| Basis of Presentation and Significant Accounting Policies | 2.
Basis of Presentation and Significant Accounting Policies
Basis
of Presentation
The accompanying Consolidated Financial Statements include our accounts and those of our controlled subsidiaries. All intercompany transactions and account balances have been eliminated in consolidation. Investments over which we exercise significant influence, but do not control, are accounted for using the equity method of accounting.
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for consolidated financial information and in accordance with the rules and regulations of the Securities and Exchange Commission. The Consolidated Financial Statements include all adjustments considered necessary for a fair presentation of the financial position and results of operations for the periods presented. Certain previously-reported amounts have been reclassified to conform to the current presentation.
Use
of Estimates in the Preparation of Financial Statements
The preparation of our Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.
The COVID-19 pandemic and the significant decline in the price of crude oil have created and may continue to create significant uncertainty in macroeconomic conditions, which may continue to cause decreased demand for our services and adversely impact our results of operations. We consider these changing economic conditions as we develop accounting estimates, such as our annual effective tax rate, allowance for bad debts, and long-lived asset impairment assessments. We expect our accounting estimates to continue to evolve depending on the duration and degree of the impact of the COVID-19 pandemic and the significant decline in the price of crude oil. Our accounting estimates may change as new events and circumstances arise.
Fair
Value Measurement
We utilize fair value measurements to measure assets in a business combination or assess impairment of property and equipment, intangible assets, and goodwill. Fair value is the amount received from the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. Fair value is a market-based measurement considered from the perspective of a market participant. We use market data or assumptions that we believe market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation. These inputs can be readily observable, market corroborated, or unobservable. We apply both market and income approaches for fair value measurements using the best available information while utilizing valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The fair value hierarchy in GAAP prioritizes the inputs used to measure fair value, giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The Partnership classifies fair value balances based on the observability of those inputs. The three levels of the fair value hierarchy are as follows:
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Level 1
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Level 2
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Level 3
Cash
and Cash Equivalents
We consider all investments purchased with initial maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of investments in highly-liquid securities.
As of December 31, 2020, U.S. cash balances are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per financial institution. Canadian cash balances are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 (Canadian Dollars) per financial institution. Our cash is primarily held at three financial institutions, and therefore is in excess of the FDIC or CDIC insurance limits. We periodically assess the financial condition of the institutions where we deposit funds.
Restricted
Cash
Restricted cash was approximately $0.7 million and $0.6 million at December 31, 2020 and 2019, respectively. These amounts are included in prepaid expenses and other
Accounts
Receivable, Allowance for Bad Debts and Concentration of Credit Risk
We
grant unsecured credit to customers under normal industry standards and terms, and have established policies and procedures
that allow for an evaluation of our customers’ creditworthiness. We typically receive payment from our customers 45 to
90 days after the services have been performed. We determine allowances for bad debts based on our assessment of the
creditworthiness of our customers. Trade receivables are written off against the allowance when deemed uncollectible.
Recoveries of trade receivables previously written off are recorded when cash is received. We do not typically charge
interest on past due trade receivables and we do not typically require collateral on our trade receivables. We had an
allowance for doubtful accounts of $0.5 million and $0.2 million at December 31, 2020 and 2019, respectively. We recorded bad
debt expense of $0.4 million in 2020, $0.2 million in 2019, and less than $0.1 million in 2018. In 2020, we wrote off
one uncollectable account in the amount of $0.1 million. In 2019, we received $0.1 million on accounts receivable previously
written off. We report bad debt expense and recoveries within general and administrative
We had two customers, Pacific Gas & Electric Company and Enbridge Inc., that represented more than 10% of total accounts receivable as of December 31, 2020.
The majority of our revenues are generated in the United States. In 2020, 2019, and 2018, we generated revenues of less than $0.1 million, $0.2 million, and $1.3 million, respectively, from services performed in Canada.
Sanchez Bankruptcy A former customer of our Inspection Services segment, Sanchez Energy Corporation and certain of its affiliates (collectively, “Sanchez”), filed for bankruptcy protection in August 2019. As of December 31, 2020, we have $0.5 million of pre-petition accounts receivable from Sanchez. We filed liens to secure $0.4 million of these accounts receivable from Sanchez, although these liens may prove to be ineffective in our efforts to collect the pre-petition accounts receivable from Sanchez as there are other parties that have secured higher priority liens on the same assets. We have recorded an allowance of $0.5 million against these accounts receivable from Sanchez as of December 31, 2020. Pacific Gas and Electric Bankruptcy
PG&E Corporation and its wholly-owned subsidiary Pacific Gas and Electric Company (collectively, “PG&E”), a customer, filed for bankruptcy protection in January 2019. We had accounts receivable from PG&E of $12.1 million at the date of the bankruptcy filing.
In November 2019, we sold $10.4 million of our pre-petition receivables from PG&E in a non-recourse sale to a third party for cash proceeds of $9.8 million. We recorded a loss of $0.5 million in the fourth quarter of 2019 on the sale of these pre-petition receivables, which is reported within Other, net
In July 2020, PG&E emerged from bankruptcy protection.
Property
and Equipment
Property and equipment consists of land, land and leasehold improvements, buildings, facilities, wells and related equipment, field equipment, computer and office equipment, and vehicles. We record property and equipment at cost. Costs of renewals and improvements that substantially extend the useful lives of the assets are capitalized. Maintenance and repairs are expensed as incurred. We depreciate property and equipment on a straight-line basis over the estimated useful lives of the assets. Upon retirement, disposition, or impairment of an asset, we remove the cost and related accumulated depreciation from the balance sheet and report the resulting gain or loss, if any, in the Consolidated Statement of Operations.
Debt
Issuance Costs
Debt issuance costs represent fees and expenses associated with securing our Credit Agreement (see Note 6). Amortization of the capitalized debt issuance costs is recorded on a straight-line basis over the term of the Credit Agreement.
Income
Taxes
As a limited partnership, we generally are not subject to federal, state or local income taxes. The tax on our net income is generally borne by the individual partners. Net income (loss) for financial statement purposes may differ significantly from taxable income (loss) of the partners as a result of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under our partnership agreement. The aggregated difference in the basis of our net assets for financial and tax reporting purposes cannot be readily determined because information regarding each partner’s tax attributes is not available to us.
The income of Tulsa Inspection Resources – Canada, ULC, our Canadian subsidiary, is taxable in Canada. Tulsa Inspection Resources – PUC, LLC (“TIR-PUC”), a subsidiary of our Inspection Services segment that performs inspection services for utility customers, and Cypress Brown Integrity - PUC, LLC, a 51% owned subsidiary, have elected to be taxed as corporations for U.S. federal income tax purposes, and therefore these subsidiaries are subject to U.S. federal and state income taxes. The amounts recognized as income tax expense, income taxes payable, and deferred tax liabilities in our Consolidated Financial Statements represent the Canadian and U.S. taxes referred to above, as well as partnership-level taxes levied by various states, most notably, franchise taxes assessed by the state of Texas.
As a publicly-traded partnership, we are subject to a statutory requirement that at least 90% of our total gross income is classified as “qualifying income” (as defined by the Internal Revenue Code, related Treasury Regulations, and Internal Revenue Service pronouncements), determined on a calendar year basis. If our qualifying income does not meet this statutory requirement, we could be taxed as a corporation for federal and state income tax purposes. Our income has met the statutory qualifying income requirement for each year since our IPO.
We evaluate uncertain tax positions for recognition and measurement in the Consolidated Financial Statements. To recognize a tax position, we determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more likely than not threshold is measured to determine the amount of benefit to be recognized in the Consolidated Financial Statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. We had no uncertain tax positions that required recognition in the financial statements at December 31, 2020 or 2019. Any interest or penalties would be recognized as a component of income tax expense.
Revenue
Recognition
Under Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers
In 2020, 2019, and 2018, we recognized $0.3 million, $0.2 million, and $0.5 million of revenue within our Inspection Services segment, respectively, on services performed in previous years. We had constrained recognition of this revenue until the expiration of a contract provision that had given the customer the opportunity to reopen negotiation of the fee paid for the services. As of December 31, 2020 and December 31, 2019, we recognized a refund liability of $0.8 million and $0.7 million, respectively, for revenue associated with such variable consideration.
In the first quarter of 2018, we recognized $0.3 million of revenue within our Pipeline & Process Services segment associated with additional billings on a project that we completed in the fourth quarter of 2017 (we recognized the revenue upon receipt of customer acknowledgment of the additional fees).
Accrued
Payroll and Other
Accrued payroll and other
December 31, 2020 December 31, 2019
(in thousands)
Accrued payroll $ 1,799 $ 9,670
Customer deposits 1,694 1,682
Litigation settlements (Note 13) 424 1,900
Other 959 1,598
$ 4,876 $ 14,850 Fair
Value of Financial Instruments
The carrying amounts reported in the Consolidated Balance Sheets for cash and cash equivalents, trade accounts receivable, prepaid expenses and other, accounts payable, accounts payable – affiliates, accrued payroll and other, and income taxes payable approximate their fair values.
Assets
and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are reported at fair value on a nonrecurring basis in our Consolidated Balance Sheets. The following methods and assumptions were used to estimate the fair values:
Property,
Plant, and Equipment
We assess property and equipment for possible impairment whenever events or changes in circumstances indicate, in the judgment of management, that the carrying value of the assets may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments, and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value. Determination as to whether and how much an asset is impaired involves management estimates on highly uncertain matters such as future commodity prices and the outlook for national or regional market supply and demand for the services we provide. In the Environmental Services segment, Property, Plant, and Equipment is grouped for impairment testing purposes at each water treatment facility, as these asset groups represent the lowest level at which cash flows are separately identifiable.
For our Environmental Services segment, we considered the decline in the price of crude oil and the fact that, during the third quarter of 2020, the largest customer of one of our highest-volume facilities notified us of its decision to build its own facility and to send most of its water to that facility beginning in February 2021. We considered these developments to be potential indicators of impairment and therefore performed a step 1 recoverability impairment test. We used the same forward crude oil price curve for our property and equipment impairment analysis that we used for our goodwill impairment analysis. Based on this analysis, we concluded that the property and equipment was not impaired. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record an impairment. While we believe we have made reasonable estimates and assumptions to estimate the future undiscounted cash flows expected from the assets, it is reasonably possible that changes could occur that would require an impairment charge in the future. Location-specific market considerations could also lead us to record an impairment to the property, plant, and equipment of one or more individual facilities in the future.
Goodwill
We have $50.4 million of goodwill on our Consolidated Balance Sheet at December 31, 2020. Of this amount, $40.3 million relates to the Inspection Services segment and $10.1 million relates to the Environmental Services segment. Goodwill is not amortized, but is subject to annual assessments on November 1 (or at other dates if events or changes in circumstances indicate that the carrying value of goodwill may be impaired) for impairment at a reporting unit level. The reporting units used to evaluate and measure goodwill for impairment are determined primarily by the manner in which the business is managed or operated. We have determined that our Inspection Services and Environmental Services operating segments are the appropriate reporting units for testing goodwill impairment.
To perform a goodwill impairment assessment, we first evaluate qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment reveals that it is more likely than not that the carrying value of a reporting unit exceeds its fair value, we then determine the estimated fair value of the reporting unit. If the carrying amount exceeds the reporting unit’s fair value, we record a goodwill impairment charge for the excess (not exceeding the carrying value of the reporting unit’s goodwill).
Crude oil prices have decreased significantly in 2020, due in part to decreased demand as a result of the worldwide COVID-19 pandemic. This decline in oil prices led many of our customers to change their budgets and plans, which has resulted in reduced spending on drilling, completions, and exploration. This has had an adverse effect on construction of new pipelines, gathering systems, and related energy infrastructure. Lower exploration and production activity has also adversely effected the midstream industry and has led to delays and cancellations of projects. It is also possible that our customers may elect to defer maintenance activities on their infrastructure. Such developments would reduce our opportunities to generate revenues. It is impossible at this time to determine what may occur, as customer plans will evolve over time. It is possible that the cumulative nature of these events could have a material adverse effect on our results of operations and financial position.
Inspection Services
We completed our annual goodwill impairment assessment as of November 1, 2020 and concluded the $40.3 million of goodwill of the Inspection Services segment was not impaired. Our evaluations included various qualitative and corroborating quantitative factors, including current and projected earnings and current customer relationships and projects, and a comparison of our enterprise value to the sum of the estimated fair values of our business segments. The qualitative and supporting quantitative assessments on this reporting unit indicated that there was no need to conduct further quantitative testing for goodwill impairment. The use of different assumptions and estimates from the assumptions and estimates we used in our analyses could have resulted in the requirement to perform further quantitative goodwill impairment analyses.
Environmental Services
We completed our annual goodwill impairment assessment as of November 1, 2020 and updated this analysis as of December 31, 2020 and concluded that the remaining $10.1 million of goodwill of the Environmental Services segment was not impaired. We considered the decline in the price of crude oil in 2020 and the fact that, during the third quarter of 2020, the largest customer of one of our highest-volume facilities notified us of its decision to build its own facility and to send most of its water to that facility beginning in February 2021. We considered these developments to be potential indicators of impairment and therefore performed quantitative goodwill impairment analyses. We estimated the fair value of the reporting unit utilizing the income approach (discounted cash flows) valuation method, which is a Level 3 measurement as defined in ASC 820, Fair Value Measurement. Significant inputs in the valuation included projections of future revenues, anticipated operating costs, and appropriate discount rates. Since the volume of water we receive at our facilities is heavily influenced by the extent of exploration and production in the areas near our facilities, and since exploration and production is in turn heavily influenced by crude oil prices, we estimated future revenues by reference to crude prices in the forward markets. We used a forward price curve that reflects a gradual increase in the West Texas Intermediate ("WTI") crude price each month, with the price remaining around $39-$47 per barrel through January 2022 and reaching $49-$53 per barrel in January 2032. We estimated future operating costs by reference to historical per-barrel costs and estimated future volumes. We estimated revenues and costs for a period of ten years and estimated a terminal value calculated as a multiple of the cash flows in the preceding year. We discounted these estimated future cash flows at a rate of 13.5%. We assumed that a hypothetical buyer would be a partnership that is not subject to income taxes and that could obtain savings in general and administrative expenses through synergies with its other operations. Based on these quantitative analyses, we concluded that the goodwill of the Environmental Services segment was not impaired. Our analysis indicated that the fair value of the reporting unit of the Environmental Services segment exceeded their book value by 16% at December 31, 2020. The use of different assumptions and estimates from those we used in our analysis could have resulted in the need to record a goodwill impairment.
Our estimates of fair value are sensitive to changes in a number of variables, many of which relate to broader macroeconomic conditions outside of our control. As a result, actual performance could be different from our expectations and assumptions. Estimates and assumptions used in determining fair value of the reporting units that are outside the control of management include commodity prices, interest rates, and cost of capital. Our water treatment facilities are concentrated in one basin, and changes in oil and gas production in that basin could have a significant impact on the profitability of the Environmental Services segment. While we believe we have made reasonable estimates and assumptions to estimate the fair values of our reporting units, it is reasonably possible that changes could occur that would require a goodwill impairment charge in the future. Such changes could include, among others, a slower recovery in demand for petroleum products than assumed in our projections, an increase in supply from other areas (or other factors) that result in reduced production in North Dakota, and increased pessimism among market participants, which could increase the discount rate on (and therefore decrease the value of) estimated future cash flows.
Identifiable
Intangible Assets
Our intangible assets consist primarily of customer relationships, trade names, and our database of inspectors. We recorded these intangible assets as part of our accounting for the acquisitions of businesses and we amortize these assets on a straight-line basis over their estimated useful lives, which typically range from 5 – 20 years (see Note 5).
We review our intangible assets for impairment whenever events or circumstances indicate that the asset group to which they relate may be impaired. To perform an impairment assessment, we first determine whether the cash flows expected to be generated from the asset group exceed the carrying value of the asset group. If such estimated cash flows do not exceed the carrying value of the asset group, we reduce the carrying value of the assets to their fair values and record a corresponding impairment loss.
Depending on future events, it is reasonably possible that we could incur impairment charges associated with our property and equipment, goodwill, or intangible assets.
Gains
on Asset Disposals
During 2018, we sold our two water treatment facilities in Texas and recorded a combined gain of $3.6 million. During 2018, we received proceeds of $0.4 million from the settlement of litigation related to lightning strikes that occurred in 2017 at our facilities in Orla, Texas and Grassy Butte, North Dakota. This litigation related to the non-performance of certain lightning protection equipment we had purchased to protect the facilities against lightning strikes. The proceeds from these sales and settlements are reported within gain on asset disposals, net
Noncontrolling
Interests
We own a 51% interest in CBI and a 49% interest in CF Inspection Management, LLC (“CF Inspection”). The accounts of these subsidiaries are included in our Consolidated Financial Statements. The portion of the net income (loss) of these entities that is attributable to outside owners is reported in net income (loss) attributable to noncontrolling interests noncontrolling interests
Foreign
Currency Translation
Our Consolidated Financial Statements are reported in U.S. dollars. We translate our Canadian-dollar-denominated assets and liabilities into U.S. dollars at the exchange rate in effect at the balance sheet date. We translate our Canadian-dollar-denominated revenues and expenses into U.S. dollars at the average exchange rate in effect during the period.
Our Consolidated Balance Sheet at December 31, 2020 includes $2.7 million of accumulated other comprehensive loss accumulated other comprehensive loss partners’ capital
Our Canadian subsidiary has certain payables to our U.S.-based subsidiaries. These intercompany payables and receivables among our consolidated subsidiaries are eliminated in our Consolidated Balance Sheets. Beginning April 1, 2017, with the expiration of a contract with our largest Canadian customer, we report currency translation adjustments on these intercompany payables and receivables within foreign currency gains (losses) other comprehensive income (loss) accumulated other comprehensive loss
New
Accounting Standards
In 2020, we adopted the following new accounting standard issued by the Financial Accounting Standards Board (“FASB”):
The FASB issued ASU 2020-15 – Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-4 0): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract in August 2020
In 2019, we adopted the following new accounting standard issued by the FASB:
The FASB issued ASU 2016-02 – Leases
We made accounting policy elections to not capitalize leases with a lease term of twelve months or less and to not separate lease and non-lease components for all asset classes. We also elected the package of practical expedients within ASU 2016-02 that allows an entity to not reassess prior to the effective date (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) initial direct costs for any existing leases, but did not elect the practical expedient of hindsight when determining the lease term of existing contracts at the effective date.
In July 2020, the FASB issued ASU 2020-11 – Targeted Improvements |
