Impairments (Notes)

3 Months Ended

Mar. 31, 2020

Impairments [Abstract]

Impairment of Goodwill, Long-lived assets and equity investments [Text Block]

2. Impairments

During the first quarter of 2020, the decrease in the worldwide demand for crude oil primarily due to COVID-19 and sharp decline in commodity prices related to the combined impact of falling demand and recent increases in production from OPEC members and other international suppliers resulted in decreases in current and expected long-term crude oil and NGL sale prices, along with reductions to the market capitalization of peer companies in the energy industry. We determined that these conditions represented a triggering event that required us to perform impairment testing of certain businesses that are sensitive to commodity prices. As a result, we performed an impairment analysis of long-lived assets within our CO₂ business segment and conducted interim tests of the recoverability of goodwill for our CO₂ and Natural Gas Pipelines Non-Regulated reporting units as of March 31, 2020.

Long-lived Assets

For our CO₂ assets, the long lived asset impairment test involved a Step 1 assessment as to whether each asset’s net book value is expected to be recovered from the estimated undiscounted future cash flows.

• To compute estimated future cash flows for our oil and gas producing properties, we used our reserve engineer’s estimates of proved and risk adjusted probable reserves. These estimates of proved and probable reserves are based upon historical performance along with adjustments for expected crude oil and natural gas field development. In calculating future cash flows, management utilized estimates of commodity prices based on a March 31, 2020 NYMEX forward curve adjusted for the impact of our existing sales contracts to determine the applicable net crude oil and NGL pricing for each property. Operating expenses were determined based on estimated fixed and variable field production requirements, and capital expenditures were based on economically viable development projects.

• To compute estimated future cash flows for our CO₂ source and transportation assets, volume forecasts were developed based on projected demand for our CO₂ services based upon management’s projections of the availability of CO₂ supply and the future demand for CO₂ for use in enhanced oil recovery projects. The CO₂ pricing assumption was a function of the March 31, 2020 NYMEX forward curve adjusted for the impact of existing sales contracts to determine the applicable net CO₂ pricing. Operating expenses were determined based on estimated fixed and variable field production requirements, and capital expenditures were based on economically viable development projects.

Certain oil and gas properties failed the first step. For these assets, we used a discounted cash flow analysis to estimate fair value. We applied a 10.5% discount rate, which we believe represents the estimated weighted average cost of capital of a

theoretical market participant. Based on step two of our long lived assets impairment test, we recognized $350 million of impairments on those oil and gas producing properties where the total carrying value exceeded its total estimated fair market value as of March 31, 2020.

Goodwill

The following goodwill impairment test for our CO₂ and Natural Gas Pipelines Non-Regulated reporting units reflects our adoption of the Accounting Standards Updates (ASU) No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” on January 1, 2020. This new accounting method simplifies the goodwill impairment test by removing Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation.

For our CO₂ and Natural Gas Pipelines Non-Regulated reporting units, we applied an income approach to evaluate the fair value of these reporting units based on the present value of cash flows these reporting units are expected to generate in the future. Due to the uncertainty and volatility in market conditions within our peer group as of the test date, we did not incorporate the market approach to estimate fair value as of March 31, 2020.

• In determining the fair value for our CO₂ reporting unit, we applied a 9.25% discount rate to the undiscounted cash flow amounts computed in the long-lived asset impairment analyses described above. The discount rate we used represents our estimate of the weighted average cost of capital of a theoretical market participant. The result of our goodwill analysis was a partial impairment of goodwill in our CO₂ reporting unit of approximately $600 million as of March 31, 2020.

• For our Natural Gas Pipelines Non-Regulated reporting unit, the income approach we used to determine fair value included an analysis of estimated discounted cash flows based on 6 years of projections and application of a year 6 exit multiple based on management’s expectations of a discount rate and exit multiple that would be applied by a theoretical market participant and for market transactions of comparable assets. The discounted cash flows included various assumptions on volumes and prices for each underlying asset within the reporting unit including, as applicable, current commodity prices. The results of our impairment analysis for our Natural Gas Pipelines Non-Regulated reporting unit did not indicate an impairment of goodwill with the reporting unit’s fair value in excess of its carrying value by less than 10% as of March 31, 2020.

We consider the inputs for our long-lived asset and goodwill impairment calculations to be Level 3 inputs in the fair value hierarchy.

We recognized the following non-cash pre-tax losses (gains) on impairments and divestitures on assets (in millions):

	Three Months Ended March 31,
	2020		2019
Products Pipelines
Impairments of long-lived and intangible assets(a)	$	21	$	—
CO2
Impairments of long-lived assets	350		—
Impairment of goodwill	600		—
Kinder Morgan Canada
Losses on divestiture of long-lived assets	—		2
Other gains on divestitures of long-lived assets	—		(2		)
Pre-tax losses on divestitures and impairments, net	$	971	$	—

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(a) 2020 impairment amount is associated with our Belton terminal.

Economic disruptions resulting from events such as COVID-19, conditions in the business environment generally, such as sustained low crude oil demand and continued low commodity prices, supply disruptions, or higher development or production costs, could result in a slowing of supply to our pipelines, terminals and other assets, which will have an adverse effect on the demand for services provided by our four business segments. Financial distress experienced by our customers or other counterparties could have an adverse impact on us in the event they are unable to pay us for the products or services we provide or otherwise fulfill their obligations to us. In addition, the revenues, cash flows, profitability and future growth of some of our

businesses depend to a large degree on prevailing crude oil, NGL and natural gas prices. Our CO₂ business segment (and the carrying value of our crude oil, NGL and natural gas producing properties) and certain midstream businesses within our Natural Gas Pipelines business segment depend to a large degree, and certain businesses within our Product Pipelines business segment depend to a lesser degree, on prevailing crude oil, NGL and natural gas prices.

As conditions warrant, we routinely evaluate our assets for potential triggering events such as those described above that could impact the fair value of certain assets or our ability to recover the carrying value of long-lived assets. Such assets include accounts receivable, equity investments, goodwill, other intangibles and property plant and equipment, including oil and gas properties and in-process construction. Depending on the nature of the asset, these evaluations require the use of significant judgments including but not limited to judgments related to customer credit worthiness, future volume expectations, current and future commodity prices, discount rates, regulatory environment, as well as general economic conditions and the related demand for products handled or transported by our assets. In the current worldwide economic and commodity price environment and to the extent conditions further deteriorate, we may identify additional triggering events that may require future evaluations of the recoverability of the carrying value of our long-lived assets, investments and goodwill which could result in further impairment charges. In addition, we are required to perform our annual goodwill impairment test on May 31^st. Because certain of our assets have been written down to fair value, any deterioration in fair value could result in further impairments. Such non-cash impairments could have a significant effect on our results of operations, which would be recognized in the period in which the carrying value is determined to not be recoverable.