STABILIS SOLUTIONS, INC.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8. Financial Statements
and Supplementary Data of this Form 10-K. Historical results and percentage
relationships set forth in the consolidated statements of operations and cash
flows, including trends that might appear, are not necessarily indicative of
future operations or cash flows.
OVERVIEW
Stabilis Solutions, Inc. and its subsidiaries is an energy transition company
that provides turnkey clean energy production, storage, transportation and
fueling solutions primarily using liquefied natural gas ("LNG") to multiple end
markets across North America . We provide LNG solutions to customers in diverse
end markets, including aerospace, agriculture, energy, industrial, marine
bunkering, mining, pipeline, remote power, and utility markets. LNG can be used
to deliver natural gas to locations where pipeline service is unavailable, has
been interrupted, or needs to be supplemented. LNG can also be used to replace a
variety of alternative fuels, including distillate fuel oil and propane, among
others, to provide environmental and economic benefits. Increasingly, LNG is
being utilized as a transportation fuel in the marine industry and as a
propellant in the private rocket launch sector. We believe that these fuel
markets are large and provide significant opportunities for LNG usage.
We believe that LNG as well as other clean energy solutions will provide an important balance between environmental sustainability, security and accessibility, and economic viability when compared to both renewables and other traditional hydrocarbon-based fuels and will play a key role in the energy transition.
The Company generates revenue by selling and delivering LNG to our customers, renting cryogenic equipment and providing engineering and field support services. We sell our products and services separately or as a bundle depending on the customer's needs. Pricing depends on market pricing for natural gas and competing fuel sources (such as diesel, fuel oil, and propane among others), as well as the customer's purchased volume, contract duration and credit profile. LNG Production and Sales-Stabilis builds and operates cryogenic natural gas processing facilities, called "liquefiers," which convert natural gas into LNG through a purification and multiple stage cooling process. We currently own and operate a liquefier that can produce up to 100,000 LNG gallons per day inGeorge West, Texas and a liquefier that can produce up to 30,000 LNG gallons per day inPort Allen, Louisiana . We also purchase LNG from third-party production sources which allows us to support customers in markets where we do not own liquefiers. We make the determination of LNG and transportation supply sources based on the cost of LNG, the transportation cost to deliver to regional customer locations, and the reliability of the supply source. Transportation and Logistics Services-Stabilis offers our customers a "virtual natural gas pipeline" by providing turnkey LNG transportation and logistics services inNorth America . We deliver LNG to our customers' work sites from both our own production facilities and our network of third-party production sources located throughoutNorth America . We own a fleet of cryogenic trailers to transport and deliver LNG. We also outsource similar equipment and transportation services from qualified third-party providers as required to support our customer base. Cryogenic Equipment Rental-Stabilis operates a fleet of mobile LNG storage and vaporization assets, including: transportation trailers, electric and gas-fired vaporizers, ambient vaporizers, storage tanks, and mobile vehicle fuelers. We also own several stationary storage and regasification assets. We believe this is one of the largest fleets of small-scale LNG equipment inNorth America . Our fleet consists primarily of trailer-mounted mobile assets, making delivery to and between customer locations more efficient. We deploy these assets on job sites to provide our customers with the equipment required to transport, store, and consume LNG in fueling operations. Our equipment is designed specifically for use in small-scale LNG applications and includes the safety and operational features that our customers and our regulators require. Engineering and Field Support Services-Stabilis has experience in the safe, cost effective, and reliable use of LNG in multiple customer applications. We have also developed many processes and procedures that we believe improve our customers' use of LNG in their operations. Our engineers help our customers design and integrate LNG into their fueling operations and our field service technicians help our customers mobilize, commission and reliably operate on the job site. 28 --------------------------------------------------------------------------------
Recent Developments:
During the third quarter of 2022, Stabilis received authorization from theDOE to export domestically produced LNG to all free trade and non-free trade countries, including Asian, European, and Latin American importing nations for up to 51.75 billion cubic feet per year of natural gas equivalent. The authorization is for a term of 28 years. Stabilis did not make any exports under this approval during the year endedDecember 31, 2022 . This authorization supplements our ability to export LNG toMexico andCanada via truck through an export licenses from theDOE and from the National Energy Board ofCanada ("NEB").
Sale of Brazil Operations and Discontinued Operations
OnOctober 31, 2022 , the Company entered into a sales agreement and closed on the sale of its operations inBrazil (the "Brazil Operations") to itsBrazil management team for approximately$0.9 million which resulted in discontinued operations presentation of the Brazil Operations and an impairment charge of$1.4 million measured as the estimated fair value of$0.9 million (calculated as the estimated net proceeds that would be received in an orderly and timely sale of the operations) less the carrying value of theBrazil net assets. See also Note 2 in the Notes to Consolidated Financial Statements for further discussion of the Company's discontinued operations and sale of the Brazil Operations. 29 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Stabilis supplies LNG to multiple end markets inNorth America and provides turnkey fuel solutions to help users of propane, diesel and other crude-based fuel products convert to LNG. The sale of the Brazil Operations represents all of the revenues and expenses previously reported within the Company's Power Delivery segment with the exception of the Company's equity method investment in BOMAY. Further, the Company also believes that the sale of the Brazil Operations meets the criteria to be reported as discontinued operations. As a result, the Company believes that it has one reporting segment and the operating results presented in the tables below have been recast to separately present the revenues and expenses related to the Brazil Operations as discontinued operations for all periods presented. The comparative tables below reflect our consolidated operating results for the year endedDecember 31, 2022 (the "Current Year") as compared to the year endedDecember 31, 2021 (the "Prior Year") (amounts in thousands, except percentages). Corporate allocations of$0.1 million for the Prior Year that were previously reported within the Company's Power Delivery Segment have been reclassified to continuing operations. For the Prior Year,$1.9 million of expense previously classified as selling, general and administrative expense was reclassified to costs of revenues, and$0.3 million was reclassified from costs of LNG product to costs of rental, service and other to conform to Current Year presentation. Consolidated Results Year Ended December 31, 2022 2021 Change % Change Revenue: Revenues$ 98,823 69,171 29,652 42.9 Operating expenses: Costs of revenues 77,694 55,216 22,478 40.7 Change in unrealized loss on natural gas derivatives 878 - 878 n/a Selling, general and administrative 13,191 13,792 (601) (4.4) Gain on disposal of fixed assets (34) (24) (10) (41.7) Depreciation 8,664 8,894 (230) (2.6) Impairment of right-of-use lease asset - 376 (376) n/a Total operating expenses 100,393 78,254 22,139 28.3 Loss from operations before equity income (1,570) (9,083) 7,513 82.7 Net equity income from foreign joint ventures' operations: Income from investments in foreign joint ventures 1,881 2,146 (265) (12.3) Foreign joint ventures' operations related expenses (283) (363) 80 22.0 Net equity income from foreign joint ventures' operations 1,598 1,783 (185) (10.4) Income (loss) from operations 28 (7,300) 7,328 100.4 Other income (expense): Interest expense, net (591) (324) (267) (82.4) Interest expense, net - related parties (179) (577) 398 69.0 Other income (expense) (185) 1,058 (1,243) 117.5 Total other income (expense) (955) 157 (1,112) n/a Loss from continuing operations before income tax expense (927) (7,143) 6,216 87.0 Income tax expense 265 487 (222) (45.6) Net loss from continuing operations (1,192) (7,630) 6,438 84.4 Loss from discontinued operations, net of income taxes of$149 and$321 , respectively (1,994) (168) (1,826) n/a Net loss$ (3,186) $ (7,798)$ 4,612 59.1 % 30
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Revenue
During the Current Year revenues increased
•Additional LNG gallons delivered in the Current Year compared to the Prior Year;
•Increased natural gas prices during the Current Year compared to the Prior Year;
•Increased pricing charged to our customers in response to cost increases from inflationary pressures; and
•Increases in rental, service, and other revenue related to additional projects with equipment and higher labor revenues.
Operating Expenses
Costs of revenues. Cost of revenues increased
•Additional LNG gallons delivered during the Current Year compared to the Prior Year;
•Increased natural gas prices during the Current Year compared to the Prior Year;
•Inflationary pressures, including increased transportation costs and increased liquefaction costs, personnel, electricity and other higher costs; and
•Increased costs of rental, service, and other revenue primarily related to increased labor and equipment rentals to support the increase of additional projects (primarily for marine bunkering).
As a percentage of revenue, these costs decreased from 80% in the Prior Year to 79% in the Current Year.
Change in unrealized loss on natural gas derivatives. The Company incurred an unrealized loss of$0.9 million in the Current Year on its natural gas derivatives. The unrealized loss was due to lower future natural gas prices atDecember 31, 2022 as compared to when the natural gas derivatives were purchased. The Company had no derivatives in the Prior Year. See also Note 5 in the Notes to the Consolidated Financial Statements for a further discussion of our derivatives. Selling, general and administrative. Selling, general and administrative expense decreased$0.6 million , or 4%, during the Current Year as compared to the Prior Year. During the Prior Year, we recorded$2.2 million for the immediate vesting of restricted stock as well as$0.8 million in severance and legal costs related to our executive transition; and$0.3 million related to an expense of previously capitalized engineering drawings. These savings were partially offset by Current Year increases in stock-based compensation, increased incentive compensation, increased headcount associated with revenue growth and increased legal and accounting fees associated with our registration statement filings during the Current Year. Gain on the disposal of fixed assets. There were no significant gains or losses from disposal of fixed assets in the Current Year or the Prior Year. Gain on disposal of fixed assets in the Current Year was$34 thousand compared to$24 thousand in the Prior Year. Depreciation. Depreciation expense in the Current Year was comparable to the Prior Year with a slight decrease in depreciation expense in the Current Year due to assets reaching the end of their depreciable lives, partially offset by a full year of depreciation expense related to ourPort Allen facility in the Current Year as the facility was acquired onJune 1, 2021 . Impairment of right-of-use lease asset. During the Prior Year, we recorded an impairment of$0.4 million related to the settlement and release of ourHouston office lease. See Note 11 of the Notes to Consolidated Financial Statements for additional discussion of our lease settlement. Net Equity Income FromForeign Joint Ventures' Operations. Income from investments in foreign joint ventures decreased by$0.2 million , or 10%, in the Current Year compared to the Prior Year primarily due to business contraction inChina . Other Income (Expense)
Interest expense, net. Interest expense increased by
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Interest expense, net - related parties. Related party interest expense
decreased by $0.4 million during the Current Year as compared to the Prior Year
primarily due to amendments to the MG Finance debt which lowered the interest
rate from 12% to 6% as well as payments made on related-party debt.
Other income (expense). Other expense was
Income tax expense. The Company incurred state and foreign income tax expense of$0.3 million during the Current Year primarily related to foreign taxes paid in connection with the cash dividend received from our BOMAY joint venture and foreign taxes incurred from our operations inMexico . The Company incurred state income and foreign tax expense of$0.5 million in the Prior Year. NoU.S. federal income tax benefit was recorded for the Current Year or Prior Year as any netU.S. deferred tax assets generated from operating losses were offset by a change in the Company's valuation allowance on net deferred tax assets. Discontinued Operations. Loss from discontinued operations, net of tax was$2.0 million and$0.2 million for the Current Year and the Prior Year, respectively. The Current Year included the impairment of$1.4 million recorded as a result of the sale of the Brazil Operations and reclassification of$0.6 million of cumulative foreign exchange losses into income, which was previously included within accumulated other comprehensive income. See Note 2 in the Notes to Consolidated Financial Statements for further discussion of the Company's discontinued operations. SEASONALITY AND INFLATION Seasonality We did not experience significant variations in volume of LNG delivered to our customers resulting from seasonal variations during 2022. However, our revenues are susceptible to variations due to changes in the price of natural gas as we pass this cost onto our customer. The price of natural gas can fluctuate at any time during the year due to isolated factors, but on average, natural gas prices tend to be higher in peak winter and peak summer months when heating and cooling demand is seasonally higher. Inflation The Company experienced higher than normal inflationary pressure during 2022 which we expect to continue into 2023. Specifically, costs for fuel, repairs, maintenance, electricity, wages for skilled labor and insurance continue to increase. We have responded with increasing our pricing to our customers. While we pass a significant portion of the cost of natural gas and transportation on to our customers, we are not able to pass through all costs which has resulted in margin pressure. No assurances can be made about future price trends; the ultimate extent and effects of these impacts are difficult to estimate; however, continued periods of increasing costs could adversely impact our future results and operating cash flows. LIQUIDITY AND CAPITAL RESOURCES Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, proceeds received from borrowings under the AmeriState Loan and distributions from our BOMAY joint venture. In prior years, the Company also obtained financing from MG Finance, a related party. During the Current Year, our principal sources of liquidity were cash provided by our operations, the advancing loan facility withAmeriState Bank , cash generated from sale of assets, including the sale of assets held for sale and theBrazil Operations, and deposits received from customers. We have used cash flows generated from operations to invest in fixed assets and increased working capital to support growth as well as to pay interest and principal amounts outstanding under our debt. The Company's sale of the Brazil Operations onOctober 31, 2022 is not anticipated to adversely impact the Company's future cash flows. As ofDecember 31, 2022 , we had$11.5 million in cash and cash equivalents on hand and$12.3 million , in outstanding debt and finance lease obligations (of which$3.3 million is due in 2023). The Company has a$10.0 million loan facility with$1.0 million available for future draws under the loan facility atDecember 31, 2022 . The Company has also filed a shelf registration statement (described below) which provides the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions. The Company is subject to substantial business risks and uncertainties inherent in the LNG industry. The Company has implemented a number of cost control measures and increased pricing to customers in response to inflationary costs; however, there is no assurance that the Company will be able to generate sufficient cash flows in the future to sustain itself or to support 32 -------------------------------------------------------------------------------- future growth. We have experienced a significant increase in sales since mid-2021. Accordingly, management believes the business will generate sufficient cash flows from its operations along with availability under our loan facility that is sufficient to fund the business for the next twelve months. As we continue to grow, management continues to evaluate additional financing alternatives, however, there is no guarantee that additional financing will be available or available at terms that would be beneficial to shareholders.
Cash Flows
Cash flows provided by (used in) our operating, investing and financing
activities are summarized below (in thousands):
Year Ended
2022 2021
Net cash provided by (used in):
Operating activities $ 14,697 $ 4,297
Investing activities (1,917) (7,520)
Financing activities (2,253) 3,012
Effect of exchange rate changes on cash 14 (119)
Net increase (decrease) in cash and cash equivalents 10,541 (330)
Cash and cash equivalents, beginning of period 910 1,240
Cash and cash equivalents, end of period $ 11,451 $ 910
Operating Activities
Net cash provided by operating activities totaled $14.7 million and $4.3 million
for the twelve months ended December 31, 2022 and 2021, respectively. The
increase in net cash provided by operating activities of $10.4 million as
compared to the Prior Year was primarily attributable to increased revenues and
improved profitability when excluding noncash items such as stock-based
compensation, depreciation and impairment charges.
Investing Activities
Net cash used in investing activities totaled$1.9 million and$7.5 million for the twelve months endedDecember 31, 2022 and 2021, respectively. The decrease in net cash used in the Current Year was primarily due to the acquisition of the LNG plant inPort Allen, Louisiana and purchases of vaporizers and other LNG equipment in the Prior Year. Additionally, the Company received proceeds of$2.0 million from the sale of certain CNG assets inMexico and$0.2 million from the sale of the Brazil Operations.
Financing Activities
Net cash used in financing activities totaled$2.3 million for the twelve months endedDecember 31, 2022 compared to net cash provided by financing activities of$3.0 million for 2021. Cash used by financing activities in the Current Year was primarily attributable to the pay down of debt. Cash provided by financing activities for the Prior Year primarily related to proceeds received from theAmeriState Bank loan facility of$8.0 million , partially offset by payments made on notes payable including from related parties.
Shelf Registration Statement
OnApril 11, 2022 , the Company filed a registration statement on Form S-3 (the "Shelf Registration") which was declared effective onApril 26, 2022 and will permit the Company to issue up to$100.0 million in either common stock, preferred stock, warrants or a combination of the above, and gives the Company the flexibility to raise capital to fund working capital requirements, repay debt and/or fund future transactions. OnDecember 16, 2022 , the Company filed a prospectus supplement to the Shelf Registration that allows the Company to sell and issue shares of common stock directly to the public "at the market" as permitted in Rule 415 under the Securities Act in the aggregate amount of$16.3 million . As a smaller reporting company, we are subject to General Instruction I.B.6 of Form S-3, which limits the amounts that we may sell under the Shelf Registration to no more than one-third of our public float in any twelve month period as measured in accordance with such instruction. There is no assurance that we will be able to raise capital pursuant to the Shelf Registration on acceptable terms or at all. We made no issuances under the Shelf Registration during the year endedDecember 31, 2022 . 33 --------------------------------------------------------------------------------
Future Cash Requirements
Uses of Liquidity and Capital Resources
We require cash to fund our operating expenses and working capital requirements, including costs associated with fuel sales, capital expenditures, debt repayments and repurchases, equipment purchases, maintenance of LNG production facilities, mergers and acquisitions (if any), pursuing market expansion, supporting sales and marketing activities and other general corporate purposes. While we believe we have sufficient liquidity and capital resources to fund our operations and repay our debt, we may elect to pursue additional financing activities such as refinancing existing debt, obtaining new debt, or debt or equity offerings to provide flexibility with our cash management. Certain of these alternatives may require the consent of current lenders or stockholders, and there is no assurance that we will be able to execute any of these alternatives on acceptable terms or at all.
Capital Expenditures
Future capital expenditures will be dependent upon accretive investment opportunities as well as the availability of additional capital at favorable terms which is difficult to predict. AtDecember 31, 2022 , we had open purchase orders with approximately$1.0 million remaining related to capital expenditures.
Debt Level and Debt Compliance
We had total indebtedness of$12.3 million (net of debt issuance costs of$0.3 million total indebtedness is$12.0 million ) as ofDecember 31, 2022 . Expected maturities excluding debt issuance costs atDecember 31, 2022 are as follows (in thousands). 2023 $ 3,283 2024 857 2025 1,285 2026 1,285 2027 1,285 Thereafter 4,285
Total long-term debt, including current maturities and excluding debt issuance costs
We expect our total interest payment obligations relating to our indebtedness to be approximately$0.6 million for the year endingDecember 31, 2023 . Certain of the agreements governing our outstanding debt, which are discussed in Note 10 of our Consolidated Financial Statements, require compliance with certain financial covenants. As ofDecember 31, 2022 , we were in compliance with all of these covenants. 34 -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS We are committed to make cash payments in the future pursuant to certain of our contracts. The following table summarizes certain contractual obligations in place as ofDecember 31, 2022 (in thousands):
Payments Due By Period
Total 2023 2024 2025 2026 2027 Thereafter
Term Loan to
525 511 440 365 290 427
MG Finance note payable - related
party 2,435 2,435 - - - - -
Interest - MG Finance note payable
(2) 78 78 - - - - -
Finance Lease Obligations 61 19 42 - - - -
Interest - Finance lease
obligations 6 6 - - - - -
Operating Lease Obligations (3) 255 114 120 21 - - -
Insurance and other notes payable 848 848 - - - - -
Total $ 15,239 $ 4,025 $ 1,530 $ 1,746 $ 1,650 $ 1,575 $ 4,713
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(1)Obligation with AmeriState Bank to provide for an advancing term loan
facility for working capital needs for our LNG liquefaction plant in Texas in
the aggregate principal amount of up to $10.0 million . The term loan facility
matures on April 8, 2031 and bears interest at 5.75% per annum through April 8,
2026 , and the U.S. prime lending rate plus 2.5% per annum thereafter.
(2)Obligation is a secured promissory note payable to MG Finance, a related
party. The note as amended bears interest at 6% and matures in
(3)The operating lease obligation relates to the former headquarters office space.
See additional discussion of our debt and lease obligations in Notes 10 and 11 of the Notes to Consolidated Financial Statements.
Contingencies
In the normal course of our business, we become involved in various litigation matters. In addition, from time to time we are involved in tax and other disputes with various government agencies. Management has used estimates in determining our potential exposure to these matters and has recorded reserves in our financial statements related thereto as appropriate. It is possible that a change in estimate related to these exposures could occur, but we do not expect such changes in the estimated costs would have a material effect on our business, consolidated financial position or results of operations. See Note 14 to the Notes to Consolidated Financial Statements for further discussion of our contingencies.
Off-Balance Sheet Arrangements
As of
NEW ACCOUNTING STANDARDSSee Note 1 of the Notes to Consolidated Financial Statements for further information related to new accounting standards.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosures of contingent assets and
liabilities known to exist at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Critical accounting policies are those policies that the Company believes are
the most important to the portrayal of the Company's financial condition and
results, and require difficult, subjective, or complex judgments, often as a
result of the need to make estimates about the effects of matters that are
inherently uncertain. We evaluate
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our estimates on an ongoing basis, based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
There can be no assurance that actual results will not differ from those
estimates. The Company has identified the following critical accounting policies
as they require significant judgments, estimates or are inherently complex.
Revenue Recognition
The Company recognizes revenue from our contracts in accordance with Accounting
Standards Update ("ASU") 2014-09, Topic 606 "Revenue from Contracts with
Customers" ("Topic 606"). Topic 606 requires entities to recognize revenue in a
way that depicts the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. Our contracts may contain
multiple performance obligations dependent upon the customer. Revenues from
contracts with customers are disaggregated into (1) LNG product (2) rental,
service, and other, and (3) power delivery.
The Company recognizes revenue associated with the sale of LNG at the point in
time when the customer obtains control of the asset. In evaluating when a
customer has control of the asset, the Company primarily considers whether the
transfer of legal title and physical delivery has occurred, whether the customer
has significant risks and rewards of ownership, and whether the customer
accepted delivery and a right of payment exists. Revenues from the providing of
services, transportation and equipment to customers is recognized as the service
is performed.
Revenue is measured as consideration specified in a contract with a customer and
excludes any sales incentives and amounts collected on behalf of third parties.
The Company recognizes revenue when it satisfies a performance obligation by
transferring control over a product or service to a customer. Amounts are billed
upon completion of service or transfer of a product and are generally due within
30 days.
LNG product revenue generated includes the revenue from the product and delivery
of the LNG to our customer's location. Product contracts are established by
agreeing on a sales price or transaction price for the related item. Product
revenue is recognized upon delivery of the related item to the customer, at
which point the customer controls the product and the Company has an
unconditional right to payment. Payment terms for product contracts are
generally within thirty days from the receipt of the invoice. The Company acts
as a principal when using third party transportation companies and therefore
recognizes the gross revenue for the delivery of LNG. The Company enters into
forward sales contracts for the delivery of LNG to its customers. Certain of
these sales contracts contain provisions that may meet the criteria of a
derivative in the event delivery is not made. These contracts are accounted for
under the normal purchase normal sales exclusion under U.S. GAAP and are not
measured at fair value each reporting period.
Rental, service and other revenue generated by the Company includes equipment
and human resources provided to the customer to support the use of LNG and
services in their application. Rental contracts are established by agreeing on a
rental price or transaction price for the related piece of equipment and the
rental period which is generally daily or monthly. Revenues related to rental of
equipment are recognized under Topic 606 and not ASC 842: Leases as the Company
maintains control of the equipment that the customer uses and can replace the
rented equipment with similar equipment should the rented equipment become
inoperable or the Company chooses to replace the equipment for maintenance
purposes. Revenue is recognized as the rental period is completed and for
periods that cross month end, revenue is recognized for the portion of the
rental period that has been completed to date. Payment terms for rental
contracts are generally within thirty days from the receipt of the invoice.
Performance obligations for rental revenue are considered to be satisfied as the
rental period is completed based upon the terms of the related contract. LNG
service revenue generated by the Company consists of mobilization and
demobilization of equipment and onsite technical support while customers are
consuming LNG in their applications. Service revenue is billed based on
contractual terms that can be based on an event (i.e. mobilization or
demobilization) or an hourly rate. Revenue is recognized as the event is
completed or work is done. Payment terms for service contracts are generally
within thirty days from the receipt of the invoice. Performance obligations for
service revenue are considered to be satisfied as the event is completed or work
is done per the terms of the related contract.
Certain of our contracts may include rental or services that may vary upon the
customer demands at stated rates within the contract and are satisfied as the
work is authorized by the customer and performed by the Company. LNG product
sales agreements may include both fixed and variable fees per gallon, but is
representative of the stand-alone selling price for LNG at the time the contract
was negotiated. We have concluded that the variable LNG fees meet the exception
for allocating variable consideration to specific parts of the contract. As
such, the variable consideration for these contracts is allocated to each
distinct molecule of LNG and recognized when that distinct molecule of LNG is
delivered to the customer.
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Power Delivery revenue prior to the sale of the Brazil Operations was generated
from time and material projects, consulting services, and the resale of
electrical and instrumentation equipment. Revenue is billed based on contractual
terms that can be based on an event or an hourly rate. Revenue is recognized as
the event is completed or work is done. Payment terms for service contracts are
generally within thirty days from the receipt of the invoice. Performance
obligations for service revenue are considered to be satisfied as the event is
completed or work is done per the terms of the related contract. The resale of
electrical and instrumentation equipment is billed upon delivery and are
generally due within thirty days from the receipt of the invoice.
Impairment of Long-Lived Assets and
The determination and calculation of impairment requires significant judgment regarding estimates of fair value and the projection of future cash flows.
LNG liquefaction facilities, and other long-lived assets held and used by the Company are reviewed periodically for potential impairment whenever events or changes in circumstances indicate that a particular asset's carrying value may not be recoverable. Recoverability generally is determined by comparing the carrying value for the asset to the expected undiscounted future cash flows of the asset. If the carrying value of the asset is not recoverable, the amount of impairment loss is measured as the excess, if any, of the carrying value of the asset over its estimated fair value. The estimated undiscounted future cash flows are based on projections of future operating results; these projections contain estimates of the value of future contracts that have not yet been obtained, future commodity pricing and our future cost structure, among others. Projections of future operating results and cash flows may vary significantly from actual results. Management reviews its estimates of cash flows on an ongoing basis using historical experience, business plans, overall market conditions, and other factors.Goodwill represents the excess of the cost of an acquired entity over the fair value of the identifiable assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial assets).Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized, and intangible assets with finite useful lives are amortized.Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the assets carrying value may not be recoverable. We currently test goodwill for impairment annually in the third quarter unless we determine that a triggering event has occurred requiring an earlier test. During 2022, the Company recorded$0.1 million of goodwill impairment related to the sale of the Brazil Operations which is included within loss from discontinued operations. We completed our annual assessment of goodwill during 2022 and 2021 and determined no additional impairment of goodwill was warranted.
Income Taxes
The calculation of income taxes is inherently complex. Additionally, the determination of the adequacy of any needed valuation allowance requires significant judgment. Deferred income taxes are accounted for under the asset-and-liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that the deferred tax asset will not be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses.
Fair Value Measurements
The determination of fair value requires significant judgements and estimates by management. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in the fair value measurements, the fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels in accordance withU.S. GAAP: 37 --------------------------------------------------------------------------------
Level 1 Inputs-Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2 Inputs-Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs-Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby, allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Derivatives
The Company had certain natural gas derivative instruments as ofDecember 31, 2022 . The Company recognizes all of its derivative instruments as either assets or liabilities which are recorded at fair value on its Consolidated Balance Sheet. The accounting for changes in the fair value of a derivative instrument depends on whether it qualifies for and has been designated as a hedge and the type of hedge. The Company has not designated its derivative instruments as hedges underU.S. GAAP and all resulting gains and losses from changes in the fair value of its derivative instruments are included within the Consolidated Statements of Operations. The Company determined the fair value of its natural gas derivatives atDecember 31, 2022 predominantly from broker quotes and are considered a level 2 fair value measurement. The Company did not enter into any derivative transactions for speculative purposes. The Company enters into forward sales contracts for the delivery of LNG to its customers. Certain of these sales contracts contain provisions that may meet the criteria of a derivative in the event delivery is not made. These contracts are accounted for under the normal purchase normal sales exclusion underU.S. GAAP and are not measured at fair value each reporting period.
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