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Basis of Presentation and Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2019

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. 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.

Significant Accounting Policies

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 (VIE). 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 and in the case of a VIE, are not the primary beneficiary. We use the cost method of accounting where we are unable to exert significant influence over the entity. All of our consolidated entities and equity method investments are not VIEs except for our investment in Crestwood Permian Basin Holdings LLC (Crestwood Permian).

Our equity interest in Crestwood Permian is considered a VIE because CEQP has provided a guarantee to a third party that requires CEQP to pay up to $10 million if Crestwood Permian fails to honor its obligations to its equity investee, Crestwood

Permian Basin, in the event Crestwood Permian Basin fails to satisfy its obligations under its gas gathering agreement with a third party. We account for our investment in Crestwood Permian as an equity method investment because we are not the primary beneficiary of the VIE as of December 31, 2019 and 2018. See Note 6 for a further discussion of our investment in Crestwood Permian.

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.

Restricted Cash

On January 1, 2018, we adopted the provisions of ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) which changed the classification and presentation of restricted cash in the statement of cash flows. The standard requires us to include restricted cash in our total cash when reconciling the beginning of period and end of period amounts shown on our consolidated statements of cash flows. The retrospective application of this ASU did not have an impact on our consolidated statement of cash flows for the year ended December 31, 2017.

Our restricted cash represents cash held under the terms of certain contractual agreements and is classified as current on our consolidated balance sheets. The $16.3 million decrease in restricted cash during the year ended December 31, 2019 and the $16.3 million increase in restricted cash during the year ended December 31, 2018 is included in operating activities (change in accounts payable, accrued expenses and other liabilities) in the consolidated statements of cash flows.

Inventory

Our inventory is stated at the lower of cost or net realizable value and cost is computed predominantly using the average cost method. Inventory consisted of the following at December 31, 2019 and 2018 (in millions):



	December 31,
	2019		2018
Crude oil and NGLs	$	53.2	$	64.2
Spare parts	0.5		0.4
Total inventory	$	53.7	$	64.6

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	15 - 20
Facilities and equipment	3 - 25
Buildings, rights-of-way and easements	1 - 40
Office furniture and fixtures	5 - 10
Vehicles	5

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 2019 and 2017, we recorded impairments of our property, plant and equipment and we reflected these impairments in long on long-lived assets in our consolidated statements of operations. We did not record impairments of our property, plant and equipment during the year ended December 31, 2018. During 2019, we incurred $4.3 million of impairments of our property, plant and equipment related to certain of our water gathering facilities in our Arrow operations which is further discussed in Note 15. During 2017, we incurred $81.4 million of impairments of our property, plant and equipment related to our MS&L West Coast operations, which resulted from decreasing the forecasted cash flows to be generated by those operations. At December 31, 2017, our estimates of fair value considered a number of factors, including the potential value if we sold the asset, a 12% discount rate and projected cash flows, which is a Level 3 fair value measurement. During 2018, we sold our MS&L West Coast operations for $70.5 million, and recorded a loss on long-lived assets of approximately $26.9 million (including $9.0 million related to the write off of goodwill). See “Goodwill” below and Note 3 for further information on the sale of these assets.

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, trademarks and certain revenue contracts. These intangible assets have arisen primarily 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. 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.

We did not record impairments of our intangible assets during the years ended December 31, 2019 and 2018. During 2017, we fully impaired $0.8 million of intangible assets related to our MS&L West Coast operations, which resulted from decreasing forecasted cash flows to be generated by those operations and we reflected the impairment in loss on long-lived assets in our consolidated statements of operations. During 2018, we sold our MS&L West Coast operations for $70.5 million, and recorded a $26.9 million of loss on long-lived assets associated with the sale. See Note 3 for further information on the sale of these assets.

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 and revenue contracts	20
Trademarks	10

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.

Upon acquisition, we are required to record the assets, liabilities and goodwill of a reporting unit at its fair value on the date of acquisition. 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.

Current commodity prices are significantly lower compared to commodity prices during 2014, and that decrease 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 2017. We did not record impairments of our goodwill during the years ended December 31, 2019 and 2018. At December 31, 2019, our accumulated goodwill impairments at CEQP and CMLP were approximately $1,656.5 million and $1,399.3 million, respectively. The following table summarizes the goodwill of our various reporting units (in millions):



	Goodwill Impairments during the Year Ended December 31, 2017		Goodwill at January 1, 2018		Other				Impact of Sale of West Coast				Goodwill at December 31, 2018		Goodwill Addition during the Year Ended December 31, 2019			Goodwill at December 31, 2019
G&P
Arrow	$	—	$	45.9	$	—			$	—			$	45.9	$	—		$	45.9
Powder River Basin	—		—		—				—				—		80.3		⁽³⁾	80.3
MS&L
NGL Marketing and Logistics	—		—		101.7			⁽¹⁾	(9.0		)	⁽²⁾	92.7		—			92.7
West Coast	2.4		—		—				—				—		—			—
Supply and Logistics	—		101.7		(101.7		)	⁽¹⁾	—				—		—			—
Storage and Terminals	36.4		—		—				—				—		—			—
Total	$	38.8	$	147.6	$	—			$	(9.0	)		$	138.6	$	80.3		$	218.9


(1)	Reflects the combination of the MS&L reporting units into one NGL Marketing and Logistics reporting unit as further discussed below.


(2)	In October 2018, we sold our West Coast assets and wrote off the goodwill attributable to these assets as further discussed below.


(3)	In April 2019, we acquired the remaining 50% equity interest in Jackalope from Williams. See Note 3 for a further discussion of the acquisition.

On January 1, 2018, we combined the four reporting units included in the MS&L segment into one NGL Marketing and Logistics reporting unit for the purpose of evaluating goodwill for impairment on an ongoing basis. We combined these reporting units based on a strategic shift in the way in which we manage, operate and report our NGL operations as an integrated platform instead of as four individual stand-alone operations. We allocated approximately $9.0 million of the

goodwill associated with our NGL Marketing and Logistics reporting unit to the West Coast facilities during 2018, and this goodwill was included in the loss on the sale of the West Coast assets. See Note 3 for a further discussion of the sale of our West Coast assets.

The goodwill impairments recorded during 2017 related to our MS&L West Coast and Storage and Terminals operations. The goodwill impairment related to our MS&L West Coast operations resulted from decreasing forecasted cash flows to be generated by those operations. Our West Coast customers experienced headwinds during 2017, with both producers and refineries located in the Western U.S. experiencing regulatory challenges and an inflow of NGLs from the Eastern U.S., which caused demand for gathering, processing and logistics services from our West Coast operations to remain relatively flat over the past several years. The goodwill impairment related to our MS&L Storage and Terminals operations resulted from decreasing forecasted cash flows to be generated by those operations. During 2017, we experienced NGL market headwinds in the Northeast with NGL exports and other market dynamics causing price differentials to narrow between purchasing NGLs in the summer (which are then stored in our NGL facilities) and selling NGLs in the winter. These dynamics also caused the rates that we are able to charge for storing NGLs in our facilities to decline from their historical levels. Although our MS&L Storage and Terminals operations’ results have been relatively consistent over the past several years, these operations have not experienced growth as fast or to the decrease that we expected when we merged with Inergy, LP in 2013, and during 2017, we revised our forecasted cash flows to reflect current market dynamics, which we believe will continue for the foreseeable future. We utilized the income approach to determine the fair value of our reporting units given the limited availability of comparable market-based transactions during 2017, and we utilized discount rates ranging from 10% to 12% in applying the income approach to determine the fair value of our reporting units with goodwill as of December 31, 2017, which is a Level 3 fair value measurement.

Leases

We maintain leases in the ordinary course of our business activities. Our leases include those for office buildings, crude oil railroad cars, certain vehicles and other operating facilities and equipment. We also sublease certain of our crude oil railroad cars and trucks to a third party. We do not have any material leases where we are considered to be the lessor. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Prior to January 1, 2019, we classified our leases as either capital or operating leases under ASC Topic 840, Leases (Topic 840). We recognized assets (included in property, plant and equipment) and liabilities (included in accrued expenses and other liabilities and other long-term liabilities) related to our capital leases on our consolidated balance sheets. We also recognized depreciation expense and interest expense related to our capital leases on our consolidated statements of operations. The majority of our lease arrangements were classified as operating leases, under which we did not recognize assets or liabilities on our consolidated balance sheets, but rather recognized lease payments on our consolidated statements of operations as either costs of product/services sold or operations and maintenance expense on a straight-line basis over the lease term.

On January 1, 2019, we adopted the provisions of ASC Topic 842, Leases (Topic 842), which revises the accounting for leases by requiring certain leases to be recognized as assets and liabilities on the balance sheet, and requiring companies to disclose additional information about their leasing arrangements. We adopted the standard using the modified retrospective method. Based on the practical expedients allowed for in the standard, we did not reassess the current GAAP classification of leases, easements and rights of way that existed as of January 1, 2019, and we did not utilize the hindsight method in determining the assets and liabilities to be recorded for our existing leases on January 1, 2019. The adoption of this standard required us to make significant judgments on whether our revenue and expenditure-related contracts were considered to be leases (or contain leases) under Topic 842, and if contracts were considered to be leases whether they should be considered operating leases or finance leases under the new standard. We do not have any material revenue contracts that are considered leases under Topic 842.

Upon the adoption of this standard, on January 1, 2019, we recorded a $67.5 million increase to our operating lease right-of-use assets, an $18.6 million increase to our accrued expenses and other liabilities and a $48.9 million increase to our long-term operating lease liabilities, related to reflecting our operating leases on our consolidated balance sheet as a result of adopting the new standard. We also recorded a $1.6 million increase to our property, plant and equipment, $0.3 million increase to our accrued expenses and other liabilities and a $1.3 million increase to our other long-term liabilities, related to our finance leases (which were all formerly capital leases under Topic 840) as a result of applying the provisions of the new standard to the leases. The adoption of the standard did not result in a material cumulative effect of accounting change to our consolidated financial statements. See Note 15 for a further discussion of our leases.

Investments in Unconsolidated Affiliates

Equity method investments in which we exercise significant influence, but do not control and are not the primary beneficiary, are accounted for using the equity method of accounting. Differences in the basis of investments and the separate net asset values of the investees, if any, are amortized into net income or loss over the remaining useful lives of the underlying assets and liabilities, except for the excess related to goodwill. 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 did not record impairments of our equity method investments during the years ended December 31, 2019, 2018 and 2017.

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 our facilities and right-of-way contracts we hold. 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.

We have various obligations to remove property, plant and equipment on rights-of-way and leases for which we cannot currently estimate the fair value of those obligations because the associated assets have indeterminate lives. An asset retirement obligation liability (and related assets), if any, will be recorded for these obligations once sufficient information is available to reasonably estimate the fair value of the obligations. Our current AROs are reflected in accrued expenses and other liabilities and our long-term AROs are reflected in other long-term liabilities on our consolidated balance sheets. See Note 5 for a further discussion of our AROs.

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 five years. Our net deferred financing costs are reflected as a reduction of long-term debt on our consolidated balance sheets.

Revenue Recognition

We provide gathering, processing, compression, storage, fractionation, and transportation (consisting of pipelines, truck and rail terminals, truck/trailer units and rail cars) services and we sell commodities (including crude oil, natural gas, NGLs and water) under various contracts. These contracts include:


•	Fixed-fee contracts. Under these contracts, we do not take title to the underlying crude oil, natural gas, NGLs and water but charge our customers a fixed-fee for the services we provide, which can be a firm reservation charge and/or a charge per volume gathered, processed, compressed, stored, loaded and/or transported (which, in certain contracts, can be subject to a minimum level of volumes);


•	Percentage-of-proceeds service contracts. Under these contracts, we take title to crude oil, natural gas or NGLs after the commodity leaves our gathering and processing facilities. We often market and sell those commodities to third parties after they leave our facilities and we will remit a portion of the sales proceeds to our producers;


•	Percentage-of-proceeds product contracts. Under these contracts, we take title to crude oil, natural gas or NGLs before the commodity enters our facilities. We market and sell those commodities to third parties and we will remit a portion of the sales proceeds to our producers; and


•	Purchase and sale contracts. Under these contracts, we purchase crude oil, natural gas or NGLs before the commodity enters our facilities, and we market and sell those commodities to third parties.

On January 1, 2018, we adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. We adopted the standard using the modified retrospective method for all revenue contracts that involve revenue generating

activities that occur after January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while amounts prior to January 1, 2018 continue to be reported in accordance with our historic accounting under Revenue Recognition (Topic 605).

Prior to January 1, 2018, we recognized revenues for services and products when all of the following criteria were met under Topic 605: (i) services had been rendered or products delivered or sold; (ii) persuasive evidence of an exchange arrangement existed; (iii) the price for services was fixed or determinable; and (iv) collectability was reasonably assured. We recorded deferred revenue when we received amounts from our customers but had not yet met the criteria listed above. We recognized deferred revenue in our consolidated statement of operations when the criteria had been met and all services had been rendered.

Beginning January 1, 2018, we recognize revenues for services and products under revenue contracts as our obligations to perform services or deliver/sell products under the contracts are satisfied. A contract’s transaction price is allocated to each performance obligation in the contract and recognized as revenue when, or as, the performance obligation is satisfied. Our fixed-fee contracts and our percentage-of-proceeds service contracts primarily have a single performance obligation to deliver a series of distinct goods or services that are substantially the same and have the same pattern of transfer to our customers. For performance obligations associated with these contracts, we recognize revenues over time utilizing the output method based on the actual volumes of products delivered/sold or services performed, because the single performance obligation is satisfied over time using the same performance measure of progress toward satisfaction of the performance obligation. The transaction price under certain of our fixed-fee contracts and percentage-of-proceeds service contracts includes variable consideration that varies primarily based on actual volumes that are delivered under the contracts. Because the variable consideration specifically relates to our efforts to transfer the services and/or products under the contracts, we allocate the variable consideration entirely to the distinct service utilizing the allocation exception guidance under Topic 606, and accordingly recognize the variable consideration as revenues at the time the good or service is transferred to the customer.

Certain of our fixed-fee contracts contain minimum volume features under which the customers must utilize our services to gather, compress or load a specified quantity of crude oil or natural gas or pay a deficiency fee based on the difference between actual volumes and the contractual minimum volume. We recognize revenues from these contracts when actual volumes are gathered, compressed or loaded and the likelihood of a customer exercising its remaining rights to make up the deficient volumes under minimum volume commitments becomes remote.

We recognize revenues at a point in time for performance obligations associated with our percentage-of proceeds product contracts and purchase and sale contracts, and these revenues are recognized because control of the underlying product is transferred to the customer when the distinct good is provided to the customer.

The evaluation of when performance obligations have been satisfied and the transaction price that is allocated to our performance obligations requires significant judgments and assumptions, including our evaluation of the timing of when control of the underlying good or service has transferred to our customers and the relative standalone selling price of goods and services provided to customers under contracts with multiple performance obligations. Actual results can significantly vary from those judgments and assumptions. We did not have any material contracts with multiple performance obligations or under which we receive material amounts of non-cash consideration during the year ended December 31, 2019.

Contract Assets and Contract Liabilities. Amounts due from our customers under our revenue contracts are typically billed as the service is being provided or on a weekly, bi-weekly or monthly basis and are due within 30 days of billing. Under certain of our contracts, we recognize revenues in excess of billings which we present as contract assets on our consolidated balance sheets.

Under certain contracts, we may be entitled to receive payments in advance of satisfying our performance obligations under the contract. We recognize a liability for these payments in excess of revenue recognized and present it as deferred revenue or contract liabilities on our consolidated balance sheets. Our deferred revenue primarily relates to:

•

Capital Reimbursements. Certain contracts in our G&P segment require that our customers reimburse us for capital expenditures related to the construction of long-lived assets utilized to provide services to them under the revenue contracts. Because we consider these amounts as consideration from customers associated with ongoing services to be provided to customers, we defer these upfront payments in deferred revenue and recognize the amounts in revenue over the life of the associated revenue contract as the performance obligations are satisfied under the contract. On January 1, 2018, we recorded an $87.6 million increase to our property, plant and equipment, net, a $69.1 million increase to our deferred revenue liability and an $18.5 million increase to partners’ capital as a result of applying the cumulative impact of adopting the new standard on these types of contracts.

•

Contracts with Increasing (Decreasing) Rates per Unit. Certain contracts in our G&P, S&T and MS&L segments have fixed rates per volume that increase and/or decrease over the life of the contract once certain time periods or thresholds are met. We record revenues on these contracts ratably per unit over the life of the contract based on the remaining performance obligations to be performed, which can result in the deferral of revenue for the difference between the consideration received and the ratable revenue recognized. On January 1, 2018, we recorded a $1.5 million increase to our deferred revenue liability and a corresponding decrease to partners’ capital as a result of applying the cumulative impact of adopting the new standard on these types of contracts.

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 least 90% 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 designated as fair value hedges or cash flow hedges for accounting purposes during the years ended December 31, 2019, 2018 or 2017.

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 on a straight line basis.

New Accounting Pronouncement Issued But Not Yet Adopted

As of December 31, 2019, the following accounting standard had not yet been adopted by us:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides guidance on how companies should evaluate their accounts and notes receivable and other financial instruments for impairment. The standard requires companies to evaluate their financial instruments for impairment by recording an allowance for doubtful accounts and/or bad debt expense based on certain categories of instruments rather than a specific identification approach. We utilized a method to estimate the allowance for doubtful accounts that considered both the aging of our accounts receivable and the projected loss rate of our receivables to adopt the provisions of this standard effective January 1, 2020. Upon adoption of this standard, we anticipate increasing our allowance for doubtful accounts by approximately $0.7 million.