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EX-32.1 - EXHIBIT 32.1 - Nuverra Environmental Solutions, Inc.nes_20151231xex321.htm
EX-31.1 - EXHIBIT 31.1 - Nuverra Environmental Solutions, Inc.nes_20151231xex311.htm
EX-21.1 - EXHIBIT 21.1 - Nuverra Environmental Solutions, Inc.nes_20151231xex211.htm
EX-31.2 - EXHIBIT 31.2 - Nuverra Environmental Solutions, Inc.nes_20151231xex312.htm
EX-23.1 - EXHIBIT 23.1 - Nuverra Environmental Solutions, Inc.nes_20151231xex231.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K
__________________________________ 
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2015
Or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission File Number: 001-33816
__________________________________

 (A Delaware Corporation)
 __________________________________
I.R.S. Employer Identification No. 26-0287117
14624 N. Scottsdale Rd., Suite 300, Scottsdale, Arizona 85254
Telephone: (602) 903-7802
 __________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
OTCQB
Securities registered pursuant to Section 12(g) of the Act:
None
__________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the Company is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
  
Accelerated filer
ý
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
¨
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $111.9 million based on the closing sale price on such date as reported on the New York Stock Exchange. Shares held by executive officers, directors and persons owning directly or indirectly more than 10% of the outstanding common stock have been excluded from the preceding number because such persons may be deemed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for any other purposes.
The number of shares outstanding of the registrant’s common stock as of February 29, 2016 was 28,181,083.
__________________________________
Documents Incorporated by Reference
Part III of this Annual Report on Form 10-K incorporates by reference information from the definitive Proxy Statement for the registrant’s 2016 Annual Meeting of Stockholders or a Form 10-K/A to be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2015.


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TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the United States Securities Exchange Act of 1934, as amended, or the “Exchange Act.” These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
future financial performance and growth targets or expectations;
market and industry trends and developments, including the current decline in oil and natural gas prices;
the potential benefits of our completed and any future merger, acquisition, disposition and financing transactions, including the disposition of Thermo Fluids Inc.; and
plans to increase or decrease operational capacity, including trucks, saltwater disposal wells, frac tanks, landfills, processing and treatment facilities and pipeline construction or expansion.
You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “might,” “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” or similar expressions, and variations or negatives of these words.
These forward-looking statements are based on information available to us as of the date of this Annual Report and our current expectations, forecasts and assumptions, and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured, and actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
financial results that may be volatile and may not reflect historical trends due to, among other things, changes in commodity prices or general market conditions, acquisition and disposition activities, fluctuations in consumer trends, pricing pressures, changes in raw material or labor prices or rates related to our business and changing regulations or political developments in the markets in which we operate;
risks associated with our indebtedness, including our ability to manage our liquidity needs and to comply with covenants under our credit facilities, including the indenture governing our notes;
risks associated with our capital structure, including our ability to refinance or restructure our indebtedness to access necessary funding under our existing or future credit facilities and to generate sufficient operating cash flow to meet our debt service obligation;
changes in customer drilling, completion and production activities and capital expenditure plans, including impacts due to low oil and/or natural gas prices or the economic or regulatory environment;
risks associated with our ability to collect outstanding receivables as a result of liquidity constraints on our customers resulting from low oil and/or natural gas prices;
difficulties in identifying and completing acquisitions and divestitures, and differences in the type and availability of consideration or financing for such acquisitions and divestitures;
difficulties in successfully executing our growth initiatives, including difficulties in permitting, financing and constructing pipelines and waste treatment assets and in structuring economically viable agreements with potential customers, financing sources and other parties;
our ability to attract, motivate and retain key executives and qualified employees in key areas of our business;
fluctuations in prices, transportation costs and demand for commodities such as oil and natural gas;
risks associated with the operation, construction and development of saltwater disposal wells, solids and liquids treatment assets, landfills and pipelines, including access to additional locations and rights-of-way, unscheduled delays or inefficiencies and reductions in volume due to micro- and macro-economic factors or the availability of less expensive alternatives;
risks associated with new technologies and the impact on our business;

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the effects of competition in the markets in which we operate, including the adverse impact of competitive product announcements or new entrants into our markets and transfers of resources by competitors into our markets;
changes in economic conditions in the markets in which we operate or in the world generally, including as a result of political uncertainty;
reduced demand for our services due to regulatory or other influences related to extraction methods such as hydraulic fracturing, shifts in production among shale areas in which we operate or into shale areas in which we do not currently have operations or the loss of key customers;
the impact of changes in laws and regulation on waste management and disposal activities, including those impacting the delivery, storage, collection, transportation treatment and disposal of waste products, as well as the use or reuse of recycled or treated products or byproducts;
control of costs and expenses;
present and possible future claims, litigation or enforcement actions or investigations;
natural disasters, such as hurricanes, earthquakes and floods, or acts of terrorism, or extreme weather conditions, that may impact our corporate headquarters, assets, including wells or pipelines, distribution channels, or which otherwise disrupt our or our customers’ operations or the markets we serve;
the threat or occurrence of international armed conflict;
the unknown future impact on our business from the legislation and governmental rulemaking, including the Affordable Care Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules to be promulgated thereunder;
risks involving developments in environmental or other governmental laws and regulations in the markets in which we operate and our ability to effectively respond to those developments including laws and regulations relating to oil and natural gas extraction businesses, particularly relating to water usage, and the disposal, transportation and treatment of liquid and solid wastes; and
other risks identified in this Annual Report or referenced from time to time in our filings with the United States Securities and Exchange Commission (the “SEC”).
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Annual Report. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

 

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NUVERRA ENVIRONMENTAL SOLUTIONS, INC.
PART I
Item 1. Business
When used in this Annual Report, the terms “Nuverra,” the “Company,” “we,” “our,” and “us” refer to Nuverra Environmental Solutions, Inc. and its consolidated subsidiaries, unless otherwise specified.
Overview
Nuverra Environmental Solutions, Inc. is a leading provider of comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations in the United States. We provide one-stop, total environmental solutions, including delivery, collection, treatment, recycling, and disposal of water, wastewater, waste fluids, hydrocarbons, and restricted solids that are part of the drilling, completion, and ongoing production of shale oil and natural gas. Headquartered in Scottsdale, Arizona, Nuverra Environmental Solutions, Inc. was incorporated in Delaware on May 29, 2007 as “Heckmann Corporation.” On May 16, 2013, we changed our name to Nuverra Environmental Solutions, Inc. Our address is 14646 N. Kierland Boulevard, Suite 260, Scottsdale, Arizona 85254, and our website is http://www.nuverra.com. The contents of our website are not a part of this Annual Report on Form 10-K and shall not be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent we incorporate any such content into such future filing by specific reference thereto.
To meet our customers’ environmental needs, we utilize a broad array of assets to provide a comprehensive environmental solution. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment and processing facilities, and liquid and solid waste disposal sites. We provide a suite of solutions to customers who demand environmental compliance and accountability from their service providers.
The following chart describes our focus on providing comprehensive environmental solutions and the assets we currently utilize or are in the process of implementing to execute on our strategy:
 
 
 
Delivery    
 
Collection    
 
Treatment    
 
Recycling    
 
Disposal    
Solutions
• 

• 
•  
Fresh water to drilling sites
Drilling mud
Water procurement




•  
Liquid waste from hydraulic fracturing
Liquid waste from ongoing well production
Solid drilling waste
•  
Oily waste water
Liquid and solid waste from drilling, completion and ongoing well production
•  
Liquid and solid waste from drilling, completion and ongoing well production
•  
Liquid and solid waste from drilling, completion and ongoing well production
 
Assets

More than 850 trucks
Approximately 5,400 tanks
50 miles of produced water collection pipeline






Appalachian Water Services, LLC (“AWS”) plant—a wastewater treatment recycling facility designed to treat and recycle water involved in the hydraulic fracturing process in the Marcellus Shale area
Thermal treatment assets for solid drilling waste


54 liquid waste disposal wells
Solid waste landfill


Our shale solutions business consists of operations in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale areas: includes our operations in the Bakken, the Eagle Ford, and the Permian Basin Shale areas. During 2015, approximately 67.7% of our revenues from continuing operations were derived from these shale areas.
Natural gas shale areas: includes our operations in the Marcellus, Utica, and Haynesville Shale areas. During 2015, approximately 32.3% of our revenues from continuing operations were derived from these shale areas.
We support our customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services include: (i) fluid logistics, including via water procurement, delivery, collection, storage, treatment, recycling and disposal; (ii) solid waste collection, treatment, recycling and disposal; (iii) temporary and permanent pipeline facilities and water infrastructure

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services; (iv) equipment rental services; and (v) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources from shale formations.
As part of our environmental solution for water and water-related services, we serve E&P customers seeking fresh water acquisition, temporary or permanent water transmission and storage, transportation, treatment or disposal of fresh flowback and produced water in connection with shale oil and natural gas hydraulic fracturing operations. We also provide services for water pit excavations, well site preparation and well site remediation. We own a 50-mile underground pipeline network in the Haynesville Shale area for the collection of produced water, a fleet of more than 850 trucks for delivery and collection, and approximately 5,400 storage tanks. We also own or lease 54 operating saltwater disposal wells in the Bakken, Marcellus/Utica, Haynesville, and Eagle Ford Shale areas. During 2015, we acquired the remaining 49% interest in Appalachian Water Services, LLC (“AWS”) from the non-controlling interest holder, which owns and operates a wastewater treatment facility specifically designed to treat and recycle water resulting from the hydraulic fracturing process in the Marcellus Shale area (see Note 12).
As part of our environmental solution for solid waste, we own an oilfield solids disposal landfill in the Bakken Shale area. The landfill is located on a 60-acre site with permitted capacity of more than 1.7 million cubic yards of airspace. We believe that permitted capacity at this site could be expanded up to 5.8 million cubic yards in the future, subject to receipt of requisite regulatory approvals. During 2014, we completed construction of an advanced solids processing and recycling facility at the landfill site in North Dakota. Nuverra’s process for treating and recycling wet cuttings is named TerrafficientSM, and this process is provided at the facility in North Dakota. TerrafficientSM enables E&P operators to recycle and re-use drill cuttings, bypassing the need for wellsite cuttings pits or special-purpose landfills. The end product resulting from the TerrafficientSM process is intended for re-use in a variety of industrial settings, including road base, general fill and flowable fill for well pads and other commercial applications. We are still in the process of commissioning the facility.
Our shale solutions business is comprised of three geographically distinct divisions, which are further described in Note 20 of the Notes to Consolidated Financial Statements herein:
Northeast Division: comprising the Marcellus and Utica Shale areas;
Southern Division: comprising the Haynesville, Eagle Ford, Permian, Mississippian and Tuscaloosa Marine Shale areas (we substantially exited the Mississippian and Tuscaloosa Marine Shale areas during the three months ended March 31, 2015), and previously the Barnett Shale area (which we substantially exited during the three months ended March 31, 2014); and
Rocky Mountain Division: comprising the Bakken Shale area.
Competitive Strengths
We believe our business possesses the following competitive strengths, which position us to better serve our customers and grow revenue and cash flow:
Leading Transportation and Logistics Network to Control Delivery, Collection, Treatment, Recycling and Disposal.
We operate a transportation and logistics network consisting of more than 850 trucks, 5,400 storage tanks, and 50 miles of produced water collection pipeline. The products we move within our logistics network include fresh water, drilling fluids, liquid waste, solid drilling waste, and oily wastewater. Our business practices and standards promote the safe and responsible collection, treatment, recycling and/or disposal of restricted environmental waste on behalf of our customers. As we expand our treatment, recycling, and disposal solutions, we believe controlling the products that are processed by these assets through our transportation and logistics network is a competitive strength when compared to competitors that rely more heavily on third-party providers for transportation and logistics expertise.
Our Customers are Highly Focused on Environmental Responsibility and Regulatory Compliance.
Our customers are committed to conducting their operations with high levels of environmental responsibility and regulatory compliance. They value a national environmental solutions provider that is focused exclusively on the safe and responsible delivery, collection, treatment, recycling, and disposal of their restricted products. There is a high level of scrutiny on the environmental impact of shale oil and natural gas drilling and production. As a result, we believe there is significant demand for Nuverra’s focus on surface environmental matters. We provide customers the ability to effectively outsource a portion of the regulatory risk surrounding their products, making it possible for them to focus on their core competencies.

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National Operating Footprint Appeals to Customers Operating in Multiple Shale Basins.
We are one of the few companies solely focused on surface environmental solutions with a national operating capability and a strong presence in the majority of North American unconventional shale basins. An increasing number of E&P operators have a presence in multiple basins, including a growing number of super majors, majors, and large independent companies. As a result, we believe we have a competitive advantage relative to many smaller local and regional competitors due to our national customer relationships and the demand for consistent and comprehensive solutions to customers' environmental needs across multiple basins.
Differentiated Value Proposition.
We continue to believe the future, long-term growth of domestic production of oil and natural gas in unconventional shale basins presents a unique growth opportunity for companies such as ours that provide comprehensive environmental solutions in a one-stop business model. Despite the decline in oil prices that began in mid-2014, and that we expect to continue throughout 2016, many industry experts and financial analysts are forecasting continuing advances in drilling and completion techniques in the unconventional shale basins in which we operate. These new techniques require significant environmental solutions to manage restricted waste products, and our customers remain committed to the responsible and safe handling of these products. As such, we believe our strategy to provide comprehensive environmental solutions, from collection through treatment, recycling or disposal, provides us with a strong competitive advantage. Many of our competitors offer only a single component of this value chain, with environmental solutions comprising a component of their overall business services. We believe our focus on the spectrum of surface-related environmental solutions makes it possible for us to provide customers with a consistent, compliant, professional, and highly differentiated value proposition.
Operational, Environmental and Regulatory Expertise.
We believe our management team and employees have significant expertise on the issues surrounding environmental waste products and can efficiently and safely provide services to our customers to manage this aspect of their business. We apply this experience to providing excellent service and identifying innovative, efficient solutions for our customers. We expect increasing regulatory compliance will increase the financial and operational burdens on our customers, which may increase demand for our services.
Strategy
Our strategy is to leverage our full-cycle business model to expand relationships with current and new customers and to provide comprehensive environmental solutions, including delivery, collection, treatment, recycling, and disposal of the environmental waste generated from unconventional shale oil and natural gas development and production. The principal elements of our business strategy are to:
Utilize Our Leading Transportation and Logistics Network to Expand Treatment, Recycling, Disposal, Rental and Water Solutions.
We intend to leverage our advanced transportation and logistics system to expand our treatment, recycling, disposal, rental and water midstream pipeline solutions in order to provide efficient and effective methods for the management of solids and fluids throughout the life cycle of customers' wells. We believe as the market in the unconventional shales evolves, customers will increasingly value a one-stop provider for all of their environmental solutions, including treatment, recycling, disposal, rental and water pipeline solutions for liquid and solid waste products. Our current transportation and logistics footprint provides the platform from which we can continue to expand our customer network while retaining our ability to provide safe and comprehensive environmental solutions.
Establish and Maintain Leading Market Positions in Core Operating Areas.
We strive to establish and maintain leading market positions within our core operating areas to realize the benefits and operating efficiencies provided by scale and customer penetration, as well as to maximize our returns on invested capital. As a result, we seek to maintain long-term customer relationships by providing comprehensive solutions in a safe, efficient and environmentally compliant manner. Combined with the increasing number of customers operating in multiple basins, we seek to maintain a continuous dialogue with our customers on a local, regional and national level in order to provide consistent solutions-based approaches to their ongoing environmental needs.
Provide Solutions in a Reliable and Responsible Manner.
We are focused on providing service efficiency and environmental sustainability through responsible practices that comply with all applicable regulatory requirements for our industry. We are committed to protecting the health and safety of our employees,

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partners and other stakeholders, reducing potential impact to the environment, supporting our communities, and enhancing the operations of our customers by providing exceptional services. These are key tenets that govern our daily activities and support our strategic vision. Our customers require high levels of regulatory, environmental and safety compliance, which we support through continuous employee training, maintenance of our asset base and our approach to developing environmentally sustainable solutions for customers.
Develop and Implement Best Practices to Drive Efficiency and Economy.
We strive to implement best practices throughout our operating divisions, as we continuously seek ways to further enhance operating efficiencies and drive results. In conjunction with these efforts, for example, we have adopted comprehensive, uniform safety programs and training; consolidated a variety of back-office functions in order to expedite throughput; and implemented technologies to enhance the speed and accuracy of field data collection. We believe these programs have contributed to service excellence and differentiate us from our competitors.
Industry Overview
During the past several years, E&P companies have focused on utilizing the vast resource potential available across many of North America’s unconventional shale areas through the application of horizontal drilling and completion technologies, including multi-stage hydraulic fracturing. We believe the majority of the capital for the continued development of shale oil and natural gas resources will be provided in part by large, well-capitalized domestic and international oil and natural gas companies. We believe these companies are highly focused on environmental responsibility, compliance, and regulatory matters and prefer to utilize experienced, highly qualified national vendors.
Advances in drilling technology and the development of unconventional North American hydrocarbon plays allow previously inaccessible or non-economical formations in the earth’s crust to be accessed by utilizing high pressure methods from water injection (or the process known as hydraulic fracturing) combined with proppant fluids (containing sand grains or ceramic beads) to create new perforation depths and fissures to extract natural gas, oil, and other hydrocarbon resources. Significant amounts of water are required for hydraulic fracturing operations, and subsequently, complex water flows, in the forms of flowback and produced water, represent a waste stream generated by these methods of hydrocarbon exploration and production. In addition to the liquid product stream involved in the hydraulic fracturing process, there are also significant environmental solid waste streams that are generated during the drilling and completion of a well. During the drilling process, a combination of the cut rock, or “cuttings,” mixed with the liquid used to drill the well, is returned to the surface and must be handled in accordance with environmental and other regulations. Historically, much of this solid waste byproduct was buried at the well site. We believe customers will increasingly focus on the treatment and offsite disposal or recycling of the solid waste byproduct. Produced water volumes, which represent water from the formation produced alongside hydrocarbons over the life of the well, are generally driven by marginal costs of production and frequently create a multi-year demand for our services once the well has been drilled and completed.
We primarily operate in the Bakken, Marcellus, Utica, Haynesville and Eagle Ford Shale areas.
The Bakken and underlying Three Forks formations are the two primary reservoirs currently being developed in the Williston Basin, which covers most of western North Dakota, eastern Montana, northwest South Dakota and southern Saskatchewan. The Bakken formation occupies approximately 200,000 square miles of the subsurface of the Williston Basin in Montana, North Dakota and Saskatchewan. The Three Forks formation lies directly below North Dakota’s portion of the Bakken formation, where oil-producing rock is located between layers of shale approximately two miles underground. According to the United States Geological Survey - Oil and Gas Resource Assessment, the Bakken and Three Forks Shale formations in North Dakota, South Dakota, and Montana contain an estimated 7.4 billion barrels of technically recoverable oil reserves. The Bakken Shale area is one of the most actively drilled unconventional resources in North America, with North Dakota crude oil production at 1.2 million barrels per day as of October 2015, currently ranking second among U.S. states in daily average crude oil production.
The Marcellus Shale area is located in the Appalachian Basin in the Northeastern United States, primarily in Pennsylvania, West Virginia, New York and Ohio. The Marcellus Shale is the largest natural gas field in North America with approximately 118.9 trillion cubic feet (or "Tcf") of technically recoverable natural gas, according to the EIA.
Adjacent to the Marcellus Shale is the emerging Utica Shale, located primarily in southwestern Pennsylvania and eastern Ohio. Still in the early stages of development, the Utica Shale play has three identified areas: oil, condensate and dry gas. According to the EIA, the Utica Shale is estimated to have approximately 37.4 Tcf of technically recoverable natural gas and 0.9 Tcf of recoverable oil reserve potential.

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The Haynesville Shale area is located across northwest Louisiana and east Texas, and extends into Arkansas. The Haynesville Shale area is the third largest natural gas-producing basin in North America, with an estimated 70.9 Tcf of technically recoverable natural gas according to the EIA.
The Eagle Ford Shale area is a natural gas and oil play located across southern Texas. The play contains a high liquid component, which has led to the definition of three areas: oil, condensate and dry gas. The Eagle Ford Shale is estimated to have approximately 53.4 Tcf of technically recoverable natural gas and 6.9 billion barrels of technically recoverable oil, according to the EIA.
Customers
Our customers include major domestic and international oil and natural gas companies, foreign national oil and natural gas companies and independent oil and natural gas production companies. In the year ended December 31, 2015, our three largest customers represented 16%, 11% and 8%, respectively, of our total consolidated revenues.
Competitors
Our competition includes small regional service providers, as well as larger companies with operations throughout the continental United States and internationally. Our major competitors are Basic Energy Services, Inc., Superior Energy Services, Inc., Forbes Energy Services, Inc., Key Energy Services, Inc., Nabors Industries Ltd., Waste Connections (R360 Environmental Solutions), Republic Services (Tervita Corporation USA) and Stallion Oilfield Services, Ltd.
We differentiate ourselves from our major competitors by our operating philosophy.  We do not, unlike many of our competitors, conduct hydraulic fracturing and/or workover operations. None of these companies focus exclusively on the surface environmental aspects of unconventional oil and natural gas operations, a key aspect of our strategy as we focus on our fluid and solid waste treatment, recycling, and disposal capabilities.  We believe that offering a comprehensive environmental solution to our customers, which includes certainty of control of products from generation through disposal, recycling or reuse is an important value proposition and will increase in importance over time.  We believe our delivery and collection logistics network is a significant competitive advantage relative to competitors that are focused solely on solids treatment, recycling and disposal operations such as Republic Services (Tervita Corporation USA), Waste Connections, Inc., Waste Management and Clean Harbors, Inc.
Health, Safety & Environment
We are committed to excellence in health, safety and environment ("HS&E") in our operations, which we believe is a critical characteristic of our business. Our customers in the unconventional shale basins, including many of the large integrated and international oil and natural gas companies, require us to meet high standards on HS&E matters. As a result, we believe that being a leading environmental solutions company with a national presence and a dedicated focus on environmental solutions is a competitive advantage relative to smaller, regional companies, as well as companies that provide certain environmental services as ancillary offerings.
Seasonality
Certain of our business divisions are impacted by seasonal factors. Generally, our business is negatively impacted during the winter months due to inclement weather, fewer daylight hours and holidays. During periods of heavy snow, ice or rain, we may be unable to move our trucks and equipment between locations, thereby reducing our ability to provide services and generate revenue. In addition, these conditions may impact our customers’ operations, and, as our customers’ drilling and/or hydraulic fracturing activities are curtailed, our services may also be reduced.
Intellectual Property
We operate under numerous trade names and own several trademarks, the most important of which are “Nuverra,” “HWR,” “Power Fuels,” and “Heckmann Water Resources.” We also have access, through certain exclusive and business relationships, to various water treatment technologies which, based on our experience, we utilize to create cost-effective and proprietary total water treatment solutions for our customers.
Operating Risks
Our operations are subject to hazards inherent in our industry, including accidents and fires that could cause personal injury or loss of life, damage to or destruction of property, equipment and the environment, suspension of operations and litigation, as described in Note 17 of the Notes to the Consolidated Financial Statements herein, associated with these hazards. Because our business involves the transportation of environmentally regulated materials, we may also experience traffic accidents or

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pipeline breaks that may result in spills, property damage and personal injury. We have implemented a comprehensive HS&E program designed to minimize accidents in the workplace, enhance our safety programs, maintain environmental compliance and improve the efficiency of our operations.
Discontinued Operations
Our former industrial solutions business, also known as Thermo Fluids Inc. ("TFI"), was sold during the three months ended June 30, 2015. The industrial solutions business previously offered route-based environmental services and waste recycling solutions, providing customers a reliable, high-quality and environmentally responsible solution through a “one-stop shop” of collection and recycling services for waste products including used motor oil (“UMO”), oily water, spent antifreeze, used oil filters and parts washers.
Following an assessment of various alternatives regarding our industrial solutions business in the third quarter of 2013 and a decision to focus exclusively on our shale solutions business, our board of directors approved and committed to a plan to divest TFI in the fourth quarter of 2013. On February 4, 2015, we entered into a definitive agreement with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen would acquire TFI for $85 million in an all-cash transaction, subject to working capital adjustments. On April 11, 2015, we completed the TFI disposition with Safety-Kleen as contemplated by the purchase agreement. As of December 31, 2015, approximately $4.3 million of cash remains restricted in an escrow account pending final resolution of working capital adjustments. (See Note 21 in the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion.)
We classified TFI as discontinued operations in our consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013. The assets and liabilities related to TFI were presented separately as "Assets held for sale" and "Liabilities of discontinued operations" in our consolidated balance sheet at December 31, 2014.
Governmental Regulation, Including Environmental Regulation and Climate Change
Our operations are subject to stringent United States federal, state and local laws and regulations concerning the discharge of materials into the environment or otherwise relating to health and safety or the protection of the environment. Additional laws and regulations, or changes in the interpretations of existing laws and regulations, that affect our business and operations may be adopted, which may in turn impact our financial condition. The following is a summary of the more significant existing health, safety and environmental laws and regulations to which our operations are subject.
Hazardous Substances and Waste
The United States Comprehensive Environmental Response, Compensation, and Liability Act, as amended, referred to as “CERCLA” or the “Superfund” law, and comparable state laws impose liability without regard to fault or the legality of the original conduct on certain defined persons, including current and prior owners or operators of a site where a release of hazardous substances occurred and entities that disposed or arranged for the disposal of the hazardous substances found at the site. Under CERCLA, these “responsible persons” may be liable for the costs of cleaning up the hazardous substances, for damages to natural resources and for the costs of certain health studies.
In the course of our operations, we occasionally generate materials that are considered “hazardous substances” and, as a result, may incur CERCLA liability for cleanup costs. Also, claims may be filed for personal injury and property damage allegedly caused by the release of hazardous substances or other pollutants. We also generate solid wastes that are subject to the requirements of the United States Resource Conservation and Recovery Act, as amended, or “RCRA,” and comparable state statutes.
Although we use operating and disposal practices that are standard in the industry, hydrocarbons or other wastes may have been released at properties owned or leased by us now or in the past, or at other locations where these hydrocarbons and wastes were taken for treatment or disposal. Under CERCLA, RCRA and analogous state laws, we could be required to clean up contaminated property (including contaminated groundwater), or to perform remedial activities to prevent future contamination.
Air Emissions
The Clean Air Act, as amended, or “CAA,” and similar state laws and regulations restrict the emission of air pollutants and also impose various monitoring and reporting requirements. These laws and regulations may require us to obtain approvals or permits for construction, modification or operation of certain projects or facilities and may require use of emission controls.

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Global Warming and Climate Change
While we do not believe our operations raise climate change issues different from those generally raised by the commercial use of fossil fuels, legislation or regulatory programs that restrict greenhouse gas emissions in areas where we conduct business or that would require reducing emissions from our truck fleet could increase our costs.
Water Discharges
We operate facilities that are subject to requirements of the United States Clean Water Act, as amended, or “CWA,” and analogous state laws for regulating discharges of pollutants into the waters of the United States and regulating quality standards for surface waters. Among other things, these laws impose restrictions and controls on the discharge of pollutants, including into navigable waters as well as the protection of drinking water sources. Spill prevention, control and counter-measure requirements under the CWA require implementation of measures to help prevent the contamination of navigable waters in the event of a hydrocarbon spill. Other requirements for the prevention of spills are established under the United States Oil Pollution Act of 1990, as amended, or “OPA”, which amended the CWA and applies to owners and operators of vessels, including barges, offshore platforms and certain onshore facilities. Under OPA, regulated parties are strictly liable for oil spills and must establish and maintain evidence of financial responsibility sufficient to cover liabilities related to an oil spill for which such parties could be statutorily responsible.
State Environmental Regulations
Our operations involve the storage, handling, transport and disposal of bulk waste materials, some of which contain oil, contaminants and other regulated substances. Various environmental laws and regulations require prevention, and where necessary, cleanup of spills and leaks of such materials and some of our operations must obtain permits that limit the discharge of materials. Failure to comply with such environmental requirements or permits may result in fines and penalties, remediation orders and revocation of permits. In Texas, we are subject to rules and regulations promulgated by the Texas Railroad Commission and the Texas Commission on Environmental Quality, including those designed to protect the environment and monitor compliance with water quality. In Louisiana, we are subject to rules and regulations promulgated by the Louisiana Department of Environmental Quality and the Louisiana Department of Natural Resources as to environmental and water quality issues, and the Louisiana Public Service Commission as to allocation of intrastate routes and territories for waste water transportation. In Pennsylvania, we are subject to the rules and regulations of the Pennsylvania Department of Environmental Protection and the Pennsylvania Public Service Commission. In Ohio, we are subject to the rules and regulations of the Ohio Department of Natural Resources and the Ohio Environmental Protection Agency. In North Dakota, we are subject to the rules and regulations of the North Dakota Department of Health, the North Dakota Industrial Commission, Oil and Gas Division, and the North Dakota State Water Commission. In Montana, we are subject to the rules and regulations of the Montana Department of Environmental Quality and the Montana Board of Oil and Gas.
Occupational Safety and Health Act
We are subject to the requirements of the United States Occupational Safety and Health Act, as amended, or “OSHA,” and comparable state laws that regulate the protection of employee health and safety. OSHA’s hazard communication standard requires that information about hazardous materials used or produced in our operations be maintained and provided to employees, state and local government authorities and citizens.
Saltwater Disposal Wells
We operate saltwater disposal wells that are subject to the CWA, the Safe Drinking Water Act, or “SDWA,” and state and local laws and regulations, including those established by the Underground Injection Control Program of the United States Environmental Protection Agency, or “EPA,” which establishes minimum requirements for permitting, testing, monitoring, record keeping and reporting of injection well activities. Our saltwater disposal wells are located in Texas, Ohio, North Dakota, Louisiana and Montana. Regulations in many states require us to obtain a permit to operate each of our saltwater disposal wells in those states. These regulatory agencies have the general authority to suspend or modify one or more of these permits if continued operation of one of our saltwater wells is likely to result in pollution of freshwater, tremors or earthquakes, substantial violation of permit conditions or applicable rules, or leaks to the environment. Any leakage from the subsurface portions of the saltwater wells could cause degradation of fresh groundwater resources, potentially resulting in cancellation of operations of a well, issuance of fines and penalties from governmental agencies, incurrence of expenditures for remediation of the affected resource and claims by third parties for property damages and personal injuries.

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Transportation Regulations
We conduct interstate motor carrier (trucking) operations that are subject to federal regulation by the Federal Motor Carrier Safety Administration, or “FMCSA,” a unit within the United States Department of Transportation, or “USDOT.” The FMCSA publishes and enforces comprehensive trucking safety regulations, including rules on commercial driver licensing, controlled substance testing, medical and other qualifications for drivers, equipment maintenance, and drivers’ hours of service, referred to as “HOS.” The agency also performs certain functions relating to such matters as motor carrier registration (licensing), insurance, and extension of credit to motor carriers’ customers. Another unit within USDOT publishes and enforces regulations regarding the transportation of hazardous materials, or “hazmat." The waste water and other water flows we transport by truck are generally not regulated as hazmat at this time.
In December 2010, the FMCSA launched a program called Compliance, Safety, Accountability, or “CSA,” in an effort to improve commercial truck and bus safety. A component of CSA is the Safety Measurement System, or “SMS,” which analyzes all safety violations recorded by federal and state law enforcement personnel to determine a carrier’s safety performance. The SMS is intended to allow the FMCSA to identify carriers with safety issues and intervene to address those problems. Although our trucking operations currently hold a “Satisfactory” safety rating from FMCSA (the best rating available), the agency has announced a future intention to revise its safety rating system by making greater use of SMS data in lieu of on-site compliance audits of carriers. We cannot predict the effect such a revision may have on our safety rating.
Our intrastate trucking operations are also subject to various state environmental and waste water transportation regulations discussed under “Environmental Regulations” above. Federal law also allows states to impose insurance and safety requirements on motor carriers conducting intrastate business within their borders, and to collect a variety of taxes and fees on an apportioned basis reflecting miles actually operated within each state.
HOS regulations establish the maximum number of hours that a commercial truck driver may work. A FMCSA rule reducing the number of hours a commercial truck driver may work each day became effective in February 2012 and the compliance date of selected provisions was July 1, 2013. The rule, which is intended to reduce the risk of fatigue and fatigue-related crashes and harm to driver health, prohibits a driver from driving if more than eight hours have passed since the driver’s last off-duty or sleeper berth break of at least 30 minutes and limits the use of the restart to once a week, which, on average, will cut the maximum work week from 82 to 70 hours. The effect of this rule on reduced driver hours may raise our operating costs.
Hydraulic Fracturing
Although we do not directly engage in hydraulic fracturing activities, certain of our shale solutions customers perform hydraulic fracturing operations. While we believe that the adoption of new federal and/or state laws or regulations imposing increased regulatory burdens on hydraulic fracturing could increase demand for our services, it is possible that it could harm our business by making it more difficult to complete, or potentially suspend or prohibit, crude oil and natural gas wells in shale formations, increasing our and our customers’ costs of compliance and adversely affecting the services we provide.
Due at least in part to public concerns that have been raised regarding the potential impact of hydraulic fracturing on drinking water, the EPA has commenced a comprehensive study, at the order of the United States Congress, to assess the potential environmental and health impacts of hydraulic fracturing activities. A final draft assessment report was issued by the EPA for peer review and public comment in June 2015. According to the report, the EPA found no evidence that hydraulic fracturing has led to widespread, systemic impacts on drinking water resources in the United States. On October 15, 2012, a rule promulgated by the EPA that established new air emission controls for crude oil and natural gas production and natural gas processing operations became effective. The rule includes New Source Performance Standards, or “NSPS,” to address emissions of sulfur dioxide and volatile organic compounds, or “VOCs,” and a separate set of emission standards to address hazardous air pollutants associated with oil and natural gas production and processing activities. The EPA’s final rule requires the reduction of VOC emissions from crude oil and natural gas production facilities by mandating the use of “green completions” for hydraulic fracturing, which requires the operator to recover rather than vent the gas and natural gas liquids that come to the surface during completion of the fracturing process.
Legislation, including bills known collectively as the Fracturing Responsibility and Awareness of Chemicals Act, or FRAC Act, has been introduced before both houses of Congress to remove the exemption of hydraulic fracturing under the SDWA and to require disclosure to a regulatory agency of chemicals used in the fracturing process and otherwise restrict hydraulic fracturing. To date, this legislation has not been passed by either house.
Various state, regional and local governments have implemented, or are considering, increased regulatory oversight of hydraulic fracturing through additional permit requirements, operational restrictions, disclosure requirements, and temporary or permanent bans on hydraulic fracturing in certain environmentally sensitive areas such as certain watersheds. The North Dakota Industrial Commission, Oil and Gas Division recently proposed regulations requiring owners, operators, and service companies

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to post the composition of the hydraulic fracturing fluid used during certain hydraulic fracturing stimulations on the FracFocus Chemical Disclosure Registry. The availability of information regarding the constituents of hydraulic fracturing fluids could potentially make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, North Dakota recently proposed regulations prohibiting the discharge of fluids, wastes, and debris other than drill cuttings into open pits.
Employees
As of December 31, 2015, we had approximately 1,365 full time employees, of whom approximately 230 were executive, managerial, sales, general, administrative, and accounting staff, and approximately 1,135 were truck drivers, service providers and field workers. In November 2015, 25 employees in the Utica shale area filed a union representation position. An election was held in December 2015, but due to union misconduct, the election was deemed invalid. The status of the petition remains unresolved. We have not experienced, and do not expect, any work stoppages, and believe that we maintain a satisfactory working relationship with our employees.
Available Information
Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to or exhibits included in these reports, are available free of charge on our website at www.nuverra.com soon after such reports are filed with or furnished to the SEC. From time to time, we also post announcements, updates, events, investor information and presentations on our website in addition to copies of all recent press releases. Our reports, including any exhibits included in such reports, that are filed with or furnished to the SEC are also available on the SEC’s website at www.sec.gov. You may also read and copy any materials we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549; information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You may request copies of these documents from the SEC, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, and Washington, D.C. 20549.
Neither the contents of our website nor that maintained by the SEC are incorporated into or otherwise a part of this filing. Further, references to the URLs for these websites are intended to be inactive textual references only.
Item 1A. Risk Factors
This section describes material risks to our businesses that currently are known to us. You should carefully consider the risks described below. If any of the risks and uncertainties described in the cautionary factors described below actually occurs, our business, financial condition and results of operations could be materially and adversely affected. The risks and factors listed below, however, are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact our business, financial condition and results of operations. Moreover, we operate in a rapidly changing environment. Other known risks that we currently believe to be immaterial could become material in the future. We also are subject to legal and regulatory changes. New factors emerge from time to time and it is not possible to predict the impact of all these factors on our business, financial condition or results of operations.
Risks Related to Our Company
Our business depends on spending by the oil and natural gas industry in the United States, and this spending and our business has been, and may continue to be, adversely affected by industry and financial market conditions that are beyond our control. The substantial and extended decline in oil and natural gas prices has resulted in lower expenditures by our customers, which have had a material adverse effect on our financial condition, results of operations and cash flows, and the continuation of such decline could adversely affect our financial condition, results of operations and cash flows further.
We depend on our customers’ willingness to make operating and capital expenditures to explore, develop and produce oil and natural gas in the United States. These expenditures are generally dependent on current oil and natural gas prices and the industry’s view of future oil and natural gas prices, including the industry’s view of future economic growth and the resulting impact on demand for oil and natural gas. The substantial and extended decline in oil and natural gas prices has resulted in significant reductions in our customers’ operating and capital expenditures. The continuation or extension of such declines in these expenditures could result in project modifications, delays or cancellations, general business disruptions, delays in, or nonpayment of, amounts owed to us, increased exposure to credit risk and bad debts, and a general reduction in demand for our services. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
Industry conditions are influenced by numerous factors over which we have no control, including:

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the domestic and worldwide price and supply of gas, natural gas liquids and oil, including the natural gas inventories and oil reserves of the United States;
changes in the level of consumer demand;
the price and availability of alternative fuels;
weather conditions;
the availability, proximity and capacity of pipelines, other transportation facilities and processing facilities;
the level and effect of trading in commodity futures markets, including by commodity price speculators and others;
the nature and extent of domestic and foreign governmental regulations and taxes;
actions of the members of the Organization of the Petroleum Exporting Countries or "OPEC," relating to oil price and production controls;
the level of excess production and projected rates of production growth;
geo-political instability or armed conflict in oil and natural gas producing regions; and
overall domestic and global economic and market conditions.
The oil and natural gas industry is currently experiencing a downturn due to an oversupply of global crude oil levels, and moderate North American temperatures with increased supply of natural gas, resulting in dramatic declines in oil and natural gas prices. Since the second half of 2014 and throughout 2015, oil prices have declined substantially from historic highs, are currently at 12-year lows and may remain depressed for the foreseeable future. Historically, downturns in the industry have been characterized by diminished demand for oilfield services and downward pressure on the prices customers are willing to pay for services such as ours. An extended downturn in the oil and natural gas industry could result in a reduction in demand for oilfield services as well as lower prices and operating margins, and could have a material adverse effect on our financial condition, results of operations and cash flows.
In the past, we have experienced periods of low demand and have incurred operating losses. In the future, we may not be able to achieve or maintain our profitability due to an inability to reduce costs, increase revenue, or reduce our debt obligations. Under such circumstances, we may incur further operating losses and experience negative operating cash flow.
Our operating margins and profitability may be negatively impacted by changes in fuel and energy costs. In addition, due to certain fixed costs, our operating margins and earnings may be sensitive to changes in revenues.
Our business is dependent on availability of fuel for operating our fleet of trucks. Changes and volatility in the price of crude oil can adversely impact the prices for these products and therefore affect our operating results. The price and supply of fuel is unpredictable and fluctuates based on events beyond our control, including geopolitical developments, supply and demand for oil and natural gas, actions by OPEC and other oil and natural gas producers, war and unrest in oil producing countries, regional production patterns, and environmental concerns.
Furthermore, our facilities, fleet and personnel subject us to fixed costs, which make our margins and earnings sensitive to changes in revenues. In periods of declining demand, our fixed cost structure may limit our ability to cut costs, which may put us at a competitive disadvantage to firms with lower or more flexible cost structures, and may result in reduced operating margins and/or higher operating losses. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.

We are currently operating at a loss and have substantial debt and declining liquidity to cover our operations, which raises substantial doubt about our ability to continue as a going concern.

As reflected in the accompanying consolidated financial statements, we had an accumulated deficit at December 31, 2015, and a net loss for the fiscal years ended December 31, 2015, 2014, and 2013. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern. We are attempting to generate sufficient revenue and reduce costs; however, our cash position may not be sufficient enough to support our daily operations. While we are executing a strategy to generate sufficient revenue and reduce costs to sustain operations, there can be no assurances to that effect. Our ability to continue as a going concern is also dependent upon our ability to restructure our debt to generate sufficient liquidity to meet our obligations and operating needs. We currently do not have enough liquidity, including cash on hand, to service the debt, operations, and pay-down debt to avoid covenant violations. On March 11, 2016, we announced that we entered into a Restructuring Support Agreement with holders of more than 80% of the 2018 Notes related to a restructuring

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transaction. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Subsequent Events Related to Restructuring” for additional information relating to our proposed restructuring strategy.)

Future charges due to possible impairments of assets may have a material adverse effect on our results of operations and stock price.
As discussed more fully in Note 8 of the Notes to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Impairment of Long-Lived Assets and Goodwill” included in Item 7 herein, during the year ended December 31, 2015 we recorded a goodwill impairment charge of $104.7 million. As of December 31, 2015, there is no remaining goodwill on the consolidated balance sheet. Additionally, during the year ended December 31, 2015 we recorded an impairment charge of $5.9 million related to some of the remaining assets in the MidCon basin which we exited earlier in the year. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs.
The testing of long-lived assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the composition of our reporting units; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or differences in our actual performance compared with estimates of our future performance, could affect the fair value of long-lived assets, which may result in further impairment charges. We perform the assessment of potential impairment at least annually, or more often if events and circumstances require.
Should the value of our long-lived assets become impaired, we would incur additional charges which could have a material adverse effect on our consolidated results of operations and could result in us incurring additional net operating losses in future periods. We cannot accurately predict the amount or timing of any impairment of assets. Any future determination requiring the write-off of a significant portion of long-lived assets, although not requiring any additional cash outlay, could have a material adverse effect on our results of operations and stock price.
The completed sale of the industrial solutions division may present future risks not contemplated at the time of the divestiture and we may not recognize the anticipated benefits from other divestitures we may pursue in the future.
As described in Note 21 of the Notes to the Consolidated Financial Statements herein, in October 2013, our Board of Directors authorized commencement of a process for the sale of TFI, comprising our industrial solutions division. On February 4, 2015, we entered into a material definitive agreement with Safety-Kleen, a subsidiary of Clean Harbors, pursuant to which Safety-Kleen would acquire TFI. On April 11, 2015, we completed the TFI disposition with Safety-Kleen as contemplated by the definitive agreement. As contemplated by the definitive agreement for the sale of TFI, we are required to retain or indemnify the buyer against certain liabilities and obligations, and we may also become subject to third-party claims arising out of such transaction. In addition, we may be subject to legal, financial or operational risks in the future that were not contemplated at the time of the TFI divestiture. We also may evaluate other potential divestiture opportunities with respect to portions of our business (including specific assets or categories of assets) from time to time, and may determine to proceed with a divestiture opportunity if and when we believe such opportunity is consistent with our business strategy and we would be able to realize value for our stockholders in so doing. Any future divestiture could expose us to significant risks, including, without limitation, fees for legal and transaction-related services, diversion of management resources, transaction execution risks (including risks resulting from buyer financing and due diligence contingencies and other closing conditions), loss of key personnel and reduction in revenue. If we do not realize the expected strategic, economic or other benefits of any divestiture transaction, it could adversely affect our financial condition and results of operations. There can be no assurances that we will obtain any necessary consents of governmental authorities or other third parties, including consent of the lenders under our credit facility that might be required in order for us to effectuate any divestiture. The completed sale of TFI took the form of a stock sale rather than a sale of TFI’s assets which resulted in a significant capital loss for tax purposes. The goodwill impairment charges recorded during the years ended December 31, 2014 and 2013 did not result in a reduction of our tax basis in the stock of TFI. We are not able to carry any recognized capital loss resulting from the sale of TFI stock back to prior years as we did not generate capital gains nor pay any federal tax during such prior carryback years. We also do not currently expect to have significant capital gains in the five succeeding carryforward tax years to offset the capital loss carryforward. Consequently, we expect that any deferred tax asset resulting from the capital loss generated from the sale of TFI stock will require a valuation allowance.

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We depend on the continued service of Mark D. Johnsrud, our Chief Executive Officer and Chairman, and other senior management.
Our success is largely dependent on the skills, experience and efforts of our people and, in particular, the continued services of Mr. Johnsrud, our Chief Executive Officer and Chairman. The loss of the services of Mr. Johnsrud, or of other members of our senior management, could have a negative effect on our business, financial condition and results of operations and future growth, as we may not be able to find suitable individuals to replace them on a timely basis, if at all. In addition, any such departure could be viewed in a negative light by investors and analysts, which may cause the price of our common stock to decline, or by current or potential providers of debt financing, which may make it more difficult or costly to refinance outstanding indebtedness or incur new or additional indebtedness. We do not carry key-person life insurance on any of our senior management.
Our Chief Executive Officer and Chairman, Mark D. Johnsrud, owns a significant amount of our voting stock and may have interests that differ from other shareholders. Mr. Johnsrud, as a significant shareholder, may, therefore, take actions that are not in the interest of other shareholders.
Mark D. Johnsrud, Chief Executive Officer and Chairman, owns shares representing approximately 36% of our common stock as of December 31, 2015, and, therefore, he has significant control on the outcome of matters submitted to a vote of shareholders, including, but not limited to, electing directors, adopting amendments to our certificate of incorporation and approving corporate transactions. In addition, Mr. Johnsrud, as Chief Executive Officer and Chairman, has the power to exert significant influence over our corporate management and policies. Circumstances may occur in which the interests of Mr. Johnsrud, as a significant shareholder, could be in conflict with the interests of other shareholders, and Mr. Johnsrud would have significant influence to cause us to take actions that align with his interests. Should conflicts of interest arise, we can provide no assurance that Mr. Johnsrud would act in the best interests of our other shareholders or that any conflicts of interest would be resolved in a manner favorable to our other shareholders.

In addition, an entity owned and controlled by Mr. Johnsrud held $31.4 million in principal amount of the outstanding $400.0 million aggregate principal amounts of 9.875% Senior Notes due 2018 as of December 31, 2015.
The litigation environment in which we operate poses a significant risk to our businesses.
We are involved in the ordinary course of business in a number of lawsuits involving employment, commercial, and environmental issues, other claims for injuries and damages, and various shareholder and class action litigation, among other matters. We may experience negative outcomes in such lawsuits in the future. Any such negative outcomes could have a material adverse effect on our business, liquidity, financial condition and results of operations. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments and estimates are based on the information available to management at the time and involve a significant amount of judgment. Actual outcomes or losses may differ materially from such assessments and estimates. The settlement or resolution of such claims or proceedings may have a material adverse effect on our results of operations. In addition, judges and juries in certain jurisdictions in which we conduct business have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and other tort cases. We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in these areas poses a significant business risk to us and could cause a significant diversion of management resources and could have a material adverse effect on our financial condition, results of operations and cash flows.
Litigation related to personal injury from the operation of our business may result in significant liabilities and limit our profitability.
The hazards and risks associated with the transport, storage, and handling, treatment and disposal of our customers’ waste (such as fires, spills, explosions and accidents) may expose us to personal injury claims, property damage claims and/or products liability claims from our customers or third parties. As protection against such claims and operating hazards, we maintain insurance coverage against some, but not all, potential losses. However, we may sustain losses for uninsurable or uninsured risks, or in amounts in excess of existing insurance coverage. As more fully described in Note 17 of the Notes to Consolidated Financial Statements herein, due to the unpredictable nature of personal injury litigation, it is not possible to predict the ultimate outcome of these claims and lawsuits, and we may be held liable for significant personal injury or damage to property or third parties, or other losses, that are not fully covered by our insurance, which could have a material adverse effect on our financial condition, results of operations and cash flows.

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Significant capital expenditures are required to conduct our business.
The development of our business and services, excluding acquisition activities, requires substantial capital expenditures. During the year ended December 31, 2015, we made capital expenditures of approximately $19.2 million, which primarily related to expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. Additionally, we continued to invest in our solids treatment capabilities at our Bakken Shale landfill site. We continue to focus on finding ways to improve the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our capital expenditure program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. In addition to capital expenditures required to maintain our current level of business activity, we may incur capital expenditures to support future growth of our business. We currently plan to decrease our level of capital expenditures for 2016, as compared to 2015, due to the continued decline in drilling activities and oil and natural gas prices. Prolonged reductions or delays in capital expenditures could delay or diminish future cash flows and adversely affect our business and results of operations. Our planned capital expenditures for 2016 are expected to be financed through cash flow from operations, borrowing under existing or new credit facilities if available, issuances of debt or equity, capital leases, other financing structures, or a combination of the foregoing. Future cash flows from operations are subject to a number of risks and variables, such as the level of drilling activity and oil and natural gas production of our customers, prices of natural gas and oil, and the other risk factors discussed herein. Our ability to obtain capital from other sources, such as the capital markets, is dependent upon many of those same factors as well as the orderly functioning of credit and capital markets. To the extent we fail to have adequate funds, we could be required to reduce or defer our capital spending, or pursue other funding alternatives which may not be as economically attractive to us, which in turn could have a materially adverse effect on our financial condition, results of operations and cash flows.
The compensation we offer our drivers is subject to market conditions, and we may find it necessary to increase driver compensation and/or modify the benefits provided to our employees in future periods.
We employed approximately 750 truck drivers as of December 31, 2015. Maintaining a staff of qualified truck drivers is critical to the success of our operations. We and other companies in the oil and natural gas industry suffer from a high turnover rate of drivers. The high turnover rate requires us to continually recruit a substantial number of drivers in order to operate existing equipment. If we are unable to continue to attract and retain a sufficient number of qualified drivers, we could be forced to, among other things, increase driver compensation and/or modify our benefit packages, or operate with fewer trucks and face difficulty meeting customer demands, any of which could adversely affect our growth and profitability. Additionally, in anticipation of or in response to geographical and market-related fluctuations in the demand for our services, we strategically relocate our equipment and personnel from one area to another, which may result in operating inefficiencies, increased labor, fuel and other operating costs and could adversely affect our growth and profitability. As a result, our driver and employee training and orientation costs could be negatively impacted. We also utilize the services of independent contractor truck drivers to supplement our trucking capacity in certain shale areas on an as-needed basis. There can be no assurance that we will be able to enter into these types of arrangements on favorable terms, or that there will be sufficient qualified independent contractors available to meet our needs, which could have a material adverse effect on our financial condition, results of operations and cash flows.
We depend on certain key customers for a significant portion of our revenues. The loss of any of these key customers or the loss of any contracted volumes could result in a decline in our business.
We rely on a limited number of customers for a significant portion of our revenues. Our three largest customers represented 16%, 11% and 8%, respectively, of our total consolidated revenues for the year ended December 31, 2015 and in total equaled 26% of our consolidated accounts receivable at December 31, 2015. The loss of all, or even a portion, of the revenues from these customers, as a result of competition, market conditions or otherwise, could have a material adverse effect on our business, results of operations, financial condition, and cash flows. A reduction in exploration, development and production activities by key customers due to the current declines in oil and natural gas prices, or otherwise, could have a material adverse effect on our financial condition, results of operations and cash flows.
Customer payment delays of outstanding receivables could have a material adverse effect on our liquidity, consolidated results of operations, and consolidated financial condition.
We often provide credit to our customers for our services, and are therefore subject to our customers delaying or failing to pay outstanding invoices. In weak economic environments, customers’ delays and failures to pay often increase due to, among other reasons, a reduction in our customers’ cash flow from operations and their access to credit markets. If our customers delay or fail to pay a significant amount of outstanding receivables, it could have a material adverse effect on our liquidity, financial condition, results of operations and cash flows.

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The fees charged to customers under our agreements with them may not escalate sufficiently, or may decline too precipitously to cover our costs and the agreements may be suspended in some circumstances, which would affect our profitability.
Under our agreements with our customers, we may be unable to increase the fees that we charge our customers at a rate sufficient to offset any increases in our costs. Likewise, customers may seek pricing declines more precipitously than our ability to reduce costs. Additionally, some customers’ obligations under their agreements with us may be permanently or temporarily reduced upon the occurrence of certain events, some of which are beyond our control, including force majeure events. Force majeure events may include (but are not limited to) events such as revolutions, wars, acts of enemies, embargoes, import or export restrictions, strikes, lockouts, fires, storms, floods, acts of God, explosions, mechanical or physical failures of our equipment or facilities of our customers. If the escalation of fees is insufficient to cover increased costs or if any customer suspends or terminates its contracts with us, the effects could have a material adverse effect on our financial condition, results of operations and cash flows.
We operate in competitive markets, and there can be no certainty that we will maintain our current customers or attract new customers or that our operating margins will not be impacted by competition.
The industries in which our business operates are highly competitive. We compete with numerous local and regional companies of varying sizes and financial resources. Competition has intensified during this downturn, and could further intensify in the future. Furthermore, numerous well-established companies are focusing significant resources on providing similar services to those that we provide that will compete with our services. We cannot assure you that we will be able to effectively compete with these other companies or that competitive pressures, including possible downward pressure on the prices we charge for our products and services, will not arise. In addition, the current declines in oil and natural gas prices may result in competitors moving resources from higher-cost exploration and production areas to relatively lower-cost exploration and production areas where we are located thereby increasing supply and putting further downward pressure on the prices we can charge for our products and services, including our rental business. In the event that we cannot effectively compete on a continuing basis, or competitive pressures arise, such inability to compete or competitive pressures could have a material adverse effect on our financial condition, results of operations and cash flows.
Any interruption in our services due to pipeline ruptures or spills or necessary maintenance could impair our financial performance and negatively affect our brand.
Our water transport pipelines are susceptible to ruptures and spills, particularly during start up and initial operation, and require ongoing inspection and maintenance. For example, in 2010 and 2011, we had breaks in our 50-mile underground pipeline network in the Haynesville Shale area that resulted in delays in transporting our customers’ water and resulted in significant repair and remediation costs. We may experience further difficulties in maintaining the operation of our pipelines, which may cause downtime and delays. We also may be required to periodically shut down all or part of our pipelines for regulatory compliance and inspection purposes. Any interruption in our services due to pipeline breakdowns or necessary maintenance, inspection or regulatory compliance could reduce revenues and earnings and result in remediation costs. Transportation interruptions at our pipelines, even if only temporary, could severely harm our business and reputation, and could have a material adverse effect on our financial condition, results of operations and cash flows.
Our operations are subject to risks inherent in the oil and natural gas industry, some of which are beyond our control. These risks may not be fully covered under our insurance policies.
Our operations are subject to operational hazards, including accidents or equipment failures that can cause pollution and other damage to the environment. Pursuant to applicable law, we may be required to remediate the environmental impact of any such accidents or incidents, which may include costs related to site investigation and soil, groundwater and surface water cleanup. In addition, hazards inherent in the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, pollution and other damage to the environment, fires and hydrocarbon spills, may delay or halt operations at extraction sites which we service. These conditions can cause:
personal injury or loss of life;
liabilities from pipeline breaks and accidents by our fleet of trucks and other equipment;
damage to or destruction of property, equipment and the environment; and
the suspension of operations.

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The occurrence of a significant event or a series of events that together are significant, or adverse claims in excess of the insurance coverage that we maintain or that are not covered by insurance, could have a material adverse effect on our financial condition, results of operations and cash flows. Litigation arising from a catastrophic occurrence at a location where our equipment and services are being used may result in our being named as a defendant in lawsuits asserting large claims.
We maintain insurance coverage that we believe to be customary in the industry against these hazards. We may not be able to maintain adequate insurance in the future at rates we consider reasonable. In addition, insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, the coverage provided by such insurance may be inadequate, or insurance premiums or other costs could make such insurance prohibitively expensive. It is likely that, in our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the past. In addition, our insurance is subject to coverage limits, and some policies exclude coverage for damages resulting from environmental contamination.
Improvements in or new discoveries of alternative energy technologies or fracking methodologies could have a material adverse effect on our financial condition and results of operations.
Because our business depends on the level of activity in the oil and natural gas industry, any improvement in or new discoveries of alternative energy technologies (such as wind, solar, geothermal, fuel cells and biofuels) that increase the use of alternative forms of energy and reduce the demand for oil and natural gas could have a material adverse effect on our financial condition, results of operations and cash flows. In addition, technological changes could decrease the quantities of water required for fracking operations or otherwise affect demand for our services.
Seasonal weather conditions and natural disasters could severely disrupt normal operations and harm our business.
Areas in which we operate are adversely affected by seasonal weather conditions, primarily in the winter and spring. During periods of heavy snow, ice or rain, our customers may curtail their operations or we may be unable to move our trucks between locations or provide other services, thereby reducing demand for, or our ability to provide services and generate revenues. For example, many municipalities impose weight restrictions on the roads that lead to our customers’ job sites in the spring due to the muddy conditions caused by spring thaws, limiting our access and our ability to provide service in these areas. In 2013 and the first quarter of 2014, inclement weather negatively impacted our operations in Pennsylvania and North Dakota. In September 2011 and October 2012, portions of Pennsylvania and other areas in the eastern United States had record rainfall and flooding. In February 2011, portions of Texas had record snowfalls. During those periods, we and our customers had to significantly reduce or halt operations, resulting in a loss of revenue. In addition, the regions in which we operate have in the past been, and may in the future be, affected by natural disasters such as hurricanes, windstorms, floods and tornadoes. In certain areas, our business may be dependent on our customers’ ability to access sufficient water supplies to support their hydraulic fracturing operations. To the extent severe drought conditions or other factors prevent our customers from accessing adequate water supplies, our business could be negatively impacted. Future natural disasters or inclement weather conditions could severely disrupt the normal operation of our business, or our customers’ business, and have a material adverse effect on our financial condition, results of operations and cash flows.
Our financial and operating performance may be affected by the inability to renew landfill operating permits, obtain new landfills and expand existing ones.
We currently own one landfill and our ability to meet our financial and operating objectives may depend, in part, on our ability to acquire, lease, or renew landfill operating permits, expand existing landfills and develop new landfill sites. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills. Operating permits for landfills in states where we operate must generally be renewed every five to ten years, although some permits are required to be renewed more frequently. These operating permits often must be renewed several times during the permitted life of a landfill. The permit and approval process is often time consuming, requires numerous hearings and compliance with zoning, environmental and other requirements, is frequently challenged by special interest and other groups, and may result in the denial of a permit or renewal, the award of a permit or renewal for a shorter duration than we believed was otherwise required by law, or burdensome terms and conditions being imposed on our operations. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfills when necessary. Any of these circumstances could have a material adverse effect on our financial condition, results of operations and cash flows.
Our ability to utilize net operating loss carryforwards in the future may be subject to substantial limitations.
We believe that our ability to use our U.S. federal net operating loss carryforwards and other tax attributes in future years could be limited. Internal Revenue Code Sections 382 and 383 provide annual limitations with respect to the ability of a corporation to utilize its net operating loss (as well as certain built-in losses) and tax credit carryforwards, respectively (“Tax Attributes”),

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against future U.S. taxable income, if the corporation experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50 percentage points over a three-year period. A future transaction or transactions and the timing of such transaction or transactions could trigger an ownership change under Section 382. As a result of an ownership change, utilization of our Tax Attributes would be subject to an overall annual limitation determined in part by multiplying the total adjusted aggregate market value of our common stock immediately preceding the ownership change by the applicable long-term tax-exempt rate, possibly subject to increase based on the built-in gain, if any, in our assets at the time of the ownership change. Any unused annual limitation may be carried over to later years. If an ownership change were to occur, future U.S. taxable income may not be fully offset by existing Tax Attributes in a given year if such income exceeds our annual limitation, resulting in higher cash taxes. Additionally, a Section 382 limitation could result in Tax Attributes expiring unused.
We are self-insured against many potential liabilities, and our reserves may not be sufficient to cover future claims.
We maintain high deductible or self-insured retention insurance policies for certain exposures including automobile, workers’ compensation and employee group health insurance. We carry policies for certain types of claims to provide excess coverage beyond the underlying policies and per incident deductibles or self-insured retentions. Because many claims against us do not exceed the deductibles under our insurance policies, we are effectively self-insured for a substantial portion of our claims. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported. The insurance accruals are influenced by our past claims experience factors, which have a limited history, and by published industry development factors. The estimates inherent in these accruals are determined using actuarial methods that are widely used and accepted in the insurance industry. If our insurance claims increase or if costs exceed our estimates of insurance liabilities, we could experience a decline in profitability and liquidity, which would adversely affect our business, financial condition or results of operations. In addition, should there be a loss or adverse judgment or other decision in an area for which we are self-insured, then our business, financial condition, results of operations and liquidity may be adversely affected.
We evaluate our insurance accruals, and the underlying assumptions, regularly throughout the year and make adjustments as needed. While we believe that the recorded amounts are reasonable, there can be no assurance that changes to our estimates will not occur due to limitations inherent in the estimation process. Changes in our assumptions and estimates could have a material adverse effect on our financial condition, results of operations and cash flows.
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, storage, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties, disrupt our operations and the services we provide to customers, and damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business/operating margins, revenues and competitive position. These effects could have a material adverse effect on our financial condition, results of operations and cash flows.
A failure in our operational systems, or those of third parties, may adversely affect our business.
Our business is dependent upon our operational and technological systems to process a large amount of data. If any of our financial, operational, or other data processing systems fail or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our operational systems. In addition, dependence upon automated systems may further increase the risk that operational system flaws, employee tampering or manipulation of those systems could result in losses that are difficult to detect. We are heavily reliant on technology for communications, financial reporting, treasury management and many other important aspects of our business. Any failure in our operational systems could have a material adverse impact on our business. Third-party systems on which we rely could also suffer operational failures. Any of these occurrences could disrupt our business, including the ability to close our financial ledgers and report the results of our operations publicly on a timely basis or otherwise have a material adverse effect on our financial condition, results of operations and cash flows.

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Risks Related to Our Indebtedness

We have a substantial level of indebtedness and we may not be able to generate sufficient cash flow to meet our debt service and other obligations. We may refinance the ABL Facility and the 2018 Notes by borrowing debt, issuing securities in the capital markets, using cash on hand or from asset sales or any combination of the foregoing. In the absence of any such refinancing, we may need to obtain a waiver from our lenders under the ABL Facility or we may seek to restructure under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”), which will adversely affect our financial condition and impair potential recoveries by creditors, including the lenders under our ABL Facility and the holders of our 2018 Notes, and by holders of our common stock.

We are highly leveraged and a substantial portion of our liquidity needs results from debt service requirements and from funding our costs of operations and capital expenditures. As of December 31, 2015, we had $520.6 million ($520.2 million net of unamortized discount and premium) of indebtedness outstanding, consisting of $400.0 million of 2018 Notes, $101.8 million under the ABL Facility, and $18.8 million of capital leases and installment notes payable for vehicle financings and a note payable for the purchase of the remaining interest in AWS. As of February 29, 2016 our cash on hand was $20.7 million, after making $20.0 million in payments on the ABL Facility in January and February of 2016, thus reducing the amount outstanding under the ABL Facility to $81.8 million. As of February 29, 2016 our borrowing availability was $0.7 million, net of required reserves thereunder. We have incurred operating losses from continuing operations of $195.2 million and $457.2 million for the years ended December 31, 2015 and 2014, respectively. Given the current environment in the oil and natural gas industry, and the corresponding decline in oil and natural gas exploration, rig counts, and production activity in the markets that we serve, we anticipate revenues will continue to decline in 2016 over 2015. There can be no assurance that our liquidity position will not deteriorate if market conditions for our services worsen.

The ABL Facility contains certain financial covenants that require us to maintain a senior leverage ratio and, upon the occurrence of certain specified conditions, a fixed charge coverage ratio. The senior leverage ratio is calculated as the ratio of senior secured debt to adjusted EBITDA and is limited to 3.0 to 1.0. Our $400.0 million of 2018 Notes and our note payable issued to acquire the remaining interest in AWS, are not secured and thus are excluded from the calculation of this ratio. The fixed charge coverage ratio, which only applies if excess availability under the ABL Facility falls below 12.5% of the maximum revolver amount, requires the ratio of adjusted EBITDA less capital expenditures to fixed charges to be at least 1.1 to 1.0. As of December 31, 2015, we remained in compliance with our financial covenants; however, our ratio of adjusted EBITDA to fixed charges was less than 1.1 to 1.0 (as calculated pursuant to the ABL Facility). As such, our net availability was reduced by 12.5% of the maximum revolver amount, or $15.6 million. In addition, although our ratio of senior secured debt to adjusted EBITDA was less than the maximum of 3.0 to 1.0 as of December 31, 2015, if future operating performance does not improve or if our senior secured debt is not sufficiently repaid, we would exceed such limit as early as the first quarter of 2016, which would constitute an event of default. During the first quarter of 2016, the agent for the ABL Facility commenced a borrowing base redetermination involving a valuation of the net orderly liquidation value of our eligible machinery and equipment by a third party specialist. In connection with the preliminary results, which were not final as of the date of this filing, the lenders applied an $18.0 million reserve against our availability based on the estimated decline to our borrowing base. As a result, we made cumulative payments of $20.0 million during January and February of 2016, thus reducing the amount outstanding under the ABL Facility to $81.8 million as of February 29, 2016. If our ratio of senior secured debt to adjusted EBITDA were to exceed the maximum limit, we would request a waiver from the lenders or may be required to repay the outstanding balance of the ABL Facility. Failure to obtain a waiver or cure the default through repayment of the facility would create an event of cross default with our senior unsecured notes. There can be no assurance that the lenders will grant a waiver, and we currently do not have sufficient liquidity, including cash on hand, to repay amounts outstanding under the ABL Facility in order to maintain compliance with such covenant.

Our financing strategy includes evaluating and pursuing alternatives to our existing debt arrangements including opportunities to restructure our ABL Facility and the 2018 Notes, selling non-productive assets, managing and lowering our costs and capital spending, and managing our working capital to maximize liquidity. On March 11, 2016, we announced that we entered into a Restructuring Support Agreement with holders of more than 80% of the 2018 Notes related to a restructuring transaction. (See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Subsequent Events Related to Restructuring” for additional information relating to our proposed restructuring strategy.) If our financing strategy is unsuccessful or if we breach any financial covenants, we may need to obtain a waiver from our lenders under the ABL Facility, a consent from the holders of our 2018 Notes or be required to repay the outstanding indebtedness thereunder. There can be no assurance that such a waiver or consent would be granted or that the amounts outstanding under the ABL Facility and the 2018 Notes will not be accelerated, in which case we may need to restructure under the Bankruptcy Code.


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In such circumstance, we would likely attempt to pursue an orderly restructuring, for example, through a ‘‘pre-packaged’’ or ‘‘pre-negotiated’’ bankruptcy proceeding, but there can be no assurance that we would be able to do so. In order for any proposed plan of reorganization to be confirmed, the Bankruptcy Code, in addition to other legal requirements, requires that at least one impaired class of creditors votes to accept the plan of reorganization. In order for a class to approve a plan of reorganization, approval of over one-half in number of creditors and at least two-thirds in claim amount by those who vote in each impaired class of creditors are required. In addition to obtaining the required votes, the requirements for a bankruptcy court to approve a plan of reorganization include, among other judicial findings, that:

we acted in accordance with the applicable provisions of the Bankruptcy Code; and

the plan of reorganization has been proposed in good faith and not by any means forbidden by law.

In the event at least one class of impaired creditors or interest holders does not vote to accept the plan of reorganization, we would have to satisfy the ‘‘cram down’’ requirements of the Bankruptcy Code and show that the plan of reorganization does not unfairly discriminate and is fair and equitable with respect to those classes of claims and interests that did not vote to accept the plan of reorganization.

We may not be able to obtain approval of a disclosure statement and/or the required votes or the required judicial approval to the proposed plan of reorganization promptly, if at all. In such event, a prolonged Chapter 11 bankruptcy proceeding could adversely affect our relationships with customers, suppliers and employees, among other parties, which in turn could adversely affect our business, competitive position, financial condition, liquidity and results of operations and our ability to continue as a going concern. A weakening of our financial condition, liquidity and results of operations could adversely affect our ability to implement any proposed plan of reorganization. In addition, if a plan of reorganization is not confirmed by the bankruptcy court, we may be forced to liquidate our assets.

If a bankruptcy proceeding is commenced, it is also possible that the bankruptcy court may dismiss the proceeding or otherwise decide to abstain from hearing it on procedural grounds. In addition, the confirmation and effectiveness of any plan of reorganization would be subject to certain conditions and requirements in addition to those described above that may not be satisfied, and the bankruptcy court may conclude that the requirements for confirmation and effectiveness have not been satisfied.
Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
As of December 31, 2015, we had approximately $520.2 million of indebtedness, net of premiums and discounts of $0.4 million, outstanding on a consolidated basis, including our $400.0 million aggregate principal amount of 9.875% Senior Notes due 2018 (the "2018 Notes"), $101.8 million under our asset-based revolving credit facility (the “ABL Facility”) and $18.8 million of capital leases and installment notes payable for vehicle financings and a note payable for the purchase of the remaining interest in AWS. We had approximately $0.7 million of net availability under our credit facility as of February 29, 2016.
Our primary source of capital is from borrowings available under our ABL Facility, as well as from cash generated by our operations with additional sources of capital in prior years from additional debt and equity accessed through the capital markets. Our historical acquisition activity was highly capital intensive and required significant investments in order to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide. Additionally, we have historically issued equity as consideration in acquisition transactions. Our expected sources of capital in 2016 are expected to be from cash generated by our operations and, if available, borrowings under our ABL Facility. Other sources of cash may include potential sales of assets, sale/leaseback transactions, additional debt or equity financing and reductions in our operating costs.
Given the current macro environment and oil and natural gas prices, we experienced a decline in revenues in 2015 and anticipate a further decline in revenues in 2016, with corresponding reductions in costs from operations.  In this environment, we continuously strive to have sufficient cash generated by operations to meet our operating needs. Our financing strategy includes closely monitoring and lowering our operating costs and capital spending, and managing our working capital to enhance liquidity. Based on our current expectations and projections, we believe that our available cash, together with availability under the ABL Facility and other debt arrangements currently being negotiated including the Restructuring Support Agreement disclosed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Subsequent Events Related to Restructuring," will be sufficient to fund our operations, capital

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expenditures and interest payments under our debt obligations through at least the first quarter of 2017, which is our current, one-year forecast period.
However, our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our substantial level of indebtedness could have other important consequences. For example, our level of indebtedness and the terms of our debt agreements may:
make it more difficult for us to satisfy our financial obligations under our other indebtedness and our contractual and commercial commitments and increase the risk that we may default on our debt obligations;
prevent us from raising the funds necessary to repurchase the 2018 Notes tendered to us if there is a change of control, which would constitute a default under the indenture governing the 2018 Notes;
heighten our vulnerability to downturns in our business, our industry or in the general economy and restrict us from exploiting business opportunities or making acquisitions;
limit management’s discretion in operating our business;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, and other general corporate purposes;
place us at a competitive disadvantage compared to our competitors that have less debt;
limit our ability to borrow additional funds or cause lenders to be unwilling to lend additional amounts under existing or future lending credit facilities;
constrain our ability to fund increased working capital needs; and
limit our flexibility in planning for, or reacting to, changes in our business, the industry in which we operate or the general economy.
Each of these factors may have a material and adverse effect on our financial condition and viability. Our ability to make payments with respect to the 2018 Notes and to satisfy our other debt obligations will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors affecting us and our industry, many of which are beyond our control. We provide no assurances that we will be able to continue to service our debt obligations or refinance our debt when it comes due or that alternative debt arrangements including the Restructuring Support Agreement currently being negotiated will be successful. In addition, the indenture governing the 2018 Notes and the credit facility documentation contain restrictive covenants that will affect our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all of our debt.
Borrowings under our credit facility bear interest at variable rates. If we were to borrow funds and these rates were to increase significantly, our ability to borrow additional funds may be reduced and the risks related to our substantial indebtedness could increase. While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk. The effects of this risk could have a material adverse effect on our financial condition, results of operations and cash flows.
We may not be able to generate sufficient cash flow to meet our debt service, lease payments and other obligations due to events beyond our control.
Our interest expense related to the 2018 Notes, the borrowings under our credit facility, and our other indebtedness was approximately $49.2 million in the year ended December 31, 2015. Our ability to generate cash flows from operations, to make scheduled payments on or refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend on our future financial performance and our ability to generate cash in the future. Our future financial performance will be affected by a range of economic, financial, competitive, business and other factors that we cannot control, such as general economic, legislative, regulatory and financial conditions in our industry, the economy generally or other risks described in our reports filed with the SEC. A significant reduction in operating cash flows resulting from changes in economic, legislative or regulatory conditions, increased competition or other events beyond our control could increase the need for additional or alternative sources of liquidity and could have a material adverse effect on our business, financial condition, results of operations, prospects and our ability to service our debt and other obligations. If we are unable to service our indebtedness or to fund our other liquidity needs, we may be forced to adopt an alternative strategy that may include actions such as reducing or

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delaying capital expenditures, selling assets, restructuring or refinancing our indebtedness, seeking additional capital, or any combination of the foregoing. If we raise additional debt, it would increase our interest expense, leverage and our operating and financial costs. We cannot assure you that any of these alternative strategies could be affected on satisfactory terms, if at all, or that they would yield sufficient funds to make required payments on our indebtedness or to fund our other liquidity needs. Reducing or delaying capital expenditures or selling assets could delay or diminish future cash flows. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.
If for any reason we are unable to meet our debt service and repayment obligations, we would be in default under the terms of the agreements governing our indebtedness, which would allow our creditors at that time to declare all outstanding indebtedness to be immediately due and payable. This would likely in turn trigger cross-acceleration or cross-default rights between our applicable debt agreements. Under these circumstances, our lenders could compel us to apply all of our available cash to repay our borrowings or they could prevent us from making payments on the 2018 Notes or our other indebtedness. In addition, the lenders under our credit facility or other secured indebtedness could seek to foreclose on our assets that collateralize the facility. If the amounts outstanding under our indebtedness were to be accelerated, or were the subject of foreclosure actions, we cannot assure you that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders. The effects of this risk could have a material adverse effect on our financial condition, results of operations and cash flows.
Despite existing debt levels, we may still be able to incur substantially more debt, which would increase the risks associated with our leverage.
Even with our existing debt levels, we and our subsidiaries may be able to incur substantial amounts of additional debt in the future, some or all of which may be secured. As of February 29, 2016 we had approximately $0.7 million of net availability under our credit facility. In addition, the indenture governing the 2018 Notes and the credit facility documentation allow us to issue additional debt, including additional notes, as well as capital leases and project finance obligations along with other forms of indebtedness, under certain circumstances. Although the terms of the credit facility and the indenture governing the 2018 Notes limit our ability to incur additional debt, these terms do not and will not prohibit us from incurring additional debt for specific purposes or under certain circumstances, some or all of which may be secured. If new debt is added to our current debt levels, the related risks that we now face to satisfy our obligations could increase. The effects of this risk could have a material adverse effect on our financial condition, results of operations and cash flows.
Our credit facility and the indenture governing the 2018 Notes impose significant operating and financial restrictions on us and our subsidiaries that may prevent us from pursuing certain business opportunities and restrict our ability to operate our business.
The credit facility and the indenture governing the 2018 Notes contain covenants that restrict our and our subsidiaries’ ability to take various actions, such as:
transferring or selling assets;
paying dividends or distributions, buying subordinated indebtedness or securities, making certain investments or making other restricted payments;
incurring or guaranteeing additional indebtedness or issuing preferred stock;
making loans to employees for the purpose of purchasing equity interests in the Company;
creating or incurring liens;
incurring dividend or other payment restrictions affecting subsidiary guarantors;
consummating a merger, consolidation or sale of all or substantially all our assets;
entering into transactions with affiliates;
making investments in non-guarantor and unrestricted subsidiaries;
engaging in business other than a business that is the same or similar, reasonably related, complementary or incidental to our business;

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making acquisitions;
making capital expenditures;
entering into sale and leaseback transactions;
repurchasing shares of our common stock on the open market; and
prepaying, redeeming or repurchasing debt prior to stated maturities.

The ABL Facility, as amended, requires, and any future credit facilities will likely require, us to comply with specified financial ratios that may limit the amount we can borrow under our ABL Facility. A breach of any of the covenants under the indenture governing the 2018 Notes (the “Indenture”) or the ABL Facility, as applicable, could result in a default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain positive operating performance metrics including, but not limited to, earnings before interest, taxes, depreciation and amortization, or EBITDA, and ratios thereof, as well as certain balance sheet ratios. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.

The ABL Facility contains certain financial covenants that require us to maintain a senior leverage ratio and, upon the occurrence of certain specified conditions, a fixed charge coverage ratio. The senior leverage ratio is calculated as the ratio of senior secured debt to adjusted EBITDA (which includes net (loss) income plus certain items such as interest, taxes, depreciation, amortization, impairment charges, stock-based compensation and other adjustments as defined in the ABL Facility), and is limited to 3.0 to 1.0. Our $400.0 million of 2018 Notes and our note payable issued to acquire the remaining interest in AWS are not secured and thus are excluded from the calculation of this ratio. The fixed charge coverage ratio, which only applies if excess availability under the ABL Facility falls below 12.5% of the maximum revolver amount, requires the ratio of adjusted EBITDA (as defined) less capital expenditures to fixed charges (as defined) to be at least 1.1 to 1.0. The senior leverage ratio and fixed charge coverage ratio covenants could have the effect of limiting our availability under the ABL Facility, as additional borrowings would be prohibited if, after giving pro forma effect thereto, we would be in violation of either such covenant.

As of December 31, 2015, we remained in compliance with our financial covenants and availability was $16.5 million; however, our ratio of adjusted EBITDA to fixed charges was less than 1.1 to 1.0 (as calculated pursuant to the ABL Facility). As such, our net availability was reduced by 12.5% of the maximum revolver amount, or $15.6 million, resulting in approximately $0.9 million of net availability as of December 31, 2015. In addition, although our ratio of senior secured debt to adjusted EBITDA was less than the maximum of 3.0 to 1.0 as of December 31, 2015, if future operating performance does not improve, we would exceed such limit as early as the first quarter of 2016, which would constitute an event of default. If such a violation were to occur, we would request a waiver from the lenders or may be required to repay the outstanding balance of the ABL Facility. Acceleration by the lenders of amounts outstanding under the ABL Facility due to the event of default would create an event of cross default with our 2018 Notes. There can be no assurance that the lenders will grant a waiver, and we currently do not have sufficient liquidity, including cash on hand, to repay amounts outstanding under the ABL Facility in order to maintain compliance with such covenant.

The maximum amount we can borrow under our ABL Facility is subject to contractual and borrowing base limitations which could significantly and negatively impact our future access to capital required to operate our business. In addition to the financial covenants described above, the ABL Facility contains certain customary limitations on our ability to, among other things, incur debt, grant liens, make acquisitions and other investments, make certain restricted payments such as dividends, dispose of assets or undergo a change in control. The ABL Facility's borrowing base limitations are based upon eligible accounts receivable and equipment. If the value of our eligible accounts receivable or equipment decreases for any reason, or if some portion of our accounts receivable or equipment is deemed ineligible under the terms of our ABL Facility, the amount we can borrow under the ABL Facility could be reduced. These limitations could have a material adverse impact on our liquidity and financial condition. In addition, the administrative agent for our ABL Facility has the periodic right to commission appraisals of the assets comprising our borrowing base, and we are obligated to reimburse the cost of up to four appraisals including one field examination, during any 12 consecutive months. If an appraisal results in a reduction of the borrowing base, we may be required to repay a portion of the amount outstanding under the ABL Facility in order to remain in compliance with applicable borrowing limitations. There can be no assurance that we will have sufficient cash on hand or other sources of liquidity to make any such repayments.

The Indenture governing the 2018 Notes contains restrictive covenants on the incurrence of senior secured indebtedness, including incurring new borrowings under the ABL Facility, which would limit our ability to incur incremental new senior

25



secured indebtedness in certain circumstances and access to capital if our fixed charge coverage ratio falls below 2.0 to 1.0. To the extent that the fixed charge coverage ratio (as defined in the Indenture) is below 2.0 to 1.0, the Indenture prohibits our incurrence of new senior secured indebtedness under the ABL Facility or any other secured credit facility, at that point in time, to the greater of $150.0 million and the amount of debt as restricted by the secured leverage ratio, which is the ratio of secured debt to EBITDA, of 2.0 to 1.0, as determined pursuant to the Indenture. The 2.0 to 1.0 fixed charge coverage ratio and secured leverage ratio are incurrence covenants, not maintenance covenants. The covenants do not require repayment of existing borrowings incurred previously in accordance with the covenants, but rather limits new borrowings during any such period. As a result of the Fourth ABL Facility Amendment, our ability to incur new borrowings under the ABL Facility is limited to a maximum of $125.0 million irrespective of the permitted availability of up to $150.0 million under the 2018 Notes.

The ABL Facility and Indenture covenants described above are subject to important exceptions and qualifications. The continued effect of low oil and natural gas prices will negatively impact our ability to comply with our covenants, and we cannot guarantee that we will satisfy those requirements. If we do not obtain a long term waiver, it would result in a default under the Indenture, ABL Facility or other debt obligations, or any future credit facilities we may enter into, which could allow all amounts outstanding thereunder to be declared immediately due and payable, subject to the terms and conditions of the documents governing such indebtedness. If we were unable to repay the accelerated amounts, our secured lenders could proceed against the collateral granted to them to secure such indebtedness. This would likely in turn trigger cross-acceleration and cross-default rights under any other credit facilities and Indentures. If the amounts outstanding under the 2018 Notes or any other indebtedness outstanding at such time were to be accelerated or were the subject of foreclosure actions, we cannot guarantee that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.
We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by such restrictive covenants. These restrictions may also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions, execute its business strategy, effectively compete with companies that are not similarly restricted or engage in other business activities that would be in our interest. In the future, we may also incur debt obligations that might subject us to additional and different restrictive covenants that could affect our financial and operational flexibility. We cannot guarantee that we will be granted waivers or amendments to the Indenture governing the 2018 Notes, the ABL Facility or such other debt obligations if for any reason we are unable to comply with our obligations thereunder. Any such limitations on borrowing under our ABL Facility could have a material adverse impact on our liquidity.

Our ABL Facility and 2018 Notes come due in early 2018.  We may not have sufficient cash on hand to pay these debts when they come due under their normal maturity schedule.  Therefore, we may seek to refinance, extend or replace our ABL Facility and our 2018 Notes by borrowing debt, issuing securities in the capital markets, using cash on hand or from asset sales or any combination of the foregoing.  Any issuance of equity securities could be materially dilutive to existing stockholders. We cannot guarantee that we will be able to refinance, extend or replace our debt on acceptable terms, or at all, should we seek to do so.  If we are unable to refinance, extend or replace our debts at maturity or meet our payment obligations, our financial condition would be adversely affected.
Our borrowings under our credit facility expose us to interest rate risk.
Our earnings are exposed to interest rate risk associated with borrowings under our credit facility. Our credit facility carries a floating interest rate; therefore, as interest rates increase, so will our interest costs, which may have a material adverse effect on our financial condition, results of operations and cash flows.
Risks Related to Our Common Stock

We were delisted from the New York Stock Exchange, and there may be a limited trading volume for our common stock on the OTCQB.

In January 2016, our common stock was delisted from the New York Stock Exchange (“NYSE”). Our common stockcurrently trades on the OTCQB under the symbol NESC, and there may be limited trading volume for our common stock.  As a result, relatively small trades of our common stock may have a significant impact on the price of our common stock and, therefore, may contribute to the price volatility of our common stock. Because of limited trading volume in our common stock and the price volatility of our common stock, you may be unable to sell your shares of common stock when you desire or at the price you desire. The inability to sell your shares in a declining market because of such illiquidity or at a price you desire may substantially increase your risk of loss.

The delisting of our common stock from the NYSE could adversely affect institutional investor interest in holding or acquiring our common stock and otherwise reduce the number of investors willing to hold or acquire our common stock. This could

26



negatively affect our ability to raise capital necessary to maintain operations and service our debt. In addition, the delisting of our common stock from the NYSE may cause a loss of confidence among our employees and customers and otherwise negatively affect our financial condition, results of operations and cash flows.
We do not now, and are not expected to in the foreseeable future, meet the listing standards of the NYSE or any other national securities exchange. We presently anticipate that our common stock will continue to be quoted on the OTCQB. As a result of the limited trading volume for our common stock, investors may be unable to sell shares of common stock at the times or in the quantities desired and therefore may be required to hold some or all of their shares for an indefinite period of time.
Our stock price may be volatile, which could result in substantial losses for investors in our securities.
The stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
The market price of our common stock may also fluctuate significantly in response to the following factors, some of which are beyond our control:
variations in our quarterly operating results and changes in our liquidity position;
changes in securities analysts’ estimates of our financial performance;
inaccurate or negative comments about us on social networking websites or other media channels;
changes in market valuations of similar companies;
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new products or product enhancements, as well as our or our competitors' success or failure in successfully executing such matters;
changes in the price of oil and natural gas;
loss of a major customer or failure to complete significant transactions; and
additions or departures of key personnel.
Until our common stock was delisted in January 2016, our common stock traded on the New York Stock Exchange, or “NYSE,” since our initial public offering. The trading price of our common stock has ranged from a high of $107.40 on September 3, 2008 to a low of $0.13 on January 20, 2016. The reported price of our common stock on the OTCQB on February 29, 2016 was $0.31 per share.
We may issue a substantial number of shares of our common stock in the future and stockholders may be adversely affected by the issuance of those shares.
We may raise additional capital or refinance or restructure our existing debt by issuing shares of common stock, which will increase the number of common shares outstanding and may result in substantial dilution in the equity interest of our current stockholders and may adversely affect the market price of our common stock. We have previously issued 1.8 million shares of common stock at a total price of $80.1 million under a shelf registration statement on Form S-3 with the SEC and we could seek to issue new debt, equity and hybrid securities in the future. In addition, we have issued shares of our common stock pursuant to private placement exemptions from Securities Act registration requirements, and may do so in connection with financings, acquisitions, the settlement of litigation and other strategic transactions in the future. The issuance, and the resale or potential resale, of shares of our common stock could adversely affect the market price of our common stock and could be dilutive to our stockholders.
We currently do not intend to pay any dividends on our common stock.
We currently do not intend to pay any dividends on our common stock, and restrictions and covenants in our debt agreements may prohibit us from paying dividends now or in the future. While we may declare dividends at some point in the future, subject to compliance with such restrictions and covenants, we cannot assure you that you will ever receive cash dividends as a result of ownership of our common stock and any gains from investment in our common stock may only come from increases in the market price of our common stock, if any.

27



We are subject to anti-takeover effects of certain charter and bylaw provisions and Delaware law, as well as of our substantial insider ownership.
Provisions of our certificate of incorporation and bylaws, each as amended and restated, and Delaware law may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our management and board of directors. These provisions include:
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;
establishing a classified board of directors, so that only approximately one-third of our directors are elected each year;
providing our board of directors the ability to set the number of directors and to fill vacancies on the board of directors occurring between stockholder meetings;
providing that directors may only be removed for “cause” and only by the affirmative vote of the holders of at least a majority in voting power of our issued and outstanding capital stock; and
limiting the ability of our stockholders to call special meetings.
We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years following the date the beneficial owner acquired at least 15% of our stock, unless various conditions are met, such as approval of the transaction by our board of directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.
The existence of the foregoing provisions and anti-takeover measures, as well as the significant amount of common stock beneficially owned by our Chief Executive Officer and Chairman, Mr. Johnsrud, could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
Risks Related to Environmental and Other Governmental Regulation
We are subject to United States federal, state and local laws and regulations relating to health, safety, transportation, and protection of natural resources and the environment. Under these laws and regulations, we may become liable for significant penalties, damages or costs of remediation. Any changes in laws and regulations could increase our costs of doing business.
Our operations, and those of our customers, are subject to United States federal, state and local laws and regulations relating to health, safety, transportation and protection of natural resources and the environment and worker safety, including those relating to waste management and transportation and disposal of produced water and other materials. For example, we are subject to environmental regulation relating to disposal into injection wells, which can pose some risks of environmental liability, including leakage from the wells to surface or subsurface soils, surface water or groundwater. Liability under these laws and regulations could result in cancellation of well operations, fines and penalties, expenditures for remediation, and liability for property damage and personal injuries. In addition, federal, state and local laws and regulations may be passed which would have the effect of increasing costs to our customers and possibly decreasing demand for our services. For example, if new laws and regulations are passed requiring increased safety measures for rail transport of crude oil, such laws and regulations may make it more difficult and expensive for customers to transport their product, which could decrease our customers’ demand for our services and negatively affect our results of operations and financial condition. Similarly, many of our customers have intrastate pipeline operations that are subject to regulation by various agencies of the states in which they are located. If new laws and/or regulations that further regulate intrastate pipelines are adopted in response to equipment failures, spills, negative environmental effects, or public sentiment, our customers may face increased costs of compliance, and thus reduce demand for our services
Our business involves the use, handling, storage, and contracting for recycling or disposal of environmentally sensitive materials. Accordingly, we are subject to regulation by federal, state, and local authorities establishing investigation and health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. We also are subject to laws, ordinances, and regulations governing investigation and remediation of contamination at facilities we operate or to which we send hazardous or toxic substances or wastes for treatment, recycling, or disposal. In particular, CERCLA imposes joint, strict, and several liability on owners or operators of facilities at, from, or to which a release of hazardous substances has occurred; parties that generated hazardous substances that were released at such facilities; and parties

28



that transported or arranged for the transportation of hazardous substances to such facilities. A majority of states have adopted statutes comparable to and, in some cases, more stringent than CERCLA. If we were to be found to be a responsible party under CERCLA or a similar state statute, we could be held liable for all investigative and remedial costs associated with addressing such contamination. In addition, claims alleging personal injury or property damage may be brought against us as a result of alleged exposure to hazardous substances resulting from our operations.
Failure to comply with these laws and regulations could result in the assessment of significant administrative, civil or criminal penalties, imposition of cleanup and site restoration costs and liens, revocation of permits, and orders to limit or cease certain operations. In addition, certain environmental laws impose strict and/or joint and several liability, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time of those actions. For example, if a landfill or disposal operator mismanages our wastes in a way that creates an environmental hazard, we and all others who sent materials could become liable for cleanup costs, fines and other expenses many years after the disposal or recycling was completed. Future events, such as the discovery of currently unknown matters, spills caused by future pipeline ruptures, changes in existing environmental laws and regulations or their interpretation, and more vigorous enforcement policies by regulatory agencies, may give rise to additional expenditures or liabilities, which could impair our operations and could have a material adverse effect on our financial condition, results of operations and cash flows.
Although we believe that we are in substantial compliance with all applicable laws and regulations, legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors that may increase our future capital expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations.
Increased regulation of hydraulic fracturing, including regulation of the quantities, sources and methods of water use and disposal, could result in reduction in drilling and completing new oil and natural gas wells or minimize water use or disposal, which could adversely impact the demand for our services.
Demand for our services depends, in large part, on the level of exploration and production of oil and natural gas and the oil and natural gas industry’s willingness to purchase our services. Most of our customer base uses hydraulic fracturing to drill new oil and natural gas wells. Hydraulic fracturing is a process that is used to release hydrocarbons, particularly natural gas, from certain geological formations. The process involves the injection of water (typically mixed with significant quantities of sand and small quantities of chemical additives) under pressure into the formation to fracture the surrounding rock and stimulate movement of hydrocarbons through the formation. The process is typically regulated by state oil and natural gas commissions and has been exempt (except when the fracturing fluids or propping agents contain diesel fuels) since 2005 from United States federal regulation pursuant to the SDWA.
The EPA is conducting a comprehensive study of the potential environmental impacts of hydraulic fracturing activities, and a committee of the United States House of Representatives is also conducting an investigation of hydraulic fracturing practices. The results of the EPA study and House investigation could lead to restrictions on hydraulic fracturing. On February 11, 2014, the EPA released revised underground injection control (UIC) program permitting guidance for wells that use diesel fuels during hydraulic fracturing activities. EPA developed the guidance to clarify how companies can comply with a law passed by Congress in 2005, which exempted hydraulic fracturing operations from the requirement to obtain a UIC permit, except in cases where diesel fuel is used as a fracturing fluid. In a February 5, 2014 memorandum, EPA’s Inspector General (IG) announced plans to evaluate how EPA and the states have used their regulatory authority to address potential impacts of hydraulic fracturing on water resources. The IG reportedly will “evaluate what regulatory authority is available to the EPA and states, identify potential threats to water resources from hydraulic fracturing, and evaluate the EPA’s and states’ responses to them.” In addition, the EPA finalized regulations under the CAA in October 2012 regarding certain criteria and hazardous air pollutant emissions from hydraulic fracturing wells and, in October 2011, announced its intention to propose regulations by 2014 under the CWA to regulate wastewater discharges from hydraulic fracturing and other natural gas production. The EPA has also announced that it will propose rules on effluent limitations for the treatment of discharge of wastewater resulting from hydraulic fracturing in early 2015. Legislation has been introduced before Congress to provide for federal regulation of hydraulic fracturing, including, for example, requiring disclosure of chemicals used in the fracturing process or seeking to repeal the exemption from the SWDA. If adopted, such legislation would add an additional level of regulation and necessary permitting at the federal level and could make it more difficult to complete wells using hydraulic fracturing. Similar laws and regulations with respect to chemical disclosure also exist or are being considered by the United States Department of Interior and in several states, including certain states in which we operate, that could restrict hydraulic fracturing. The Delaware River Basin Commission is also considering regulations which may impact “hydrofracturing” water practices in certain areas of Pennsylvania, New York, New Jersey and Delaware. Some local governments have also sought to restrict drilling in certain areas.

29



Additionally, in response to concerns about seismic activity being triggered by the injection of produced waters into underground wells, certain regulators have adopted or are considering additional requirements related to seismic safety for hydraulic fracturing activities. For example, in January 2012, the Ohio Department of Natural Resources issued a temporary moratorium on the development of hydraulic fracturing disposal wells in northeast Ohio due to minor earthquakes reported in the area. In Texas, the Texas Railroad Commission (the "RRC") amended its existing oil and natural gas disposal well regulations to require applicants for new disposal wells to conduct seismic activity searches utilizing the U.S. Geological Survey to assess whether the RRC should impose limits on existing wells, including a temporary injection ban. Finally, the state of Arkansas imposed a moratorium on waste water injection in certain areas due to concerns that hydraulic fracturing may be related to increased earthquake activity. Such laws and regulations could delay or curtail production of oil and natural gas by our customers, and thus reduce demand for our services.
Future United States federal, state or local laws or regulations could significantly restrict, or increase costs associated with hydraulic fracturing and make it more difficult or costly for producers to conduct hydraulic fracturing operations, which could result in a decline in exploration and production. New laws and regulations, and new enforcement policies by regulatory agencies, could also expressly restrict the quantities, sources and methods of water use and disposal in hydraulic fracturing and otherwise increase our costs and our customers’ cost of compliance, which could minimize water use and disposal needs even if other limits on drilling and completing new wells were not imposed. Any decline in exploration and production or any restrictions on water use and disposal could result in a decline in demand for our services and have a material adverse effect on our business, financial condition, results of operations and cash flows.
Delays or restrictions in obtaining permits by our customers for their operations or by us for our operations could impair our business.
In most states, our customers are required to obtain permits from one or more governmental agencies in order to perform drilling and completion activities and we may be required to procure permits for construction and operation of our disposal wells and pipelines. Such permits are typically required by state agencies, but can also be required by federal and local governmental agencies. The requirements for such permits vary depending on the location where our, or our customers’, activities will be conducted. As with all governmental permitting processes, there is a degree of uncertainty as to whether a permit will be granted, the time it will take for a permit to be issued, and the conditions which may be imposed in connection with the granting of the permit. Delays or restrictions in obtaining saltwater disposal well permits could adversely impact our growth, which is dependent in part on new disposal capacity.
Our customers have been affected by moratoriums that have been imposed on the issuance of permits for drilling and completion activities in certain jurisdictions. For example, in December 2010, the State of New York imposed a moratorium on certain drilling and completion activities. In 2011, the state announced plans to lift the moratorium, however, in December 2014 the state announced that it intended to take action to prohibit certain drilling and completion activities, including hydraulic fracturing, in the state. A similar moratorium has been in place within the Delaware River Basin pending issuance of regulations by the Delaware River Basin Commission. Other states, including Texas, Arkansas, Pennsylvania, Wyoming and Colorado, have enacted laws and regulations applicable to our business activities, including disclosure of information regarding the substances used in hydraulic fracturing. California is presently considering similar requirements. The EPA published a rule on January 9, 2014 requiring oil and natural gas companies using hydraulic fracturing off the coast of California to disclose the chemicals they discharge into the ocean. Some of the drilling and completion activities of our customers may take place on federal land, requiring leases from the federal government to conduct such drilling and completion activities. In some cases, federal agencies have canceled oil and natural gas leases on federal lands. Consequently, our operations in certain areas of the country may be interrupted or suspended for varying lengths of time, causing a loss of revenue and potentially having a materially adverse effect on our financial condition, results of operations and cash flows.
We are subject to the trucking safety regulations, which are likely to be amended, and made stricter, as part of the initiative known as Compliance, Safety, Accountability, or “CSA.” If our current USDOT safety rating of “Satisfactory” is downgraded in connection with this initiative, our business and results of our operations may be adversely affected.
As part of the CSA initiative, the FMCSA is continuously revising its safety rating methodology and implementation of the same. These revisions will likely link safety ratings more closely to roadside inspection and driver violation data gathered and analyzed from month to month under the FMCSA’s new Safety Measurement System, or “SMS” and may place increased scrutiny on carriers transporting significant quantities of hazardous material. This linkage could result in greater variability in safety ratings than the current system. Preliminary studies by transportation consulting firms indicate that “Satisfactory” ratings (or any equivalent under a new SMS-based system) may become more difficult to achieve and maintain under such a system. If our operations lose their current “Satisfactory” rating, which is the highest and best rating under this initiative, we may lose some of our customer contracts that require such a rating, adversely affecting our financial condition, results of operations and cash flows.

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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease our corporate headquarters in Scottsdale, Arizona and we own or lease numerous facilities including administrative offices, sales offices, truck yards, maintenance and warehouse facilities, a landfill facility, a water treatment facility and well disposal sites in 10 states. We also own or lease 54 saltwater disposal wells in Texas, Ohio, North Dakota, Louisiana and Montana as of December 31, 2015. We believe that we have satisfactory title to the properties owned and used in our businesses, subject to liens for taxes not yet payable, liens incident to minor encumbrances, liens for credit arrangements (including liens under our credit facility) and easements and restrictions that do not materially detract from the value of these properties, our interests in these properties, or the use of these properties in our businesses.
We believe all properties that we currently occupy are suitable for their intended uses. We believe that we have sufficient facilities to conduct our operations. However, we continue to evaluate the purchase or lease of additional properties or the consolidation of our properties, as our business requires.
Item 3. Legal Proceedings
We are party to legal proceedings and potential claims arising in the ordinary course of our business, including, but not limited to, claims related to employment matters, contractual disputes, personal injuries and property damage. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. See “Legal Matters” in Note 17 of the Notes to the Consolidated Financial Statements herein for a description of our legal proceedings.
Item 4. Mine Safety Disclosures
None.

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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Company is a Delaware corporation and was formerly named Heckmann Corporation. At the 2013 annual meeting of shareholders, our shareholders approved an amendment to our Certificate of Incorporation to change our name from “Heckmann Corporation” to “Nuverra Environmental Solutions, Inc.” Our shares began trading on the New York Stock Exchange ("NYSE") under our new name and stock ticker symbol “NES,” effective as of the market open on May 20, 2013.
On December 3, 2013, we filed a Certificate of Amendment to our Restated Certificate of Incorporation in order to effect a one-for-ten reverse split of our common stock and our common stock began trading on the NYSE on a split-adjusted basis on the same date. No fractional shares were issued in connection with the reverse stock split. Furthermore, proportional adjustments were made to stock options, warrants, and restricted stock units. The change in the number of shares resulting from the reverse stock split has been applied retroactively to all shares and per share amounts presented in this Annual Report on Form 10-K.
The table below presents the intra-day high and low price per share of our common stock, as reported by the NYSE, for each of the quarters in the years ended December 31, 2014 and 2015, respectively: 
For the Year Ending December 31, 2014
 
High
 
Low
First Quarter
 
$
20.60

 
$
13.17

Second Quarter
 
$
20.68

 
$
15.32

Third Quarter
 
$
21.29

 
$
12.90

Fourth Quarter
 
$
15.11

 
$
4.80

 
 
 
 
 
For the Year Ending December 31, 2015
 
High
 
Low
First Quarter
 
$
5.73

 
$
1.65

Second Quarter
 
$
6.78

 
$
3.45

Third Quarter
 
$
6.29

 
$
1.26

Fourth Quarter
 
$
2.28

 
$
0.41

On January 19, 2016, we received notification from the NYSE Regulation, Inc. that trading of our common stock on the NYSE would be suspended before the opening of trading on January 20, 2016. The NYSE suspended trading and initiated delisting procedures with respect to our common stock as we had fallen below the NYSE's continued listing standard requiring an average global market capitalization during a consecutive 30 trading-day period of not less than $15.0 million. As a result of being delisted by the NYSE, our common shares began trading on the OTCQB Market beginning January 20, 2016 under the ticker symbol "NESC."
Holders
As of February 29, 2016, there were 384 holders of record of our common stock. The number of beneficial holders is substantially greater than the number of record holders because a significant portion of our common stock is held of record in broker “street names.” We estimate that as of December 31, 2015, there were approximately 17,000 beneficial holders of our common stock.
Dividends
We have not paid any dividends on our common stock to date, and we currently do not intend to pay dividends in the future. The payment of dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any dividends will be within the discretion of our board of directors and will be subject to other limitations as may be contained in our ABL Facility, the indenture governing the 2018 Notes or other applicable agreements governing our indebtedness. It is the present intention of our board of directors to retain all earnings, if any, for use in our business operations and, accordingly, our board does not anticipate declaring any dividends in the foreseeable future.
Unregistered Sales of Equity Securities
We did not make any sales of unregistered equity securities during the year ended December 31, 2015.

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Repurchases of Equity Securities
During the year ended December 31, 2015, we did not repurchase any options or warrants for shares of our common stock, nor did we repurchase any shares of our common stock on the open market.
Recent Performance
The following performance graph and related information shall not be deemed “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
Stock Performance Graph
The following performance graph compares the performance of our common stock to the S&P 500 Index, the Dow Jones Industrial Average Index (DJIA), the Russell 2000 Index and a peer group as established by management. The peer group consists of the following companies, each of which was selected on an industry and/or line-of business basis: Key Energy Services, Inc., Basic Energy Services, Inc., Superior Energy Services, Inc., and Pioneer Energy Services Corp. We feel that the Russell 2000 Index and the selected peer group provides a more meaningful comparison to our common stock's performance, and intend to compare our performance to these two indices going forward.
The graph below compares the cumulative five-year total return to holders of our common stock with the cumulative total returns of the listed S&P 500 Index, the DJIA Index, the Russell 2000 Index and our peer group. The graph assumes that the value of the investment in our common stock and each index (including reinvestment of dividends) was $100 at January 1, 2011 and tracks the return on the investment through December 31, 2015.


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Company / Index
 
January 1,
2011
 
December 31,
2011
 
December 31,
2012
 
December 31,
2013
 
December 31,
2014
 
December 31,
2015
NES
 
$
100.00

 
$
132.21

 
$
80.12

 
$
33.38

 
$
11.03

 
$
1.01

S&P 500 Index
 
100.00

 
100.00

 
113.40

 
146.97

 
163.71

 
162.52

DJIA Index
 
100.00

 
105.53

 
113.19

 
143.18

 
153.95

 
150.51

Russell 2000 Index
 
100.00

 
95.57

 
111.54

 
154.70

 
162.49

 
155.21

Peer Group
 
100.00

 
86.22

 
66.40

 
86.08

 
69.85

 
50.74

Item 6. Selected Financial Data
The following table presents selected consolidated financial information and other operational data for our business. You should read the following information in conjunction with Item 7 of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Statement of Operations Data
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
($ in thousands, except per share data)
Revenue
 
$
356,699

 
$
536,282

 
$
525,816

 
$
256,671

 
$
156,837

Loss from operations (1)(2)(3)(4)(5)
 
(144,839
)
 
(417,654
)
 
(149,659
)
 
(37,574
)
 
(5,412
)
Loss from continuing operations (1)(2)(3)(4)(5)
 
(195,167
)
 
(457,178
)
 
(134,040
)
 
(6,597
)
 
(108
)
(Loss) income from discontinued operations (2)(3)(6)
 
(287
)
 
(58,426
)
 
(98,251
)
 
9,124

 
(22,898
)
Net (loss) income attributable to common stockholders
 
(195,454
)
 
(515,604
)
 
(232,291
)
 
2,527

 
(23,006
)
Weighted average shares outstanding used in computing net (loss) income per basic and diluted common share
 
27,681

 
26,090

 
24,492

 
14,994

 
11,457

Basic and diluted loss per share from continuing operations
 
$
(7.05
)
 
$
(17.52
)
 
$
(5.47
)
 
$
(0.44
)
 
$
(0.01
)
Basic and diluted (loss) income per share from discontinued operations
 
$
(0.01
)
 
$
(2.24
)
 
$
(4.01
)
 
$
0.61

 
$
(2.00
)
Net (loss) income per basic and diluted share
 
$
(7.06
)
 
$
(19.76
)
 
$
(9.48
)
 
$
0.17

 
$
(2.01
)
 
(1)
Loss from operations and loss from continuing operations for the year ended December 31, 2015 includes a goodwill impairment charge of $104.7 million, restructuring charges of $7.1 million, approximately $1.4 million in litigation and environmental charges and the write-off of a portion of the unamortized deferred financings costs associated with amendments to the asset-based revolving credit facility of approximately $2.1 million.
(2)
Loss from operations and loss from continuing operations for the year ended December 31, 2014 included a goodwill impairment charge of $304.0 million, a long-lived asset impairment charge of $112.4 million, approximately $8.8 million in litigation and environmental charges and the write-off of a portion of the unamortized deferred financing costs associated with the Amended Revolving Credit Facility of approximately $3.2 million. Additionally, as a result of the on-going sales process of our industrial solutions division, we recorded charges totaling $74.4 million, which is included within "Loss from discontinued operations, net of income taxes" in our consolidated statement of operations herein.
(3)
During the fourth quarter of 2013, our board of directors approved and committed to a plan to divest our Thermo Fluids Inc. ("TFI") subsidiary, which comprises our industrial solutions business. Subsequently, the sales process began and as a result, we considered TFI to be held for sale. As such, all prior periods were restated to reflect TFI as discontinued operations. 2013 results included a $98.5 million goodwill impairment charge associated with our industrial solutions business in loss from discontinued operations. On April 11, 2015, we completed the TFI disposition with Safety-Kleen, Inc. for $85.0 million in an all-cash transaction, subject to working capital adjustments. See “Assets Held for Sale and Discontinued Operations” in Note 21 of the Notes to the Consolidated Financial Statements herein for further information. Loss from operations and loss from continuing operations for the year ended December 31, 2013 included a long-lived asset impairment charge of $111.9 million, $24.6 million in litigation settlement charges and the write-off of $4.3 million of investments.

34



(4)
Loss from operations and loss from continuing operations for the year ended December 31, 2012 included merger and acquisition costs of $7.7 million, impairment charges of $2.4 million and $3.7 million related to write-downs of the carrying values of a customer intangible asset and saltwater disposal wells, respectively, and a $1.4 million charge to accrue for the estimated costs of remediation and testing to comply with Louisiana Department of Environmental Quality requirements. In addition, loss from continuing operations for the year ended December 31, 2012 included a $2.6 million charge for the write-off of unamortized deferred financing costs due to the repayment and replacement of our prior credit facility. 2012 results also included amounts from the acquisitions of Keystone Vacuum, Inc. and related entities, Thermo Fluids Inc., Homer Enterprises, Inc., JB Transportation Services, Inc. (“All Phase”), Appalachian Water Services, LLC and Badlands Power Fuels, LLC from their transaction dates of February 3, 2012, April 10, 2012, May 31, 2012, June 15, 2012, September 1, 2012 and November 30, 2012, respectively. Finally, 2012 also included an income tax benefit from the release of a $38.5 million valuation allowance associated with net operating losses because of a determination that the realization of the associated deferred tax assets is more likely than not based on future taxable income arising from the reversal of deferred tax liabilities that we acquired in the TFI acquisition and the Power Fuels merger.
(5)
2011 results include amounts from the acquisitions of Bear Creek, LLC, Devonian Industries, Inc., Sand Hill Foundation, LLC, Excalibur Energy Services, Inc., Blackhawk, LLC and Consolidated Petroleum, Inc. from their acquisition dates of April 1, 2011, April 4, 2011, April 12, 2011, May 5, 2011 and June 14, 2011, respectively. Loss from continuing operations for the year ended December 31, 2011 also included charges of $2.1 million for start-up and commissioning costs associated with a pipeline in the Haynesville Shale area.
(6)
On September 30, 2011, we completed the disposition, through a sale and abandonment, of the China Water bottled water business. The business has, for all periods presented herein, been reported as discontinued operations for financial reporting purposes.
Balance Sheet Data
 
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
 
 
($ in thousands)
Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (1)
 
$
39,309

 
$
13,367

 
$
8,783

 
$
14,776

 
$
80,194

Total current assets
 
92,317

 
154,672

 
161,691

 
165,981

 
139,761

Property, plant and equipment, net (2)
 
406,188

 
475,982

 
498,541

 
579,022

 
270,054

Goodwill (2)
 

 
104,721

 
408,696

 
415,176

 
90,008

Total assets (2)(3)
 
531,327

 
871,572

 
1,410,763

 
1,644,339

 
539,681

Current portion of long-term debt (4)
 
508,417

 
4,863

 
5,464

 
4,699

 
11,914

Current liabilities
 
553,795

 
96,193

 
124,538

 
86,470

 
49,329

Long-term portion of debt (4)
 
11,758

 
592,455

 
549,713

 
561,427

 
132,156

Total liabilities
 
569,598

 
718,625

 
766,394

 
796,578

 
197,871

Total equity of Nuverra Environmental Solutions, Inc.
 
(38,271
)
 
152,947

 
644,369

 
847,761

 
341,810

(1)
The decrease to cash and cash equivalents in 2012 was due primarily to the use of cash to fund 2012 merger and acquisition activity.
(2)
Goodwill was reduced to zero in 2015 as a result of a goodwill impairment charge of $104.7 million. The 2014 decrease in goodwill and total assets related to a goodwill and long-lived asset impairment charge of $304.0 million and $112.4 million, respectively. 2013 results included an impairment of long-lived assets of $111.9 million. The 2012 increases to property, plant and equipment, goodwill and total assets were due to the 2012 acquisition and merger transactions.
(3)
Total assets as of December 31, 2014 and 2013 also reflect a reduction in goodwill relating to an impairment of $48.0 million and $98.5 million, respectively, for TFI which was included in assets held for sale at those year ends. Additionally, total assets as of December 31, 2014 also reflected a reduction in intangible assets of $26.4 million for TFI.
(4)
In April 2012 and November 2012, we issued $250.0 million and $150.0 million, respectively, aggregate principal amount of 9.875% senior unsecured notes due 2018 ("2018 Notes") to partially finance the acquisition of TFI and the merger with Power Fuels. As a result of the probability of breaching one of the financial covenants if we are not successful at

35



restructuring our debt (as discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Subsequent Events Related to Restructuring”), the carrying value of the ABL Facility and the 2018 Notes was reclassified as current in the consolidated balance sheet as of December 31, 2015.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements, and the Notes and Schedules related thereto, which are included in this Annual Report.
Company Overview
Nuverra Environmental Solutions, Inc. is among the largest companies in the United States dedicated to providing comprehensive, full-cycle environmental solutions to customers focused on the development and ongoing production of oil and natural gas from shale formations. Nuverra’s strategy is to provide one-stop, total environmental solutions, including delivery, collection, treatment, recycling, and disposal of water, wastewater, waste fluids, hydrocarbons, and restricted solids that are part of the drilling, completion, and ongoing production of shale oil and natural gas.
We operate in shale basins where customer exploration and production (“E&P”) activities are predominantly focused on shale oil and natural gas as follows:
Oil shale areas: includes our operations in the Bakken, Eagle Ford, Mississippian and Tuscaloosa Marine (both of which we substantially exited during the three months ended March 31, 2015) and Permian Basin Shale areas.
Natural gas shale areas: includes our operations in the Marcellus, Utica, Haynesville and Barnett (which we substantially exited during the three months ended March 31, 2014) Shale areas.
Nuverra supports its customers’ demand for diverse, comprehensive and regulatory compliant environmental solutions required for the safe and efficient drilling, completion and production of oil and natural gas from shale formations. Current services, as well as prospective services in which Nuverra has made investments, include (i) fluid logistics via water procurement, delivery, collection, storage, treatment, recycling and disposal, (ii) solid drilling waste collection, treatment, recycling and disposal, (iii) permanent and portable pipeline facilities, water infrastructure services and equipment rental services, and (iv) other ancillary services for E&P companies focused on the extraction of oil and natural gas resources.
To meet our customers’ environmental needs, Nuverra utilizes a broad array of assets to provide comprehensive environmental solutions. Our logistics assets include trucks and trailers, temporary and permanent pipelines, temporary and permanent storage facilities, ancillary rental equipment, treatment facilities, and liquid and solid waste disposal sites. We continue to expand our suite of solutions to customers who demand environmental compliance and accountability from their service providers.
As a result of our historical acquisition activity to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide, we have accumulated a large level of indebtedness. Due to the continued decline in oil and natural gas prices, and the resulting decrease in drilling and completion activities, there is lower demand for our services. The decrease in demand for our services, which we expect to continue into 2016, impacts our overall liquidity and our ability to generate sufficient cash to meet our debt obligations and operating needs.
Trends Affecting Our Operating Results
Our results are driven by demand for our services, which are in turn affected by E&P spending trends in the shale areas in which we operate, in particular the level of drilling activity (which impacts the amount of environmental waste products being managed) and active wells (which impacts the amount of produced water being managed). In general, drilling activity in the oil and natural gas industry is affected by the market prices (or anticipated prices) for those commodities. Persistent low natural gas prices have resulted in reduced drilling activity in “dry” gas shale areas such as the Haynesville and Marcellus Shale areas where natural gas is the predominant natural resource. In addition, the low natural gas prices have in the past caused many natural gas producers to curtail capital budgets and these cuts in spending curtailed drilling programs, as well as discretionary spending on well services in certain shale areas, and accordingly reduced demand for our services in these areas. Drilling and completion activities in the oil and "wet" gas basins such as the Eagle Ford, Permian Basin, Utica and Bakken shale areas experienced a dramatic decline in oil prices that began in the fourth quarter of 2014, which substantially reduced drilling and completion activity in these areas. Accordingly, our customer base reduced their capital programs and drilling and completion activity levels for 2015. We anticipate that the decrease in demand for our services will continue into 2016.
Our results are also driven by a number of other factors, including (i) our available inventory of equipment, which we have built through acquisitions and capital expenditures over the past several years, (ii) transportation costs, which are affected by fuel

36



costs, (iii) utilization rates for our equipment, which are also affected by the level of our customers’ drilling and production activities and competition, and our ability to relocate our equipment to areas in which oil and natural gas exploration and production activities are growing, (iv) the availability of qualified drivers (or alternatively, subcontractors) in the areas in which we operate, particularly in the Bakken and Marcellus/Utica Shale areas, (v) labor costs, which have been generally increasing through the periods discussed due to tight labor market conditions and increased government regulation, including the Affordable Care Act, (vi) developments in governmental regulations, (vii) seasonality and weather events and (viii) our health, safety and environmental performance record.
The following table summarizes our total revenues, loss from continuing operations before income taxes, loss from continuing operations and EBITDA (defined below) for the years ended December 31, 2015, 2014 and 2013 (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Revenue - from predominantly oil shale areas (a)
$
241,403

 
$
403,371

 
$
373,410

Revenue - from predominantly natural gas shale areas (b)
115,296

 
132,911

 
152,406

Total revenue
356,699

 
536,282

 
525,816

 
 
 
 
 
 
Loss from continuing operations before income taxes
(195,284
)
 
(469,641
)
 
(207,135
)
Loss from continuing operations
(195,167
)
 
(457,178
)
 
(134,040
)
EBITDA (c, d)
(75,579
)
 
(332,844
)
 
(54,196
)
_________________________
(a)
Represents revenues that are derived from predominantly oil-rich areas consisting of the Bakken, Eagle Ford, Mississippian and Tuscaloosa Marine (prior to our substantial exit from the Mississippian and Tuscaloosa Marine basins during the three months ended March 31, 2015) and Permian Basin Shale areas. Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a natural gas shale area.
(b)
Represents revenues that are derived from predominantly natural gas-rich areas consisting of the Marcellus, Utica, Haynesville and Barnett Shale areas (prior to our substantial exit from the Barnett basin during the three months ended March 31, 2014). Note that the Utica Shale area was previously included in the oil shale areas until the three months ended September 30, 2015 when it was reclassified as a natural gas shale area.
(c)
Defined as consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. EBITDA is not a recognized measure under generally accepted accounting principles in the United States (“GAAP”). See the reconciliation between loss from continuing operations and EBITDA under “Liquidity and Capital Resources - EBITDA” discussed later on.
(d)
The financial covenants referred to in Note 11 of the Notes to the Consolidated Financial Statements are based on EBITDA adjusted for certain items as defined in the debt agreements. Most notably, long-lived asset and goodwill impairments are allowed to be adjusted out of EBITDA in calculating the Adjusted EBITDA for the asset-based revolving credit facility financial covenant.
The accompanying consolidated financial statements have been prepared by management in accordance with the instructions to Form 10-K and the rules and regulations of the SEC. These statements include all normal recurring adjustments considered necessary by management to present a fair statement of the consolidated balance sheets, results of operations and cash flows. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in this Annual Report on Form 10-K.
As discussed in Note 20 of the Notes to the Consolidated Financial Statements herein, during the three months ended September 30, 2014, we completed the organizational realignment of our shale solutions business into three operating divisions, the Northeast, Southern and Rocky Mountain divisions. On February 4, 2015, we entered into a definitive agreement with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen agreed to acquire Thermo Fluids Inc. ("TFI") for $85.0 million in an all-cash transaction, subject to working capital adjustments. On April 11, 2015, we completed the TFI disposition with Safety-Kleen. As a result, TFI's assets and liabilities, results of operations and cash flows are presented as discontinued operations in the accompanying consolidated financial statements for the year ended December 31, 2015, as well as for the years ended December 31, 2014 and 2013 when it was considered held for sale (See Note 21 in the Notes to the Consolidated Financial Statements).

37



For trends affecting our business and the markets in which we operate see “Trends Affecting our Operating Results” presented above and also “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.
Impairment of Long-Lived Assets and Goodwill
Since late 2014, oil and natural gas prices have declined significantly to their lowest levels since 2003 and 1999, respectively. As a result of the reduced price of oil and natural gas and the subsequent downturn in the oil and natural gas industry, we have experienced a decline in demand and pricing for our services. Additionally, similar to the market price of many others in our industry, the market price of our common stock has continued to decline. As a result of these factors, indicators of potential impairment existed during 2015 for both goodwill and long-lived assets.

As of September 30, 2015, and prior to the annual goodwill impairment test, the entire goodwill balance of $104.7 million related to the Rocky Mountain division. Therefore, at September 30, 2015, we performed step one of the goodwill impairment test only for the Rocky Mountain division. To measure the fair value of the Rocky Mountain reporting unit, we used a combination of the discounted cash flow method and the guideline public company method. Based upon the results of the first step of the goodwill impairment test, we concluded that the fair value of the Rocky Mountain reporting unit was less than its carrying value, thereby requiring us to proceed to the second step of the goodwill impairment test. As part of the second step, we determined that for the Rocky Mountain reporting unit, the carrying value of the goodwill (or $104.7 million) exceeded the implied fair value of the reporting unit goodwill (or $0). Accordingly, during the three months ended September 30, 2015, we recognized an impairment charge of $104.7 million related to our Rocky Mountain division, thereby eliminating all remaining goodwill. This impairment charge is shown as "Impairment of goodwill" in the consolidated statement of operations.

During the three months ended December 31, 2015, due to the continued decline in activities in all basins as a result of further decreasing oil prices, we determined it was no longer cost effective to move the remaining equipment still located in the Mississippian (or "MidCon") basin (which we exited during the three months ended March 31, 2015) to other basins as originally planned. Additionally, based upon current market re-sale prices, we determined that we should keep the remaining equipment for future use in other basins when activities increase rather than sell these assets. Based upon these facts, we determined that the MidCon basin should be a separate asset group for purposes of reviewing our long-lived assets for impairment during the three months ended December 31, 2015. As of December 31, 2015, we have total long-lived assets of $423.1 million that remain subject to impairment. Continued drops in oil and natural gas prices and rig counts, combined with lower revenues than expected would likely result in further asset impairments.

Our impairment review of our long-lived assets during the three months ended December 31, 2015, concluded that the undiscounted cash flows for all asset groups other than than the MidCon basin were greater than the carrying amount, thus additional impairment analyses were not required. For the MidCon basin, which did not pass the recoverability test, the asset group's fair value was compared to the carrying amount.  As the asset group's fair value was less than the carrying amount, an impairment charge of $5.9 million was recorded for the amount by which the carrying amount exceeded the fair value. This impairment charge was recorded to "Other, net" in the consolidated statement of operations as part of restructuring expenses related to the exit of the MidCon Shale area (Note 9). If reduced customer activity levels continue to result in decreased demand for our services for a prolonged period of time, or if we otherwise make further downward adjustments to our projections, our actual cash flows could be less than our estimated cash flows, which could result in future impairment charges for long-lived assets.
During the year ended December 31, 2014, we recognized total impairment charges of $416.4 million. During the three months ended September 30, 2014, in coordination with our annual goodwill impairment test, we recognized a goodwill impairment charge of $100.7 million ($66.9 million in the Southern division and $33.8 million in the Northeast division), which is included in "Impairment of goodwill" in our consolidated statement of operations. During the three months ended December 31, 2014, due to the continued significant decline in oil and natural gas prices and the market condition of our common stock, we recognized an impairment charge of $112.4 million related to the customer relationship intangible asset in the Rocky Mountain division which is reported in "Impairment of long-lived assets" in our consolidated statement of operations. Additionally during the three months ended December 31, 2014, we recognized a goodwill impairment charge for the Rocky Mountain division of $203.3 million, which was included in "Impairment of goodwill" in the our consolidated statement of operations.
During the year ended December 31, 2013, we recognized long-lived asset impairment charges totaling $111.9 million for write-downs to the carrying values of our freshwater pipeline in the Haynesville Shale basin of $27.0 million and certain other long-lived assets including customer relationships 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, which is characterized as "Impairment of long-lived assets" in the consolidated statement of operations.

38



Results of Operations
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):
 
Year Ended
 
Percent of Revenue
 
 
 
 
 
December 31,
 
December 31,
 
Increase (Decrease)
 
2015
 
2014
 
2015
 
2014
 
2015 versus 2014
Non-rental revenue
$
327,655

 
$
463,418

 
91.9
 %
 
86.4
 %
 
$
(135,763
)
 
(29.3
)%
Rental revenue
29,044

 
72,864

 
8.1
 %
 
13.6
 %
 
(43,820
)
 
(60.1
)%
Total revenue
356,699

 
536,282

 
100.0
 %
 
100.0
 %
 
(179,583
)
 
(33.5
)%
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
279,881

 
392,458

 
78.5
 %
 
73.2
 %
 
(112,577
)
 
(28.7
)%
General and administrative expenses
39,327

 
59,187

 
11.0
 %
 
11.0
 %
 
(19,860
)
 
(33.6
)%
Depreciation and amortization
70,511

 
85,880

 
19.8
 %
 
16.0
 %
 
(15,369
)
 
(17.9
)%
Impairment of long-lived assets

 
112,436

 
 %
 
21.0
 %
 
(112,436
)
 
(100.0
)%
Impairment of goodwill
104,721

 
303,975

 
29.4
 %
 
56.7
 %
 
(199,254
)
 
(65.5
)%
Other, net
7,098

 

 
2.0
 %
 
 %
 
7,098

 
(100.0
)%
Total costs and expenses
501,538

 
953,936

 
140.6
 %
 
177.9
 %
 
(452,398
)
 
(47.4
)%
Loss from operations
(144,839
)
 
(417,654
)
 
(40.6
)%
 
(77.9
)%
 
(272,815
)
 
(65.3
)%
Interest expense, net
(49,194
)
 
(50,917
)
 
(13.8
)%
 
(9.5
)%
 
(1,723
)
 
(3.4
)%
Other income (expense), net
894

 
2,107

 
0.3
 %
 
0.4
 %
 
1,213

 
(57.6
)%
Loss on extinguishment of debt
(2,145
)
 
(3,177
)
 
(0.6
)%
 
(0.6
)%
 
(1,032
)
 
(32.5
)%
Loss from continuing operations before income taxes
(195,284
)
 
(469,641
)
 
(54.7
)%
 
(87.6
)%
 
(274,357
)
 
(58.4
)%
Income tax benefit
117

 
12,463

 
 %
 
2.3
 %
 
(12,346
)
 
(99.1
)%
Loss from continuing operations
(195,167
)
 
(457,178
)
 
(54.7
)%
 
(85.2
)%
 
(262,011
)
 
(57.3
)%
Loss from discontinued operations, net of income taxes
(287
)
 
(58,426
)
 
(0.1
)%
 
(10.9
)%
 
(58,139
)
 
(99.5
)%
Net loss attributable to common stockholders
$
(195,454
)
 
$
(515,604
)
 
(54.8
)%
 
(96.1
)%
 
$
(320,150
)
 
(62.1
)%
Non-Rental Revenue
Non-rental revenue consists of fees charged to customers for the sale and transportation of fresh water and saltwater by our fleet of logistics assets and/or through water midstream assets owned by us to customer sites for use in drilling and completion activities and from customer sites to remove and dispose of flowback and produced water originating from oil and natural gas wells. Non-rental revenue also includes fees for solids management services. Non-rental revenue for the year ended December 31, 2015 was $327.7 million, down $135.8 million, or 29.3%, from $463.4 million for the year ended December 31, 2014. In the Rocky Mountain division, lower drilling and completion activities during the year, as well as pricing pressures, led to lower non-rental revenue as compared to the prior year. Lower non-rental revenue in the Southern division was driven by our exit from the Mississippian shale area and Tuscaloosa Marine Shale logistics business, pricing pressures and overall reduced drilling and completion activities. These decreases were partially offset in the Northeast division due to increased activities from an expanded customer base as compared to the same period in the prior year, and an increase in water treatment revenues as a result of the AWS expansion completed in July 2014.
Rental Revenue
Rental revenue consists of fees charged to customers for use of equipment owned by us over the term of the rental period, as well as other fees charged to customers for items such as delivery and pickup. Rental revenue for the year ended December 31, 2015 was $29.0 million, down $43.8 million, or 60.1%, from $72.9 million for the year ended December 31, 2014. The decrease was the result of lower utilization of our rental fleet primarily in the Rocky Mountain and Southern divisions, in conjunction with the reduction in drilling and completion activities due to lower oil prices.

39



Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2015 were $279.9 million, versus $392.5 million for the year ended December 31, 2014, a decrease of 28.7%. The decrease in direct operating expenses is primarily attributable to lower compensation expenses and fuel costs, as well as repairs and maintenance costs associated with decreased activities. Additionally, we implemented various cost-management initiatives to reduce direct operating expenses given the decrease in activities due to lower oil and natural gas prices.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2015 were $39.3 million, down $19.9 million from $59.2 million for the year ended December 31, 2014. The decrease in general and administrative expenses is primarily due to a decrease in business activities and our cost-management initiatives, which resulted in lower bad debt expense and lower compensation expense during the year ended December 31, 2015. Additionally, the year ended December 31, 2014 included $2.1 million of integration and rebranding costs, along with $6.3 million of legal and environmental expenses for the Texas Cases and Shareholder Litigation, which did not occur in such magnitude in 2015.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2015 was $70.5 million, down approximately $15.4 million from $85.9 million for the year ended December 31, 2014. The decrease is primarily attributable to the write-off of the intangible assets in the Rocky Mountain division as of December 31, 2014, resulting from the long-lived asset impairment charges totaling $112.4 million in 2014.
Other, net
We recorded a charge totaling approximately $7.1 million in the year ended December 31, 2015 to restructure our business in certain shale basins and reduce costs, including an exit from the Mississippian shale area and the Tuscaloosa Marine Shale logistics business. Included in the $7.1 million of restructuring charges is approximately $5.9 million for the impairment of certain assets in the Mississippian shale area. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impairment of Long-Lived Assets and Goodwill", as well as Note 8 and Note 9 in the Notes to the Consolidated Financial Statements herein for further discussion.
Impairment of Long-Lived Assets
No charges were recorded to the impairment of long-lived assets line for the year ended December 31, 2015. The long-lived asset impairment charges of $112.4 million for the year ended December 31, 2014 consisted of the write-off of our customer relationship intangible located in our Rocky Mountain division following impairment testing that resulted from triggering events that occurred during the three months ended December 31, 2014, including the significant decline in oil and natural gas prices and the market price of the our common stock. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impairment of Long-Lived Assets and Goodwill" and Note 8 of the Notes to the Consolidated Financial Statements herein.
Impairment of Goodwill
Goodwill impairment amounted to $104.7 million for the year ended December 31, 2015 and related to our Rocky Mountain division, thereby eliminating all remaining goodwill on the consolidated balance sheet, as a result of our annual impairment test during the three months ended September 30, 2015. For the year ended December 31, 2014, total goodwill impairment charges were $304.0 million and represented a $33.8 million, $66.9 million, and $203.3 million reduction of the carrying value of goodwill associated with our Northeast, Southern and Rocky Mountain divisions, respectively, following impairment testing that resulted from triggering events that occurred throughout the year, including the significant decline in oil and natural gas prices and the market price of our common stock, as well as a redefinition of our reporting unit structure. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impairment of Long-Lived Assets and Goodwill" and Note 8 of the Notes to the Consolidated Financial Statements herein.
Interest Expense, net
Interest expense, net during the year ended December 31, 2015 was $49.2 million compared to $50.9 million for the year ended December 31, 2014. The decrease in interest expense was primarily attributable to lower borrowings on the asset-based revolving credit facility (the “ABL Facility”) during the year ended December 31, 2015, as compared to the borrowings on the ABL Facility during the year ended December 31, 2014.

40



Other Income (Expense), net
Other income (expense), net was $0.9 million of income for the year ended December 31, 2015 compared to $2.1 million of income for the year ended December 31, 2014. The decrease in other income (expense), net was primarily attributable to a $2.0 million gain related to a change in the fair value of our Heckmann Water Resources (CVR), Inc. contingent consideration obligation recognized in the year ended December 31, 2014, which reduced the obligation to zero.
Loss on Extinguishment of Debt
During the year ended December 31, 2015, as a result of two amendments to our ABL Facility, we wrote-off a portion of the unamortized deferred financings costs associated with the ABL Facility of approximately $2.1 million. In February 2014, we entered into the ABL Facility and wrote-off a portion of the unamortized deferred financing costs associated with our previous Amended Revolving Credit Facility of approximately $3.2 million during the year ended December 31, 2014.
Income Taxes
The income tax benefit for the year ended December 31, 2015 was $0.1 million (a 0.0% effective rate) compared to $12.5 million (effective rate of 2.7% ) in the prior year. The lower effective tax benefit rate in 2015 is primarily the result of the tax impact of the impairment of goodwill and an increased valuation allowance related to deferred tax assets.

We have significant deferred tax assets, consisting primarily of net operating losses (“NOLs”), which have a limited life, generally expiring between the years 2029 and 2035 and capital losses, which have a five year carryforward expiring in 2020. Management regularly assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred this year and in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income.

In light of our continued losses, at December 31, 2015, we determined that our deferred tax liabilities were not sufficient to fully realize our deferred tax assets and, as a result, a valuation allowance continues to be required to be recorded against our deferred tax assets. Accordingly, we have recorded a valuation allowance of approximately $171.7 million as of December 31, 2015.
Loss from Discontinued Operations
Loss from discontinued operations in the years ended December 31, 2015 and 2014 represents the financial results of TFI, which comprised our industrial solutions business, which was sold in April of 2015. Such loss, which is presented net of income taxes, was $0.3 million and $58.4 million for the years ended December 31, 2015 and 2014, respectively. The 2014 loss includes impairment charges of $74.4 million. See Note 21 in the Notes to the Consolidated Financial Statements herein for additional information.

41



Results of Operations
Year Ended December 31, 2014 Compared to the Year Ended December 31, 2013
The following table sets forth for each of the periods indicated our statements of operations data and expresses revenue and expense data as a percentage of total revenues for the periods presented (dollars in thousands):  
 
Year Ended
 
Percent of Revenue
 
 
 
 
 
December 31,
 
December 31,
 
Increase (Decrease)
 
2014
 
2013
 
2014
 
2013
 
2014 versus 2013
Non-rental revenue
$
463,418

 
441,421

 
86.4
 %
 
83.9
 %
 
$
21,997

 
5.0
 %
Rental revenue
72,864

 
84,395

 
13.6
 %
 
16.1
 %
 
(11,531
)
 
(13.7
)%
Total revenue
536,282

 
525,816

 
100.0
 %
 
100.0
 %
 
10,466

 
2.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Direct operating expenses
392,458

 
388,353

 
73.2
 %
 
73.9
 %
 
4,105

 
1.1
 %
General and administrative expenses
59,187

 
75,087

 
11.0
 %
 
14.3
 %
 
(15,900
)
 
(21.2
)%
Depreciation and amortization
85,880

 
99,236

 
16.0
 %
 
18.9
 %
 
(13,356
)
 
(13.5
)%
Impairment of long-lived assets
112,436

 
111,900

 
21.0
 %
 
21.3
 %
 
536

 
0.5
 %
Impairment of goodwill
303,975

 

 
56.7
 %
 
 %
 
303,975

 
100.0
 %
Other, net

 
899

 
 %
 
0.2
 %
 
(899
)
 
(100.0
)%
Total costs and expenses
953,936

 
675,475

 
177.9
 %
 
128.5
 %
 
278,461

 
41.2
 %
Loss from operations
(417,654
)
 
(149,659
)
 
(77.9
)%
 
(28.5
)%
 
267,995

 
179.1
 %
Interest expense, net
(50,917
)
 
(53,703
)
 
(9.5
)%
 
(10.2
)%
 
(2,786
)
 
(5.2
)%
Other income (expense), net
2,107

 
(3,773
)
 
0.4
 %
 
(0.7
)%
 
(5,880
)
 
(155.8
)%
Loss on extinguishment of debt
(3,177
)
 

 
(0.6
)%
 
 %
 
3,177

 
(100.0
)%
Loss from continuing operations before income taxes
(469,641
)
 
(207,135
)
 
(87.6
)%
 
(39.4
)%
 
262,506

 
126.7
 %
Income tax benefit
12,463

 
73,095

 
2.3
 %
 
13.9
 %
 
(60,632
)
 
(82.9
)%
Loss from continuing operations
(457,178
)
 
(134,040
)
 
(85.2
)%
 
(25.5
)%
 
323,138

 
241.1
 %
Loss from discontinued operations, net of income taxes
(58,426
)
 
(98,251
)
 
(10.9
)%
 
(18.7
)%
 
(39,825
)
 
(40.5
)%
Net loss attributable to common stockholders
$
(515,604
)
 
$
(232,291
)
 
(96.1
)%
 
(44.2
)%
 
$
283,313

 
122.0
 %
Non-Rental Revenue
Non-rental revenue for the year ended December 31, 2014 was $463.4 million, up $22.0 million from $441.4 million for the year ended December 31, 2013. The increase in revenues in our Rocky Mountain division was driven by improved pricing as our activity levels remained constant in 2014 as compared to 2013, coupled with higher revenues from the solids management services. Some of these gains were offset by decreased logistics and disposal activity levels in the Southern division and, to a lesser extent, the Northeast division which were partially mitigated by increases in overall pricing. Additionally, our business in the Northeast was negatively impacted by severe winter weather earlier in 2014, as well as the interruption of the operations of our largest customer in the region due to a natural gas well explosion and fire.
Rental Revenue
Rental revenue for the year ended December 31, 2014 was $72.9 million, down $11.5 million, or 13.7%, from $84.4 million for the year ended December 31, 2013. The decrease was the result of lower utilization of the Company’s rental fleet primarily in the Rocky Mountain division driven by increased competition and customer efficiencies.
Direct Operating Expenses
Direct operating expenses for the year ended December 31, 2014 were $392.5 million, versus $388.4 million for the year ended December 31, 2013, an increase of less than 2%. Overall repairs and maintenance increased while fuel costs decreased. Compensation and benefits costs were lower in the Southern and Northeast divisions, offset by the Rocky Mountain division. Additionally, we recorded a gain of $4.4 million related to the disposal of certain transportation assets in 2014, which was

42



partially offset by a charge of $1.9 million related to a contract settlement. Direct operating expenses as a percentage of revenue was nearly flat for the year ended December 31, 2014 when compared to the prior year period.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2014 amounted to $59.2 million, down $15.9 million from $75.1 million for the year ended December 31, 2013. General and administrative expenses in the year ended December 31, 2014 included approximately $2.1 million of integration and rebranding costs which were completed during the year. Additionally, we recorded $6.3 million of legal and environmental expenses, including for the Texas Cases and Shareholder Litigation. For the year ended December 31, 2013, general and administrative expenses included charges totaling $24.6 million for the settlement of the 2010 Derivative Action and 2010 Class Action litigation, along with integration and rebranding costs of $8.2 million. Excluding the impact of these items, the higher general and administrative expenses in 2014 are chiefly attributable to increased personnel costs associated with higher staffing levels, costs related to the termination of an executive employment agreement and certain severance costs.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2014 was $85.9 million, down approximately $13.4 million from $99.2 million for the year ended December 31, 2013. The decrease resulted from the reduction in basis of certain long-lived assets, including write-downs to the freshwater pipeline, disposal wells and transportation equipment, totaling $111.9 million recorded in 2013.
Other, net
We recorded a net charge totaling approximately $0.9 million in the year ended December 31, 2013 to restructure our business in certain shale basins and improve overall operating efficiency.
Impairment of Long-Lived Assets
Long-lived asset impairment amounted to $112.4 million for the year ended December 31, 2014, and consisted of the write-off of our customer relationship intangible located in our Rocky Mountain division following impairment testing that resulted from triggering events occurring in the three months ended December 31, 2014, including the significant decline in oil and natural gas prices and the market price of our common stock. Additionally, we recorded long-lived asset impairment charges of $111.9 million for the year ended December 31, 2013, which primarily consisted of write-downs totaling $108.4 million of the carrying values of our freshwater pipeline and certain other assets in the Haynesville, Eagle Ford and Barnett Shale basins. We also recognized a $3.5 million charge in 2013 to write down certain operating assets in connection with our decision to significantly curtail operations in the Tuscaloosa Marine Shale area. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impairment of Long-Lived Assets and Goodwill" and Note 8 of the Notes to the Consolidated Financial Statements herein.
Impairment of Goodwill
Goodwill impairment amounted to $304.0 million for the year ended December 31, 2014, and represents a $33.8 million, $66.9 million, and $203.3 million reduction of the carrying value of goodwill associated with our Northeast, Southern and Rocky Mountain divisions, respectively, following impairment testing that resulted from triggering events occurring throughout the year ended December 31, 2014, including the significant decline in oil and natural gas prices and the market price of our common stock, as well as a redefinition of our reporting unit structure. No goodwill impairment was recorded for the year ended December 31, 2013. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Impairment of Long-Lived Assets and Goodwill" and Note 8 of the Notes to the Consolidated Financial Statements herein.
Interest Expense, net
Interest expense, net during the year ended December 31, 2014 was $50.9 million compared to $53.7 million for the year ended December 31, 2013. The decrease in interest expense was primarily attributable to a lower average interest rate on the ABL Facility as compared to the Amended Revolving Credit Facility, and reduced amortization of deferred financing costs as a result of the write-off of a portion of such costs associated with the Amended Revolving Credit Facility (see “Loss on Extinguishment of Debt” below). These decreases were partially offset by higher average borrowings on the ABL Facility during the year ended December 31, 2014 compared to borrowings under the previous credit facility during the year ended December 31, 2013.

43



Other Income (Expense), net
Other income (expense), net was $2.1 million of income for the year ended December 31, 2014 compared to $3.8 million of expense for the year ended December 31, 2013. The year-to-year change in other income (expense), net was primarily attributable to a $2.0 million gain related to a change in the fair value of our Heckmann Water Resources (CVR), Inc. contingent consideration obligation. Additionally, during the year ended December 31, 2013 we recognized a $3.8 million write-down to our cost-method investment in Underground Solutions, Inc. ("UGSI") (Note 19) and a $1.0 million loss incurred in the first quarter of 2013 as a result of a “make-whole” agreement with the seller of TFI in connection with a decline in the value of shares of our common stock held in escrow following the acquisition.
Loss on Extinguishment of Debt
In February 2014, we entered into the ABL Facility and wrote-off a portion of the unamortized deferred financing costs associated with our Amended Revolving Credit Facility of approximately $3.2 million during the year ended December 31, 2014.
Income Taxes
The income tax benefit for the year ended December 31, 2014 was $12.5 million (a 2.7% effective rate) compared to $73.1 million (effective rate of 35.3% ) in the prior year. The lower effective tax benefit rate in 2014 is primarily the result of the tax impact of the impairment of goodwill and an increased valuation allowance related to deferred tax assets.

We have significant deferred tax assets, consisting primarily of net operating losses (“NOLs”), which have a limited life, generally expiring between the years 2029 and 2034. Management regularly assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative losses incurred this year and in recent years. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future taxable income. In light of our continued losses, at December 31, 2014, we determined that our deferred tax liabilities (excluding net deferred tax liabilities included in discontinued operations which were expected to not be available after the sale of the stock of TFI) were not sufficient to fully realize our deferred tax assets and, as a result, a valuation allowance was required against a portion of our deferred tax assets. Accordingly, we have recorded a valuation allowance of approximately $70.3 million as of December 31, 2014.
Loss from Discontinued Operations
Loss from discontinued operations in the years ended December 31, 2014 and 2013 represents the financial results of TFI, which comprises our industrial solutions business. Such loss, which is presented net of income taxes, was $58.4 million and $98.3 million for the years ended December 31, 2014 and 2013, respectively. The 2014 loss includes impairment charges of $74.4 million. The 2013 loss includes a goodwill impairment charge of $98.5 million in the quarter ended September 30, 2013 and $12.3 million of depreciation and amortization expense. See Note 21 of the Notes to the Consolidated Financial Statements herein for additional information.
Liquidity and Capital Resources
Cash Flows and Liquidity
Our primary source of capital is from cash generated by our operations and from borrowings available under our ABL Facility, with additional sources of capital in prior years from debt and equity accessed through the capital markets. Our historical acquisition activity was highly capital intensive and required significant investments in order to expand our presence in existing shale basins, access new markets and to expand the breadth and scope of services we provide. Additionally, we have historically issued equity as consideration in acquisition transactions. Our sources of capital in 2016 are expected to be from cash generated by our operations, borrowings under our ABL Facility to the extent our borrowing base and financial covenants permit such borrowings and borrowings under other debt arrangements currently being negotiated. Other sources of cash may include asset sales, sale/leaseback transactions, additional debt or equity financing and reductions in our operating costs.
At December 31, 2015 our total indebtedness was $520.6 million. We have incurred operating losses from continuing operations of $195.2 million, $457.2 million and $134.0 million for the years ended December 31, 2015, 2014 and 2013, respectively, including impairments of goodwill and long-lived assets. At December 31, 2015 we had cash and cash equivalents of $39.3 million and $0.9 million of net availability under the ABL Facility.


44



Our consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the consolidated financial statements, we had an accumulated deficit at December 31, 2015, and a net loss for the fiscal years ended December 31, 2015, 2014 and 2013. These factors, coupled with our large outstanding debt balance, raise substantial doubt about our ability to continue as a going concern. We are attempting to restructure our debt, generate sufficient revenues and reduce costs; however, our cash position may not be sufficient to support our daily operations if we are not successful. While we are executing a strategy to generate sufficient revenue and reduce costs to sustain operations through the downturn, there can be no assurances to that effect. Our ability to continue as a going concern is also dependent upon our ability to restructure our debt and to generate sufficient liquidity to meet our obligations and operating needs. We currently do not have enough liquidity, including cash on hand, to service the debt, operations, and pay-down debt to avoid covenant violations. See the "Subsequent Events Related to Restructuring" discussion later in this section for details on management's financing strategy to restructure the debt in 2016.
Given the current macro environment and oil and natural gas prices, we anticipate lower revenues in 2016 and reductions in costs from operations. During 2016, we expect to use cash on hand to repay a portion of our ABL Facility in order to maintain compliance with our ABL financial covenants and to cover any deterioration to our ABL Facility borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. In the event our cash on hand is not adequate to cover any shortfall, we would be required to seek alternate sources of debt at higher rates of interest, and such debt may not be available to us.
Our operational and financial strategies include closely monitoring and lowering our operating costs and capital spending to match revenue trends, managing our working capital and restructuring our debt to enhance liquidity. Based on our current expectations and projections, and assuming we are successful in restructuring our debt as contemplated by the Restructuring Support Agreement (discussed later in this section under "Subsequent Events Related to Restructuring"), we believe that our available cash and net cash generated from operations, together with availability under the ABL Facility and other debt arrangements currently being negotiated in connection with the Restructuring Support Agreement, will be sufficient to fund our operations, capital expenditures and interest payments under our proposed new debt obligations through at least the first quarter of 2017, which is our current, one-year forecast period. We provide no assurances that we will be able to continue to service our debt obligations or refinance our debt when it comes due, or that the Restructuring Support Agreement will be successful in providing sufficient liquidity for us to meet our debt payments and other financial obligations over our one-year forecast period or beyond.
The following table summarizes our sources and uses of cash from continuing operations for the years ended December 31, 2015, 2014 and 2013 (in thousands):
 
 
Year Ended December 31,
Net cash provided by (used in) continuing operations:
 
2015
 
2014
 
2013
Operating activities
 
$
49,827

 
17,376

 
66,668

Investing activities
 
68,178

 
(45,539
)
 
(52,788
)
Financing activities
 
(93,118
)
 
32,747

 
(19,873
)
Net increase (decrease) in cash and cash equivalents from continuing operations
 
$
24,887

 
$
4,584

 
$
(5,993
)
As of December 31, 2015, we had cash and cash equivalents of $39.3 million, an increase of $25.9 million from December 31, 2014. Generally, we manage our cash flow by drawing on our ABL Facility to fund short-term cash needs and by using any excess cash, after considering our working capital and capital expenditure needs, to pay down the outstanding balance of our ABL Facility.
Operating Activities — Net cash provided by operating activities was $49.8 million for the year ended December 31, 2015. The net loss from continuing operations, after adjustments for non-cash items, used cash of $6.3 million, whereas $42.0 million was generated in 2014, as described below. Changes in operating assets and liabilities provided $56.1 million primarily due to a decrease in accounts receivable due to a focused effort on collections and lower overall revenues. The non-cash items and other adjustments included $104.7 million in impairment of goodwill, $5.9 million in impairment of long-lived assets, $70.5 million of depreciation and amortization of intangible assets and the loss on extinguishment of debt of $2.1 million.
Net cash provided by operating activities was $17.4 million for the year ended December 31, 2014. The net loss from continuing operations, after adjustments for non-cash items, provided cash of $42.0 million, up significantly from the $26.0 million generated in 2013. Changes in operating assets and liabilities used $24.7 million primarily due to an increase in accounts receivable and a decrease in accounts payable which was partially offset by a decrease in prepaid expenses and other receivables. The non-cash items and other adjustments included $304.0 million in impairment of goodwill, $112.4 million in

45



impairment of long-lived assets, $85.9 million of depreciation and amortization of intangible assets and the loss on extinguishment of debt of $3.2 million, partially offset by a deferred income tax benefit of $12.6 million and a $4.8 million gain on disposal of property, plant and equipment.
Net cash provided by operating activities was $66.7 million for the year ended December 31, 2013. The net loss from continuing operations, after adjustments for non-cash items, provided cash of $26.0 million. Changes in operating assets and liabilities provided an additional $40.7 million and were largely the result of an increase in accounts payable and accrued liabilities and a decrease in accounts receivable. The non-cash items and other adjustments included $99.2 million of depreciation and amortization of intangible assets, $111.9 million of impairment of long-lived assets and the write-down of cost method investments of $4.3 million, partially offset by a deferred income tax benefit of $68.6 million.
Investing Activities — Net cash provided by investing activities was $68.2 million for the year ended December 31, 2015, which primarily consisted of $78.9 million of proceeds from the sale of TFI and $12.7 million of proceeds from the sale of property, plant and equipment, offset by $19.2 million of purchases of property, plant and equipment.
Net cash used in investing activities was $45.5 million for the year ended December 31, 2014 which consisted primarily of $55.7 million of purchases of property, plant and equipment, partially offset by $10.2 million in proceeds from sales of property plant and equipment.
Net cash used in investing activities was $52.8 million for the year ended December 31, 2013 and consisted primarily of $46.6 million of purchases of property, plant and equipment, $10.6 million for acquisitions, net of cash acquired. These cash outlays were partially offset by $4.4 million in proceeds from the settlement of the Power Fuels working capital adjustment and sales of property, plant and equipment.
Financing Activities — Net cash used in financing activities was $93.1 million for the year ended December 31, 2015 and was primarily a result of using the proceeds received from the sale of TFI to make $81.6 million of payments under our credit facilities. Additionally, we used cash of $11.2 million for payments under capital leases, notes payable and other financing activities, and $0.2 million for payments of deferred financing costs.
Net cash provided by financing activities was $32.7 million for the year ended December 31, 2014 and consisted primarily of $40.2 million of net borrowings under credit facilities, partially offset by $6.4 million of payments under capital leases, notes payable and other financing activities, and $1.0 million of payments of deferred financing costs.
Net cash used in financing activities was $19.9 million for the year ended December 31, 2013 and consisted of $11.0 million of net payments under our prior credit facility, $8.0 million of payments under capital leases, notes payable and other financing activities, and $0.9 million of payments of deferred financing costs.
Capital Expenditures
Cash required for capital expenditures (related to continuing operations) for the year ended December 31, 2015 totaled $19.2 million compared to $55.7 million for the year ended December 31, 2014. Capital expenditures for the year ended December 31, 2015 primarily related to expenditures to extend the useful life and productivity on our fleet of trucks, tanks, equipment and disposal wells. Additionally, we continued to invest in our solids treatment capabilities at our Bakken Shale landfill site. Capital expenditures in the year ended December 31, 2014 included payments for a thermal desorption system as part of the expansion of solids treatment capabilities at our Bakken Shale landfill site and other equipment. Historically, a portion of our transportation-related capital requirements were financed through capital leases, which are excluded from the capital expenditures figures cited in the preceding sentences. Such equipment additions under capital leases were approximately $2.9 million and $0.3 million for the years ended December 31, 2015 and December 31, 2014, respectively. We continue to focus on improving the utilization of our existing assets and optimizing the allocation of resources in the various shale areas in which we operate. Our capital expenditures program is subject to market conditions, including customer activity levels, commodity prices, industry capacity and specific customer needs. Our planned capital expenditures for 2016 are expected to be financed through cash flow from operations, borrowings under existing or new credit facilities if available, issuances of debt or equity, capital leases, other financing structures, or a combination of the foregoing.
Indebtedness
We are highly leveraged and a substantial portion of our liquidity needs result from debt service requirements and from funding our costs of operations and capital expenditures, including acquisitions. As of December 31, 2015, we had $520.6 million ($520.2 million net of unamortized discount and premium) of indebtedness outstanding, consisting of $400.0 million of 2018 Notes, $101.8 million under the asset-based revolving credit facility, $12.3 million of capital leases and installment notes payable for vehicle financings, and $6.5 million for notes payable related to acquiring the remaining interest in AWS.

46



Asset-Based Revolving Credit Facility and Amendments
In February 2014, we entered into a new asset-based revolving credit facility (“ABL Facility”) with Wells Fargo Bank as Administrative Agent and other lenders, which amended and replaced our Amended Revolving Credit Facility. Initially, the ABL Facility provided a maximum credit amount of $200.0 million, with an increase of up to $225.0 million through a $25.0 million accordion feature. Initial borrowings under the ABL Facility were used to refinance amounts outstanding under the Amended Revolving Credit Facility and fund certain related fees and expenses. In March 2014, we expanded the ABL Facility to increase the maximum availability from $200.0 million to $245.0 million and also increased the accordion feature from $25.0 million to $50.0 million. The terms and pricing of the facility remained the same and were unaffected by the upsizing of the facility. The ABL Facility is being used to support ongoing working capital needs and other general corporate purposes. The ABL Facility, which matures at the earlier of five years from the closing date or 90 days prior to the maturity of other material indebtedness including the 2018 Notes, is secured by substantially all of our assets.

In connection with the closing of the Thermo Fluids Inc. ("TFI") disposition, we entered into a Second Amendment, Consent and Release to Amended and Restated Credit Agreement (the “ABL Facility Amendment”), dated April 13, 2015, with Wells Fargo Bank, National Association, as agent, and the lenders named therein, which amends the ABL Facility. The ABL Facility Amendment reduced the maximum revolver availability from $245.0 million to $195.0 million and removed the accordion feature. Pricing of the ABL Facility remained the same other than corresponding changes reflecting the reduction of maximum revolver availability. The ABL Facility Amendment also reflects an updated appraisal for machinery and equipment that is used in the borrowing base formula.

In May 2015, we entered into a Third Amendment to Amended and Restated Credit Agreement for the purpose of adding four of our wholly-owned subsidiaries, consisting of Nuverra Rocky Mountain Pipeline, LLC, (or "RMP"), Nuverra Total Solutions, LLC, NES Water Solutions, LLC, and Heckmann Woods Cross, LLC (collectively, the “New Loan Parties”) as guarantors.

In November 2015, we entered into a Fourth Amendment, Consent and Release to Amended and Restated Credit Agreement (the "Fourth ABL Facility Amendment"). The Fourth ABL Facility Amendment reduced the maximum revolver availability from $195.0 million to $125.0 million, and institutes an Advance Rate equal to the lower of 94% of the net book value of eligible machinery and equipment, which falls 1% each month beginning on February 1, 2016 until the advance rate is reduced to 70% (the "Eligible Equipment NBV Advance Rate") or 84% of the net orderly liquidation value of eligible machinery and equipment which falls 1% each month beginning on February 1, 2016 until the advance rate is reduced to 60% (the "Eligible Equipment NOLV Advance Rate"). In addition, the Fourth ABL Facility Amendment releases RMP from all obligations under the ABL Facility, including as guarantor and a grantor under the guaranty and security agreement to the ABL Facility, releases all liens on the assets of RMP and equity interests in RMP to the extent they are transferred to a third party investor and establishes a separate permitted investment basket allowing for additional aggregate investments of up to $5.0 million in RMP. The Fourth ABL Facility Amendment also reflects an updated appraisal for machinery and equipment that is used in the borrowing base formula beginning November 2, 2015.
As of December 31, 2015, our borrowing base would support additional borrowings under the ABL Facility of up to $0.9 million. As of February 29, 2016, net availability under the ABL Facility was approximately $0.7 million.

Sale of TFI

In February 2015, Nuverra entered into a definitive agreement with Safety-Kleen, Inc. ("Safety-Kleen"), a subsidiary of Clean Harbors, Inc., whereby Safety-Kleen agreed to acquire TFI for $85.0 million in an all-cash transaction, subject to working capital adjustments. On April 11, 2015, Nuverra and Safety-Kleen completed the TFI disposition as contemplated by the previously disclosed purchase agreement. Pursuant to the purchase agreement, $4.3 million of the purchase price was deposited into an escrow account to satisfy our indemnification obligations under the purchase agreement. Any remaining balance in the escrow account will be released to us 18 months following the closing date, unless both parties mutually agree to release the remaining balance prior to such date. Pursuant to the purchase agreement, the purchase price paid at closing was adjusted based upon an estimated working capital adjustment, which is subject to a post-closing reconciliation, to reflect TFI’s actual working capital (calculated in accordance with the purchase agreement) on the closing date. After giving effect to the indemnity escrow, the estimated working capital adjustment and the payment of transaction fees and other expenses, the amount of net cash proceeds used to reduce the outstanding balance under the ABL Facility on the closing date was approximately $74.6 million. The post-closing working capital reconciliation is still in process and may result in an increase or decrease in our final net cash proceeds.

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Financial Covenants and Borrowing Limitations

The ABL Facility, as amended, requires, and any future credit facilities will likely require, us to comply with specified financial ratios that may limit the amount we can borrow under our ABL Facility. A breach of any of the covenants under the indenture governing the 2018 Notes (the “Indenture”) or the ABL Facility, as applicable, could result in a default. Our ability to satisfy those covenants depends principally upon our ability to meet or exceed certain positive operating performance metrics including, but not limited to, earnings before interest, taxes, depreciation and amortization, or EBITDA, and ratios thereof, as well as certain balance sheet ratios. Any debt agreements we enter into in the future may further limit our ability to enter into certain types of transactions.

The ABL Facility contains certain financial covenants that require us to maintain a senior leverage ratio and, upon the occurrence of certain specified conditions, a fixed charge coverage ratio. The senior leverage ratio is calculated as the ratio of senior secured debt to adjusted EBITDA (which includes net (loss) income plus certain items such as interest, taxes, depreciation, amortization, impairment charges, stock-based compensation and other adjustments as defined in the ABL Facility), and is limited to 3.0 to 1.0. Our $400.0 million of 2018 Notes and our note payable issued to acquire the remaining interest in AWS are not secured and thus are excluded from the calculation of this ratio. The fixed charge coverage ratio, which only applies if excess availability under the ABL Facility falls below 12.5% of the maximum revolver amount, requires the ratio of adjusted EBITDA (as defined) less capital expenditures to fixed charges (as defined) to be at least 1.1 to 1.0. The senior leverage ratio and fixed charge coverage ratio covenants could have the effect of limiting our availability under the ABL Facility, as additional borrowings would be prohibited if, after giving pro forma effect thereto, we would be in violation of either such covenant. As of December 31, 2015, we remained in compliance with our financial debt covenants and availability was $16.5 million; however, our ratio of adjusted EBITDA to fixed charges was less than 1.1 to 1.0 (as calculated pursuant to the ABL Facility). As such, our net availability was reduced by 12.5% of the maximum revolver amount, or $15.6 million, resulting in approximately $0.9 million of net availability as of December 31, 2015. In addition, although our ratio of senior secured debt to adjusted EBITDA was less than the maximum of 3.0 to 1.0 as of December 31, 2015, if future operating performance does not improve or if our senior secured debt is not sufficiently repaid, we would exceed such limit as early as the first quarter of 2016, which would constitute an event of default. During the first quarter of 2016, the agent for the ABL Facility commenced a borrowing base redetermination involving a valuation of the net orderly liquidation value of our eligible machinery and equipment by a third party specialist. In connection with the preliminary results, which were not final as of the date of this filing, the lenders applied an $18.0 million reserve against our availability based on the estimated decline to our borrowing base. As a result, we made cumulative payments of $20.0 million during January and February of 2016, thus reducing the amount outstanding under the ABL Facility to $81.8 million as of February 29, 2016. If our ratio of senior secured debt to adjusted EBITDA were to exceed the maximum limit, we would request a waiver from the lenders or may be required to repay the outstanding balance of the ABL Facility. Failure to obtain a waiver or cure the default through repayment of the facility would create an event of cross default with our senior unsecured notes. There can be no assurance that the lenders will grant a waiver, and we currently do not have sufficient liquidity, including cash on hand, to repay amounts outstanding under the ABL Facility in order to maintain compliance with such covenant.

The maximum amount we can borrow under our ABL Facility is subject to contractual and borrowing base limitations which could significantly and negatively impact our future access to capital required to operate our business. In addition to the financial covenants described above, the ABL Facility contains certain customary limitations on our ability to, among other things, incur debt, grant liens, make acquisitions and other investments, make certain restricted payments such as dividends, dispose of assets or undergo a change in control. The ABL Facility's borrowing base limitations are based upon eligible accounts receivable and equipment. If the value of our eligible accounts receivable or equipment decreases for any reason, or if some portion of our accounts receivable or equipment is deemed ineligible under the terms of our ABL Facility, the amount we can borrow under the ABL Facility could be reduced. These limitations could have a material adverse impact on our liquidity and financial condition. In addition, the administrative agent for our ABL Facility has the periodic right to commission appraisals of the assets comprising our borrowing base, and we are obligated to reimburse the cost of up to four appraisals including one field examination, during any 12 consecutive months. If an appraisal results in a reduction of the borrowing base, we may be required to repay a portion of the amount outstanding under the ABL Facility in order to remain in compliance with applicable borrowing limitations. At December 31, 2015 we had $0.9 million of net availability under the ABL Facility. During 2016, we expect further deterioration to our ABL borrowing base due to declining accounts receivable and downward pressure on the orderly liquidation values of our machinery and equipment. In addition, starting February 1, 2016, the NOLV Advance Rate of 84% falls 1% per month thereafter until the advance rate is reduced to 60%. During January and February of 2016, we made payments of $20.0 million against the outstanding balance of the ABL Facility to cover the borrowing base deterioration and to ensure the ratio of senior secured debt to adjusted EBITDA, as described above, was less than the maximum of 3.0 to 1.0. There can be no assurance that we will have sufficient cash on hand or other sources of liquidity to make any such future repayments.

48




Our ABL facility also contains a non-financial covenant in connection with an auditor's opinion on the consolidated financial statements. The covenant is considered breached in the event we receive a qualified opinion and/or explanatory paragraph related to going concern. As of March 11, 2016, the Report of Independent Registered Public Accounting Firm in the accompanying consolidated financial statements includes an explanatory paragraph regarding our ability to continue as a going concern. Consequently, we are in violation of the ABL Facility non-financial covenant, however our lenders have consented to a waiver for this breach. Despite this, without the successful completion of the restructuring transaction described below (see "Subsequent Events Related to Restructuring"), we expect to breach additional covenants within the next 12 months that would cause a default of our ABL Facility and Indenture debt, resulting in an acceleration of the related maturity dates. Although we expect to complete the restructuring transaction and avoid any further defaults, the transaction is not solely within our control and therefore prevailing accounting guidance requires us to report the affected debt balances as current liabilities in our consolidated balance sheet at December 31, 2015. As a result, the carrying value of the ABL Facility and the 2018 Notes was reclassified as current in the consolidated balance sheet as of December 31, 2015.

The Indenture governing the 2018 Notes contains restrictive covenants on the incurrence of senior secured indebtedness, including incurring new borrowings under the ABL Facility, which would limit our ability to incur incremental new senior secured indebtedness in certain circumstances and access to capital if our fixed charge coverage ratio falls below 2.0 to 1.0. To the extent that the fixed charge coverage ratio (as defined in the Indenture) is below 2.0 to 1.0, the Indenture prohibits our incurrence of new senior secured indebtedness under the ABL Facility or any other secured credit facility, at that point in time, to the greater of $150.0 million and the amount of debt as restricted by the secured leverage ratio, which is the ratio of secured debt to EBITDA, of 2.0 to 1.0, as determined pursuant to the Indenture. The 2.0 to 1.0 fixed charge coverage ratio and secured leverage ratio are incurrence covenants, not maintenance covenants. The covenants do not require repayment of existing borrowings incurred previously in accordance with the covenants, but rather limits new borrowings during any such period. As a result of the Fourth ABL Facility Amendment, our ability to incur new borrowings under the ABL Facility is limited to a maximum of $125.0 million irrespective of the permitted availability of up to $150.0 million under the 2018 Notes.

The ABL Facility and Indenture covenants described above are subject to important exceptions and qualifications. The continued effect of low oil and natural gas prices will negatively impact our compliance with our covenants, and we cannot guarantee that we will satisfy those requirements. If we do not obtain a long term waiver for any breached covenants, it would result in a default under the Indenture, ABL Facility or other debt obligations, or any future credit facilities we may enter into, which could allow all amounts outstanding thereunder to be declared immediately due and payable, subject to the terms and conditions of the documents governing such indebtedness. If we were unable to repay the accelerated amounts, our secured lenders could proceed against the collateral granted to them to secure such indebtedness. This would likely in turn trigger cross-acceleration and cross-default rights under any other credit facilities and Indentures. If the amounts outstanding under the 2018 Notes or any other indebtedness outstanding at such time were to be accelerated or were the subject of foreclosure actions, we cannot guarantee that our assets would be sufficient to repay in full the money owed to the lenders or to our other debt holders.
We may also be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by such restrictive covenants. These restrictions may also limit our ability to plan for or react to market conditions, meet capital needs or otherwise restrict our activities or business plans and adversely affect our ability to finance our operations, enter into acquisitions, execute its business strategy, effectively compete with companies that are not similarly restricted or engage in other business activities that would be in our interest. In the future, we may also incur debt obligations that might subject us to additional and different restrictive covenants that could affect our financial and operational flexibility. We cannot guarantee that we will be granted waivers or amendments to the Indenture governing the 2018 Notes, the ABL Facility or such other debt obligations if for any reason we are unable to comply with our obligations thereunder. Any such limitations on borrowing under our ABL Facility could have a material adverse impact on our liquidity.
Subsequent Events Related to Restructuring
On March 11, 2016, we announced that we entered into a Restructuring Support Agreement with holders of more than 80% of the 2018 Notes relating to a restructuring transaction (the “Restructuring”), which is subject to the satisfaction of certain closing conditions including shareholder approval and minimum noteholder participation, pursuant to which, among other terms and conditions: (i) we will offer to exchange up to $368.6 million aggregate principal amount of the 2018 Notes for new second lien secured notes due 2021 (the “2021 Notes”), (ii) approximately $31.4 million aggregate principal amount of the 2018 Notes purchased on the open market during the year ended December 31, 2015 by an entity controlled by Mr. Mark D. Johnsrud, our Chief Executive Officer and Chairman of the board of directors, will be exchanged for our common stock at a volume-weighted, market-average conversion price per share, (iii) certain holders of the 2018 Notes will fund a new $24.0 million principal amount “last out” first lien term loan due 2021 (the “Term Loan”) with annual interest at 13% to be paid in-kind by increasing the principal amount payable thereunder and due at maturity, and (iv) we will issue warrants to purchase up to 15% of our then outstanding common stock, at an exercise price of $0.01 per share, to the lenders under the Term Loan and certain

49



holders of the 2018 Notes that participate in the exchange offer. Also as part of the Restructuring, Mr. Johnsrud also has agreed to backstop a $5.0 million equity rights offering (the “Rights Offering”) that we expect to complete in May 2016. The net proceeds of the Term Loan and the Rights Offering will be used to pay down a portion of the outstanding balance on the ABL Facility, which will be available for reborrowing subject to any borrowing base limitations and compliance with other applicable terms and conditions under the ABL Facility.
As part of the Restructuring and concurrent with the foregoing transactions, we expect to amend our ABL Facility, for which we have received conditional consents from the required lenders thereunder. The proposed amendments include, among other terms and conditions, the following: (i) locking the Eligible Equipment advance rate at 80% of Net Orderly Liquidation Value, (ii) establishing an excess cash flow sweep, and (iii) replacing the secured leverage ratio covenant with a minimum cumulative EBITDA covenant, tested monthly beginning in April 2016.
Interest on the 2021 Notes will be payable semiannually on April 15 and October 15 of each year beginning on October 15, 2016, and will be paid in-kind by increasing the principal amount payable thereunder and due at maturity and/or in cash as follows: (i) interest payable on October 15, 2016 will be paid in-kind at a rate of 12.5% per annum, (ii) interest payable in 2017 will be paid 50% in-kind and 50% in cash at a rate of 10% per annum, (iii) interest payable on April 15, 2018 and thereafter will be paid in cash at a rate of 10% per annum until maturity. The liens securing the 2021 Notes will be contractually subordinated to the liens on such assets securing the ABL Facility and the Term Loan. Both the conversion of Mr. Johnsrud’s 2018 Notes to equity and the Rights Offering are subject to shareholder approval of amendments to our certificate of incorporation to provide for the issuance of sufficient additional shares of common stock.
The Restructuring and the transactions contemplated thereby are subject to additional terms and conditions. We provide no assurances that we will be able to successfully consummate the Restructuring or other alternatives to restructure our existing indebtedness, in which case we may need to restructure under the Bankruptcy Code.
Contractual Obligations
The following table details our contractual cash obligations as of December 31, 2015 (in thousands). See Note 16 of the Notes to the Consolidated Financial Statements for additional information.
 
 
Payments due by Period
 
 
Less than
1 Year
 
1-3 Years
 
3-5 Years
 
More than
5 Years
 
Total
Debt obligations including capital leases (1)
 
$
508,136

 
$
9,879

 
$
2,612

 
$

 
$
520,627

Interest on debt and capital leases (2)
 
43,369

 
649

 
76

 

 
44,094

Operating leases (3)
 
4,044

 
5,358

 
1,272

 
1,676

 
12,350

Contingent consideration (4)
 
8,628

 

 

 

 
8,628

Asset retirement obligation (5)
 

 

 
196

 
2,839

 
3,035

Total
 
$
564,177

 
$
15,886

 
$
4,156

 
$
4,515

 
$
588,734

(1)
Principal payments are reflected when contractually required. As a result of the probability of breaching one of the financial covenants if we are not successful at restructuring our debt (as previously discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Subsequent Events Related to Restructuring”), the carrying value of the ABL Facility and the 2018 Notes was reclassified as current in the consolidated balance sheet as of December 31, 2015, and the payoff of those debts is reflected in the "Less than 1 Year" column.
(2)
Estimated interest on debt for all periods presented is calculated using interest rates available as of December 31, 2015 and includes fees for the unused portion of our ABL Facility.
(3)
Represents operating leases primarily for facilities, vehicles and rental equipment.
(4)
Represents contingent consideration payments in connection with certain acquisitions, which are payable in shares of our common stock or cash at our discretion (Note 12).
(5)
Represents estimated future costs related to the closure and/or remediation of our disposal wells and landfill. As we are uncertain as to when these future costs will be paid, the majority of the obligation has been presented in the more than five years column.

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Off Balance Sheet Arrangements
As of December 31, 2015, we did not have any material off-balance-sheet arrangements other than operating leases, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
EBITDA
As a supplement to the financial statements in this Annual Report on Form 10-K, which are prepared in accordance with GAAP, we also present EBITDA. EBITDA is consolidated net income (loss) from continuing operations before net interest expense, income taxes and depreciation and amortization. We present EBITDA because we believe this information is useful to financial statement users in evaluating our financial performance. We also use EBITDA to evaluate our financial performance, make business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. EBITDA is not a measure of performance calculated in accordance with GAAP, may not necessarily be indicative of cash flow as a measure of liquidity or ability to fund cash needs, and there are material limitations to its usefulness on a stand-alone basis. EBITDA does not include reductions for cash payments for our obligations to service our debt, fund our working capital and pay our income taxes. In addition, certain items excluded from EBTIDA such as interest, income taxes, depreciation and amortization are significant components in understanding and assessing our financial performance. All companies do not calculate EBITDA in the same manner and our presentation may not be comparable to those presented by other companies. Financial statement users should use EBITDA in addition to, and not as an alternative to, net income (loss) from continuing operations as defined under and calculated in accordance with GAAP.
The table below provides a reconciliation between loss from continuing operations, as determined in accordance with GAAP, and EBITDA (in thousands):
 
Year Ended December 31,
 
2015
 
2014
 
2013
Loss from continuing operations
$
(195,167
)
 
$
(457,178
)
 
$
(134,040
)
Depreciation and amortization
70,511

 
85,880

 
99,236

Interest expense, net
49,194

 
50,917

 
53,703

Income tax benefit
(117
)
 
(12,463
)
 
(73,095
)
EBITDA
$
(75,579
)
 
$
(332,844
)
 
$
(54,196
)
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results, however, may materially differ from our calculated estimates.
We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements and changes in these judgments and estimates may impact future results of operations and financial condition. For additional discussion of our accounting policies see Note 3 of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Allowance for Doubtful Accounts
Accounts receivable are recognized and carried at the original invoice amount less an allowance for doubtful accounts. We provide an allowance for doubtful accounts to reflect the expected uncollectability of trade receivables for both billed and unbilled receivables on our rental and non-rental revenues. We perform ongoing credit evaluations of prospective and existing customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by a review of their current credit information. In addition, we continuously monitor collections and payments from customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s willingness or ability to pay, our compliance with customer invoicing requirements, the effect of general economic conditions and the ongoing relationship with the customer. Additionally, if the financial condition of a specific customer or our general customer base were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Accounts receivable are presented net of allowances for doubtful accounts of approximately $3.5 million, $7.6 million and $5.5 million at December 31, 2015, 2014 and 2013 respectively.

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Contingent Consideration
Contingent consideration primarily consists of earnout obligations in connection with business combinations that are payable by us to the former owners of an acquiree as part of the exchange for control of the acquiree if specified future events occur or conditions are met. Contingent consideration is recorded at the acquisition date fair value, which is measured at the present value of the consideration expected to be transferred. The fair value of contingent consideration is remeasured at the end of each reporting period with the change in fair value recognized as other income (expense) in the consolidated statements of operations. Estimates of the fair value of contingent consideration are impacted by changes to cash flow projections, results of operations, growth rates, discount rates and probabilities of achieving future milestones. Contingent consideration obligations were $8.6 million at December 31, 2015, all of which was classified as current in our Consolidated Balance Sheets.
Impairment of Long-Lived Assets and Intangible Assets with Finite Useful Lives
We review long-lived assets including intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate the carrying value of a long-lived asset (or asset group) may not be recoverable. If an impairment indicator is present, we evaluate recoverability by comparing the estimated future cash flows of the asset group, on an undiscounted basis, to their carrying values. The assets group represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the undiscounted cash flows exceed the carrying value, no impairment is present. If the undiscounted cash flows are less than the carrying value, the impairment is measured as the difference between the carrying value and the fair value of the long-lived asset (or asset group). Our determination that an event or change in circumstance has occurred potentially indicating the carrying amount of an asset (or asset group) may not be recoverable generally includes but is not limited to one or more of the following: (1) a deterioration in an asset’s financial performance compared to historical results, (2) a shortfall in an asset’s financial performance compared to forecasted results, (3) changes affecting the utility and estimated future demands for the asset, (4) a significant decrease in the market price of an asset, (5) a current expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated useful life, (6) a significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition, and (7) declining operations and severe changes in projected cash flows.
During the year ended December 31, 2015 we recognized an impairment charge for long-lived assets of $5.9 million which was recorded in "Other, net" in the consolidated statement of operations as part of restructuring expenses related to the exit of the MidCon Shale area (Note 9). During the years ended December 31, 2014 and 2013 we recognized impairment charges for long-lived assets and intangible assets with finite useful lives of $112.4 million and $111.9 million, respectively, in "Impairment of long-lived assets" in the consolidated statement of operations. We could recognize future impairments to the extent adverse events or changes in circumstances result in conditions in which long-lived assets are not recoverable. See Note 8 in the Notes to the Consolidated Financial Statements for additional information.
Income Taxes and Valuation of Deferred Tax Assets
We are subject to federal income taxes and state income taxes in those jurisdictions in which we operate. We exercise judgment with regard to income taxes in interpreting whether expenses are deductible in accordance with federal income tax and state income tax codes, estimating annual effective federal and state income tax rates and assessing whether deferred tax assets are, more likely than not, expected to be realized. The accuracy of these judgments impacts the amount of income tax expense we recognize each period.
With regard to the valuation of deferred tax assets, we record valuation allowances to reduce net deferred tax assets to the amount considered more likely than not to be realized. All available evidence is considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed.
Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example ordinary income or capital gain) within the carryback or carryforward periods available under the tax law. We have had significant pretax losses in recent years. Accordingly, we do not have income in carryback years. These cumulative losses also present significant negative evidence about the likelihood of income in carryforward periods.    
Future reversals of existing taxable temporary differences are another source of taxable income that is used in this analysis. As a result, deferred tax liabilities in excess of deferred tax assets generally will provide support for recognition of deferred tax assets. However, most of our deferred tax assets are associated with net operating loss (NOL) carryforwards, which statutorily expire after a specified number of years; therefore, we compare the estimated timing of these taxable timing difference reversals with the scheduled expiration of our NOL carryforwards, considering any limitations on use of NOL carryforwards, and record a valuation allowance against deferred tax assets that would expire unused.

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As a matter of law, we are subject to examination by federal and state taxing authorities. We have estimated and provided for income taxes in accordance with settlements reached with the Internal Revenue Service in prior audits. Although we believe that the amounts reflected in our tax returns substantially comply with the applicable federal and state tax regulations, both the IRS and the various state taxing authorities can take positions contrary to our position based on their interpretation of the law. A tax position that is challenged by a taxing authority could result in an adjustment to our income tax liabilities and related tax provision.
We measure and record tax contingency accruals in accordance with GAAP which prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a return. Only positions meeting the “more likely than not” recognition threshold at the effective date may be recognized or continue to be recognized. A tax position is measured at the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Codification 605 (ASC 605 “Revenue Recognition”) and Staff Accounting Bulletin No 104, and accordingly all of the following criteria must be met for revenues to be recognized: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed and determinable and collectability is reasonably assured.
The majority of our revenues are from the transportation of fresh and saltwater by our trucks or through temporary or permanent water transport pipelines to customer sites for use in drilling and hydraulic fracturing activities and from customer sites to remove and dispose of flowback and produced water originating from oil and natural gas wells. Revenues are also generated through fees charged for disposal of oilfield wastes in our landfill, disposal of fluids in our disposal wells and from the rental of tanks and other equipment. Certain customers are under contract with us to utilize our saltwater pipeline and have an obligation to dispose of a minimum quantity (number of barrels) of saltwater over the contract period. Transportation and disposal rates are generally based on a fixed fee per barrel of disposal water or, in certain circumstances transportation is based on an hourly rate. Revenue is recognized based on the number of barrels transported or disposed of at hourly rates for transportation services, depending on the customer contract. Rates for other services are based on negotiated rates with our customers and revenue is recognized when the services have been performed.
Our discontinued industrial solutions business derived the majority of its revenue from the sale of used motor oil and antifreeze after it is refined by one of its processing facilities. We recognized revenue upon shipment or delivery, dependent on contracted terms, of salable fuel oil or upon recovery service provided in the receipt of waste oil and antifreeze per specific customer contract terms. Transportation costs charged to customers were also included in revenue.
Environmental and Legal Contingencies
We have established liabilities for environmental and legal contingencies. We record a loss contingency for these matters when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In determining the liability, we consider a number of factors including, but not limited to, the jurisdiction of the claim, related claims, insurance coverage when insurance covers the type of claim and our historic outcomes in similar matters, if applicable. A significant amount of judgment and the use of estimates are required to quantify our ultimate exposure in these matters. The determination of liabilities for these contingencies is reviewed periodically to ensure that we have accrued the proper level of expense. The liability balances are adjusted to account for changes in circumstances for ongoing issues, including the effect of any applicable insurance coverage for these matters. While we believe that the amount accrued to-date is adequate, future changes in circumstances could impact these determinations.
We record obligations to retire tangible, long-lived assets on our balance sheet as liabilities, which are recorded at a discount when we incur the liability. A certain amount of judgment is involved in estimating the future cash flows of such obligations, as well as the timing of these cash flows. If our assumptions and estimates on the amount or timing of the future cash flows change, it could potentially have a negative impact on our earnings.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The amendments in this update will be added to the ASC as Topic 606, Revenue from Contracts with Customers, and replaces the guidance in Topic 605. The underlying principle of the guidance in this update is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. This new revenue standard also calls for more detailed disclosures and provides guidance for transactions that weren’t addressed completely, such as service revenue and contract modifications which may be applied retrospectively or modified retrospectively. In August 2015, the FASB issued ASU No. 2015-14, Revenue from

53



Contracts with Customers (Topic 606): Deferral of the Effective Date ("ASU 2015-14"). The guidance in ASU 2015-14 delays the effective date for the new revenue recognition guidance outlined in ASU 2014-09 to reporting periods beginning after December 15, 2017, which for us is the reporting period starting January 1, 2018. We are reviewing the guidance in ASU 2014-09 and have not yet assessed the impact, if any, on our consolidated financial statements and have not determined our method of adoption.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In doing so, companies will have reduced diversity in the timing and content of footnote disclosures than under today’s guidance. ASU 2014-15 is effective for reporting periods beginning after December 15, 2016, which for us is the reporting period starting January 1, 2017, with early adoption permitted. We are reviewing the guidance in ASU 2014-15 and evaluating the impact this new guidance may have on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends ASC Subtopic 835-30, Interest - Imputation of Interest.  The amendments in this ASU simplify the presentation of debt issuance costs and align the presentation with debt discounts. Entities will be required to present debt issuance costs as a direct deduction from the face amount of the related note, rather than as a deferred charge.  Upon adoption, the amended guidance will affect our classification of debt issuance costs, which are currently classified in "Other assets" in the condensed consolidated balance sheets.  The reclassification of debt issuance costs will effectively decrease "Other assets" and correspondingly decrease the respective long-term debt balances.  The amendments in this ASU require retrospective application, with related disclosures for a change in accounting principle.  Upon adoption, we will comply with these disclosure requirements by providing the nature and reason for the change, the transition method, a description of the adjusted prior period information and the effect of the change on the financial statement line items. For public business entities, the amendments in this ASU will be effective for financial statements issued for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years.  We will adopt this guidance effective January 1, 2016 as required. Our total debt issuance costs as of December 31, 2015 were $10.9 million.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes. The new guidance requires that deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current in a statement of financial position. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016, with early adoption permitted. We early adopted this new guidance on a prospective basis for the fiscal year ended December 31, 2015.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk    
Inflation
Inflationary factors, such as increases in our cost structure, could impair our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of sales revenue if the selling prices of our products do not increase with these increased costs.
Commodity Risk
We are subject to market risk exposures arising from declines in oil and natural gas drilling activity in unconventional areas, which is primarily a function of the market price for oil and natural gas. Various factors beyond our control affect the market prices for oil and natural gas, including but not limited to the level of consumer demand, governmental regulation, the price and availability of alternative fuels, political instability in foreign markets, weather-related factors and the overall economic environment. Market prices for oil and natural gas historically have been volatile and unpredictable, and we expect this volatility to continue in the future. Prolonged declines in the market price of oil and/or natural gas could contribute to declines in drilling activity and accordingly would reduce demand for our services. We attempt to manage this risk by strategically aligning our assets with those areas where we believe demand is highest and market conditions for our services are most favorable. If there is further deterioration in our business operations or prospects, our stock price, the broader economy or our industry, including further declines in oil and natural gas prices, the value of our long-lived assets and goodwill, or those we may acquire in the future, could decrease significantly and result in additional impairment and financial statement write-offs which could have a material adverse effect on our financial condition, results of operations and cash flows.

54



Interest Rates
As of December 31, 2015 the outstanding principal balance on ABL Facility was $101.8 million with variable rates of interest based on, at the Company’s election, (i) the greater of (a) the prime lending rate as publicly announced by Wells Fargo, (b) the Federal Funds rate plus 0.5% or (c) the one month LIBOR plus one percent, plus, in each case, an applicable margin of 0.75% to 1.50% or (ii) the LIBOR rate plus an applicable margin of 1.75% to 2.50%. The weighted average interest rate for the year ended December 31, 2015 was 2.84%. We have assessed our exposure to changes in interest rates on variable rate debt by analyzing the sensitivity to our earnings assuming various changes in market interest rates. Assuming a hypothetical increase of 1% to the interest rates on the average outstanding balance of our variable rate debt portfolio during the year ended December 31, 2015, our net interest expense for the year ended December 31, 2015 would have increased by an estimated $1.0 million, respectively.
As of December 31, 2015 the carrying value and the fair value of our 2018 Notes was $400.0 million and $138.8 million, respectively. The fair value of our 2018 Notes is affected, among other things, by changes to market interest rates. Should we decide to retire our 2018 Notes early, a change in interest rates could affect our future repurchase price. We have assessed our exposure to changes in interest rates by analyzing the sensitivity to the fair value of our 2018 Notes assuming various changes in market interest rates. Assuming a hypothetical increase to market interest rates of 1%, we estimate the fair value of our 2018 Notes would decrease by approximately $2.8 million. Assuming a hypothetical decrease to market interest rates of 1%, we estimate the fair value of our 2018 Notes would increase by approximately $1.2 million.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in Item 15. “Exhibits, Financial Statement Schedules” contained in Part IV, Item 15 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountant on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in company reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

55



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2015.
Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting. This report has been included on page 57 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.


56




Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Nuverra Environmental Solutions, Inc.:

We have audited Nuverra Environmental Solutions Inc.’s (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Nuverra Environmental Solution, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A (a), Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Nuverra Environmental Solutions, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Nuverra Environmental Solutions, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2015, and our report dated March 11, 2016 expressed an unqualified opinion on those consolidated financial statements. Our report on the consolidated financial statements dated March 11, 2016 contains an explanatory paragraph that states there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP
Phoenix, Arizona
March 11, 2016



57



Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance

The information required by this item will be contained in, and is incorporated by reference to, the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2015.
Item 11. Executive Compensation

The information required by this item will be contained in, and is incorporated by reference to, the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be contained in, and is incorporated by reference to, the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be contained in, and is incorporated by reference to, the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2015.
Item 14. Principal Accounting Fees and Services

The information required by this item will be contained in, and is incorporated by reference to, the definitive Proxy Statement for our 2016 Annual Meeting of Stockholders or a Form 10-K/A which, in either case, we will file with the Securities and Exchange Commission within 120 days after our fiscal year ended December 31, 2015.

58



PART IV

Item 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Annual Report on Form 10-K:
1. Audited Consolidated Financial Statements:
2. Financial Statement Schedules: All financial statement schedules have been omitted since they are not required, not applicable, or the information is otherwise included in the audited consolidated financial statements.
(b)
The exhibits listed on the “Exhibit Index” following the audited consolidated financial statements are filed with this Annual Report on Form 10-K or incorporated by reference as set forth below.

59



SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale, State of Arizona, on March 11, 2016.
 
 
 
 
Nuverra Environmental Solutions, Inc.
 
 
 
 
 
 
 
 
By:
 
/s/    MARK D. JOHNSRUD        
 
 
 
 
Name:
 
Mark D. Johnsrud
 
 
 
 
Title:
 
Chief Executive Officer, President and Chairman

POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark D. Johnsrud and Gregory J. Heinlein, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.


60



Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Signature
  
Title
 
Date
 
 
 
/s/    MARK D. JOHNSRUD
  
Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
 
March 11, 2016
Mark D. Johnsrud
 
 
 
 
 
 
 
/s/    GREGORY J. HEINLEIN
  
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
 
March 11, 2016
Gregory J. Heinlein
 
 
 
 
 
 
 
/s/    STACY W. HILGENDORF
  
Vice President, Corporate Controller
(Principal Accounting Officer)
 
March 11, 2016
Stacy W. Hilgendorf
 
 
 
 
 
 
 
/s/    ROBERT B. SIMONDS, JR.
  
Vice Chairman of the Board and Director
 
March 11, 2016
Robert B. Simonds, Jr.
 
 
 
 
 
 
 
/s/    WILLIAM M. AUSTIN
  
Director
 
March 11, 2016
William M. Austin
 
 
 
 
 
 
 
/s/    EDWARD A. BARKETT
  
Director
 
March 11, 2016
Edward A. Barkett
 
 
 
 
 
 
 
 
 
/s/    TOD C. HOLMES
  
Director
 
March 11, 2016
Tod C. Holmes
 
 
 
 
 
 
 
 
 
/s/    R.D. NELSON
  
Director
 
March 11, 2016
R.D. NELSON
 
 
 
 
 
 
 
/s/    DR. ALFRED E. OSBORNE, JR.
  
Director
 
March 11, 2016
Dr. Alfred E. Osborne, Jr.
 
 
 
 
 
 
 
/s/    J. DANFORTH QUAYLE
  
Director
 
March 11, 2016
J. Danforth Quayle
 
 
 
 


61




INDEX TO FINANCIAL STATEMENTS
NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
The following financial statements of the Company and its subsidiaries required to be included in Item 15(a)(1) of Form 10-K are listed below:
 
Supplementary Financial Data:
The supplementary financial data of the Registrant and its subsidiaries required to be included in Item 15(a)(2) of Form 10-K have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto.

62




Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Nuverra Environmental Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Nuverra Environmental Solutions, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in equity, and cash flows for each of the years in the three‑year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nuverra Environmental Solutions, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 2 to the consolidated financial statements, the Company has incurred recurring losses from operations and has limited cash resources, which raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Nuverra Environmental Solutions, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Phoenix, Arizona
March 11, 2016



63



NUVERRA ENVIRONMENTAL SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
December 31,
 
2015
 
2014
Assets
 
 
 
Cash and cash equivalents
$
39,309

 
$
13,367

Restricted cash
4,250

 
114

Accounts receivable, net
42,188

 
108,813

Inventories
2,985

 
4,413

Prepaid expenses and other receivables
3,377

 
4,147

Deferred income taxes

 
3,179

Other current assets
208

 
173

Current assets held for sale

 
20,466

Total current assets
92,317

 
154,672

Property, plant and equipment, net
406,188

 
475,982

Equity investments
3,750

 
3,814

Intangibles, net
16,867

 
19,757

Goodwill