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Cypress Energy Partners, L.P. Announces Third Quarter Results and Filing of Form 10-Q

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Cypress Energy Partners, L.P. (NYSE:CELP) today reported:

Adjusted EBITDA – Increased 7% over Q2

Net Income – Increased 3% over Q2

Revenues – Increased 18% over Q2

Distributable Cash Flow – Increased 1% over Q2

Cash Distribution to Unit Holders – Increased 4.9% over MQD

Peter C. Boylan III, CELP’s chairman, president and chief executive officer, stated, “We had organic sequential top line revenue and gross margin growth during the quarter that generated 7% quarter-over-quarter Adjusted EBITDA growth. Our third quarter results included a 16% increase in our Water & Environmental Services segment volumes coupled with a 15% increase in our inspector headcounts in our Pipeline Inspection and Integrity Services segment over the prior quarter. We incurred some higher repair and maintenance costs in our Water & Environmental Services segment during the quarter that we believe to be non-recurring in nature.”

Mr. Boylan continued, “We secured several new inspection clients during the quarter that should represent some promising new growth prospects in future periods offset by some projects that didn’t start as soon as originally planned. This segment also continued to organically grow revenue sequentially in October. Our focus on produced water that occurs for the life of completed oil and gas wells vs. flowback in our Water & Environmental Services will help reduce some of the inevitable pressure from lower crude oil prices. During the quarter, we continued to evaluate a number of acquisition opportunities that look very interesting and hope to complete at least one of them in the near future.”

In conclusion, Mr. Boylan commented, “We were pleased to announce our second consecutive increase in distributions consistent with our long-term stated objective of thoughtfully growing cash flow distributions per unit. During the quarter, we increased our credit facility to $200 million and currently have approximately $125 million of availability. We continue to evaluate the timing associated with a drop down of the remaining 49.9% of TIR not currently owned by CELP. We continue to operate with a strong balance sheet and capital structure that allows us to pursue opportunities and we have a significant pipeline of opportunities we are currently evaluating. Demand for our inspection and integrity services remains solid and opportunities to grow our volumes in our Water & Environmental segment continue to exist. We also continue to hire additional talent to build the organization’s capabilities to pursue organic growth that have negatively impacted EBITDA margins in the short term.”

Third Quarter:

  • Revenue of $111.0 million for the three months ended September 30, 2014.
  • Declared cash distribution of $4.8 million or $0.406413 per unit for the three months ended September 30, 2014, a 4.88% increase over the minimum quarterly distribution of $0.3875 and a 2.41% increase from the prior quarter
  • Distributable cash flow of $5.2 million for the three months ended September 30, 2014.
  • Adjusted EBITDA of $7.9 million for the three months ended September 30, 2014 (including non-controlling interests).
  • Adjusted EBITDA attributable to Cypress Energy Partners, L.P. of $5.3 million for the three months ended September 30, 2014.
  • Net income of $5.1 million for the three months ended September 30, 2014, compared to our predecessor’s net income of $4.5 million for the three months ended September 30, 2013, a 13% increase.
  • Net income attributable to Cypress Energy Partners, L.P. of $3.6 million for the three months ended September 30, 2014.
  • A coverage ratio of 1.08X.

Year To Date:

  • Revenue of $302.3 million for the nine months ended September 30, 2014.
  • Distributable cash flow of $13.5 million for the period from January 21, 2014 through September 30, 2014.
  • Adjusted EBITDA of $21.8 million for the nine months ended September 30, 2014 (including non-controlling interests and periods prior to the IPO), compared to our predecessor’s Adjusted EBITDA of $14.6 million for the nine months ended September 30, 2013, a 49% increase.
  • Adjusted EBITDA attributable to Cypress Energy Partners, L.P. of $13.8 million for the period from January 21, 2014 through September 30, 2014.
  • Net income of $13.5 million for the nine months ended September 30, 2014, compared to our predecessor’s net income of $8.3 million (excluding an $11.2 million contingent consideration reversal) for the nine months ended September 30, 2013, a 63% increase.
  • Net income attributable to Cypress Energy Partners, L.P. of $9.3 million for the period from January 21, 2014 through September 30, 2014.

Highlights include:

  • We averaged 1,648 inspectors per week for the third quarter of 2014. We were engaged by several new customers in the third quarter of 2014 who will utilize our services on new projects.
  • We disposed 5.5 million barrels of saltwater at an average revenue per barrel of $1.09 for the third quarter of 2014, compared to disposing 5.1 million barrels of saltwater at an average revenue per barrel of $1.19 for the third quarter of 2013 despite increased competition in several locations. Lower oil prices primarily impacted average rate per barrel.
  • We increased our senior credit facility from $120 million to $200 million and extended the maturity to December 2018 and had $75 million outstanding at quarter end.
  • Our leverage ratio as calculated under our credit facility is 0.82x and our interest coverage ratio is 6.32x, reflecting a strong balance sheet-with ample available cash and substantial availability.
  • Maintenance capital expenditures for the three months ended September 30, 2014 were $80 thousand reflecting the limited maintenance capital expenditures required to operate our businesses.
  • We remain focused on reviewing potential acquisition opportunities in both of our segments and other areas covered under our private letter ruling.
  • A combination of organic growth and new acquisition opportunities including a future partial or full drop down of the remaining 49.9% of Tulsa Inspection Resources, LLC (“TIR”) not currently owned by the Partnership in the first half of 2015 will continue to enhance our growth in distributable cash flow.

Looking forward:

  • Our previously stated goal remains a 10% annualized increase in cash distributions per unit over the long term driven by a combination of organic growth and acquisitions, including potentially a drop down of the remaining 49.9% of TIR. Our 4.9% increase this quarter vs. the minimum quarterly distribution reflects the same and was not contemplated in our S-1 filing.
  • The market price of crude oil has a direct impact on our revenues associated with the sale of residual oil. It also has an indirect impact on our water disposal revenues depending on the reaction of oil and gas producers in the vicinity of our facilities to declining oil prices. Producers could delay new drilling activities that would reduce flow back water, and although unlikely, could potentially stop production on existing wells which would have a direct impact on the volumes of disposed water and residual oil recovery at our facilities.
  • For the full 2014 year, we expect to spend less than an aggregate of $1.0 million on maintenance capital expenditures and expansion capital expenditures.

CELP also announced that it has filed its quarterly report on Form 10-Q for its fiscal quarter ended September 30, 2014 with the Securities and Exchange Commission. CELP has posted a copy of the Form 10-Q on its website at www.cypressenergy.com.

CELP will host an earnings call on Wednesday, November 12, 2014, at 5:00 p.m. EST (4:00 p.m. CST) to discuss its third quarter 2014 financial results. Analysts, investors, and other interested parties may access the conference call by dialing Toll-Free (US & Canada): (888) 428-7458 or International Dial-In (Toll): (862) 255-5400. An archived audio replay of the call will be available on the investor section of our website at www.cypressenergy.com beginning at 5:00 p.m. EST (4:00 p.m. CST) on November 17, 2014.

CELP defines Adjusted EBITDA as net income, plus interest expense, depreciation and amortization expenses, income tax expenses and offering costs; less gain on reversal of contingent consideration. CELP defines Distributable Cash Flow as Adjusted EBITDA excluding cash interest paid, cash income taxes paid and maintenance capital expenditures. Adjusted EBITDA and Distributable Cash Flow should not be considered an alternative to net income, income before income taxes, 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. CELP believes that the presentation of Adjusted EBITDA will provide useful information to investors in assessing our financial condition and results of operations. CELP uses Distributable Cash Flow as a supplemental financial measure to assess the cash flows generated by our assets (prior to the establishment of any retained cash reserves by the general partner) to fund the cash distributions we expect to pay to unitholders, to evaluate our success in providing a cash return on investment and whether or not the Partnership is generating cash flow at a level that can sustain or support an increase in its quarterly distribution rates and to determine the yield of our units, which is a quantitative standard used through the investment community with respect to publicly-traded partnerships as the value of a unit is generally determined by a unit’s yield (which in turn is based on the amount of cash distributions the entity pays to a unitholder). Because adjusted EBITDA and distributable cash flow may be defined differently by other companies in our industry our definitions of Adjusted EBITDA and Distributable Cash Flow may not be comparable to a similarly titled measure of other companies, thereby diminishing their utility. A reconciliation of Adjusted EBITDA and Distributable Cash Flow to net income is shown below.

This press release includes “forward-looking statements.” All statements other than statements of historical facts included or incorporated herein may constitute forward-looking statements. Actual results could vary significantly from those expressed or implied in such statements and are subject to a number of risks and uncertainties. While CELP believes its expectations as reflected in the forward-looking statements are reasonable, CELP can give no assurance that such expectations will prove to be correct. The forward-looking statements involve risks and uncertainties that affect operations, financial performance, and other factors as discussed in filings with the Securities and Exchange Commission. Other factors that could impact any forward-looking statements are those risks described in CELP’s Annual Report filed on Form 10-K and other public filings. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, specifically those under the heading “Risk Factors.” CELP undertakes no obligation to publicly update or revise any forward-looking statements except as required by law.

About Cypress Energy Partners, L.P.

Cypress Energy Partners, L.P. is a growth-oriented master limited partnership that provides saltwater disposal and other water and environmental services to U.S. onshore oil and natural gas producers and trucking companies in North Dakota and west Texas. Cypress also provides independent pipeline inspection and integrity services to producers and pipeline companies throughout the U.S. and Canada. In both of these business segments, Cypress works closely with its customers to help them comply with increasingly complex and strict environmental and safety rules and regulations and reduce their operating costs. Cypress was founded by Cypress Energy Holdings, LLC, an entity controlled by the family of Charles C. Stephenson, Jr. and by Peter C. Boylan III, the Chairman, President and CEO of Cypress. Cypress is headquartered in Tulsa, Oklahoma.

CYPRESS ENERGY PARTNERS, L.P.
Condensed Consolidated Balance Sheets
As of September 30, 2014 and December 31, 2013
(in thousands, except unit data)
(unaudited)
September 30, December 31,
2014 2013

(Recast)

ASSETS
Current assets:
Cash and cash equivalents $ 24,694 $ 26,690
Trade accounts receivable, net 62,265 60,730
Deferred tax assets 62 134
Deferred offering costs 2,539
Prepaid expenses and other 2,622 1,458
Total current assets 89,643 91,551
Property and equipment:
Property and equipment, at cost 42,670 42,529
Less: Accumulated depreciation 6,774 3,711
Total property and equipment, net 35,896 38,818
Intangible assets, net 30,662 32,551
Goodwill 75,376 75,466
Debt issuance costs, net 1,863 2,149
Other assets 92 55
Total assets $ 233,532 $ 240,590
LIABILITIES, PARENT NET INVESTMENT AND OWNERS’ EQUITY
Current liabilities:
Accounts payable $ 2,431 $ 2,673
Accrued payroll and other 19,438 10,662
Income taxes payable 641 16,158
Total current liabilities 22,510 29,493
Long-term debt 75,000 75,000
Deferred tax liabilities 464 541
Asset retirement obligations 9 9
Total liabilities 97,983 105,043

Commitments and contingencies

Parent net investment attributable to controlling interests 130,012
Parent net investment attributable to non-controlling interests 719
Owners’ equity:
Partners’ capital
Common units (5,913,000 outstanding at September 30, 2014) 23,354
Subordinated units (5,913,000 outstanding at September 30, 2014) 83,276
General partner 1,999 4,816
Accumulated other comprehensive loss (327 )
Total partners’ capital 108,302 4,816
Non-controlling interests 27,247
Total parent net investment and owners’ equity 135,549 135,547
Total liabilities, parent net investment and owners’ equity $ 233,532 $ 240,590
CYPRESS ENERGY PARTNERS, L.P.
Condensed Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2014 and September 30, 2013
(in thousands, except unit and per unit data)
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013

(Recast)

(Recast)

Revenues $ 111,016 $ 116,980 $ 302,261 $ 131,493
Costs of services 97,735 102,669 265,257 109,702
Gross margin 13,281 14,311 37,004 21,791
Operating costs and expense:
General and administrative 5,437 5,543 15,358 7,243
Depreciation, amortization and accretion 1,582 1,624 4,719 3,498
Operating income 6,262 7,144 16,927 11,050
Other income (expense):
Interest expense, net (795 ) (1,447 ) (2,352 ) (1,500 )
Offering costs (446 )
Gain on reversal of contingent consideration 11,250
Other, net 43 2 68 7
Net income before income tax expense 5,510 5,699 14,197 20,807
Income tax expense 413 1,211 654 1,264
Net income 5,097 $ 4,488 13,543 $ 19,543
Net income attributable to non-controlling interests 1,542 3,564
Net income attributable to partners 3,555 9,979
Less net income attributable to general partner 646
Net income attributable to limited partners $ 3,555 $ 9,333
Net income attributable to limited partners allocated to:
Common unitholders $ 1,778 $ 4,667
Subordinated unitholders 1,777 4,666
$ 3,555 $ 9,333
Net income per common limited partner unit:
Basic $ 0.30 $ 0.79
Diluted $ 0.30 $ 0.78
Net income per subordinated unit – basic and diluted $ 0.30 $ 0.79
Weighted average common units outstanding:
Basic 5,913,000 5,913,000
Diluted 5,978,804 5,986,328
Weighted average subordinated units outstanding – basic and diluted 5,913,000 5,913,000

Reconciliation of Net Income to Adjusted EBITDA (in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013

(Recast)

(Recast)

Net income $ 5,097 $ 4,488 $ 13,543 $ 19,543
Add:
Interest expense 795 1,447 2,352 1,500
Income tax expense 413 1,211 654 1,264
Depreciation, amortization and accretion 1,621 1,624 4,847 3,550
Offering costs 446
Less:
Gain on reversal of contingent consideration 11,250
Adjusted EBITDA $ 7,926 $ 8,770 $ 21,842 $ 14,607

Reconciliation of Net Income attributable to partners to Adjusted EBITDA and Distributable Cash Flow Attributable to Partners (in thousands)

Three Months January 21, 2014
Ended through
September 30, 2014 September 30, 2014
Net income attributable to partners $ 3,555 $ 9,333
Add:
Interest expense attributable to partners 224 614
Income tax expense attributable to partners 213 329
Depreciation, amortization and accretion attributable to partners 1,276 3,529
Adjusted EBITDA attributable to partners $ 5,268 $ 13,805
Less:
Cash interest paid, cash taxes paid & maintenance capital expenditures 76 271
Distributable cash flow attributable to partners $ 5,192 $ 13,534

Operating Data (1)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2014 2013 2014 2013
Total barrels of saltwater disposed (in thousands) 5,465 5,126 14,205 14,489
Average revenue per barrel $ 1.09 $ 1.19 $ 1.21 $ 1.14
Water and environmental services gross margins 58.3 % 68.7 % 62.1 % 68.4 %
Average number of inspectors (1) 1,648 1,667 1,530 1,383
Average revenue per inspector per week (1) $ 4,850 $ 5,061 $ 4,778 $ 4,968
Pipeline inspection and integrity services gross margins (1) 9.3 % 9.1 % 9.2 % 9.3 %
Maintenance capital expenditures (in thousands) $ 82 $ 297 $ 165 $ 887
Expansion capital expenditures (2) $ 302
Coverage ratio 1.08X N/A 1.04X N/A

(1) Operating data for the Pipeline Inspection and Integrity Services segment for the three and nine months ended September 30, 2013 is prior to our obtaining control of the TIR Entities on June 26, 2013.

(2) Represents pre-IPO expansion capital expenditures attributable to a North Dakota facility in our Water and Environmental Services segment committed in 2013 and paid in 2014.

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