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 SeptemberFOR THE QUARTERLY PERIOD ENDED JUNE 30, 20172020

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 ENERGYENVIRONMENTAL PARTNERS, L.P.

(Exact name of Registrant as specified in its charter)

 

Delaware61-1721523
(State of or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
  
5727 South Lewis Avenue, Suite 300 
Tulsa, Oklahoma74105
(Address of principal executive offices)(zipZip code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 Title of each class Trading Symbol(s)     Name of each exchange on which registered
Common UnitsCELPNew York Stock Exchange

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 (§232.405 of this chapter) 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”company,” and "emerging“emerging growth company"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 NovemberAugust 7, 2017,2020, the registrant had 11,889,95812,209,281 common units outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:None.

 

 

 

 

 

 

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

 

Table of Contents

 

  Page
PART I – FINANCIAL INFORMATION 
  
ITEM 1.Unaudited Condensed Consolidated Financial Statements56
   
Unaudited Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 and December 31, 2016201956
   
Unaudited Condensed Consolidated Statements of Operations for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 2016201967
   
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 201620197
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 20168
   
Unaudited Condensed Consolidated StatementStatements of Owners’ Equity for the NineThree and Six Months Ended SeptemberJune 30, 20172020 and 20199
   
Notes to theUnaudited Condensed Consolidated Financial Statements of Cash Flows for the Six Months Ended June 30, 2020 and 201910
   
Notes to the Unaudited Condensed Consolidated Financial Statements11
ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3422
   
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk5540
   
ITEM 4.Controls and Procedures5540
   
PART II – OTHER INFORMATION41
  
ITEM 1.Legal Proceedings5641
   
ITEM 1A.Risk Factors5641
   
ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds5641
   
ITEM 3.Defaults upon Senior Securities5641
   
ITEM 4.Mine Safety Disclosures5641
   
ITEM 5.Other Information5642
   
ITEM 6.Exhibits5742
   
SIGNATURES5844

  

2  

3

 

 

NAMES OF ENTITIES

 

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

 

References to:

 

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

 

CEM LLC” refers to Cypress Environmental Management, LLC, a wholly-owned subsidiary of the General Partner;

CEM TIR” refers to Cypress Environmental Management – TIR, LLC, a wholly-owned subsidiary of CEM LLC;

CEP LLC” refers to Cypress EnergyEnvironmental Partners, LLC, a wholly ownedwholly-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;Holding and a Director of our General Partner;

 

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

 

Holdings” refers to Cypress Energy Holdings, LLC, the owner of Holdings II;6,957,349 common units representing 57% of our outstanding common units as of August 7, 2020;

 

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 EnergyEnvironmental 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 LLCTIR-Canada” ” refers to Tulsa Inspection Resources, LLC, a wholly owned subsidiary of CEP LLC;

TIR-Canadarefers to Tulsa Inspection Resources – Canada, ULC, a wholly ownedwholly-owned subsidiary of CEPTIR LLC;

 

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

 

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

3  

CAUTIONARY REMARKS REGARDING FORWARD-LOOKING STATEMENTS

 

The information discussed in this Quarterly Report on Form 10-Q includes “forward-looking statements.” These forward-lookingforward 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-lookingforward- 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, 20162019 and in our Quarterly Report on Form 10-Q/A for the period ended March 31, 2020, filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2020 and May 12, 2020, respectively, 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 ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Balance Sheets

As of SeptemberJune 30, 20172020 and December 31, 20162019

 (in thousands, except unit data) (in thousands)

 

 September 30, December 31, 
 2017 2016 
       June 30,
2020
 December 31,  
 2019
 
ASSETS                
Current assets:                
Cash and cash equivalents $19,238  $26,693  $27,761  $15,700 
Trade accounts receivable, net  49,945   38,482   35,008   52,524 
Prepaid expenses and other  1,610   1,042   1,704   988 
Total current assets  70,793   66,217   64,473   69,212 
Property and equipment:                
Property and equipment, at cost  20,355   22,459   26,903   26,499 
Less: Accumulated depreciation  8,634   7,840   15,082   13,738 
Total property and equipment, net  11,721   14,619   11,821   12,761 
Intangible assets, net  26,180   29,624   18,719   20,063 
Goodwill  55,430   56,903   50,287   50,356 
Finance lease right-of-use assets, net  749   600 
Operating lease right-of-use assets  2,207   2,942 
Debt issuance costs, net  532   803 
Other assets  188   149   588   605 
Total assets $164,312  $167,512  $149,376  $157,342 
                
LIABILITIES AND OWNERS’ EQUITY                
Current liabilities:                
Accounts payable $2,171  $1,690  $3,594  $3,529 
Accounts payable - affiliates  3,568   1,638   141   1,167 
Accrued payroll and other  12,242   7,585   9,813   14,850 
Income taxes payable  748   1,011   1,385   1,092 
Finance lease obligations  249   183 
Operating lease obligations  421   459 
Current portion of long-term debt  81,029    
Total current liabilities  18,729   11,924   96,632   21,280 
Long-term debt  136,142   135,699      74,929 
Deferred tax liabilities     362 
Asset retirement obligations  161   139 
Finance lease obligations  423   359 
Operating lease obligations  1,717   2,425 
Other noncurrent liabilities  169   158 
Total liabilities  155,032   148,124   98,941   99,151 
                
Commitments and contingencies - Note 9        
Commitments and contingencies - Note 7        
                
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 
Common units (12,209 and 12,068 units outstanding at June 30, 2020 and December 31, 2019, respectively)  29,445   37,334 
Preferred units (5,769 units outstanding at June 30, 2020 and December 31, 2019)  44,291   44,291 
General partner  (25,876)  (25,876)  (25,876)  (25,876)
Accumulated other comprehensive loss  (2,725)  (2,538)  (2,368)  (2,577)
Total partners’ capital  5,532   14,338   45,492   53,172 
Noncontrolling interests  3,748   5,050   4,943   5,019 
Total owners’ equity  9,280   19,388   50,435   58,191 
Total liabilities and owners’ equity $164,312  $167,512  $149,376  $157,342 

 

See accompanying notes.


CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Operations

For the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(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 
  Three Months Ended June 30,  Six Months Ended June 30, 
 2020  2019  2020  2019 
            
Revenue $51,688  $111,091  $120,171  $201,467 
Costs of services  44,307   96,284   104,835   176,637 
Gross margin  7,381   14,807   15,336   24,830 
                
Operating costs and expense:                
General and administrative  4,926   6,158   10,866   12,389 
Depreciation, amortization and accretion  1,211   1,109   2,419   2,213 
Gain on asset disposals, net  (11)  (2)  (23)  (23)
Operating income  1,255   7,542   2,074   10,251 
                
Other (expense) income:                
Interest expense, net  (1,152)  (1,415)  (2,276)  (2,726)
Foreign currency gains (losses)  184   84   (273)  185 
Other, net  165   50   270   138 
Net income (loss) before income tax expense  452   6,261   (205)  7,848 
Income tax expense  71   618   291   824 
Net income (loss)  381   5,643   (496)  7,024 
                
Net income attributable to noncontrolling interests  697   277   609   58 
Net (loss) income attributable to partners / controlling interests  (316)  5,366   (1,105)  6,966 
                
Net income attributable to preferred unitholder  1,033   1,033   2,066   2,066 
Net (loss) income attributable to common unitholders $(1,349) $4,333  $(3,171) $4,900 
                
Net (loss) income per common limited partner unit:                
Basic $(0.11) $0.36  $(0.26) $0.41 
Diluted $(0.11) $0.29  $(0.26) $0.38 
                
Weighted average common units outstanding:                
Basic  12,209   12,053   12,153   12,012 
Diluted  12,209   18,218   12,153   18,163 

 

See accompanying notes.

 


7

   

CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

For the Three and NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(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)
  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
             
Net income (loss) $381  $5,643  $(496) $7,024 
Other comprehensive income (loss) - foreign currency translation  (139)  (63)  209   (135)
                 
Comprehensive income (loss) $242  $5,580  $(287) $6,889 
                 
Comprehensive income attributable to preferred unitholders  1,033   1,033   2,066   2,066 
Comprehensive income attributable to noncontrolling interests  697   277   609   58 
                 
Comprehensive (loss) income attributable to common unitholders $(1,488) $4,270  $(2,962) $4,765 

See accompanying notes.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Owners’ Equity

For the Six Months Ended June 30, 2020 and 2019

(in thousands)

 Six Months Ended June 30, 2020 
  Common
Units
   Preferred
Units
   General
Partner
  

 Accumulated
Other

Comprehensive

Income (Loss)

  

 Noncontrolling

Interests

   Total Owners’
Equity
 
                        
Owners’ equity at December 31, 2019 $37,334  $44,291  $(25,876) $(2,577) $5,019  $58,191 
Net (loss) income for the period January 1, 2020 through March 31, 2020  (1,822)  1,033         (88)  (877)
Foreign currency translation adjustment           348      348 
Distributions  (2,534)  (1,033)        (26)  (3,593)
Equity-based compensation  264               264 
Taxes paid related to net share settlement of equity-based compensation  (138)              (138)
                        
Owners’ equity at March 31, 2020  33,104   44,291   (25,876)  (2,229)  4,905   54,195 
                        
Net (loss) income for the period April 1, 2020 through June 30, 2020  (1,349)  1,033         697   381 
Foreign currency translation adjustment           (139)     (139)
Distributions  (2,564)  (1,033)        (659)  (4,256)
Equity-based compensation  254               254 
Taxes paid related to net share settlement of equity-based compensation                  
                        
Owners’ equity at June 30, 2020 $29,445  $44,291  $(25,876) $(2,368) $4,943  $50,435 

 

 

 Six Months Ended June 30, 2019 
  Common
Units
   Preferred
Units
   General
Partner
  

 Accumulated

Other

Comprehensive Loss

   Noncontrolling
Interests
  

 Total Owners’

Equity

 
                        
Owners’ equity at December 31, 2018 $34,677  $44,291  $(25,876) $(2,414) $3,609  $54,287 
Net income (loss) for the period January 1, 2019 through March 31, 2019  567   1,033         (219)  1,381 
Foreign currency translation adjustment           (72)     (72)
Distributions  (2,510)  (1,033)           (3,543)
Equity-based compensation  269               269 
Taxes paid related to net share settlement of equity-based compensation  (158)              (158)
                        
Owners’ equity at March 31, 2019  32,845   44,291   (25,876)  (2,486)  3,390   52,164 
                        
Net income for the period April 1, 2019 through June 30, 2019  4,333   1,033         277   5,643 
Foreign currency translation adjustment           (63)     (63)
Distributions  (2,531)  (1,033)           (3,564)
Equity-based compensation  174               174 
Taxes paid related to net share settlement of equity-based compensation  (1)              (1)
                        
Owners’ equity at June 30, 2019 $34,820  $44,291  $(25,876) $(2,549) $3,667  $54,353 

See accompanying notes.


CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Unaudited Condensed Consolidated Statements of Cash Flows

For the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019

 (in(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 
 Six Months Ended June 30, 
 2020  2019 
Operating activities:        
Net (loss) income $(496) $7,024 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:        
Depreciation, amortization and accretion  2,927   2,765 
Gain on asset disposals, net  (23)  (23)
Interest expense from debt issuance cost amortization  289   261 
Equity-based compensation expense  518   443 
Equity in earnings of investee  (103)  (39)
Distributions from investee  125   75 
Foreign currency losses (gains)  273   (185)
Changes in assets and liabilities:        
Trade accounts receivable  17,516   (25,595)
Prepaid expenses and other  (734)  128 
Accounts payable and accounts payable - affiliates  (115  1,912 
Accrued payroll and other  (5,037)  4,446 
Income taxes payable  292   (252)
Net cash provided by (used in) operating activities  15,432   (9,040)
        
Investing activities:        
Proceeds from fixed asset disposals  37   34 
Purchases of property and equipment, excluding finance leases  (1,371)  (1,045)
Net cash used in investing activities  (1,334)  (1,011)
        
Financing activities:        
Borrowings on credit facility  39,100   7,800 
Repayments on credit facility  (33,000)   
Repayments on finance lease obligations  (126)  (95)
Other  (19)   
Taxes paid related to net share settlement of equity-based compensation  (138)  (159)
Distributions  (7,849)  (7,107)
Net cash (used in) provided by financing activities  (2,032)  439 
        
Effect of exchange rates on cash  (5)  2 
        
Net increase (decrease) in cash and cash equivalents  12,061   (9,610)
Cash and cash equivalents, beginning of period (includes restricted cash equivalents of $551 at December 31, 2019 and December 31, 2018)  16,251   15,931 
Cash and cash equivalents, end of period (includes restricted cash equivalents of $551 at June 30, 2020 and June 30, 2019) $28,312  $6,321 
        
Non-cash items:        
Accounts payable excluded from capital expenditures $285  $100 
Acquisitions of finance leases included in liabilities $247  $ 
Acquisitions of property and equipment included in liabilities $  $291 

 

See accompanying notes.


 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.


CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

1.Organization and Operations

1. Organization and Operations

 

Cypress EnergyEnvironmental Partners, L.P. (the(“we”, “us”, “our”, or the “Partnership”) is a Delaware limited partnership formed in 2013 to2013. We offer essential services that help protect the environment and ensure sustainability. We 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 anda wide range of environmental services to U.S. onshore oilincluding independent inspection, integrity, and natural gas producerssupport services for pipeline and trucking companies.energy infrastructure owners and operators and public utilities. We also provide water pipelines, hydrocarbon recovery, disposal, and water treatment services. 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”Pipeline Inspection”), IntegrityPipeline & Process Services (“IS”Pipeline & Process Services”), and Water and Environmental Services (“W&ES”Environmental Services”) segments. PIS provides pipeline

The Pipeline Inspection segment generates revenue by providing essential environmental services including inspection and otherintegrity 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 performon a variety of inspection services oninfrastructure assets including midstream pipelines, gathering systems, and distribution systems, includingsystems. Services include nondestructive examination, in-line inspection support, pig tracking, survey, data gathering, and supervision of third-party construction,contractors. Our results in this segment are driven primarily by the number of inspectors that perform services for our customers and the fees that we charge for those services, which depend on the type, skills, technology, equipment, and number of inspectors used on a particular project, the nature of the project, and the duration of the project. The number of inspectors engaged on projects is driven by the type of project, prevailing market rates, the age and condition of customers’ assets including pipelines, gas plants, compression stations, storage facilities, and gathering and distribution systems including the legal and regulatory requirements relating to the inspection and maintenance of those assets. We also bill our customers for per diem charges, mileage, and repair projects. IS provides independent integrityother reimbursement items. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity considering that many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, inspection work throughout the United States during the winter months (especially in the northern states) may be hampered or delayed due to inclement weather.

The Pipeline & Process Services segment generates revenue primarily by providing essential environmental services including hydrostatic testing services and chemical cleaning to major natural gas and petroleum pipelineenergy companies and to pipeline construction companies located throughout the United States. Field personnelof newly-constructed and existing pipelines and related infrastructure. We generally charge our customers in this segment on a fixed-bid basis, depending on the size and length of the pipeline being tested, the complexity of services provided, and the utilization of our work force and equipment. Our results in this segment are driven primarily by the number of field personnel that perform hydrostatic testingservices for our customers and the fees that we charge for those services, which depend on newly-constructedthe type and existing natural gasnumber of field personnel used on a particular project, the type of equipment used and petroleum pipelines. W&ES provides servicesthe fees charged for the utilization of that equipment, and the nature and duration of the project. Revenue and costs in this segment may be subject to oilseasonal variations and natural gas producersinterim activity may not be indicative of yearly activity, considering that many of our customers develop yearly operating budgets and trucking companies through its ownershipenter into contracts with us for work to be performed during the remainder of the year. Additionally, field work during the winter months may be hampered or delayed due to inclement weather.

The Environmental Services segment owns and operation of eight commercial SWDoperates nine (9) water treatment facilities with ten (10) EPA Class II injection wells in the Bakken Shaleshale region of the Williston Basin in North DakotaDakota. We wholly-own eight of these facilities and two SWD facilitieswe own a 25% interest in the Permian Basinremaining facility. These water treatment facilities are connected to twelve (12) pipeline gathering systems, including two (2) that we developed and own. We specialize in Texas.the treatment, recovery, separation, and disposal of waste byproducts generated during the lifecycle of an oil and natural gas well to protect the environment and our drinking water. All of the water treatment facilities utilize specialized equipment and remote monitoring to minimize the facilities’ downtime and increase the facilities’ efficiency for peak utilization. These facilitiesRevenue is generated on a fixed-fee per barrel basis for receiving, separating, filtering, recovering, processing, and injecting produced and flowback water. We also containsell recovered oil, skimming processes that remove oilreceive fees for pipeline transportation of water, and receive fees from a partially owned water delivered to the sites. In addition to these SWD facilities, we providetreatment facility for management and staffing services for an SWD facility pursuant to a management agreement (see Note 7)6).

The volumes of water processed at our water treatment facilities are driven by water volumes generated from existing oil and natural gas wells during their useful lives and development drilling. Producers’ willingness to engage in new drilling is determined by a number of factors, the most important of which are the current and projected prices of oil, natural gas, and natural gas liquids; the cost to drill and operate a well; the availability and cost of capital; and environmental and governmental regulations. We generally expect the level of drilling to correlate with long-term trends in prices of oil, natural gas, and natural gas liquids.

We also owngenerate revenues from the sale of residual oil recovered during the water treatment process. Our ability to recover residual oil is dependent upon the residual oil content in the saltwater we treat, which is, among other things, a 25% member interestfunction of water type, chemistry, source, and temperature. Generally, where outside temperatures are lower, there is less residual oil content and separation is more difficult. Thus, our residual oil recovery during the winter is usually lower than our recovery during the summer. Additionally, residual oil content can decrease based on the following factors, among others: an increase in this managed SWD facility.pipeline water as operators control the flow of pipeline water and an increase in residual oil recovered in saltwater by producers prior to delivering the saltwater to us for treatment.

2.Basis of Presentation and Summary of Significant Accounting Policies

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements as of SeptemberJune 30, 20172020 and for the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 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, 20162019 is derived from our audited financial statements.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated 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.Commission (the “SEC”). The Unaudited Condensed Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the consolidated financial position and consolidated results of operations for the interim periods presented. Such adjustments consist only of normal recurring items, unless otherwise disclosed herein. Accordingly, the Unaudited Condensed Consolidated Financial Statements do not include all of the information and notes required by GAAP for complete consolidated financial statements. However, we believe that the disclosures made are adequate to make the information not misleading. These interim Unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited financial statements as of and for the year ended December 31, 20162019 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’sour 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.

 

The COVID-19 pandemic and the significant decline in the price of crude oil have created and may continue to create significant uncertainty in macroeconomic conditions, which may continue to cause decreased demand for our services and adversely impact our results of operations. We consider these changing economic conditions as we develop accounting estimates, such as our annual effective tax rate, allowance for bad debts, and long-lived asset impairment assessments. We expect our accounting estimates to continue to evolve depending on the duration and degree of the impact of the COVID-19 pandemic and the significant decline in the price of crude oil. Our accounting estimates may change as new events and circumstances arise.

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, 20162019 included in our Form 10-K.


CYPRESS ENERGY PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

Accounts Receivable10-K, except for Accounting Standards Update (“ASU”) 2018-15 – Intangibles—Goodwill and AllowanceOther— Internal-Use Software (Subtopic 350-40): Customer’s Accounting 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,Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract which we recorded as a reductionimplemented on January 1, 2020. The effects of implementing ASU 2018-15 were immaterial togeneral 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.Statements.

 

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.

Goodwill

Noncontrolling Interest

We own a 51% interest in Brown Integrity, LLC (“Brown”) and a 49% interest in CF Inspection Management, LLC (“CF Inspection”). The accountshave $50.3 million 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 ingoodwill on our Unaudited Condensed Consolidated Balance Sheets.

Property and Equipment

Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, computer and office equipment, and vehicles. We record property and equipmentSheet 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.


CYPRESS ENERGY PARTNERS, L.P.

NotesJune 30, 2020. Of this amount, $40.2 million relates to the Unaudited Condensed Consolidated Financial Statements

Identifiable Intangible Assets

Our intangible assets consist primarily of customer relationships, trade names,Pipeline Inspection segment and our database of inspectors. We recorded these intangible assets as part of our accounting for$10.1 million relates to 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

Environmental Services segment. Goodwill is not amortized, but is subject to an annual review for impairmentassessments on November 1 (or at other dates if events or changes in circumstances indicate that the carrying value of goodwill may be impaired) 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,Pipeline Inspection and W&ESEnvironmental Services operating segments are the appropriate reporting units for testing goodwill impairment.

 

To perform a goodwill impairment assessment, we perform an analysisfirst evaluate qualitative factors to assessdetermine whether it is more likely than not that the fair value of thea reporting unit exceeds its carrying value. If we determinethis assessment reveals that it is more likely than not that the carrying value of thea reporting unit exceeds its fair value, we reducethen determine the estimated fair market value of the reporting unit. 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).

Crude oil prices have decreased significantly in 2020, due in part to decreased demand as a result of the worldwide COVID-19 outbreak, and due in part to the oil price war started by Russia and Saudi Arabia with a focus on slowing down U.S. oil production. This decline in oil prices has led many of our customers to change their budgets and plans, which has resulted in reduced spending on drilling, completions, and exploration. This has had an adverse effect on construction of new pipelines, gathering systems, and related energy infrastructure. Lower exploration and production activity has also adversely effected the midstream industry and has led to delays and cancellations of projects. It is also possible that our customers may elect to defer maintenance activities on their infrastructure. Such developments would reduce our opportunities to generate revenues. It is impossible at this time to determine what may occur, as customer plans will evolve over time. It is possible that the cumulative nature of these events could have a material adverse effect on our results of operations and financial position.

For our Pipeline Inspection segment, we performed a qualitative goodwill impairment analysis at June 30, 2020 and recordconcluded that the fair value of the reporting unit was more likely than not greater than its carrying value. Our evaluation included various qualitative factors, including current and projected earnings, current customer relationships and projects, and the impact of commodity 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. The use of different assumptions and estimates from those we used in our qualitative analysis could have resulted in the requirement to perform a correspondingquantitative goodwill impairment expense.analysis.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

ImpairmentsFor our Environmental Services segment, we considered the decline in the price of Long-Lived Assetscrude oil to be a potential indicator of impairment and therefore performed a quantitative goodwill impairment analysis at June 30, 2020. 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. Since the volume of water we receive at our facilities is heavily influenced by the extent of exploration and production in the areas near our facilities, and since exploration and production is in turn heavily influenced by crude oil prices, we estimated future revenues by reference to crude prices in the forward markets. We used a forward price curve that reflects a gradual increase in the West Texas Intermediate ("WTI") crude price each month, with the price remaining around $40 per barrel through January 2021 and reaching $50 per barrel in September 2028. We estimated future operating costs by reference to historical per-barrel costs and estimated future volumes. We estimated revenues and costs for a period of ten years and estimated a terminal value calculated as a multiple of the cash flows in the preceding year. We discounted these estimated future cash flows at a rate of 13.5%. We assumed that a hypothetical buyer would be a partnership that is not subject to income taxes and that could obtain modest savings in general and administrative expenses through synergies with its other operations. Based on this quantitative analysis, we concluded that the goodwill of the Environmental Services segment was not impaired. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record a goodwill impairment.

 

Our estimates of fair value are sensitive to changes in a number of variables, many of which relate to broader macroeconomic conditions outside our control. As a result, actual performance could be different from our expectations and assumptions. Estimates and assumptions used in determining fair value of the reporting units that are outside the control of management include commodity prices, interest rates, and cost of capital. Our water treatment facilities are concentrated in one basin, and changes in oil and gas production in that basin could have a significant impact on the profitability of the Environmental Services segment. 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 future. Such changes could include, among others, a slower recovery in demand for petroleum products than assumed in our projections, an increase in supply from other areas (or other factors) that result in reduced production in North Dakota, and increased pessimism among market participants, which could increase the discount rate on (and therefore decrease the value of) estimated future cash flows.

Property and Equipment

We assess property and equipment for possible impairment whenever events or changes in circumstances indicate, in the judgment of management, 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. In the Environmental Services segment, Property and Equipment is grouped for impairment testing purposes at each water treatment facility, as these asset groups represent the lowest level at which cash flows are separately identifiable.

 

For our Environmental Services segment, we used the same forward crude oil price curve for our June 30, 2020 property and equipment impairment analysis that we used for our goodwill impairment analysis. Based on this analysis, we concluded that the property and equipment was not impaired. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record an impairment. While we believe we have made reasonable estimates and assumptions to estimate the future undiscounted cash flows expected from the assets, it is reasonably possible that changes could occur that would require an impairment charge in the future. Location-specific market considerations could also lead us to record an impairment to the property, plant, and equipment of one or more individual facilities in the future.

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 the creditworthiness of each of our customers. We typically receive payment from our customers 45 to 90 days after the services have been performed. We determine allowances for bad debts based on management’s assessment of the creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when cash is received. As of both June 30, 2020 and December 31, 2019, we had an allowance for doubtful accounts of $0.2 million.

A former customer of our Pipeline Inspection segment, Sanchez Energy Corporation and certain of its affiliates (collectively, “Sanchez”), filed for bankruptcy protection in August 2019. As of June 30, 2020 and December 31, 2019, our Unaudited Condensed Consolidated Balance Sheets included $0.5 million of pre-petition accounts receivable from Sanchez. We have recorded an allowance of less than $0.1 million at both June 30, 2020 and December 31, 2019 against the accounts receivable from Sanchez. We do not believe it is probable that we will be unable to collect the remaining $0.4 million balance of the pre-petition receivables. However, we cannot make assurances regarding the ultimate collection of these receivables nor can we make assurances regarding the timing of any such collections. 


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

Accrued Payroll and Other

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

 

 September 30,
2017
 December 31,
2016
  June 30, 2020 December 31, 2019 
  (in thousands)  (in thousands) 
                
Accrued payroll $9,975  $5,594  $6,209  $9,670 
Customer deposits  1,393   1,361   1,440   1,682 
Litigation accrual  900   1,900 
Other  874   630   1,264   1,598 
 $12,242  $7,585  $9,813  $14,850 

 

Foreign Currency TranslationRevenue Recognition

 

In the second quarter of 2020, we recognized $0.3 million of revenue within our Pipeline Inspection segment on services performed in previous years. We had constrained recognition of this revenue until the expiration of a contract provision that had given the customer the opportunity to reopen negotiation of the fee paid for the services. As of June 30, 2020 and December 31, 2019, we recognized refund liabilities of $0.5 million and $0.7 million, respectively, for revenue associated with such variable consideration. These liabilities are reported within accrued payroll and other on our Unaudited Condensed Consolidated Balance Sheets.

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.


CYPRESS ENERGY PARTNERS, L.P.

Notes toperiod in which the Unaudited Condensed Consolidated Financial Statementsapplicable revenues and expenses were recorded.

 

Our Unaudited Condensed Consolidated Balance Sheet at SeptemberJune 30, 20172020 includes $2.7$2.4 million of accumulated other comprehensive lossassociated 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 lossto other accounts within Partners’partners’ capital, which would be reported in the Unaudited Condensed Consolidated Statement of Operations as a reduction to net (loss) income.

Our Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated subsidiaries are eliminated inon our Unaudited Condensed Consolidated Balance Sheets. Beginning April 1, 2017, weWe 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)(losses) in our Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss).Operations.

 

New Accounting Standards

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 Partnership2020, we adopted the following new accounting standardsstandard issued by the Financial Accounting Standards Board (“FASB”):

 

The FASB issued ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensationfor Implementation Costs Incurred in March 2016.a Cloud Computing Arrangement That Is a Service Contract in August 2018. This guidance requires a customer in a cloud computing arrangement to follow the internal use software guidance in ASC 350-40 to determine which costs should be capitalized as assets or expensed as incurred. The amendments in this ASU gives entities the option to accountare effective 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).fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this new standard on Januaryguidance prospectively from the date of adoption (January 1, 20172020) and elected to account for forfeitures as they occur. The adoption of this ASUguidance has not had no significanta material 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 2016-022016-13LeasesFinancial Instruments – Credit Losses in February 2016.June 2016, which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss” methodology. This guidance attempts to increase transparency and comparability among organizations by recognizing certain leaseaffects trade receivables, financial assets and lease liabilities oncertain other instruments that are not measured at fair value through net income. In November 2019, the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP andFASB issued final guidance to delay the implementation of 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 forsmaller reporting companies until fiscal years beginning after December 15, 2018,2022, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determiningevaluating the impact this guidanceASU 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.


CYPRESS ENERGYENVIRONMENTAL 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).3. Debt

 

In the first quarter of 2017,On May 29, 2018, we recordedentered into an impairment of $0.7 million to the property, plantamended 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.


CYPRESS ENERGY PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

4.Credit Agreement

We are party to arestated credit agreement (as amended and restated, the “Credit Agreement”) that provides up to $200.0$110.0 million inof 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. Thethree-year Credit Agreement matures December 24, 2018.

Outstanding borrowings at September 30, 2017 and December 31, 2016May 28, 2021. The obligations under the Credit Agreement were as follows:are secured by a first priority lien on substantially all of our assets.

 

  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 

Outstanding borrowings at June 30, 2020 and December 31, 2019 were $81.0 million and $74.9 million, respectively, and are reflected as current portion of long-term debt and long-term debt, respectively, on the Unaudited Condensed Consolidated Balance Sheets. We also had $0.7 million of finance lease liabilities at June 30, 2020 that count as indebtedness under the Credit Agreement. Debt issuance costs are reported as debt issuance costs, net on the Unaudited Condensed Consolidated Balance Sheets and total $0.5 million and $0.8 million at June 30, 2020 and December 31, 2019, respectively. These debt issuance costs are being amortized on a straight-line basis over the term of the Credit Agreement. The carrying value of the partnership’s long-termour 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%1.5% to 2.75%3.0% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.25%2.5% to 3.75%4.0% per annum (“LIBOR Borrowings”). The applicable margin is determined based on theour leverage ratio, of the Partnership, as defined in the Credit Agreement. Generally, the

The interest rate on our Credit Agreement borrowings ranged between 3.90%3.33% and 4.99%4.80% for the ninesix months ended SeptemberJune 30, 20172020 and 3.54%5.90% and 4.28%6.02% for the ninesix months ended SeptemberJune 30, 2016.2019. As of June 30, 2020, the interest rate in effect on our outstanding borrowings was 3.81%. 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, duringincluding commitment fees, was $1.0 million and $1.3 million for the three months ended SeptemberJune 30, 20172020 and 20162019, respectively. Interest paid, including commitment fees, was $1.7$1.9 million and $1.6$2.4 million respectively, including commitment fees. Interest paidfor the six months ended June 30, 2020 and 2019, respectively. The average debt balance outstanding was $89.6 million and $80.5 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016 was $5.0 million and $4.3 million, respectively, including commitment fees.2019, respectively.

 

OurThe Credit Agreement contains various customary affirmative and negative covenants and restrictive provisions. OurThe Credit Agreement also requires maintenance of certain financial covenants at each quarter end, including a combined total adjusted leverage ratio (as defined in ourthe Credit Agreement) of not more than 4.0 to 1.0 and an interest coverage ratio (as defined in ourthe Credit Agreement) of not less than 3.0 to 1.0. At SeptemberJune 30, 2017,2020, our combined total adjusted leverage ratio was 3.773.5 to 1.0 and our interest coverage ratio was 3.087.6 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 ourthe Credit Agreement, the lenders may declare any outstanding principal, of our Credit Agreement debt, together with any accrued and unpaid interest, to be immediately due and payable and may exercise the other remedies set forth or referred to in ourthe Credit Agreement. We were in compliance with all debt covenants as of SeptemberJune 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.2020.

Borrowings under the Credit Agreement at each quarter-end may not exceed four times the trailing-twelve-month EBITDA. Trailing-twelve-month EBITDA, as calculated under the Credit Agreement, was $23.6 million at June 30, 2020.

 

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


CYPRESS ENERGY PARTNERS, L.P.

Notes totime of the Unaudited Condensed Consolidated Financial Statementsdistribution.

 

OurIn March and April 2020, in an abundance of caution, we borrowed a combined $39.1 million on the Credit Agreement to provide substantial liquidity to manage our business in light of the COVID-19 outbreak and a significant decline in the price of crude oil. In May and June 2020, we repaid a combined $28.0 million on the Credit Agreement.

The fact that the Credit Agreement matures on December 24, 2018 and, although unfavorable financial results may impactwithin one year raises substantial doubt about our ability to meetcontinue as a going concern beyond the May 28, 2021 maturity date. In addition, our current debt covenants, we believe itborrowing capacity under the Credit Agreement is probablelimited to a multiple of trailing-twelve-month EBITDA, and the lower levels of EBITDA that we will be ableare generating under current market conditions could constrain our borrowing capacity under the Credit Agreement, which could lead to maintain compliancea future event of default under the Credit Agreement. We continue to have discussions with the financial ratio covenants throughour lenders about extending the maturity date of the Credit Agreement through some combination of 1) improved operating results, 2) refinancingfacility in return for modifications to 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 anticipationterms 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 requirefacility. Such modifications could include, among others, a reduction in our current outstanding debt balancethe available capacity 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 currentlyrestrictions on the balance sheet; 2) issuing some sortamounts of future common unit distributions. Our ability to enter into a new or amended credit facility with a longer term will depend on a number of factors, many of which are beyond our control, which include the perceptions of lenders related to our future financial performance, the perceptions of lenders regarding market conditions, the lending strategies and policies of lenders, and other factors. If these efforts prove not to be successful, we would explore other avenues of debt or equity tofinancing, which would likely be more expensive than the owners of Holdings or third parties; 3) issuing convertible debt to the owners of Holdings or third parties; 4) monetizing a portion offinancing cost under 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.existing facility.

 

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.4. Income Taxes

 

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, asAs a limited partnership, we are generally not subject to U.S. federal or state income taxes. Our income tax provision relates primarily to (1) our U.S. corporate subsidiaries that serviceprovide services to public utility customers, which are subjectmay not fit within the definition of qualified income as it is defined in the Internal Revenue Code, Regulations, and other guidance, which subjects this income to U.S. federal and state income taxes, (2) our Canadian subsidiary, which is subject to Canadian federal and provincial income taxes, and to(3) certain other state income taxes, including the Texas franchise tax.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

6.Equity Compensation

Notes to the Unaudited Condensed Consolidated Financial Statements

 

As a publicly-traded partnership, we are subject to a statutory requirement that 90% of our total gross income represents “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 General Partnerincome has adoptedmet the statutory qualifying income requirement each year since our initial public offering.

5. Equity

Series A Preferred Units

On May 29, 2018 (the “Closing Date”), we sold 5,769,231 Series A Preferred Units representing limited partner interests in the Partnership (the “Preferred Units”) to an affiliate (“the Purchaser”) for a long-term incentive plan (“LTIP”)cash purchase price of $7.54 per Preferred Unit, resulting in gross proceeds of $43.5 million.

The Purchaser is entitled to receive quarterly distributions that authorizesrepresent an annual return of 9.5% on the issuancePreferred Units. Of this 9.5% annual return, we are required to pay at least 2.5% in cash and we have the option to pay the remaining 7.0% in kind (in the form of upissuing additional preferred units) for the first twelve quarters after the Closing Date. The Preferred Units rank senior to 1,182,600our common units, and we must pay distributions on the Preferred Units (including any arrearages) before paying distributions on our common units. Certain directors and employeesIn addition, the Preferred Units rank senior to the common units with respect to rights upon liquidation.

After the third anniversary of the PartnershipClosing Date, the Purchaser will have been awarded Phantom Restrictedthe option to convert the Preferred Units into common units on a one-for-one basis. If certain conditions are met after the third anniversary of the Closing Date, we will have the option to cause the Preferred Units to convert to common units. After the third anniversary of the Closing Date, we will also have the option to redeem the Preferred Units. We may redeem the Preferred Units (a) at any time after the third anniversary of the Closing Date and on or prior to the fourth anniversary of the Closing Date at a redemption price equal to 105% of the issue price, and (b) at any time after the fourth anniversary of the Closing Date at a redemption price equal to 101% of the issue price.

At-the-Market Equity Program

In April 2018, we established an at-the-market equity program (“Units”ATM Program”), which will allow us to offer and sell common units from time to time, to or through the sales agent under the terms of the LTIP.ATM Program. The fair value of the awards is determinedmaximum amount we may sell varies based on changes in the quoted market value of the publicly-tradedunits. Currently, the maximum amount we may sell is approximately $4 million. We are under no obligation to sell any common units at each grant date, adjusted for certain discounts. Compensation expense is recorded on a straight-line basis over the vesting periodunder this program. As of the grant. We recorded expensedate of $1.1 millionthis filing, we have not sold any common units under the ATM Program and, $0.7 million duringas such, have not received any net proceeds or paid any compensation to the ninesales agent under the ATM Program.

Employee Unit Purchase Plan

In November 2019, we established an employee unit purchase plan (“EUPP”), which will allow us to offer and sell up to 500,000 common units. Employees can elect to have up to 10% of their annual base pay withheld to purchase common units, subject to terms and limitations of the EUPP. The purchase price of the common units is 95% of the volume weighted average of the closing sales prices of our common units on the ten immediately preceding trading days at the end of each offering period. There have been no common unit issuances under the EUPP.

Net (Loss) Income per Unit

Our net (loss) income is attributable and allocable to three ownership groups: (1) our preferred unitholder, (2) the noncontrolling interests in certain subsidiaries, and (3) our common unitholders. Income attributable to our preferred unitholder represents the 9.5% annual return to which the owner of the Preferred Units is entitled. Net income attributable to noncontrolling interests represents 49% of the income generated by Brown and 51% of the income generated by CF Inspection. Net (loss) income attributable to common unitholders represents our remaining net (loss) income, after consideration of amounts attributable to our preferred unitholder and the noncontrolling interests.

Basic net (loss) income per common limited partner unit is calculated as net (loss) income attributable to common unitholders divided by the basic weighted average common units outstanding. Diluted net (loss) income per common limited partner unit includes the net (loss) income attributable to preferred unitholder and the dilutive effect of the potential conversion of the preferred units and the dilutive effect of the unvested equity compensation.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

The following table summarizes the calculation of the basic net (loss) income per common limited partner unit for the three and six months ended SeptemberJune 30, 20172020 and 2016, respectively related to2019:

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
  (in thousands, except per unit data) 
             
Net (loss) income attributable to common unitholders $(1,349) $4,333  $(3,171) $4,900 
Weighted average common units outstanding  12,209   12,053   12,153   12,012 
Basic net (loss) income per common limited partner unit $(0.11) $0.36  $(0.26) $0.41 

The following table summarizes the Unit awards. During November 2017, an officer with 76,345 unvested LTIP units resigned. Duringcalculation of the diluted net (loss) income per common limited partner unit for the three and six 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.ended June 30, 2020 and 2019:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2020  2019  2020  2019 
  (in thousands, except per unit data) 
             
Net (loss) income attributable to common unitholders $(1,349) $4,333  $(3,171) $4,900 
Net income attributable to preferred unitholder     1,033      2,066 
Net (loss) income attributable to limited partners $(1,349) $5,366  $(3,171) $6,966 
                 
Weighted average common units outstanding  12,209   12,053   12,153   12,012 
Effect of dilutive securities:                
Weighted average preferred units outstanding     5,769      5,769 
Long-term incentive plan unvested units     396      382 
Diluted weighted average common units outstanding  12,209   18,218   12,153   18,163 
Diluted net income (loss) per common limited partner unit $(0.11) $0.29  $(0.26) $0.38 

For the three and six months ended June 30, 2020, the preferred units and long-term incentive plan unvested units would have been antidilutive and, therefore, were not included in the computation of diluted net (loss) income per common limited partner unit.

Cash Distributions

The following table summarizes the LTIP Unit activitycash distributions declared and paid to our common unitholders for the nine months ended September 30, 20172019 and 2016:2020:

 

  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 
        Total Cash 
  Per Unit Cash  Total Cash  Distributions 
Payment Date Distributions  Distributions  to Affiliates (a) 
     (in thousands) 
          
February 14, 2019 $0.21  $2,510  $1,606 
May 15, 2019  0.21   2,531   1,622 
August 14, 2019  0.21   2,534   1,624 
November 14, 2019  0.21   2,534   1,627 
Total 2019 Distributions $0.84  $10,109  $6,479 
             
February 14, 2020 $0.21  $2,534  $1,627 
May 15, 2020  0.21   2,564   1,648 
Total 2020 Distributions (to date) $0.42  $5,098  $3,275 

(a)64% of the Partnership’s outstanding common units at June 30, 2020 were held by affiliates.


CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

The majority offollowing table summarizes 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,distributions paid to our preferred unitholder for 2019 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.2020:

  Cash  Paid-in-Kind  Total 
Payment Date Distributions  Distributions  Distributions 
  (in thousands) 
          
February 14, 2019 $1,033  $  $1,033 
May 15, 2019  1,033      1,033 
August 14, 2019  1,033      1,033 
November 14, 2019  1,034      1,034 
Total 2019 Distributions $4,133  $  $4,133 
             
February 14, 2020 $1,033  $  $1,033 
May 15, 2020  1,033      1,033 
August 14, 2020 (a)  1,033      1,033 
Total 2020 Distributions (to date) $3,099  $  $3,099 

 

7.(a)Related-Party TransactionsSecond quarter 2020 distribution was declared and will be paid in the third quarter of 2020.

 

Long-Term Incentive Plan (“LTIP”)

Omnibus Agreement and Other Support from Holdings

In May 2020, 396,900 phantom units (“Units”) were granted to certain employees and directors. Of these Units, 375,300 Units will vest in three equal tranches in April 2023, April 2024, and April 2025, respectively, and 21,600 Units will vest in three equal tranches in April 2021, April 2022, and April 2023, respectively, contingent only on the continued service of the recipients through the vesting dates.

Cypress Brown Integrity, LLC

Brown’s company agreement generally requires Brown to make an annual distribution to its members equal to or greater than the amount of Brown’s taxable income multiplied by the maximum federal income tax rate. In April 2020, Brown declared and paid a distribution of $1.3 million, of which $0.7 million was distributed to us and the remainder of which was distributed to noncontrolling interest owners.

6. Related-Party Transactions

Omnibus Agreement

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

things, our right of first offer on Holdings’ and its subsidiaries’ assets used in, and entities primarily engaged in, providing water treatment and other water and environmental services. So long as affiliates of Holdings controlcontrols our General Partner, the omnibus agreement will remain in full force and effect, unless we and Holdings agree to terminate it sooner. If affiliates of Holdings ceaseceases 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.agreement. 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.

 

Prior to January 1, 2020, the omnibus agreement called for Holdings to provide certain general and administrative services, including executive management services and expenses associated with our being a publicly-traded entity (such as audit, tax, and transfer agent fees, among others) in return for a fixed annual fee (adjusted for inflation) that was payable quarterly. This annual fee was $4.5 million in 2019. In an effort to simplify this arrangement so it would be easier for investors to understand, in November 2019, with the approval of the Conflicts Committee of the Board of Directors, we and Holdings agreed to terminate the management fee provisions of the omnibus agreement effective December 31, 2019. Beginning January 1, 2020, the executive management services and other general and administrative expenses that Holdings previously incurred and charged to us via the annual administrative fee are charged directly to us as they are incurred and are now paid directly by the Partnership. Under our current cost structure, we expect these direct expenses of $0.9 million onto be lower than the annual administrative fee that we previously paid, although we expect to experience more variability in our behalf duringquarterly general and administrative expense now that we are incurring the expenses directly than when we paid a consistent administrative fee each quarter. For the three and six months ended SeptemberJune 30, 2016, and $1.82019, Holdings charged us an administrative fee of $1.1 million and $2.9$2.2 million, on our behalf during the nine months ended September 30, 2017 and 2016, respectively. These expenses are reportedrespectively, recorded within general and administrativein the accompanyingUnaudited Condensed Consolidated Statement of Operations.


CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

All of the employees who conduct our business are employed by affiliates of Holdings, although we sometimes refer to these individuals in this report as our employees. We reimburse Holdings for the compensation costs associated with these employees.

Alati Arnegard, LLC

The Partnership provides management services to a 25% owned company, Alati Arnegard, LLC (“Arnegard”), which is part of the Environmental Services segment. We recorded earnings from this investment of $0.1 million and less than $0.1 million for the six months ended June 30, 2020 and 2019, respectively. These earnings are recorded in other, net in the Unaudited Condensed Consolidated Statements of Operations and as contributions from general partnerequity in the accompanying Unaudited Condensed Consolidated Statementearnings 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 partnerinvestee in the Unaudited Condensed Consolidated StatementStatements 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”).Cash Flows. Management fee revenue earned from Arnegard is included in revenue in the Unaudited Condensed Consolidated Statements of Operations and totaled $0.2 million and $0.1$0.3 million for each of the threesix months ended SeptemberJune 30, 20172020 and 2016, respectively, and $0.5 million and $0.4 million for the nine months ended September 30, 2017 and 2016, respectively.2019. Accounts receivable from Arnegard weretotaled $0.1 million at Septemberboth June 30, 20172020 and December 31, 2016,2019, and areis included in trade accounts receivable, neton the Unaudited Condensed Consolidated Balance Sheets. Our investment in Arnegard was $0.4 million at June 30, 2020 and December 31, 2019 and is included in other assets inon the Unaudited Condensed Consolidated Balance Sheets.


CF Inspection Management, LLC

CYPRESS ENERGY PARTNERS, L.P.
Notes

We have also entered into a joint venture with CF Inspection, a nationally-qualified woman-owned inspection firm affiliated with one of Holdings’ owners and a Director of our General Partner. CF Inspection allows us to offer various services to clients that require the services of an approved Women’s Business Enterprise (“WBE”), as CF Inspection is certified as a Women’s Business Enterprise by the Supplier Clearinghouse in California and as a National Women’s Business Enterprise by the Women’s Business Enterprise National Council. We own 49% of CF Inspection and Cynthia A. Field, an affiliate of Holdings and a Director of our General Partner, owns the remaining 51% of CF Inspection. For the six months ended June 30, 2020 and 2019, CF Inspection, which is part of the Pipeline Inspection segment, represented approximately 3.9% and 2.7% of our consolidated revenue, respectively.

Pipeline and Process Services

Entities owned by our parent company provided contract labor support to our Pipeline & Process Services segment during 2020. During the three and six months ended June 30, 2020, the Pipeline & Process Services segment incurred approximately $0.1 million and $0.4 million, respectively, associated with these services, which is included in costs of services in our Unaudited Condensed Consolidated Financial Statements

8.Earnings per Unit and Cash Distributions

Our net income (loss) is attributable and allocable to several typesStatement 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.Operations.  

 

Diluted net income (loss) per common7. Commitments 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.Contingencies

 

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.

CYPRESS ENERGY PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

9.Commitments and Contingencies

Security Deposits

Security Deposits

We haveThe Partnership has various performance obligations whichthat are secured with short-term security deposits (reflected as restricted cash equivalents in our Unaudited Condensed Consolidated Statements of $0.5Cash Flows) totaling $0.6 million at SeptemberJune 30, 20172020 and December 31, 2016,2019. These amounts are 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

Compliance Audit Contingencies

Certain customer master service agreements (“MSA’s”MSAs”) offer our customers the opportunityright 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’sMSAs 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 Septemberongoing. As of June 30, 2017, the Partnership had2020 and December 31, 2019, we established a reserve of $0.2 million as an estimated liabilityestimate of $0.1 million recorded for suchpotential liabilities related to these compliance audit contingencies.

 

Legal Proceedings

 

On July 3, 2014, a group of former minority shareholders of Tulsa Inspection Resources, Inc. (“Diaz v. CEM 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")December 12, 2019, three inspectors filed a putative collective action lawsuit alleging that TIR LLC and 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”)FLSA titled James Fithian,Francisco Diaz, et al v. CEM TIR, LLC, et al in the United States District Court for the WesternNorthern District of Texas, Midland Division. The plaintiff alleges he was a non-exempt employee ofOklahoma. TIR LLC and that he and other potential class members were not paid overtime in compliance withCEM TIR deny 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,claims. CEM TIR and Cypress Energy Partners – Texas,TIR LLC denyfiled a motion to dismiss one of the claims.plaintiffs for bringing the lawsuit in a venue that was inconsistent with the forum selection clause in his employment agreement mandating suit exclusively in the District Court of Tulsa County, Oklahoma. CEM TIR and TIR LLC also filed a motion to compel arbitration for the other two plaintiffs to enforce the binding arbitration clauses in their employment agreements. The Court has not yet ruled on either motion. However, all three plaintiffs subsequently initiated arbitration proceedings.

 

Internal Revenue Service AuditOther

 

We have been and may in the future be subject to litigation involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. In January 2016,addition, we received notice fromgenerally indemnify our customers for claims related to the Internal Revenue Service (“IRS”) that conveyed its intentservices we provide and actions we take under our contracts, including claims regarding the Fair Labor Standards Act and state wage and hour laws, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Claims related to audit the consolidated income tax return of oneFair Labor Standards Act are generally not covered by insurance. From time to time, we are subject to various claims, lawsuits and other legal proceedings brought or threatened against us in the ordinary course of our predecessor entitiesbusiness. These actions and proceedings may seek, among other things, compensation for the 2012 tax year. This audit concluded during the third quarteralleged personal injury, workers’ compensation, employment discrimination and other employment-related damages, breach of 2017 with no material effect on the Partnershipcontract, property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, punitive damages and civil penalties or its subsidiaries.other losses, liquidated damages, consequential damages, or injunctive or declaratory relief.


CYPRESS ENERGYENVIRONMENTAL PARTNERS, L.P.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

10.Reportable Segments

8. Leases

In the second quarter, we notified the landlord of our office headquarters of our intent to terminate a portion of our office lease effective November 2020. The termination of this lease will save us approximately $0.6 million in lease payments through November 2024.

9. Reportable Segments

 

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

PIS – This segment represents our pipeline inspection services operations. This segment provides independent inspection The amounts within “Other” represent corporate 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 expensesoverhead items not specifically allocable to ourthe other reportable segments.

  Pipeline  Pipeline &  Environmental       
  Inspection  Process Services  Services  Other  Total 
  (in thousands) 
                
Three months ended June 30, 2020                    
                     
Revenue $43,260  $7,153  $1,275  $  $51,688 
Costs of services  38,836   5,041   430      44,307 
Gross margin  4,424   2,112   845      7,381 
General and administrative  3,771   531   455   169   4,926 
Depreciation, amortization and accretion  555   140   383   133   1,211 
Gain on asset disposal, net     (4)  (7)     (11)
Operating income (loss) $98  $1,445  $14  $(302)  1,255 
Interest expense, net                  (1,152)
Foreign currency gains                  184 
Other, net                  165 
Net income before income tax expense                 $452 
                     
Three months ended June 30, 2019                    
                     
Revenue $104,006  $4,381  $2,704  $  $111,091 
Costs of services  92,560   3,028   696      96,284 
Gross margin  11,446   1,353   2,008      14,807 
General and administrative  4,605   634   772   147   6,158 
Depreciation, amortization and accretion  556   143   407   3   1,109 
Gains on asset disposals, net     (2)        (2)
Operating income (loss) $6,285  $578  $829  $(150)  7,542 
Interest expense, net                  (1,415)
Foreign currency gains                  84 
Other, net                  50 
Net income before income tax expense                 $6,261 

CYPRESS ENERGYENVIRONMENTAL 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.
  Pipeline  Pipeline &  Environmental       
  Inspection  Process Services  Services  Other  Total 
  (in thousands) 
                
Six months ended June 30, 2020                    
                     
Revenue $107,155  $10,075  $2,941  $  $120,171 
Costs of services  96,359   7,402   1,074      104,835 
Gross margin  10,796   2,673   1,867      15,336 
General and administrative  8,289   1,171   1,012   394   10,866 
Depreciation, amortization and accretion  1,111   285   794   229   2,419 
Gain on asset disposal, net     (30)  7      (23)
Operating income (loss) $1,396  $1,247  $54  $(623)  2,074 
Interest expense, net                  (2,276)
Foreign currency losses                  (273)
Other, net                  270 
Net loss before income tax expense                 $(205)
                     
Six months ended June 30, 2019                    
                     
Revenue $190,235  $6,355  $4,877  $  $201,467 
Costs of services  170,418   4,747   1,472      176,637 
Gross margin  19,817   1,608   3,405      24,830 
General and administrative  9,211   1,230   1,538   410   12,389 
Depreciation, amortization and accretion  1,111   286   809   7   2,213 
Gain on asset disposals, net     (23)        (23)
Operating income (loss) $9,495  $115  $1,058  $(417)  10,251 
Interest expense, net                  (2,726)
Foreign currency gains                  185 
Other, net                  138 
Net income before income tax expense                 $7,848 
                     
Total Assets                    
                     
June 30, 2020 $96,275  $14,652  $20,511  $17,938  $149,376 
                     
December 31, 2019 $114,858  $14,318  $21,911  $6,255  $157,342 

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 

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.


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 

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 

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 

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 

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 

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)

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) $1,347 

 Condensed Consolidating Statement of Comprehensive Income (Loss)

 For the Three Months Ended September 30, 2016

 (in thousands) 

        Non-       
  Parent  Guarantors  Guarantors  Eliminations  Consolidated 
                
 Net income (loss) $1,820  $3,286  $262  $(3,370) $1,998 
 Other comprehensive income (loss) -                    
 Foreign currency translation     (109)  38      (71)
                     
 Comprehensive income (loss) $1,820  $3,177  $300  $(3,370) $1,927 
                     
 Comprehensive income attributable to noncontrolling interests     81         81 
 Comprehensive loss attributable to general partner  (1,431)           (1,431)
 Comprehensive income (loss) attributable to limited partners $3,251  $3,096  $300  $(3,370) $3,277 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 Condensed Consolidating Statement of Comprehensive Income (Loss)

 For the Nine Months Ended September 30, 2017

 (in thousands) 

        Non-       
  Parent  Guarantors  Guarantors  Eliminations  Consolidated 
                
 Net income (loss) $(2,342) $(288) $(3,238) $2,006  $(3,862)
 Other comprehensive income -                    
 Foreign currency translation     (59)  (128)     (187)
                     
 Comprehensive income (loss) $(2,342) $(347) $(3,366) $2,006  $(4,049)
                     
 Comprehensive income (loss) attributable to noncontrolling interests     (1,290)        (1,290)
 Comprehensive loss attributable to general partner  (2,750)           (2,750)
 Comprehensive income (loss) attributable to limited partners $408  $943  $(3,366) $2,006  $(9)

 Condensed Consolidating Statement of Comprehensive Income (Loss)

 For the Nine Months Ended September 30, 2016

 (in thousands) 

        Non-       
  Parent  Guarantors  Guarantors  Eliminations  Consolidated 
                
 Net income (loss) $(6,031) $(6,787) $(10,049) $11,888  $(10,979)
 Other comprehensive income -                    
 Foreign currency translation     82   433      515 
                     
 Comprehensive income (loss) $(6,031) $(6,705) $(9,616) $11,888  $(10,464)
                     
 Comprehensive loss attributable to non-controlling interests     (4,898)        (4,898)
 Comprehensive loss attributable to general partner  (5,366)           (5,366)
 Comprehensive income (loss) attributable to controlling interests $(665) $(1,807) $(9,616) $11,888  $(200)

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 Condensed Consolidating Statement of Cash Flows

 For the Nine Months Ended September 30, 2017

 (in thousands) 

        Non-       
  Parent  Guarantors  Guarantors  Eliminations  Consolidated 
                
 Operating activities:                    
 Net income (loss) $(2,342) $(288) $(3,238) $2,006  $(3,862)
 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                    
 Depreciation, amortization and accretion     3,484   894      4,378 
 Impairments     688   2,910      3,598 
 (Gain) loss on asset disposal     88   7      95 
 Interest expense from debt issuance cost amortization  443            443 
 Equity-based compensation expense  1,136            1,136 
 Equity in earnings of investee     (98)        (98)
 Distributions from investee     75         75 
 Equity earnings in subsidiaries  (1,002)  3,008      (2,006)   
 Deferred tax benefit, net     (8)  (353)     (361)
 Non-cash allocated expenses  1,750            1,750 
 Foreign currency gains     (211)  (613)    (824)
 Changes in assets and liabilities:                    
 Trade accounts receivable     (13,249)  2,235   (569)  (11,583)
 Receivables from affiliates     (2,442)     2,442    
 Prepaid expenses and other  (323)  (635)  11  182   (765)
 Accounts payable and accrued payroll and other  4,320   3,756   531   (2,055)  6,552 
 Income taxes payable     (396)  125      (271)
 Net cash provided by (used in) operating activities  3,982   (6,228)  2,509      263
                     
 Investing activities:                    
 Proceeds from fixed asset disposals     1,576   2      1,578 
 Purchases of property and equipment     (1,169)  (13)     (1,182)
 Net cash provided by (used in) investing activities     407   (11)     396 
                     
 Financing activities:                    
 Taxes paid related to net share settlement of equity-based compensation  (120)           (120)
 Contributions from general partner  1,000            1,000 
 Distributions from subsidiaries  4,823   (4,812)  (11)      
 Distributions to limited partners  (9,813)           (9,813)
 Distributions to non-controlling members        (12)     (12)
 Net cash used in financing activities  (4,110)  (4,812)  (23)     (8,945)
                     
 Effects of exchange rates on cash     387   444      831 
                     
 Net increase (decrease) in cash and cash equivalents  (128)  (10,246)  2,919      (7,455)
 Cash and cash equivalents, beginning of period  695   20,251   5,747      26,693 
 Cash and cash equivalents, end of period $567  $10,005  $8,666  $  $19,238 
                     
 Non-cash items:                    
 Changes in accounts payable excluded from capital expenditures $  $320  $  $  $320 

CYPRESS ENERGY PARTNERS, L.P.

 Notes to the Unaudited Condensed Consolidated Financial Statements

 Condensed Consolidating Statement of Cash Flows

 For the Nine Months Ended September 30, 2016

 (in thousands) 

        Non-       
  Parent  Guarantors  Guarantors  Eliminations  Consolidated 
                
 Operating activities:                    
 Net income (loss) $(6,031) $(6,787) $(10,049) $11,888  $(10,979)
 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:                    
 Depreciation, amortization and accretion     3,379   975      4,354 
 Impairments     2,119   8,411      10,530 
 Gain on asset disposal        (2)     (2)
 Interest expense from debt issuance cost amortization  426            426 
 Equity-based compensation expense  829            829 
 Equity in earnings of investee     (234)        (234)
 Distributions from investee     138         138 
 Equity earnings in subsidiaries  1,889   9,999      (11,888)   
 Deferred tax benefit, net     (30)  (9)     (39)
 Non-cash allocated expenses  2,866            2,866 
 Changes in assets and liabilities:                    
 Trade accounts receivable     5,498   (2,326)  1,827   4,999 
 Receivables from affiliates     (2,401)     2,401    
 Prepaid expenses and other  (36)  (101)  217   973   1,053 
 Accounts payable and accrued payroll and other  2,791   3,435   2,812   (5,236)  3,802 
 Income taxes payable     (118)  (1)  35   (84)
 Net cash provided by operating activities  2,734   14,897   28      17,659 
                     
 Investing activities:                    
 Proceeds from fixed asset disposals        3      3 
 Purchases of property and equipment     (687)  (245)     (932)
 Net cash used in investing activities     (687)  (242)     (929)
                     
 Financing activities:                    
 Repayments of long-term debt     (4,000)        (4,000)
 Taxes paid related to net share settlement of equity awards  (100)           (100)
 Contribution attributable to general partner  2,500            2,500 
 Distributions from subsidiaries  9,622   (9,239)  (383)      
 Distributions to limited partners  (14,439)           (14,439)
 Distributions to non-controlling members        (415)     (415)
 Net cash used in financing activities  (2,417)  (13,239)  (798)     (16,454)
                     
 Effects of exchange rates on cash     82   395      477 
                     
 Net increase (decrease) in cash and cash equivalents  317   1,053   (617)     753 
 Cash and cash equivalents, beginning of period  378   19,570   4,202      24,150 
 Cash and cash equivalents, end of period $695  $20,623  $3,585  $  $24,903 
                     
 Non-cash items:                    
Accrued capital expenditures $  $12  $64  $  $76 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control, including, among other things, the risk factors discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 20162019, our Quarterly Report on Form 10-Q/A for the period ended March 31, 2020 and this Quarterly Report on Form 10-Q. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for oil and natural gas, production volumes, capital expenditures, weather, economic and competitive conditions, regulatory changes and other uncertainties, as well as those factors discussed below and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 20162019 and this Quarterly Report on Form 10-Q, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may or may not occur. See “Cautionary Remarks Regarding Forward-Looking Statements” in the front of this Quarterly Report on Form 10-Q.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a discussion of our business, including a general overview of our properties, our results of operations, our liquidity and capital resources, and our quantitative and qualitative disclosures about market risk broken down into three segments: (1) our Pipeline Inspection Services (“PIS”Pipeline Inspection”) segment is comprised ofcomprises our investment in the TIR Entities; (2) our IntegrityPipeline & Process Services (“IS”Pipeline & Process Services”) segment made up ofcomprises our 51% ownership investment in Cypress Brown Integrity, LLC and; (3) our Water and Environmental Services (W&ES”(“Environmental Services”) segment comprised ofcomprises our investments in various salt water disposal (“SWD”)treatment facilities and activities related thereto. The financial information for PIS, ISPipeline Inspection, Pipeline & Process Services and W&ESEnvironmental Services included in “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the interim financial statements and related notes included elsewhere in this report and prepared in accordance with accounting principles generally accepted in the United States of America and in our Consolidated Financial Statements for the year ended December 31, 2016.2019.

Overview

 

We are a growth-oriented master limited partnership formed in September 2013 to provide environmental services to energy and utility companies. We offer essential services that help protect the oilenvironment and gas industry. ensure sustainability. As a master limited partnership traded on the New York Stock Exchange (“NYSE”) (NYSE: CELP) we hold ourselves to the high standards of the Securities and Exchange Commission, Environmental Protection Agency, Department of Transportation, various state regulators, and the NYSE.

We provide a wide range of environmental services including independent inspection, integrity, and support services for pipeline and energy infrastructure owners and operators and public utilities. We also provide water pipelines, hydrocarbon recovery, disposal, and water treatment services.

We provide independent pipeline inspection and integrity services to various energy exploration and production and midstream companies and their vendors public utility companies, and energy exploration and production (“E&P”) companies in our PIS and IS segments throughout the United States and Canada.Canada through our Pipeline Inspection and Pipeline & Process Services segments. The PISPipeline Inspection segment is comprised ofcomprises the operations of theour TIR Entities and the ISPipeline & Process Services segment is comprised ofcomprises the operations of Brown. We also provide SWDsaltwater disposal and other water and environmental services to U.S. onshore oil and natural gas producers and trucking companies through our W&ESEnvironmental Services segment. We operate ten SWDnine (eight wholly-owned) water treatment facilities, eightall of which are located in the Bakken Shale region of the Williston Basin in North Dakota and two of which are located in the Permian Basin in west Texas.Dakota. We also have a management agreement in place to provide staffing and management services to an SWD facility in the Bakken Shale region (a facility in which we own aone 25% interest). W&ES customers are oil and natural gas exploration and production companies and trucking companies operating in the regions that we serve. -owned water treatment facility.

In all of our business segments, we work closely with our customers to help them protect the environment, property, and people. Our wide range of services also help our clients comply with increasingly complex federal and strictstate environmental and safety rules and regulations applicable to production and pipeline operations, assisting in reducing their operating costs.regulations. 

 

We enjoy strong long-term customer relationships, many of which date back 17 years in our Pipeline Inspection segment and ten years in our Pipeline & Process Services segment. In 2019, 28% of the gross margin of our Pipeline Inspection segment was generated from customers that we have served for over 10 years, and another 40% was generated from customers we have served for over five years. The majority of the gross margin of our Pipeline & Process Services and Environmental Services segments in 2019 was generated from customers that we have served for over 5 years.

Many clients encourage supplier diversity, and some encourage the use of minority-owned businesses as suppliers. To support clients seeking a minority qualified vendor solution, we have formed a strategic partnership with CF Inspection that allows us to offer our services to clients that require the services of an approved Women’s Business Enterprise (“WBE”). CF Inspection is certified as a WBE by the Supplier Clearinghouse in California and as a National Women’s Business Enterprise by the Women’s Business Enterprise National Council.

We have an experienced management team and board of directors with decades of industry experience and expertise.

Ownership

Ownership

As of SeptemberJune 30, 2017, Holdings owns approximately 58.6% of the Partnership, while affiliates of Holdings own approximately 5.8% of the Partnership, for a total ownership percentage of the Partnership of approximately 64.4% by2020, Holdings and its affiliates.affiliates own 64% of our common units. Holdings’ ownership group also owns 100% of the General Partner and thecertain incentive distribution rights.rights (although no such incentive distributions have been paid to date), and an affiliate of Holdings owns 100% of the preferred units.

 

22

Omnibus Agreement

Omnibus Agreement

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

things, our right of first offer on Holdings’ and its subsidiaries’ assets used in, and entities primarily engaged in, providing water treatment and other water and environmental services. So long as affiliates of Holdings controlcontrols our General Partner, the omnibus agreement will remain in full force and effect, unless we and Holdings agree to terminate it sooner. If affiliates of Holdings ceaseceases 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.agreement. 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.

 

Prior to January 1, 2020, the omnibus agreement called for Holdings to provide certain general and administrative services, including executive management services and expenses associated with our being a publicly-traded entity (such as audit, tax, and transfer agent fees, among others) in return for a fixed annual fee (adjusted for inflation) that was payable quarterly. This annual fee was $4.5 million in 2019. In an effort to simplify this arrangement so it would be easier for investors to understand, in November 2019, with the approval of the Conflicts Committee of the Board of Directors, we and Holdings agreed to terminate the management fee provisions of the omnibus agreement effective December 31, 2019. Beginning January 1, 2020, the executive management services and other general and administrative expenses that Holdings previously incurred and charged to us via the annual administrative fee are charged directly to us as they are incurred and are now paid directly by the Partnership. Under our current cost structure, we expect these direct expenses of $0.9 million onto be lower than the annual administrative fee that we previously paid, although we expect to experience more variability in our behalf duringquarterly general and administrative expense now that we are incurring the expenses directly than when we paid a consistent administrative fee each quarter. For the three and six months ended SeptemberJune 30, 2016, and $1.82019, Holdings charged us an administrative fee of $1.1 million and $2.9$2.2 million, on our behalf during the nine months ended September 30, 2017 and 2016, respectively. These expenses are reportedrespectively, recorded 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 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 partnerin 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.Operations.

 

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.

Pipeline Inspection

Pipeline Inspection Services

We generateThe Pipeline Inspection segment generates revenue in the PIS segment primarily by providing essential environmental services, including inspection and integrity services on a variety of infrastructure assets including midstream pipelines, gathering systems, and distribution systems, includingsystems. Services include nondestructive examination, in-line inspection support, pig tracking, survey, data gathering, and supervision of third-party construction, inspection, and maintenance and repair projects.contractors. Our results in this segment are driven primarily by the number of inspectors that perform services for our customers and the fees that we charge for those services, which depend on the type, skills, technology, equipment, and number of inspectors used on a particular project, the nature of the project, and the duration of the project. The number of inspectors engaged on projects is driven by the type of project, prevailing market rates, the age and condition of customers’ midstreamassets including pipelines, gas plants, compression stations, storage facilities, and gathering and distribution systems andincluding the legal and regulatory requirements relating to the inspection and maintenance of those assets. We chargealso bill our customers on a per-inspector basis, includingfor per diem charges, mileage, and other reimbursement items. Revenue and costs in this segment may be subject to seasonal variations and interim activity may not be indicative of yearly activity considering many of our customers develop yearly operating budgets and enter into contracts with us during the winter season for work to be performed during the remainder of the year. Additionally, inspection work throughout the United States during the winter months (especially in the northern states) may be hampered or delayed due to inclement weather.

 

Pipeline & Process Services

Integrity Services

We generateThe Pipeline & Process Services segment generates revenue in our IS segment primarily by providing essential environmental services, including hydrostatic testing services and chemical cleaning to major natural gas and petroleumenergy companies and pipeline construction companies ofon newly-constructed and existing natural gaspipelines and petroleum pipelines.related infrastructure. We generally charge our customers in this segment on a fixed-bid basis, with the price depending on the size and length of the pipeline being inspected,tested, the complexity of services provided, and the utilization of our work force and equipment. Our results in this segment are driven primarily by the number of field personnel that perform services for our customers and the fees that we charge for those services, which depend on the type and number of field personnel used on a particular project, the type of equipment used and the fees charged for the utilization of that equipment, and the nature and duration of the project.

 

Environmental Services

Water and Environmental Services

We generate revenueThe Environmental Services segment owns and operates nine (9) water treatment facilities with ten (10) EPA Class II injection wells in the W&ES segment primarily by treating flowback and produced water and injectingBakken shale region of the saltwater into our SWD facilities. Our results are driven primarily by the volumesWilliston Basin in North Dakota. We wholly-own eight of produced water and flowback water we inject into our SWDthese facilities and we own a 25% interest in the fees we charge for these services.remaining facility. These fees are charged on a per-barrel basis under contracts that are short-term in nature and vary based on the quantity and type of saltwater disposed, competitive dynamics, and operating costs. In addition, for minimal marginal cost, we generate revenue by selling residual oil we recover from the water. We also generate revenue managing an SWD facility for a fee.

The volumes of saltwater disposed at our SWDwater treatment facilities are driven by water volumesconnected to twelve (12) pipeline gathering systems, including two (2) that we developed and own. We specialize in the treatment, recovery, separation, and disposal of waste byproducts generated from existingduring the lifecycle of an oil and natural gas wellswell to protect the environment and our drinking water. All of the water treatment facilities utilize specialized equipment and remote monitoring to minimize the facilities’ downtime and increase the facilities’ efficiency for peak utilization. Revenue is generated on a fixed-fee per barrel basis for receiving, separating, filtering, recovering, processing, and injecting produced and flowback water. We also sell recovered oil, receive fees for pipeline transportation of water, and receive fees from a partially-owned water treatment facility for management and staffing services.

Outlook

Overall

Our second quarter 2020 results were adversely affected by the significant decline in oil prices during their useful livesthe year, which was driven in part by increased supply from Russia, Saudi Arabia, and development drillingother oil-producing nations as a result of a price war and production volumes from wells located near our facilities. Producers’ willingness to engage in new drilling is determinedpart by a numbersignificant decrease in demand as a result of factors, the COVID-19 pandemic. In response to the COVID-19 pandemic, we implemented our business continuity plan, with most important of which areour corporate employees working from home, and we have continued our field operations without any significant disruption in our service to our customers.


In recent months, we took swift actions to reduce overhead and other costs by over $4.5 million annually through a combination of salary reductions, reductions in force, furloughs, hiring freezes, reductions in hours, and other cost-cutting measures. We have elected to defer some discretionary capital expenditures and we remain focused on opportunities to reduce our working capital needs. We will take further actions as necessary to adjust to evolving market conditions. We believe the actions we have taken will not only temper the impact of the activity declines, but also enable us to be in a strong position to take advantage of the market’s eventual recovery.

In March and April 2020, in an abundance of caution, we borrowed $39.1 million on our revolving credit facility to provide substantial liquidity to manage our business in light of the COVID-19 outbreak and the significant decline in the price of crude oil. In May and June 2020, we repaid $28.0 million of these borrowings. As of June 30, 2020, we had cash and cash equivalents of $27.8 million. We expect the leverage ratio under our Credit Agreement to increase in the future until market conditions improve (the leverage ratio under the Credit Agreement is measured once per quarter, using trailing-twelve-month EBITDA).

In light of the current market conditions, we have made the difficult decision to temporarily suspend payment of common unit distributions. This will enable us to retain more cash to manage our financing needs during these challenging market conditions.

The U.S. Pipeline and projected pricesHazardous Materials Safety Administration (“PHMSA”) recently issued new rules that impose several new requirements on operators of oil, naturalonshore gas transmission systems and natural gashazardous liquids (“NGLs”),pipelines. The new rules expand requirements to address risks to pipelines outside of environmentally sensitive and populated areas. In addition, the costrules make changes to drillintegrity management requirements, including emphasizing the use of in-line inspection technology. The new rules took effect on July 1, 2020 with various implementation phases over a period of years. We remain optimistic about the long-term demand for environmental services such as pipeline inspection, integrity services, and operatewater solutions, due to our nation’s aging pipeline infrastructure, and we believe we continue to be well-positioned to capitalize on these opportunities.

In 2018, Holdings completed two acquisitions to further broaden our collective suite of environmental services. One acquisition provided entry into the municipal water industry, whereby we can offer our traditional inspection services, including corrosion and nondestructive testing services, as well as in-line inspection (“ILI”). Holdings’ next generation 5G ultra high-resolution magnetic flux leakage (“MFL”) ILI technology called Eco Vision™ UHD, is capable of helping pipeline owners and operators better manage the integrity of their assets in both the municipal water and energy industries. We believe Holdings is the only technology provider today capable of offering this service to the large and diverse municipal water industry that provides drinking water to our communities. Holdings has been investing in the companies to prepare to offer them for drop down to us, once market conditions warrant. It is unlikely this will occur in 2020.

Our parent company’s ownership interests continue to remain fully aligned with our unitholders, as our General Partner and insiders collectively own 76% of our total common and preferred units.

Pipeline Inspection

Revenues of our Pipeline Inspection segment decreased from $104.0 million during the three months ended June 30, 2019 to $43.3 million during the three months ended June 30, 2020, a well,decrease of 58%. Gross margins decreased from $11.4 million during the availability and costthree months ended June 30, 2019 to $4.4 million during the three months ended June 30, 2020, a decrease of capital, and environmental and governmental regulations. We generally expect61%. Revenues during the levelsecond quarter of drilling to correlate with long-term trends in prices of oil, natural gas, and NGLs.


We also generate revenues2019 benefited from the sales of residual oil recovered during the saltwater treatment process.  Our ability to recover residual oil is dependent upon the residual oil contentlargest contract in the saltwater we treat,17-year history of TIR, which is, among other things,was a function of water type, chemistry, source, and temperature.  Generally, where outside temperatures are lower, there is less residual oil content and separation is more difficult.  Thus, our residual oil recovery during the winter season is usually lower than our recovery during the summer seasonsingle-source pipeline inspection project in North Dakota.  Additionally, residual oil content will decrease if, among other things, producers begin recovering higher levels of residual oil in saltwater prior to delivering such saltwater to us for treatment.

Outlook

Overall

For our PIS and IS business segments, revenues, margins, and margin percentages were higherTexas. This project began in the thirdfourth quarter of 2017 than they were2018, peaked in the second quarter of 2017, even though some projects were delayed due to Hurricane Harvey, which struck the gulf coast in August 2017. This is generally consistent2019, and continued with the seasonality inherent in our business, in whichdeclining headcounts into the third quarter of each year is generally2020. Our revenues during the strongest quarter of the annual business cycle. We believe that our PIS and IS segments will have many opportunities over the next several years, as many customer projects previously delayed have recently been approved. We have also invested in organic growth and have started twothree months ended June 30, 2020 did not significantly benefit from any other large new business units this year, with the latest business unit offering mechanical integrity services, a new line of inspection and integrity support. This new line of business has already been awarded several new projects from investment-grade companies.

For our Pipeline Inspection Services segment, headcount was higher in the third quarter of 2017 than it was inprojects. During the second quarter of 2017,2020, the COVID-19 outbreak, combined with a significant decrease in crude oil prices resulting from reduced demand and an anticipated increase in supply from Saudi Arabia and Russia, led many of our customers to change their budgets and plans. 

In our Pipeline Inspection segment, most projects that were already in process continued, despite the lossCOVID-19 outbreak. However, many customers have announced reductions in their capital expansion budgets and deferrals of over 200 inspectors in Canada earlier this year. We have continuedplanned construction projects, and we expect these changes to focus onreduce our nondestructive examination business, staking, and mechanical integrity, businesses and the revenues of these business lines were higherrevenue-generating opportunities in the third quarter 2017 than in any previous quarter. These businesses typically generate higher margins than our legacy inspection business.near term. We expect revenuescustomers to continue to conduct maintenance activities, many of which are government-mandated. However, many customers are deferring maintenance work whenever possible if they have the option. We believe our reputation developed over 17 years will give us a competitive advantage during this challenging industry downturn when many of our Canadian operations to be much lower in the future than they have been in the recent past due to the loss of low margin work from our largest Canadian customer at the end of the second quarter. We continue to support this customer with higher margin integrity services.

Revenues of our 51% owned Integrity Services segment were higher in the third quarter of 2017 than they were in the second quarter of 2017, as our utilization rate significantly improved and our backlog has remained healthy. Earlier in 2017, we hired new business development personnel to assist in these efforts and we have seen some successful increases in backlog for the fourth quarter of 2017 and the first quarter of 2018.competitors may not survive. We continue to bid on numerous upcomingnew work opportunities and remain focused on winning more of these bidsthat could benefit us if we are successful in an on-going effort to increase our volume and backlog.

Revenuesbeing awarded those inspection opportunities. The vast majority of our Watercustomers are under significant financial pressures to reduce costs and Environmental Services segment were 5% higher in third quarter 2017 than in the second quarter. Two ofhave been aggressively pursuing pricing concessions. We value our facilities are located in the Permian basin, which has experienced an increase in production activity. The remainder of our facilities are in the Bakken region, where the recovery of production activity has been slower. However, through the nine months ended September 30, 2017, a substantial amount of acquisition activity has occurredlong-term customer relationships and work closely with private equity backed energy companies acquiring both production and acreage in the Bakken with plansthem to increase drillingaddress this reality, which in turn requires us to modify what pay we can offer to our valued inspectors. The net result of the actions remains to be known at this time, but it will create substantial amounts of new water for disposal. Additionally, in both regions, a significant number of wells have been drilled but not yet completed. Once producers complete these wells, we expectlead to haveless working capital required to operate the opportunity to generate additional volumes and revenues. As previously disclosed, two of our facilities were struck by lightning and one remains out of service. Our Orla, Texas facility should be fully rebuilt and open for regular business in December, and we continue to work with our insurance company on the covered loss at our Grassy Butte facility in North Dakota. We also continue to work on the growth capital expenditure development of a water gathering system that will connect three large five well pads into one of our existing facilities in the Bakken for a large public energy company.

Despite the low commodity prices of recent years, we maintained positive operating cash flows during the year ended December 31, 2016 and expect to generate positive operating cash flows for the year ending December 31, 2017.businesses.

 

We continue to evaluate several interesting acquisition opportunities, including continued due diligence of one sizable exclusive opportunity currently under a letter of intent. Areas of focus continue to be traditional midstream opportunities and opportunities in our existing lines of business. Holdings remains willing to deploy capital to assist us in acquiring attractive assets that may be larger than what we can currently acquire independently, with plans to offer those assets to us as drop-down opportunities.

Pipeline Inspection Services

Demand is once again growing for our pipeline inspection services, as we operate in a very large market, with well over 1,000more than 3,000 customer prospects that we do not currently serve who require federalfederally and/or state mandatedstate-mandated inspection and integrity services.

An energy research analyst recently published the following multi-year pipeline industry update that is summarized below:

2017 Forecast: Estimated 2017 pipeline spending of $25.5 billion, a 5.1% increase over 2016 levels of $24.2 billion. This follows very strong growth of 25.2% in 2016. With this update, essentially shifted all pipeline construction activity that has not yet begun, or is firmly scheduled to begin in the next two months, into future years.

2018 Forecast: Tracking $38.5 billion of pipeline/midstream infrastructure spending proposed for 2018. On a probability-weighted basis, forecasted all-in potential 2018 spending of $33.1 billion, or a 30.2% year-to-year increase. If only highest confidence Tier 1 projects were to move forward, would produce 13.7% year-to-year growth. Layering in moderate confidence Tier 2 projects, the growth forecast rises to 25.3%.

2019 and beyond: Anticipated 2019 spending will reflect growth over 2018 levels. Given that the database only includes announced, named pipeline projects, the tracker currently reflects a decline in proposed activity in 2019 and 2020. This is a function of the timing of project announcements, and is expected to rise through 2018. Virtually every industry contact/source along the supply chain, including equipment providers, engineers and construction sources, are suggesting that 2019 could post growth off of a record 2018.

Bidding and award activity is accelerating following delays related to the lack of a quorum at FERC. Recall that the Federal Energy Regulatory Commission (“FERC”) lacked a quorum for roughly 6 months, delaying large project approval activity in the first half of 2017. The quorum was re-established on August 10, with the swearing-in of Robert Powelson. At the time the quorum was re-established, it was estimated that approximately $14 billion of pipeline projects had been backlogged. FERC is beginning to take action on the queue, with NEXUS, Atlantic Coast, and the Mountain Valley Pipelines approved in October.

Tracking nearly $30 billion in projects that could be awarded over the next approximately 12 months, and believe that at least $4.5 billion worth of projects is currently out to bid. This bodes well for additional large pipeline project awards for contractors in late 2017/early 2018. Developers are concerned about procuring quality construction partners, given that the industry is likely to reach full utilization in 2018. This generally bodes well for contractor pricing, terms, and conditions.

Our continued focus remains on both maintenance and integrity work on existing pipelines, as well as work on new projects. The majority of our existing and potential customers are once again investing in their businesses following a difficult economic downturn. We continue to focus on new lines of business to serve our existing customers, including mechanical integrity, pipeline pig cleaning, and decontamination services. The majority of our clients are large public investment-grade companies with long planning cycles that lead to healthy backlogs of new long-term projects when market conditions warrant and existing pipeline networks that also require inspection and integrity services. We believe that with regulatory requirements, andcoupled with the aging pipeline infrastructure, mean that, the PIS business is more insulated from changes inregardless of commodity prices, our customers will require our inspection services. We recently started a new service line to offer corrosion inspection services, nondestructive examination, and related support services to the municipal water and the offshore energy markets. We have been aggressively pursuing organic business development (despite the work from home environment) and have been awarded some new customer contracts and relationships that should benefit us in the near term than has been the case in the past.future. However, a prolonged depressiondownturn in oil and natural gas prices could lead to a downturn incontinued low demand for our services, as was the case in recent years. services.


Pipeline & Process Services

The two year downturn in energy prices required manyRevenues of our customers that rely more heavily on commodity pricesPipeline & Process Services segment increased from $4.4 million during the three months ended June 30, 2019 to focus on reducing their operating costs, leverage, and$7.2 million during the three months ended June 30, 2020, an increase of 63%. Gross margins increased from $1.4 million during the three months ended June 30, 2019 to $2.1 million during the three months ended June 30, 2020, an increase of 56%. The increase in many cases they delayed or cancelled new projects. Several clients have soughtrevenue was due to reduce the rates paid to inspectors to reduce their inspection costs. We have recently renewed several sizable existing contracts and are bidding on several new contracts. However, we continue to see certain of our customers’increased success in winning bids for projects slipping past original start dates as a result of permitting orimproved business development efforts. We believe we have positioned ourselves as a preferred provider for large hydrotesting projects with our customer base. Although market conditions have been adverse for our other delays. This has improved substantially followingbusinesses, hydrotesting is one of the changelast steps to be completed before a pipeline is placed into service, and during the second quarter of 2020, a number of pipelines on which construction began prior to the COVID-19 pandemic were nearing completion. 

In 2018, we opened a new office in Odessa, Texas to better serve the Permian basin market. In addition, we added several industry veterans to our management team in order to further enhance our image and grow the segment. In early 2019, we opened a new location in the FERC administration as noted above. Year to date in 2017, we added 26 new customers.  

Integrity Services

Brown, our 51% owned hydrostatic testing business unit, has seen a significant improvement through 2017 in its utilization rate and backlog. Brown had a difficult year in 2016, which forced us to implement aggressive measures to manage and reduce its cost structure. We have recently hired new business development personnel who are focused on the potential synergies that may develop between IS and other current customers of the Partnership, as well as the growth and nurture of Brown’s historical, ongoing business. The initial results have been encouraging and the new construction projects referenced above should significantly benefit Brown. Brown operated in 13 states during 2016, compared with over 40 states that the TIR Entities (through our PIS segment) operated in throughout 2016. Year-to-date in 2017, Brown has worked in 15 states and has successfully obtained new business from TIR relationships. Brown’s revenues improved in the third quarter along with its backlog.Houston market. Brown continues to enjoy an excellent reputation in the industry and has a substantial amount of new work that it is currently bidding to win. Year-to-dateindustry. Although the planned reduction in 2017, Brown added 10 new customers.

Water and Environmental Services

Quarterly volumes in our W&ES segment grew 5% over the prior quarter, despite two of our facilities having been hitcapital expansion projects by lightning earlier in the year. Our average revenue per barrel held steady at $0.68 per barrel (inclusive of disposal fees, residual oil sales, and management fees). Drilling activity has improved dramatically following the downturn and the low that occurred in May 2016. As of the end of October 2017, as reported publicly by Baker Hughes:

Total US rig count of 909, including 379 in the Permian basin and 49 in the Williston basin/Bakken;

Rigs have increased 125%, or 505 rigs, from the May 2016 trough of 404; and

Rigs still remain down 52.9%, or 1,022 rigs, from September 2014 peak of 1,931.

Crude oil prices have also improved, and at the end of October, WTI crude exceeded $54 per barrel of oil. The decline in the market price of crude oil, which began in the second half of 2014, has had an adverse impact on our volumes and revenues over the last three years. The resultant slowdown in exploration and production activity led to lower new drilling activity, volumes, and commodity prices from sales of crude oil we recover from the water we process. In addition, many of our E&P customers requested pricing concessions to help them cope with the lower commodity prices, and the market became over supplied relative to activity levels. In the majority of the basins in the country, new SWD facilities were developed to support previous rig counts and activity levels prior to the sharp contraction in activity and commodity prices. These events have led to excess SWD facility supply relative to current demand in many locations, including the Bakken and the Permian that, in turn, has led to aggressive pricing.

We have always focused on produced water and piped water whenever possible instead of trucked flowback water, and therefore,will reduce our revenue-generating opportunities, we believe we have been less impacted than manydeveloped a strong reputation over the last decade that will give us a competitive advantage when bidding on future work. We remain active in bidding for new projects and we believe this downturn may put some competitors out of business.

Environmental Services

Revenues of our competitorsEnvironmental Services segment decreased from $2.7 million during the three months ended June 30, 2019 to $1.3 million during the three months ended June 30, 2020, a decrease of 53%. Gross margins decreased from $2.0 million during the three months ended June 30, 2019 to $0.8 million during the three months ended June 30, 2020, a decrease of 58%. Low commodity prices, an excess of supply, and low demand have led to a significant reduction in activity by producers in North Dakota. 

Bakken Clearbrook oil pricing has been under intense pressure, along with WTI oil prices. WTI oil prices, which were at $61.14 at December 31, 2019, decreased in January and gas economic downturn. DuringFebruary 2020, decreased even more sharply in March and April 2020, and then gradually increased to $39.27 per barrel at June 30, 2020. Pipeline capacity and storage constraints have also adversely impacted this market. Several prominent exploration and production customers have elected to shut in their production instead of selling oil at these prices. According to a published rig count as of August 7, 2020, the quarter, 90%Williston basin of our volumes were produced water and approximately 45%the Bakken totaled 11 rigs, down 82% from its peak in 2019 of 61 rigs.

Although market conditions are adverse, we expect to continue to benefit from the fact that 99% of our water in 2020 was received viaproduced water from existing wells (rather than flowback water from new wells) and 63% of our water in 2020 was from dedicated pipelines. InWe also took steps to reduce our operating costs, including the temporary closure during the second quarter of 2016, we took aggressive actions to reduce operating costs in an effort to offset the financial impact2020 of continued depressedseveral of our facilities. We have since reopened these facilities as market volumes and prices, and continue to see the positive results of those actions, including gross margins exceeding 60%. Additionally, we continue to focus on piped water opportunities to secure additional long-term volumes of produced water for the life of the oil and gas wells’ production and currently are working onconditions have improved. We recently completed a growth capital expenditure project to develop a water gathering system that will connect to 15 oil wells fornew contract with a public energy company in the Bakken. We also provide management services for a Bakken SWD facility in which we also own a 25% interest.

We continue to actively pursue acquisition opportunities with the same discipline that protected the Partnership during a heated market in 2014 and 2013 that drove up valuationsconnect their pipeline to unsustainable levels, leading to many bankruptcies and restructurings. We also continue to evaluate and compete for some interesting opportunities for pipelines and new SWD facilities directly with E&P companies seeking to monetize their midstream assets or minimize their spending on infrastructure required to support their production. We continue to work collaboratively withone of our customers to help them address the volatility in commodity prices and their need to reduce operating expenses. We also continue to carefully evaluate market pricing on a facility-by-facility basis to ensure we remain competitive.water treatment facilities.

 

In January 2017, our Orla, Texas facility was struckJuly 2020, in relation to an ongoing lawsuit challenging various federal authorizations for the Dakota Access Pipeline, a federal court ordered that the Dakota Access Pipeline be shut down and drained of oil by lightning.August 5, 2020. The downhole facilities were not damagedowners of the pipeline appealed the decision, and we had insurance coveringa federal appeals court stayed the surface facilities with a reasonable deductible. We do not carry business interruption insurance given its costs, waiting periods,July 2020 order to close the pipeline and coverages. Within two weeks,ordered further briefing on the facility re-opened with temporary surface facilities. We have begunissue. The Dakota Access Pipeline transports approximately 40% of the redevelopment process with insurance proceeds and plan to have this facility fully functional in December. We continue to take both piped and trucked water with temporary facilities. In July 2017, a lightning strike at our Grassy Butte, North Dakota SWD facility initiated a firecrude oil that effectively destroyed the surface storage equipment at the facility, but it did not damage our pumps, electrical, housing, office, or downhole facilities. The facility has been closed while we negotiate our insurance claim. We have reached an agreement with the insurance carrier and plan to commence reconstruction with the intent to open for business againis produced in the first quarterBakken region. Although most of 2018. the production from the wells that our facilities serve is not transported on the Dakota Access Pipeline, the closure of the pipeline would likely have an adverse effect on overall production in the Bakken, which would likely reduce the volume of water delivered to our facilities.


Results of Operations

 

Consolidated Results of Operations

The following table summarizes our Unaudited Condensed Consolidated Statements of Operations for the three and nine month periodssix months ended SeptemberJune 30, 20172020 and 2016:2019:

 

 Three Months Ended
September 30,
 Nine Months Ended
September 30,
  Three Months Ended June 30, Six Months Ended June 30, 
 2017 2016 2017 2016  2020 2019 2020 2019 
   (in thousands)    (in thousands) 
                
Revenues $77,682  $81,806  $216,971  $227,591 
Revenue $51,688  $111,091  $120,171  $201,467 
Costs of services  68,292   71,880   192,643   202,540   44,307   96,284   104,835   176,637 
Gross margin  9,390   9,926   24,328   25,051   7,381   14,807   15,336   24,830 
                                
Operating costs and expense:                                
General and administrative - segment  5,276   3,896   13,351   13,328   4,757   6,011   10,472   11,979 
General and administrative - corporate  298   1,160   2,662   3,477   169   147   394   410 
Depreciation, amortization and accretion  1,184   1,214   3,561   3,685   1,211   1,109   2,419   2,213 
Impairments        3,598   10,530 
Losses on asset disposals, net  208      95    
Operating income (loss)  2,424   3,656   1,061   (5,969)
Gain on asset disposals, net  (11)  (2)  (23)  (23)
Operating income  1,255   7,542   2,074   10,251 
                                
Other income (expense):                
Other (expense) income:                
Interest expense, net  (1,907)  (1,641)  (5,411)  (4,878)  (1,152)  (1,415)  (2,276)  (2,726)
Foreign currency gains  557      824    
Foreign currency gains (losses)  184   84   (273)  185 
Other, net  17   210   122   257   165   50   270   138 
Net income (loss) before income tax expense  1,091   2,225   (3,404)  (10,590)  452   6,261   (205)  7,848 
Income tax expense  529   227   458   389   71   618   291   824 
Net income (loss)  562   1,998   (3,862)  (10,979)  381   5,643   (496)  7,024 
                                
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 income attributable to noncontrolling interests  697   277   609   58 
Net (loss) income attributable to partners / controlling interests  (316)  5,366   (1,105)  6,966 
                                
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 attributable to preferred unitholder  1,033   1,033   2,066   2,066 
Net (loss) income attributable to common unitholders $(1,349) $4,333  $(3,171) $4,900 

  

See the detailed discussion of revenues, costs of services, gross margin, general and administrative expense and depreciation, amortization and accretion by reportable segmentsegments below. The following is a discussion of significant changes in the non-segment related corporate other income and expenses during the respective periods.

General and administrative – corporate.General and administrative-corporate decreased primarily dueadministrative expense – corporate includes equity-based compensation expense for certain employees and certain administrative expenses not directly attributed to the omnibus administrative expense charge of $1.0 million that was incurred in the third quarter of 2017 and recorded in general and administrative-segment in 2017.  This omnibus administrative expense was waived by the sponsor in 2016. Amounts recorded in general and administrative-corporate include administrative expenses incurred by Holdings on our behalf (and not charged to us).operating segments.

Interest expense.Interest expense primarily consists of interest on borrowings under our Credit Agreement, as well as amortization of debt issuance costs and unused commitment fees. Interest expense increased from 2016decreased during the six months ended June 30, 2020 compared to 2017the six months ended June 30, 2019 primarily due to an increase inlower interest rates. Average debt outstanding during the nine months ended September 30, 2017 and 2016 was $136.9 million and $137.6 million, respectively. The average interest rate on our borrowings has increased from 4.08%revolving credit facility was 4.25% for the six months ended June 30, 2020, compared to 6.02% for the six months ended June 30, 2019. This decrease was partially offset by a higher average debt balance outstanding. Average debt outstanding was $89.6 million for the six months ended June 30, 2020, compared to $80.5 million for the six months ended June 30, 2019. In March and April 2020, in an abundance of caution, we borrowed a combined $39.1 million on the Credit Agreement to provide substantial liquidity to manage our business in light of the COVID-19 outbreak and a significant decline in the nine months ended September 30, 2016 to 4.62% inprice of crude oil. In May and June 2020, we repaid a combined $28.0 million on the nine months ended September 30, 2017.Credit Agreement.

 

Foreign currency gains.gains (losses). During the threeOur Canadian subsidiary has certain intercompany payables to our U.S.-based subsidiaries. Such intercompany payables and nine months ended September 30, 2017, we recorded $0.6 million and $0.8 million, respectively, of income associated withreceivables among our consolidated subsidiaries are eliminated on our Unaudited Condensed Consolidated Balance Sheets. We report currency translation adjustments on these intercompany balances amongpayables and receivables within foreign currency gains (losses) in our consolidated subsidiaries.Unaudited Condensed Consolidated Statements of Operations. The net foreign currency losses during the six months ended June 30, 2020 resulted from the depreciation of the Canadian dollar relative to the U.S. dollar (the value of the Canadian dollar declined 4% relative to the U.S. dollar during the six months ended June 30, 2020).

 

OOther,ther, net.Other income includes income associated with our 25% interest in an SWDa water treatment facility, which we account for under the equity method.


Income tax expense.expense (benefit). IncomeOur income tax expense includesprovision relates primarily to (1) our U.S. corporate subsidiaries that provide services to public utility customers, which do not appear to fit within the definition of qualified income as it is defined in the Internal Revenue Code, Regulations, and other guidance, which subjects this income to U.S. federal and state income taxes, related(2) our Canadian subsidiary, which is subject to two of our taxable corporate subsidiaries inCanadian federal and provincial income taxes, and (3) certain other state income taxes, including the United States and one taxable corporate subsidiary in Canada (two in our PIS segment and one in our IS segment), as well as business activity, gross margin, andTexas franchise taxes incurred in certain states.tax. We estimate an annual tax rate based on our projected income for the year and apply that annual tax rate to our year-to-date earnings. Income tax expense decreased from $0.8 million during the six months ended June 30, 2019 to $0.3 million for the six months ended June 30, 2020 primarily due to decreased income in our U.S. corporate subsidiary that provides services to public utility customers and decreases in revenue that is subject to the Texas franchise tax.


As a publicly-traded partnership, we are subject to a statutory requirement that 90% of our total gross income represents “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements), determined on a calendar-year basis. Income generated by taxable corporate subsidiaries is excluded from this calculation. During the six months ended June 30, 2020, substantially all of our gross income, which consisted of approximately $89.8 million of revenue (exclusive of the income generated by our taxable corporate subsidiaries), represented “qualifying income”.

 

Net lossincome attributable to noncontrolling interests. We own a 51% interest in Brown and a 49% interest in CF Inspection. The accounts of these subsidiaries are included within our 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 interestinterests in our Unaudited Condensed Consolidated Statements of Operations.

 

Net lossincome attributable to general partnerpreferred unitholder. In 2018, we issued and sold $43.5 million of preferred equity. The net lossholder of the preferred units is entitled to an annual return of 9.5% on this investment. The earnings attributable to the general partner during the three and nine months ended September 30, 2017 and 2016 consists of expenses that Holdings incurred on our behalf. Since Holdings did not charge us for these expenses, we recorded these expenses as an equity contribution from our general partner. The net loss attributable to the general partner in the three and nine months ended September 30, 2017 also includes $1.0 million of cash support provided by the General Partner for reimbursement of expenses. The net loss attributable to the general partner in the three and nine months ended September 30, 2016 also includes $0.5 million and $2.5 million, respectively, of cash support provided by the General Partner for reimbursement of expenses.preferred unitholder reflects this return.

 

Segment Operating Results



Pipeline Inspection Services (PIS)

 

The following table summarizes the operating results of the PISPipeline Inspection segment for the three months ended SeptemberJune 30, 20172020 and 2016.  

  Three Months Ended September 30, 
  2017  % of Revenue  2016  % of Revenue  Change  % Change 
  (in thousands, except average revenue and inspector data) 
    
Revenue $72,737      $75,313      $(2,576)  (3.4)%
Costs of services  65,323       67,579       (2,256)  (3.3)%
Gross margin  7,414   10.2%  7,734   10.3%  (320)  (4.1)%
                         
General and administrative  3,893   5.4%  2,920   3.9%  973   33.3%
Depreciation, amortization and accretion  577   0.8%  608   0.8%  (31)  (5.1)%
Operating income $2,944   4.0% $4,206   5.6% $(1,262)  (30.0)%
                         
Operating Data                        
Average number of inspectors  1,211       1,231       (20)  (1.6)%
Average revenue per inspector per week $4,570      $4,655      $(85)  (1.8)%
                         
Revenue variance due to number of inspectors                 $(1,201)    
Revenue variance due to average revenue per inspector                 $(1,375)    

2019. 

Revenues. Revenues

  Three Months Ended June 30, 
  2020 % of Revenue  2019 % of Revenue  Change % Change 
  (in thousands, except average revenue and inspector data) 
                
Revenue $43,260     $104,006     $(60,746) (58.4)%
Costs of services  38,836      92,560      (53,724) (58.0)%
Gross margin  4,424  10.2%  11,446  11.0%  (7,022) (61.3)%
                      
General and administrative  3,771  8.7%  4,605  4.4%  (834) (18.1)%
Depreciation and amortization  555  1.3%  556  0.5%  (1) (0.2)%
Operating income $98  0.2% $6,285  6.0% $(6,187) (98.4)%
                      
Operating Data                     
Average number of inspectors  700      1,673      (973) (58.2)%
Average revenue per inspector per week $4,754     $4,782     $(28) (0.6)%
Revenue variance due to number of inspectors               $(60,134)   
Revenue variance due to average revenue per inspector               $(612)   

Revenue. Revenue decreased $2.6$60.7 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016, primarily2019, due to a decrease in the average number of inspectors engaged (a decrease of 20973 inspectors accounting for a $1.2$60.1 million of the revenue decrease) and a reductiondecrease in the average revenue billed for eachper inspector (accounting for a $1.4$0.6 million of the revenue decrease).

Revenues during the three months ended June 30, 2019 benefited from the largest contract in the 17-year history of TIR, which was a single-source pipeline inspection project in Texas. This project began in the fourth quarter of 2018, peaked in the second quarter of 2019, and has continued with declining headcounts into third quarter 2020. We generated $1.6 million and $23.2 million of revenue from this project during the three months ended June 30, 2020 and 2019, respectively. Our revenues during the three months ended June 30, 2020 did not significantly benefit from any other large new projects. During the three months ended June 30, 2020, the COVID-19 outbreak, combined with a significant decrease in crude oil prices resulting from reduced demand and an anticipated increase in supply from Saudi Arabia and Russia, led many of our customers to change their budgets and plans. Revenues of our Canadian businesssubsidiary that serves public utility customers decreased $8.6by $7.9 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016,2019, due primarilyin part to lower activity as a result of the lossCOVID-19 pandemic. Revenues of a major customer in the second quarter of 2017. This decrease was partially offset by an increase of $6.0 million in our U.S. domestic business lines, including increases of $1.3 million in our public utility business and $0.8 million in nondestructive examination service line decreased by $1.8 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016.2019, due in part to lower activity as a result of the COVID-19 pandemic.


Costs of services.Costs of services decreased $2.3$53.7 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016, corresponding2019, primarily related to thea decrease in revenue.the average number of inspectors employed during the period.

 

Gross margin.Gross margin decreased $0.3$7.0 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016,2019. The gross margin percentage was 10.2% in 2020, compared to 11.0% in 2019. The decrease in gross margin percentage was due in part to lower revenues of our nondestructive examination service line (this service line carries more fixed costs than our other inspection service lines), due in part to an annual increase in pay for a group of inspectors for which the resultant increase in our billing rates was pending receipt of a signed contract modification from the customer, and a slightly decreased margin percentage.in part to changes in the mix of revenue among our customer base.

 

General and administrative. General and administrative expenses increased $1.0decreased by $0.8 million of which $0.7 million was dueduring the three months ended June 30, 2020 compared to the omnibus administrativethree months ended June 30, 2019, due primarily to a decrease in employee compensation expense chargethrough a combination of salary reductions, reductions in force, furloughs, hiring freezes, reductions in hours, and reductions in incentive compensation and sales commission expense. Legal fees increased by $0.3 million as a result of costs associated with certain employment-related lawsuits and claims. Expenses we incurred and allocatedfor costs that were previously incurred by Holdings pursuant to the segments inOmnibus Agreement were $0.2 million lower during the third quarter of 2017 that was waivedthree months ended June 30, 2020 than the administrative fee charged by Holdings during the three months ended June 30, 2019; however, the benefit of this reduced expense was partially offset by increased expense resulting from a reassessment of the allocation of shared expenses to the various segments, which resulted in 2016less expense being charged to the Environmental Services segment and recordedmore expense being charged to the Pipeline Inspection segment in general and administrative-corporate.2020.

 

Depreciation, amortization and amortization.accretion. Depreciation, amortization and amortizationaccretion expense during the third quarter of 2017three months ended June 30, 2020 was not significantly different from depreciation, amortization and amortizationaccretion expense during the third quarter of 2016.three months ended June 30, 2019.

 

Operating income.Operating income decreased $1.3by $6.2 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016,2019, due primarily to the increaseda decrease in gross margin, which was partially offset by a decrease in general and administrative expenses and the decreased gross margin in the third quarter of 2017 compared to the third quarter of 2016. expense.

 

The following table summarizes the operating results of the PISPipeline Inspection segment for the ninesix months ended SeptemberJune 30, 20172020 and 2016.  2019.

 

 Nine Months Ended September 30,  Six Months Ended June 30, 
 2017 % of Revenue 2016 % of Revenue Change % Change  2020 % of Revenue 2019 % of Revenue Change % Change 
 (in thousands, except average revenue and inspector data)  (in thousands, except average revenue and inspector data) 
              
Revenue $205,039      $209,632      $(4,593)  (2.2)% $107,155     $190,235     $(83,080) (43.7)%
Costs of services  185,308       189,788       (4,480)  (2.4)%  96,359      170,418      (74,059) (43.5)%
Gross margin  19,731   9.6%  19,844   9.5%  (113)  (0.6)%  10,796  10.1%  19,817  10.4%  (9,021) (45.5)%
                                             
General and administrative  10,212   5.0%  9,439   4.5%  773   8.2%  8,289  7.7%  9,211  4.8%  (922) (10.0)%
Depreciation, amortization and accretion  1,755   0.9%  1,834   0.9%  (79)  (4.3)%
Impairments  1,329   0.6%     0.0%  1,329     
Losses on asset disposals and insurance recoveries, net  18   0.0%     0.0%  18     
Depreciation and amortization  1,111  1.0%  1,111  0.6%    0.0%
Operating income $6,417   3.1% $8,571   4.1% $(2,154)  (25.1)% $1,396  1.3% $9,495  5.0% $(8,099) (85.3)%
                                             
Operating Data                                             
                        
Average number of inspectors  1,160       1,165       (5)  (0.4)%  858      1,553      (695) (44.8)%
Average revenue per inspector per week $4,532      $4,597      $(65)  (1.4)% $4,830     $4,737     $93  2.0%
                        
Revenue variance due to number of inspectors                 $(884)                   $(86,813)   
Revenue variance due to average revenue per inspector                 $(3,709)                   $3,733    

 

40

Revenues.Revenue. RevenuesRevenue decreased $4.6$83.1 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016, primarily2019, due to a decrease in the average number of inspectors engaged (a decrease of 5695 inspectors accounting for a $0.9$86.8 million of the revenue decrease) and a reduction, partially offset by an increase in the average revenue billed for eachper inspector (accounting for a(offsetting $3.7 million of the revenue decrease). Revenues during the six months ended June 30, 2019 benefited from the ramp-up of the largest contract in the 17-year history of TIR, which was a single-source pipeline inspection project in Texas. This project began in the fourth quarter of 2018, peaked in the second quarter of 2019, and has continued with declining headcounts into third quarter 2020. We continuegenerated $7.8 million and $36.5 million of revenue from this project during the six months ended June 30, 2020 and 2019, respectively. Our revenues during the six months ended June 30, 2020 did not significantly benefit from any other large new projects. During the six months ended June 30, 2020, the COVID-19 outbreak, combined with a significant decrease in crude oil prices resulting from reduced demand and an anticipated increase in supply from Saudi Arabia and Russia, led many of our customers to focus on areaschange their budgets and plans. Revenues of inspectionour subsidiary that are less impacted by economic conditions, such as maintenance projects and projects associated withserves public utility companies,customers decreased by $10.8 million during the six months ended June 30, 2020 compared to help mitigate the declinesix months ended June 30, 2019, due in revenues associated with new construction projects.part to lower activity as a result of the COVID-19 pandemic. Revenues of our nondestructive examination service line increaseddecreased by $2.9$2.7 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016.

Operating income. Operating income (loss). Our W&ES segment generated an operating loss of $0.2decreased by $0.8 million during the three months ended SeptemberJune 30, 20172020 compared to operating income of $0.3 million during the three months ended SeptemberJune 30, 2016. This2019. The decrease in operating income (loss) was primarily due to an increaselower revenues, partially offset by decreases in cost of services and general and administrative costs of $0.4 million and losses on asset disposals, net of $0.2 million. expense.


The following table summarizes the operating results of the W&ESEnvironmental Services segment for the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.

 

 Nine Months Ended September 30,  Six Months Ended June 30, 
 2017 % of Revenue 2016 % of Revenue Change % Change  2020 % of Revenue 2019 % of Revenue Change % Change 
 (in thousands, except per barrel data)  (in thousands, except per barrel data) 
                    
Revenue $6,005      $6,630      $(625)  (9.4)% $2,941     $4,877     $(1,936) (39.7)%
Costs of services  2,330       3,084       (754)  (24.4)%  1,074      1,472      (398) (27.0)%
Gross margin  3,675   61.2%  3,546   53.5%  129   3.6%  1,867  63.5%  3,405  69.8%  (1,538) (45.2)%
                                             
General and administrative  1,651   27.5%  1,501   22.6%  150   10.0%  1,012  34.4%  1,538  31.5%  (526) (34.2)%
Depreciation, amortization and accretion  1,335   22.2%  1,349   20.3%  (14)  (1.0)%  794  27.0%  809  16.6%  (15) (1.9)%
Impairments  688   11.5%  2,119   32.0%  (1,431)  (67.5)%
Losses on asset disposals, net  77   1.3%         77     
Operating loss $(76)  (1.3)% $(1,423)  (21.5)% $1,347   (94.7)%
Gain on asset disposals, net  7  0.2%        7    
Operating income $54  1.8% $1,058  21.7% $(1,004) (94.9)%
                                             
Operating Data                                             
Total barrels of saltwater disposed  8,841       9,917       (1,076)  (10.9)%
Average revenue per barrel disposed (a) $0.68      $0.67      $0.01   2.0%
Revenue variance due to barrels disposed                 $(719)    
Total barrels of water processed  4,091      6,333      (2,242) (35.4)%
Average revenue per barrel processed (a) $0.72     $0.77     $(0.05) (6.5)%
Revenue variance due to barrels processed               $(1,727)   
Revenue variance due to revenue per barrel                 $94                    $(209)   

  

(a)Average revenue per barrel disposedprocessed is calculated by dividing revenues (which includes disposalwater treatment revenues, residual oil sales and management fees) by the total barrels of saltwater disposed.water processed.

 

Revenue. Revenue. Revenues decreased by $0.6$1.9 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016,2019. The decrease in revenues was due primarily due to a 10.9% decrease of 2.2 million barrels in the volume of saltwater disposed. The decreasewater processed and lower prices on the sale of recovered crude oil. Low commodity prices, an excess of supply, and low demand have led to a significant reduction in volumes was due primarily to reduced exploration and production activity by producers in North Dakota, as a result of low commodity prices. Average revenue per barrel remained relatively consistent from 2016 to 2017. Oil revenue represented approximately 7.5% of total revenue during the nine months ended September 30, 2017 compared to 5.5% during the nine months ended September 30, 2016.Dakota.

 

In addition, business activity was interrupted by a lightning strike and fire at our facility in Orla, Texas in January 2017 and at our Grassy Butte facility in North Dakota in July 2017. We re-established temporary operations at the Orla facility soon after that incident, but the incidents did have an adverse effect on the revenues of these facilities. Revenues at the Orla facility were $0.3 million lower and revenues at our Grassy Butte facility were $0.1 million lower during the nine months ended September 30, 2017 than during the nine months ended September 30, 2016.

Costs of services. Costs of services decreased by $0.8$0.4 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016,2019 due in part to a decrease in variable costs resulting from a decrease in volumes and due in part to a decrease in fixed costs as a result of salary reductions and reductions in force.

Gross margin. Gross margin decreased by $1.5 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due primarily to cost reduction measures that we implemented in mid-2016 in response to adverse market conditions. These measures included the temporary suspension of activity at two of our facilities and investments in automation at other facilities.

Gross margin. Gross margin increased by $0.1a $1.9 million between the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. A decrease in revenues of $0.6 million wasrevenue, partially offset by a $0.4 million decrease in costscost of services of $0.8 million.services.


General and administrative.General and administrative expenses include general office overhead expenses such as salary costs, insurance, property taxes, royalty expenses, and other miscellaneous expenses. GeneralThese expenses decreased in the six months ended June 30, 2020 compared to the six months ended June 30, 2019, through a combination of salary reductions, reductions in force, furloughs, hiring freezes, reductions in hours, reductions incentive compensation expense, and other cost-cutting measures. Expenses we incurred for costs that were previously incurred by Holdings pursuant to the Omnibus Agreement were $0.1 million lower during the six months ended June 30, 2020 than the administrative fee charged by Holdings during the six months ended June 30, 2019. In addition, the decrease in general and administrative expenses duringwas partially due to a reassessment of the nine months ended September 30, 2017 were reduced by $0.3 million relatedallocation of shared expenses to the collection of an account receivable onvarious segments, which we had previously recorded a valuation allowance and increased by a $0.3 million omnibus administrativeresulted in less expense charge incurred and allocatedbeing charged to the segmentsEnvironmental Services segment and more expense being charged to the Pipeline Inspection segment in the third quarter of 2017 that was waived by Holdings2020 than in 2016 and recorded in general and administrative-corporate.2019.


Depreciation, amortization and accretion.Depreciation, amortization and accretion expense during the ninesix months ended SeptemberJune 30, 20172020 was not significantly different from depreciation, amortization and amortizationaccretion expense during the ninesix months ended SeptemberJune 30, 2016.2019.

 

Impairments. 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 experienced low volumes at this facility due to competition in the area and to low levels of exploration and production activity near the facility. In the second quarter of 2016, we recorded an impairment of $2.1 million to the property, plant and equipment at one of our SWD facilities. 

Losses on asset disposals, net. During the three months ended September 30, 2017, we recorded a loss of $0.1 million related to lightning strikes and fires at two of our SWD facilities, which primarily represent non-reimbursable costs associated with these incidents.  This loss was net of a $0.3 million gain that we recorded upon receipt of proceeds from a property damage insurance claim related to the Orla, Texas facility.

Operating loss.income. Our W&ES segment generated an operating loss of $0.1Operating income decreased by $1.0 million during the ninesix months ended SeptemberJune 30, 20172020 compared to an operating loss of $1.4 million during the ninesix months ended SeptemberJune 30, 2016.2019. The decrease in the operating lossincome was primarily due to a decreaselower revenues, partially offset by decreases in cost of $1.4 million in impairments.services and general and administrative expense.

 

Adjusted EBITDA

We define Adjustedadjusted EBITDA as net income (loss); plusor loss exclusive of (i) interest expense;expense, (ii) depreciation, amortization, and accretion expenses;expense, (iii) income tax expense; impairments; non-cash allocated expenses;expense or benefit, (iv) equity-based compensation expense; lessexpense, (v) and certain other extraordinaryunusual or non-recurringnonrecurring items. We define Adjustedadjusted EBITDA attributable to limited partners as net income (loss)adjusted EBITDA exclusive of amounts attributable to limited partners; plus interest expense attributablethe general partner and to limited partners; depreciation, amortization, and accretion expenses attributable to limited partners; income tax expense attributable to limited partners; impairments attributable to limited partners; non-cash allocated expenses attributable to limited partners; equity-based compensation expense attributable to limited partners; less other extraordinary or non-recurring items attributable to limited partners.noncontrolling interests. We define Distributable Cash Flowdistributable cash flow as Adjustedadjusted EBITDA attributable to limited partners excludingless cash interest paid, cash income taxes paid, maintenance capital expenditures, and other extraordinary or non-recurring items. Adjusted EBITDA, Adjusted EBITDA attributable to limited partners and Distributable Cash Flowcash distributions on preferred equity. Management believes these measures provide investors meaningful insight into results from ongoing operations.

These non-GAAP financial measures are used as supplemental financialliquidity and performance measures by our management and by external users of our financial statements, such as investors, and commercial banks, research analysts, and others to assess:

 

theour financial performance of our assets without regard to the impact of financing methods, capital structure or historical cost basis of our assets;

the our operating performance and return on capital as compared to those of other companies, without regard to financing methods or capital structure;
viability and performance of acquisitions and capital expenditure projects and the overall rates of return on alternative investment opportunities; and

our ability to incur and service debt and fund capital expenditures;

the ability of our assetsbusinesses to generate sufficient cash sufficient to pay interest costs, support our indebtedness, and make debt payments andcash distributions to make distributions; and

our operating performance as compared to those of other companies in our industry without regard to the impact of financing methods and capital structure.unitholders.

 

We believe that the presentation of Adjusted EBITDAthese non-GAAP measures provides useful information to investors in assessing our financial condition and results of operations. The GAAP measures most directly comparable to Adjustedadjusted EBITDA, Adjustedadjusted EBITDA attributable to limited partners’partners, and Distributable Cash Flowdistributable cash flow are net (loss) income (loss) and cash flow from operating activities. These non-GAAP measures should not be considered as alternatives to the most directly comparable GAAP financial measure. Each of these non-GAAP measures excludeexcludes some, but not all, of the items that affect the most directly comparable GAAP financial measure.measures. Adjusted EBITDA, Adjustedadjusted EBITDA attributable to limited partners, and Distributable Cash Flowdistributable cash flow should not be considered alternatives to net income (loss), net income (loss) before income taxes, net (loss) income (loss) attributable to limited partners, cash flows from operating activities, or any other measure of financial performance calculated in accordance with GAAP, as those items are used to measure operating performance, liquidity, or the ability to service debt obligations.

 

Because Adjustedadjusted EBITDA, Adjustedadjusted EBITDA attributable to limited partners, and Distributable Cash Flowdistributable cash flow may be defined differently by other companies, in our industry, our definitions of Adjustedadjusted EBITDA, Adjustedadjusted EBITDA attributable to limited partners, and Distributable Cash Flowdistributable cash flow may not be comparable to a similarly titled measuresmeasure of other companies, thereby diminishing their utility.

 

The following tables present a reconciliation of net income (loss)to Adjustedadjusted EBITDA and to Distributable Cash Flow,distributable cash flow, a reconciliation of net (loss) income (loss) attributable to limited partnersto Adjustedadjusted EBITDA attributable to limited partners and to Distributable Cash Flow,distributable cash flow, and a reconciliation of net cash provided by (used in) operating activitiesto adjusted EBITDA and to distributable cash flow for each of the periods indicated.


Reconciliation of Net Income (Loss) to Adjusted EBITDA and to Distributable Cash Flow for each of the periods indicated.


Reconciliation of Net Loss to Adjusted EBITDA and to Distributable Cash Flow

         
 Three Months ended September 30, Nine Months ended September 30,  Three Months ended June 30, Six Months ended June 30, 
 2017 2016 2017 2016  2020 2019 2020 2019 
    (in thousands)    (in thousands) 
            
Net income (loss) $562  $1,998  $(3,862) $(10,979) $381  $5,643  $(496) $7,024 
Add:                                
Interest expense  1,907   1,641   5,411   4,878   1,152   1,415   2,276   2,726 
Depreciation, amortization and accretion  1,465   1,447   4,378   4,354   1,447   1,388   2,927   2,764 
Impairments        3,598   10,530 
Income tax expense  529   227   458   389   71   618   291   824 
Non-cash allocated expenses     931   1,750   2,866 
Equity based compensation  371   322   1,137   829 
Losses on asset disposals, net  208      77    
Equity-based compensation  254   174   518   443 
Foreign currency losses        273    
Less:                                
Foreign currency gains  557      824      184   84      185 
Adjusted EBITDA $4,485  $6,566  $12,123  $12,867  $3,121  $9,154  $5,789  $13,596 
                                
Adjusted EBITDA attributable to general partner  (1,000)  (500)  (1,000)  (2,500)
Adjusted EBITDA attributable to non-controlling interests  163   294   (73)  (137)
Adjusted EBITDA attributable to noncontrolling interests  844   420   906   331 
Adjusted EBITDA attributable to limited partners / controlling interests $5,322  $6,772  $13,196  $15,504  $2,277  $8,734  $4,883  $13,265 
                                
Less:                                
Cash interest paid, cash taxes paid, maintenance capital expenditures  1,910   1,671   6,380   5,058 
Preferred unit distributions  1,033   1,033   2,066   2,066 
Cash interest paid, cash taxes paid, and maintenance capital expenditures attributable to limited partners  989   2,464   2,194   3,682 
Distributable cash flow $3,412  $5,101  $6,816  $10,446  $255  $5,237  $623  $7,517 

 

Reconciliation of Net Loss(Loss) Income Attributable to Limited Partners to Adjusted

EBITDA Attributable to Limited Partners and to Distributable Cash Flow

 

 Three Months ended September 30, Nine Months ended September 30,  Three Months ended June 30, Six Months ended June 30, 
 2017 2016 2017 2016  2020 2019 2020 2019 
    (in thousands)    (in thousands) 
                  
Net income (loss) attributable to limited partners $1,554  $3,348  $178  $(715)
Net (loss) income attributable to limited partners $(316) $5,366  $(1,105) $6,966 
Add:                                
Interest expense attributable to limited partners  1,907   1,578   5,411   4,690   1,152   1,415   2,276   2,726 
Depreciation, amortization and accretion attributable to limited partners  1,322   1,306   3,952   3,921   1,318   1,255   2,653   2,504 
Impairments attributable to limited partners        2,823   6,409 
Income tax expense attributable to limited partners  517   218   442   370   53   608   268   811 
Equity based compensation attributable to limited partners  371   322   1,137   829   254   174   518   443 
Losses on asset disposals attributable to limited partners, net  208      77    
Foreign currency losses attributable to limited partners        273    
Less:                                
Foreign currency gains attributable to limited partners  557      824      184   84      185 
Adjusted EBITDA attributable to limited partners  5,322   6,772   13,196   15,504   2,277   8,734   4,883   13,265 
                                
Less:                                
Cash interest paid, cash taxed paid and maintenance capital expenditures attributable to limited partners  1,910   1,671   6,380   5,058 
Preferred unit distributions  1,033   1,033   2,066   2,066 
Cash interest paid, cash taxes paid, and maintenance capital expenditures attributable to limited partners  989   2,464   2,194   3,682 
Distributable cash flow $3,412  $5,101  $6,816  $10,446  $255  $5,237  $623  $7,517 

Reconciliation of Net Cash Flows Provided by (Used in) Operating Activities to Adjusted

EBITDA and to Distributable Cash Flow

 

 Nine Months ended September 30,  Six Months ended June 30, 
 2017 2016  2020 2019 
 (in thousands)  (in thousands) 
          
Cash flows provided by operating activities $263 $17,659 
Cash flows provided by (used in) operating activities $15,432  $(9,040)
Changes in trade accounts receivable, net  11,583   (4,999)  (17,516)  25,595 
Changes in prepaid expenses and other  765   (1,053)  734   (128)
Changes in accounts payable and accrued liabilities  (6,552)  (3,802)  5,152   (6,358)
Changes in income taxes payable  271   84 
Change in income taxes payable  (292)  252 
Interest expense (excluding non-cash interest)  4,968   4,452   1,987   2,465 
Income tax expense (excluding deferred tax benefit)  819   428   291   824 
Other  6   98   1   (14)
Adjusted EBITDA $12,123  $12,867  $5,789  $13,596 
                
Adjusted EBITDA attributable to general partner  (1,000)  (2,500)
Adjusted EBITDA attributable to noncontrolling interests  (73)  (137)  906   331 
Adjusted EBITDA attributable to limited partners / controlling interests $13,196  $15,504  $4,883  $13,265 
                
Less:                
Cash interest paid, cash taxes paid, maintenance capital expendirures  6,380   5,058 
Preferred unit distributions  2,066   2,066 
Cash interest paid, cash taxes paid, and maintenance capital expenditures attributable to limited partners  2,194   3,682 
Distributable cash flow $6,816  $10,446  $623  $7,517 

 

Management’s Discussion and Analysis of Financial Condition and Liquidity

 

Liquidity and Capital Resources

 

We anticipate making growth capital expenditures in the future, including acquiring new businesses that may include pipeline inspection companies and SWD facilities or expanding ourthe existing assets and offerings in our current operations. In addition, the working capital needs of the PISour Pipeline Inspection segment are substantial, driven by payroll and per diemreimbursable expenses paid to our inspectors on a weekly basis (pleasebasis. Please read “Risk Factors — Risks Related to Our Business — The working capital needs of the PISPipeline Inspection segment are substantial” in our Annual Report on Form 10-K for the year ended December 31, 2016),2019, which could require us to seek additional financing that we may not be able to obtain on satisfactory terms, or at all. Consequently, our ability to develop and maintain sources of funds to meet our capital requirements is critical to our ability to meet our growth objectives. We expect that our future growth capital expenditures will be funded by cash on hand and the issuance of debt and equity securities. However, we may not be able to raise additional funds on desired or favorable terms or at all.

 

At SeptemberJune 30, 2017,2020, our sources of liquidity included:

 

$19.227.8 million of cash on the balance sheetand cash equivalents at SeptemberJune 30, 2017;2020;

 

available borrowings under our Credit Agreement of $63.1$12.8 million at SeptemberJune 30, 2017 that are limited by certain borrowing base computations and financial covenant ratios as outlined in the agreement;2020; and

 

issuance of equity and/or debt securities. We filed a Securities Registration Statement with the Securities and Exchange Commission on June 8, 2015securities, subject to register $1.0 billion in securities, which we may issue in any combination of equity orour debt securities from time to time in one or more offerings.covenants.

On October 27, 2017, our Board

In March and April 2020, in an abundance of Directors declared a distribution of $0.21 per common unit ($0.84 annualized), payablecaution, we borrowed $39.1 million on November 14, 2017 to owners of record on November 7, 2017. If this distribution level is maintained through the fourth quarter of 2017, it will provide approximately $9.3 million of internally generated capital on an annualized basisCredit Agreement to provide increasedsubstantial liquidity reduceto manage our business in light of the COVID-19 outbreak and the significant decline in the price of crude oil. In May and June 2020, we repaid $28.0 million on the Credit Agreement. Our current outstanding borrowings, inclusive of finance lease obligations, is $81.7 million. At each quarter end, our borrowing capacity is limited to four times trailing-twelve-month EBITDA (as defined in the Credit Agreement); at June 30, 2020, trailing-twelve-month EBITDA (as defined in the Credit Agreement) was $23.6 million. We expect the leverage invest in selected growth projectsratio under our Credit Agreement to increase in the future and strengthenuntil market conditions improve.

In light of the Company’s balance sheet comparedcurrent market conditions, we have made the difficult decision to the previous distribution leveltemporarily suspend payment of $0.406413 percommon unit per quarter ($1.63 annualized).distributions. This action should provide a sound catalystwill enable us to reducingretain more cash to manage our currently elevated cost of capital by de-levering and improving increased distribution coverage to our unitholders. We are confidentfinancing needs during these actions support the long-term interests of our unitholders, employees, and other stakeholders.challenging market conditions.

The Credit Agreement matures on May 28, 2021. We continue to see encouraging signshave discussions with some new customers and are focused on organic growth, and improved SWD asset utilizationour lenders about extending the maturity date of the facility in an effort to improve cash flow that will, in turn, contributereturn for modifications to the improvementterms of allthe facility and the possibility of utilizing one of the new U.S. Federal Reserve Main Street Lending facilities. Such modifications could include, among others, a reduction in the available capacity and restrictions on the amounts of future common unit distributions. Our ability to enter into a new or amended credit facility with a longer term will depend on a number of factors, many of which are beyond our control, which include the perceptions of lenders related to our future financial performance, the perceptions of lenders regarding market conditions, the lending strategies and policies of lenders, and other factors. If these efforts prove not to be successful, we would explore other avenues of debt or equity financing, which would likely be more expensive than the financing cost under our existing facility


At-the-Market Equity Program

In April 2018, we established an at-the-market equity program (“ATM Program”), which will allow us to offer and sell common units from time to time, to or through the sales agent under the ATM Program. The maximum amount we may sell varies based on changes in the market value of the units. Currently, the maximum amount we may sell is approximately $4 million. We are under no obligation to sell any common units under this program. As of the date of this filing, we have not sold any common units under the ATM Program and, as such, have not received any net proceeds or paid any compensation to the sales agent under the ATM Program.

Employee Unit Purchase Plan

In November 2019, we established an employee unit purchase plan (“EUPP”), which will allow us to offer and sell up to 500,000 common units. Employees can elect to have up to 10% of their annual base pay withheld to purchase common units, subject to terms and limitations of the EUPP. The purchase price of the common units is 95% of the volume weighted average of the closing sales prices of our financial ratios. We continue to believecommon units on the fundamental demand for increased inspection and water disposal remains strong over the long-term, but the recovery has been slower than previously anticipated.

Our partnership agreement requires that, within 45ten immediately preceding trading days afterat the end of each quarter, we distribute all of our available cash to unitholders of record onoffering period. There have been no common unit issuances under the applicable record date.EUPP.

 

AvailableCash Distributions

The following table summarizes the cash distributions declared and paid to our common unitholders for any quarter, consists of all cash2019 and cash equivalents on hand at the end of that quarter:2020:

        Total Cash 
  Per Unit Cash  Total Cash  Distributions 
Payment Date Distributions  Distributions  to Affiliates (a) 
     (in thousands) 
          
 February 14, 2019 $0.21  $2,510  $1,606 
 May 15, 2019  0.21   2,531   1,622 
 August 14, 2019  0.21   2,534   1,624 
 November 14, 2019  0.21   2,534   1,627 
  Total 2019 Distributions $0.84  $10,109  $6,479 
             
 February 14, 2020 $0.21  $2,534  $1,627 
 May 15, 2020  0.21   2,564   1,648 
  Total 2020 Distributions (to date) $0.42  $5,098  $3,275 

 

less, the amount of cash reserves established by our General Partner at the date of determination of available cash for the quarter to:

(a)
provide for the proper conduct of our business, which could include, but is not limited to, amounts reserved for capital expenditures, working capital and operating expenses;
comply with applicable law, and of our debt instruments or other agreements; or
provide funds for distributions to our unitholders (including our General Partner) for any one or more64% of the next four quarters (provided that our General Partner may not establish cash reserves for the payment of future distributions unless it determines that the establishment of reserves will not prevent us from distributing the minimum quarterly distribution on allPartnership’s outstanding common units and any cumulative arrearages on such common units for such quarter);
plus, if our General Partner so determines, all or a portion of cash on hand on the date of determination of available cash for the quarter, including cash on hand resulting from working capital borrowings made after the end of the quarter.at June 30, 2020 were held by affiliates.

In light of the current market conditions, we have made the difficult decision to temporarily suspend payment of common unit distributions. This will enable us to retain more cash to manage our financing needs during these challenging market conditions.


The following table summarizes the distributions declared sincepaid to our IPO:preferred unitholder for 2019 and 2020:

 

        Total Cash 
  Per Unit Cash  Total Cash  Distributions 
Payment Date Distributions  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 
  Cash  Paid-in-Kind  Total 
Payment Date Distributions  Distributions  Distributions 
  (in thousands) 
          
 February 14, 2019 $1,033  $  $1,033 
 May 15, 2019  1,033      1,033 
 August 14, 2019  1,033      1,033 
 November 14, 2019  1,034      1,034 
  Total 2019 Distributions $4,133  $  $4,133 
             
 February 14, 2020 $1,033  $  $1,033 
 May 15, 2020  1,033      1,033 
 August 14, 2020 (a)  1,033      1,033 
  Total 2020 Distributions (to date) $3,099  $  $3,099 

 

(a)Approximately 64.4% of the Partnership’s outstanding 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)ThirdSecond quarter 20172020 distribution was declared and will be paid in the fourththird quarter of 2017.2020.

Our Credit Agreement

 

We are party to aOn May 29, 2018, we entered into an amended and restated credit agreement (as amended and restated, the “Credit Agreement”) that provides up to $200.0$110.0 million inof borrowing capacity, subject to certain limitations. The three-year 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,matures May 28, 2021. The obligations under the Credit Agreement provides for an accordion feature that allows us to increase the availability under the facilitiesare secured by an additional $125.0 million if lenders agree to increase their commitments. The Credit Agreement matures December 24, 2018, and we are currently in discussions with the leader of the lending syndicatea first priority lien on substantially all of our Credit Agreement about refinancing the Credit Agreement.assets.

 

Outstanding borrowings at SeptemberJune 30, 20172020 and December 31, 20162019 were $81.0 million and $74.9 million, respectively, and are reflected as current portion of long-term debt and long-term debt, respectively, on the Unaudited Condensed Consolidated Balance Sheets. We also had $0.7 million of finance lease liabilities at June 30, 2020 that count as indebtedness under the Credit Agreement wereAgreement. Debt issuance costs are reported 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 

debt issuance costs, net on the Unaudited Condensed Consolidated Balance Sheets and total $0.5 million and $0.8 million at June 30, 2020 and December 31, 2019, respectively. These debt issuance costs are being amortized on a straight-line basis over the term of the Credit Agreement. The carrying value of our long-term debt approximates fair value, as the borrowings under the Credit Agreement are considered to be priced at market for debt instruments having similar terms and conditions (Level 2 of the fair value hierarchy).

 

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

All borrowings under the Credit Agreement bear interest, at our option, on a leveraged based grid pricing at (i) a base rate plus a margin of 1.25%1.5% to 2.75%3.0% per annum (“Base Rate Borrowing”) or (ii) an adjusted LIBOR rate plus a margin of 2.25%2.5% to 3.75%4.0% per annum (“LIBOR Borrowings”). The applicable margin is determined based on theour leverage ratio, of the Partnership, as defined in the Credit Agreement. Generally, the

The interest rate on our Credit Agreement borrowings ranged between 3.90%3.33% and 4.99%4.80% for the ninesix months ended SeptemberJune 30, 20172020 and 3.54%5.90% and 4.28%6.02% for the ninesix months ended SeptemberJune 30, 2016.2019. As of June 30, 2020, the interest rate in effect on our outstanding borrowings was 3.81%. 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, duringincluding commitment fees, was $1.0 million and $1.3 million for the three months ended SeptemberJune 30, 20172020 and 20162019, respectively. Interest paid, including commitment fees, was $1.7$1.9 million and $1.6$2.4 million respectively, including commitment fees. Interest paidfor the six months ended June 30, 2020 and 2019, respectively. The average debt balance outstanding was $89.6 million and $80.5 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016 was $5.0 million and $4.3 million, respectively, including commitment fees.2019, respectively.

 

OurThe Credit Agreement contains various customary affirmative and negative covenants and restrictive provisions. OurThe Credit Agreement also requires maintenance of certain financial covenants at each quarter end, including a combined total adjusted leverage ratio (as defined in ourthe Credit Agreement) of not more than 4.0 to 1.0 and an interest coverage ratio (as defined in ourthe Credit Agreement) of not less than 3.0 to 1.0. At SeptemberJune 30, 2017,2020, our combined total adjusted leverage ratio was 3.773.5 to 1.0 and our interest coverage ratio was 3.087.6 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 ourthe Credit Agreement, the lenders may declare any outstanding principal, of our Credit Agreement debt, together with any accrued and unpaid interest, to be immediately due and payable and may exercise the other remedies set forth or referred to in ourthe Credit Agreement. We were in compliance with all debt covenants as of SeptemberJune 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.2020.

 

Borrowings under the Credit Agreement at each quarter-end may not exceed four times the trailing-twelve-month EBITDA. Trailing-twelve-month EBITDA, as calculated under the Credit Agreement, was $23.6 million at June 30, 2020.


In addition, ourthe Credit Agreement restricts our ability to make distributions on, or redeem or repurchase, our equity interests.interests, with certain exceptions detailed in the Credit Agreement. However, we may make distributions of available cash so long as, both at the time of the distribution and after giving effect to the distribution, no default exists under ourthe Credit Agreement, the borrowers and the guarantorswe are in compliance with the financial covenants in the borrowing base (which includes 100% of cash on hand) exceeds the amount of outstanding credit extensions under the Working Capital Facility byCredit Agreement, and we have at least $5.0 million andof unused capacity on the Credit Agreement at least $5.0the time of the distribution. As of June 30, 2020, we had $12.8 million in lender commitments are available to be drawnof unused borrowing capacity under the Working Capital Facility.Credit Agreement.


Our

In March and April 2020, in an abundance of caution, we borrowed a combined $39.1 million on the Credit Agreement to provide substantial liquidity to manage our business in light of the COVID-19 outbreak and a significant decline in the price of crude oil. In May and June 2020, we repaid a combined $28.0 million on the Credit Agreement.

The fact that the Credit Agreement matures on December 24, 2018 and, although unfavorable financial results may impactwithin one year raises substantial doubt about our ability to meetcontinue as a going concern beyond the May 28, 2021 maturity date. In addition, our current debt covenants, we believe itborrowing capacity under the Credit Agreement is probablelimited to a multiple of trailing-twelve-month EBITDA, and the lower levels of EBITDA that we will be ableare generating under current market conditions could constrain our borrowing capacity under the Credit Agreement, which could lead to maintain compliancea future event of default under the Credit Agreement. We continue to have discussions with the financial ratio covenants throughour lenders about extending the maturity date of the Credit Agreement through some combination of 1) improved operating results, 2) refinancingfacility in return for modifications to 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 anticipationterms 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 requirefacility. Such modifications could include, among others, a reduction in our current outstanding debt balancethe available capacity 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 currentlyrestrictions on the balance sheet; 2) issuing some sortamounts of future common unit distributions. Our ability to enter into a new or amended credit facility with a longer term will depend on a number of factors, many of which are beyond our control, which include the perceptions of lenders related to our future financial performance, the perceptions of lenders regarding market conditions, the lending strategies and policies of lenders, and other factors. If these efforts prove not to be successful, we would explore other avenues of debt or equity tofinancing, which would likely be more expensive than the owners of Holdings or third parties; 3) issuing convertible debt to the owners of Holdings or third parties; 4) monetizing a portion offinancing cost under 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.existing facility.

 

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.

Cash Flows

 

The following table sets forth a summary of the net cash provided by (used in) operating, investing, and financing activities for the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019.

 

  Nine Months Ended
September 30,
 
  2017  2016 
  (in thousands) 
    
Net cash provided by operating activities $263 $17,659 
Net cash provided by (used in) investing activities  396   (929)
Net cash used in financing activities  (8,945)  (16,454)
Effect of exchange rates on cash  831   477 
Net increase (decrease) in cash and cash equivalents $(7,455) $753 
  Six Months Ended June 30, 
  2020  2019 
  (in thousands) 
       
 Net cash provided by (used in) operating activities $15,432  $(9,040)
 Net cash used in investing activities  (1,334)  (1,011)
 Net cash (used in) provided by financing activities  (2,032)  439 
 Effect of exchange rates on cash  (5)  2 
 Net increase (decrease) in cash and cash equivalents $12,061  $(9,610)

 

Net cash provided by operating activitiesactivities. . Net operating cash provided by operating activitiesinflows for the ninesix months ended SeptemberJune 30, 2017 was $0.32020 were $15.4 million, consisting of a net loss of $3.9$0.5 million plus non-cash expenses of $10.2$4.0 million lessand net changes in working capital of $6.0 million (including an increase in accounts receivable of $11.5 million and an increase in prepaid expenses and other of $0.8 million, partially offset by an increase in current liabilities of $6.3 million). The increase in working capital during the nine months ended September 30, 2017 was due, in part, to revenue growth.$11.9 million. Non-cash expenses included depreciation, amortization, and accretion and impairmentequity-based compensation expense, among others. Non-cash expenses also included expenses attributableDuring periods of revenue growth, changes in working capital typically reduce operating cash flows, based on the fact that we pay our employees before we collect our accounts receivable from our customers. During the six months ended June 30, 2020, we experienced a decrease in inspectors in our Pipeline Inspection segment, which reduced the need to the Partnership that were paid by Holdings and recorded as an equity contribution in the Partnership’s financial statements.expend cash for working capital.

 

Net operating cash provided by operationsoutflows for the ninesix months ended SeptemberJune 30, 2016 of $17.72019 were $9.0 million, included $11.0 millionconsisting of net loss, $18.9income of $7.0 million ofplus non-cash expenses (including impairments of $10.5 million) and $9.8$3.3 million, ofwhich was offset by net changes in working capital of $19.3 million. Non-cash expenses included depreciation, amortization and accretion, and equity-based compensation expense, among others. The net change in working capital includes a net increase of $25.6 million in accounts receivable partially offset by a net increase of approximately $6.1 million in current liabilities. During periods of revenue growth, changes in working capital typically reduce operating cash flows, based on the fact that we pay our employees before we collect accounts receivable from our customers. During the six months ended June 30, 2019, we experienced a significant increase in inspector headcount that required the use of working capital. In addition, the collection of $12.1 million of accounts receivable from our customer Pacific Gas and Electric Company (“PG&E”) was delayed as a result of PG&E’s January 2019 bankruptcy filing. In November 2019 we sold $10.4 million of these pre-petition receivables in a non-recourse sale to a third party for cash proceeds of $9.8 million, and in March 2020 we collected from PG&E the remaining $1.7 million of pre-petition receivables under a court-approved “operational integrity supplier” program.

 

Net cash provided by (used in)used in investing activities. Cash provided by (used in)Net cash outflows from investing activities for the ninesix months ended SeptemberJune 30, 20172020 were $1.3 million, consisting primarily consists of $1.6 million of insurance proceedscosts associated with property damagea new software system for payroll and clean-uphuman resources management.

Net cash outflows from investing activities that resulted from a lightning strike and fire at our SWD facility in Orla, TX, offset by capital expenditures. Capital expenditures duringfor the ninesix months ended SeptemberJune 30, 2017 consisted2019 were $1.0 million, consisting primarily of equipment purchases, muchthe purchase of which wasequipment to support increasing revenues in our Pipeline Inspection Services segment’s non-destructivenondestructive examination business and improvements to onecosts associated with the implementation of our SWD facilities in anticipation of building a gatheringnew software system from production sites to the facility.  Capital expenditures during the nine months ended September 30, 2016 were made primarily in our Pipeline Inspection Services segment’s non-destructive examination business.for payroll and human resources management.

 

Net cash used in financing activities. Financing cash outflowsinflows for the ninesix months ended SeptemberJune 30, 20172020 primarily consisted of $9.8$6.1 million of distributionsnet borrowings on our revolving credit facility. In March and April 2020, in an abundance of caution, we borrowed a combined $39.1 million on the Credit Agreement to limited partners, offset byprovide substantial liquidity to manage our business in light of the COVID-19 outbreak and a contribution attributable to our general partnersignificant decline in the price of $1.0 million.crude oil. In January, May, and June 2020, we repaid a combined $33.0 million on the Credit Agreement. Financing cash outflows for the ninesix months ended SeptemberJune 30, 2016 included $14.42020 primarily consisted of $5.1 million of common unit distributions to limited partners, $0.4and $2.1 million of distributions to noncontrolling interest owners, and a $4.0preferred unit distributions.

Financing cash inflows for the six months ended June 30, 2019 primarily consisted of $7.8 million paymentof borrowings on our revolving credit facility to fund working capital needs of our Pipeline Inspection business. Financing cash outflows for the six months ended June 30, 2019 primarily consisted of $5.0 million of common unit distributions and $2.1 million of preferred unit distributions.


Working Capital Facility, partially offset by contributions attributable to our general partner totaling $2.5 million.

53  

Working Capital

 

Our working capital (defined as net current assets less net current liabilities) was $52.1$(32.2) million at SeptemberJune 30, 2017. Working capital increased from December 31, 20162020, which included $27.8 million of cash and cash equivalents and $81.0 million of borrowings under our revolving credit facility. Beginning June 30, 2020, our revolving credit facility, which is due in May of 2021, is classified as current. We continue to September 30, 2017 due primarilyhave discussions with our lenders about extending the maturity date of the facility in return for modifications to increased accounts receivable, partially offset by increased accrued liabilitiesthe terms of the existing facility. 

Our Pipeline Inspection and a decreased cash balance. Business activity in our PIS and IS segments is typically higher during the second and third quarters of a year, and during this time working capital typically increases. Our PIS and ISPipeline & Process Services segments have substantial working capital needs, as wethey generally pay ourtheir inspectors and field personnel on a weekly basis, but typically receive payment from ourtheir customers 45 to 90 days after the services have been performed. We utilize borrowings under our Credit Agreement to fund the working capital needs of these segments. These borrowings reduce the amount of credit available for other uses, such as acquisitions and growth projects, and increases interest expense, thereby reducing cash flow. Please read “Risk Factors — Risks Related to Our Business — The working capital needs of the PISPipeline Inspection segment are substantial, which could require usand will continue to seek additional financing that webe substantial. This will reduce our borrowing capacity for other purposes and reduce our cash available for distribution,” and “Risk Factors – Risks Related to Our Business – Our existing and future debt levels may not be ablelimit our flexibility to obtain on satisfactory terms, or at all”financing and to pursue other business opportunities” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.

 

Capital Expenditures

 

W&ESWe generally have small capital expenditure requirements compared to many other master limited partnerships. Our Environmental Services segment has minimal capital needs requiring investmentexpenditure requirements for the maintenance of existing SWD facilities and the acquisition or construction and development of new SWDwater treatment facilities. Our PISPipeline Inspection segment does not generally require significant capital expenditures, other than in the nondestructive examination service line, which has been acquiringinvested growth capital to acquire field equipment to support its growing revenues. ISequipment. Our Pipeline & Process Services segment has both maintenance and growth capital needs for heavy equipment and vehicles in order to perform hydrostatic testing and other integrity procedures. Our partnership agreement requires that we categorize our capital expenditures as either maintenance capital expenditures or expansion capital expenditures.

 

Maintenance capital expenditures are those cash expenditures that will enable us to maintain our operating capacity or operating income over the long-term. Maintenance capital expenditures include tankage, workovers, pipelines, pumps, and other improvement of existing capital assets, including the construction or development of new capital assets to replace our existing saltwater disposal systems as they become obsolete.  Other examples of maintenance capital expenditures are expenditures to repair, refurbish, and replace tubing and packers on the SWD well itself to maintain equipment reliability, integrity, and safety, as well as to address environmental laws and regulations. Maintenance capital expenditures, inclusive of finance lease obligation payments, were $0.2 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.3$0.4 million and $0.2 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively.2019, respectively (cash basis).

 

Expansion capital expenditures are those capital expenditures that we expect will increase our operating capacity or operating income over the long-term. Expansion capital expenditures include the acquisition of assets or businesses and the construction or development of additional saltwater disposalwater treatment capacity, to the extent such expenditures are expected to expand our long-term operating capacity or operating income. Expansion capital expenditures were $0.5$1.1 million and $0.8$0.9 million for the three and ninesix months ended SeptemberJune 30, 2017,2020 and 2019, respectively and $0.1 million and $0.5 million for the three and nine months ended September 30, 2016, respectively.(cash basis).

 

Future expansion capital expenditures may vary significantly from period to period based on the investment opportunities available. We expect to fund future capital expenditures from cash flows generated from our operations borrowings under our Credit Agreement,and the issuanceuse of additional partnership units or debt offerings.cash on hand.

 

Contractual Obligations

We have $136.9 million of borrowings under our Credit Agreement as of September 30, 2017. Additionally, we have long-term office and other lease obligations totaling approximately $4.7 million (including extensions), payable through calendar year 2042.

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements or any hedging arrangements.

 

Critical Accounting Policies

 

OurThe preparation of financial statements in conformity with generally accepted accounting principles requires management to select appropriate accounting policies and to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of these accounting policies and estimates involve judgments and uncertainties to such an extent that there is a reasonable likelihood that materially different amounts could have been reported under different conditions, or if different assumptions had been used. For more information, please see “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” to our Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and our disclosure of critical accounting policies are consistent with those disclosed in Note 2 included Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our audited financial statements as of andAnnual Report on Form 10-K for the year ended December 31, 2016 included in our Form 10-K and also as outlined in Note 2 of our Unaudited Condensed Financial Statements as of for the three and nine months ended September 30, 2017 included in our Form 10-Q.2019.

 

54  

Recent Accounting Standards

 

In 2017, the Partnership2020, we adopted the following new accounting standardsstandard issued by the Financial Accounting Standards Board (“FASB”);


The FASB issued ASU 2018-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Update (“ASU”) 2016-09 – Compensation – Stock Compensationfor Implementation Costs Incurred in March 2016.a Cloud Computing Arrangement That Is a Service Contract in August 2018. This guidance requires a customer in a cloud computing arrangement to follow the internal use software guidance in ASC 350-40 to determine which costs should be capitalized as assets or expensed as incurred. The amendments in this ASU gives entities the option to accountare effective 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).fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We adopted this new standard on Januaryguidance prospectively from the date of adoption (January 1, 20172020) and elected to account for forfeitures as they occur. The adoption of this ASUguidance has not had no significanta material 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 2016-022016-13LeasesFinancial Instruments – Credit Losses in February 2016.June 2016, which replaces the current “incurred loss” methodology for recognizing credit losses with an “expected loss” methodology. This guidance attempts to increase transparency and comparability among organizations by recognizing certain leaseaffects trade receivables, financial assets and lease liabilities oncertain other instruments that are not measured at fair value through net income. In November 2019, the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP andFASB issued final guidance to delay the implementation of 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 forsmaller reporting companies until fiscal years beginning after December 15, 2018,2022, including interim periods within those fiscal years. Early adoption is permitted. We are currently examining the guidance provided in the ASU and determiningevaluating the impact this guidanceASU 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.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

ThereLess than 1% of our consolidated revenues during the six months ended June 30, 2020 were derived from sales of recovered crude oil. A hypothetical change in crude oil prices of 10% would result in an increase or decrease of our revenues derived from sales of commodities by less than $0.1 million. Increases or decreases in commodity prices can also result in changes in demand for our water treatment, pipeline inspection, and pipeline and process services, resulting in an increase or decrease of our revenues and gross margins.

Crude oil prices have been no material changesdecreased significantly in 2020, due in part to decreased demand as a result of the worldwide COVID-19 outbreak, and due in part to the Partnership’soil price war started by Russia and Saudi Arabia with a focus on slowing down U.S. oil production. This decline in oil prices has led many of our customers to change their budgets and plans, which has decreased their spending on drilling, completions, and exploration. This has had an impact on construction of new pipelines, gathering systems, and related energy infrastructure. Lower exploration and production activity has also affected the midstream industry and have led to delays and cancellations of projects. It is also possible that our customers may elect to defer maintenance activities on their infrastructure. Such developments would reduce our opportunities to generate revenues. It is impossible at this time to determine what may occur, as customer plans will evolve over time. It is possible that the cumulative nature of these events could have a material adverse effect on our results of operations and financial position. For further discussion of the volatility of crude oil prices, please read “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Interest Rate Risk

The interest rate on our Credit Agreement floats based on LIBOR, and as a result we have exposure to market risk since December 31, 2016.changes in interest rates on this indebtedness, which was $81.0 million as of June 30, 2020. Based on the debt balance outstanding at June 30, 2020, a hypothetical change in interest rates of 1.0% would result in an increase or decrease in our annual interest expense of approximately $0.8 million.

 

The credit markets have recently experienced historical lows in interest rates. It is possible that monetary policy will tighten, resulting in higher interest rates to counter possible inflation. Interest rates in the future could be higher than current levels, causing our financing costs to increase accordingly.

Counterparty and Customer Credit Risk

Our credit exposure generally relates to receivables for services provided. If significant customers were to have credit or financial problems resulting in a delay or failure to repay the amounts they owe to us, this could have a material adverse effect on our business, financial condition, results of operations, or cash flows. The current adverse market conditions, which include the COVID-19 pandemic and low commodity prices, could have a material adverse effect on the financial position of our customers, which could increase the risk that we are unable to collect accounts receivable from customers for services we have provided. We would aggressively act to protect our rights in any such event, as we have done in the past.

A former customer of our Pipeline Inspection segment, Sanchez Energy Corporation and certain of its affiliates (collectively, “Sanchez”), filed for bankruptcy protection in August 2019. As of June 30, 2020, our Unaudited Condensed Consolidated Balance Sheet included $0.5 million of pre-petition accounts receivable from Sanchez. We have filed liens to secure $0.4 million of these accounts receivable. We have recorded an allowance of $0.1 million at June 30, 2020 against the accounts receivable from Sanchez. We do not believe it is probable that we will be unable to collect the remaining $0.4 million balance of the pre-petition receivables. However, we cannot make assurances regarding the ultimate collection of these receivables nor can we make assurances regarding the timing of any such collections.

Item 4.Controls and Procedures

 

Management’s Evaluation of Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, the Partnership carried outwe conducted an evaluation of the effectiveness of the design and operation of the Partnership’sour disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer, and Chief Financial Officer, as well asand others involved in the accounting and reporting functions.


Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in Partnershipour reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the PartnershipPartnership’s reports filed under the Exchange Act is accumulated and communicated to management, including the Partnership’sour Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Partnership’sour disclosure controls and procedures were effective to provide reasonable assurance that financial information was processed, recorded and reported accurately.

 

55  

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the three months ended SeptemberJune 30, 20172020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In early 2020, we implemented a new software system for payroll and human resources management. We have applied and will test internal control procedures related to this new system as deemed necessary.

 

PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings

 

StuartDiaz v. CEM TIR

In July 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 between the entities.  The former shareholders in 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.

Fithian v. TIR LLC

 

On October 5, 2017, aDecember 12, 2019, three former inspector for TIR LLC and Cypress Energy Management - TIR, LLC ("CEM TIR")inspectors filed a putative collective action lawsuit alleging that TIR LLC and 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”)FLSA titled James Fithian,Francisco Diaz, et al v. CEM TIR, LLC, et al in the United States District Court for the WesternNorthern District of Texas, Midland Division. The plaintiff alleges he was a non-exempt employee ofOklahoma. TIR LLC and that he and other potential class members were not paid overtime in compliance withCEM TIR deny 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,claims. CEM TIR and Cypress Energy Partners – Texas,TIR LLC denyfiled a motion to dismiss one of the claims.plaintiffs for bringing the lawsuit in a venue that was inconsistent with the forum selection clause in his employment agreement mandating suit exclusively in the District Court of Tulsa County, Oklahoma. CEM TIR and TIR LLC also filed a motion to compel arbitration for the other two plaintiffs to enforce the binding arbitration clauses in their employment agreements. The Court has not yet ruled on either motion. However, all three plaintiffs subsequently initiated arbitration proceedings.

 

Other

 

We have been and may in the future be subject to litigation involving allegations of violations of the Fair Labor Standards Act and state wage and hour laws. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts, including claims regarding the Fair Labor Standards Act and state wage and hour laws, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Claims related to the Fair Labor Standards Act are generally not covered by insurance. From time to time, we are subject to various claims, lawsuits and other legal proceedings and claims that arisebrought or threatened against us in the ordinary course of our business. LikeThese actions and proceedings may seek, among other organizations, our operations are subject to extensive and rapidly changing federal and state environmental, health and safetythings, compensation for alleged personal injury, workers’ compensation, employment discrimination and other lawsemployment-related damages, breach of contract, property damage, environmental liabilities, multiemployer pension plan withdrawal liabilities, punitive damages and regulations governing air emissions, wastewater discharges, and solid and hazardous waste management activities.civil penalties or other losses, liquidated damages, consequential damages, or injunctive or declaratory relief.

 

We are not a party to any other material pending or overtly threatened legal or governmental proceedings, other than proceedings and claims that arise in the ordinary course and are incidental to our business.

Item 1A.Risk Factors

 

There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2019, except for the following risk factors which have been updated since the filing of our Annual Report on Form 10-K.

 

Our ability to operate our business effectively could be impaired if affiliates of our general partner fail to attract and retain key management Personnel, or if such personnel suddenly become unavailable to perform their duties.

We depend on the continuing efforts of our executive officers and other key management personnel, all of whom are employees of affiliates of our general partner. Additionally, neither we, nor our subsidiaries, have employees. CEM LLC and its affiliates are responsible for providing the employees and other personnel necessary to conduct our operations. All of the employees that conduct our business are employed by affiliates of our general partner. The loss of any member of our management or other key employees could have a material adverse effect on our business. Consequently, our ability to operate our business and implement our strategies will depend on the continued ability of affiliates of our general partner to attract and retain highly skilled management personnel with industry experience, as well as such personnel remaining healthy and available to perform their duties. Competition for these persons is intense. Given our size, we may be at a disadvantage relative to our larger competitors in the competition for these personnel. We may not be able to continue to employ our senior executives and other key personnel, or attract and retain qualified personnel in the future, and one or more such personnel could become unable to perform their duties as a result of health issues, such as the COVID-19 virus, or other unexpected calamities. Our failure to retain or attract our senior executives and other key personnel, or other loss of such personnel, could have a material adverse effect on our ability to effectively operate our business.

Public health threats could have a material adverse effect on our operations and our financial results.

Public health threats, such as COVID-19 and other highly communicable diseases, could adversely impact our operations, the operations of our customers, and the global economy, including the worldwide demand for oil and natural gas and the level of demand for our environmental services. Any quarantine of personnel or inability to access our offices or work locations could adversely affect our operations. Travel restrictions or operational problems in any areas in which we operate, or any reduction in the demand for our environmental services caused by public health threats, may materially impact operations and adversely affect our financial results. Additionally, due to the uncertainties created by the COVID-19 pandemic and the related impact on our business, we have made or may make future employment decisions that may subject us to increased risks related to employment matters, including increased litigation and/or claims for severance or other benefits. Further, we may owe indemnity obligations to customers who may assert that they suffered losses as a result of COVID-19 infection contracted from our employees.

Item 2.Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.Item 3.Defaults upon Senior Securities

 

None.

 

Item 4.Item 4.Mine Safety Disclosures

 

Not applicable.


Item 5.Item 5.Other Information

 

On November 8, 2017August 12, 2020, the Boardboard of Directorsdirectors of the General Partner reappointed Jeffrey Herbers as the Chief Accounting Officerour general partner approved an amendment to our Code of the General PartnerBusiness Conduct and increased his duties such that he will act as the principal accounting officer and interim principal financial officer of the General Partner,Ethics, effective as of November 26, 2017.August 12, 2020 (as amended, the “Code of Conduct”), for purposes of updating the Partnership’s expectations with respect to fair dealing. The Code of Conduct applies to all of our directors, officers and employees, and the directors, officers and employees of our general partner and our subsidiaries. The Code of Conduct is available on the “Corporate Governance” section of our website at www.cypressenvironmental.biz. The foregoing description of the Code of Conduct does not purport to be complete and is qualified in its entirety by reference to the full text of the Code of Conduct, which is filed as Exhibit 14.1 hereto and incorporated herein by reference. The contents of our website are not incorporated by reference herein or made a part hereof for any purpose.

 

Mr. Herbers, age 40, has served the General Partner as the Chief Accounting Officer since September 2016.  Prior to his employment with the General Partner, Mr. Herbers served as sole member of Jeff Herbers PLLC from December 2015 until September 2016 and, prior to that role, served as the Chief Accounting Officer of the general partner of NGL Energy Partners LP from February 2012 until November 2015.  Mr. Herbers holds a B.B.A. in accounting from the University of Tulsa.

There are no family relationships between Mr. Herbers and and director or other executive officer of the General Partner, and he was not selected by the General Partner's board of directors to serve in any capacity pursuant to any arrangement or understanding with any person.  Mr. Herbers has no direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.

56  

Item 6.Exhibits

 

The following exhibits are filed as part of, or incorporated by reference into, this Form 10-Q.

 

Exhibit Index

Exhibit

Numbernumber

Description
3.1
3.1First Amended and Restated Agreement of Limited Partnership of Cypress EnergyEnvironmental Partners, L.P. dated as of January 21, 2014 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on January 27, 2014)

3.2First Amendment to First Amended and Restated Agreement of Limited Partnership of Cypress Environmental Partners, L.P., dated as of May 29, 2018 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on May 31, 2018)

3.23.3Second Amendment to First Amended and Restated Agreement of Limited Partnership of Cypress Energy Partners, L.P., dated as of March 5, 2020 (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on March 6, 2020)

3.4Amended and Restated Limited Liability Company Agreement of Cypress EnergyEnvironmental Partners, GP, LLC dated as of January 21, 2014 (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on January 27, 2014)

3.5First Amendment to Amended and Restated Limited Liability Agreement of Cypress Energy Partners GP, LLC, dated as of March 5, 2020 (incorporated by reference to Exhibit 3.3 of our Current Report on Form 8-K filed on March 6, 2020)

3.6Certificate of Limited Partnership of Cypress Environmental Partners, L.P. (incorporated by reference to Exhibit 3.7 of our Registration Statement on Form S-1/A filed on December 17, 2013)

3.7Certificate of Amendment to the Certificate of Limited Partnership of Cypress Energy Partners, L.P., dated as of March 2, 2020 (incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on March 6, 2020)

3.8Certificate of Formation of Cypress Environmental Partners, GP, LLC (incorporated by reference to Exhibit 3.5 of our Registration Statement on Form S-1/A filed on December 17, 2013)

3.9First Amendment to the Certificate of Formation of Cypress Energy Partners GP, LLC, dated as of February 27, 2020 (incorporated by reference to Exhibit 3.4 of our Current Report on Form 8-K filed on March 6, 2020)

10.1Second Amended and Restated Omnibus Agreement among Cypress Energy Holdings, LLC, Cypress Environmental Management, LLC, Cypress Environmental Partners, LLC, Cypress Environmental Partners, L.P., Cypress Environmental Partners GP, LLC, Tulsa Inspection Resources, LLC and Tulsa Inspection Resources – Canada ULC, dated as of January 1, 2020 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on January 3, 2020

31.1*14.1 *Code of Business Conduct and Ethics of Cypress Environmental Partners, L.P. adopted as of January 14, 2014 and last updated as of August 12, 2020.

31.1*Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*
31.2*Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1 **
32.1**Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 **
32.2**Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101 INS* XBRL Instance Document
   
101 SCH* XBRL Schema Document

101 CAL* XBRL Calculation Linkbase Document
   
101 DEF* XBRL Definition Linkbase Document
   
101 LAB* XBRL Label Linkbase Document

101 PRE* XBRL Presentation Linkbase Document

*
104*Cover Page Interactive Date File
* Filed herewith.
**Furnished herewith.

57  


SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tulsa, State of Oklahoma, on November 14, 2017.August 13, 2020.

Cypress Environmental Partners, L.P.

 

By:Cypress Energy Partners, L.P.
By:Cypress EnergyEnvironmental Partners GP, LLC, its general partner 

/s/ Peter C. Boylan III 
By:Peter C. Boylan III 
Title:Chief Executive Officer 
   
/s/ G. Les AustinJeffrey A. Herbers 
By:G. Les AustinJeffrey A. Herbers 
Title:Chief Financial Officer and Principal Accounting Officer 

 

58  

44

2019, due in part to lower activity as a result of the COVID-19 pandemic. The declineincrease in average revenue per inspector is due in part to changes in customer mix. Fluctuations in the average revenue per inspector per year are expected, given that we charge different rates for different types of inspectors and different types of inspection services. Competition remains strong in the industry which continues to exert downward pressure on rates.


Costs of services.Costs of services decreased $4.5$74.1 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016, due2019, primarily related to lower revenues.a decrease in the average number of inspectors employed during the period.

 

Gross margin.Gross margin remained relatively consistentdecreased $9.0 million during the ninesix months ended SeptemberJune 30, 20172020 compared to the ninesix months ended SeptemberJune 30, 2016. Gross2019. The gross margin percentage changes can be attributablewas 10.1% in 2020, compared to 10.4% in 2019. The decrease in gross margin percentage was due in part to lower revenues of our nondestructive examination service line (this service line carries more fixed costs than our other inspection service lines), in part to an annual increase in pay for a group of inspectors for which the resultant increase in our billing rates is pending receipt of a signed contract modification from the customer, and in part to changes in the mix of services provided.revenue among our customer base.

 

General and administrative. General and administrative expenses increased $0.8decreased by $0.9 million primarily dueduring the six months ended June 30, 2020 compared to the omnibus administrativesix months ended June 30, 2019, due primarily to a decrease in employee compensation expense chargethrough a combination of salary reductions, reductions in force, furloughs, hiring freezes, reductions in hours, and reductions in incentive compensation and sales commission expense. Legal fees increased by $0.4 million as a result of costs associated with certain employment-related lawsuits and claims. Expenses we incurred and allocatedfor costs that were previously incurred by Holdings pursuant to the segments inOmnibus Agreement were $0.4 million lower during the third quarter of 2017 that was waivedsix months ended June 30, 2020 than the administrative fee charged by Holdings during the six months ended June 30, 2019; however, the benefit of this reduced expense was partially offset by increased expense resulting from a reassessment of the allocation of shared expenses to the various segments, which resulted in 2016less expense being charged to the Environmental Services segment and recordedmore expense being charged to the Pipeline Inspection segment in general and administrative-corporate.2020.

 

Depreciation, amortization and amortization.accretion. Depreciation, amortization and amortizationaccretion expense during the ninesix months ended SeptemberJune 30, 20172020 was not significantly different from depreciation, amortization and amortizationaccretion expense during the ninesix months ended SeptemberJune 30, 2016.2019.

 

Impairments.Operating income. DuringOperating income decreased by $8.1 million during the six months ended June 30, 2020 compared to the six months ended June 30, 2019, due primarily to a decrease in gross margin, which was partially offset by a decrease in general and administrative expense.

Pipeline & Process Services

The following table summarizes the results of the Pipeline & Process Services segment for the three months ended June 30, 2020 and 2019.

  Three Months Ended June 30, 
  2020  % of Revenue  2019  % of Revenue  Change  % Change 
  (in thousands, except average revenue and inspector data) 
                   
Revenue $7,153     $4,381     $2,772  63.3%
Costs of services  5,041      3,028      2,013  66.5%
Gross margin  2,112  29.5%  1,353  30.9%  759  56.1%
                      
General and administrative  531  7.4%  634  14.5%  (103) (16.2)%
Depreciation, amortization and accretion  140  2.0%  143  3.3%  (3) (2.1)%
Gain on asset disposals, net  (4) (0.1)%  (2) (0.0)%  (2) 100.0%
Operating income $1,445  20.2% $578  13.2% $867  150.0%
                      
Operating Data                     
Average number of field personnel  27      29      (2) (6.9)%
Average revenue per field personnel per week $20,379     $11,621     $8,758  75.4%
Revenue variance due to number of field personnel               $(530)   
Revenue variance due to average revenue per field personnel               $3,302    

Revenue. Revenues of our Pipeline & Process Services segment increased $2.8 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Adverse weather during the first quarter of 2017,2019 delayed several large projects to later in the largest customeryear. Our Pipeline & Process Services segment generates more of its revenues from a smaller number of larger-scale projects than does our Canadian subsidiary completedPipeline Inspection segment.As a bid process and selected different service providers for its inspection contracts. In considerationresult, the revenues of the lossPipeline & Process Services segment can be significantly influenced by the ability to win a relatively small number of this contract,bids for hydrotesting projects. The increase in revenue was due to increased success in winning bids for projects as a result of improved business development efforts. We believe we recorded impairmentshave positioned ourselves as a preferred provider for large hydrotesting projects with our customer base. Although market conditions have been adverse for our other businesses, hydrotesting is one of the last steps to be completed before a pipeline is placed into service, and during the second quarter of 2020, a number of pipelines on which construction began prior to the carrying valuesCOVID-19 pandemic were nearing completion.


Costs of certainservices. Cost of services increased by $2.0 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to increased revenues.

Gross margin. Gross margin increased by $0.8 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase in gross margin was due to increased revenues. The gross margin percentage decreased moderately in the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due primarily to an increase in contract labor used during the three months ended June 30, 2020 to perform on the high volume of work.

General and administrative. General and administrative expenses primarily include compensation expense for office employees and general office expenses. These expenses decreased by $0.1 million during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily due to a decrease in incentive compensation expense.

Depreciation, amortization and accretion. Depreciation, amortization, and accretion expense includes depreciation of property and equipment and amortization of intangible assets of $1.3 million in the first quarter of 2017. Of this amount, $1.1 million related toassociated with customer relationships, trade names, and $0.2 million related to trade names.noncompete agreements. Depreciation, amortization and accretion expense during the three months ended June 30, 2020 was not significantly different from depreciation, amortization and accretion expense during the three months ended June 30, 2019.

 

Operating income. Operating income decreased $2.2increased by $0.9 million during the ninethree months ended SeptemberJune 30, 20172020 compared to the ninethree months ended SeptemberJune 30, 2016,2019. The increase was primarily due primarily to $1.3increased gross margin of $0.8 million of impairmentsand to an increasea decrease in general and administrative costsexpense of $0.8$0.1 million.


Integrity Services (IS)

 

The following table summarizes the results of the ISPipeline & Process Services segment for the threesix months ended SeptemberJune 30, 20172020 and 2016. 2019.

 

  Three Months Ended September 30, 
  2017  % of Revenue  2016  % of Revenue  Change  % Change 
  (in thousands, except average revenue and inspector data) 
                   
Revenue $2,834      $4,525      $(1,691)  (37.4)%
Costs of services  2,132       3,558       (1,426)  (40.1)%
Gross margin  702   24.8%  967   21.4%  (265)  (27.4)%
                         
General and administrative  525   18.5%  514   11.4%  11   2.1%
Depreciation, amortization and accretion  157   5.5%  157   3.5%     0.0%
Operating income (loss) $20   0.7% $296   6.5% $(276)  (93.2)%
                         
Operating Data                        
Average number of field personnel  21       25       (4)  (16.0)%
Average revenue per field personnel per week $10,268      $13,772      $(3,504)  (25.4)%
Revenue variance due to number of field personnel                 $(540)    
Revenue variance due to average revenue per field personnel                 $(1,151)    

  Six Months Ended June 30,
  2020 % of Revenue 2019 % of Revenue Change % Change
  (in thousands, except average revenue and inspector data)
             
Revenue $10,075      $6,355      $3,720   58.5%
Costs of services  7,402       4,747       2,655   55.9%
Gross margin  2,673   26.5%  1,608   25.3%  1,065   66.2%
                         
General and administrative  1,171   11.6%  1,230   19.4%  (59)  (4.8)%
Depreciation, amortization and accretion  285   2.8%  286   4.5%  (1)  (0.3)%
Gain on asset disposals, net  (30)  (0.3)%  (23)  (0.4)%  (7)  30.4%
Operating income $1,247   12.4% $115   1.8% $1,132   984.3%
                         
Operating Data                        
Average number of field personnel  27       28       (1)  (3.6)%
Average revenue per field personnel per week $14,431      $8,778      $5,653   64.4%
Revenue variance due to number of field personnel                 $(373)    
Revenue variance due to average revenue per field personnel                 $4,093     

Revenue. Revenues decreased approximately $1.7of our Pipeline & Process Services segment increased $3.7 million during the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 20162019. Our Pipeline & Process Services segment generates more of its revenues from a smaller number of larger-scale projects than does our Pipeline Inspection segment. As a result, the revenues of the Pipeline & Process Services segment can be significantly influenced by the ability to win a relatively small number of bids for hydrotesting projects. The increase in revenue was due to increased success in winning bids for projects as a $0.5 million decreaseresult of improved business development efforts. We believe we have positioned ourselves as a preferred provider for large hydrotesting projects with our customer base. Although market conditions have been adverse for our other businesses, hydrotesting is one of the last steps to be completed before a pipeline is placed into service, and during the second quarter of 2020, a number of pipelines on which construction began prior to the COVID-19 pandemic were nearing completion. During the first half of 2019, adverse weather delayed several large projects to later in the average number of field personnel engaged in customer projects and a decrease in the average revenue charged per field personnel of $1.2 million. Revenues during the three months ended September 30, 2017 continued to be adversely affected by a slowdown in new projects by our customers and by the loss during 2016 of key business development employees. Earlier in 2017, we hired new business development personnel to assist in these efforts and we have seen some success via increases in backlog for the fourth quarter of 2017 and the first quarter of 2018.year.


Costs of services.Cost of services decreased approximately $1.4increased by $2.7 million during the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 2016, consistent with the decrease in revenue.2019, primarily due to increased revenues.

 

Gross margin. Gross margin decreased approximately $0.3increased by $1.1 million during the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 2016,2019. The increase in gross margin was due to increased revenues. The employees of the Pipeline & Process Services segment are full-time employees, and therefore represent fixed costs (in contrast to the employees of the Pipeline Inspection segment who perform work in the field, most of whom only earn wages when they are performing work for a customer and whose wages are therefore primarily to lower revenues,variable costs). Because these employees were more fully utilized during the six months ended June 30, 2020 than in the six months ended June 30, 2019, the gross margin percentage was higher. This increase in gross margin percentage was partially offset by an improved gross margin percentage.increase in expense for contract labor used during the six months ended June 30, 2020 to perform on the high volume of work.

 

General and administrative. General and administrative expenses primarily include compensation expense for office employees and general office expenses. These expenses remained relatively consistent from the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 2016.2019.

 

Depreciation, amortization and amortization.accretion. Depreciation, amortization, and accretion expense includes depreciation of property and equipment and amortization of intangible assets associated with customer relationships, trade names, and noncompete agreements. Depreciation, amortization and amortizationaccretion expense during the threesix months ended SeptemberJune 30, 20172020 was not significantly different from depreciation, amortization and amortizationaccretion expense during the threesix months ended SeptemberJune 30, 2016.2019.

 

Operating income (loss).income. Operating income (loss) decreased $0.3increased by $1.1 million during the threesix months ended SeptemberJune 30, 20172020 compared to the threesix months ended SeptemberJune 30, 2016, due2019. The increase was primarily to the decrease in gross margin.


The following table summarizes the results of the IS segment for the nine months ended September 30, 2017 and 2016. 

  Nine Months Ended September 30, 
  2017  % of Revenue  2016  % of Revenue  Change  % Change 
  (in thousands, except average revenue and inspector data) 
    
Revenue $5,927      $11,329      $(5,402)  (47.7)%
Costs of services  5,005       9,668       (4,663)  (48.2)%
Gross margin  922   15.6%  1,661   14.7%  (739)  (44.5)%
                         
General and administrative  1,488   25.1%  2,388   21.1%  (900)  (37.7)%
Depreciation, amortization and accretion  471   7.9%  502   4.4%  (31)  (6.2)%
Impairments  1,581   26.7%  8,411   74.2%  (6,830)  (81.2)%
Operating loss $(2,618)  (44.2)% $(9,640)  (85.1)% $7,022   (72.8)%
                         
Operating Data                        
Average number of field personnel  18       24       (6)  (25.0)%
                         
Average revenue per field personnel per week $8,443      $12,059      $(3,616)  (30.0)%
Revenue variance due to number of field personnel                 $(1,976)    
Revenue variance due to average revenue per field personnel                 $(3,426)    

Revenue. Revenues decreased approximately $5.4 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Approximately $2.0 million of the decrease was due to a decrease in the average numberincreased gross margin of field personnel engaged in customer projects and approximately $3.4 million of the decrease was due to a decrease in the average revenue per field personnel generated. Revenues during the nine months ended September 30, 2017 have been adversely affected by a slowdown in new projects by our customers and by the loss during 2016 of key business development employees.$1.1 million.

 

Costs of services. Cost of services decreased approximately $4.7 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due primarily to the slowdown in business activity.

Gross margin. Gross margin decreased approximately $0.7 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due primarily to lower revenues, partially offset by an improved gross margin percentage. 

General and administrative. General and administrative expenses primarily include compensation expense for office employees and general office expenses. These expenses decreased by $0.9 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due primarily to cost-cutting measures we implemented in response to the continued low-revenue environment. These measures included the closure of one office location.


Depreciation and amortization. Depreciation expense includes depreciation of property and equipment and amortization of intangible assets associated with customer relationships, trade names, and noncompete agreements. Depreciation and amortization expense during the nine months ended September 30, 2017 was not significantly different from depreciation and amortization expense during the nine months ended September 30, 2016.

Impairments. During the first quarter of 2017, we recorded an impairment of $1.6 million to goodwill. During the nine months ended September 30, 2016, we recorded an impairment of $8.4 million to goodwill. As of March 31, 2017, goodwill in this segment was fully impaired.

Operating loss. Operating loss decreased by $7.0 million during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due primarily to a lower goodwill impairment charge of $6.8 million and lower general and administrative expenses of $0.9 million, partially offset by a $0.7 million decrease in the gross margin.

Environmental Services

Water & Environmental Services (W&ES)

The following table summarizes the operating results of the W&ESEnvironmental Services segment for the three months ended SeptemberJune 30, 20172020 and 2016.2019.

 

 Three Months Ended September 30,  Three Months Ended June 30, 
 2017 % of Revenue 2016 % of Revenue Change % Change  2020 % of Revenue 2019 % of Revenue Change % Change 
 (in thousands, except per barrel data)  (in thousands, except per barrel data) 
          
Revenue $2,111      $1,968      $143   7.3% $1,275     $2,704     $(1,429) (52.8)%
Costs of services  837       743       94   12.7%  430      696      (266) (38.2)%
Gross margin  1,274   60.4%  1,225   62.2%  49   4.0%  845  66.3%  2,008  74.3%  (1,163) (57.9)%
                                             
General and administrative  858   40.6%  462   23.5%  396   85.7%  455  35.7%  772  28.6%  (317) (41.1)%
Depreciation, amortization and accretion  450   21.3%  449   22.8%  1   0.2%  383  30.0%  407  15.1%  (24) (5.9)%
Losses on asset disposals, net  208   9.9%         208     
Operating income (loss) $(242)  (11.5)% $314   16.0% $(556)  (177.1)%
Gain on asset disposals, net  (7) (0.5)%        (7)   
Operating income $14  1.1% $829  30.7% $(815) (98.3)%
                                             
Operating Data                                             
Total barrels of saltwater disposed  3,102       2,937       165   5.6%
Average revenue per barrel disposed (a) $0.68      $0.67      $0.01   2.0%
Revenue variance due to barrels disposed                 $111     
Total barrels of water processed  1,769      3,518      (1,749) (49.7)%
Average revenue per barrel processed (a) $0.72     $0.77     $(0.05) (6.5)%
Revenue variance due to barrels processed               $(1,342)   
Revenue variance due to revenue per barrel                 $32                    $(87)   

(a)Average revenue per barrel disposedprocessed is calculated by dividing revenues (which includes disposalwater treatment revenues, residual oil sales and management fees) by the total barrels of saltwater disposed.water processed.

 

Revenue. Revenue. Revenues increased $0.1 decreased by $1.4 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016,2019. The decrease in revenues was due primarily to a 5.6% increasedecrease of 1.7 million barrels in the volume of saltwater disposed. The increasewater processed and lower prices on the sale of recovered crude oil. Low commodity prices, an excess of supply, and low demand led to a significant reduction in volume was due primarily to increased flowback volumes at one of our facilitiesactivity by producers in North Dakota. Average revenue per barrel was relatively consistent. Oil revenue represented approximately 5.7% of total revenue during the three months ended September 30, 2017 and 2016.

The increase in revenues was partially offset by interruptions associated with lightning strikes and fires at our facility in Orla, Texas in January 2017 and at our Grassy Butte facility in North Dakota in July 2017. We re-established temporary operations at the Orla facility soon after that incident, and the incidents did have an adverse effect on the revenues of these facilities.


Costs of services. Costs of services increased $0.1decreased by $0.3 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016, relatively consistent with the increase2019, due in revenues.part to a decrease in variable costs resulting from a decrease in volumes and due in part to a decrease in fixed costs as a result of salary reductions and reductions in force.

 

Gross marginmargin. . Gross margin remained relatively consistentdecreased by $1.2 million during the three months ended SeptemberJune 30, 20172020 compared to the three months ended SeptemberJune 30, 2016.2019, due primarily to a $1.4 million decrease in revenue, partially offset by a $0.3 million decrease in cost of services.

 

General and administrative. General and administrative expenses include general office overhead expenses such as salary costs, insurance, property taxes, royalty expenses, and other miscellaneous expenses. GeneralThese expenses decreased in the three months ended June 30, 2020 compared to the three months ended June 30, 2019, through a combination of salary reductions, reductions in force, furloughs, hiring freezes, reductions in hours, reductions in incentive compensation expense, and other cost-cutting measures. Expenses we incurred for costs that were previously incurred by Holdings pursuant to the Omnibus Agreement were $0.1 million lower during the three months ended June 30, 2020 than the administrative fee charged by Holdings during the three months ended June 30, 2019. In addition, the decrease in general and administrative expenses increased $0.4 million, primarilywas partially due to a reassessment of the omnibus administrative expense charge incurred and allocatedallocation of shared expenses to the various segments, which resulted in less expense being charged to the third quarter of 2017 that was waived by HoldingsEnvironmental Services segment and more expense being charged to the Pipeline Inspection segment in 2016 and recorded2020 than in general and administrative-corporate.2019.

 

Depreciation, amortization and accretion.Depreciation, amortization and accretion expense during the three months ended SeptemberJune 30, 20172020 was not significantly different from depreciation, amortization and amortizationaccretion expense during the three months ended SeptemberJune 30, 2016.

Losses on asset disposals, net. During the three months ended September 30, 2017, we recorded losses of $0.2 million related to lightning strikes and fires at two of our SWD facilities for non-reimbursable costs associated with these incidents.2019.