing capacity or potentially place the Partnership at risk of default on the working capital revolving credit facility of our Credit Agreement. The result of downgrades of our customers’ receivables could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
The majority of our revenues are generated in the United States. Total revenues generated in Canada were $31.2 million, $27.5 million, and $32.4 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Accrued Payroll and Other
Included in accrued payroll and other is $5.6 million and $5.8 million of payroll costs as of December 31, 2016 and 2015, respectively. The remaining amounts relate to various other accrued liabilities.
Fair Value of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents; trade accounts receivable, net; prepaid expenses and other; accounts payable; accounts payable – affiliates; accrued payroll and other; and income taxes payable approximate their fair values.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in the Partnership’s Consolidated Balance Sheets. The following methods and assumptions were used to estimate the fair values:
Impairments of Property and Equipment
The Partnership reviews its property and equipment for impairment whenever events or changes in circumstances indicate, in the judgment of management, that a decline in the recoverability of their carrying value may have occurred. When an indicator of impairment exists, the Partnership compares its estimate of undiscounted cash flows attributable to the assets to the carrying value of the assets to determine whether an impairment has occurred. If the estimate of undiscounted cash flows is less than the carrying value of the asset group, the Partnership determines the amount of the impairment recognized in the financial statements by estimating the fair value of the assets and records a loss for the amount by which the carrying value exceeds the estimated fair value. Assets are grouped for impairment purposes at each SWD facility in the W&ES segment, as these asset groups represent the lowest level as which cash flows are separately identifiable. The Partnership recorded impairment losses to property, plant, and equipment of $2.1 million, $6.6 million, and $12.8 million for the years ended December 31, 2016, 2015 and 2014, respectively (see Note 4). Unfavorable changes in the future are reasonably possible, and therefore it is possible that we may incur additional impairment charges in the future.
Goodwill
At December 31, 2016 and 2015, the Partnership had $56.9 million and $65.3 million of goodwill, respectively. Goodwill is not amortized, but is subject to annual reviews on November 1 for impairment 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 operating segments are the appropriate reporting units for testing goodwill impairment. The accounting estimate relative to assessing the impairment of goodwill is a critical accounting estimate for each of our operating segments.
For our PIS reporting unit, we performed qualitative assessments to determine whether the fair value of the reporting unit was less than its carrying value. Our evaluations consisted of assessing various qualitative factors including current and projected future earnings, capitalization, current customer relationships and projects, and the impact of lower crude oil prices on our earnings. The qualitative assessment on this reporting unit indicated that there was no need to conduct further quantitative testing for goodwill impairment. Different judgments from those we used in our qualitative analysis could have resulted in the requirement to perform a quantitative goodwill impairment analysis.
During 2016, for our IS and W&ES segments, after giving consideration to certain qualitative factors, including trends in the energy industry and recorded impairments of property and equipment, we elected to perform quantitative goodwill impairment analyses. We computed the fair values of the reporting units using multiple valuation methodologies, including market approaches (market price multiples of comparable companies) and income approaches (discounted cash flow analyses). These approaches are consistent with the requirement to utilize all appropriate valuation techniques as described in ASC 820-10-35-24 “Fair Value Measurements and Disclosures.” Given recent declines in the price of crude oil and the related impact on the valuations of energy related companies, relevant market data was difficult to obtain and was of limited usefulness. Accordingly, we relied heavily on the use of the income approach for the valuations of the reporting units.
Based on our valuation, we determined that the goodwill in our IS segment was impaired as of June 30, 2016 by $8.4 million (see Note 5). During 2014, we determined that the carrying value of the W&ES reporting unit exceeded the fair value of the reporting unit, resulting in a goodwill impairment charge of $19.8 million. Further unfavorable changes in the future are reasonably possible, and therefore it is possible that we may incur additional impairment charges in the future.
Intangible Assets
Intangible assets include acquired customer relationships, trade names, and certain other intangibles acquired via various acquisitions and have been recorded utilizing various assumptions to determine fair market value including, but not limited to, replacement costs, liquidation values, future cash flows on a discounted basis of the net assets acquired, pay-off values, and average royalty rates. Due to the unobservable nature of these assumptions, these fair value measurements are considered to be Level 3 fair value estimates. Amortization of intangible assets is computed utilizing the straight-line method over their estimated useful lives, typically 5 – 20 years (see Note 6).
We review our intangible assets for impairment whenever events or changes in circumstances indicate we should assess the recoverability of the carrying amount of the intangible asset. We recognized no impairments for other intangible assets in 2016 or 2015.
Should we continue to experience a continued, prolonged energy market down turn resulting in further declines in revenues and cash flows, we could incur additional impairment charges associated with our property and equipment, goodwill, or intangible assets.
Non-controlling Interest
The non-controlling interests shown in our Consolidated Financial Statements reflect interests in consolidated subsidiaries that we own less than 100% of, but over which we exercise control.
Business Combinations
The Partnership evaluates all potential acquisitions and changes in control to determine whether it has purchased or acquired control of a business. If the acquired or newly-controlled assets meet the definition of a business, the transaction is accounted for as a business combination; otherwise it is accounted for as an asset acquisition. Transactions discussed in Note 3 were accounted for as business combinations for the periods described.
Foreign Currency Translation
The reporting currency is the U.S. dollar. Non-U.S. dollar denominated monetary items are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Non-U.S. dollar denominated non-monetary items are translated to U.S. dollars at the exchange rate in effect when the transactions occur. Revenues and expenses denominated in foreign currencies are translated at the exchange rate in effect during the period. Foreign exchange gains or losses on translation are included in other comprehensive income.
New Accounting Standards
In 2016 the Partnership has adopted the following new accounting standards issued by the Financial Accounting Standards Board (“FASB”);
The FASB issued Accounting Standards Update (“ASU”) 2015-17 – Income Taxes in November 2015. ASU 2015-17 was issued as a part of the FASB’s initiative to reduce complexity in accounting standards. The Partnership adopted this guidance beginning January 1, 2016. The guidance simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities to be classified as noncurrent in a classified consolidated balance sheet. Therefore, the Partnership’s deferred tax assets and liabilities have been classified as noncurrent in the Consolidated Balance Sheets for the periods presented.
The FASB issued ASU 2015-03 – Interest – Imputation of Interest in April 2015. This guidance requires certain debt issuance costs to be presented on the balance sheet as a reduction of the carrying amount of the long-term debt. The Partnership has adopted this guidance beginning January 1, 2016. As a result of the adoption of this ASU, netted debt issuance costs against long-term debt for all periods presented, moving the debt issuance costs from noncurrent assets to noncurrent liabilities on the Partnership’s Consolidated Balance Sheets.
The FASB issued ASU 2014-15 – Presentation of Financial Statements – Going Concern in August 2014. ASU 2014-15 applies to all entities and is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter and will be applied prospectively. Early application is permitted. This standard requires the Partnership’s management to assess our ability to continue as a going concern. The amendments (1) require an evaluation every reporting period (including interim periods), (2) provide principles for considering the mitigating effect of management’s plans, (3) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (4) require an express statement and other disclosures when substantial doubt is not alleviated, and (5) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). This guidance is intended to reduce diversity in the timing and content of footnote disclosures related to an entity’s going concern. The adoption of this guidance did not affect our financial position, results of operations or cash flows.
Other accounting guidance proposed by the FASB that may have some impact on the Consolidated Financial Statements of the Partnership, but have not yet been adopted by the Partnership include:
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 by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, the Partnership will be required to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. In the event the carrying amount exceeds the reporting unit’s fair value, a goodwill impairment charge for the excess will be recorded (not exceeding the recorded amount of the reporting unit’s goodwill). The Partnership will be required to adopt the amendments in this ASU for its annual goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Partnership is currently evaluating whether to early adopt this guidance and the potential effects adoption may have on our financial position, results of operations and cash flows.
Also in January 2017, the FASB issued ASU 2017-01 – Business Combinations. The intent of this ASU is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Partnership will be required to apply the provisions in the ASU to acquisitions occurring in annual periods beginning after December 15, 2017 and should be applied prospectively. Early application is allowed. The Partnership anticipates that the adoption of this guidance will not materially affect our financial position, results of operations or cash flows.
The FASB issued ASU 2016-15 – Statement of Cash Flows in August 2016. This guidance was issued to address diversity in practice of how cash receipts and cash payments are presented and classified in the statement of cash flows. It specifically addresses eight cash flow issues with the objective of reducing the current existing diversity in practice. Specific portions of the guidance that may apply directly to the Partnership include (1) the classification of debt prepayment or debt extinguishment costs, (2) classification of contingent consideration payments made after a business combination, (3) classification of distributions received from equity method investees, and potentially (4) the classification of separately identifiable cash flows and application of the predominance principle. Current GAAP is either unclear or does not include specific guidance on the classification issues addressed in this ASU. These amendments are effective for fiscal years beginning after December 15, 2017 and interim periods with those fiscal years and will be retrospectively applied to each period presented. The Partnership has not yet determined the impact this guidance may have on the Consolidated Financial Statements, but since the ASU addresses classification issues, the Partnership does not expect the adoption of this guidance to materially affect our financial position, results of operations or cash flows.
The FASB issued ASU 2016-09 – Compensation – Stock Compensation in March 2016. The purpose of the guidance is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, and all interim periods within that year. Amendments are to be applied retrospectively or prospectively, depending on the specific provision included in the ASU. We will adopt this guidance in the first quarter of 2017 and are still assessing whether to account for forfeitures when they occur or continue to record expense based on estimates of future forfeitures. Should we make the policy election to account for forfeitures as they occur, we would be required to record a cumulative-effect adjustment to owners’ equity as of the beginning of 2017, which would reduce partners’ capital by approximately $0.3 million.
The FASB issued ASU 2016-02 – Leases in February 2016. This guidance was proposed in an attempt to increase transparency and comparability among organizations by recognizing 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 lease assets and lease liabilities by lessees for leases that have been 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 and will be retrospectively applied to each period presented. Early application is permitted. We are currently assessing the impact this guidance will have on our 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. The Partnership will be required to adopt this standard in 2018 and to apply its provisions retrospectively to each prior reporting period presented or retrospectively 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.
|
2015 Business Combinations
The estimated fair values of the assets acquired and liabilities assumed as of the purchase date were as follows:
(in thousands) | ||||
Cash | $ | 175 | ||
Accounts receivable | 3,229 | |||
Other current assets | 108 | |||
Property and equipment | 2,578 | |||
Intangible assets: | ||||
Customer relationships | 3,128 | |||
Trade names and trademarks | 2,049 | |||
Non-compete agreements | 143 | |||
Goodwill | 9,992 | |||
21,402 | ||||
Current liabilities | 1,294 | |||
Non-controlling interests | 9,497 | |||
Net assets acquired | $ | 10,611 |
2014 Business Combination
The estimated fair values of the assets acquired and liabilities assumed as of the purchase date were as follows:
(in thousands) | ||||
Current assets | $ | 50 | ||
Property and equipment | 1,837 | |||
Intangible assets: | ||||
Contracts | 241 | |||
2,128 | ||||
Current liabilities | 386 | |||
Asset retirement obligation | 1 | |||
Net assets acquired | $ | 1,741 |
|
Property and equipment consist of the following, recorded at cost, as of December 31, 2016 and 2015:
December 31, | ||||||||||||
Asset Category | Useful Lives (years) | 2016 | 2015 | |||||||||
(in thousands) | ||||||||||||
Land | $ | 1,278 | $ | 2,114 | ||||||||
Land improvements | 15 | 698 | 848 | |||||||||
Buildings and leasehold improvements | 30 - 39 | 1,242 | 1,396 | |||||||||
Facilities, wells, and equipment | 5 - 15 | 17,563 | 17,711 | |||||||||
Computer and office equipment | 3 - 9 | 1,268 | 1,213 | |||||||||
Vehicles and other | 3 - 5 | 410 | 424 | |||||||||
22,459 | 23,706 | |||||||||||
Less accumulated depreciation | (7,840 | ) | (5,369 | ) | ||||||||
Net property and equipment | $ | 14,619 | $ | 18,337 |
The following table summarizes the impaired property and equipment in our W&ES segment for the years ended December 31, 2016, 2015 and 2014:
Asset Category | 2016 | 2015 | 2014 | |||||||||
(in thousands) | ||||||||||||
Land | $ | 1,000 | $ | 587 | $ | 1,527 | ||||||
Land improvements | 157 | 385 | 2,034 | |||||||||
Buildings and leasehold improvements | 136 | 568 | 1,054 | |||||||||
Facilities, wells and equipment | 1,726 | 6,951 | 19,679 | |||||||||
Computer and office equipment | — | 4 | 5 | |||||||||
Vehicles and other | 5 | 5 | 10 | |||||||||
3,024 | 8,500 | 24,309 | ||||||||||
Less accumulated depreciation | (289 | ) | (1,268 | ) | (4,296 | ) | ||||||
Net book value of impaired properties prior to impairment | 2,735 | 7,232 | 20,013 | |||||||||
Estimated fair market value of impaired properties as of date of impairment | 616 | 587 | 7,241 | |||||||||
Impairments | $ | 2,119 | $ | 6,645 | $ | 12,772 |
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Changes in goodwill are as follows:
PIS | IS | W&ES | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance - December 31, 2014 | $ | 40,470 | $ | — | $ | 15,075 | $ | 55,545 | ||||||||
Goodwill from business combination | — | 9,992 | — | $ | 9,992 | |||||||||||
Foreign currency translation | (264 | ) | — | — | $ | (264 | ) | |||||||||
Balance - December 31, 2015 | 40,206 | 9,992 | 15,075 | 65,273 | ||||||||||||
Impairments | — | (8,411 | ) | — | (8,411 | ) | ||||||||||
Foreign currency translation | 41 | — | — | 41 | ||||||||||||
Balance - December 31, 2016 | $ | 40,247 | $ | 1,581 | $ | 15,075 | $ | 56,903 |
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Intangible assets consist of the following at December 31, 2016 and 2015:
December 31, | ||||||||||||
Asset Category | Useful Lives (years) | 2016 | 2015 | |||||||||
(in thousands) | ||||||||||||
Customer relationships | 5 - 20 | $ | 24,261 | $ | 24,257 | |||||||
Contracts | 3 | 241 | 241 | |||||||||
Non-compete agreements | 3 | 143 | 143 | |||||||||
Trademarks and trade names | 10 | 12,079 | 12,067 | |||||||||
Inspector database | 10 | 2,080 | 2,080 | |||||||||
38,804 | 38,788 | |||||||||||
Less accumulated amortization | (9,180 | ) | (6,302 | ) | ||||||||
Net intangibles | $ | 29,624 | $ | 32,486 |
Future amortization expense of our intangible assets is estimated to be as follows:
Year ending December 31, | (in thousands) | |||
2017 | $ | 2,917 | ||
2018 | 2,829 | |||
2019 | 2,807 | |||
2020 | 2,786 | |||
2021 | 2,778 | |||
Thereafter | 15,507 | |||
$ | 29,624 |
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Outstanding borrowings at December 31, 2016 and 2015 under the Credit Agreement were as follows:
December 31, | ||||||||
2016 | 2015 | |||||||
(in thousands) | ||||||||
Working capital facility | $ | 48,000 | $ | 52,000 | ||||
Acquisition facility | 88,900 | 88,900 | ||||||
Total borrowings | 136,900 | 140,900 | ||||||
Debt issuance costs | 1,201 | 1,771 | ||||||
Long-term debt | $ | 135,699 | $ | 139,129 |
The following table reflects the changes in long-term debt during the year:
Working Capital | Acquisition | |||||||||||
Long-term debt | Facility | Facility | Total | |||||||||
(in thousands, except %’s) | ||||||||||||
Balance - December 31, 2015 | $ | 52,000 | $ | 88,900 | $ | 140,900 | ||||||
Payments | 4,000 | — | 4,000 | |||||||||
Balance - December 31, 2016 | $ | 48,000 | $ | 88,900 | $ | 136,900 | ||||||
Weighted average interest rate at December 31, 2016 | 3.91 | % | 4.48 | % |
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Significant components of income tax expense (benefit) are as follows for the years ended December 31:
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Current tax expense (benefit) | ||||||||||||
U.S. federal | $ | 527 | $ | (123 | ) | $ | 38 | |||||
State | 690 | 501 | 332 | |||||||||
Canadian | 3 | 6 | 100 | |||||||||
Total | 1,220 | 384 | 470 | |||||||||
Deferred tax expense (benefit) | ||||||||||||
U.S. federal | (27 | ) | 45 | (12 | ) | |||||||
State | (8 | ) | 13 | (3 | ) | |||||||
Canadian | 10 | 10 | 13 | |||||||||
Total | (25 | ) | 68 | (2 | ) | |||||||
Total income tax expense | $ | 1,195 | $ | 452 | $ | 468 |
The following table reconciles the differences between the U.S. federal statutory rate of 35% to the Partnership’s income tax expense on the Consolidated Statements of Operations for the years ended December 31:
2016 | 2015 | 2014 | ||||||||||
(in thousands) | ||||||||||||
Tax (benefit) computed at statutory rate | $ | (2,788 | ) | $ | 1,590 | $ | (5,149 | ) | ||||
(Income) loss not subject to federal tax | 3,336 | (1,790 | ) | 5,274 | ||||||||
State income taxes, net of federal benefit | 644 | 514 | 326 | |||||||||
Other | 3 | 138 | 17 | |||||||||
$ | 1,195 | $ | 452 | $ | 468 |
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The following table sets forth the units granted and forfeitured under the LTIP for the years ended December 31, 2016, 2015 and 2014:
Weighted Average | ||||||||
Number | Grant Date Fair | |||||||
of Units | Value / Unit | |||||||
Units at January 1, 2014 | — | |||||||
Units granted | 178,264 | $ | 17.96 | |||||
Units forfeited | (19,911 | ) | $ | 16.78 | ||||
Units at December 31, 2014 | 158,353 | $ | 18.11 | |||||
Units granted | 230,310 | $ | 12.08 | |||||
Units vested and issued | (7,467 | ) | $ | 19.72 | ||||
Units forfeited | (19,498 | ) | $ | 16.92 | ||||
Units at December 31, 2015 | 361,698 | $ | 14.30 | |||||
Units granted | 346,999 | $ | 6.32 | |||||
Units vested and issued | (36,505 | ) | $ | 16.17 | ||||
Units forfeited | (98,290 | ) | $ | 11.38 | ||||
Units at December 31, 2016 | 573,902 | $ | 9.86 |
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Minimum annual lease commitments under the current office lease and other operating leases at December 31, 2016 follows:
(in thousands) | ||||
2017 | $ | 865 | ||
2018 | 151 | |||
2019 | 25 | |||
2020 | 25 | |||
2021 | 25 | |||
Thereafter | 507 | |||
Total | $ | 1,598 |
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The following table outlines segment operating income and a reconciliation of total segment operating income to net income before income tax expense.
PIS | IS | W&ES | Other | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Year ended December 31, 2016 | ||||||||||||||||||||
Revenue | $ | 275,171 | $ | 13,884 | $ | 8,942 | $ | — | $ | 297,997 | ||||||||||
Costs of services | 247,214 | 11,542 | 3,761 | — | 262,517 | |||||||||||||||
Gross margin | 27,957 | 2,342 | 5,181 | — | 35,480 | |||||||||||||||
General and administrative | 12,521 | 2,829 | 1,866 | 4,637 | (a) | 21,853 | ||||||||||||||
Depreciation, amortization and accretion | 2,439 | 658 | 1,764 | — | 4,861 | |||||||||||||||
Impairments | — | 8,411 | 2,119 | — | 10,530 | |||||||||||||||
Operating income (loss) | $ | 12,997 | $ | (9,556 | ) | $ | (568 | ) | $ | (4,637 | ) | (1,764 | ) | |||||||
Interest expense, net | (6,559 | ) | ||||||||||||||||||
Other, net | 356 | |||||||||||||||||||
Net loss before income tax expense | $ | (7,967 | ) |
(a) | Amount includes $3.8 million that Holdings could have charged the Partnership under the omnibus agreement. Since Holdings elected to waive this omnibus fee for the year ended December 31, 2016, none of this expense is reflected in the operating results of the individual segments. |
Year ended December 31, 2015 | ||||||||||||||||||||
Revenue | $ | 341,929 | $ | 14,614 | $ | 14,648 | $ | — | $ | 371,191 | ||||||||||
Costs of services | 309,584 | 10,398 | 6,279 | — | 326,261 | |||||||||||||||
Gross margin | 32,345 | 4,216 | 8,369 | — | 44,930 | |||||||||||||||
General and administrative | 16,672 | 2,490 | 3,351 | 1,282 | (b) | 23,795 | ||||||||||||||
Depreciation, amortization and accretion | 2,512 | 421 | 2,494 | — | 5,427 | |||||||||||||||
Impairments | — | — | 6,645 | — | 6,645 | |||||||||||||||
Operating income (loss) | $ | 13,161 | $ | 1,305 | $ | (4,121 | ) | $ | (1,282 | ) | 9,063 | |||||||||
Interest expense, net | (5,656 | ) | ||||||||||||||||||
Gain on waiver of right of purchase and other, net | 1,136 | |||||||||||||||||||
Net loss before income tax expense | $ | 4,543 |
(b) | Amount includes $0.6 million of expenses incurred by Holdings in excess of the omnibus fee. |
Year ended December 31, 2014 | ||||||||||||||||||||
Revenue | $ | 382,002 | $ | — | $ | 22,416 | $ | — | $ | 404,418 | ||||||||||
Costs of services | 346,738 | — | 8,617 | — | 355,355 | |||||||||||||||
Gross margin | 35,264 | — | 13,799 | — | 49,063 | |||||||||||||||
General and administrative | 17,734 | — | 3,090 | 497 | 21,321 | |||||||||||||||
Depreciation, amortization and accretion | 2,539 | — | 3,806 | — | 6,345 | |||||||||||||||
Impairments | — | — | 32,546 | — | 32,546 | |||||||||||||||
Operating income (loss) | $ | 14,991 | $ | — | $ | (25,643 | ) | $ | (497 | ) | (11,149 | ) | ||||||||
Interest expense, net | (3,208 | ) | ||||||||||||||||||
Offering costs | (446 | ) | ||||||||||||||||||
Other, net | 92 | |||||||||||||||||||
Net loss before income tax expense | $ | (14,711 | ) | |||||||||||||||||
Total Assets | ||||||||||||||||||||
December 31, 2016 | $ | 124,840 | $ | 12,079 | $ | 38,141 | $ | (7,548 | ) | $ | 167,512 | |||||||||
December 31, 2015 (as adjusted) | $ | 130,623 | $ | 23,097 | $ | 38,418 | $ | (1,256 | ) | $ | 190,882 |
|
The following table summarizes the cash distributions declared and paid by the Partnership 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 (c) | 0.406413 | 4,823 | 3,107 | |||||||||
Total Distributions (through February 13, 2017 since IPO) | $ | 4.762363 | $ | 56,377 | $ | 36,101 |
(a) | Approximately 64.3% of the Partnership’s outstanding units at December 31, 2016 were held by affiliates. | |||
(b) | Distribution was pro-rated from the date of our IPO through March 31, 2014. | |||
(c) | Fourth quarter 2016 distribution was declared and paid in the first quarter of 2017. |
|
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 | ||||||||||||||
Commitments and contingencies - Note 13 | ||||||||||||||||||||
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 |
Consolidating Balance Sheet |
As of December 31, 2015 |
(as adjusted - in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 378 | $ | 19,570 | $ | 4,202 | $ | — | $ | 24,150 | ||||||||||
Trade accounts receivable, net | — | 40,029 | 8,289 | (53 | ) | 48,265 | ||||||||||||||
Accounts receivable - affiliates | — | 5,601 | — | (5,601 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 2,078 | 286 | (35 | ) | 2,329 | ||||||||||||||
Total current assets | 378 | 67,278 | 12,777 | (5,689 | ) | 74,744 | ||||||||||||||
Property and equipment: | ||||||||||||||||||||
Property and equipment, at cost | — | 20,790 | 2,916 | — | 23,706 | |||||||||||||||
Less: Accumulated depreciation | — | 4,941 | 428 | — | 5,369 | |||||||||||||||
Total property and equipment, net | — | 15,849 | 2,488 | — | 18,337 | |||||||||||||||
Intangible assets, net | — | 26,135 | 6,351 | — | 32,486 | |||||||||||||||
Goodwill | — | 53,914 | 11,359 | — | 65,273 | |||||||||||||||
Investment in subsidiaries | 42,034 | 10,465 | — | (52,499 | ) | — | ||||||||||||||
Notes receivable - affiliates | — | 13,527 | — | (13,527 | ) | — | ||||||||||||||
Other assets | — | 32 | 10 | — | 42 | |||||||||||||||
Total assets | $ | 42,412 | $ | 187,200 | $ | 32,985 | $ | (71,715 | ) | $ | 190,882 | |||||||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 6 | $ | 467 | $ | 1,732 | $ | — | $ | 2,205 | ||||||||||
Accounts payable - affiliates | 1,237 | 912 | 4,042 | (5,278 | ) | 913 | ||||||||||||||
Accrued payroll and other | — | 6,855 | 293 | (53 | ) | 7,095 | ||||||||||||||
Income taxes payable | — | 385 | — | (35 | ) | 350 | ||||||||||||||
Total current liabilities | 1,243 | 8,619 | 6,067 | (5,366 | ) | 10,563 | ||||||||||||||
Long-term debt | (1,771 | ) | 135,400 | 5,500 | — | 139,129 | ||||||||||||||
Notes payable - affiliates | — | — | 13,850 | (13,850 | ) | — | ||||||||||||||
Deferred tax liabilities | — | 43 | 328 | — | 371 | |||||||||||||||
Asset retirement obligations | — | 117 | — | — | 117 | |||||||||||||||
Total liabilities | (528 | ) | 144,179 | 25,745 | (19,216 | ) | 150,180 | |||||||||||||
Commitments and contingencies | ||||||||||||||||||||
Owners’ equity: | ||||||||||||||||||||
Total partners’ capital | 32,967 | 33,048 | 7,240 | (42,526 | ) | 30,729 | ||||||||||||||
Non-controlling interests | 9,973 | 9,973 | — | (9,973 | ) | 9,973 | ||||||||||||||
Total owners’ equity | 42,940 | 43,021 | 7,240 | (52,499 | ) | 40,702 | ||||||||||||||
Total liabilities and owners’ equity | $ | 42,412 | $ | 187,200 | $ | 32,985 | $ | (71,715 | ) | $ | 190,882 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 252,955 | $ | 58,694 | $ | (13,652 | ) | $ | 297,997 | |||||||||
Costs of services | — | 222,067 | 54,102 | (13,652 | ) | 262,517 | ||||||||||||||
Gross margin | — | 30,888 | 4,592 | — | 35,480 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 4,637 | 12,625 | 4,591 | — | 21,853 | |||||||||||||||
Depreciation, amortization and accretion | — | 4,091 | 770 | — | 4,861 | |||||||||||||||
Impairments | — | 2,119 | 8,411 | — | 10,530 | |||||||||||||||
Operating (loss) | (4,637 | ) | 12,053 | (9,180 | ) | — | (1,764 | ) | ||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings (loss) in subsidiaries | 862 | (10,020 | ) | — | 9,158 | — | ||||||||||||||
Interest expense, net | (889 | ) | (4,854 | ) | (816 | ) | — | (6,559 | ) | |||||||||||
Other, net | — | 334 | 22 | — | 356 | |||||||||||||||
Net income (loss) before income tax expense | (4,664 | ) | (2,487 | ) | (9,974 | ) | 9,158 | (7,967 | ) | |||||||||||
Income tax expense | — | 1,150 | 45 | — | 1,195 | |||||||||||||||
Net income (loss) | (4,664 | ) | (3,637 | ) | (10,019 | ) | 9,158 | (9,162 | ) | |||||||||||
Net (loss) attributable to non-controlling interests | — | (4,499 | ) | — | — | (4,499 | ) | |||||||||||||
Net income (loss) attributable to partners / controlling interests | (4,664 | ) | 862 | (10,019 | ) | 9,158 | (4,663 | ) | ||||||||||||
Net (loss) attributable to general partner | (6,298 | ) | — | — | — | (6,298 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 1,634 | $ | 862 | $ | (10,019 | ) | $ | 9,158 | $ | 1,635 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 329,086 | $ | 54,708 | $ | (12,603 | ) | $ | 371,191 | |||||||||
Costs of services | — | 290,524 | 48,340 | (12,603 | ) | 326,261 | ||||||||||||||
Gross margin | — | 38,562 | 6,368 | — | 44,930 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | 1,282 | 18,180 | 4,333 | — | 23,795 | |||||||||||||||
Depreciation, amortization and accretion | — | 4,832 | 595 | — | 5,427 | |||||||||||||||
Impairments | — | 6,645 | — | — | 6,645 | |||||||||||||||
Operating income (loss) | (1,282 | ) | 8,905 | 1,440 | — | 9,063 | ||||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings in subsidiaries | 6,115 | 1,010 | — | (7,125 | ) | — | ||||||||||||||
Interest expense, net | (902 | ) | (4,115 | ) | (639 | ) | — | (5,656 | ) | |||||||||||
Other, net | — | 1,116 | 20 | — | 1,136 | |||||||||||||||
Net income (loss) before income tax expense | 3,931 | 6,916 | 821 | (7,125 | ) | 4,543 | ||||||||||||||
Income tax expense | — | 372 | 80 | — | 452 | |||||||||||||||
Net income (loss) | 3,931 | 6,544 | 741 | (7,125 | ) | 4,091 | ||||||||||||||
Net income (loss) attributable to non-controlling interests | 143 | 429 | — | 27 | 599 | |||||||||||||||
Net income (loss) attributable to partners / controlling interests | 3,788 | 6,115 | 741 | (7,152 | ) | 3,492 | ||||||||||||||
Net (loss) attributable to general partner | (648 | ) | — | — | — | (648 | ) | |||||||||||||
Net income (loss) attributable to limited partners | $ | 4,436 | $ | 6,115 | $ | 741 | $ | (7,152 | ) | $ | 4,140 |
Consolidating Statement of Operations |
For the Year Ended December 31, 2014 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Revenues | $ | — | $ | 370,081 | $ | 34,337 | $ | — | $ | 404,418 | ||||||||||
Costs of services | — | 323,821 | 31,534 | — | 355,355 | |||||||||||||||
Gross margin | — | 46,260 | 2,803 | — | 49,063 | |||||||||||||||
Operating costs and expense: | ||||||||||||||||||||
General and administrative | — | 19,257 | 2,064 | — | 21,321 | |||||||||||||||
Depreciation, amortization and accretion | — | 6,136 | 209 | — | 6,345 | |||||||||||||||
Impairments | — | 32,546 | — | — | 32,546 | |||||||||||||||
Operating income (loss) | — | (11,679 | ) | 530 | — | (11,149 | ) | |||||||||||||
Other income (expense): | ||||||||||||||||||||
Equity earnings in subsidiaries | (14,134 | ) | — | — | 14,134 | — | ||||||||||||||
Interest expense, net | (983 | ) | (1,892 | ) | (333 | ) | — | (3,208 | ) | |||||||||||
Offering costs, net | (446 | ) | — | — | — | (446 | ) | |||||||||||||
Other, net | — | 84 | 8 | — | 92 | |||||||||||||||
Net income (loss) before income tax expense | (15,563 | ) | (13,487 | ) | 205 | 14,134 | (14,711 | ) | ||||||||||||
Income tax expense | — | 356 | 112 | — | 468 | |||||||||||||||
Net income (loss) | (15,563 | ) | (13,843 | ) | 93 | 14,134 | (15,179 | ) | ||||||||||||
Net income (loss) attributable to non-controlling interests | 4,646 | 291 | — | 36 | 4,973 | |||||||||||||||
Net income (loss) attributable to partners / controlling interests | (20,209 | ) | (14,134 | ) | 93 | 14,098 | (20,152 | ) | ||||||||||||
Net income attributable to general partner | 149 | — | — | — | 149 | |||||||||||||||
Net income (loss) attributable to limited partners | $ | (20,358 | ) | $ | (14,134 | ) | $ | 93 | $ | 14,098 | $ | (20,301 | ) |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (4,664 | ) | $ | (3,637 | ) | $ | (10,019 | ) | $ | 9,158 | $ | (9,162 | ) | ||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | 71 | 182 | — | 253 | |||||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | (4,664 | ) | $ | (3,566 | ) | $ | (9,837 | ) | $ | 9,158 | $ | (8,909 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | — | (4,499 | ) | — | — | (4,499 | ) | |||||||||||||
Comprehensive (loss) attributable to general partner | (6,298 | ) | — | — | — | (6,298 | ) | |||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | 1,634 | $ | 933 | $ | (9,837 | ) | $ | 9,158 | $ | 1,888 |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | 3,931 | $ | 6,544 | $ | 741 | $ | (7,125 | ) | $ | 4,091 | |||||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | (564 | ) | (1,178 | ) | - | (1,742 | ) | ||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | 3,931 | $ | 5,980 | $ | (437 | ) | $ | (7,125 | ) | $ | 2,349 | ||||||||
Comprehensive (loss) attributable to non-controlling interests | 143 | 429 | — | (430 | ) | 142 | ||||||||||||||
Comprehensive (loss) attributable to general partner | (648 | ) | — | — | — | (648 | ) | |||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | 4,436 | $ | 5,551 | $ | (437 | ) | $ | (6,695 | ) | $ | 2,855 |
Consolidating Statement of Comprehensive Income (Loss) |
For the Year Ended December 31, 2014 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Net income (loss) | $ | (15,563 | ) | $ | (13,843 | ) | $ | 93 | $ | 14,134 | $ | (15,179 | ) | |||||||
Other comprehensive income - | — | |||||||||||||||||||
Foreign currency translation | — | (316 | ) | (621 | ) | — | (937 | ) | ||||||||||||
— | ||||||||||||||||||||
Comprehensive income (loss) | $ | (15,563 | ) | $ | (14,159 | ) | $ | (528 | ) | $ | 14,134 | $ | (16,116 | ) | ||||||
Comprehensive (loss) attributable to non-controlling interests | 4,646 | 291 | — | (279 | ) | 4,658 | ||||||||||||||
Comprehensive income attributable to general partner | 149 | — | — | — | 149 | |||||||||||||||
Comprehensive income (loss) attributable to limited partners | $ | (20,358 | ) | $ | (14,450 | ) | $ | (528 | ) | $ | 14,413 | $ | (20,923 | ) |
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2016 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (4,664 | ) | $ | (3,637 | ) | $ | (10,019 | ) | $ | 9,158 | $ | (9,162 | ) | ||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 4,495 | 1,293 | — | 5,788 | |||||||||||||||
Impairments | — | 2,119 | 8,411 | — | 10,530 | |||||||||||||||
Gain (loss) on asset disposal | — | (12 | ) | (7 | ) | — | (19 | ) | ||||||||||||
Interest expense from debt issuance cost amortization | 570 | — | — | — | 570 | |||||||||||||||
Equity-based compensation expense | 1,086 | — | — | — | 1,086 | |||||||||||||||
Equity in earnings of investee | — | (309 | ) | — | — | (309 | ) | |||||||||||||
Distributions from investee | — | 200 | — | — | 200 | |||||||||||||||
Equity earnings in subsidiaries | (862 | ) | 10,020 | — | (9,158 | ) | — | |||||||||||||
Deferred tax benefit, net | — | (35 | ) | 11 | — | (24 | ) | |||||||||||||
Non-cash allocated expenses | 3,798 | — | — | — | 3,798 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 6,983 | 2,252 | 636 | 9,871 | |||||||||||||||
Receivables from affiliates | — | (7,021 | ) | — | 7,021 | — | ||||||||||||||
Prepaid expenses and other | — | 941 | 308 | 101 | 1,350 | |||||||||||||||
Accounts payable and accrued payroll and other | 7,632 | 507 | 132 | (7,793 | ) | 478 | ||||||||||||||
Income taxes payable | — | 582 | 45 | 35 | 662 | |||||||||||||||
Net cash provided by (used in) operating activities | 7,560 | 14,833 | 2,426 | — | 24,819 | |||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from fixed asset disposals | — | 26 | 20 | — | 46 | |||||||||||||||
Purchases of property and equipment | — | (1,066 | ) | (310 | ) | — | (1,376 | ) | ||||||||||||
Net cash used in investing activities | — | (1,040 | ) | (290 | ) | — | (1,330 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Repayments of long-term debt | — | (4,000 | ) | — | — | (4,000 | ) | |||||||||||||
Taxes paid related to net share settlement of equity-based compensation | (107 | ) | — | — | — | (107 | ) | |||||||||||||
Contributions from general partner | 2,500 | — | — | — | 2,500 | |||||||||||||||
Distributions from subsidiaries | 9,622 | (9,239 | ) | (383 | ) | — | — | |||||||||||||
Distributions to limited partners | (19,258 | ) | — | — | — | (19,258 | ) | |||||||||||||
Distributions to non-controlling members | — | — | (424 | ) | — | (424 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (7,243 | ) | (13,239 | ) | (807 | ) | — | (21,289 | ) | |||||||||||
Effects of exchange rates on cash | — | 127 | 216 | — | 343 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents | 317 | 681 | 1,545 | — | 2,543 | |||||||||||||||
Cash and cash equivalents, beginning of period | 378 | 19,570 | 4,202 | — | 24,150 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 695 | $ | 20,251 | $ | 5,747 | $ | — | $ | 26,693 | ||||||||||
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2015 |
(in thousands) |
Parent | Guarantors | Non- Guarantors |
Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | 3,931 | $ | 6,544 | $ | 741 | $ | (7,125 | ) | $ | 4,091 | |||||||||
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 5,102 | 902 | — | 6,004 | |||||||||||||||
Impairments | — | 6,645 | — | — | 6,645 | |||||||||||||||
Loss on asset disposals | — | — | (1 | ) | — | (1 | ) | |||||||||||||
Interest expense from debt issuance cost amortization | 547 | — | — | — | 547 | |||||||||||||||
Equity-based compensation expense | 1,167 | — | — | — | 1,167 | |||||||||||||||
Equity in earnings of investee | — | (102 | ) | — | — | (102 | ) | |||||||||||||
Distributions from investee | — | 100 | — | — | 100 | |||||||||||||||
Equity earnings in subsidiaries | (6,115 | ) | (1,010 | ) | — | 7,125 | — | |||||||||||||
Deferred tax benefit, net | — | 58 | (90 | ) | — | (32 | ) | |||||||||||||
Non-cash allocated expenses | 648 | — | — | — | 648 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 9,540 | (546 | ) | 45 | 9,039 | ||||||||||||||
Receivables from affiliates | 22 | 3,208 | — | (3,230 | ) | — | ||||||||||||||
Prepaid expenses and other | — | 267 | (69 | ) | 35 | 233 | ||||||||||||||
Accounts payable and accrued payroll and other | 1,203 | (1,074 | ) | (4,536 | ) | 3,185 | (1,222 | ) | ||||||||||||
Income taxes payable | — | (122 | ) | (39 | ) | (35 | ) | (196 | ) | |||||||||||
Net cash provided by (used in) operating activities | 1,403 | 29,156 | (3,638 | ) | — | 26,921 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Proceeds from disposals of property and equipment | — | 2 | — | — | 2 | |||||||||||||||
Cash paid for acquisition of 49.9% interest in the TIR Entities | — | (52,588 | ) | — | — | (52,588 | ) | |||||||||||||
Cash paid for acquisition of 51% of Brown Integrity, LLC, net of cash acquired of $175 | — | (10,436 | ) | — | — | (10,436 | ) | |||||||||||||
Purchases of property and equipment | — | (1,607 | ) | (250 | ) | — | (1,857 | ) | ||||||||||||
Net cash (used in) investing activities | — | (64,629 | ) | (250 | ) | — | (64,879 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Advances on long-term debt | — | 63,300 | 5,500 | — | 68,800 | |||||||||||||||
Repayments of long-term debt | — | (5,500 | ) | — | — | (5,500 | ) | |||||||||||||
Distributions from subsidiaries | 17,225 | (17,225 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (19,232 | ) | — | — | — | (19,232 | ) | |||||||||||||
Distributions to non-controlling members | — | (1,567 | ) | — | — | (1,567 | ) | |||||||||||||
Net cash provided by (used in) financing activities | (2,007 | ) | 39,008 | 5,500 | — | 42,501 | ||||||||||||||
Effects of exchange rates on cash | — | (563 | ) | (587 | ) | — | (1,150 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (604 | ) | 2,972 | 1,025 | — | 3,393 | ||||||||||||||
Cash and cash equivalents, beginning of period | 982 | 16,598 | 3,177 | — | 20,757 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 378 | $ | 19,570 | $ | 4,202 | $ | — | $ | 24,150 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Accrued capital expenditures | $ | — | $ | 6 | $ | 94 | $ | — | $ | 100 |
Consolidating Statement of Cash Flows |
For the Year Ended December 31, 2014 |
(in thousands) |
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Operating activities: | ||||||||||||||||||||
Net income (loss) | $ | (15,563 | ) | $ | (13,843 | ) | $ | 93 | $ | 14,134 | $ | (15,179 | ) | |||||||
Adjustments to reconcile net income (loss) to cash provided by | ||||||||||||||||||||
(used in) operating activities: | ||||||||||||||||||||
Depreciation, amortization and accretion | — | 6,304 | 209 | — | 6,513 | |||||||||||||||
Impairments | — | 32,546 | — | — | 32,546 | |||||||||||||||
Loss on asset disposals | — | 3 | — | — | 3 | |||||||||||||||
Interest expense from debt issuance cost amortization | 714 | — | — | — | 714 | |||||||||||||||
Equity-based compensation expense | 785 | — | — | — | 785 | |||||||||||||||
Equity in earnings of investee | — | (46 | ) | — | — | (46 | ) | |||||||||||||
Distributions from investee | — | 55 | — | — | 55 | |||||||||||||||
Equity earnings in subsidiaries | 14,134 | — | — | (14,134 | ) | — | ||||||||||||||
Deferred tax benefit, net | — | (22 | ) | 9 | — | (13 | ) | |||||||||||||
Non-cash allocated expenses | — | 497 | — | — | 497 | |||||||||||||||
Changes in assets and liabilities: | ||||||||||||||||||||
Trade accounts receivable | — | 4,115 | 2,527 | 8 | 6,650 | |||||||||||||||
Receivables from affiliates | (22 | ) | (9,604 | ) | 795 | 8,831 | — | |||||||||||||
Prepaid expenses and other | (285 | ) | (248 | ) | (400 | ) | — | (933 | ) | |||||||||||
Accounts payable and accrued payroll and other | 21 | 6,513 | (659 | ) | (8,839 | ) | (2,964 | ) | ||||||||||||
Income taxes payable | — | (14,481 | ) | (1,131 | ) | — | (15,612 | ) | ||||||||||||
Net cash provided by (used in) operating activities | (216 | ) | 11,789 | 1,443 | — | 13,016 | ||||||||||||||
Investing activities: | ||||||||||||||||||||
Acquisitions of businesses | — | (1,769 | ) | — | — | (1,769 | ) | |||||||||||||
Purchases of property and equipment | — | (483 | ) | (34) | — | (517 | ) | |||||||||||||
Net cash (used in) investing activities | — | (2,252 | ) | (34 | ) | — | (2,286 | ) | ||||||||||||
Financing activities: | ||||||||||||||||||||
Proceeds from initial public offering | 80,213 | — | — | — | 80,213 | |||||||||||||||
Distribution of initial public offering proceeds to Cypress Energy Holdings, LLC |
(80,213 | ) | — | — | — | (80,213 | ) | |||||||||||||
Payment of offering costs | (314 | ) | — | — | — | (314 | ) | |||||||||||||
Advances on long-term debt | — | 7,600 | — | — | 7,600 | |||||||||||||||
Repayments of long-term debt | — | (5,000 | ) | — | — | (5,000 | ) | |||||||||||||
Payment of debt issuance costs | — | (883 | ) | — | — | (883 | ) | |||||||||||||
Distributions to members prior to IPO | (279 | ) | 111 | — | — | (168 | ) | |||||||||||||
Contribution from general partner | 314 | 168 | — | — | 482 | |||||||||||||||
Distributions from subsidiaries | 14,541 | (14,541 | ) | — | — | — | ||||||||||||||
Distributions to limited partners | (13,064 | ) | — | — | — | (13,064 | ) | |||||||||||||
Distributions to non-controlling members | — | (4,683 | ) | — | — | (4,683 | ) | |||||||||||||
Net cash provided by (used in) financing activities | 1,198 | (17,228 | ) | — | — | (16,030 | ) | |||||||||||||
Effects of exchange rates on cash | — | (317 | ) | (316 | ) | — | (633 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 982 | (8,008 | ) | 1,093 | — | (5,933 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | — | 24,606 | 2,084 | — | 26,690 | |||||||||||||||
Cash and cash equivalents, end of period | $ | 982 | $ | 16,598 | $ | 3,177 | $ | — | $ | 20,757 | ||||||||||
Non-cash items: | ||||||||||||||||||||
Accrued capital expenditures | $ | — | $ | 756 | $ | — | $ | — | $ | 756 |
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The following table sets forth certain unaudited financial data for each quarter during 2016 and 2015. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown.
2016 | Quarter Ended, | |||||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Revenues | $ | 73,474 | $ | 72,311 | $ | 81,806 | $ | 70,406 | ||||||||
Gross margin | 7,760 | 7,365 | 9,926 | 10,429 | ||||||||||||
Impairments | — | 10,530 | — | — | ||||||||||||
Net income (loss) | (1,361 | ) | (11,616 | ) | 1,998 | 1,817 | ||||||||||
Net income (loss) attributable to partners / controlling interests | (994 | ) | (7,004 | ) | 1,917 | 1,418 | ||||||||||
Net income (loss) per common limited partner unit - basic | (0.00 | ) | (0.34 | ) | 0.28 | 0.20 | ||||||||||
Net income (loss) per common limited partner unit - diluted | (0.00 | ) | (0.34 | ) | 0.27 | 0.19 | ||||||||||
Net income (loss) per subordinated limited partner unit - basic and diluted | (0.00 | ) | (0.34 | ) | 0.28 | 0.20 |
2015 | Quarter Ended, | |||||||||||||||
(in thousands, except per unit amounts) | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 | |||||||||||||
Revenues | $ | 94,066 | $ | 90,953 | $ | 96,408 | $ | 89,764 | ||||||||
Gross margin | 10,549 | 10,763 | 12,101 | 11,517 | ||||||||||||
Impairments | — | — | 5,567 | 1,078 | ||||||||||||
Net income (loss) | 2,826 | 1,859 | (1,640 | ) | 1,046 | |||||||||||
Net income (loss) attributable to partners / controlling interests | 2,659 | 1,936 | (1,809 | ) | 706 | |||||||||||
Net income (loss) per common limited partner unit - basic and diluted | 0.22 | 0.18 | (0.15 | ) | 0.10 | |||||||||||
Net income (loss) per subordinated limited partner unit - basic and diluted | 0.22 | 0.18 | (0.15 | ) | 0.10 |
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We estimated the fair value of the reporting unit utilizing the income approach (discounted cash flows) valuation method, which is a Level 3 input as defined in ASC 820, Fair Value Measurement. Significant inputs in the valuation included projections of future revenues, anticipated operating costs and appropriate discount rates. To estimate the fair value of the reporting unit and the implied fair value of goodwill under a hypothetical acquisition of the reporting unit, we assumed a tax structure where a buyer would obtain a step-up in the tax basis of the net assets acquired. Significant assumptions used in valuing the reporting unit included revenue growth rates ranging from 2% to 5% annually and a discount rate of 17.5%.
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