NUVERRA ENVIRONMENTAL SOLUTIONS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements, and the Notes and Schedules related thereto, which are included in this Annual Report. Company Overview Nuverra provides water logistics and oilfield services to customers focused on the development and ongoing production of oil and natural gas from shale formations inthe United States . Our business operations are organized into three geographically distinct divisions: theRocky Mountain division, the Northeast division, and the Southern division. Within each division, we provide water transport services, disposal services, and rental and other services associated with the drilling, completion, and ongoing production of shale oil and natural gas.Rocky Mountain Division The Rocky Mountain division is ourBakken Shale area business. The Bakken and underlyingThree Forks shale formations are the two primary oil producing reservoirs currently being developed in this geographic region, which covers westernNorth Dakota , easternMontana , northwesternSouth Dakota and southernSaskatchewan . We have operations in various locations throughoutNorth Dakota andMontana , including yards inDickinson ,Williston ,Watford City ,Tioga ,Stanley , andBeach, North Dakota , as well asSidney, Montana . Additionally, we operate a financial support office inMinot, North Dakota . As ofDecember 31, 2020 , we had 249 employees in the Rocky Mountain division.
Water Transport Services
We manage a fleet of 176 trucks in the Rocky Mountain division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities. In the Rocky Mountain division, we own an inventory of lay flat temporary hose as well as related pumps and associated equipment used to move fresh water from water sources to operator locations for use in completion activities. We employ specially trained field personnel to manage and operate this business. For customers who have secured their own source of fresh water, we provide and operate the lay flat temporary hose equipment to move the fresh water to the drilling and completion location. We may also use third-party sources of fresh water in order to provide the water to customers as a package that includes our water transport service. Disposal Services We manage a network of 20 owned and leased salt water disposal wells with current capacity of approximately 82 thousand barrels of water per day, and permitted capacity of 104 thousand barrels of water per day. Our salt water disposal wells in the Rocky Mountain division are operated under the Landtech brand. Additionally, we operate a landfill facility nearWatford City, North Dakota that handles the disposal of drill cuttings and other oilfield waste generated from drilling and completion activities in the region.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Rocky Mountain division. These assets include tanks, loaders, manlifts, light towers, winch trucks, and other miscellaneous equipment used in drilling and completion activities. In the Rocky Mountain division, we also provide oilfield labor services, also called "roustabout work," where our employees move, set-up and maintain the rental equipment for customers, in addition to providing other oilfield labor services.
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--------------------------------------------------------------------------------Northeast Division
The Northeast division is comprised of the Marcellus andUtica Shale areas, both of which are predominantly natural gas producing basins. The Marcellus andUtica Shale areas are located in the northeasternUnited States , primarily inPennsylvania ,West Virginia ,New York andOhio . We have operations in various locations throughoutPennsylvania ,West Virginia , andOhio , including yards inMasontown andWheeling, West Virginia ,Williamsport andWellsboro, Pennsylvania , andCambridge andCadiz, Ohio . As ofDecember 31, 2020 , we had 186 employees in the Northeast division. Water Transport Services We manage a fleet of 177 trucks in the Northeast division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region, or to other customer locations for reuse in completing other wells. Additionally, our trucks collect and transport fresh water from water sources to operator locations for use in well completion activities.
Disposal Services
We manage a network of 13 owned and leased salt water disposal wells with current and permitted capacity of approximately 22 thousand barrels of water per day in the Northeast division. Our salt water disposal wells in the Northeast division are operated under the Nuverra, Heckmann, and Clearwater brands.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Northeast division. These assets include tanks and winch trucks used in drilling and completion activities.
Southern Division
The Southern division is comprised of theHaynesville Shale area, a predominantly natural gas producing basin, which is located across northwesternLouisiana and easternTexas , and extends into southwesternArkansas . We have operations in various locations throughout easternTexas and northwesternLouisiana , including a yard inFrierson, Louisiana . Additionally, we operate a corporate support office inHouston, Texas . As ofDecember 31, 2020 , we had 62 employees in the Southern division.
Water Transport Services
We manage a fleet of 35 trucks in the Southern division that collect and transport flowback water from drilling and completion activities, and produced water from ongoing well production activities, to either our own or third-party disposal wells throughout the region. Additionally, our trucks collect and transport fresh water to operator locations for use in well completion activities. In the Southern division, we also own and operate a 60-mile underground twin pipeline network for the collection of produced water for transport to interconnected disposal wells and the delivery of fresh water from water sources to operator locations for use in well completion activities. The pipeline network can currently handle disposal volumes up to approximately 68 thousand barrels per day with 6 disposal wells attached to the pipeline and is scalable up to approximately 106 thousand barrels per day.
Disposal Services
We manage a network of 7 owned and leased salt water disposal wells that are not connected to our pipeline with current capacity of approximately 32 thousand barrels of water per day, and permitted capacity of approximately 100 thousand barrels of water per day, in the Southern division.
Rental and Other Services
We maintain and lease rental equipment to oil and gas operators and others within the Southern division. These assets include tanks and winch trucks used in drilling and completion activities.
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--------------------------------------------------------------------------------Acquisitions
OnOctober 5, 2018 , we completed the acquisition ofClearwater Three, LLC ,Clearwater Five, LLC , andClearwater Solutions, LLC (collectively, "Clearwater") for an initial purchase price of$42.3 million , subject to customary working capital adjustments (the "Clearwater Acquisition"). Clearwater is a supplier of waste water disposal services used by the oil and gas industry in the Marcellus andUtica shale areas. Clearwater has three salt water disposal wells in service, all of which are located inOhio . This acquisition expanded our service offerings in the Marcellus andUtica shale areas in our Northeast division. Refer to Note 6 in the Notes to Consolidated Financial Statements for additional information.
Trends Affecting Our Operating Results
COVID-19 Pandemic and Oil Price Declines
The outbreak of COVID-19 in the first quarter of 2020 and its continued spread across the globe throughout 2020 has resulted, and is likely to continue to result, in significant economic disruption, including reduction in energy demand and commodity price volatility that adversely impacted our business. Beginning in the first quarter of 2020, federal, state and local governments implemented significant actions to mitigate the public health crisis, including shelter-in-place orders, business closures and capacity limits, quarantines, travel restrictions, executive orders and similar restrictions intended to control the spread of COVID-19. Over the remainder of 2020, many of these restrictions were adjusted based on the severity of the COVID-19 outbreak in particular communities, sometimes resulting in an easing of restrictions while other times resulting in a reinstatement or tightening of restrictions. As a result, the economy was marked by significant uncertainty, and changes in travel patterns have resulted in a generally reduced demand for refined products, such as gasoline and jet fuel, and consequently a reduction in the demand for crude oil. The uncertainty of the ongoing COVID-19 pandemic has continued to impact travel patterns and generally depress market demand for crude oil. Additionally, beginning in earlyMarch 2020 , the global oil markets were negatively impacted by an oil supply conflict occurring when theOrganization of Petroleum Exporting Countries and other oil producing nations ("OPEC+") were initially unable to reach an agreement on production levels for crude oil, at which pointSaudi Arabia andRussia initiated efforts to aggressively increase crude oil production. The result was an oversupply of oil, which put downward pressure on the price of crude oil. The convergence of the COVID-19 pandemic and oil supply conflict created a dramatic decline in the demand and price of crude oil. The resulting impact to oil prices during the first half of 2020 was significant, with the price per barrel of West Texas Intermediate ("WTI") crude oil plummeting 56% duringMarch 2020 . WTI oil spot prices decreased from a high of$63 per barrel in early January to a low of$9 per barrel in late April, including negative pricing for one day in April. The physical markets for crude oil showed signs of distress as spot prices were negatively impacted by the lack of available storage capacity. This significantly increased the volatility in oil prices. OPEC+ agreed inApril 2020 to cut production, which began inMay 2020 and continued throughDecember 2020 . The effect of the production cuts began to ease storage supply issues and stabilize crude oil markets. WTI crude oil prices began to steadily rise duringMay 2020 , and sinceJune 2020 , prices have been above$35 per barrel. Despite the improvement in the crude oil markets, there continues to be an oversupply of crude oil, and drilling and completion activity inthe United States and our markets remains depressed. While commodity prices have increased, a recent trend by our customers, at the insistence of investors, has been to limit capital expenditures to cash flow and to return any excess cash to shareholders in the form of dividends or stock repurchases and or to repay debt. This trend may limit the increase in activity and pricing by our customers despite commodity price increases as our customers focus on these objectives versus increasing production volumes. While we experienced minimal impact in the first quarter of 2020, we experienced a significant decline in activity during the remainder of 2020. We do not foresee a return to pre-COVID-19 activity and pricing during 2021 and possibly beyond. In anticipation of a meaningful and sustained decline in our revenues, during the first quarter of 2020, we implemented a number of initiatives to adjust our cost structure, including: •Adjusted salaries for all exempt and non-exempt non-contracted employees between 10% and 20%; •Headcount reduction of approximately 100 employees, including changes made earlier in the first quarter of 2020; •Reduced Chief Executive Officer's salary by 25%, Chief Operating Officer salary by 20% and two other executives' salaries between 10% and 20%; •Reduced the compensation program for the non-employee Board of Directors by 25%; •Materially scaled back operations in two completions-related businesses and closed one location; and •Reduced other non-critical operating expenses. 31 -------------------------------------------------------------------------------- Additionally, we implemented a significant reduction in our capital expenditures budget. We continue to maintain most of our pay reductions and other savings initiatives, but monitor market conditions that would necessitate increasing employee wages. Our liquidity may be negatively impacted depending on how quickly consumer demand and oil prices return to more normalized levels. A lack of confidence in our industry on the part of the financial markets may result in a lack of access to capital, which could lead to reduced liquidity, an event of default, or an inability to access amounts available under our operating line of credit of$5.0 million , and our letter of credit facility of$5.35 million . Our operating line of credit is secured by a first lien security interest in all business assets of the Company and its subsidiaries including without limitation all accounts receivable, inventory, trademarks and intellectual property licenses to which it is a party and by a reserve Account, while the letter of credit facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by a reserve Account. While we are not able to estimate the full impact of the COVID-19 outbreak and oil price declines on our financial condition and future results of operations, we expect that this situation will have an adverse effect on our reported results through 2021 and possibly beyond.
Other Trends Affecting Operating Results
We continue to monitor several industry trends in the shale basins in which we operate. Our results are affected by capital expenditures made by the exploration and production operators in the shale basins in which we operate. These capital expenditures determine the level of drilling and completion activity which in turn impacts the amount of produced water, water for fracking, flowback water, drill cuttings and rental equipment requirements that create demand for our services. The primary drivers of these expenditures are current or anticipated prices of crude oil and natural gas. Prices trended lower during 2019 and continued to decline considerably during 2020. The average price per barrel of WTI crude oil was$39.16 in 2020 as compared to$56.98 in 2019. The average price per million Btu of natural gas as measured by theHenry Hub Natural Gas index was$2.03 in 2020 compared to$2.56 in 2019. See "COVID-19 Pandemic and Oil Price Declines" above for further discussion. The rapid drop in crude prices occurred primarily in March andApril 2020 . InMay 2020 , OPEC+ began cutting oil production, which began to positively impact crude prices. Between June andDecember 2020 , crude oil prices ranged between$35 and$49 per barrel, but prices were still below levels from earlier in 2020. The drop in crude oil prices had minimal impact on the first quarter of 2020 operating results as our customers had little time to adjust activity levels. However, our customers' drilling and completion activity fell substantially beginning in the second quarter of 2020, with many customers also shutting in or lowering production as a result of spot crude prices falling below the cash costs of production in many basins and wells. Producers have shut-in production on a scale not seen in prior downturns and have been slower to bring wells back on line than anticipated. DuringJune 2020 , per theNorth Dakota Industrial Commission , approximately 28% of daily crude oil production in the Bakken shale region was estimated to have been shut-in, contributing to a reduction of approximately 405,000 barrels per day. The curtailed production dropped the volumes of produced water accordingly. This had a dramatic negative effect on our produced water business in the Rocky Mountain division that has been slow to rebound. Additionally, in earlyJuly 2020 , aUnited States court ruling ordered the shutdown of the DAPL over concerns on the environmental impact of the pipeline. The DAPL is a major transporter of oil volumes from the Bakken shale area. Although transport of product from the Bakken shale area historically has also occurred by rail and other means, which is a higher transportation cost than the DAPL, there can be no assurance that there will be sufficient future takeaway capacity. An appeals court has allowed the DAPL to continue to operate in the near term, but courts have also vacated needed easements making DAPL vulnerable to being shut down by government action or further litigation. The potential closure of the DAPL has customers cautious about returning to more normal business volumes and/or deferring capital expenditure projects until the litigation has been adjudicated. As a result, the recovery of the Rocky Mountain division has been slower than other oil producing basins. The reduction in customer activity related to commodity prices most directly impacts our services that cater to drilling and completion activities. This includes fresh water transportation via lay flat hose, our rental equipment business and our landfill business in the Rocky Mountain division. Additionally, a portion of our trucking and salt water disposal business comes from completion-related flowback work; however, the majority of this business is derived from produced water transportation and disposal from existing wells. As such, we anticipate meaningful reductions in revenue and profitability to continue during fiscal 2021. 32 -------------------------------------------------------------------------------- An additional important trend in recent years has been the focus ofWall Street and investors in the energy sector to encourage exploration and production operators to spend as a function of the cash flow they generate. Historically, as a result of accommodating debt and equity markets, exploration and production companies were able to spend in excess of the cash flow generated by the business. This shift in investor sentiment has brought increased capital discipline to exploration and production companies who are careful to make more selective capital allocation decisions. The drop during 2020 in underlying commodity prices, net of hedging activities, will impact our customers' underlying cash flows and therefore their drilling plans. Additionally, following the decrease in commodity prices and the impact of COVID-19, a number of our customers witnessed a material drop in their public stock prices and received debt rating downgrades. We believe this trend will make it more difficult for our customers to raise new sources of capital, which may further limit their ability to spend capital on future drilling and completion activities. Lastly, during 2020, we have seen an increase in reuse and water sharing in the Northeast. Some of our customers are using produced and flowback water for fracking as they have determined it is more economical to transport produced water to sites than it is to dispose of the water. Operators are also sharing water with other operators to avoid disposal. Transporting shared or reused water still requires trucking services, but it is generally shorter haul work done at an hourly rate which negatively impacts our revenues.
Other Factors Affecting Our Operating Results
Our results are also driven by a number of other factors, including
(i) availability of our equipment, which we have built through acquisitions and
capital expenditures, (ii) transportation costs, which are affected by fuel
costs, (iii) utilization rates for our equipment, which are also affected by the
level of our customers' drilling and production activities, competition, and our
ability to relocate our equipment to areas in which oil and natural gas
exploration and production activities are more robust on a relative basis,
(iv) the availability of qualified employees (or alternatively, subcontractors)
in the areas in which we operate, (v) labor costs, (vi) changes in governmental
laws and regulations at the federal, state and local levels, (vii) seasonality
and weather events, (viii) pricing and (ix) our health, safety and environmental
performance record.
While we have agreements in place with certain of our customers to establish
pricing for our services and various other terms and conditions, these
agreements typically do not contain minimum volume commitments or otherwise
require the customer to use us. Accordingly, our customer agreements generally
provide the customer the ability to change the relationship by either
in-sourcing some or all services we have historically provided or by contracting
with other service providers. As a result, even with respect to customers with
which we have an agreement to establish pricing, the revenue we ultimately
receive from that customer, and the mix of revenue among lines of services
provided, is unpredictable and subject to variation over time.
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Results of Operations: Year Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2020 2019 2020 vs 2019
Revenue:
Service revenue $ 102,810 $ 152,541 $ (49,731) (32.6) %
Rental revenue 7,477 15,697 (8,220) (52.4) %
Total revenue 110,287 168,238 (57,951) (34.4) %
Costs and expenses:
Direct operating expenses 87,299 131,019 (43,720) (33.4) %
General and administrative expenses 18,960 20,864 (1,904) (9.1) %
Depreciation and amortization 28,614 36,183 (7,569) (20.9) %
Impairment of long-lived assets 15,579 766 14,813 1,933.8 %
Impairment of goodwill - 29,518 (29,518) NM
Other, net - (10) 10 (100.0) %
Total costs and expenses 150,452 218,340 (67,888) (31.1) %
Operating loss (40,165) (50,102) 9,937 (19.8) %
Interest expense, net (4,070) (5,227) 1,157 (22.1) %
Other income, net 216 502 (286) (57.0) %
Reorganization items, net (111) (200) 89 (44.5) %
Loss before income taxes (44,130) (55,027) 10,897 (19.8) %
Income tax benefit (expense) (13) 90 (103) (114.4) %
Net loss $ (44,143) $ (54,937) $ 10,794 (19.6) %
NM - Percentages over 100% are not displayed.
Service Revenue
Service revenue consists of fees charged to customers for water transport services, disposal services and other service revenues associated with the drilling, completion, and ongoing production of shale oil and natural gas.
On a consolidated basis, service revenue for the year endedDecember 31, 2020 was$102.8 million , down$49.7 million , or 32.6%, from$152.5 million for the year endedDecember 31, 2019 . The decline in service revenue is primarily due to decreases in water transport services and disposal services in all three divisions. As the primary causes of the decreases in water transport services and decreases in disposal services are different for all three divisions, see "Segment Operating Results" below for further discussion.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us, as well as other fees charged to customers for items such as delivery and pickup of equipment. Our rental business is primarily located in the Rocky Mountain division, however, we do have some rental equipment available in both the Northeast and Southern divisions. Rental revenue for the year endedDecember 31, 2020 was$7.5 million , down$8.2 million , or 52.4%, from the year endedDecember 31, 2019 due primarily to a significant decline in drilling and completion activity and lower commodity prices, which resulted in lower utilization and the return of rental equipment by our customers in the Rocky Mountain division.
Direct Operating Expenses
The primary components of direct operating expenses are compensation costs for
employees performing operational activities, third-party hauling costs, fuel
costs associated with transportation and logistics activities, and costs to
repair and maintain transportation, rental equipment and disposal wells.
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Direct operating expenses for the year ended December 31, 2020 were $87.3
million , compared to $131.0 million for the year ended December 31, 2019 , a
decrease of 33.4%. The decrease is primarily attributable to lower activity
levels in water transport services and disposal services and company-enacted
cost cutting measures resulting in a decline in third-party hauling costs,
compensation costs, and fleet-related expenses, including fuel and maintenance
and repair costs. See "Segment Operating Results" below for further details on
each division.
General and Administrative Expenses
General and administrative expenses for the year endedDecember 31, 2020 were$19.0 million , down$1.9 million from$20.9 million for the year endedDecember 31, 2019 . The decrease was primarily due to a decrease in compensation costs resulting from broad employee wage reductions and layoffs, partially offset by$1.9 million of transaction fees during 2020 associated with the credit agreements.
Depreciation and Amortization
Depreciation and amortization for the year endedDecember 31, 2020 was$28.6 million , down$7.6 million from$36.2 million for the year endedDecember 31, 2019 . The decrease is primarily attributable to lower depreciable asset base due to impairment of long-lived assets during 2020, the sale of under-utilized or non-core assets and assets becoming fully depreciated partially offset by asset additions.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Due to the impacts of the outbreak of COVID-19 and the oil supply conflict between two major oil producing countries, there was a significant decline in oil prices during the first quarter of 2020, which resulted in a decrease in activities by our customers. As a result of these events, during the year endedDecember 31, 2020 , there were indicators that the carrying values of the assets associated with the landfill in the Rocky Mountain division and trucking equipment in the Southern division were not recoverable and as a result we recorded long-lived asset impairment charges of$15.0 million . We may face additional asset impairments in the future, along with other accounting charges, if demand for our services decreases. Additionally, during 2020, certain property classified as held for sale in the Rocky Mountain division was evaluated for impairment based on an accepted offer received by the Company for the sale of the property. As a result of that offer, an impairment charge of$0.6 million was recorded during the year endedDecember 31, 2020 to adjust the book value to match the fair value. During the year endedDecember 31, 2019 , management approved plans to sell real property located in the Northeast and Rocky Mountain divisions. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in long-lived asset impairment charges of$0.8 million , of which$0.6 million related to the Northeast division and$0.1 million related to the Rocky Mountain division. During the year endedDecember 31, 2018 , management approved plans to sell certain assets located in the Southern division as a result of exiting the EagleFord shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were also expected to sell within one year. These assets qualified to be classified as assets held for sale and as the fair value of the assets was lower than the net book value, we recorded an impairment charge of$4.8 million , of which$4.4 million related to the Southern division for the Eagle Ford exit,$0.3 million related to the Corporate division for the sale of certain real property inTexas approved to be sold as part of the Eagle Ford exit, and$0.1 million related to the Northeast division.
See also Note 8 in the Notes to the Consolidated Financial Statements herein for further discussion.
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Impairment of
When we reviewed goodwill for impairment as ofOctober 1, 2019 , we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of$29.5 million during the year endedDecember 31, 2019 , which is a full impairment of all existing goodwill. Of the$29.5 million recorded for goodwill impairment during 2019,$21.9 million related to the Northeast division,$4.9 million related to the Rocky Mountain division, and$2.7 million related to the Southern division. The majority of the goodwill associated with this impairment was established based on valuation work completed at the time of the Company's emergence from bankruptcy. During 2019, enterprise valuations in the energy sector materially decreased resulting in a lower estimated valuation of the Company and the impairment charge. See Note 8 in the Notes to the Consolidated Financial Statements herein for further details on goodwill impairment during 2019. Other, net OnMarch 1, 2018 , the Board determined it was in the best interest of the Company to cease our operations in the Eagle Ford shale area. In making this determination, the Board considered a number of factors, including among other things, the historical and projected financial performance of our operations in the Eagle Ford shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our business operations, and recommendations from management. We substantially exited the Eagle Ford shale area as ofJune 30, 2018 . The total costs related to the exit recorded during the year endedDecember 31, 2018 were$1.1 million . During the year endedDecember 31, 2019 , we recorded final adjustments to the accrued lease liabilities for the both the Eagle Ford exit and the Mississippian exit in 2015 as further payments were not required.
Interest Expense, net
Interest expense primarily consists of interest costs related to our outstanding debt, accretion expense related to our asset retirement obligations and amortization of debt issuance costs.
Interest expense, net during the year endedDecember 31, 2020 was$4.1 million compared to$5.2 million for the year endedDecember 31, 2019 . The decrease is primarily due to the refinancing of the First and Second Lien Term Loans (as defined below) and the lower overall effective interest rates on our outstanding debt. Other Income, net Other income, net was$0.2 million for the year endedDecember 31, 2020 compared to$0.5 million for the year endedDecember 31, 2019 . The decrease is primarily due to$0.2 million of insurance proceeds during 2019 for business interruption coverage. Reorganization Items, net Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as "Reorganization items, net" in the consolidated statements of operations. For the year endedDecember 31, 2019 , these fees are primarily comprised of professional and legal fees related to our 2017 chapter 11 filing. Reorganization items were$0.1 million and 0.2 million during the year endedDecember 31, 2020 and 2019, respectively.
Income Taxes
Income tax expense for the year endedDecember 31, 2020 was$13.0 thousand (a 0.0% effective rate) compared to benefit of$0.1 million (a 0.2% effective rate) in the prior year. The effective tax rate in 2019 is primarily the result of the current year state income taxes offset by the current year state income taxes offset by the change in the deferred tax liability attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes. 36 --------------------------------------------------------------------------------
Segment Operating Results: Years Ended
The following table shows operating results for each of our segments for the
years ended
Rocky Mountain Northeast Southern Corporate/Other Total
Year ended December 31, 2020
Revenue $ 59,393 $ 34,173 $ 16,721 $ - $ 110,287
Direct operating expenses 49,245 26,040 12,014 - 87,299
Impairment of long-lived assets 12,183 - 3,396 - 15,579
Impairment of goodwill - - - - -
Operating loss (18,654) (3,761) (6,146) (11,604) (40,165)
Year ended December 31, 2019
Revenue $ 103,552 $ 44,001 $ 20,685 $ - $ 168,238
Direct operating expenses 81,529 35,836 13,654 - 131,019
Impairment of long-lived assets 120 646 - - 766
Impairment of goodwill 4,922 21,861 2,735 - 29,518
Operating loss (5,022) (27,977) (5,208) (11,895) (50,102)
Change
Revenue $ (44,159) $ (9,828) $ (3,964) $ - $ (57,951)
Direct operating expenses (32,284) (9,796) (1,640) - (43,720)
Impairment of long-lived assets 12,063 (646) 3,396 - 14,813
Impairment of goodwill (4,922) (21,861) (2,735) - (29,518)
Operating loss (13,632) 24,216 (938) 291 9,937
Rocky Mountain
The Rocky Mountain division experienced a significant slowdown in 2020, with rig
count declining 56% from 52 at December 31, 2019 to 23 at December 31, 2020 in
addition to producers shutting in wells due to the decline in WTI crude oil
price per barrel, which averaged $39.16 for the year ended December 31, 2020
versus an average of $56.98 for the same period in 2019. Revenues for the Rocky
Mountain division decreased by $44.2 million , or 43%, during 2020 as compared to
2019 primarily due to a $24.3 million , or 38%, decrease in water transport
revenues from lower trucking volumes. Third-party trucking revenue decreased
60%, or $12.1 million , and company-owned trucking revenue declined 25%, or
$10.9 million . Average total billable hours were down 19% compared to the prior
year. While company-owned trucking activity is more levered to production water
volumes, third-party trucking activity is more sensitive to drilling and
completion activity, which has declined to historically low levels, thereby
resulting in meaningful revenue reduction. Our rental and landfill businesses
are our two service lines most levered to drilling activity, and therefore have
declined by the highest percentage versus the prior period. Rental revenues
decreased by 52%, or $8.0 million , in the current year due to lower utilization
resulting from a significant decline in drilling activity driving the return of
rental equipment. Our landfill revenues decreased 62%, or $3.2 million , compared
to prior year due primarily to a 61% decrease in disposal volumes at our
landfill as rigs working in the vicinity declined materially. Our salt water
disposal well revenue decreased $6.4 million , or 50%, compared to prior year as
well shut-ins and lower completion activity led to a 37% decrease in average
barrels per day disposed during the current year, with water from producing
wells continuing to maintain a base level of volume activity.
For the Rocky Mountain division, direct operating costs decreased by $32.3
million during the year ended December 31, 2020 as compared to the year ended
December 31, 2019 due primarily to lower activity levels for water transport
services and disposal services resulting in a decline in third-party hauling
costs, compensation costs that are also impacted by company cost cutting
initiatives, and fleet-related expenses, including fuel and maintenance and
repair costs. The average number of drivers during the year decreased 19% from
the prior year. Operating loss increased $13.6 million over the prior year
period primarily due to an increase in $12.1 million in long-lived asset
impairment charge (as previously discussed above in the consolidated results)
and lower activity levels for water transport services and disposal services.
37
--------------------------------------------------------------------------------Northeast
Revenues for the Northeast division decreased by$9.8 million , or 22%, during 2020 as compared to 2019 due to decreases in water transport services of$5.6 million , or 19%, and disposal services of$3.9 million , or 32%. Natural gas prices per million Btu, as measured by the Henry Hub Natural Gas Index, decreased 6% from an average of$2.38 for 2019 to an average of$2.52 for 2020, contributing to a 27% rig count reduction in the Northeast operating area from 52 atDecember 31, 2019 to 38 atDecember 31, 2020 . Additionally, as a result of the 25% decline in WTI crude oil prices experienced during the period, many of our customers who had historically focused on production of liquids-rich wells reduced activity levels and shut-in some production in our operating area due to lower realized prices for these products. This led to lower activity levels for both water transport services and disposal services despite the relatively lower decrease in natural gas prices versus crude oil prices. In addition to reduced drilling and completion activity due to commodity prices, our customers continued the industry trend of water reuse during completion activities. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells. For our trucking services, revenues per billed hour decreased by 24% which contributed to the decline, along with disposal volumes in our salt water disposal wells by a 5% decrease in average barrels per day. These were offset by total billable hours, up 8% from the prior year and a 6% improvement in driver utilization. For the Northeast division, direct operating costs decreased by$9.8 million during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to a combination of lower activity levels for water transport services and disposal services as well as company cost cutting initiatives resulting in a decline in compensation costs and fleet-related expenses, including fuel costs. The average number of drivers during the year decreased 20% from the prior year. Operating loss improved by$24.2 million over the prior year period primarily due to$21.9 million goodwill impairment charge during 2019 (as previously discussed above in the consolidated results),$0.6 million long-lived asset impairment charge during 2019 (as previously discussed above in the consolidated results), a$1.1 million decrease in general and administrative expenses due to headcount and compensation reductions and$0.7 million in lower depreciation and amortization expense.
Southern
Revenues for the Southern division decreased by$4.0 million , or 19%, during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The decrease was due primarily to lower disposal well volumes, whether connected to the pipeline or not, resulting from an activity slowdown in the region, as evidenced by fewer rigs operating in the area as well as lower revenue per barrel. Rig count declined 18% in the area, from 49 atDecember 31, 2019 to 40 atDecember 31, 2020 . Volumes received in our disposal wells not connected to our pipeline decreased by an average of 8,644 barrels per day or 30% during 2020 and volumes received in the disposal wells connected to the pipeline decreased by an average of 7,557 barrels per day or 17% during 2020. In the Southern division, direct operating costs decreased by$1.6 million during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 due to lower activity levels for disposal services and water transport services. Operating loss increased by$0.9 million over the prior year period due primarily to a$3.4 million long-lived asset impairment charge during 2020 (as previously discussed above in the consolidated results) partially offset by$2.7 million goodwill impairment charge during 2019.
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the year endedDecember 31, 2020 were$0.3 million lower than the year endedDecember 31, 2019 due primarily to headcount and compensation reductions, partially offset by$1.9 million of transaction fees during 2020 associated with the credit agreements. 38 --------------------------------------------------------------------------------
Results of Operations: Year Ended
The following table sets forth for each of the periods indicated our statements of operations data (dollars in thousands):
Year Ended December 31, Increase (Decrease)
2019 2018 2019 vs 2018
Revenue:
Service revenue $ 152,541 $ 181,793 $ (29,252) (16.1) %
Rental revenue 15,697 15,681 16 0.1 %
Total revenue 168,238 197,474 (29,236) (14.8) %
Costs and expenses:
Direct operating expenses 131,019 158,896 (27,877) (17.5) %
General and administrative expenses 20,864 38,510 (17,646) (45.8) %
Depreciation and amortization 36,183 46,434 (10,251) (22.1) %
Impairment of long-lived assets 766 4,815 (4,049) (84.1) %
Impairment of goodwill 29,518 - 29,518 NM
Other, net (10) 1,119 (1,129) (100.9) %
Total costs and expenses 218,340 249,774 (31,434) (12.6) %
Operating loss (50,102) (52,300) 2,198 (4.2) %
Interest expense, net (5,227) (5,973) 746 (12.5) %
Other income, net 502 896 (394) (44.0) %
Reorganization items, net (200) (1,679) 1,479 (88.1) %
Loss before income taxes (55,027) (59,056) 4,029 (6.8) %
Income tax benefit (expense) 90 (207) 297 (143.5) %
Net loss $ (54,937) $ (59,263) $ 4,326 (7.3) %
NM - Percentages over 100% are not displayed.
Service Revenue
On a consolidated basis, service revenue for the year endedDecember 31, 2019 was$152.5 million , down$29.3 million , or 16.1%, from$181.8 million for the year endedDecember 31, 2018 . The largest contributors to the decline in service revenues were Rocky Mountain third-party trucking activity and lay flat hose projects, slower trucking activity in the Northeast due to customers moving to reuse of produced water and overall activity declines and, in the South, the loss of a large customer that historically consumed a material percentage of the capacity on ourHaynesville pipeline. These declines were partially offset by an increase in disposal revenues in all three divisions. Additionally,$1.8 million in revenues associated with theEagle Ford Shale area were included in service revenues in the prior year but did not reoccur in 2019 due to management's decision to exit theEagle Ford Shale area as ofMarch 1, 2018 . As the primary causes of the decreases in water transport services and increases in disposal services are different for all three divisions, see "Segment Operating Results" below for further discussion.
Rental Revenue
Rental revenue for the year endedDecember 31, 2019 was$15.7 million , up$16.0 thousand , or 0.1%, from the year endedDecember 31, 2018 . The prior year period included$0.3 million of rental revenues for theEagle Ford Shale area that did not reoccur in 2019 due to management's decision to exit theEagle Ford Shale area as ofMarch 1, 2018 . When removing the impact of the Eagle Ford exit, rental revenues increased by$0.3 million primarily as a result of pricing increases implemented in the Rocky Mountain division. 39 --------------------------------------------------------------------------------
Direct Operating Expenses
Direct operating expenses for the year endedDecember 31, 2019 were$131.0 million , compared to$158.9 million for the year endedDecember 31, 2018 , a decrease of 17.5%. While the decrease in direct operating expenses was primarily attributable to lower activity levels for water transport services during the period, direct operating expenses improved to 77.9% of revenues from 80.5% in the prior year period as a result of favorable service mix due to more higher margin work, a reduction in outsourced trucking and active cost reduction efforts during the past year. (See "Segment Operating Results" below for further details on each division.)
General and Administrative Expenses
General and administrative expenses for the year endedDecember 31, 2019 were$20.9 million , down$17.6 million from$38.5 million for the year endedDecember 31, 2018 . The decrease in general and administrative expenses was primarily attributable to higher compensation costs in the prior year, including$15.3 million related to the departures of our former Chief Executive Officer and Chief Financial Officer. Additionally, general and administrative expenses in 2018 included$1.3 million in transaction fees for the acquisition of Clearwater.
Depreciation and Amortization
Depreciation and amortization for the year endedDecember 31, 2019 was$36.2 million , down$10.3 million from$46.4 million for the year endedDecember 31, 2018 . The decrease was primarily attributable to a lower depreciable asset base due to the sale of under-utilized or non-core assets, assets becoming fully depreciated and assets being classified as held for sale with the resulting cessation of depreciation.
Impairment of Long-Lived Assets
During the year endedDecember 31, 2019 , management approved plans to sell real property located in the Northeast and Rocky Mountain divisions. The real property qualified to be classified as held for sale and as a result was recorded at the lower of net book value or fair value less costs to sell, which resulted in long-lived asset impairment charges of$0.8 million , of which$0.6 million related to the Northeast division and$0.1 million related to the Rocky Mountain division. During the year endedDecember 31, 2018 , management approved plans to sell certain assets located in the Southern division as a result of exiting the EagleFord shale area. In addition, management approved the sale of certain assets, primarily frac tanks, located in the Northeast division, that were also expected to sell within one year. These assets qualified to be classified as assets held for sale and as the fair value of the assets was lower than the net book value, we recorded an impairment charge of$4.8 million , of which$4.4 million related to the Southern division for the Eagle Ford exit,$0.3 million related to the Corporate division for the sale of certain real property inTexas approved to be sold as part of the Eagle Ford exit, and$0.1 million related to the Northeast division.
See also Note 8 in the Notes to the Consolidated Financial Statements herein for further discussion.
Impairment ofGoodwill When we reviewed goodwill for impairment as ofOctober 1, 2019 , we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of$29.5 million during the year endedDecember 31, 2019 , which is a full impairment of all existing goodwill. Of the$29.5 million recorded for goodwill impairment during 2019,$21.9 million related to the Northeast division,$4.9 million related to the Rocky Mountain division, and$2.7 million related to the Southern division. The majority of the goodwill associated with this impairment was established based on valuation work completed at the time of the Company's emergence from bankruptcy. During 2019, enterprise valuations in the energy sector materially decreased resulting in a lower estimated valuation of the Company and the impairment charge. See Note 8 in the Notes to the Consolidated Financial Statements herein for further details on the goodwill impairment during 2019. 40 --------------------------------------------------------------------------------
Other, net
OnMarch 1, 2018 , the Board determined it was in the best interest of the Company to cease our operations in the Eagle Ford shale area. In making this determination, the Board considered a number of factors, including among other things, the historical and projected financial performance of our operations in the Eagle Ford shale area, pricing for our services, capital requirements and projected returns on additional capital investment, competition, scope and scale of our business operations, and recommendations from management. We substantially exited the Eagle Ford shale area as ofJune 30, 2018 . The total costs related to the exit recorded during the year endedDecember 31, 2018 were$1.1 million . During the year endedDecember 31, 2019 , we recorded final adjustments to the accrued lease liabilities for the both the Eagle Ford exit and the Mississippian exit in 2015 as further payments were not required.
Interest Expense, net
Interest expense, net during the year endedDecember 31, 2019 was$5.2 million compared to$6.0 million for the year endedDecember 31, 2018 . The lower interest expense was primarily due to repayment of the Bridge Term Loan (as defined below) in January of 2019 and continued principal payments on the First and Second Lien Term Loans (as defined below), offset by additional finance leases recorded upon the adoption of ASU No. 2016-02, Leases (Topic 842) ("ASC 842") as ofJanuary 1, 2019 and as a result of our heavy duty truck replacement project. Other Income, net Other income, net was$0.5 million for the year endedDecember 31, 2019 compared to$0.9 million for the year endedDecember 31, 2018 . The decrease was primarily attributable to a$34.0 thousand gain associated with the change in the fair value of the derivative warrant liability during the year endedDecember 31, 2019 , compared to a$0.4 million gain during the year endedDecember 31, 2018 . We issued warrants with derivative features upon our emergence from chapter 11 during 2017. These instruments are accounted for as derivative liabilities with any decrease or increase in the estimated fair value recorded in "Other income, net." See Note 13 and Note 14 in the Notes to the Consolidated Financial Statements for further details on the warrants.
Reorganization Items, net
Expenses, gains and losses directly associated with the chapter 11 proceedings are reported as "Reorganization items, net" in the consolidated statements of operations for the years endedDecember 31, 2019 and 2018. These fees are primarily comprised of professional, legal and insurance fees, and other continuing fees related to our 2017 chapter 11 filing. Included in Reorganization items, net for the year endedDecember 31, 2018 was$1.3 million in chapter 11 fees paid to the United States Trustee for the District ofDelaware . See Note 26 in the Notes to the Consolidated Financial Statements herein for further details.
Income Taxes
The income tax benefit for the year endedDecember 31, 2019 was$0.1 million (a 0.2% effective rate) compared to expense of$0.2 million (a (0.4%) effective rate) in the prior year. The effective tax rate in 2019 was primarily the result of the change in the deferred tax liability attributable to long-lived assets. See Note 19 in the Notes to the Consolidated Financial Statements herein for additional information on income taxes. 41 --------------------------------------------------------------------------------
Segment Operating Results: Years Ended
The following table shows operating results for each of our segments for the
years ended
Rocky Mountain Northeast Southern Corporate/Other Total
Year ended December 31, 2019
Revenue $ 103,552 $ 44,001 $ 20,685 $ - $ 168,238
Direct operating expenses 81,529 35,836 13,654 - 131,019
Operating loss (5,022) (27,977) (5,208) (11,895) (50,102)
Year ended December 31, 2018
Revenue $ 127,758 $ 43,564 $ 26,152 $ - $ 197,474
Direct operating expenses 101,855 37,660 19,381 - 158,896
Operating loss (2,782) (9,059) (11,396) (29,063) (52,300)
Rocky Mountain
Revenues for the Rocky Mountain division decreased during the year ended
December 31, 2019 as compared to the year ended December 31, 2018 due primarily
to a $14.3 million decrease in overall water transport revenues largely stemming
from lower trucking volumes outsourced to third parties and an $8.0 million
reduction in water transport revenues from lay flat temporary hose projects. The
decrease in trucking volumes outsourced to third parties was due to less fresh
water and flowback hauling from well completion projects in the geographical
areas that we serve. In addition, some of this third-party work was replaced by
operators using lay flat hose. The decrease in water transport service revenues
from lay flat temporary hose during 2019 was due to increased overall
competition for this service and more specifically from competitors that had
better access to water sources. Disposal volumes in our salt water disposal
wells increased by an average of 8,379 barrels per day (or 21.7%) and revenue
increased proportionally. Disposal volumes at our landfill decreased by 12,260
tons (or 6.1%) due to fewer rigs operating near our landfill, coupled with
pricing pressures from competing landfills rendering our facility less
attractive to customers relative to the competition. Rental revenues increased
by 2.1% in 2019 due to pricing increases implemented during 2019.
For the Rocky Mountain division, direct operating costs decreased during the
year ended December 31, 2019 as compared to the year ended December 31, 2018 due
primarily to decreased water transport activity. Direct operating costs improved
as a percentage of revenue to 78.7% in 2019 as compared to 79.7% in the prior
year period. The Rocky Mountain division had a $5.0 million operating loss
during 2019, as opposed to a $2.8 million loss in the prior year period, due
primarily to the aforementioned factors as well as a $4.9 million goodwill
impairment charge.
Northeast
Revenues for the Northeast division increased slightly during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . During 2019, natural gas prices, as measured by theHenry Hub Natural Gas index decreased 36% from$3.25 in 2018 to$2.09 in 2019, contributing to a 30% rig count reduction as ofDecember 2019 in the Northeast operating area from 74 in 2018 to 52 in 2019. Also, as a result of pricing declines, customers sought to reduce costs and turned to the reuse of production water in completion activities leading to a reduction in both price and activity for our water transport services. During 2019, we experienced a shift of approximately 50% of our transportation revenue from disposal wells to reuse. Water reuse inherently reduces trucking activity due to shorter hauling distances as water is being transported between well sites rather than to disposal wells and partially negates our considerable competitive advantage of having higher barrel capacity trailers hauling to better positioned disposal wells. As a result, overall billable trucking hours declined 9% and revenue decreased from$33.9 million to$29.6 million on a year-over-year basis. However, the Clearwater Acquisition presented a transportation cost savings due to its proximity to customers and generated salt water disposal revenues sufficient to offset the declines in trucking. 42 -------------------------------------------------------------------------------- For the Northeast division, direct operating costs decreased during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 primarily due to proportionally higher disposal volumes which generate lower costs on a dollar of revenue as compared to our trucking operations. Direct operating costs improved as a percentage of revenue to 81.4% in 2019 as compared to 86.4% in the prior year period due to the increase in higher margin disposal services. Operating loss was$18.9 million higher in 2019 due mainly to total impairment charges of$22.5 million for goodwill and long-lived assets held for sale, partially offset by$1.4 million in lower depreciation and amortization expense. Southern Revenues for the Southern division decreased during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 due to three primary factors: a$2.1 million decrease in revenue due to management's decision to exit the Eagle Ford shale area in 2018, a$1.9 million decrease in pipeline revenue and a$1.1 million decline in trucking revenue. In the Southern division, despite the overall decline in revenue due to pricing pressures, the volume of water transported by our pipeline increased in 2019 driven by a number of new customers acquired to replace the loss of a sizable customer's pipeline volumes. The volumes from this particular customer largely ceased inMay 2019 . Disposal revenue was effectively flat with pricing decreases negating the slight increase in volumes. Trucking total billed hours were down approximately 24% in 2019 and revenue decreased$1.1 million due to overall lower customer activity in the region. During 2019, natural gas prices, as measured by theHenry Hub Natural Gas index, decreased 36% from$3.25 in 2018 to$2.09 in 2019, leading to a rig count reduction of 15% in the Southern operating area from 62 in 2018 to 53 in 2019. In the Southern division, direct operating costs decreased during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 with direct operating costs as a percentage of revenue improving to 66.0% in 2019 as compared to 74.1% in the prior year period due to an increase in higher margin disposal services relative to trucking services. Operating loss improved by$6.2 million over the prior year period due to$5.5 million in restructuring and impairment charges during the year endedDecember 31, 2018 in connection with the Eagle Ford exit, while goodwill impairment charges were$2.7 million in 2019. Additionally, there was$3.0 million in lower depreciation and amortization expense in 2019.
Corporate/Other
The costs associated with the Corporate/Other division are primarily general and administrative costs. The Corporate general and administrative costs for the year endedDecember 31, 2019 were$16.8 million lower than those reported for the year endedDecember 31, 2018 due primarily to$15.3 million in compensation costs related to the departure of our former Chief Executive Officer and Chief Financial Officer during 2018. Operating loss for the Corporate division improved by$17.2 million due to the aforementioned compensation cost reduction and$0.3 million in non-recurring impairment charges in the prior year period.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. Our primary sources of capital for 2020 included cash generated by our operations and asset sales, our credit facilities, our Paycheck Protection Program loan, a comprehensive refinancing of the majority of the Company's debt onNovember 16, 2020 with a commercial bank, and the proceeds received onJanuary 2, 2019 from our 2018 Rights Offering (as defined below). During the years endedDecember 31, 2020 andDecember 31, 2019 , cash provided by operating activities was$13.2 million and$6.5 million , respectively, and losses from continuing operations were$44.1 million and$54.9 million , respectively. As ofDecember 31, 2020 , our total indebtedness was$35.0 million and total liquidity was$17.9 million , consisting of$12.9 million of cash and$5.0 million available under the Operating LOC Loan (as defined below). OnNovember 16, 2020 , the Company entered into a Loan Agreement (the "Master Loan Agreement") withFirst International Bank & Trust , aNorth Dakota banking corporation ("Lender"). Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the "Equipment Loan"; (ii) a$10.0 million real estate term loan (the "CRE Loan"); (iii) a$5.0 million operating line of credit (the "Operating LOC Loan"); and (iv) a$4.839 million letter of credit facility (the "Letter of Credit Facility") (the CRE Loan, the Equipment Loan, the Operating LOC Loan and the Letter of Credit Facility, collectively may be referred to as the "Loans"). The Loans were funded and closed onNovember 20, 2020 . In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement (as defined below) and the Second Lien Term Loan Agreement (as defined below) totaling$12.6 million and$8.3 million , respectively. 43 -------------------------------------------------------------------------------- The Company continues to incur operating losses, and we anticipate losses to continue into the near future. Additionally, due to the COVID-19 outbreak, there has been a significant decline in oil and natural gas demand, which has negatively impacted our customers' demand for our services, resulting in uncertainty surrounding the potential impact on our cash flows, results of operations and financial condition. We expect demand for oilfield services to be curtailed for the foreseeable future as we anticipate our customers' crude oil or natural gas drilling and completion activity to continue to operate at lower levels. In order to mitigate these conditions, the Company implemented various initiatives during 2020 that management believes positively impacted our operations, including personnel and salary reductions, other changes to our operating structure to achieve additional cost reductions, and the sale of certain assets. We believe that as a result of the cost reduction initiatives, our cash flow from operations, together with cash on hand and other available liquidity, will provide sufficient liquidity to fund operations for at least the next twelve months. The following table summarizes our sources and uses of cash, cash equivalents and restricted cash for the years endedDecember 31, 2020 , 2019 and 2018 (in thousands): Year Ended December 31, Net cash provided by (used in): 2020 2019 2018 Operating activities$ 13,165 $ 6,519 $ 9,449 Investing activities (165) (1,264) (35,318) Financing activities (3,010)
(7,503) 27,043
Change in cash, cash equivalents and restricted cash
Operating Activities Net cash provided by operating activities was$13.2 million for the year endedDecember 31, 2020 . The net loss, after adjustments for non-cash items, provided cash and restricted cash of$1.2 million in 2020 as compared to$12.1 million in 2019, as described below. Changes in operating assets and liabilities provided$12.0 million primarily due to a decrease of accounts receivable of$11.2 million . The non-cash items and other adjustments included$28.6 million of depreciation and amortization expense, long-lived asset impairment charges of$15.6 million , stock-based compensation expense of$2.0 million partially offset by a$1.6 million gain on the sale of assets. Net cash provided by operating activities was$6.5 million for the year endedDecember 31, 2019 . The net loss, after adjustments for non-cash items, provided cash and restricted cash of$12.1 million in 2019 as compared to$3.9 million in 2018, as described below. Changes in operating assets and liabilities used$5.6 million primarily due to a decrease in accounts payable and accrued and other current liabilities. The non-cash items and other adjustments included$36.2 million of depreciation and amortization expense, goodwill impairment charges of$29.5 million , stock-based compensation expense of$2.0 million , and long-lived asset impairment charges of$0.8 million partially offset by a$2.0 million gain on the sale of assets. Net cash provided by operating activities was$9.4 million for the year endedDecember 31, 2018 . The net loss, after adjustments for non-cash items, provided cash and restricted cash of$3.9 million . Changes in operating assets and liabilities provided$5.6 million primarily due to an increase in accounts payable and accrued liabilities, as well as a decrease in prepaid expenses and other receivables. The non-cash items and other adjustments included$46.4 million of depreciation and amortization expense, stock-based compensation expense of$12.7 million ,$4.8 million for impairment of long-lived assets, and a$0.3 million change in deferred income taxes partially offset by a$0.9 million gain on the disposal of property, plant and equipment, a$0.4 million gain resulting from the change in the fair value of the derivative warrant liability, and bad debt recoveries of$0.3 million .
Investing Activities
Net cash used in investing activities was$0.2 million for the year endedDecember 31, 2020 , and primarily consisted of$3.4 million for purchases of property, plant and equipment, offset by$3.2 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of the disposition of two properties and under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our fleet upgrades for water transport and disposal services. 44 -------------------------------------------------------------------------------- Net cash used in investing activities was$1.3 million for the year endedDecember 31, 2019 , and primarily consisted of$8.2 million for purchases of property, plant and equipment, partially offset by$7.0 million of proceeds from the sale of property, plant and equipment. Asset sales were primarily comprised of under-utilized or non-core assets, while asset purchases included investments in our disposal capacity and our trucks for water transport and disposal services. Net cash used in investing activities was$35.3 million for the year endedDecember 31, 2018 , and consisted primarily of$42.3 million in cash paid for the acquisition of Clearwater (which is discussed further in Note 6 in the Notes to the Consolidated Financial Statements herein),$12.2 million for purchases of property, plant and equipment, partially offset by$19.1 million of proceeds from the sale of property, plant and equipment.
Financing Activities
Net cash used in financing activities was$3.0 million for the year endedDecember 31, 2020 and was primarily comprised of$27.0 million of payments on the First Lien Term Loan and Second Lien Term Loan,$2.0 million of payments on vehicle finance leases and other financing activities, partially offset by proceeds from the Equipment Loan of$13.0 million , the CRE Loan of$10.0 million and the PPP Loan (as defined below) of$4.0 million . Net cash used in financing activities was$7.5 million for the year endedDecember 31, 2019 and was primarily comprised of$31.4 million in cash payments for the Bridge Term Loan,$4.9 million of payments on the First Lien Term Loan and Second Lien Term Loan,$2.2 million of payments on finance leases and other financing activities, partially offset by$31.1 million of proceeds received from the issuance of stock for the completed Rights Offering. Net cash provided by financing activities was$27.0 million for the year endedDecember 31, 2018 , and consisted of$32.5 million in proceeds from the Bridge Term Loan,$10.0 million in additional proceeds under the First Lien Term Loan, partially offset primarily by payments of$13.4 million on the First Lien Term Loan and Second Lien Term Loan and$1.9 million in payments under capital leases and other financing activities. The Bridge Term Loan proceeds were primarily related to the acquisition of Clearwater and were repaid onJanuary 2, 2019 from the proceeds raised in the Rights Offering.
Capital Expenditures
Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Cash required for capital expenditures for the year endedDecember 31, 2020 totaled$3.4 million compared to$8.2 million for the year endedDecember 31, 2019 . These capital expenditures were partially offset by proceeds received from the sale of under-utilized or non-core assets of$3.2 million and$7.0 million in the years endedDecember 31, 2020 and 2019, respectively. A portion of our transportation-related capital requirements are financed through finance leases (see Note 5 in the Notes to the Consolidated Financial Statements for further discussion of finance leases). We had$0.5 million and$9.5 million of equipment additions under finance leases during the years endedDecember 31, 2020 and 2019, respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale basins in which we operate. Due to the COVID-19 outbreak, we implemented a significant reduction in our capital expenditures budget for fiscal 2020, as discussed above in "Trends Affecting Our Operating Results." Our planned capital expenditures for 2021 are expected to be financed through cash flow from operations, finance leases, borrowings under our Operating LOC Loan, or a combination of the foregoing.
Indebtedness
As ofDecember 31, 2020 , we had$35.0 million of indebtedness outstanding, consisting of$13.0 million under the Equipment Loan,$9.9 million under the CRE Loan,$4.0 million under the PPP Loan,$0.4 million under the Vehicle Term Loan (as defined below),$0.2 million under the Equipment Finance Loan (defined below), and$7.6 million of finance leases for vehicle financings and real property leases. As further described below, the Loans contain certain affirmative and negative covenants, including a minimum debt service coverage ratio ("DSCR"), beginningDecember 31, 2021 , as well as other terms and conditions that are customary for loans of this type. As ofDecember 31, 2020 , we were in compliance with all covenants. 45 --------------------------------------------------------------------------------
Master Loan Agreement
OnNovember 16, 2020 , the Company entered into the Master Loan Agreement with Lender. Pursuant to the Master Loan Agreement, Lender agreed to extend to the Company: (i) the Equipment Loan that is subject to the MSPLF; (ii) the CRE Loan; (iii) the Operating LOC Loan; and (iv) the Letter of Credit Facility. OnNovember 18, 2020 , the Company was advised by Lender that the Equipment Loan had been approved as a MSPLF, and the Loans were funded and closed onNovember 20, 2020 . In connection with the closing of the Loans, the Company repaid all outstanding obligations in full under the First Lien Credit Agreement and Second Lien Term Loan Agreement totaling$12.6 million and$8.3 million , respectively. The terms of the Master Loan Agreement provide for customary events of default, including, among others, those relating to a failure to make payment, bankruptcy, breaches of representations and covenants, and the occurrence of certain events. Pursuant to the Master Loan Agreement, the Company must maintain a minimum DSCR of 1.35 to 1.00 beginningDecember 31, 2021 and annually onDecember 31 of each year thereafter. The DSCR means the ratio of (i) Adjusted EBITDA to (ii) the annual debt service obligations (less subordinated debt annual debt service) of the Company, calculated based on the actual four quarters ended on the applicableDecember 31 measurement date. If the DSCR falls below 1.35 to 1.00, then in addition to all other rights and remedies available to Lender, the interest rates on the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility will increase by 1.5% until the minimum DSCR is maintained. The Company may cure a failure to comply with the DSCR by issuing equity interests in the Company for cash and applying the proceeds to the applicable Adjusted EBITDA measurement. In addition, the Master Loan Agreement limits capital expenditures to$7.5 million annually and requires the Company to maintain a positive working capital position of at least$7.0 million at all times. The Master Loan Agreement also requires the Company deposit into a reserve account held by Lender (the "Reserve Account") the sum of$2.5 million and make additional monthly deposits of$100 thousand into the Reserve Account. Funds held in the Reserve Account are not accessible by the Company and are pledged as additional security for the CRE Loan, the Operating LOC Loan and the Letter of Credit Facility.
Equipment Loan
The Equipment Loan is evidenced by that certain Promissory Note (Equipment Loan) executed by the Company in the original principal amount of$13.0 million . The Equipment Loan bears interest at a rate of one-month US dollar LIBOR plus 3.00%. Interest payments during the first year will be deferred and added to the loan balance and principal payments during the first two years will be deferred. Monthly amortization of principal will commence onDecember 1, 2022 , with principal amortization payments due in annual installments of 15% onNovember 16, 2023 , 15% onNovember 16, 2024 , and the remaining 70% on the maturity date ofNovember 16, 2025 . The Equipment Loan, plus accrued and unpaid interest, may be prepaid at any time at par. The entire outstanding principal balance of the Equipment Loan together with all accrued and unpaid interest is due and payable in full onNovember 16, 2025 . In connection with the Equipment Loan, the Company paid a$130 thousand origination fee to Lender and a$130 thousand origination fee to MSPLF. The Equipment Loan includes all covenants and certifications required by the MSPLF, including, without limitation, the MSPLF Borrower Certifications and Covenants Instructions and Guidance. In connection with the same, the Company delivered a Borrower Certifications and Covenants (the "MS Certifications and Covenants") toMS Facilities LLC , aDelaware limited liability company, a special purpose vehicle of theFederal Reserve . Under the MS Certifications and Covenants, the Company is subject to certain restrictive covenants during the period that the Equipment Loan is outstanding and, with respect to certain of those restrictive covenants, for an additional one year period after the Equipment Loan is repaid, including restrictions on the Company's ability to repurchase stock, pay dividends or make other distributions and limitations on executive compensation and severance arrangements. The Equipment Loan is secured by a first lien security interest in all equipment and titled vehicles of the Company and its subsidiaries. CRE Loan The CRE Loan is evidenced by that certain Promissory Note (Real Estate) executed by the Company in the original principal amount of$10.0 million . The CRE Loan bears interest at the Federal Home LoanBank Rate ofDes Moines three-year advance rate plus 4.50% with an interest rate floor of 6.50%. The CRE Loan has a twelve-year maturity. The Company is required to make monthly principal and interest payments, and monthly escrow deposits for real estate taxes and insurance. The entire outstanding principal balance of the CRE Loan together with all accrued and unpaid interest is due and payable in full onNovember 13, 2032 . In connection with the CRE Loan, the Company paid a$150 thousand origination fee to Lender. 46 -------------------------------------------------------------------------------- The CRE Loan is secured by a first lien real estate mortgage on certain real estate owned by the Company and its subsidiaries and by the Reserve Account. The Company will incur a declining prepayment premium of 6%, 5%, 4%, 3%, 2%, and 1% of the outstanding principal balance of the CRE Loan over the first six years of the loan, respectively. The Company is not permitted to prepay the principal of the CRE Loan more than 5% per year without Lender's prior written approval.
Operating LOC Loan
The Operating LOC Loan is evidenced by that certain Revolving Promissory Note (Operating Line of Credit Loan) executed by the Company in the original maximum principal amount of$5.0 million . The Operating LOC Loan bears interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. In connection with the Operating LOC Loan, the Company paid a$50 thousand origination fee to Lender. The Operating LOC Loan is currently undrawn and fully available to the Company.
The Operating LOC Loan is secured by a first lien security interest in all
business assets of the Company and its subsidiaries, including without
limitation all accounts receivable, inventory, trademarks and intellectual
property licenses to which it is a party and by the Reserve Account. The entire
outstanding principal balance of the Operating LOC Loan together with all
accrued and unpaid interest is due and payable in full on
Letter of Credit Facility
The Letter of Credit Facility provides for the issuance of letters of credit of up to$4.839 million in aggregate face amount and is evidenced by that certain Promissory Note (Letter of Credit Loan) executed by the Company. Amounts drawn on letters of credit issued under the Letter of Credit Facility bear interest at a variable rate, adjusting daily, equal to the Prime Rate plus 3.75%, with an interest rate floor of 7.00%. The Letter of Credit Facility has a one-year final maturity onNovember 19, 2021 . OnJanuary 25, 2021 , the Letter of Credit Facility was amended in order to increase by$510,000 the maximum availability thereunder. As amended, the Letter of Credit Facility provides for the issuance of letters of credit of up to$5.349 million in aggregate face amount and is evidenced by that certain Amended and Restated Promissory Note (Letter of Credit Loan), datedJanuary 25, 2021 , executed by the Company. In connection with the Letter of Credit Facility, the Company is required to pay an annual fee equal to 3.00% of the maximum undrawn face amount of each letter of credit issued thereunder. The Letter of Credit Facility is secured by a first lien security interest in all business assets of the Company and its subsidiaries and by the Reserve Account.
First Lien Credit Agreement
On the Effective Date, pursuant to the Plan, the Company entered into a$45.0 million First Lien Credit Agreement (the "First Lien Credit Agreement") by and among the lenders party thereto (the "First Lien Credit Agreement Lenders"),ACF FinCo I, LP , as administrative agent (the "Credit Agreement Agent"), and the Company, which included a$30.0 million senior secured revolving credit facility (the "Revolving Facility") and a$15.0 million senior secured term loan facility (the "First Lien Term Loan"). The First Lien Credit Agreement also contained an accordion feature that provided for an increase in availability of up to an additional$20.0 million , subject to the satisfaction of certain terms and conditions contained in the First Lien Credit Agreement. OnOctober 5, 2018 , in connection with the Clearwater Acquisition, we entered into a First Amendment to the Credit Agreement (the "First Amendment to the Credit Agreement") with the First Lien Credit Agreement Lenders and the Credit Agreement Agent, which amended the First Lien Credit Agreement. Pursuant to the First Amendment to the Credit Agreement, the Credit Agreement Lenders provided us with an additional term loan under the First Lien Credit Agreement in the amount of$10.0 million , which was used to finance a portion of the Clearwater Acquisition. OnJuly 13, 2020 , the Company entered into the Third Amendment to First Lien Credit Agreement (the "Third Amendment to First Lien Credit Agreement") with the First Lien Credit Agreement Lenders and Credit Agreement Agent, which further amended the First Lien Credit Agreement to extend the maturity date fromFebruary 7, 2021 toMay 15, 2022 . In connection with the Third Amendment to First Lien Credit Amendment, onJuly 13, 2020 , the Company repaid$2.5 million of the outstanding principal amount of the First Lien Term Loan. 47 -------------------------------------------------------------------------------- OnNovember 20, 2020 , in connection with the closing of the Loans, all amounts outstanding under the First Lien Term Loan totaling$12.6 million were repaid in full, and all of the commitments and obligations under the FirstLien Credit Agreement were terminated. The Company made a liquidated damages payment in the amount of$0.5 million and paid a deferred amendment fee of$325 thousand as a result of the repayment of indebtedness and termination of the First Lien Credit Agreement. The Company also deposited approximately$5.1 million as cash collateral to secure outstanding letters of credit, which will be released and refunded to the Company upon cancellation of such outstanding letters of credit as replacements are issued under the Letter of Credit Facility. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the First Lien Credit Agreement.
Second Lien Term Loan Credit Agreement
On the Effective Date, pursuant to the Plan, the Company also entered into the Second Lien Term Loan Agreement (the "Second Lien Term Loan Agreement") by and among the lenders party thereto (the "Second Lien Term Loan Lenders"),Wilmington , and the Company. Pursuant to the Second Lien Term Loan Agreement, the Second Lien Term Loan Lenders agreed to extend to the Company a$26.8 million second lien term loan facility (the "Second Lien Term Loan"), of which$21.1 million was advanced on the Effective Date and up to an additional$5.7 million was available at the request of the Company after the closing date subject to the satisfaction of certain terms and conditions specified in the Second Lien Term Loan Agreement. OnJuly 13, 2020 , the Company entered into a Second Amendment to Credit Agreement with the lenders party thereto andWilmington , which amended the Second Lien Term Loan Credit Agreement to extend the maturity date fromOctober 7, 2021 toNovember 15, 2022 . OnNovember 20, 2020 , in connection with the closing of the Loans, all amounts outstanding under the Second Lien Term Loan Agreement totaling$8.3 million were repaid in full, and all of the commitments and obligations under the Second Lien Term Loan Agreement were terminated. The Company did not incur any early termination penalties as a result of the repayment of indebtedness and termination of the Second Lien Term Loan Agreement. In connection with the repayment of outstanding indebtedness by the Company, the Company was permanently released from all security interests, mortgages, liens and encumbrances under the Second Lien Term Loan Credit Agreement.
Paycheck Protection Program Loan
OnMay 8, 2020 , pursuant to the Paycheck Protection Program (the "PPP") under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted onMarch 27, 2020 , an indirect wholly-owned subsidiary of the Company (the "PPP Borrower") received proceeds of a loan (the "PPP Loan") fromFirst International Bank & Trust (the "PPP Lender") in the principal amount of$4.0 million . The PPP Loan is evidenced by a promissory note (the "Promissory Note"), datedMay 8, 2020 . The Promissory Note is unsecured, matures onMay 8, 2022 , bears interest at a rate of 1.00% per annum, and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration (the "SBA") under the CARES Act. Under the terms of the PPP, up to the entire principal amount of the PPP Loan, and accrued interest, may be forgiven if the proceeds are used for certain qualifying expenses over the covered period as described in the CARES Act and applicable implementing guidance issued by the SBA, subject to potential reduction based on the level of full-time employees maintained by the organization during the covered period as compared to a baseline period. InJune 2020 , the Paycheck Protection Program Flexibility Act of 2020 ("Flexibility Act") was signed into law, which amended the CARES Act. The Flexibility Act changed key provisions of the PPP, including, but not limited to, (i) provisions relating to the maturity of PPP loans, (ii) the deferral period covering PPP loan payments and (iii) the process for measurement of loan forgiveness. More specifically, the Flexibility Act provides a minimum maturity of five years for all PPP loans made on or after the date of the enactment of the Flexibility Act ("June 5, 2020 ") and permits lenders and borrowers to extend the maturity date of earlier PPP loans by mutual agreement. As of the date of this filing, the Company has not approached the PPP Lender to request an extension of the maturity date from two years to five years. The Flexibility Act also provides that if a borrower does not apply for forgiveness of a loan within 10 months after the last day of the measurement period ("covered period"), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. In addition, the Flexibility Act extended the length of the covered period from eight weeks to 24 weeks from receipt of proceeds, while allowing borrowers that received PPP loans beforeJune 5, 2020 to determine, at their sole discretion, a covered period of either eight weeks or 24 weeks. 48 -------------------------------------------------------------------------------- The PPP Borrower used the PPP Loan proceeds for designated qualifying expenses over the covered period and applied for forgiveness of the PPP Loan duringSeptember 2020 in accordance with the terms of the PPP, but no assurance can be given that the PPP Borrower will obtain forgiveness of the PPP Loan in whole or in part. As such, the Company has classified the PPP loan as debt and it is included in long-term debt on the consolidated balance sheet. With respect to any portion of the PPP Loan that is not forgiven, the PPP Loan will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the Promissory Note and cross-defaults on any other loan with the PPP Lender or other creditors. Upon a default under the Promissory Note, including the non-payment of principal or interest when due, the obligations of the PPP Borrower thereunder may be accelerated. In the event the PPP Loan is not forgiven, the principal amount of$4.0 million shall be repaid at maturity.
The Company obtained the consent of the lenders under each of the First Lien Credit Agreement and the Second Lien Term Loan Credit Agreement for the PPP Borrower to enter into and obtain the funds provided by the PPP Loan.
Vehicle Term Loan
OnDecember 27, 2019 , we entered into a Direct Loan Security Agreement (the "Vehicle Term Loan") withPACCAR Financial Corp as theSecured Party . The Vehicle Term Loan was used to refinance 38 trucks that were previously recorded as finance leases with balloon payments that would have been due in January of 2020. The Vehicle Term Loan matures onDecember 27, 2021 , when the entire unpaid principal balance and interest, plus any other accrued charges, shall become due and payable. The Vehicle Term Loan shall be repaid in installments of$31,879 beginning onJanuary 27, 2020 and on the same day of each month thereafter, with interest accruing at an annual rate of 5.27%.
Equipment Finance Loan
OnNovember 20, 2019 , we entered into a Retail Installment Contract (the "Equipment Finance Loan") with a secured party to finance$0.2 million of equipment. The Equipment Finance Loan matures onNovember 15, 2022 , and shall be repaid in monthly installments of approximately$7 thousand beginningDecember 2019 and then each month thereafter, with interest accruing at an annual rate of 6.50%.
Off Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles inthe United States ("GAAP"). The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results, however, may materially differ from our calculated estimates. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements and changes in these judgments and estimates may impact future results of operations and financial condition. For additional discussion of our accounting policies see Note 3 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K. 49 --------------------------------------------------------------------------------
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at the original invoice amount less an allowance for doubtful accounts. We provide an allowance for doubtful accounts to reflect the expected uncollectibility of trade receivables for both billed and unbilled receivables on our service and rental revenues. We perform ongoing credit evaluations of prospective and existing customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by a review of their current credit information. In addition, we continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer's willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Additionally, if the financial condition of a specific customer or our general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Accounts receivable are presented net of allowances for doubtful accounts of approximately$1.0 million ,$1.3 million , and$1.6 million atDecember 31, 2020 , 2019 and 2018, respectively.
Impairment of
Our goodwill was tested for impairment annually atOctober 1st and more frequently if events or circumstances lead to a determination that it was more likely than not that the fair value of a reporting unit is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test was unnecessary. In the event a determination was made that it was more likely than not that the fair value of a reporting unit was less than its carrying value, the goodwill impairment test was performed. The first step of the test, used to identify potential impairment, compared the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit was not considered to be impaired. If the carrying amount of a reporting unit exceeded its fair value, since we adopted ASU No. 2017-04, Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment, an impairment charge was recorded based on the excess of a reporting unit's carrying amount over its fair value. When we reviewed goodwill for impairment as ofOctober 1, 2019 , we determined that it was more likely than not that the fair value of the reporting units were less than their carrying value. As a result, we completed the goodwill impairment test and determined that the fair value of all three reporting units was less than the carrying amount, resulting in a goodwill impairment charge of$29.5 million during the year endedDecember 31, 2019 . See Note 8 for further details on the goodwill impairment during 2019.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
We review long-lived assets including intangible assets with finite useful lives
for impairment whenever events or changes in circumstances indicate the carrying
value of a long-lived asset (or asset group) may not be recoverable. If an
impairment indicator is present, we evaluate recoverability by comparing the
estimated future cash flows of the asset group, on an undiscounted basis, to
their carrying values. The asset group represents the lowest level for which
identifiable cash flows are largely independent of the cash flows of other
groups of assets and liabilities. If the undiscounted cash flows exceed the
carrying value, no impairment is present. If the undiscounted cash flows are
less than the carrying value, the impairment is measured as the difference
between the carrying value and the fair value of the long-lived asset (or asset
group). Our determination that an event or change in circumstance has occurred
potentially indicating the carrying amount of an asset (or asset group) may not
be recoverable generally includes but is not limited to one or more of the
following: (1) a deterioration in an asset's financial performance compared to
historical results, (2) a shortfall in an asset's financial performance compared
to forecasted results, (3) changes affecting the utility and estimated future
demands for the asset, (4) a significant decrease in the market price of an
asset, (5) a current expectation that a long-lived asset will be sold or
disposed of significantly before the end of its previously estimated useful
life, (6) a significant adverse change in the extent or manner in which a
long-lived asset (asset group) is being used or in its physical condition, and
(7) declining operations and severe changes in projected cash flows.
50
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We recorded total impairment charges of $15.6 million , $0.8 million and $4.8
million for long-lived assets during the years ended December 31, 2020 , 2019 and
2018, respectively, which was included in "Impairment of long-lived assets" in
the consolidated statement of operations. Of the impairment charges recorded
during the year ended December 31, 2020 , $15.0 million related to long-lived
assets and $0.6 million related to long-lived assets classified as held for
sale. All of the impairment charges recorded during 2019 and 2018 were related
to long-lived assets classified as held for sale. We could recognize future
impairments to the extent adverse events or changes in circumstances result in
conditions in which long-lived assets are not recoverable. See Note 8 in the
Notes to the Consolidated Financial Statements for additional information on our
impairment charges.
Income Taxes and Valuation of Deferred Tax Assets
We are subject to federal income taxes and state income taxes in those
jurisdictions in which we operate. We exercise judgment with regard to income
taxes in interpreting whether expenses are deductible in accordance with federal
income tax and state income tax codes, estimating annual effective federal and
state income tax rates and assessing whether deferred tax assets are, more
likely than not, expected to be realized. The accuracy of these judgments
impacts the amount of income tax expense we recognize each period.
With regard to the valuation of deferred tax assets, we record valuation
allowances to reduce net deferred tax assets to the amount considered more
likely than not to be realized. All available evidence is considered to
determine whether, based on the weight of that evidence, a valuation allowance
for deferred tax assets is needed. See Note 19 to our Consolidated Financial
Statements herein for further information regarding the valuation of our
deferred tax assets and the impact of new legislation.
Future realization of the tax benefit of an existing deductible temporary
difference or carryforward ultimately depends on the existence of sufficient
taxable income of the appropriate character (for example ordinary income or
capital gain) within the carryback or carryforward periods available under the
tax law. We have had significant pretax losses in recent years. Accordingly, we
do not have income in carryback years. These cumulative losses also present
significant negative evidence about the likelihood of income in carryforward
periods.
Future reversals of existing taxable temporary differences are another source of
taxable income that is used in this analysis. As a result, deferred tax
liabilities in excess of deferred tax assets generally will provide support for
recognition of deferred tax assets. However, most of our deferred tax assets are
associated with net operating loss ("NOL") carryforwards, many of which
statutorily expire after a specified number of years; therefore, we compare the
estimated timing of these taxable timing difference reversals with the scheduled
expiration of our NOL carryforwards, considering any limitations on use of NOL
carryforwards, and record a valuation allowance against deferred tax assets for
which realization is not more likely than not. In addition, as a result of
limitations on the use of our NOLs due to prior ownership changes, we have
reduced our deferred tax asset and corresponding valuation allowance by the NOLs
that will likely expire unused.
As a matter of law, we are subject to examination by federal and state taxing
authorities. We have estimated and provided for income taxes in accordance with
settlements reached with the Internal Revenue Service in prior audits. Although
we believe that the amounts reflected in our tax returns substantially comply
with the applicable federal and state tax regulations, both the IRS and the
various state taxing authorities can take positions contrary to our position
based on their interpretation of the law. A tax position that is challenged by a
taxing authority could result in an adjustment to our income tax liabilities and
related tax provision.
We measure and record tax contingency accruals in accordance with GAAP which
prescribes a threshold for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a return. Only positions
meeting the "more likely than not" recognition threshold at the effective date
may be recognized or continue to be recognized. A tax position is measured at
the largest amount that is greater than 50% likely of being realized upon
ultimate settlement.
Revenue Recognition
OnJanuary 1, 2018 , we adopted the guidance in ASC 606, including all related amendments, and applied the new revenue standard to all contracts using the modified retrospective method. The impact of the new revenue standard was not material and there was no adjustment required to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under ASC 605, or the accounting guidance in effect for those periods. 51 -------------------------------------------------------------------------------- Revenues are generated upon the performance of contracted services under formal and informal contracts with customers. Revenues are recognized when the contracted services for our customers are completed in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Sales and usage-based taxes are excluded from revenues. Payment is due when the contracted services are completed in accordance with the payment terms established with each customer prior to providing any services. As such, there is no significant financing component for any of our revenues. Some of our contracts with customers involve multiple performance obligations as we are providing more than one service under the same contract, such as water transport services and disposal services. However, our core service offerings are capable of being distinct and also are distinct within the context of contracts with our customers. As such, these services represent separate performance obligations when included in a single contract. We have standalone pricing for all of our services which is negotiated with each of our customers in advance of providing the service. The contract consideration is allocated to the individual performance obligations based upon the standalone selling price of each service, and no discount is offered for a bundled services offering.
Environmental and Legal Contingencies
We have established liabilities for environmental and legal contingencies. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining the liability, we consider a number of factors including, but not limited to, the jurisdiction of the claim, related claims, insurance coverage when insurance covers the type of claim and our historic outcomes in similar matters, if applicable. We are primarily self-insured against physical damage to our property, equipment and vehicles due to large deductibles or self-insurance. We are also self-insured for certain potential liabilities for third-party vehicular claims. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters, and the actual outcome could differ significantly from estimated amounts. The determination of liabilities for these contingencies is reviewed periodically to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues, including the effect of any applicable insurance coverage for these matters. While we believe that the amount accrued is adequate, future changes in circumstances, or in our assumptions or estimates, could impact these determinations or have a negative impact on our reported financial results.
Asset Retirement Obligations
We record obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. A certain amount of judgment is involved in estimating the future cash flows of such obligations, as well as the timing of these cash flows. If our assumptions and estimates on the amount or timing of the future cash flows change, it could potentially have a negative impact on our earnings.
Recently Issued Accounting Pronouncements
See the "Recently Issued Accounting Pronouncements" section of Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein for a complete description of recent accounting standards which may be applicable to our operations. The significant accounting standards that have been adopted during the year endedDecember 31, 2020 are described in Note 3 on Significant Accounting Policies in the Notes to the Consolidated Financial Statements herein.
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