Impairments (Notes)

9 Months Ended

Sep. 30, 2020

Impairments [Abstract]

Impairments

2. Impairments

During the first quarter of 2020, the energy production and demand factors related to COVID-19 and the sharp decline in commodity prices represented triggering events that required us to perform impairment testing on 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, which resulted in impairments of long-lived assets and goodwill within our CO₂ business segment during the three months ended March 31, 2020.

Additionally, we performed our annual goodwill impairment testing as of May 31, 2020. For our Natural Gas Pipelines Non-Regulated reporting unit, while no goodwill impairment was required as of March 31, 2020, the additional market and economic indicators existing at May 31, 2020, as further described below, resulted in the recognition of a goodwill impairment for that reporting unit during the three months ended June 30, 2020.

We recognized the following non-cash pre-tax loss (gain) on impairments and divestitures on assets during the nine months ended September 30, 2020 and 2019:

	Nine Months Ended September 30,
	2020		2019
	(In millions)
Natural Gas Pipelines
Impairment of goodwill	$	1,000	$	—
Impairments of inventory	11		—
Gain on divestitures of long-lived assets	—		(10)
Products Pipelines
Impairment of long-lived and intangible assets	21		—
Terminals
Impairment of long-lived and intangible assets	5		—
Gain on divestitures of long-lived assets	—		(3)
CO2
Impairment of goodwill	600		—
Impairment of long-lived assets	350		—
Kinder Morgan Canada
Loss on divestiture of long-lived assets	—		2
Other gain on divestitures of long-lived assets	—		(2)
Pre-tax loss (gain) on divestitures and impairments, net	$	1,987	$	(13)

Long-lived Assets

As of March 31, 2020, for our CO₂ assets, the long lived asset impairment test involved an 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 represented 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

Changes in the amounts of our goodwill for the nine months ended September 30, 2020 are summarized by reporting unit as follows:

	Natural Gas Pipelines Regulated		Natural Gas Pipelines Non-Regulated		CO2		Products Pipelines		Products Pipelines Terminals		Terminals		Total
	(In millions)
Goodwill as of December 31, 2019	$	14,249	$	3,343	$	1,528	$	1,378	$	151	$	802	$	21,451
Impairments	—		(1,000)		(600)		—		—		—		(1,600)
Goodwill as of September 30, 2020	$	14,249	$	2,343	$	928	$	1,378	$	151	$	802	$	19,851

•Our May 31, 2020 goodwill impairment tests of the Products Pipelines, Products Pipelines Terminals, Natural Gas Pipelines Regulated and CO₂ reporting units indicated that their fair values exceeded their carrying values. The results of our impairment analyses for our Products Pipelines, Terminals and CO₂ reporting units, determined that each of the three reporting unit’s fair value was in excess of carrying value by less than 10%. For the Products Pipelines and Terminals reporting units, we used the market approach with assumptions similar to those described below for the Natural Gas Pipelines Non-Regulated reporting unit. For our May 31, 2020 goodwill impairment test of the CO₂ reporting unit we used the income approach with assumptions similar to those used for its March 31, 2020 goodwill impairment test.

•In regards to our Natural Gas Pipelines Non-Regulated reporting unit, it experienced a sharp decline in customer demand for its services during the second quarter of 2020. This represented a timing lag from the initial economic decline impacts resulting from the severe downturn in the upstream energy industry, including our CO₂ business, whereby oil and gas producing companies accelerated their shut down of wells and reduced production during the second quarter which consequently adversely impacted the demand for our midstream services. In addition, continued diminished (i) current and expected future commodity pricing and (ii) peer group market capitalization values provided further indicators that an impairment of goodwill had occurred for this reporting unit during the second quarter.

Our May 31, 2020 goodwill impairment test for the Natural Gas Pipelines Non-Regulated reporting unit utilized a weighted average of a market approach (25%) and income approach (75%) to estimate its fair value. We gave higher weighting to the income approach as we believe it was more representative of the value that would be received from a market participant.

The market approach was based on enterprise value (EV) to estimated 2020 EBITDA multiples for a selected number of peer group midstream companies with comparable operations and economic characteristics. We estimated the median EV to EBITDA multiple to be approximately 10x without consideration of any control premium. The income approach we used to determine fair value included an analysis of estimated discounted cash flows based on 6.5 years of projections and application of an 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. We applied an approximate 8% discount rate to the undiscounted cash flow amounts which represents our estimate of the weighted average cost of capital of a theoretical market participant. The discounted cash flows included various assumptions on commodity volumes and prices for each underlying asset within the reporting unit, and as applicable applied to our existing contracts and expected future customer demand for such commodities. The fair value based on a weighting of the market and income approaches resulted in an implied EV to 2020 EBITDA multiple valuation of approximately 11x. Management believes this is a reasonable estimate of fair value based on comparable sales transactions and the fact that it implies a reasonable control premium at the reporting unit level.

The results of the Natural Gas Pipelines Non-Regulated reporting unit goodwill impairment analysis was a partial impairment of goodwill of approximately $1,000 million as of May 31, 2020.

•For our March 31, 2020 interim goodwill impairment test of the CO₂ reporting unit, we applied an income approach to evaluate its fair value based on the present value of its cash flows that it is expected to generate in the future. Due to the uncertainty and volatility in market conditions within its 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.

The fair value estimates used in the long-lived asset and goodwill test were primarily based on Level 3 inputs of the fair value hierarchy.

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.

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. Although we did not identify additional triggering events during the third quarter of 2020, 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. Because certain of our assets have been written down to fair value, or its fair value is close to carrying 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.