Cypress Environmental Partners, L.P.
Q4 2017 Earnings Call Transcript

Published: 23 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Cypress Energy Partners Fourth Quarter Earnings Conference Call headed by Richard Carson. My name is Sam and I'm the event manager. [Operator Instructions] And now, I'd like to hand over to Richard. Please go ahead.

[Richard Carson:]

Thank you. Hello, and welcome to the Cypress Energy Partners' fourth quarter 2017 investor conference call. I am Richard Carson, the Senior Vice President and General Counsel. With us today are Pete Boylan, our Chairman and CEO; Jeff Herbers, our Vice President and Principal Financial & Accounting Officer. We released our fourth quarter 2017 financial results and posted the press release on our website, cypressenergy.com. In the press release, you will find an important disclaimer regarding forward-looking statements. This disclaimer is an essential component of our remarks and it's important that you review it. Also included in the press release are various non-GAAP measures that we have reconciled to financial measures under Generally Accepted Accounting Principles. Those reconciliations appear towards the end of the press release. With that, I will turn the call over to Pete.

[Pete Boylan:]

Thanks, Richard. Good morning, everybody. Thank you for joining us today and thank you for your interest in our Company. I'm pleased to report that we exceeded analyst consensus this quarter on gross margin, EBITDA, DCF and coverage ratio. 2017 should represent an important inflection point for the partnership as we enter 2018 with a much stronger commodity pricing environment that benefits all of our customers and in turn Cypress. I believe the MLP investors keenly understand the commodity prices, ultimately impact everybody on our industry regardless of the type of assets you own, the services you offer or the contracts you have with other energy customers. $65 oil has been much better for everyone in our business compared with the challenges we experienced in 2015 and 2016 when prices collapsed. We are primarily in inspection and integrity services MLP with approximately 97% of our revenue and approximately 85% of our EBITDA coming from these mission critical services. Our primary business, TIR, is celebrating it's 15th anniversary this year and has proven it's resilience through the 2008 financial crisis and the 2014 OPEC driven energy downturn. Our country's aging energy infrastructure will lead more inspection and integrity services for the foreseeable future. I'm also pleased to report that TIR has an extraordinary customer retention rate that is well in excess of 90%. It can take time to develop a new customer relationship but generally, once we win that customer, they remain with us for the long-term. We continue to focus on growing and diversifying our customer and continue to add new customers across all 3 business segments. We added a total of 40 new customers during 2017 and 2007 in the fourth quarter. We have tremendous opportunities to grow and gain additional market share with a large group of potential customers that we currently do not serve. Therefore, our primary focus currently remains growing and diversifying our inspection and integrity services customer base. We can do this without having to invest much in the way of capital expenditures, given our CapEx like business model. Our saltwater disposal business is primarily concentrated in North Dakota and the Bakken and is currently benefiting from a combination of higher oil prices, the completion of the DAPL pipeline and substantial new investment by private equity backed DMP companies in the region. The rig count is more than doubled from the bottom of the downturn and permit growth has been strong. In 2018, we also benefit from having two of our facilities reopened after fires from lightning strikes in 2017. We will also benefit from the January completion of two new pipelines into one of our facilities. We are also pleased to announce that in March 2018 we successfully obtained commitments for our new 3-year credit facility with our existing bank group to replace the current credit facility that expires later this year, thus reducing uncertainty regarding the maturing debt while materially reducing our leverage. The new $80 million credit facility has a $20 million of Ford EMP for a total of $100 million. We are also still talking with two other banks about joining this new facility and further expanding it. Under the new credit facility we currently anticipate that we will borrow what closing approximately $76.1 million, representing 3.75x our trailing 12-month adjusted EBITDA as defined in the credit agreement. Approximately $60.8 million or 44% lower than our outstanding debt of $136.9 million at year end. After we refinanced under the new credit facility, our net debt defined as outstanding debtless current cash balance will be approximately 48% lower and our net debt leverage will be approximately 3x. The new revolving credit facility will have customary covenants, including the maximum leverage ratio with 4x adjusted EBITDA and minimum interest coverage ratio of 3x. Alternatively, we can lower the senior secured debt to 3.25x and add another 1.5x of subordinated debt for a total leverage of 4.75x. We believe we will be able to expand this new facility when we find attractive accretive acquisition opportunities given our better credit metrics. The interest rate on the new facility will be based on LIBOR plus margin of approximately 3.5% at closing. We expect the interest rate to approximate 5.5% all-in at closing. I believe this is fair to say that both equity investors and lenders sentiment towards the energy industry and MLPs has been quite negative for the last year with the recent FURK [ph] decision last week representing the latest new development impacting some MLPs but not Cypress. In order to successful refinance our credit facility our lenders required that we significantly deleverage the partnership to these levels. The process of reaching an agreement on the terms of new credit facility proves substantial and more challenging that our agent anticipated when we went to market in November of last year as investor and lender sentiment towards MLPs leaned [ph]. Lenders remained focused on reducing leverage with many of their MLP customers and we are no exception given that MLPs uniquely payout the majority of their earnings and distributions to their unit holders each quarter and they seldom amortize debt balances unlike most traditional, commercial and industrial borrowers. Things are also regulated by either the OCC, federal reserve or in some cases both, and they face pressure from the regulators with regard to energy customers and borrowers with elevated leverage. We experienced a significant decline in our EBITDA from it's peak in Q3 of 2014 when oil prices were in the $90 to $100 barrel per range to the bottom of the cycle in Q2 of '16 when oil prices declined to approximately $35 per barrel. As our adjusted EBITDA declined, our leverage increased since our balance outstanding debt remained basically the same. As you may recall, the leverage covenant of existing credit facility excluded the working capital tranche of the debt. As a result, our covenant leverage had remained below 4x despite the fact that the actual leverage under more customary calculations exceeded 6x trailing 12-month adjusted EBITDA. The banks sentiment towards energy and MLPs has deteriorated over the last year and certain members of our bank were not interested in participating in the renewal of the facility without these material modifications. With our facility expiring in December of this year, our Board concluded that these new terms were in the best interest to the partnership. To meet the bank's leverage requirements, we sold our saltwater disposal facility on attractive return terms and retained a perpetual royalty, we'll utilize in excess cash and we agreed to issue upto a $50 million of equity in the form of convertible preferred equity otherwise described as a pipe [ph] in this for an affiliate of CEA to delete -- deleverage the partnership on favorable terms. As noted last quarter, we had several levers available to accomplish this pack as described above. We believe the terms of this pipe are more attractive than what we could have received from unaffiliated third-parties. The conflicts committee of our Board of Directors and it's legal and financial advisors negotiated the terms of the pipe to ensure fairness of this related party equity investment. The terms of the new pipe will be described in more detail on our 10-K filing. The conflicts committee also believes that pipe terms were more favorable in many respects and what could be obtained from an unrelated third-party with regard to numerous key provisions, including conversion premium redemption rights, no warrants, the interest rate and pick flexibility. We may execute on the commitments to close on the new credit facility and we issue the pipe anytime on/or before May 31. Based upon our current analysis and our improving operating results, we believe that we can support the current distribution post conversion of the pipe if not earlier. In fact, we believe we can potentially grow distributions later this year or in 2019 if our business continues to improve without any acquisitions. Of course any accretive acquisition could be additive. Additionally, we have retained the services of a financial advisor to shop to market to determine if more favorable pipe terms pipe terms could be obtained from an independent third-party and to explore strategic alternatives to determine if any more attractive transformational opportunities exists that would be more attractive for the partnership. In the event this process does not generate better opportunities, we will close on the new credit facility and the pipe investment in the second quarter. If the third-party offers a superior pipe, we are under no obligation to close with our affiliate and we are not obligated to pay any fees for this commitment. The MLP IPO markets are currently closed and there are many private equity backed mid-stream companies that have attracted MLP eligible assets that have had their own plans to go public. We believe we have a unique and attractive inspection and integrity business and a small MLP structure that might appeal to these parties who have pipelines or other midstream assets. We expect to complete this refinancing process in the next 60 days unless a more attractive alternative arises that should be seriously considered by our Board of Directors. In the event, we do not identify a superior alternative for the partnership in the process described above are substantially lower leverage required under the new credit facility should reduce our interest expense, improve distributable cash flow and position us to increase the size of our credit facility when we find a suitable acquisition opportunity. As noted earlier, we believe that we will be able to maintain our distributions at the current level and eventually resume growing our distribution. We negotiated for favorable redemption rights in the event we are able to refinance the pipe on more favorable terms. In a perfect world, we would have preferred to raise less equity but we also understand our lenders perspectives and the benefits of significantly reducing our leverage to ultimately bring in other banks to our credit facility in the future. We will have substantially less interest expense on our debt outstanding that will be offset by our dividend on the pipe that was required to deleverage the company. In 2017 we paid approximately $6.8 million as interest expense that would have likely increased by at least $1 million with rising interest rates. The yield on the pipe is lower than our current yield of approximately 14% on our common equity and we have the ability to pay in kind or pick upto 7% if desired. Our debt outstanding at closing of the new facility will be almost $61 million lower, saving us approximately $3.3 million per year in interest expense. This will be offset by approximately $4.75 million per year at 9.5% yield on our preferred units which is 450 basis points lower than our common yield or approximately 30% lower. With respect to the preferred units, we are only obligated to pay 2.5% in cash or $1.25 million per year and we may pick the balance. Based on our current forecast, again, we believe that we will be able to support the current distribution and hopefully resume growing it. We also retain an attractive right again to refinance and redeem the pipe in the future. In 2017, our sponsor provided another $4.1 million of support at no charge to our unit holders reconfirming the fact that it's interest are fully aligned with our unit holders because of our approximately 64% ownership and the partnership. We believe that a stronger balance sheet with less debt will allow us to support the current distribution and ultimately position us to begin growing the distribution again. We believe that our pipeline, inspection and integrity segments will have additional opportunities over the next several years due to the continued aging in North America's existing pipeline infrastructure and a continued energy sector economically bound [ph]. We continue to invest in organic growth and started two new business units during 2017 and with latest business unit offering mechanical integrity services, a new line of inspection and integrity support that most of our customers require. This new line of business has already been awarded several nice new projects from investment grade customers. In our pipeline inspection segment, we are primarily targeting maintenance and integrity services and including non-destructive examination, staking and our mechanical integrity business. These businesses typically generate much higher margins than our basic inspection services. Overtime, we plan to increase our focus on these opportunities given the greater comparative returns on working capital over our traditional basic inspection services. We also remain focused on margin improvement, working capital efficiency, and managing and increasing our distributable cash flow. Consistent with our desire to focus on margin improvement, our Canadian revenues will be much lower in the future than they have been in the recent past, due to our decision of not to lower our prices to retain what was already a very low margin basic inspection service client at the end of the second quarter last year. Canadian revenue as most of you know is also less attractive for any MLP and all of the inspectors in Canada are not employees under our direct control but instead because of various tax reasons, independent contractors that ultimately introduce incremental risk to us. As our business model progresses, we continue to be less interested in specter headcount and much more focused on our mix of business and margins, ultimately gross margin, not revenue generates EBITDA and DCF to support our distributions. Revenues from our 51% owned integrity services segment, hydro-testing were higher in the fourth quarter of 2017 than they were in the third quarter of 2017 as their utilization rate significantly improved and our backlog has remained more consistent. We continue to bid on numerous upcoming opportunities and remain focused on winning more of these bids in an ongoing effort to increase our volume and backlog. Our backlog at the end of 2017 was materially higher than the prior year and year-to-date, and we have a substantial amount of new work; we are off to a solid start in 2018 as a result of our strong backlog and during the year. Revenues of our Water Services segment were 15.4% higher in the fourth quarter than in the third quarter showing once again sequential improvement. In January, we divested our [indiscernible] facility but retailed royalty and perpetuity. The majority of our facilities in the Bakken region have also begun to enjoy the effects of the energy recovery and $65 oil. Rig count has more than doubled, permits have increased and the E&P economics have improved with both, higher oil prices and the opening of the DAPL pipeline. In addition, a substantial amount of acquisition activity has occurred with private equity backed energy companies acquiring both production and acreage in the Bakken with plans to increase drilling which in turn should create new water for disposal. As previously disclosed, two of our facilities were struck by lightning in 2017 and are being rebuilt with plans to reopen in the second quarter of 2018. In January, we completed construction and connected two new pipelines with large multi-well pads into one of our existing facilities in Bakken for our large public energy company under a long-term contract with an acreage dedication. We also recently, verbally agreed to a deal for a new pipeline into another one of our North Dakota facilities that has never received pipe water as the EMP companies continue to focus on eliminating trucking costs and piping water whenever possible. We continue to examine and evaluate accretive acquisition opportunities in both traditional midstream and our existing business. Holdings in our affiliates remain willing the deploy capital to assist us in acquiring attractive assets that maybe larger than what we can currently acquire independently, with plans to offer those assets to us as dropdown opportunities. As we announced in February, this quarters cash distribution was $0.21 per limited partner unit, at this unit distributions will total approximately $9.9 million for the year. Since our last earnings call, general investors segment toward energy and MLPs remains negative. After healthy fund flows in January, February flows turned negative in week 2 and average negative $333 million over the last 3 weeks of the month making it the weakest month for MLPs since the fall of 2015. Investors have also shown a clear preference for lower leveraged MLPs. Dozens of other MLPs have also been required to modify their distribution policies, increased coverage, raise equity and reduce debt to position themselves for growth in the future. Notwithstanding this current negative sentiment toward MLPs, we still have an aging population that truly needs income for retirement. MLPs are trading unfavorably in comparison with other income alternatives and the S&P500 market as a whole. I believe the pendulum will ultimately swing back towards the middle. We can't control the MacPro investor sentiment but we can keep our heads down and focus on growing our business organically. Our management team and Board of Directors remain keenly focused on growing the company, and ultimately our distributions through a disciplined approach. We remain interested in accretive acquisition opportunities and we are not interested in simply pursuing an acquisition because it happens to be accretive for few quarters. We look forward to seeing what the strategic opportunities process presents if anything through our process that could ultimately benefit our partnership. With that, I'd like to introduce Jeff Herbers, our VP and Principal Financial & Accounting Officer; he can walk you through some of our other financial highlights.

[Jeff Herbers:]

Thank you, Pete. I would like to take a moment to highlight some of our financial information. Adjusted EBITDA for the fourth quarter was $4.5 million, $5.5 million of which is attributable to our common unit holders, $0.3 million of which is attributable to the non-controlling interest holders that owned 49% of our hydrostatic testing subsidiary and $1.3 million EBITDA loss attributable to our general partner. A loss attributable to the general partner represents $1.3 million of cash support provided by our sponsor, free of charge to the partnership. Distributable cash flow for the fourth quarter was $3.2 million, and our coverage ratio for the quarter was 1.28. I have provided this non-GAAP financial information to further help our investors understand our performance. Our net income in the fourth quarter was $1.9 million, the net income was comprised of $3.1 million attributable to our common unit holders, $0.2 million attributable to non-controlling interest and a net loss of $1.3 million attributable to our general partner. In addition to these financial highlights, I would also note that our leverage ratio as calculated under our existing credit facility was 3.7x compared to a maximum of 4x, and our interest coverage ratio was 3.1x compared to a minimum of 3x. Our cash position was $24.5 million at the end of the year. We averaged 1,101 inspectors in the field during the fourth quarter compared to 1,211 inspectors during the third quarter. This decrease is consistent with the typical seasonal decline in inspector headcount. The gross margin percentage for the pipeline inspection segment was 11% during the fourth quarter, an improvement over the margin percentage of 10.2% in the third quarter. The average of 1,101 inspectors during the fourth quarter was similar to the average of 1,083 inspectors in the fourth quarter of 2016 despite the loss during 2017 of our largest Canadian customer. Retaining this customer would have required us to bid work at rate that are lower than we could accept. We disposed of approximately 3.7 million barrels of saltwater during the fourth quarter of 2017 at an average revenue per barrel of $0.65 compared to 3.1 million barrels during the third quarter at an average revenue per barrel of $0.68. This 19% sequential increase reflects our progress in the Bakken. Our average rate per barrel reflects lower pricing for new customer while we completed a pipeline project that will lead to higher pricing in 2018. The water and environment services business generated a gross margin percentage of 58.5% for the year with nominal maintenance capital expenditures which is attractive relative to many services business serving the energy industry. The 3.7 million barrels of saltwater disposed during the fourth quarter 10.5% higher than the 3.4 million barrels of saltwater disposed in the fourth quarter of 2016 which is an impressive statistic considering that our Grassy Butte facility is temporarily closed and our Orla facility is operating on temporary equipment, in both cases as a result of lightning strikes and fires that occurred in 2017. During the fourth quarter, approximately 90% of total water volumes came from produced water, and piped water represented approximately 41% of our total water volume. Today pipe water is now over 50% with the completion of two new pipelines in January 2018. As commodity prices continue to improve, and drilling and completion activities increase, we expect to have significant operating leverage with our current cost structure and we anticipate minimal maintenance capital expenditures as volumes increase. Our research shows numerous drilled and uncompleted wells within a 15-mile radius of our facilities. As prices improve, we expect to benefit from the completion of these wells. Our saltwater disposal facilities were utilized at approximately 24% of their capacity in 2017. As activity has picked up in the Bakken, we should see some meaningful benefits, considering that more than 90% of our saltwater disposal facilities are located in this region. As previously mentioned, in January 2018 we completed construction of a new water gathering system that connects 2 significant well pads with a total of 10 oil wells to one of our existing saltwater disposal facilities. We expect this new gathering system to yield higher water volumes, revenues, EBITDA and DCF. Our integrity service segments revenues were $3.3 million during the fourth quarter compared to $2.8 million during the third quarter representing an 18% increase. Gross margin was $1 million during the fourth quarter compared to $0.7 million during the third quarter representing a 42% increase. Our backlog improved throughout the second half of 2017 and we ended the year with a backlog of $2.8 million representing a dramatic improvement over the same time last year. The fourth quarter 2017 revenues of $3.3 million were higher than the fourth quarter 2016 revenues of $2.6 million by 31%. On a consolidated basis, maintenance capital expenditures for the fourth quarter were less than $200,000 reflecting the attractive business model of limited maintenance capital expenditures required to operate our business. This remains a key differentiator for us versus virtually all other MLPs. And with that, I will turn the call back over to Pete.

[Pete Boylan:]

Thanks, Jeff. We are pleased to record some solid improvement in our existing operations, relative to the prior quarter continuing our slow but steady recover from the multi-year downturn. I'm also pleased that we have commitments in hand to enable us to execute a refinancing plan that will materially deleverage our balance sheet and truly appreciate our partners/affiliates willingness to backstop this financing until we determine if any superior terms are available in the market. Higher oil prices and rig counts have led to rising permitting activity that should benefit the industry in the foreseeable future. We continue to focus on pursuing the 100s of other clients that can utilize our services. Our sponsors, approximately 64% ownership in Cypress fully aligns our interest and we remain interested in finding attractive, accretive acquisition opportunities; and the strategic alternatives processed will represent our first formal effort to pursue the same. We recently mailed approximately 6,400 K-1's to our moment of partners and truly appreciate your valuable time and your continued support of our partnership. Our Board, management team, employees also remain committed to working hard to grow our company while maintaining a focus on long-term unit holder value through a disciplined approach to growth. Operator, we may now begin to take some questions.

[Operator:]

[Operator Instructions] We have a question from Mike [ph]. Please go ahead, your now live on the call.

[Unidentified Analyst:]

Could you talk a little bit about -- I guess the backlog, the new customers, the new projects; kind of maybe what's the difference this year versus last year; you seem kind of an increase in the size of the order and maybe just kind of the demographics or locations where most of these new customers or projects are coming from?

[Pete Boylan:]

Are you speaking as it relates to the hydro-testing or the inspection and integrity, or both?

[Unidentified Analyst:]

I would like both, but absolutely, whatever you can talk about.

[Pete Boylan:]

I'll start with the hydro-testing business first. In that particular segment, we had some significant challenges as you know in 2015-2016 and kind of right-sized our cost structure and really began focusing on making sure that we were bidding jobs that could actually occur within a reasonable timeframe that would allow us to remain utilize an appropriate rate to actually make money. And so Q4, we did a really good job, we bid and successfully won a lot of jobs coming into Q1 that have allowed us to continue that goal of staying highly utilized which in turn can make us very profitable. There is a ton of work that was pent up from the downturn and as most of you know, our clients are typically owners of pipelines and other facilities that need to be tested and you can differ testing by only for so long to stay in compliance and remain improved operator [ph]. So, we're seeing the benefit of growing budgets and people having to address projects that were deferred, and then obviously the new administration and what occurred would [indiscernible] caused a bunch of projects, it did then hung up in permitting and other things to proceed. So it's a combination of all of those factors for the hydro-testing business. As it relates to the TIR business, we have been focused on expanding and diversifying our customer base for a year plus now, and during the downturn very few companies were interested in adding new vendors. And to work for any customer, you have to go through a pretty comprehensive wedding process the involves EHS and procurement and their line people that would actually manage you on the day-to-day basis as a vendor; and you need a sponsor to ultimately go through and become an approved vendor, get an MSA in place and so forth. So that generally doesn't happen overnight there on occasions but as I mentioned, during the year we added collectively about 40 new customers and some of those calling efforts have been years in the making and occasionally, again you get lucky where some incumbent vendor messaged up and gets terminated and our client chooses to bring in a new vendor that was unexpected. So we have brought in a new Head of Business Development to run that as a season veteran with an impressive background. And we have assigned over 1,300 different prospective, new customers to our BD Team that's geographically distributed and we have an ongoing business development calling effort on those new customers. In appropriate world, I would rather do work for 300 or 400 customers with 10 or 15 inspectors on each one of them doing higher margin maintenance and integrity work that's 20% to 40% gross margin work than I would have 100 guys out on a new construction project doing basic inspection work that's sub 10% gross margin. So we've really been focused on those opportunities that can be more recurring in nature and higher margin.

[Unidentified Analyst:]

And then on the refinancing; it looks like a new facility potentially got about $4 million available liquidity plus the cash on-hand. Can you kind of talk about your capital needs for 2018 and maybe what you have in the outside of acquisitions, maybe just in the growth projects?

[Pete Boylan:]

As I mentioned in our prepared remarks, we're still talking to a couple of other banks that could increase that $80 million commitment and we'll see here over the next several months where we ultimately end up. But we have today in excess of $25 million of cash on the balance sheet; at December 31, 2017 we had this -- you saw about $20.5 million of cash. The beauty is, our business is CapEx light and the water business has the minimum maintenance capital expenditures and as you know, we're only about 25% utilized on those facilities. So as new water comes in, very high contribution margin to free cash flow or distributable cash flow occurs with each barrel of water. In the inspection business, really the only CapEx we've had for TIR has been growth CapEx associated with this mechanical integrity group and non-destructive examination group and again, it's quite nominal relative to the margin in cash flow opportunity. And then in the Brown business, we do have some trucks and some equipment but those are generally leased and so at the moment we really don't have any liquidity challenges or growth CapEx requirements that can't be covered with our liquidity and/or the current facility even if we were not to expand it.

[Operator:]

The next question comes from Brian Butler. Brian, please go ahead, you're now live on the call.

[Brian Butler:]

Just one quick housekeeping one first; is one of the 10-K going to be out?

[Pete Boylan:]

Should be out now but certainly sometime today.

[Brian Butler:]

Okay. And then looking at the kind of the revenues you had talked about, do you have a breakdown on the segments for what the revenues were for fourth quarter?

[Pete Boylan:]

Jeff, do you want to take that or would you like me to…

[Jeff Herbers:]

So the fourth quarter revenues for Brown were $3.3 million. And the fourth quarter revenues for the Water business were approximately $2.4 million, and then the remainder would have been for TIR.

[Brian Butler:]

So then, thinking about that momentum in the fourth quarter and to 2018, I mean is that the kind of pace of growth that we saw in the fourth quarter; the right way to think about how 2018 goes? I'm just trying to understand when you talk about growing the business and some of the investments you've made, just kind of what's the right pace to think about for 2018? If you give us some color on that that would be great.

[Pete Boylan:]

Well, as you know, we don't provide guidance but what I will say is that water business has been sequentially growing and completion of these new pipelines that I mentioned kicks-in in full here in Q1. So the water business, you should continue to see some nice growth that drops huge percentage of it down to EBITDA and free cash flow. The inspection business as you know has some level of seasonality to it that kind of starts in and around Thanksgiving where most companies start slowing down and not doing a lot of work from the Thanksgiving holiday through the New Year. Lot of energy companies don't improve their budgets until January/February, as you're probably aware and therefore a lot of that activity really begins picking up in March and beyond. And our peak periods typically are Q3, latter part of Q2 and early Q4 for the inspection business, just because of combination of weather and budgets and people gearing up to do what were the priorities for that particular customer in the year. The hydro-testing business is I've said is off to a really strong start compared to where we were a year ago this time and just order of magnitude, the backlog at December 31 was like 600% or 700% higher than it was at the same time last year. So there is different things going on in the different segments that will continue to carry into each of the quarters in 2018.

[Brian Butler:]

And in the second quarter you said that the two facilities that were struck by lightning were going to reopen. Can you remind us what those businesses were doing prior to them going down?

[Pete Boylan:]

I don't have that data right in front of me but we can certainly get back to you. The Orla facility was struck in January of '17 and the Grassy Butte facility in North Dakota was struck in July and the Orla facility obviously is in one of the best zip codes in the country, down in Ribs County where there is a tremendous amount of activity. We do have the 3 pipelines currently into the facility but it's really the truck to volume and all the flow back that we have not been able to accommodate the downturn there.

[Brian Butler:]

Okay. And thinking about the pipe transaction that you've talked about and shopping that I'm looking at potential alternatives; can we get a little bit more color on I guess kind of what Intel is in that alternatives? I mean is that everything including divestiture of some of the segments, whether that be water or some of the assets? Whether that be some of the facilities that are coming back online or even the possible sale of Cypress and it's entire ARVs, all things that are being looked at?

[Pete Boylan:]

I think we're looking at everything to ensure that there is not a superior opportunity to create unit holders value but specifically I think there is two primary objectives with the process. Number 1 is to determine if there is a third-party institutional investor that would be prepared to offer equal or better pipe terms to allow us to deleverage and close on the new credit facility given that requirement. Separate and independent from that, although there could be a situation that includes the same, we have long been interested in finding attractive traditional midstream assets like pipelines, gas plants, storage facilities, etcetera. But as you know, we've never run a formal process to really go hire an advisor and go to talk to the dozens and dozens of target equity shops that have nice midstream assets, many times of which they had planned to go public on their own, and you know with the market closed, their alternative remains -- just maintaining the asset privately, strategist's really aren't buying them, they could always sell it to some other private equity backed group but taking it public on their own is really not a viable alternative. So our structure is very attractive, and we think that there could be an attractive opportunity to partner with some private equity shop who has assets that we would be interested in. We'd be prepared to obviously share both the general partner and the incentive distribution rights if that particular opportunity was attractive and accretive for our common unit holders. So the advisor will be pursuing this dual task process, anything is possible and we certainly have a duty and will evaluate any opportunities that make economic sense but that's kind of what we're hoping to accomplish as determine if there is a better, more attractive pipe and/or determine if there is strategic acquisition/combination merger that could bring valuable assets into our structure and really grow the company.

[Brian Butler:]

On the proposed pipe, do we know is that a mandatory convert? And if so, kind of what's the conversion rate for that transaction?

[Pete Boylan:]

So the terms will be more fully described in the 10-K but we have attractive rights to redeem it in the advance that we would find a big acquisition, put a new credit facility in place and choose to refinance it. We have the right to force conversion, we have attractive rights as it relates to what we choose to pay in cash versus pic. Obviously, the rate is very attractive, relative to our common yield and the convert price is 15% up from what will be typical be wrap [indiscernible] prior to closing.

[Brian Butler:]

Okay. And then kind of more industry-wide taking -- just, if we can maybe get your thoughts on the SERC comments just on MLPs and some of those costs issues. Just thoughts what impact that might have on Cypress?

[Pete Boylan:]

Which comments? I'm sorry.

[Brian Butler:]

Just the comment on the MLP and the cost issues about tax, pushing those through.

[Pete Boylan:]

Sure. So if I understand the question, the new tax code obviously has a benefit for Cypress and that you may recall that we -- our PUC or LDC inspection business is in abundance of caution, we have a C-core blocker and we pay cash taxes on that and those cash taxes were in excess of $1 million in 2017. With the corporate tax rate going from 35% to 21%, we will enjoy the benefit of that 14% reduction in the tax rate we have to pay on that income or blocking. Of course if we get larger, and end up doing something in the strategic alternatives process, there was an exemption where 10% of your income in MLP can be non-qualified, and if that were the case and we were to have more revenue through size of strategic transaction we would not have to pay those cash taxes on that PUC income. So in addition to that, MLP still have about 650 basis points advantage over a C-corp and we think that is material and is something that is going to be there for a minimum in the next five years and likely longer, given what we've seen in the past. So as we step back and look at the opportunities for retiring, aging population in this country, they can buy bonds; I certainly wouldn't recommend my family buy bonds in a rising interest rate environment. They can buy REITs, I personally think REITs are materially over-valued and the cap rates only have one way to go which is up in a rising interest rate environment. They can buy utilities but utilities have historically been very expensive on a PE multiple and now as we solve at [indiscernible] week, we're seeing the unattended consequences of tax cut where every shipper has gone to FORX [ph] saying, these MLPs are getting a tax break and our rate should go down. And then of course, every consumer like you and I that buy natural gas from a low fuel utility; we are all bringing rate cases in our state regulators because most of those utilities are C-corps that have seen a material reduction in their corporate tax rate and therefore those rates will go down. So my personal view is, the MLP structure is not going away, it's a very attractive yield opportunity for investors relative to those other alternatives that I described and obviously somebody could run out and go buy a basket of Dow Jones Industrial or S&P500 and dividend yielding stocks but those are value that very, very high multiples the store can own. So we think that pendulum will swing back towards the middle as it relates to investor sentiment and interest and we think we've got a very good business and this pipe that deleverages our credit facility will ultimately allow us to not only continue to support the current dividend but eventually return to growing our dividend.

[Brian Butler:]

Last one, just on the sponsor support; with the pipe being contemplated or being put into place -- should we expect that the sponsor support goes away in 2018?

[Pete Boylan:]

We committed to the bank group that the -- to the extent our leverage exceeds a certain amount, we would provide a waiver of the [indiscernible] fee to further support the credit and so that yield we'll be able to see in the 10-K filing.

[Jeff Herbers:]

And then just to confirm that I gave you the correct revenue numbers on your first question, let me give you a quick recap on fourth quarter revenue. For the pipeline inspection segment, revenue for the fourth quarter was $63.7 million for integrity services, it was $3.3 million for water and environmental services, it was $2.4 million and that sums to the $69.4 million total in the press release.

[Operator:]

We do have one final question from Patrick [ph]. Patrick, please go ahead, you're now live on the call.

[Unidentified Analyst:]

Can you discuss how your new Orla facility compares to the original facility? I'm just wondering here in terms of the capacity, the suite of services offered at the new facility converting the old one? And to what extent was this new facility upsized versus the original one?

[Pete Boylan:]

So the facility will -- the well is permitted for 20,000 barrels a day. We believe the formation can actually 25,000 barrels a day. We are rebuilding it with steel line tanks and set fiber glass, given significant number of lightning strikes that have occurred down in the Permian Basin where the consensus seems to be that these fiber glass tanks are attracting the lightning strikes. So we will have the ability to dispose as much as 25,000 barrels a day, we would need to increase to the permit which we don't believe would be a problem if we wanted to do so. We're setting up the storage to believe -- I believe to be about 10,500 barrels of storage and we will have new high speed offload lanes that will allow us to get trucks in and out of there more quickly than the old system that we had. We've also designed it on a modular basis, so it will be very easy to expand the storage capability and pumping the down hole capability. We also have a freshwater well, we actually own the land, [indiscernible] royalty, and as you might imagine there is a tremendous amount of water being used on completions. So we're currently looking at the possibility of water requirement [ph] and drilling some more water wells to be able to sell freshwater. The system and the design has also been architected so that we can add additional capabilities including a truck washout and some solid handling if the market would support the same. There has been some new expansions in the area and a 30-mile radius of some of those facilities and so we decided to wait and see how the market settles out on those before we add those additional services.

[Unidentified Analyst:]

And then just a final quick one for me; we've been seeing some consistent declines in the North Dakota Duct [ph] count over the last couple of months. Have you noticed the same around your Bakken radius? And would it be fair to say that some of the uplift in results that you saw on the fourth quarter were directly the effects of working down some of that backlog or is that more the result of general activity uplifts?

[Pete Boylan:]

I think for us it's primarily been driven by the two pipelines we completed, with the deal we made with the public energy company, and some new drilling activity from some private equity backed E&P companies that came in above acreage from majors and have plans to drill it up. We really haven't yet seen much of an uplift from the docs from what I understand from our team.

[Operator:]

We will now hand the call to Pete Boylan for concluding results.

[Pete Boylan:]

Thank you, everybody. We appreciate your time and interest and have a great weekend. So long, bye.

[Operator:]

Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining and have a good day.