| Basis of Presentation and Summary of Significant Accounting Policies | Note 2 – Basis of Presentation and Summary of Significant
Accounting Policies
Basis of Presentation
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States
of America (GAAP) and include the accounts of all consolidated
subsidiaries after the elimination of all intercompany accounts and
transactions. In management’s opinion, all necessary
adjustments to fairly present our results of operations, financial
position and cash flows for the periods presented have been made
and all such adjustments are of a normal and recurring nature.
Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance
with GAAP have been omitted pursuant to the rules and regulations
of the SEC.
In May 2015, CEQP, Crestwood Midstream and certain of their
affiliates entered into a definitive agreement under which
Crestwood Midstream would merge with a wholly-owned subsidiary of
CEQP, with Crestwood Midstream surviving as a wholly-owned
subsidiary of CEQP (the Simplification Merger). In conjunction with
the closing of the Simplification Merger on September 30,
2015, Crestwood Equity contributed 100% of its interest in
Crestwood Operations LLC (Crestwood Operations) to Crestwood
Midstream. As a result of this equity transaction, Crestwood
Midstream controls the operating and financial decisions of
Crestwood Operations. Crestwood Midstream accounted for this
transaction as a reorganization of entities under common control
and the accounting standards related to such transactions requires
Crestwood Midstream to retroactively adjust Crestwood
Midstream’s historical results to reflect the operations of
Crestwood Operations as being acquired on June 19, 2013, the
date in which Crestwood Midstream and Crestwood Operations came
under common control. Prior to the Simplification Merger, Crestwood
Equity consolidated the results of Crestwood Operations in its
financial statements and as such, this transaction had no impact on
its historical financial statements.
Beginning in the third quarter of 2015, we changed our income
statement to classify the revenues associated with the products to
which we take title as product revenues in our consolidated
statement of operations. As such, we reclassified our historical
consolidated statement of operations for three months ended
March 31, 2015 to reflect this change. We classify all other
revenues as service revenues in our consolidated statement of
operations.
Significant Accounting Policies
There were no material changes in our significant accounting
policies from those described in our 2015 Annual Report on Form
10-K. Below is an update of our accounting policies related to
Property, Plant and Equipment and Goodwill.
Property, Plant and Equipment
Property, plant and equipment is recorded at its original cost of
construction or, upon acquisition, at the fair value of the assets
acquired. The accounting predecessor of Crestwood Equity acquired
the accounting predecessor of Crestwood Midstream in October 2010,
and accordingly recorded its acquisition of Crestwood
Midstream’s property, plant and equipment related to its
gathering and processing assets in the Barnett Shale at fair value
on that date. The resulting increase to Crestwood Midstream’s
property, plant and equipment was not pushed down by Crestwood
Equity to Crestwood Midstream’s balance sheet, as permitted
by GAAP.
We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the amount of an asset may
not be recoverable. If such events or changes in circumstances are
present, a loss is recognized if the carrying value of the asset is
in excess of the sum of the undiscounted cash flows expected to
result from the use of the asset and its eventual disposition.
During 2015, Crestwood Equity recorded a $354.4 million impairment
of its property, plant and equipment related to its gathering and
processing assets in the Barnett Shale. Crestwood Midstream did not
record an impairment of its property, plant and equipment related
to its gathering and processing assets in the Barnett Shale as the
sum of the undiscounted cash flows expected to result from the use
of the assets and their eventual disposition exceeded the carrying
value of the property, plant and equipment by over 30% as of
March 31, 2016 and December 31, 2015. As a result,
Crestwood Midstream’s property, plant and equipment exceeds
Crestwood Equity’s property, plant and equipment related to
its gathering and processing assets in the Barnett Shale as of
March 31, 2016 and December 31, 2015.
Goodwill
Our goodwill represents the excess of the amount we paid for a
business over the fair value of the net identifiable assets
acquired. We evaluate goodwill for impairment annually on
December 31, and whenever events indicate that it is more
likely than not that the fair value of a reporting unit could be
less than its carrying amount. This evaluation requires us to
compare the fair value of each of our reporting units to its
carrying value (including goodwill). If the fair value exceeds the
carrying amount, goodwill of the reporting unit is not considered
impaired.
We estimate the fair value of our reporting units based on a number
of factors, including discount rates, projected cash flows, and the
potential value we would receive if we sold the reporting unit. We
also compare the total fair value of our reporting units to our
overall enterprise value, which considers the market value for our
common and preferred units. Estimating projected cash flows
requires us to make certain assumptions as it relates to the future
operating performance of each of our reporting units (which
includes assumptions, among others, about estimating future
operating margins and related future growth in those margins,
contracting efforts and the cost and timing of facility expansions)
and assumptions related to our customers, such as their future
capital and operating plans and their financial condition. When
considering operating performance, various factors are considered
such as current and changing economic conditions and the commodity
price environment, among others.
Due to the imprecise nature of these projections and assumptions,
actual results can and often do, differ from our estimates. If the
assumptions embodied in the projections prove inaccurate, we could
incur a future impairment charge. In addition, the use of the
income approach to determine the fair value of our reporting units
(see further discussion of the use of the income approach below)
could result in a different fair value if we had utilized a market
approach, or a combination thereof.
We acquired substantially all of our reporting units in 2013, 2012
and 2011, which required us to record the assets, liabilities and
goodwill of each of those reporting units at fair value on the date
they were acquired. As a result, any level of decrease in the
forecasted cash flows of these businesses or increases in the
discount rates utilized to value those businesses from their
respective acquisition dates would likely result in the fair value
of the reporting unit falling below the carrying value of the
reporting unit, and could result in an assessment of whether that
reporting unit’s goodwill is impaired.
Commodity prices have continued to decline since 2014, and that
decline has adversely impacted forecasted cash flows, discount
rates and stock/unit prices for most companies in the midstream
industry, including us. In particular, due to the significant,
sustained decrease in the market price of our common units from
January 1, 2016 to March 31, 2016, we evaluated the
carrying value of our reporting units and determined it was more
likely than not that the goodwill associated with several of our
reporting units was impaired as of March 31, 2016. As a result
of further analysis of the fair value of our reporting units, we
recorded goodwill impairments on several of our reporting units
during the three months ended March 31, 2016.
The following table summarizes the goodwill of our various
reporting units (in millions):
Goodwill at December 31, 2015
Goodwill Impairments during the March 31, 2016 Goodwill at March 31, 2016
Gathering and Processing Marcellus $ 8.6 $ 8.6 $
—
Arrow 45.9
— 45.9
Storage and Transportation
Northeast Storage and Transportation 726.3
— 726.3
COLT 44.9 13.7 31.2
Marketing, Supply and Logistics
Supply and Logistics 167.2 65.5 101.7
Storage and Terminals 50.5 14.1 36.4
US Salt 12.6
— 12.6
Trucking 29.5 7.8 21.7
Total $ 1,085.5 $ 109.7 $ 975.8
The goodwill impairments recorded during three months ended
March 31, 2016 primarily resulted from increasing the discount
rates utilized in determining the fair value of the reporting units
considering the significant, sustained decrease in the market price
of our common units and the continued decrease in commodity prices
and its impact on the midstream industry and our customers. Our
COLT, Supply and Logistics, Storage and Terminals and Trucking
reporting units also experienced impairments during 2015 based on
the impact that the prolonged low commodity price environment is
expected to have on the demand for future services provided by
these operations. Despite increases in the operating results of
these reporting units from 2013 to 2015, in light of our modified
expectations, we revised our cash flow forecasts for these
operations at December 31, 2015 in light of our current view
that these operations will not grow as fast or as significantly in
the future as originally forecasted in 2013 when the assets were
acquired.
The remaining goodwill related to these reporting units represents
the fair value of the goodwill as of March 31, 2016, which is
a Level 3 fair value measurement. We utilized the income approach
to determine the fair value of our reporting units given the
limited availability of comparable market-based transactions as of
March 31, 2016 and December 31, 2015, and we utilized
discount rates ranging from 10% to 19% in applying the income
approach to determine the fair value of our reporting units with
goodwill as of March 31, 2016. We also used the market
approach to validate the fair value of our Northeast Storage and
Transportation reporting unit given the value to be received
related to the anticipated Stagecoach joint venture transaction
further described in Note 14.
Deferred Financing Costs
Deferred financing costs represent costs associated with obtaining
long-term financing and are amortized over the term of the related
debt using a method which approximates the effective interest
method and has a weighted average life of six years. Effective
January 1, 2016, we adopted the provisions of Accounting
Standards Update (ASU) 2015-03, Interest - Imputation of
Interest (Subtopic 835-30),
Consolidations
Effective 1, 2016, we adopted the provisions of ASU 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation
Analysis
New Accounting Pronouncements Issued But Not Yet Adopted
As of March 31, 2016, the following accounting standards had
not yet been adopted by us:
In May 2014, the Financial Accounting Standards Board (FASB) issued
ASU 2014-09, Revenue from Contracts with Customers,
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842)
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock
Compensation (Topic 718):Improvements to Employee Share-Based
Payment Accounting | Note 2—Basis of Presentation and Summary of Significant
Accounting Policies
Basis of Presentation
Our consolidated financial statements are prepared in accordance
with GAAP and include the accounts of all consolidated subsidiaries
after the elimination of all intercompany accounts and
transactions. Our consolidated financial statements for prior
periods include reclassifications that were made to conform to the
current year presentation, none of which impacted our previously
reported net income, earnings per unit or partners’ capital.
In management’s opinion, all necessary adjustments to fairly
present our results of operations, financial position and cash
flows for the periods presented have been made and all such
adjustments are of a normal and recurring nature.
Crestwood Equity
Crestwood Midstream
In connection with the closing of the Simplification Merger on
September 30, 2015, CEQP contributed 100% of its interest in
Crestwood Operations to Crestwood Midstream. As a result of this
equity contribution, Crestwood Midstream controls the operating and
financial decisions of Crestwood Operations. Crestwood Midstream
accounted for this transaction as a reorganization of entities
under common control and the accounting standards related to such
transactions requires Crestwood Midstream to record the assets and
liabilities of Crestwood Operations at CEQP’s carrying value
and retroactively adjust Crestwood Midstream’s historical
results to reflect the operations of Crestwood Operations as being
acquired on June 19, 2013, the date in which Crestwood
Midstream and Crestwood Operations came under common control.
Principles of Consolidation
We consolidate entities when we have the ability to control or
direct the operating and financial decisions of the entity or when
we have a significant interest in the entity that gives us the
ability to direct the activities that are significant to that
entity. The determination to consolidate or apply the equity method
of accounting to an entity can also require us to evaluate whether
that entity is considered a variable interest entity. This
evaluation, along with the determination of our ability to control,
direct or exert significant influence over an entity involves the
use of judgment. We apply the equity method of accounting where we
can exert significant influence over, but do not control or direct
the policies, decisions or activities of an entity. We use the cost
method of accounting where we are unable to exert significant
influence over the entity.
In December 2014, Crestwood Equity sold its 100% interest in Tres
Palacios Gas Storage Company LLC (Tres Palacios) to Tres Palacios
Holdings LLC (Tres Holdings), a newly formed joint venture between
Crestwood Midstream and an affiliate of Brookfield Infrastructure
Group (Brookfield); consequently, Crestwood Equity deconsolidated
Tres Palacios and began accounting for the investment in Tres
Holdings under the equity method of accounting through its indirect
ownership in Crestwood Midstream. See Note 6 for additional
information related to the sale of Tres Palacios.
Use of Estimates
The preparation of our consolidated financial statements in
conformity with GAAP requires the use of estimates and assumptions
that affect the amounts we report as assets, liabilities, revenues
and expenses and our disclosures in these consolidated financial
statements. Actual results can differ from those estimates.
Cash
We consider all highly liquid investments with an original maturity
of less than three months to be cash.
Inventory
Inventory for our our storage and transportation operations and our
marketing, supply and logistics operations are stated at the lower
of cost or market and are computed predominantly using the average
cost method. Our inventory consisted primarily of NGLs of
approximately $35.4 million and $37.5 million at December 31,
2015 and 2014.
Property, Plant and Equipment
Property, plant and equipment is recorded at is original cost of
construction or, upon acquisition, at the fair value of the assets
acquired. For assets we construct, we capitalize direct costs, such
as labor and materials, and indirect costs, such as overhead and
interest. We capitalize major units of property replacements or
improvement and expense minor items. Depreciation is computed by
the straight-line method over the estimated useful lives of the
assets, as follows:
Years
Gathering systems and pipelines 20
Facilities and equipment 20 – 25
Buildings, rights-of-way and easements 20 – 40
Office furniture and fixtures 5 – 10
Vehicles 5
We deplete salt deposits included in our property, plant and
equipment utilizing the unit of production method.
We evaluate our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If such events or changes in
circumstances are present, a loss is recognized if the carrying
value of the asset is in excess of the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual
disposition. An impairment loss is measured as the amount by which
the carrying amount of the asset exceeds the fair value of the
asset, which is typically based on discounted cash flow projections
using assumptions as to revenues, costs and discount rates typical
of third party market participants, which is a Level 3 fair value
measurement.
During 2015 and 2014, we recorded the following impairments for our
property, plant and equipment included in gain (loss) on long-lived
assets in our consolidated statements of operations:
• During 2015 and 2014, we incurred
$8.5 million and $13.2 million of impairments of our property,
plant and equipment related to our Granite Wash gathering and
processing operations, which resulted from decreases in forecasted
cash flows for those operations given that our major customer of
those assets has declared bankruptcy and has ceased any substantial
drilling in the Granite Wash in the near future given current and
future anticipated market conditions related to normal gas and
NGLs. The fair value of our property, plant and equipment related
to our Granite Wash operations was $11.2 million as of
December 31, 2015.
• During 2015, Crestwood Equity
incurred $354.4 million of impairments of its property, plant and
equipment related to its Barnett gathering and processing
operations, which resulted from the recent actions of our primary
customer in the Barnett Shale, Quicksilver Resources, Inc.
(Quicksilver), related to its filing for protection under Chapter
11 of the U.S. Bankruptcy Code in 2015. The fair value of our
property, plant and equipment related to our Barnett operations was
$298.5 million as of December 31, 2015.
• During 2015, we incurred $61.9
million and $45.7 million of impairments of property, plant and
equipment related to our Fayetteville and Haynesville gathering and
processing operations, respectively, which resulted from decreases
in forecasted cash flows for those operations given that our
customers for those assets have ceased any substantial drilling in
the Fayetteville and Haynesville Shales in the near future given
current and future anticipated market conditions related to natural
gas. The fair value of our property, plant and equipment related to
our Fayetteville and Haynesville operations was $59.3 million and
$3.8 million, respectively, as of December 31, 2015.
• During 2015, we incurred $31.2
million of impairments on our property, plant and equipment related
to our Watkins Glen development project in our marketing, supply
and logistics segment, which resulted from continued delays and
uncertainties in the permitting of our proposed NGL storage
facility. The fair value of our property, plant and equipment
related to our Watkins Glen development project was $6.7 million as
of December 31, 2015.
The remaining carrying value related to the property, plant and
equipment associated with these assets represents the fair value of
the property, plant and equipment as of December 31, 2015,
which is a Level 3 fair value measurement. Our estimates of fair
value considered a number of factors, including the potential value
we would receive if we sold the asset, a 15% discount rate and
projected cash flows. Projected cash flows of our property, plant
and equipment are generally based on current and anticipated future
market conditions, which require significant judgment to make
projections and assumptions about pricing, demand, competition,
operating costs, constructions costs, legal and regulatory issues
and other factors that may extend many years into the future and
are often outside of our control. Due to the imprecise nature of
these projections and assumptions, actual results can and often do,
differ from our estimates.
Identifiable Intangible Assets
Our identifiable intangible assets consist of customer accounts,
covenants not to compete, trademarks, certain revenue contracts and
deferred financing costs. Customer accounts, covenants not to
compete, trademarks and certain of our revenue contracts have
arisen from acquisitions. We amortize certain of our revenue
contracts based on the projected cash flows associated with these
contracts if the projected cash flows are readily determinable,
otherwise we amortize our revenue contracts on a straight-line
basis. Deferred financing costs represent financing costs incurred
in obtaining financing and are being amortized over the term of the
related debt using a method which approximates the effective
interest method and has a weighted average life of six years. We
recognize acquired intangible assets separately if the benefit of
the intangible asset is obtained through contractual or other legal
rights, or if the intangible asset can be sold, transferred,
licensed, rented or exchanged, regardless of the acquirer’s
intent to do so.
During 2015 and 2014, we recorded the following impairments of our
intangible assets included in gain (loss) on long-lived assets in
our consolidated statements of operations:
• During 2014, we fully impaired $20
million of intangible assets related to our Granite Wash gathering
and processing operations, which resulted from decreases in
forecasted cash flows for those operations given that our major
customer of those assets has declared bankruptcy and has ceased any
substantial drilling in the Granite Wash in the near future given
current and future anticipated market conditions related to natural
gas and NGLs.
• During 2015, Crestwood Equity fully
impaired $238.9 million of its intangible assets related to its
Barnett gathering and processing operations, which resulted from
the recent actions of our primary customer in the Barnett Shale,
Quicksilver, related to filing for protection under Chapter 11 of
the U.S. Bankruptcy Code in 2015.
• During 2015, we fully impaired $70.9
million and $6.0 million of intangible assets related to our
Fayetteville and Haynesville gathering and processing operations,
respectively, which resulted from decreases in forecasted cash
flows for those operations given that our customers for those
assets have ceased any substantial drilling in the Fayetteville and
Haynesville Shales in the near future given current and future
anticipated market conditions related to natural gas.
The remaining carrying value related to these intangible assets
represents the fair value of the intangible assets as of
December 31, 2015, which is a Level 3 fair value measurement.
Our estimates of fair value considered a number of factors,
including the potential value we would receive if we sold the
asset, a 15% discount rate and projected cash flows. Projected cash
flows of our intangible assets are generally based on current and
anticipated future market conditions, which require significant
judgment to make projections and assumptions about pricing, demand,
competition, operating costs, construction costs, legal and
regulatory issues and other factors that may extend many years into
the future and are often outside of our control. Due to the
imprecise nature of these projections and assumptions, actual
results can and often do, differ from our estimates.
Certain intangible assets are amortized on a straight-line basis
over their estimated economic lives, as follows:
Weighted-Average Life (years)
Customer accounts 22
Covenants not to compete 5
Trademarks 6
Goodwill
Our goodwill represents the excess of the amount we paid for a
business over the fair value of the net identifiable assets
acquired. We evaluate goodwill for impairment annually on
December 31, and whenever events indicate that it is more
likely than not that the fair value of a reporting unit could be
less than its carrying amount. This evaluation requires us to
compare the fair value of each of our reporting units to its
carrying value (including goodwill). If the fair value exceeds the
carrying amount, goodwill of the reporting unit is not considered
impaired.
We estimate the fair value of our reporting units based on a number
of factors, including discount rates, projected cash flows and the
potential value we would receive if we sold the reporting unit. We
also compare the total fair value of our reporting units to our
overall enterprise value, which considers the market value for our
common and preferred units. Estimating projected cash flows
requires us to make certain assumptions as it relates to the future
operating performance of each of our reporting units (which
includes assumptions, among others, about estimating future
operating margins and related future growth in those margins,
contracting efforts and the cost and timing of facility expansions)
and assumptions related to our customers, such as their future
capital and operating plans and their financial condition. When
considering operating performance, various factors are considered
such as current and changing economic conditions and the commodity
price environment, among others. Due to the imprecise nature of
these projections and assumptions, actual results can and often do,
differ from our estimates. If the assumptions embodied in the
projections prove inaccurate, we could incur a future impairment
charge.
We acquired substantially all of our reporting units in 2013, 2012
and 2011, which required us to record the assets, liabilities and
goodwill of each of those reporting units at fair value on the date
they were acquired. As a result, any level of decrease in the
forecasted cash flows of these businesses or increases in the
discount rates utilized to value those businesses from their
respective acquisition dates would likely result in the fair value
of the reporting unit falling below the carrying value of the
reporting unit, and could result in an assessment of whether that
reporting unit’s goodwill is impaired.
Commodity prices have continued to decline since late 2014, and
that decline has adversely impacted forecasted cash flows, discount
rates and stock/unit prices for most companies in the midstream
industry, including us. As a result, we recorded goodwill
impairments on several of our reporting units during 2015 and 2014.
The following table summarizes the goodwill of our various
reporting units (in millions):
Goodwill at Final Goodwill Goodwill at Goodwill (1) Goodwill at
Gathering and Processing
Fayetteville $ 76.8 $
— $ 4.3 $ 72.5 $ 72.5 $
—
Granite Wash 14.2
— 14.2
—
—
—
Marcellus 8.6
—
— 8.6
— 8.6
Arrow 45.5 0.4
— 45.9
— 45.9
Storage and Transportation
Northeast Storage and
Transportation 727.1 (0.8 )
— 726.3
— 726.3
COLT 670.5 (2.2 )
— 668.3 623.4 44.9
Marketing, Supply and Logistics
West Coast 89.1 (3.2 )
— 85.9 85.9
—
Supply and Logistics 269.5 (3.3 )
— 266.2 99.0 167.2
Storage and Terminals 104.7 (0.5 )
— 104.2 53.7 50.5
US Salt 16.1 (1.3 ) 2.2 12.6
— 12.6
Trucking 178.4 (0.5 )
— 177.9 148.4 29.5
Watkins Glen 94.6 (0.3 ) 28.1 66.2 66.2
—
Total Crestwood Midstream $ 2,295.1 $ (11.7 ) $ 48.8 $ 2,234.6 $ 1,149.1 $ 1,085.5
Barnett (Gathering and Processing) 257.2
—
— 257.2 257.2
—
Total Crestwood Equity $ 2,552.3 $ (11.7 ) $ 48.8 $ 2,491.8 $ 1,406.3 $ 1,085.5
(1) Included in these amounts are
approximately $515.4 million and $470.6 million of goodwill
impairments recorded at Crestwood Equity and Crestwood Midstream,
respectively, during the three months ended December 31, 2015,
which primarily resulted from the finalization of the preliminary
goodwill impairments recorded on these reporting units during the
three months ended September 30, 2015.
The goodwill impairments recorded during 2015 and 2014 primarily
resulted from decreasing forecasted cash flows and increasing the
discount rates utilized in determining the fair value of the
reporting units considering the continued decrease in commodity
prices and its impact on the midstream industry and our customers.
We utilized discount rates ranging from 10% to 16% to determine the
fair value of our reporting units as of December 31, 2015.
The remaining goodwill related to these reporting units represents
the fair value of the goodwill as of December 31, 2015, which
is a Level 3 fair value measurement.
Investment in Unconsolidated Affiliates
We evaluate our equity method investments for impairment when
events or circumstances indicate that the carrying value of the
equity method investment may be impaired and that impairment is
other than temporary. If an event occurs, we evaluate the
recoverability of our carrying value based on the fair value of the
investment. If an impairment is indicated, or if we decide to sell
an investment in unconsolidated affiliate, we adjust the carrying
values of the asset downward, if necessary, to their estimated fair
values.
We estimated the fair value of our equity-method investments at
December 31, 2015 based on projected cash flows, a 15.5%
discount rate and the potential value we would receive if we sold
the equity-method investment. Estimating projected cash flows
requires us to make certain assumptions as it relates to the future
operating performance of each of our equity-method investments
(which includes assumptions, among others, about estimating future
operating margins and related future growth in those margins,
contracting efforts and the cost and timing of facility expansions)
and assumptions related to our equity-method investments’
customers, such as future capital and operating plans and their
financial condition. When considering operating performance,
various factors are considered such as current and changing
economic conditions and the commodity price environment, among
others. Due to the imprecise nature of these projections and
assumptions, actual results can and often do, differ from our
estimates.
During 2015, we recorded a $51.4 million and $23.4 million
impairment of our Jackalope Gas Gathering Services, L.L.C.
(Jackalope) and Powder River Basin Industrial Complex, LLC (PRBIC)
equity-method investments, respectively, as a result of decreasing
forecasted cash flows and increasing the discount rates utilized in
determining the fair value of the equity-method investments
considering the continued decrease in commodity prices and its
impact on the midstream industry and our equity-method
investments’ customers. The remaining carrying value of
$202.4 million and $15.1 million related to our Jackalope and PRBIC
equity-method investments, respectively, represents the fair value
of the equity-method investments as of December 31, 2015,
which is a Level 3 fair value measurement.
Asset Retirement Obligations
An asset retirement obligation (ARO) is an estimated liability for
the cost to retire a tangible asset. We record a liability for
legal or contractual obligations to retire our long-lived assets
associated with right-of-way contracts we hold and our facilities
whether owned or leased. We record a liability in the period the
obligation is incurred and estimable. An ARO is initially recorded
at its estimated fair value with a corresponding increase to
property, plant and equipment. This increase in property, plant and
equipment is then depreciated over the useful life of the asset to
which that liability relates. An ongoing expense is recognized for
changes in the fair value of the liability as a result of the
passage of time, which we record as depreciation, amortization and
accretion expense on our consolidated statements of operations. The
fair value of certain AROs could not be determined as the
settlement dates (or range of dates) associated with these assets
were not estimable. At December 31, 2015 and 2014, our AROs
were reflected in other long-term liabilities on our consolidated
balance sheets. See Note 5 for a further discussion of our
AROs.
Revenue Recognition
We gather, treat, compress, store, transport and sell various
commodities (including crude oil, natural gas, NGLs and water)
pursuant to fixed-fee and percent-of-proceeds contracts. Under
certain of those contracts in our G&P operations and our
marketing, supply and logistics operations, we take title to the
underlying commodity. In the current year, we changed our income
statement to classify the revenues associated with the products to
which we take title as product revenues in our consolidated
statement of operations. In addition, we also reclassified our
historical consolidated statements of operations for the years
ended December 31,2014 and 2013 to reflect this change. We
classify all other revenues as service revenues in our consolidated
statement of operations.
We recognize revenues for these services and products when all of
the following criteria are met:
• services have been rendered or
products delivered or sold;
• persuasive evidence of an exchange
arrangement exists;
• the price for services is fixed or
determinable; and
• collectability is reasonably
assured.
We record deferred revenue when we receive amounts from our
customers but have not met the criteria listed above. We recognize
deferred revenue in our consolidated statements of operations when
the criteria has been met and all services have been rendered. At
December 31, 2015 and 2014, we had deferred revenue of
approximately $14.2 million and $12.2 million, which is reflected
in accrued expenses and other liabilities on our consolidated
balance sheets.
Credit Risk and Concentrations
Inherent in our contractual portfolio are certain credit risks.
Credit risk is the risk of loss from nonperformance by suppliers,
customers or financial counterparties to a contract. We take an
active role in managing credit risk and have established control
procedures, which are reviewed on an ongoing basis. We attempt to
minimize credit risk exposure through credit policies and periodic
monitoring procedures as well as through customer deposits, letters
of credit and entering into netting agreements that allow for
offsetting counterparty receivable and payable balances for certain
financial transactions, as deemed appropriate.
Income Taxes
Crestwood Equity is a master limited partnership and Crestwood
Midstream is a limited partnership. Partnerships are generally not
subject to federal income tax, although publicly-traded
partnerships are treated as corporations for federal income tax
purposes and therefore are subject to federal income tax, unless
the partnership generates at least90% of its gross income from
qualifying sources. If the qualifying income requirement is
satisfied, the publicly-traded partnership will be treated as a
partnership for federal income tax purposes. We satisfy the
qualifying income requirement and are treated as a partnership for
federal and state income tax purposes. Our consolidated earnings
are included in the federal and state income tax returns of our
partners. However, legislation in certain states allows for
taxation of partnerships, and as such, certain state taxes have
been included in our accompanying financial statements as income
taxes due to the nature of the tax in those particular states as
discussed below. In addition, federal and state income taxes are
provided on the earnings of the subsidiaries incorporated as
taxable entities. We are required to recognize deferred tax assets
and liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial reporting
and tax basis of assets and liabilities using expected rates in
effect for the year in which the differences are expected to
reverse.
We are responsible for the Texas Margin tax computed on the Texas
franchise tax returns. The margin tax qualifies as an income tax
under GAAP, which requires us to recognize the impact of this tax
on the temporary differences between the financial statement assets
and liabilities and their tax basis attributable to such tax.
Net earnings for financial statement purposes may differ
significantly from taxable income reportable to unitholders as a
result of differences between the tax basis and the financial
reporting basis of assets and liabilities and the taxable income
allocation requirements under the partnership agreement.
Environmental Costs and Other Contingencies
We recognize liabilities for environmental and other contingencies
when there is an exposure that indicates it is both probable that a
liability has been incurred and the amount of loss can be
reasonably estimated. Where the most likely outcome of a
contingency can be reasonably estimated, we accrue a liability for
that amount. Where the most likely outcome cannot be estimated, a
range of potential losses is established and if no one amount in
that range is more likely than any other, the low end of range is
accrued.
We record liabilities for environmental contingencies at their
undiscounted amounts on our consolidated balance sheets as accrued
expenses and other liabilities when environmental assessments
indicate that remediation efforts are probable and costs can be
reasonably estimated. Estimates of our liabilities are based on
currently available facts and presently enacted laws and
regulations, taking into consideration the likely effects of other
societal and economic factors. These estimates are subject to
revision in future periods based on actual costs or new
circumstances. We capitalize costs that benefit future periods and
recognize a current period charge in operations and maintenance
expenses when clean-up efforts do not benefit future periods.
We evaluate potential recoveries of amounts from third parties,
including insurance coverage, separately from our liability.
Recovery is evaluated based on the solvency of the third party,
among other factors. When recovery is assured, we record and report
an asset separately from the associated liability on our
consolidated balance sheet.
Price Risk Management Activities
We utilize certain derivative financial instruments to
(i) manage our exposure to commodity price risk, specifically,
the related change in the fair value of inventory, as well as the
variability of cash flows related to forecasted transactions;
(ii) ensure the availability of adequate physical supply of
commodity; and (iii) manage our exposure to the interest rate
risk associated with fixed and variable rate borrowings. We record
all derivative instruments on the balance sheet at their fair
values as either assets or liabilities measured at fair value.
Changes in the fair value of these derivative financial instruments
are recorded through current earnings.
We did not have any derivatives identified as fair value hedges or
cash flow hedges for accounting purposes during the years ended
December 31, 2015, 2014 or 2013.
Unit-Based Compensation
Long-term incentive awards are granted under the Crestwood Equity
incentive plan. Unit-based compensation awards consist of
restricted units that are valued at the closing market price of
CEQP’s common units on the date of grant, which reflects the
fair value of such awards. For those awards that are settled in
cash, the associated liability is remeasured at every balance sheet
date through settlement, such that the vested portion of the
liability is adjusted to reflect its revised fair value through
compensation expense. We generally recognize the expense associated
with the award over the vesting period.
New Accounting Pronouncements Issued But Not Yet Adopted
As of December 31, 2015, the following accounting standards
had not yet been adopted by us.
In May 2014, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update 2014-09, Revenue from Contracts with
Customers,
In February 2015, the FASB issued Accounting Standards Update
2015-02, Consolidation (Topic 810): Amendments to the
Consolidation Analysis,
In April 2015, the FASB issued Accounting Standards Update 2015-03,
Interest—Imputation of Interest (Subtopic 835-30)
In February 2016, the FASB issued Accounting Standards Update
2016-02, Leases (Topic 842) |
