Goodwill and Other Intangibles
Goodwill and Excess Investment Cost
We record the excess of the cost of an acquisition price over the fair value of acquired net assets as an asset on our balance sheet. This amount is referred to and reported separately as “Goodwill” in our accompanying consolidated balance sheets. Goodwill is not subject to amortization but must be tested for impairment at least annually. This test requires us to assign goodwill to an appropriate reporting unit and to determine if the implied fair value of the reporting unit’s goodwill is less than its carrying amount.
We evaluate goodwill for impairment on May 31 of each year. For this purpose, we have seven reporting units as follows: (i) Products Pipelines (excluding associated terminals); (ii) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (iii) Natural Gas Pipelines Regulated; (iv) Natural Gas Pipelines Non-Regulated; (v) CO2; (vi) Terminals; and (vii) Kinder Morgan Canada. During the quarter ended June 30, 2013, we created the Natural Gas Pipelines Non-Regulated reporting unit to include the non-regulated businesses we acquired from Copano on May 1, 2013 as well as other non-regulated businesses that were historically part of the former Natural Gas Pipelines reporting unit (now the Natural Gas Pipelines Regulated reporting unit). We then allocated goodwill between these two reporting units based on the relative fair values of the reporting units.
There were no impairment charges resulting from our May 31, 2013 impairment testing, and no event indicating an impairment has occurred subsequent to that date. We determined the fair value of each reporting unit as of May 31, 2013 based on a market approach utilizing an average dividend/distribution yield of comparable companies. The value of each reporting unit was determined on a stand-alone basis from the perspective of a market participant and represented the price estimated to be received in a sale of the unit as a whole in an orderly transaction between market participants at the measurement date.
Changes in the gross amounts of our goodwill and accumulated impairment losses for each of the years ended December 31, 2013 and 2012, are summarized as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Natural Gas Pipelines | | CO2 | | Products Pipelines | | Terminals | | Kinder Morgan Canada | | Total |
Historical Goodwill | $ | 557 |
| | $ | 46 |
| | $ | 263 |
| | $ | 326 |
| | $ | 621 |
| | $ | 1,813 |
|
Accumulated impairment losses | — |
| | — |
| | — |
| | — |
| | (377 | ) | | (377 | ) |
Balance as of December 31, 2011 | 557 |
| | 46 |
| | 263 |
| | 326 |
| | 244 |
| | 1,436 |
|
Acquisitions(a) | 4,061 |
| | — |
| | — |
| | — |
| | — |
| | 4,061 |
|
Disposals(b) | (85 | ) | | — |
| | — |
| | — |
| | — |
| | (85 | ) |
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
Balance as of December 31, 2012 | 4,533 |
| | 46 |
| | 263 |
| | 326 |
| | 249 |
| | 5,417 |
|
Acquisitions(c) | 1,146 |
| | — |
| | — |
| | — |
| | — |
| | 1,146 |
|
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (16 | ) | | (16 | ) |
Balance as of December 31, 2013 | $ | 5,679 |
| | $ | 46 |
| | $ | 263 |
| | $ | 326 |
| | $ | 233 |
| | $ | 6,547 |
|
__________
| |
(a) | 2012 acquisition amount relates to acquisition of the drop-down asset groups from KMI as discussed in Note 3. |
| |
(b) | 2012 disposal amount relates to the sale of our FTC Natural Gas Pipelines disposal group as discussed in Note 3. Since our FTC Natural Gas Pipelines disposal group represented a significant portion of our Natural Gas Pipelines business segment, we allocated the goodwill of the segment based on the relative fair value of the portion being disposed of and the portion of the segment remaining. |
| |
(c) | 2013 acquisition amount consists of $1,141 million relating to our May 1, 2013 Copano acquisition as discussed in Note 3, and $5 million relating to the acquisition of the drop-down asset groups from KMI. |
For more information on our accounting for goodwill, see Note 2 “Summary of Significant Accounting Policies—Goodwill.”
With regard to our equity investments in unconsolidated affiliates, in almost all cases, either (i) the price we paid to acquire our share of the net assets of such equity investees; or (ii) the revaluation of our share of the net assets of any retained noncontrolling equity investment (from the sale of a portion of our ownership interest in a consolidated subsidiary, thereby losing our controlling financial interest in the subsidiary) differed from the underlying carrying value of such net assets. This differential consists of two pieces. First, an amount related to the difference between the investee’s recognized net assets at book value and at current fair values (representing the appreciated value in plant and other net assets), and secondly, to any premium in excess of fair value (referred to as equity method goodwill) we paid to acquire the investment. We include both amounts within “Investments” on our accompanying consolidated balance sheets.
The first differential, representing the excess of the fair market value of our investees’ plant and other net assets over its underlying book value at either the date of acquisition or the date of the loss of control totaled $309 million and $186 million as of December 31, 2013 and 2012, respectively. In almost all instances, this differential, relating to the discrepancy between our share of the investee’s recognized net assets at book values and at current fair values, represents our share of undervalued depreciable assets, and since those assets (other than land) are subject to depreciation, we amortize this portion of our investment cost against our share of investee earnings. As of December 31, 2013, this excess investment cost is being amortized over a weighted average life of approximately twenty-five years.
The second differential, representing total unamortized excess cost over underlying fair value of net assets acquired (equity method goodwill) totaled $138 million as of both December 31, 2013 and 2012. This differential is not subject to amortization but rather to impairment testing. Accordingly, in addition to our annual impairment test of goodwill, we periodically reevaluate the amount at which we carry the excess of cost over fair value of net assets accounted for under the equity method, as well as the amortization period for such assets, to determine whether current events or circumstances warrant adjustments to our carrying value and/or revised estimates of useful lives. Our impairment test considers whether the fair value of the equity investment as a whole, not the underlying net assets, has declined and whether that decline is other than temporary. As of December 31, 2013, we believed no such impairment had occurred and no reduction in estimated useful lives was warranted.
Other Intangibles
Excluding goodwill, our other intangible assets include customer contracts, relationships and agreements, lease value, and technology-based assets. These intangible assets have definite lives, are subject to amortization, and are reported separately as “Other intangibles, net” in our accompanying consolidated balance sheets. As of December 31, 2013 and 2012, these intangible assets totaled $2,414 million and $1,142 million, respectively, and primarily consisted of customer contracts, relationships and agreements associated with our Natural Gas Pipelines and Terminals business segments.
Primarily, these contracts, relationships and agreements relate to the gathering of natural gas, and the handling and storage of petroleum, chemical, and dry-bulk materials, including oil, gasoline and other refined petroleum products, coal, petroleum coke, fertilizer, steel and ores. We determined the values of these intangible assets by first, estimating the revenues derived from a customer contract or relationship (offset by the cost and expenses of supporting assets to fulfill the contract), and second, discounting the revenues at a risk adjusted discount rate.
We amortize the costs of our intangible assets to expense in a systematic and rational manner over their estimated useful lives. The life of each intangible asset is based either on the life of the corresponding customer contract or agreement or, in the case of a customer relationship intangible (the life of which was determined by an analysis of all available data on that business relationship), the length of time used in the discounted cash flow analysis to determine the value of the customer relationship. Among the factors we weigh, depending on the nature of the asset, are the effect of obsolescence, new technology, and competition. For each of the years ended December 31, 2013, 2012 and 2011, the amortization expense on our intangibles totaled $121 million, $82 million and $61 million, respectively. Our estimated amortization expense for our intangible assets for each of the next five fiscal years (2014 – 2018) is approximately $137 million, $132 million, $129 million, $126 million and $124 million, respectively. As of December 31, 2013, the weighted average amortization period for our intangible assets was approximately twenty-one years.
