Cypress Environmental Partners Reports Third Quarter Results

TULSA, Okla.--(BUSINESS WIRE)--Today, Cypress Environmental Partners, L.P., (NYSE: CELP) reported its financial results for the three months ended September 30, 2020.

HIGHLIGHTS

• Third quarter 2020 Adjusted EBITDA of $3.6 million, an increase of 16% over second quarter 2020.
• Third quarter 2020 Pipeline Inspection Services segment gross margin of $5.1 million, an increase of 15% from second quarter 2020.
• Third quarter 2020 Pipeline & Process Services segment gross margin of $1.3 million, a decrease of 38% from second quarter 2020.
• Third quarter 2020 Water & Environmental Services segment gross margin of $0.9 million, an increase of 10% from second quarter 2020.
• Net loss attributable to common unitholders of $0.5 million for the three months ended September 30, 2020.
• Distributable cash flow (DCF) of $(0.1 million) for the three months ended September 30, 2020, inclusive of $1.3 million in cash paid for tax payments related to 2019 results.
• Continued the temporary suspension of our common unit distribution to protect our balance sheet and liquidity.
• Cost reductions representing over $4.5 million of savings on an annualized basis.
• Reduced debt and exited the third quarter with approximately $9.6 million of cash and cash equivalents and a net debt leverage ratio of 3.0x.
• Made additional progress with the in-line inspection technology investment currently owned by its GP that is focused on next generation 5G MFL in-line inspection (“Smart Pigging”) for the municipal water industry and traditional energy pipelines.

THIRD QUARTER 2020 SUMMARY FINANCIAL RESULTS

		Three Months Ended
		September 30,
		2020		2019
		(Unaudited)
		(in thousands, except per unit amounts)
Net income	$	805	$	5,480
Net (loss) income attributable to common unitholders	$	(471)	$	3,813
Net (loss) income per limited partner unit – basic	$	(0.04)	$	0.32
Net (loss) income per limited partner unit – diluted	$	(0.04)	$	0.26
Adjusted EBITDA(1)	$	3,615	$	9,504
Distributable cash flow(1)	$	(55)	$	5,766

(1) This press release includes the following financial measures not presented in accordance with U.S. generally accepted accounting principles, or GAAP: adjusted EBITDA, adjusted EBITDA attributable to limited partners, and distributable cash flow. Each such non-GAAP financial measure is defined below under “Non-GAAP Financial Information”, and each is reconciled to its most directly comparable GAAP financial measure in schedules at the end of this press release.

CEO'S PERSPECTIVE

“Our business results improved in the third quarter but remain pressured as a result of ongoing demand headwinds from COVID-19, and the resulting commodity prices that continue to impact our customers and in turn, us. In the second quarter we temporarily suspended our common unit distributions and we continued that suspension for the third quarter to protect our balance sheet. Our primary focus continues to be safely serving our customers, and ensuring the health and safety of our employees during this unprecedented and dynamic environment as we face the potential second wave of COVID-19 and winter flu season," said Peter C. Boylan III, chairman, president, and CEO. “Our dedicated employees delivered improved third quarter results due in part to improved volumes in our Environmental Services segment. I am proud of how all our employees have handled the challenges with the pandemic in the field, office, and work-from-home environments.

“We continue to focus on winning new customers while supporting our existing clients. We view the next two quarters as a period of transition for our customers that should represent the bottom of this cycle. However, while the global lockdowns are evolving, therapeutics are advancing, and vaccine development is progressing, the near-term recovery remains fragile as we enter winter with potential subsequent waves of COVID-19 that could pose a significant risk to this outlook. Protecting people, property, and the environment will continue to be important for us and all of our customers. Our leadership team has begun working on a diversification strategy to begin offering our inspection services to other industries including renewables (wind, solar, hydro), electrical transmission, municipal water and sewer, and infrastructure (bridges). Many of our inspectors and employees have the skills to offer these services to these new markets.”

GROWTH UPDATE

Pipeline Inspection Services

• During the third quarter we had ~ 700 inspectors and technicians working throughout the United States. Although several large projects that had been previously awarded were delayed or cancelled in 2020 with the economic downturn, CELP continues to bid on new work.
• CELP continues to aggressively pursue organic business development (despite the work-from-home environment) and has successfully been awarded some new customer contracts and relationships that should benefit CELP in the future.

Pipeline & Process Services (“PPS”)

• The PPS segment continues to have a strong year; with several new customers and projects benefitting the backlog. This division has made some additional investment in the Houston energy complex with a focus on maintenance and integrity projects.

Water & Environmental Services (“Environmental Services”)

• Volumes continued to improve in the Bakken, despite the rig count ending the quarter at 11 rigs, compared with a trough in Q2 2016 of 22 rigs, and a recent peak of 55 rigs in Q4 2019. The rig count in this basin was as high as 198 rigs in Q3 2014. Today’s rigs are substantially more efficient than those of six years ago. Operators continued to increase production during the quarter, after having choked back wells earlier this year when oil prices collapsed.
• CELP recently completed a new contract with a public energy company to connect its pipeline to one of its water treatment facilities. This facility began receiving volumes from this pipeline in October 2020.

COMMON UNIT DISTRIBUTIONS

On July 28, 2020, CELP announced that it has temporarily suspended common unit distributions and the suspension continued for the third quarter.

CELP’s distributable cash flow was $(0.1 million) for the three months ended September 30, 2020, inclusive of $1.3 million in cash paid for tax payments related to 2019 results.

THIRD QUARTER 2020 OPERATING RESULTS BY BUSINESS SEGMENT

Pipeline Inspection Services

The segment’s results for the three months ended September 30, 2020 and 2019 were:

• Revenue - $41.9 million and $99.7 million, respectively.
• Gross Margin - $5.1 million and $11.1 million, respectively.

Pipeline & Process Services (“PPS”)

PPS segment’s results for the three months ended September 30, 2020 and 2019 were:

• Revenue - $4.7 million and $6.2 million, respectively.
• Gross Margin - $1.3 million and $2.1 million, respectively.

Water & Environmental Services (“Environmental Services”)

Environmental Services segment’s results for the three months ended September 30, 2020 and 2019 were:

• Revenue - $1.4 million and $3.1 million, respectively.
• Gross Margin - $0.9 million and $2.3 million, respectively

CAPITALIZATION, LIQUIDITY, AND FINANCING

Credit Facility

CELP has a $110 million revolving credit facility. Proceeds from this facility can be used to fund working capital requirements and other general partnership purposes, including growth and acquisitions. CELP had $9.6 million of cash and cash equivalents at September 30, 2020.

• The credit facility matures on May 28, 2021. CELP is working with the lenders regarding the possibility of utilizing the U.S. Federal Reserve Main Street Expanded Loan Facility, and/or a renewal, modification, and reduction of the current facility.
• As of September 30, 2020, CELP had $62.6 million of debt outstanding (inclusive of finance leases). At September 30, 2020, CELP's leverage ratio (calculated as debt net of cash and cash equivalents divided by trailing-twelve-month EBITDA as defined in the credit agreement) was 3.0 times on a net debt basis. The effective interest rate on CELP's debt as of September 30, 2020 was 3.7%.

CAPITAL EXPENDITURES

During the quarter CELP had $0.2 million in maintenance capital expenditures and $0.1 million in expansion capital expenditures, which are reflective of an attractive business model that requires minimal capital expenditures.

QUARTERLY REPORT

CELP filed its quarterly report on Form 10-Q for the three months ended September 30, 2020 with the Securities and Exchange Commission today. CELP will also post a copy of the Form 10-Q on its website at www.cypressenvironmental.biz. Unitholders may request a printed copy of CELP’s complete audited financial statements and annual report for the year ended December 31, 2019 free of charge by contacting CELP at the email address below.

NON-GAAP FINANCIAL INFORMATION

This press release and the accompanying financial schedules include the following non-GAAP financial measures: adjusted EBITDA, adjusted EBITDA attributable to limited partners, and distributable cash flow. The accompanying schedules provide reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures. CELP's non-GAAP financial measures should not be considered in isolation or as an alternative to its financial measures presented in accordance with GAAP, including revenues, net income or loss attributable to limited partners, net cash provided by or used in operating activities, or any other measure of liquidity or financial performance presented in accordance with GAAP as a measure of operating performance, liquidity, or ability to service debt obligations and make cash distributions to unitholders. The non-GAAP financial measures presented by CELP may not be comparable to similarly-titled measures of other entities because other entities may not calculate their measures in the same manner.

CELP defines adjusted EBITDA as net income or loss exclusive of (i) interest expense, (ii) depreciation, amortization, and accretion expense, (iii) income tax expense or benefit, (iv) equity-based compensation expense, (v) and certain other unusual or nonrecurring items. CELP defines adjusted EBITDA attributable to limited partners as adjusted EBITDA exclusive of amounts attributable to the general partner and to noncontrolling interests. CELP defines distributable cash flow as adjusted EBITDA attributable to limited partners less cash interest paid, cash income taxes paid, maintenance capital expenditures, and cash 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 liquidity and performance measures by CELP's management and by external users of its financial statements, such as investors, banks, and others to assess:

• financial performance of CELP without regard to financing methods, capital structure or historical cost basis of assets;
• CELP's 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 investment opportunities; and
• the ability of CELP's businesses to generate sufficient cash to pay interest costs, support its indebtedness, and make cash distributions to its unitholders.

ABOUT CYPRESS ENVIRONMENTAL PARTNERS, L.P.

Cypress Environmental Partners, L.P. is a master limited partnership that provides essential environmental services to the energy and municipal water industries, including pipeline & infrastructure inspection, NDE testing, various integrity services, and pipeline & process services throughout the United States. Cypress also provides environmental services to upstream energy companies and their vendors in North Dakota, including water treatment, hydrocarbon recovery, and disposal into EPA Class II injection wells to protect our groundwater. Cypress works closely with its customers to help them protect people, property, and the environment, and to assist their compliance with increasingly complex and strict rules and regulations. Cypress is headquartered in Tulsa, Oklahoma.

CAUTIONARY STATEMENTS

This press release may contain or incorporate by reference forward-looking statements as defined under the federal securities laws regarding Cypress Environmental Partners, L.P., including projections, estimates, forecasts, plans and objectives. Although management believes that expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove to be correct. In addition, these statements are subject to certain risks, uncertainties and other assumptions that are difficult to predict and may be beyond CELP's control. If any of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, CELP's actual results may vary materially from what management forecasted, anticipated, estimated, projected or expected.

The key risk factors that may have a direct bearing on CELP's results of operations and financial condition are described in detail in the "Risk Factors" section of CELP's most recently filed annual report and subsequently filed quarterly reports with the Securities and Exchange Commission. Investors are encouraged to closely consider the disclosures and risk factors contained in CELP's annual and quarterly reports filed from time to time with the Securities and Exchange Commission. The forward-looking statements contained herein speak as of the date of this announcement. CELP undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities laws. Information contained in this press release is unaudited and subject to change.

CYPRESS ENVIRONMENTAL PARTNERS, L.P.
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 2020 and December 31, 2019
(in thousands)
	September 30,			December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	9,585		$	15,700
Trade accounts receivable, net		31,478			52,524
Prepaid expenses and other		1,620			988
Total current assets		42,683			69,212
Property and equipment:
Property and equipment, at cost		26,906			26,499
Less: Accumulated depreciation		15,789			13,738
Total property and equipment, net		11,117			12,761
Intangible assets, net		18,053			20,063
Goodwill		50,316			50,356
Finance lease right-of-use assets, net		678			600
Operating lease right-of-use assets		2,057			2,942
Debt issuance costs, net		387			803
Other assets		588			605
Total assets	$	125,879		$	157,342
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Accounts payable	$	2,117		$	3,529
Accounts payable - affiliates		357			1,167
Accrued payroll and other		8,637			14,850
Income taxes payable		360			1,092
Finance lease obligations		249			183
Operating lease obligations		379			459
Current portion of long-term debt		62,029			-
Total current liabilities		74,128			21,280
Long-term debt		-			74,929
Finance lease obligations		362			359
Operating lease obligations		1,614			2,425
Other noncurrent liabilities		173			158
Total liabilities		76,277			99,151
Owners' equity:
Partners’ capital:
Common units (12,209 and 12,068 units outstanding at
September 30, 2020 and December 31, 2019, respectively)		29,185			37,334
Preferred units (5,769 units outstanding at September 30, 2020 and December 31, 2019)		44,291			44,291
General partner		(25,876	)		(25,876	)
Accumulated other comprehensive loss		(2,449	)		(2,577	)
Total partners' capital		45,151			53,172
Noncontrolling interests		4,451			5,019
Total owners' equity		49,602			58,191
Total liabilities and owners' equity	$	125,879		$	157,342

CYPRESS ENVIRONMENTAL PARTNERS, L.P.
Unaudited Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2020 and 2019
(in thousands, except per unit data)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Revenue	$	48,047		$	108,934		$	168,218		$	310,401
Costs of services		40,702			93,533			145,537			270,170
Gross margin		7,345			15,401			22,681			40,231
Operating costs and expense:
General and administrative		4,301			6,557			15,167			18,946
Depreciation, amortization and accretion		1,250			1,116			3,669			3,329
Gain on asset disposals, net		(4	)		-			(27	)		(23	)
Operating income		1,798			7,728			3,872			17,979
Other (expense) income:
Interest expense, net		(959	)		(1,376	)		(3,235	)		(4,102	)
Foreign currency (losses) gains		106			(47	)		(167	)		138
Other, net		142			82			412			220
Net income before income tax expense		1,087			6,387			882			14,235
Income tax expense		282			907			573			1,731
Net income		805			5,480			309			12,504
Net income attributable to noncontrolling interests		243			634			852			692
Net income (loss) attributable to partners / controlling interests		562			4,846			(543	)		11,812
Net income attributable to preferred unitholder		1,033			1,033			3,099			3,099
Net (loss) income attributable to common unitholders	$	(471	)	$	3,813		$	(3,642	)	$	8,713
Net (loss) income per common limited partner unit:
Basic	$	(0.04	)	$	0.32		$	(0.30	)	$	0.72
Diluted	$	(0.04	)	$	0.26		$	(0.30	)	$	0.65
Weighted average common units outstanding:
Basic		12,209			12,065			12,171			12,030
Diluted		12,209			18,350			12,171			18,207

Reconciliation of Net Income to Adjusted EBITDA and Distributable Cash Flow
	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020		2019
	(in thousands)
Net income	$	805		$	5,480	$	309	$	12,504
Add:
Interest expense		959			1,376		3,235		4,102
Depreciation, amortization and accretion		1,464			1,391		4,391		4,155
Income tax expense		282			907		573		1,731
Equity-based compensation		211			303		729		746
Foreign currency losses		-			47		167		-
Less:
Foreign currency gains		106			-		-		138
Adjusted EBITDA	$	3,615		$	9,504	$	9,404	$	23,100
Adjusted EBITDA attributable to noncontrolling interests		368			783		1,274		1,114
Adjusted EBITDA attributable to limited partners / controlling interests	$	3,247		$	8,721	$	8,130	$	21,986
Less:
Preferred unit distributions		1,033			1,033		3,099		3,099
Cash interest paid, cash taxes paid, maintenance capital expenditures		2,269			1,922		4,463		5,604
Distributable cash flow	$	(55	)	$	5,766	$	568	$	13,283

Reconciliation of Net (Loss) Income Attributable to Limited Partners to Adjusted
EBITDA Attributable to Limited Partners and Distributable Cash Flow
	Three Months Ended September 30,					Nine Months Ended September 30,
	2020			2019		2020			2019
	(in thousands)
Net (loss) income attributable to limited partners	$	562		$	4,846	$	(543	)	$	11,812
Add:
Interest expense attributable to limited partners		959			1,376		3,235			4,102
Depreciation, amortization and accretion attributable to limited partners		1,346			1,255		3,999			3,759
Income tax expense attributable to limited partners		275			894		543			1,705
Equity based compensation attributable to limited partners		211			303		729			746
Foreign currency losses attributable to limited partners		-			47		167			-
Less:
Foreign currency gains attributable to limited partners		106			-		-			138
Adjusted EBITDA attributable to limited partners		3,247			8,721		8,130			21,986
Less:
Preferred unit distributions		1,033			1,033		3,099			3,099
Cash interest paid, cash taxes paid and maintenance capital expenditures
attributable to limited partners		2,269			1,922		4,463			5,604
Distributable cash flow	$	(55	)	$	5,766	$	568		$	13,283
Reconciliation of Net Cash Flows Provided by Operating
Activities to Adjusted EBITDA and Distributable Cash Flow
						Nine Months Ended September 30,
						2020			2019
						(in thousands)
Cash flows provided by operating activities						$	18,216		$	5,055
Changes in trade accounts receivable, net							(21,046	)		20,879
Changes in prepaid expenses and other							642			(121	)
Changes in accounts payable and accrued liabilities							7,482			(8,023	)
Change in income taxes payable							733			(166	)
Interest expense (excluding non-cash interest)							2,801			3,711
Income tax expense (excluding deferred tax benefit)							573			1,731
Other							3			34
Adjusted EBITDA						$	9,404		$	23,100
Adjusted EBITDA attributable to noncontrolling interests							1,274			1,114
Adjusted EBITDA attributable to limited partners / controlling interests						$	8,130		$	21,986
Less:
Preferred unit distributions							3,099			3,099
Cash interest paid, cash taxes paid, maintenance capital expenditures							4,463			5,604
Distributable cash flow						$	568		$	13,283

Operating Data
	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2020			2019			2020			2019
Total barrels of saltwater disposed (in thousands)		1,978			3,989			6,069			10,322
Average revenue per barrel	$	0.73		$	0.76		$	0.72		$	0.77
Environmental Services gross margins		64.6	%		74.1	%		63.8	%		71.5	%
Average number of inspectors		659			1,540			792			1,548
Average number of U.S. inspectors		659			1,539			792			1,547
Average revenue per inspector per week	$	4,842		$	4,925		$	4,809		$	4,802
Pipeline Inspection Services gross margins		12.2	%		11.1	%		10.7	%		10.7	%
Average number of field personnel		28			29			27			28
Average revenue per field personnel per week	$	12,696		$	16,264		$	13,954		$	11,496
Pipeline & Process Services gross margins		28.0	%		33.1	%		27.0	%		29.2	%
Maintenance capital expenditures (in thousands)	$	161		$	234		$	557		$	521
Expansion capital expenditures (in thousands)	$	72		$	296		$	1,170		$	1,158
Common unit distributions (in thousands)	$	-		$	2,534		$	2,564		$	7,599
Preferred unit distributions (in thousands)	$	1,033		$	1,033		$	3,099		$	3,099
Net debt leverage ratio	2.99x			2.34x			2.99x			2.34x