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Section 1: 10-Q (QUARTERLY REPORT)

celp-10q_093017.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q  

 

(MARK ONE)

 

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

 

For the quarterly period ended September 30, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM _________ TO _________

 

Commission File Number 001-36260

 

CYPRESS ENERGY PARTNERS, L.P. 

(Exact name of Registrant as specified in its charter)

 

Delaware   61-1721523
(State of or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
5727 South Lewis Avenue, Suite 300    
Tulsa, Oklahoma   74105
(Address of principal executive offices)   (zip code)

 

Registrant’s telephone number, including area code: (918) 748-3900 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    Accelerated filer   Non-accelerated filer    Smaller reporting company   Emerging growth company

(Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

 

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

 

As of November 7, 2017, the registrant had 11,889,958 common units outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:       None.

 

 

 

 

 

  

CYPRESS ENERGY PARTNERS, L.P. 

 

Table of Contents

 

     Page
PART I – FINANCIAL INFORMATION  
   
ITEM 1. Condensed Consolidated Financial Statements 5
     
Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 5
     
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 6
     
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 7
     
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 8
     
Condensed Consolidated Statement of Owners’ Equity for the Nine Months Ended September 30, 2017 9
     
Notes to the Condensed Consolidated Financial Statements 10
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
     
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 55
     
ITEM 4. Controls and Procedures 55
     
PART II – OTHER INFORMATION  
   
ITEM 1. Legal Proceedings 56
     
ITEM 1A. Risk Factors 56
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 56
     
ITEM 3. Defaults upon Senior Securities 56
     
ITEM 4. Mine Safety Disclosures 56
     
ITEM 5. Other Information 56
     
ITEM 6. Exhibits 57
     
SIGNATURES 58

  

2  

 

 

NAMES OF ENTITIES

 

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to “Cypress Energy Partners, L.P.,” “our partnership,” “we,” “our,” “us,” or like terms, refer to Cypress Energy Partners, L.P. and its subsidiaries.

 

References to:

 

  Brown” refers to Brown Integrity, LLC, a 51% owned subsidiary of CEP LLC;

  

   CEP LLC” refers to Cypress Energy Partners, LLC, a wholly owned subsidiary of the Partnership;

 

  CES LLC” refers to Cypress Energy Services, LLC, a wholly owned subsidiary that performs management services for our salt water disposal (“SWD”) facilities, as well as a third party facility;

 

  CF Inspection” refers to CF Inspection Management, LLC, owned 49% by TIR-PUC and consolidated under generally accepted accounting principles by TIR-PUC.  CF Inspection is 51% owned, managed and controlled by Cynthia A. Field, an affiliate of Holdings;

 

  General Partner” refers to Cypress Energy Partners GP, LLC, a subsidiary of Cypress Energy GP Holdings, LLC;

 

  Holdings” refers to Cypress Energy Holdings, LLC, the owner of Holdings II;

 

  Holdings II” refers to Cypress Energy Holdings II, LLC, the owner of 5,610,549 common units, representing 47.2% of our outstanding common units;

 

  IS” refers to our Integrity Services business segment;

 

  Partnership” refers to the registrant, Cypress Energy Partners, L.P.;

 

  PIS” refers to our Pipeline Inspection Services business segment;

 

  TIR Entities” refer collectively to  TIR LLC, TIR-Canada, TIR-NDE, TIR-PUC and CF Inspection;

 

  TIR LLC” refers to Tulsa Inspection Resources, LLC, a wholly owned subsidiary of CEP LLC;

 

  TIR-Canada” refers to Tulsa Inspection Resources – Canada ULC, a wholly owned subsidiary of CEP LLC;

 

  TIR-NDE” refers to Tulsa Inspection Resources – Nondestructive Examination, LLC, a wholly owned subsidiary of CEP LLC;

 

  TIR-PUC” refers to Tulsa Inspection Resources – PUC, LLC, a subsidiary of TIR LLC that has elected to be treated as a corporation for federal income tax purposes; and
     
  W&ES” refers to our Water and Environmental Services business segment.

 

3  

 

 

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

 

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties and we can give no assurance that such expectations or assumptions will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements are described under “Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in this report. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report on Form 10-Q and speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

4  

 

 

PART I.   FINANCIAL INFORMATION

 

ITEM 1. Unaudited Condensed Consolidated Financial Statements

 

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Balance Sheets

 As of September 30, 2017 and December 31, 2016

 (in thousands, except unit data) 

 

    September 30,     December 31,  
    2017     2016  
             
ASSETS                
Current assets:                
Cash and cash equivalents   $ 19,238     $ 26,693  
Trade accounts receivable, net     49,945       38,482  
Prepaid expenses and other     1,610       1,042  
Total current assets     70,793       66,217  
Property and equipment:                
Property and equipment, at cost     20,355       22,459  
Less:  Accumulated depreciation     8,634       7,840  
Total property and equipment, net     11,721       14,619  
Intangible assets, net     26,180       29,624  
Goodwill     55,430       56,903  
Other assets     188       149  
Total assets   $ 164,312     $ 167,512  
                 
LIABILITIES AND OWNERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 2,171     $ 1,690  
Accounts payable - affiliates     3,568       1,638  
Accrued payroll and other     12,242       7,585  
Income taxes payable     748       1,011  
Total current liabilities     18,729       11,924  
Long-term debt     136,142       135,699  
Deferred tax liabilities           362  
Asset retirement obligations     161       139  
Total liabilities     155,032       148,124  
                 
Commitments and contingencies - Note 9                
                 
Owners’ equity:                
Partners’ capital:                
Common units (11,889,958 and 5,945,348 units outstanding at September 30, 2017 and December 31, 2016, respectively)     34,133       (7,722 )
Subordinated units (5,913,000 units outstanding at December 31, 2016)           50,474  
General partner     (25,876 )     (25,876 )
Accumulated other comprehensive loss     (2,725 )     (2,538 )
Total partners’ capital     5,532       14,338  
Noncontrolling interests     3,748       5,050  
Total owners’ equity     9,280       19,388  
Total liabilities and owners’ equity   $ 164,312     $ 167,512  

 

 See accompanying notes. 

 

5

 

 

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Statements of Operations

 For the Three and Nine Months Ended September 30, 2017 and 2016

 (in thousands, except unit and per unit data)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2017     2016     2017     2016  
                         
 Revenues   $ 77,682     $ 81,806     $ 216,971     $ 227,591  
 Costs of services     68,292       71,880       192,643       202,540  
 Gross margin     9,390       9,926       24,328       25,051  
                                 
 Operating costs, expenses and other:                                
 General and administrative     5,574       5,056       16,013       16,805  
 Depreciation, amortization and accretion     1,184       1,214       3,561       3,685  
 Impairments                 3,598       10,530  
 Losses on asset disposals, net     208             95        
 Operating income (loss)     2,424       3,656       1,061       (5,969 )
                                 
 Other (expense) income:                                
 Interest expense, net     (1,907 )     (1,641 )     (5,411 )     (4,878 )
 Foreign currency gains     557             824        
 Other, net     17       210       122       257  
 Net income (loss) before income tax expense     1,091       2,225       (3,404 )     (10,590 )
 Income tax expense     529       227       458       389  
 Net income (loss)     562       1,998       (3,862 )     (10,979 )
                                 
 Net Income (loss) attributable to noncontrolling interests     8       81       (1,290 )     (4,898 )
 Net income (loss) attributable to partners / controlling interests     554       1,917       (2,572 )     (6,081 )
                                 
 Net loss attributable to general partner     (1,000 )     (1,431 )     (2,750 )     (5,366 )
 Net income (loss) attributable to limited partners   $ 1,554     $ 3,348     $ 178     $ (715 )
                                 
 Net income (loss) attributable to limited partners allocated to:                                
 Common unitholders   $ 1,554     $ 1,676     $ 178     $ (358 )
 Subordinated unitholders           1,672             (357 )
    $ 1,554     $ 3,348     $ 178     $ (715 )
                                 
 Net income (loss) per common limited partner unit                                
 Basic   $ 0.13     $ 0.28     $ 0.02     $ (0.06 )
 Diluted   $ 0.13     $ 0.27     $ 0.02     $ (0.06 )
                                 
 Net income (loss) per subordinated limited partner unit - basic and diluted   $     $ 0.28     $     $ (0.06 )
                                 
 Weighted average common units outstanding                                
 Basic     11,884,196       5,939,158       10,902,838       5,930,718  
 Diluted     11,994,881       6,158,961       11,111,454       5,930,718  
                                 
 Weighted average subordinated units outstanding - basic and diluted           5,913,000       974,670       5,913,000  

 

 See accompanying notes. 

 

6

 

 

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 For the Three and Nine Months Ended September 30, 2017 and 2016

 (in thousands) 

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2017     2016     2017     2016  
                         
 Net income (loss)   $ 562     $ 1,998     $ (3,862 )   $ (10,979 )
 Other comprehensive income (loss) -                                
 foreign currency translation     (207 )     (71 )     (187 )     515  
                                 
 Comprehensive income (loss)   $ 355     $ 1,927     $ (4,049 )   $ (10,464 )
                                 
 Comprehensive income (loss) attributable to noncontrolling interests     8       81       (1,290 )     (4,898 )
 Comprehensive loss attributable to general partner     (1,000 )     (1,431 )     (2,750 )     (5,366 )
                                 
 Comprehensive income (loss) attributable to limited partners   $ 1,347     $ 3,277     $ (9 )   $ (200 )

 

 See accompanying notes. 

 

7

 

 

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Statements of Cash Flows

 For the Nine Months Ended September 30, 2017 and 2016

 (in thousands) 

 

    Nine Months Ended
September 30,
 
    2017     2016  
 Operating activities:                
 Net loss   $ (3,862 )   $ (10,979 )
 Adjustments to reconcile net loss to net cash provided by operating activities:                
 Depreciation, amortization and accretion     4,378       4,354  
 Impairments     3,598       10,530  
 (Gains) losses on asset disposals, net     95       (2 )
 Interest expense from debt issuance cost amortization     443       426  
 Equity-based compensation expense     1,136       829  
 Equity in earnings of investee     (98 )     (234 )
 Distributions from investee     75       138  
 Deferred tax benefit, net     (361 )     (39 )
 Non-cash allocated expenses     1,750       2,866  
 Foreign currency gains     (824 )      
 Changes in assets and liabilities:                
 Trade accounts receivable     (11,583 )     4,999  
 Prepaid expenses and other     (765 )     1,053  
 Accounts payable and accrued payroll and other     6,552       3,802  
 Income taxes payable     (271 )     (84 )
 Net cash provided by operating activities     263     17,659  
                 
 Investing activities:                
 Proceeds from fixed asset disposals, including insurance proceeds     1,578       3  
 Purchase of property and equipment     (1,182 )     (932 )
 Net cash provided by (used in) investing activities     396       (929 )
                 
 Financing activities:                
 Repayment of long-term debt           (4,000 )
 Taxes paid related to net share settlement of equity-based compensation     (120 )     (100 )
 Contributions attributable to general partner     1,000       2,500  
 Distributions to limited partners     (9,813 )     (14,439 )
 Distributions to noncontrolling members     (12 )     (415 )
 Net cash used in financing activities     (8,945 )     (16,454 )
                 
 Effect of exchange rates on cash     831       477  
                 
 Net decrease in cash and cash equivalents     (7,455 )     753  
 Cash and cash equivalents, beginning of period     26,693       24,150  
 Cash and cash equivalents, end of period   $ 19,238     $ 24,903  
                 
 Non-cash items:                
 Changes in accounts payable excluded from capital expenditures   $ 320     $ 76  

 

 See accompanying notes. 

 

8

 

 

 CYPRESS ENERGY PARTNERS, L.P.

 Unaudited Condensed Consolidated Statement of Owners’ Equity

 For the Nine Months Ended September 30, 2017

 (in thousands)

 

    General
Partner
    Common
Units
    Subordinated Units     Accumulated Other Comprehensive Loss     Noncontrolling Interests     Total Owners’ Equity  
                                     
 Owners’ equity at December 31, 2016   $ (25,876 )   $ (7,722 )   $ 50,474     $ (2,538 )   $ 5,050     $ 19,388  
Net income (loss) for the period January 1, 2017 through September 30, 2017     (2,750 )     178                   (1,290 )     (3,862 )
Foreign currency translation adjustment                       (187 )           (187 )
Contributions attributable to general partner     2,750                               2,750  
Distributions to partners           (7,408 )     (2,405 )                 (9,813 )
Distributions to noncontrolling interests                             (12 )     (12 )
Conversion of Subordinated Units to Common Units           48,111       (48,111 )                  
Equity-based compensation           1,094       42                   1,136  
Taxes paid related to net share settlement of equity-based compensation           (120 )                       (120 )
                                                 
 Owners’ equity at September 30, 2017   $ (25,876 )   $ 34,133     $     $ (2,725 )   $ 3,748     $ 9,280  

 

See accompanying notes.

 

9

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

1. Organization and Operations

 

Cypress Energy Partners, L.P. (the “Partnership”) is a Delaware limited partnership formed in 2013 to provide independent pipeline inspection and integrity services to producers, public utility companies, and pipeline companies and to provide salt water disposal (“SWD”) and other water and environmental services to U.S. onshore oil and natural gas producers and trucking companies. Trading of our common units began January 15, 2014 on the New York Stock Exchange under the symbol “CELP”.

 

Our business is organized into the Pipeline Inspection Services (“PIS”), Integrity Services (“IS”), and Water and Environmental Services (“W&ES”) segments. PIS provides pipeline inspection and other services to energy exploration and production (“E&P”) companies, public utility companies, and midstream companies and their vendors throughout the United States and Canada. The inspectors of PIS perform a variety of inspection services on midstream pipelines, gathering systems, and distribution systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. IS provides independent integrity services to major natural gas and petroleum pipeline companies and to pipeline construction companies located throughout the United States. Field personnel in this segment primarily perform hydrostatic testing on newly-constructed and existing natural gas and petroleum pipelines. W&ES provides services to oil and natural gas producers and trucking companies through its ownership and operation of eight commercial SWD facilities in the Bakken Shale region of the Williston Basin in North Dakota and two SWD facilities in the Permian Basin in Texas. All of the facilities utilize specialized equipment and remote monitoring to minimize downtime and increase efficiency for peak utilization. These facilities also contain oil skimming processes that remove oil from water delivered to the sites. In addition to these SWD facilities, we provide management and staffing services for an SWD facility pursuant to a management agreement (see Note 7). We also own a 25% member interest in this managed SWD facility.

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Unaudited Condensed Consolidated Financial Statements as of September 30, 2017 and for the nine months ended September 30, 2017 and 2016 include our accounts and those of our controlled subsidiaries. Investments over which we exercise significant influence, but do not control, are accounted for using the equity method of accounting. All significant intercompany transactions and account balances have been eliminated in consolidation. The Unaudited Condensed Consolidated Balance Sheet at December 31, 2016 is derived from audited financial statements.

 

The accompanying Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Unaudited Condensed Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 2016 included in our Form 10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of the Partnership’s Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

 

Significant Accounting Policies

 

Our significant accounting policies are consistent with those disclosed in Note 2 to our audited financial statements as of and for the year ended December 31, 2016 included in our Form 10-K.

  

10

 

 

CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Accounts Receivable and Allowance for Bad Debts

 

We grant unsecured credit to customers under normal industry standards and terms, and have established policies and procedures that allow for an evaluation of each customer’s creditworthiness. The Partnership determines allowances for bad debts based on management’s assessment of the creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. In the first quarter of 2017, we received $0.3 million on accounts receivable previously reserved, which we recorded as a reduction to general and administrative expense in our Unaudited Consolidated Statements of Operations.

 

Income Taxes

 

As a limited partnership, we generally are not subject to federal, state, or local income taxes. The tax on our net income is generally borne by the individual partners. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) of the partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.

 

The income of Tulsa Inspection Resources – Canada, ULC, our Canadian subsidiary, is taxable in Canada. Tulsa Inspection Resources – PUC, LLC, a subsidiary of our PIS segment that performs pipeline inspection services for utility customers, and Brown Integrity – PUC, LLC, a 51% owned subsidiary, have elected to be taxed as corporations for U.S. federal income tax purposes, and therefore, these subsidiaries are subject to U.S. federal and state income tax. The amounts recognized as income tax expense (benefit), income taxes payable, and deferred tax liabilities in our Unaudited Condensed Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states, most notably franchise taxes assessed by the state of Texas.

 

As a publicly-traded partnership, we are subject to a statutory requirement that 90% of our total gross income classify as “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements), determined on a calendar-year basis. If our qualifying income does not meet this statutory requirement, we could be taxed as a corporation for federal and state income tax purposes. Our income has met the statutory qualifying income requirement for each year since our IPO.

 

Noncontrolling Interest

 

We own a 51% interest in Brown Integrity, LLC (“Brown”) and a 49% interest in CF Inspection Management, LLC (“CF Inspection”). The accounts of these subsidiaries are included in our Unaudited Condensed Consolidated Financial Statements. The portion of the net income (loss) of these entities that is attributable to outside owners is reported in net income (loss) attributable to noncontrolling interests in our Unaudited Condensed Consolidated Statements of Operations, and the portion of the net assets of these entities that is attributable to outside owners is reported in noncontrolling interests in our Unaudited Condensed Consolidated Balance Sheets.

 

Property and Equipment

 

Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, computer and office equipment, and vehicles. We record property and equipment at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. We depreciate property and equipment on a straight-line basis over the estimated useful lives of the assets. Upon retirement or disposition of an asset, we remove the cost and related accumulated depreciation from the balance sheet and report the resulting gain or loss, if any, in the Unaudited Condensed Consolidated Statement of Operations.

 

11

 

 

CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Identifiable Intangible Assets

 

Our intangible assets consist primarily of customer relationships, trade names, and our database of inspectors. We recorded these intangible assets as part of our accounting for the acquisitions of businesses, and we amortize these assets on a straight-line basis over their estimated useful lives, which typically range from 5 – 20 years.

 

We review our intangible assets for impairment whenever events or circumstances indicate that the asset group to which they relate may be impaired. To perform an impairment assessment, we first determine whether the cash flows expected to be generated from the asset group exceed the carrying value of the asset group. If such estimated cash flows do not exceed the carrying value of the asset group, we reduce the carrying values of the assets to their fair values and record a corresponding impairment loss.

 

Goodwill

 

Goodwill is not amortized, but is subject to an annual review for impairment on November 1 (or at other dates if events or changes in circumstances indicate that the carrying value of goodwill may be impaired) at a reporting unit level. The reporting units used to evaluate and measure goodwill for impairment are determined primarily from the manner in which the business is managed or operated. We have determined that our PIS, IS, and W&ES segments are the appropriate reporting units for testing goodwill impairment.

 

To perform a goodwill impairment assessment, we perform an analysis to assess whether it is more likely than not that the fair value of the reporting unit exceeds its carrying value. If we determine that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, we reduce the carrying value of goodwill and record a corresponding impairment expense.

 

Impairments of Long-Lived Assets

 

We assess property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation on operating expenses, and the outlook for national or regional market supply and demand for the services we provide.

 

Accrued Payroll and Other

 

Accrued payroll and other on our Unaudited Condensed Consolidated Balance Sheets includes the following:

 

    September 30,
2017
    December 31,
2016
 
      (in thousands)  
                 
Accrued payroll   $ 9,975     $ 5,594  
Customer deposits     1,393       1,361  
Other     874       630  
    $ 12,242     $ 7,585  

 

Foreign Currency Translation

 

Our Unaudited Condensed Consolidated Financial Statements are reported in U.S. dollars. We translate our Canadian-dollar-denominated assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate our Canadian-dollar-denominated revenues and expenses into U.S. dollars at the average exchange rate in effect during the period.

 

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CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Our Unaudited Condensed Consolidated Balance Sheet at September 30, 2017 includes $2.7 million of accumulated other comprehensive loss associated with accumulated currency translation adjustments, all of which relate to our Canadian operations. If at some point in the future we were to sell or substantially liquidate our Canadian operations, we would reclassify the balance in accumulated other comprehensive loss to other accounts within Partners’ capital, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net income.

 

Our Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated subsidiaries are eliminated in our Unaudited Condensed Consolidated Balance Sheets. Beginning April 1, 2017, we report currency translation adjustments on these intercompany payables and receivables within foreign currency gains in our Unaudited Condensed Consolidated Statements of Operations, with offsetting amounts reported within other comprehensive income (loss) in our Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss).

 

Subordination

 

With the payment of the 2016 fourth quarter distribution and the fulfillment of other requirements associated with the termination of the subordination period, the Partnership emerged from subordination effective February 14, 2017, and the 5,913,000 subordinated units converted into common units on a one-for-one basis.

 

New Accounting Standards

 

In 2017, the Partnership adopted the following new accounting standards issued by the Financial Accounting Standards Board (“FASB”):

 

The FASB issued Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensation in March 2016. This ASU gives entities the option to account for forfeitures of share-based awards when the forfeitures occur (previously, entities were required to estimate future forfeitures and reduce their share-based compensation expense accordingly). We adopted this new standard on January 1, 2017 and elected to account for forfeitures as they occur. The adoption of this ASU had no significant effect on our Unaudited Condensed Consolidated Financial Statements.

 

The FASB issued ASU 2017-04 – Intangibles – Goodwill and Other in January 2017. The objective of this guidance is to simplify how an entity is required to calculate the amounts of goodwill impairments. We adopted this new standard effective January 1, 2017 in order to simplify the measurement process of any future impairments of goodwill. Under the new standard, we perform a goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).

 

Other accounting guidance proposed by the FASB that may impact our Unaudited Condensed Consolidated Financial Statements which we have not yet adopted include:

 

The FASB issued ASU 2016-02 – Leases in February 2016. This guidance attempts to increase transparency and comparability among organizations by recognizing certain lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and this new guidance is the recognition on the balance sheet of certain lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determining the impact this guidance will have on our Unaudited Condensed Consolidated Financial Statements.

 

The FASB issued ASU 2014-09 – Revenue from Contracts with Customers in May 2014. ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common standard for recognizing revenue for GAAP and International Financial Reporting Standards that is applicable to all organizations. We will be required to adopt this standard in 2018 and to apply its provisions either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application (modified retrospective method). Although we continue to evaluate the financial impact of this ASU on the Partnership, we currently plan to adopt this standard utilizing the modified retrospective method and do not anticipate that the adoption of this ASU will materially impact our financial position, results of operations or cash flows.

 

 

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CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

3. Impairments

 

In the first quarter of 2017, the largest customer of TIR-Canada, the Canadian subsidiary of our PIS segment, completed a bid process and selected different service providers for its inspection projects. During the nine months ended September 30, 2017, pipeline inspection services to this customer accounted for approximately $18.8 million of revenue and $1.3 million of gross margin, which represented approximately 84% of the revenues and 89% of the gross margin of our Canadian operations (and approximately 9% of our consolidated revenues and 5% of our consolidated gross margin for the nine months ended September 30, 2017). In consideration of the loss of this contract, we recorded impairments to the carrying values of certain intangible assets of $1.3 million in the first quarter of 2017. Of this amount, $1.1 million related to customer relationships and $0.2 million related to trade names. Based on discounted cash flow calculations, which represent Level 3 non-recurring fair value adjustments, we concluded the fair value of the customer relationships and trade names was zero, and thus, have written off the full amounts. We continue to perform inspection and integrity work for customers in Canada (including integrity work for the customer referred to above).

 

In the first quarter of 2017, we recorded an impairment of $0.7 million to the property, plant and equipment at one of our SWD facilities. We have temporarily shut down the operations at this facility because of low volumes due to competition in the area and due to low levels of exploration and production activity near the facility. Because of the decline in revenues and the temporary shutdown of the facility, we performed a discounted cash flow calculation, which represents a Level 3 non-recurring fair value adjustment, concluding that the fair value of the facility was limited to the fair value of the land. As such, we recorded an impairment to reduce the carrying value of the facility to $0.1 million in the first quarter of 2017, all of which is attributable to land.

 

In the first quarter of 2017, we recorded an impairment of $1.6 million to the goodwill of our Integrity Services segment. Revenues of this segment were lower than we had expected for the first quarter of 2017. In addition, for this segment, the level of bidding activity for work is typically high in March and April, once customers have finalized their budgets for the upcoming year. While we won bids on a number of projects, and our backlog began to improve, the improvement in the backlog was slower than we had originally anticipated and we revised downward our expectations of the near-term operating results of the segment. For our goodwill impairment assessment, we calculated an estimated fair value of the Integrity Services segment using a discounted cash flow analysis. We prepared two calculations of cash flows for the next twelve months, one of which represented our estimate of the high end of the range of probable cash flows and the other of which represented our estimate of the low range of probable cash flows. We estimated cash flows for the following four years assuming a 2% increase in each succeeding year, to account for estimated inflation, and calculated a terminal value using a Gordon Growth model. We then discounted the future cash flows at a discount rate of 18%. The mid-point of the estimated fair values produced by these two calculations indicated that a full impairment of the value of the goodwill of the Integrity Services segment was warranted. These calculations represent Level 3 non-recurring fair value measurements. If anticipated operating results in this segment do not meet expectations, it is possible that finite-lived intangibles may also become impaired in the future.

 

In January 2017, a lightning strike at our Orla SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. As a result, we wrote off the net book value of the surface equipment ($1.3 million) of the facility. In May 2017, we received $1.6 million of insurance proceeds. We recorded a gain of $0.3 million in losses on asset disposals, net on our Unaudited Condensed Consolidated Statement of Operations in the second quarter of 2017 for the difference between the proceeds received and the net book value of the property that was destroyed. During the nine months ended September 30, 2017, we incurred approximately $0.2 million of temporary setup and other costs associated with this incident that are not recoverable through insurance. These expenses are reported within losses on asset disposals, net in our Unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2017.

 

In July 2017, a lightning strike at our Grassy Butte SWD facility initiated a fire that effectively destroyed the surface equipment at the facility. As a result of previously-recorded impairments, the net book value of the property, plant and equipment at this facility was $0 at the time of the fire. During the three months ended September 30, 2017, we recorded $0.2 million of expense associated with cleanup costs that are not recoverable from insurance, which is reported within losses on asset disposals, net in our Unaudited Condensed Consolidated Statements of Operations. At September 30, 2017, we recorded a receivable of $0.1 million for expected insurance recoveries, which is reported within prepaid expenses and other on our Unaudited Condensed Consolidated Balance Sheet.  In November 2017, we reached agreement with an insurer under which we expect to receive $0.7 million of insurance proceeds during the three months ending December 31, 2017 as partial payment for our property damage and property cleanup claims associated with this incident. We expect to record a $0.6 million gain upon receipt of these proceeds.

 

 

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CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

4. Credit Agreement

 

We are party to a credit agreement (as amended, the “Credit Agreement”) that provides up to $200.0 million in borrowing capacity, subject to certain limitations. The Credit Agreement includes a working capital revolving credit facility (“Working Capital Facility”), which provides up to $75.0 million in borrowing capacity to fund working capital needs, and an acquisition revolving credit facility (“Acquisition Facility”), which provides up to $125.0 million in borrowing capacity to fund acquisitions and expansion projects. In addition, the Credit Agreement provides for an accordion feature that allows us to increase the availability under the facilities by an additional $125.0 million if lenders agree to increase their commitments. The Credit Agreement matures December 24, 2018.

 

Outstanding borrowings at September 30, 2017 and December 31, 2016 under the Credit Agreement were as follows:

 

    September 30,
2017
    December 31,
2016
 
      (in thousands)  
                 
Working Capital Facility   $ 48,000     $ 48,000  
Acquisition Facility     88,900       88,900  
Total borrowings     136,900       136,900  
Debt issuance costs     (758 )     (1,201 )
Long-term debt   $ 136,142     $ 135,699  

 

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 our calculated borrowing base, a principal payment in the amount of the excess is due upon submission of the borrowing base calculation. Available borrowings under the Acquisition Facility may be limited by certain financial covenant ratios as defined in the Credit Agreement. The obligations under our Credit Agreement are secured by a first priority lien on substantially all of our assets.

 

All borrowings under the Credit Agreement bear interest, at our option, on a leveraged based grid pricing at (i) a base rate plus a margin of 1.25% to 2.75% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.25% to 3.75% per annum (“LIBOR Borrowings”). The applicable margin is determined based on the leverage ratio of the Partnership, as defined in the Credit Agreement. Generally, the interest rate on our Credit Agreement borrowings ranged between 3.90% and 4.99% for the nine months ended September 30, 2017 and 3.54% and 4.28% for the nine months ended September 30, 2016. Interest on Base Rate Borrowings is payable monthly. Interest on LIBOR Borrowings is paid upon maturity of the underlying LIBOR contract, but no less often than quarterly. Commitment fees are charged at a rate of 0.50% on any unused credit and are payable quarterly. Interest paid during the three months ended September 30, 2017 and 2016 was $1.7 million and $1.6 million, respectively, including commitment fees. Interest paid during the nine months ended September 30, 2017 and 2016 was $5.0 million and $4.3 million, respectively, including commitment fees.

 

Our Credit Agreement contains various customary affirmative and negative covenants and restrictive provisions. Our Credit Agreement also requires maintenance of certain financial covenants, including a combined total adjusted leverage ratio (as defined in our Credit Agreement) of not more than 4.0 to 1.0 and an interest coverage ratio (as defined in our Credit Agreement) of not less than 3.0 to 1.0. At September 30, 2017, our combined total adjusted leverage ratio was 3.77 to 1.0 and our interest coverage ratio was 3.08 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 September 30, 2017. Working capital borrowings, which are fully secured by our net working capital, are subject to a monthly borrowing base and are excluded from our debt compliance ratios.

 

In addition, our Credit Agreement restricts our ability to make distributions on, or redeem or repurchase, our equity interests. However, we may make distributions of available cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under our Credit Agreement, the borrowers and the guarantors are in compliance with the financial covenants, the borrowing base (which includes 100% of cash on hand) exceeds the amount of outstanding credit extensions under the Working Capital Facility by at least $5.0 million and at least $5.0 million in lender commitments are available to be drawn under the Working Capital Facility.

 

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CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

Our Credit Agreement matures on December 24, 2018 and, although unfavorable financial results may impact our ability to meet our current debt covenants, we believe it is probable that we will be able to maintain compliance with the financial ratio covenants through the maturity date of the Credit Agreement through some combination of 1) improved operating results, 2) refinancing the Credit Agreement, and/or 3) future sponsor support from Holdings.

 

We plan to improve our operating results through a combination of 1) enhanced business development efforts in our Pipeline Inspection Services and Integrity Services segments, including our continued focus on higher margin services, 2) the re-opening of our Orla, TX and our Grassy Butte, ND SWD facilities that were struck by lightning earlier this year; 3) enhancing our SWD activities due to additional drilling and completion activities in both the Permian and Bakken regions; and 4) capital expansion in our Water and Environmental Services segment (specifically, we are in the process of building a water gathering system at one of our North Dakota facilities).

 

In anticipation of the Credit Agreement maturing in December 2018, we have an executed mandate and term sheet with the lead bank in the Credit Agreement regarding a refinancing of the Credit Agreement, subject to syndication. The new credit agreement will require a reduction in our current outstanding debt balance and will have modified financial ratio covenants. The term sheet provides for conditions precedent to reduce the principal balance, which may include some combination of 1) using cash currently on the balance sheet; 2) issuing some sort of equity to the owners of Holdings or third parties; 3) issuing convertible debt to the owners of Holdings or third parties; 4) monetizing a portion of our investment-grade accounts receivable with Holdings or a third-party; and/or 5) asset sales of some of our SWD facilities. Although it is our intent to refinance our Credit Agreement under the executed term sheet, we can offer no assurances that the refinancing of our Credit Agreement will be consummated under terms acceptable to us given the conditions precedent outlined in the term sheet.

 

Holdings has continued to support the Partnership during the oil and gas economic downturn and has provided sponsor support of $6.3 million during the year ended December 31, 2016 and $2.8 million during the nine months ended September 30, 2017. The owners of Holdings, who collectively own approximately 64% of our common units, remain incentivized and have the financial wherewithal to continue to support us in order to maintain compliance with the financial ratio covenants through the maturity date of the Credit Agreement.

 

5. Income Taxes

 

The income tax expense (benefit) reported in our Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 differs from the statutory tax rate of 35% due to the fact that, as a partnership, we are generally not subject to U.S. federal or state income taxes. Our income tax provision relates primarily to our corporate subsidiaries that service public utility customers, which are subject to U.S. federal and state income taxes, our Canadian subsidiary, which is subject to Canadian federal and provincial income taxes, and to certain other state income taxes, including the Texas franchise tax.

 

6. Equity Compensation

 

Our General Partner has adopted a long-term incentive plan (“LTIP”) that authorizes the issuance of up to 1,182,600 common units. Certain directors and employees of the Partnership have been awarded Phantom Restricted Units (“Units”) under the terms of the LTIP. The fair value of the awards is determined based on the quoted market value of the publicly-traded common units at each grant date, adjusted for certain discounts. Compensation expense is recorded on a straight-line basis over the vesting period of the grant. We recorded expense of $1.1 million and $0.7 million during the nine months ended September 30, 2017 and 2016, respectively related to the Unit awards. During November 2017, an officer with 76,345 unvested LTIP units resigned. During the three months ending December 31, 2017, we expect to record a reduction to expense of $0.3 million related to the forfeiture of these units upon this officer’s departure.

 

The following table summarizes the LTIP Unit activity for the nine months ended September 30, 2017 and 2016:

 

    Nine Months Ended September 30,  
    2017     2016  
                         
      Number of Units       Weighted Average Grant Date Fair Value / Unit       Number of Units       Weighted Average Grant Date Fair Value / Unit  
                                 
 Units at January 1     573,902     $ 9.86       361,698     $ 14.30  
 Units granted     249,120     $ 7.11       336,847     $ 6.34  
 Units vested and issued     (43,930 )   $ 16.56       (34,023 )   $ 10.33  
 Units forfeited     (39,722 )   $ 8.51       (62,951 )   $ 10.93  
 Units at June 30     739,370     $ 8.61       601,571     $ 10.42  

 

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CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

The majority of the awards vest in three tranches, with one-third of the units vesting three years from the grant date, one-third vesting four years from the grant date, and one-third vesting five years from the grant date. However, certain of the awards have different, and typically shorter, vesting periods. For two of the grants, which total 77,495 units, vesting is contingent upon the recipient meeting certain performance targets. Distributions are not paid on unvested Units during the vesting period. Total unearned compensation associated with the Unit awards was $3.8 million at September 30, 2017, and the awards had an average remaining life of 2.29 years.

 

7. Related-Party Transactions

 

Omnibus Agreement and Other Support from Holdings

 

We are party to an omnibus agreement with Holdings and other related parties. The omnibus agreement governs the following matters, among other things:

 

  our payment of a quarterly administrative fee in the amount of $1.0 million to Holdings for providing certain partnership overhead services, including certain executive management services by certain officers of our General Partner, and payroll services for substantially all employees required to manage and operate our businesses.  This fee also includes the incremental general and administrative expenses we incur as a result of being a publicly-traded partnership.  For the three months ended September 30, 2017, this fee was paid to Holdings in accordance with its terms and conditions.  For the six months ended June 30, 2017 and for the year ended December 31, 2016, Holdings provided sponsor support to the Partnership by waiving payment of the quarterly administrative fee;

 

  our right of first offer on Holdings’ and its subsidiaries’ assets used in, and entities primarily engaged in, providing SWD and other water and environmental services; and

 

  indemnification of us by Holdings for certain environmental and other liabilities, including events and conditions associated with the operation of assets that occurred prior to the closing of the IPO and our obligation to indemnify Holdings for events and conditions associated with the operation of our assets that occur after the closing of the IPO and for environmental liabilities related to our assets to the extent Holdings is not required to indemnify us.

 

So long as affiliates of Holdings control our General Partner, the omnibus agreement will remain in effect, unless we and Holdings agree to terminate it sooner. If affiliates of Holdings cease to control our General Partner, either party may terminate the omnibus agreement, provided that the indemnification obligations will remain in full force and effect in accordance with their terms. We and Holdings may agree to amend the omnibus agreement; however, amendments will also require the approval of the Conflicts Committee of our Board of Directors.

 

Holdings incurred expenses of $0.9 million on our behalf during the three months ended September 30, 2016, and $1.8 million and $2.9 million on our behalf during the nine months ended September 30, 2017 and 2016, respectively. These expenses are reported within general and administrative in the accompanying Unaudited Condensed Consolidated Statements of Operations and as contributions from general partner in the accompanying Unaudited Condensed Consolidated Statement of Owners’ Equity.

 

In addition to funding certain general and administrative expenses on our behalf, Holdings contributed $1.0 million and $0.5 million during the three months ended September 30, 2017 and 2016, respectively, and a total of $2.5 million in cash for the nine months ended September 30, 2016 attributable to the General Partner as a reimbursement of certain expenditures previously incurred by the Partnership. These payments are reflected as contributions attributable to general partner in the Unaudited Condensed Consolidated Statement of Owners’ Equity and as components of the net loss attributable to the general partner in the Unaudited Condensed Consolidated Statement of Operations for the three and nine month periods ended September 30, 2017 and 2016.

 

Total support from Holdings attributable to non-cash allocated expenses and the reimbursement of certain expenditures was $1.0 million and $2.8 million, respectively, for the three and nine months ended September 30, 2017 and $1.4 million and $5.4 million, respectively, for the three and nine months ended September 30, 2016.

 

Alati Arnegard, LLC

 

We provide management services to a 25% owned entity, Alati Arnegard, LLC (“Arnegard”). Management fee revenue earned from Arnegard totaled $0.2 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively. Accounts receivable from Arnegard were $0.1 million at September 30, 2017 and December 31, 2016, and are included in trade accounts receivable, net in the Unaudited Condensed Consolidated Balance Sheets.

  

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CYPRESS ENERGY PARTNERS, L.P.
Notes to the Unaudited Condensed Consolidated Financial Statements

 

8. Earnings per Unit and Cash Distributions

 

Our net income (loss) is attributable and allocable to several types of owners. Income (loss) attributable to noncontrolling interests represents 49% of the income of Brown and 51% of the income of CF Inspection. Net loss attributable to the general partner includes expenses incurred by Holdings and not charged to us, as well as contributions for reimbursements of expenses made to us by Holdings. Income attributable to common and subordinated units represents the remaining net income (loss), after consideration of amounts attributable to noncontrolling interests and to the general partner; such amounts were allocated to common and subordinated units ratably based on the weighted-average number of such units outstanding during the relevant time period. In February 2017, all of the outstanding subordinated units converted into common units. Since the subordinated units did not share in the distribution of cash generated subsequent to December 31, 2016, we did not allocate any income or loss after that date to the subordinated units.

 

Diluted net income (loss) per common and subordinated unit includes the dilutive impact of unvested unit awards granted as share-based compensation to employees and directors. Such awards had no dilutive effect during the nine months ended September 30, 2016 as we incurred net losses attributable to limited partners during those periods.

 

The following table summarizes the cash distributions declared and paid to our limited partners since our IPO.

 

Payment Date   Per Unit Cash Distributions     Total Cash  Distributions     Total Cash  Distributions to Affiliates (a)  
    (in thousands)  
       
May 15, 2014 (b)   $ 0.301389     $ 3,565     $ 2,264  
August 14, 2014     0.396844       4,693       2,980  
November 14, 2014     0.406413       4,806       3,052  
Total 2014 Distributions     1.104646       13,064       8,296  
                         
February 14, 2015     0.406413       4,806       3,052  
May 14, 2015     0.406413       4,808       3,053  
August 14, 2015     0.406413       4,809       3,087  
November 13, 2015     0.406413       4,809       3,092  
Total 2015 Distributions     1.625652       19,232       12,284  
                         
February 12, 2016     0.406413       4,810       3,107  
May 13, 2016     0.406413       4,812       3,099  
August 12, 2016     0.406413       4,817       3,103  
November 14, 2016     0.406413       4,819       3,105  
Total 2016 Distributions     1.625652       19,258       12,414  
                         
February 13, 2017     0.406413       4,823       3,107  
May 15, 2017     0.210000       2,495       1,606  
August 14, 2017     0.210000       2,495       1,607  
November 14, 2017 (c)     0.210000       2,497       1,608  
      1.036413       12,310       7,928  
                         
Total Distributions (through November 14, 2017 since IPO)   $ 5.392363     $ 63,864     $ 40,922  

 

(a) Approximately 64.4% of the Partnership’s outstanding common units at September 30, 2017 were held by affiliates.
(b) Distribution was pro-rated from the date of our IPO through March 31, 2014.
(c) Third quarter 2017 distribution was declared and will be paid in the fourth quarter of 2017.

 

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CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

9. Commitments and Contingencies

 

Security Deposits

 

We have various performance obligations which are secured with short-term security deposits of $0.5 million at September 30, 2017 and December 31, 2016, included in prepaid expenses and other on the Unaudited Condensed Consolidated Balance Sheets.

 

Employment Contract Commitments

 

We have employment agreements with certain members of management. These agreements provide for minimum annual compensation for specified terms, after which employment will continue on an “at will” basis. Certain agreements provide for severance payments in the event of specified termination of employment. At September 30, 2017, the aggregate commitment for future compensation and severance was approximately $0.7 million.

 

Compliance Audit Contingencies

 

Certain customer master service agreements (“MSA’s”) offer our customers the opportunity to perform periodic compliance audits, which include the examination of the accuracy of our invoices. Should our invoices be determined to be inconsistent with the MSA, the MSA’s may provide the customer the right to receive a credit or refund for any overcharges identified. At any given time, we may have multiple audits outstanding. At September 30, 2017, the Partnership had an estimated liability of $0.1 million recorded for such contingencies.

 

Legal Proceedings

 

On July 3, 2014, a group of former minority shareholders of Tulsa Inspection Resources, Inc. (“TIR Inc.”), formerly an Oklahoma corporation, filed a civil action in the United States District Court for the Northern District of Oklahoma (the “District Court”) 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 of the entities. The former shareholders of TIR Inc. claim that they did not receive sufficient value for their shares and are seeking compensatory and punitive damages. All claims against TIR LLC have been resolved by the District Court in TIR LLC’s favor, subject to appeal to the United States Court of Appeals for the Tenth Circuit, and plaintiffs have abandoned their claim for rescission of the merger. The remaining claims, none of which are asserted against the Partnership nor any subsidiary of the Partnership including TIR LLC, were adjudicated at jury trial that began on September 5, 2017. On September 14, 2017, the jury returned a unanimous verdict in favor of the defendants, finding that the value paid to the plaintiffs was fair and awarding them no damages.

 

On October 5, 2017, a former inspector for TIR LLC and Cypress Energy Management - TIR, LLC ("CEM TIR") filed a putative collective action lawsuit alleging that TIR LLC, CEM TIR and Cypress Energy Partners – Texas, LLC failed to pay a class of workers overtime in compliance with the Fair Labor Standards Act (“FLSA”) titled James Fithian, et al v. TIR LLC, et al in the United States District Court for the Western District of Texas, Midland Division. The plaintiff alleges he was a non-exempt employee of TIR LLC and that he and other potential class members were not paid overtime in compliance with the FLSA. The plaintiff seeks to proceed as a collective action and to receive unpaid overtime and other monetary damages, including attorney’s fees. TIR LLC, CEM TIR and Cypress Energy Partners – Texas, LLC deny the claims.

 

Internal Revenue Service Audit

 

In January 2016, we received notice from the Internal Revenue Service (“IRS”) that conveyed its intent to audit the consolidated income tax return of one of our predecessor entities for the 2012 tax year. This audit concluded during the third quarter of 2017 with no material effect on the Partnership or its subsidiaries.

 

19

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

10. Reportable Segments

 

Our operations consist of three reportable segments: (i) Pipeline Inspection Services (“PIS”), (ii) Integrity Services (“IS”), and (iii) Water and Environmental Services (“W&ES”).

 

PIS – This segment represents our pipeline inspection services operations. This segment provides independent inspection and integrity services to various energy, public utility, and pipeline companies. The inspectors in this segment perform a variety of inspection services on midstream pipelines, gathering and distribution systems, including data gathering and supervision of third-party construction, inspection, and maintenance and repair projects. Our results in this segment are driven primarily by the number and type of inspectors performing services for customers and the fees charged for those services, which depend on the nature and duration of the projects.

 

IS – This segment provides independent hydrostatic testing integrity services to major natural gas and petroleum pipeline companies, and to pipeline construction companies located throughout the United States. Field personnel in this segment primarily perform hydrostatic testing on newly-constructed and existing natural gas and petroleum pipelines. Results in this segment are driven primarily by field personnel performing services for customers and the fees charged for those services, which depend on the nature, scope, and duration of the projects.

 

W&ES – This segment includes the operations of ten SWD facilities and an ownership interest in one managed facility. Segment results are driven primarily by the volumes of water we inject into our SWD facilities and the fees we charge for our services. These fees are charged on a per-barrel basis and vary based on the quantity and type of saltwater disposed, competitive dynamics, and operating costs. In addition, for minimal marginal cost, we generate revenue by selling residual oil we recover from the disposed water.

 

Other – These amounts represent general and administrative expenses not specifically allocable to our reportable segments.

 

20

 

 

CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

The following tables show operating income (loss) by reportable segment and a reconciliation of segment operating income (loss) to net income (loss) before income tax expense.

 

    PIS     IS     W&ES     Other     Total  
      (in thousands)  
Three months ended September 30, 2017                                        
                                         
Revenues   $ 72,737     $ 2,834     $ 2,111     $     $ 77,682  
Costs of services     65,323       2,132       837             68,292  
Gross margin     7,414       702       1,274             9,390  
General and administrative     3,893  (a)     525  (a)     858       298     5,574  
Depreciation, amortization and accretion     577       157       450             1,184  
Losses on asset disposals, net                 208             208  
Operating income (loss)   $ 2,944     $ 20     $ (242 )   $ (298 )     2,424  
Interest expense, net                                     (1,907 )
Foreign currency gains                                     557  
Other, net                                     17  
Net income before income tax expense                                   $ 1,091  

 

(a) Amount includes $0.7 million and $0.3 million of administrative charges under the omnibus agreement charged directly to PIS and W&ES segments, respectivley.

 

Three months ended September 30, 2016                                        
                                         
Revenues   $ 75,313     $ 4,525     $ 1,968     $     $ 81,806  
Costs of services     67,579       3,558       743             71,880  
Gross margin     7,734       967       1,225             9,926  
General and administrative     2,920       514       462       1,160 (b)     5,056  
Depreciation, amortization and accretion     608       157       449             1,214  
Operating income (loss)   $ 4,206     $ 296     $ 314     $ (1,160 )   $ 3,656  
Interest expense, net                                     (1,641 )
Other, net                                     210  
Net income before income tax expense                                   $ 2,225  

 

(b) Amount includes $0.9 million of administrative charges incurred by Holdings on our behalf under the omnibus agreement not charged to separate segments.

 

21

 

 

CYPRESS ENERGY PARTNERS, L.P. 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

    PIS     IS     W&ES     Other     Total  
      (in thousands)  
Nine months ended September 30, 2017                                        
                                         
Revenues   $ 205,039     $ 5,927     $ 6,005     $     $ 216,971  
Costs of services     185,308       5,005       2,330             192,643  
Gross margin     19,731       922       3,675             24,328  
General and administrative     10,212  (a)     1,488  (a)     1,651       2,662 (b)     16,013  
Depreciation, amortization and accretion     1,755       471       1,335             3,561  
Impairments     1,329       1,581       688             3,598  
Losses on asset disposals, net     18             77             95  
Operating income (loss)   $ 6,417     $ (2,618 )   $ (76 )   $ (2,662 )     1,061  
Interest expense, net                                     (5,411 )
Foreign currency gains                                     824  
Other, net                                     122  
Net loss before income tax expense                                   $ (3,404 )

 

(a) Amount includes $0.7 million and $0.3 million of administrative charges under the omnibus agreement charged directly to PIS and W&ES segments, respectively.
(b)

Amount includes $1.8 million of administrative charges incurred by Holdings on our behalf under the omnibus agreement not charged to separate segments.

 

Nine months ended September 30, 2016                                        
                                         
Revenues   $ 209,632     $ 11,329     $ 6,630     $     $ 227,591  
Costs of services     189,788       9,668       3,084             202,540  
Gross margin     19,844       1,661       3,546             25,051  
General and administrative     9,439       2,388       1,501       3,477 (c)     16,805  
Depreciation, amortization and accretion     1,834       502       1,349             3,685  
Impairments           8,411       2,119             10,530  
Operating income (loss)   $ 8,571     $ (9,640 )   $ (1,423 )   $ (3,477 )   $ (5,969 )
Interest expense, net                                     (4,878 )
Other, net                                     257  
Net loss before income tax expense                                   $ (10,590 )

 

(c) Amount includes $2.9 million of administrative charges incurred by Holdings on our behalf under the omnibus agreement not charged to separate segments.

 

Total Assets                                        
                                         
September 30, 2017   $ 126,092     $ 9,979     $ 38,477     $ (10,236 )   $ 164,312  
                                         
December 31, 2016   $ 124,840     $ 12,079     $ 38,141     $ (7,548 )   $ 167,512  

 

22

 

  

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

11. Condensed Consolidating Financial Information

 

The following financial information reflects consolidating financial information of the Partnership and its wholly owned guarantor subsidiaries and non-guarantor subsidiaries for the periods indicated. The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of financial position, results of operations, or cash flows had the guarantor subsidiaries or non-guarantor subsidiaries operated as independent entities. The Partnership has not presented separate financial and narrative information for each of the guarantor subsidiaries or non-guarantor subsidiaries because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the guarantor subsidiaries and non-guarantor subsidiaries. The Partnership anticipates issuing debt securities that will be fully and unconditionally guaranteed by the guarantor subsidiaries. These debt securities will be jointly and severally guaranteed by the guarantor subsidiaries. There are no restrictions on the Partnership’s ability to obtain cash dividends or other distributions of funds from the guarantor subsidiaries.

 

23

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Balance Sheet

 As of September 30, 2017

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 ASSETS                                        
 Current assets:                                        
 Cash and cash equivalents   $ 567     $ 10,005     $ 8,666     $     $ 19,238  
 Trade accounts receivable, net           46,295       3,770       (120 )     49,945  
 Accounts receivable - affiliates           15,064             (15,064 )      
 Prepaid expenses and other     324       1,253       33             1,610  
 Total current assets     891       72,617       12,469       (15,184 )     70,793  
 Property and equipment:                                        
 Property and equipment, at cost           17,338       3,017             20,355  
 Less:  Accumulated depreciation           7,205       1,429             8,634  
 Total property and equipment, net           10,133       1,588             11,721  
 Intangible assets, net           22,179       4,001             26,180  
 Goodwill           53,914       1,516             55,430  
 Investment in subsidiaries     24,953       (3,383 )           (21,570 )      
 Notes receivable - affiliates           13,845             (13,845 )      
 Other assets           163       25             188  
 Total assets   $ 25,844     $ 169,468     $ 19,599     $ (50,599 )   $ 164,312  
                                         
 LIABILITIES AND OWNERS’ EQUITY                                        
 Current liabilities:                                        
 Accounts payable   $     $ 1,303     $ 868     $     $ 2,171  
 Accounts payable - affiliates     13,098             5,534       (15,064 )     3,568  
 Accrued payroll and other     97       11,508       757       (120 )     12,242  
 Income taxes payable           571       177             748  
 Total current liabilities     13,195       13,382       7,336       (15,184 )     18,729  
 Long-term debt     (758 )     131,400       5,500             136,142  
 Notes payable - affiliates                 13,845       (13,845 )      
 Deferred tax liabilities                              
 Asset retirement obligations           161                   161  
 Total liabilities     12,437       144,943       26,681       (29,029 )     155,032  
                                         
 Owners’ equity:                                        
 Total partners’ capital     9,659       20,777       (7,082 )     (17,822 )     5,532  
 Non-controlling interests     3,748       3,748             (3,748 )     3,748  
 Total owners’ equity     13,407       24,525       (7,082 )     (21,570 )     9,280  
 Total liabilities and owners’ equity   $ 25,844     $ 169,468     $ 19,599     $ (50,599 )   $ 164,312  

 

24

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Balance Sheet

 As of December 31, 2016

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 ASSETS                                        
 Current assets:                                        
 Cash and cash equivalents   $ 695     $ 20,251     $ 5,747     $     $ 26,693  
 Trade accounts receivable, net           33,046       6,125       (689 )     38,482  
 Accounts receivable - affiliates           12,622             (12,622 )      
 Prepaid expenses and other           996       46             1,042  
 Total current assets     695       66,915       11,918       (13,311 )     66,217  
 Property and equipment:                                        
 Property and equipment, at cost           19,366       3,093             22,459  
 Less:  Accumulated depreciation           6,798       1,042             7,840  
 Total property and equipment, net           12,568       2,051             14,619  
 Intangible assets, net           23,875       5,749             29,624  
 Goodwill           53,914       2,989             56,903  
 Investment in subsidiaries     29,454       (417 )           (29,037 )      
 Notes receivable - affiliates           13,662             (13,662 )      
 Other assets           139       10             149  
 Total assets   $ 30,149     $ 170,656     $ 22,717     $ (56,010 )   $ 167,512  
                                         
 LIABILITIES AND OWNERS’ EQUITY                                        
 Current liabilities:                                        
 Accounts payable   $     $ 1,653     $ 712     $ (675 )   $ 1,690  
 Accounts payable - affiliates     8,860             5,400       (12,622 )     1,638  
 Accrued payroll and other     15       7,082       503       (15 )     7,585  
 Income taxes payable           967       44             1,011  
 Total current liabilities     8,875       9,702       6,659       (13,312 )     11,924  
 Long-term debt     (1,201 )     131,400       5,500             135,699  
 Notes payable - affiliates                 13,662       (13,662 )      
 Deferred tax liabilities           8       354             362  
 Asset retirement obligations           139                   139  
 Total liabilities     7,674       141,249       26,175       (26,974 )     148,124  
                                         
 Owners’ equity:                                        
 Total partners’ capital     17,425       24,357       (3,458 )     (23,986 )     14,338  
 Non-controlling interests     5,050       5,050             (5,050 )     5,050  
 Total owners’ equity     22,475       29,407       (3,458 )     (29,036 )     19,388  
 Total liabilities and owners’ equity   $ 30,149     $ 170,656     $ 22,717     $ (56,010 )   $ 167,512  

 

25

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Statement of Operations

 For the Three Months Ended September 30, 2017

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 Revenues   $     $ 73,607     $ 7,762     $ (3,687 )   $ 77,682  
 Costs of services           65,042       6,937       (3,687 )     68,292  
 Gross margin           8,565       825             9,390  
                                         
 Operating costs, expenses and other:                                        
 General and administrative     297       4,617       660             5,574  
 Depreciation, amortization and accretion           1,027       157             1,184  
 Losses on asset disposals, net           208                   208  
 Operating income (loss)     (297 )     2,713       8             2,424  
                                         
 Other (expense) income:                                        
 Equity earnings (loss) in subsidiaries     920       (118 )           (802 )    
 Interest expense, net     (229 )     (1,460 )     (218 )           (1,907 )
 Foreign currency gains           141       416             557  
 Other, net           7       10             17  
 Net income (loss) before income tax expense     394       1,283       216       (802 )     1,091  
 Income tax expense           425       104             529  
 Net income (loss)     394       858       112       (802 )     562  
                                         
 Net Income (loss) attributable to noncontrolling interests           8                   8  
 Net income (loss) attributable to partners / controlling interests     394       850       112       (802 )     554  
                                         
 Net loss attributable to general partner     (1,000 )                       (1,000 )
 Net income (loss) attributable to limited partners   $ 1,394     $ 850     $ 112     $ (802 )   $ 1,554  

 

26

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Statement of Operations

 For the Three Months Ended September 30, 2016

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 Revenues   $     $ 67,408     $ 18,540     $ (4,142 )   $ 81,806  
 Costs of services           59,156       16,866       (4,142 )     71,880  
 Gross margin           8,252       1,674             9,926  
                                         
 Operating costs and expense:                                        
 General and administrative     1,161       2,905       990             5,056  
 Depreciation, amortization and accretion           1,029       185             1,214  
 Operating (loss)     (1,161 )     4,318       499             3,656  
                                         
 Other income (expense):                                        
 Equity earnings (loss) in subsidiaries     3,205       165             (3,370 )      
 Interest expense, net     (224 )     (1,226 )     (191 )           (1,641 )
 Other, net           205       5             210  
 Net income (loss) before income tax expense     1,820       3,462       313       (3,370 )     2,225  
 Income tax expense           176       51             227  
 Net income (loss)     1,820       3,286       262       (3,370 )     1,998  
                                         
 Net income attributable to non-controlling interests           81                   81  
 Net income (loss) attributable to controlling interests     1,820       3,205       262       (3,370 )     1,917  
                                         
 Net (loss) attributable to general partner     (1,431 )                       (1,431 )
 Net income (loss) attributable to limited partners   $ 3,251     $ 3,205     $ 262     $ (3,370 )   $ 3,348  

 

27

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Statement of Operations

 For the Nine Months Ended September 30, 2017

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 Revenues   $     $ 188,740     $ 35,572     $ (7,341 )   $ 216,971  
 Costs of services           166,803       33,181       (7,341 )     192,643  
 Gross margin           21,937       2,391             24,328  
                                         
 Operating costs, expenses and other:                                        
 General and administrative     2,662       10,975       2,376             16,013  
 Depreciation, amortization and accretion           3,071       490             3,561  
 Impairments           688       2,910             3,598  
 Losses on asset disposals, net           88       7             95  
 Operating income (loss)     (2,662 )     7,115       (3,392 )           1,061  
                                         
 Other (expense) income:                                        
 Equity earnings (loss) in subsidiaries     1,002       (3,008 )           2,006        
 Interest expense, net     (682 )     (4,128 )     (601 )           (5,411 )
 Foreign currency gains           211       613             824  
 Other, net           103       19             122  
 Net income (loss) before income tax expense     (2,342 )     293       (3,361 )     2,006       (3,404 )
 Income tax expense           581       (123 )           458  
 Net income (loss)     (2,342 )     (288 )     (3,238 )     2,006       (3,862 )
                                         
 Net Income (loss) attributable to noncontrolling interests           (1,290 )                 (1,290 )
 Net income (loss) attributable to partners / controlling interests     (2,342 )     1,002       (3,238 )     2,006       (2,572 )
                                         
 Net loss attributable to general partner     (2,750 )                       (2,750 )
 Net income (loss) attributable to limited partners   $ 408     $ 1,002     $ (3,238 )   $ 2,006     $ 178  

 

28

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Statement of Operations

 For the Nine Months Ended September 30, 2016

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 Revenues   $     $ 193,605     $ 44,734     $ (10,748 )   $ 227,591  
 Costs of services           171,844       41,444       (10,748 )     202,540  
 Gross margin           21,761       3,290             25,051  
                                         
 Operating costs and expense:                                        
 General and administrative     3,478       9,601       3,726             16,805  
 Depreciation, amortization and accretion           3,099       586             3,685  
 Impairments           2,119       8,411             10,530  
 Operating (loss)     (3,478 )     6,942       (9,433 )           (5,969 )
                                         
 Other income (expense):                                        
 Equity earnings (loss) in subsidiaries     (1,889 )     (9,999 )           11,888        
 Interest expense, net     (664 )     (3,607 )     (607 )           (4,878 )
 Other, net           243       14             257  
 Net income (loss) before income tax expense     (6,031 )     (6,421 )     (10,026 )     11,888       (10,590 )
 Income tax expense           366       23             389  
 Net income (loss)     (6,031 )     (6,787 )     (10,049 )     11,888       (10,979 )
                                         
 Net (loss) attributable to non-controlling interests           (4,898 )                 (4,898 )
 Net income (loss) attributable to controlling interests     (6,031 )     (1,889 )     (10,049 )     11,888       (6,081 )
                                         
 Net (loss) attributable to general partner     (5,366 )                       (5,366 )
 Net income (loss) attributable to limited partners   $ (665 )   $ (1,889 )   $ (10,049 )   $ 11,888     $ (715 )

 

29

 

 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 

 Condensed Consolidating Statement of Comprehensive Income (Loss)

 For the Three Months Ended September 30, 2017

 (in thousands) 

 

                Non-              
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
                               
 Net income (loss)   $ 394     $ 858     $ 112     $ (802 )   $ 562  
 Other comprehensive income (loss) -                                        
 Foreign currency translation               (207 )           (207 )
                                         
 Comprehensive income (loss)   $ 394     $ 858     $ (95   $ (802 )   $ 355  
                                         
 Comprehensive income (loss) attributable to noncontrolling interests           8                   8  
 Comprehensive loss attributable to general partner     (1,000 )                       (1,000 )
 Comprehensive income (loss) attributable to limited partners   $ 1,394     $ 850     $ (95 )   $ (802