(7) Impairment of Long-Lived Assets and Goodwill

Due to the existence of a number of potential impairment indicators at June 30, 2013, the Company performed a company-wide impairment review of its long-lived assets and goodwill, which it completed during the three months ended September 30, 2013. Indicators of impairment, which triggered the need for such review, included adverse changes in the business climate in certain shale basins including persistently low natural gas prices and shifts in customer end markets and resulting higher logistics costs in the Company’s Industrial Solutions operating segment, combined with lower-than-expected financial results. Additionally, the market value of the equity of the Company traded for a period of time at a value that was less than the book value of the equity of the Company. In its Shale Solutions operating segment, long-lived assets were grouped at the shale basin level for purposes of assessing their recoverability. Except for AWS and the Company’s pipelines, the Company concluded the basin level is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For those asset groups with carrying values that exceed their undiscounted future cash flows, the Company recognized an impairment charge for the amount by which the carrying values of the asset group exceeded their respective fair values. Long-lived asset impairment was $111.9 million for the year ended December 31, 2013. The impairment charge recognized during 2013 consists of write-downs to the carrying values of the Company’s freshwater pipeline in the Haynesville Share basin of $27.0 million and certain other long-lived assets including customer relationship and disposal permit intangibles totaling $4.5 million and disposal wells and equipment of $80.4 million in the Haynesville, Eagle Ford, Tuscaloosa Marine and Barnett Shale basins.

 

Impairment charges recorded for the year ended December 31, 2013 and 2012 related to continuing operations consist of the following:

 

		2013				2012
Impairment of property, plant and equipment		$	107,413			$	3,658
Impairment of intangible assets			4,487				2,372
Total impairment		$	111,900			$	6,030

During the year ended December 31, 2012, the Company recognized a $3.7 million impairment charge on three saltwater disposal wells primarily in the Haynesville shale area after the wells developed technical problems which required the Company to suspend their use. During the year ended December 31, 2012, the Company also recognized a $2.4 million impairment charge related to the write-down of a customer relationship intangible associated with a portion of a prior business acquisition.

The goodwill impairment test has two steps. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. During the quarter ended September 30, 2013, the Company performed step one of the goodwill impairment test for each of its four reporting units: the Shale Solutions reporting unit, the Industrial Solutions reporting unit, the Pipeline reporting unit and the AWS reporting unit. To measure the fair value of each reporting unit, the Company used a combination of the discounted cash flow method and the guideline public company method. Based on the results of the step-one goodwill impairment review the Company concluded the fair values of the Shale Solutions, Pipeline and AWS reporting units exceeded their respective carrying amounts and accordingly, the second step of the impairment test was not necessary for these reporting units. Conversely, the Company concluded the fair value of the Industrial Solutions reporting unit was less than its carrying value thereby requiring the Company to proceed to the second step of the two-step goodwill impairment test. The second step of the goodwill impairment test, used to measure the amount of the impairment loss, compares the implied fair value of reporting unit goodwill with its carrying amount. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. After allocating the fair value of Industrial Solutions to the assets and liabilities of the reporting unit, the Company concluded the carrying value of reporting unit goodwill exceeded its implied fair value. Accordingly, the Company recognized a goodwill impairment charge of $98.5 million in 2013 which is recorded within loss from discontinued operations in the accompanying Consolidated Statement of Operations (Note 20).

The Company has $408.7 million in goodwill as of December 31, 2013 related to its Shale Solutions reportable segment, which has been allocated to its Shale Solutions, Pipeline and AWS reporting units. As described in the preceding paragraphs, the results of the Company’s impairment test during the third quarter of 2013, which we updated through September 30, 2013 (our annual testing date), indicated that the goodwill relating to these reporting units was not impaired at June 30, 2013 and September 30, 2013, since the estimated fair values of all reporting units exceeded their carrying values. With respect to the Pipeline and AWS reporting units, the estimated fair values of the reporting units exceeded their carrying values by a substantial amount. However, while no impairment was indicated as a result of our analysis and testing at June 30, 2013, September 30, 2013 or from our subsequent review at December 31, 2013, we determined that the Company’s Shale Solutions reporting unit, with goodwill of $390.7 million, had an estimated fair value that exceeded its carrying value by less than 3.5 percent.

The fair values of each of the reporting units as well as the related assets and liabilities utilized to assess the 2013 impairment were measured using Level 2 and Level 3 inputs as described in Note 11. The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable estimates of the implied fair value of each reporting unit. However, these assumptions are subject to uncertainty and relatively small declines in the future performance or cash flows of the Shale Solutions reporting unit or small changes in other key assumptions may result in the recognition of impairment charges, which could be significant. The Company believes the most significant assumption used in its analysis is the expected improvement in the margins and overall profitability of its reporting units. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test, a hypothetical decline of greater than 65 basis points in the operating margin in its Shale Solutions reporting unit would result in an estimated carrying value in excess of its fair value, requiring the Company to proceed to the second step of the goodwill impairment test. Additionally, the Company may not meet its revenue growth targets, working capital needs and capital expenditures may be higher than forecast, changes in credit or equity markets may result in changes to the Company’s cost of capital and discount rate and general business conditions may result in changes to the Company’s terminal value assumptions for its reporting units. One or more of these factors, among others, could result in additional impairment charges.

In evaluating the reasonableness of the Company’s fair value estimates, the Company considers (among other factors) the relationship between its book value, the market price of its common stock and the fair value of its reporting units. At December 31, 2013, the closing market price of the Company’s common stock was $16.79 per share compared to its book value per share of $24.79 as of such date. The Company’s assessment assumes this relationship is temporary; however, if the Company’s book value per share continues to exceed its market price per share for an extended period of time, this would likely indicate the occurrence of events or changes that could cause the Company to revise its fair value estimates and perform a step-two goodwill impairment analysis. While the Company believes that its estimates of fair value are reasonable, the Company will continue to monitor and evaluate this relationship in 2014.

In the fourth quarter of 2013, the Company announced a plan to realign its Shale Solutions business into three operating divisions: (1) the Northeast Division comprising the Marcellus and Utica Shale areas (2) the Southern Division comprising the Haynesville, Barnett, Eagle Ford and Mississippian Shale areas and Permian Basin and (3) the Rocky Mountain Division comprising the Bakken Shale area. The implementation of this organizational realignment is ongoing and is expected to be completed in 2014. In connection with these planned organizational changes, the Company is evaluating whether the new operating divisions constitute separate operating segments and if so, whether two or more of them can be aggregated into one or more reportable segments. As the organizational realignment progresses, the Company will continue to evaluate its potential impact on its reporting units, which is a level of reporting at which goodwill is tested for impairment. To the extent the Company concludes the composition of its reporting units has changed, the Company will be required to allocate goodwill on a relative fair value basis to the new reporting units and test the newly-allocated goodwill for impairment should triggering events occur. The Company may be required to record impairment of its goodwill and other intangible assets as a result of this reallocation.