NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We are one of the largest energy infrastructure companies in North America. Unless the context requires otherwise, references to “we,” “us,” “our,” “the Company,” or “KMI” are intended to mean Kinder Morgan, Inc. and its consolidated subsidiaries. Our pipelines transport natural gas, refined petroleum products, renewable fuels, crude oil, condensate, CO2 and other products, and our terminals store and handle various commodities including gasoline, diesel fuel, renewable fuel feedstocks, chemicals, ethanol, metals and petroleum coke.
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| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
Our reporting currency is U.S. dollars, and all references to dollars are U.S. dollars, unless stated otherwise. Our accompanying consolidated financial statements have been prepared under the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in the FASB’s Accounting Standards Codification (ASC), the single source of GAAP. Under such rules and regulations, all significant intercompany items have been eliminated in consolidation. Additionally, certain amounts from prior years have been reclassified to conform to the current presentation.
Use of Estimates
Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions which cannot be known with certainty at the time our financial statements are prepared. These estimates and assumptions affect the amounts we report for assets and liabilities, our revenues and expenses during the reporting period, and our disclosures, including those related to contingent assets and liabilities at the date of our financial statements. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Certain accounting policies are of more significance in our financial statement preparation process than others, and set out below are the principal accounting policies we apply in the preparation of our consolidated financial statements.
Cash Equivalents and Restricted Deposits
We define cash equivalents as all highly liquid short-term investments with original maturities of three months or less.
Amounts included in the restricted deposits in the accompanying consolidated financial statements represent a combination of restricted cash amounts required to be set aside by regulatory agencies to cover obligations for our captive insurance subsidiary, cash margin deposits posted by us with our counterparties associated with certain energy commodity contract positions and escrow deposits.
Allowance for Credit Losses
We evaluate our financial assets measured at amortized cost and off-balance sheet credit exposures for expected credit losses over the contractual term of the asset or exposure. We consider available information relevant to assessing the collectability of cash flows including the expected risk of credit loss even if that risk is remote. We measure expected credit losses on a collective (pool) basis when similar risk characteristics exist, and we reflect the expected credit losses on the amortized cost basis of the financial asset as of the reporting date.
Our financial instruments primarily consist of our accounts receivable from customers, notes receivable from affiliates and contingent liabilities such as proportional guarantees of debt obligations of an equity investee. We utilized historical analysis of credit losses experienced over the previous five years along with current conditions and reasonable and supportable forecasts of future conditions in our evaluation of collectability of our financial assets.
Our allowance for credit losses as of both December 31, 2022 and 2021 was $1 million and is included in “Other current assets” in our accompanying consolidated balance sheets.
Inventories
Our inventories consist of materials and supplies and products such as natural gas, NGL, crude oil, condensate, refined petroleum products and transmix. We report products inventory at the lower of weighted-average cost or net realizable value. We report materials and supplies inventories at cost, and periodically review for physical deterioration and obsolescence.
Property, Plant and Equipment, net
Capitalization, Depreciation and Depletion and Disposals
We report property, plant and equipment at its acquisition cost. We expense costs for routine maintenance and repairs in the period incurred. The following table summarizes our significant policies related to our property, plant and equipment. The application of these policies can involve significant estimates.
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| Asset | | Accounting Area | | Policy |
| Straight-line assets | | Depreciation rates | | •Depreciable lives are based on estimated economic lives. This includes age, manufacturing specifications, technological advances, estimated production life of the oil or gas field served by the asset, contract terms for assets on leased or customer property and historical data concerning useful lives of similar assets. |
| | Gains and losses | | •A gain or loss on the sale of property, plant and equipment is calculated as the difference between the cost of the asset disposed of, net of depreciation, and the sale proceeds received or when held for sale, the market value of the asset. •A gain on an asset disposal is recognized in income in the period that the sale is closed. •A loss is recognized when the asset is sold or when classified as held for sale. •Gains and losses are recorded in operating costs, expenses and other. |
| Composite assets | | Depreciation rates | | •A single depreciation rate is applied to the total cost of a functional group of assets that have similar economic characteristics until the net book value of the composite group equals the salvage value. •Interstate natural gas FERC-regulated entities use the depreciation rates approved by the FERC. •A depreciation rate for other composite assets is based on estimated economic lives. This includes age, manufacturing specifications, technological advances, estimated production life of the oil or gas field served by the asset, contract terms for assets on leased or customer property and historical data concerning useful lives of similar assets. |
| | Gains and losses | | •Gains and losses are credited or charged to accumulated depreciation, net of salvage and cost of removal. •Gains and losses on FERC-approved operating unit sales and land sales are recorded in operating costs, expenses and other. |
| Oil and gas producing activities(a) | | Successful efforts method of accounting | | •Costs that are incurred to acquire leasehold and subsequent development costs are capitalized. •Costs that are associated with the drilling of successful exploration wells are capitalized if proved reserves are found. •Costs associated with the drilling of exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of certain non-producing leasehold costs are expensed as incurred. •The capitalized costs of our producing oil and gas properties are depreciated and depleted by the units-of-production method. •Other miscellaneous property, plant and equipment are depreciated over the estimated useful lives of the asset. |
| | Enhanced recovery techniques | | •In some cases, the cost of the CO2 associated with enhanced recovery is capitalized as part of our development costs when it is injected. •The cost of CO2 associated with pressure maintenance operations for reservoir management is expensed when it is injected. •When CO2 is recovered in conjunction with oil production, it is extracted and re-injected, and all of the associated costs are expensed as incurred. •Proved developed reserves are used in computing units of production rates for drilling and development costs, and total proved reserves are used for depletion of leasehold costs. |
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(a)Gains and losses associated with assets in our oil and gas producing activities have a similar treatment as with that associated with our straight-line assets.
Circumstances may develop which cause us to change our estimates, thus impacting the future calculation of depreciation and amortization expense. Historically, adjustments to useful lives have not had a material impact on our aggregate depreciation levels from year to year.
Asset Retirement Obligations
We record liabilities for obligations related to the retirement and removal of long-lived assets used in our businesses. The majority of our asset retirement obligations are associated with our CO2 business where we are required to plug and abandon oil and gas wells that have been removed from service and to remove the surface wellhead equipment and compressors, but we also have obligations for certain gathering and long-haul pipelines and certain processing plants. We record, as liabilities, the fair value of asset retirement obligations on a discounted basis when they are incurred and can be reasonably estimated, which is typically at the time the assets are installed or acquired. The fair value estimates are primarily based on Level 3 inputs of the fair value hierarchy. The inputs include estimates and assumptions related to timing of settlement and retirement costs, which we base on historical retirement costs, future inflation rates and credit-adjusted risk-free interest rates. Amounts recorded for the related assets are increased by the amount of these obligations. Over time, the liabilities are accreted to reflect the change in their present value, and the initial capitalized costs are depreciated over the useful lives of the related assets. The liabilities are eventually extinguished when the asset is taken out of service. Our estimates of retirement costs could change as a result of changes in cost estimates and/or timing of the obligation.
The following table summarizes changes in the asset retirement obligations included in our accompanying consolidated balance sheets:
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| December 31, |
| 2022 | | 2021 |
| (In millions) |
| Balance at beginning of period | $ | 196 | | | $ | 215 | |
| Accretion expense | 12 | | | 7 | |
| New obligations | 2 | | | 6 | |
| Settlements | (6) | | | (8) | |
| Revisions to previous estimates | — | | | (24) | |
| Balance at end of period(a) | $ | 204 | | | $ | 196 | |
(a)Balances at December 31, 2022 and 2021 include $3 million and $4 million, respectively, included within “Other current liabilities” on our accompanying consolidated balance sheets.
For certain assets, we currently cannot reasonably estimate the fair value of the asset retirement obligations because the associated assets have indeterminate lives. These assets include certain pipelines, processing plants and distribution facilities, and liquids and bulk terminal facilities. Based on the widespread use of hydrocarbons domestically and for international export, management expects supply and demand to exist for the foreseeable future. Therefore, the remaining useful lives of these assets is indeterminate due to prolonged expected demand. Additionally, these assets could also benefit from potential future conversion opportunities. For example, certain assets could be converted to transport, handle or store products other than traditional hydrocarbons. Under our integrity program, individual asset parts are replaced regularly. Although some of the individual asset parts may be replaced, the assets themselves may remain intact indefinitely. For these assets, an asset retirement obligation, if any, will be recognized once sufficient information is available to reasonably estimate the fair value of the obligation.
Long-lived Asset Impairments
We evaluate long-lived assets including leases and investments for impairment whenever events or changes in circumstances indicate that our carrying amount of an asset or investment may not be recoverable.
In addition to our annual goodwill impairment test discussed further below, to the extent triggering events exist, we complete a review of the carrying value of our long-lived assets, including property, plant and equipment as well as other intangibles, and record, as applicable, the appropriate impairments using a two-step approach. To determine if a long-lived asset is recoverable, we compare the asset’s estimated undiscounted cash flows to its carrying value (step 1). Because the
impairment test for long-lived assets held in use is based on estimated undiscounted cash flows, there may be instances where an asset or asset group is not considered impaired, even when its fair value may be less than its carrying value, because the asset or asset group is recoverable based on the cash flows to be generated over the estimated life of the asset or asset group. If the carrying value of a long-lived asset or asset group is in excess of estimated undiscounted cash flows, we typically use discounted cash flow analyses to calculate the fair value of the long-lived asset to determine if an impairment is required and the amount of the impairment losses to be recognized (step 2).
We evaluate our oil and gas producing properties for impairment of value on a field-by-field basis or, in certain instances, by logical grouping of assets if there is significant shared infrastructure, using undiscounted future cash flows based on estimated future oil and gas production volumes.
Oil and gas producing properties deemed to be impaired are written down to their fair value, as determined by discounted future cash flows based on estimated future oil and gas production volumes. Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment.
Refer to Note 4 for further information.
Equity Method of Accounting and Basis Differences
We use the equity method of accounting for investments which we do not control, but for which we have the ability to exercise significant influence. The carrying values of these investments are impacted by our share of investee income or loss, distributions, amortization or accretion of basis differences and other-than-temporary impairments.
The difference between the carrying value of an investment and our share of the investment’s underlying equity in net assets is referred to as a basis difference. If the basis difference is assigned to depreciable or amortizable assets and liabilities, the basis difference is amortized or accreted as part of our share of investee earnings. To the extent that the basis difference relates to goodwill, referred to as equity method goodwill, the amount is not amortized.
We evaluate our equity method investments for other-than-temporary impairment. When an other-than-temporary impairment is recognized the loss is recorded as a reduction in equity earnings.
Goodwill
Goodwill is the cost of an acquisition of a business in excess of the fair value of acquired assets and liabilities and is recorded as an asset on our balance sheet. Goodwill is not subject to amortization but must be tested for impairment at least annually and in interim periods if indicators of impairment exist. This test requires us to assign goodwill to an appropriate reporting unit and compare the fair value of a reporting unit to its carrying value. If the carrying value of a reporting unit, including allocated goodwill, exceeds its fair value an impairment is measured and recorded at the amount by which the reporting unit’s carrying value exceeds its fair value.
We evaluate goodwill for impairment on May 31 of each year, or more frequently to the extent events occur or conditions change between annual tests that would indicate a risk of possible impairment at the interim period. For purposes of our May 31, 2022 evaluation, we grouped our businesses into seven reporting units as follows: (i) Natural Gas Pipelines Regulated; (ii) Natural Gas Pipelines Non-Regulated; (iii) CO2; (iv) Products Pipelines (excluding associated terminals); (v) Products Pipelines Terminals (evaluated separately from Products Pipelines for goodwill purposes); (vi) Terminals; and (vii) Energy Transition Ventures. Generally, the evaluation of goodwill for impairment involves a quantitative test, although under certain circumstance an initial qualitative evaluation may be sufficient to conclude that goodwill is not impaired without conducting the quantitative test.
A large portion of our goodwill is non-deductible for tax purposes, and as such, to the extent there are impairments, all or a portion of the impairment may not result in a corresponding tax benefit.
Refer to Note 8 for further information.
Other Intangibles
Excluding goodwill, our other intangible assets include customer contracts and other relationships and agreements.
Our intangible assets primarily relate to customer contracts or other relationships for the handling and storage of petroleum, chemical, and dry-bulk materials, including oil, gasoline, and other refined petroleum products, petroleum coke, metals and ores, the gathering of natural gas and the production and supply of RNG. 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 effects of obsolescence, new technology, and competition.
The following tables summarize our other intangible assets as of December 31, 2022 and 2021 and our amortization expense for the years ended December 31, 2022, 2021 and 2020:
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| Weighted Average Amortization Period (years) | | December 31, |
| | 2022 | | 2021 |
| | | (In millions) |
| Gross | 11.2 | | $ | 3,382 | | | $ | 3,036 | |
| Accumulated amortization | | | (1,573) | | | (1,358) | |
| Net carrying amount | | | $ | 1,809 | | | $ | 1,678 | |
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| | December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Amortization expense | | $ | 253 | | | $ | 237 | | | $ | 212 | |
Our estimated amortization expense for our intangible assets for each of the next five fiscal years is:
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| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
| | (In millions) |
| Estimated amortization expenses | | $ | 201 | | | $ | 175 | | | $ | 170 | | | $ | 168 | | | $ | 167 | |
Revenue Recognition
The majority of our revenues are accounted for under Topic 606, Revenue from Contracts with Customers; however, to a limited extent, some revenues are accounted for under other guidance such as Topic 842, Leases or Topic 815, Derivatives and Hedging Activities.
Revenue from Contracts with Customers
We review our contracts with customers using the following steps to recognize revenue based on the transfer of goods or services to customers and in amounts that reflect the consideration the company expects to receive for those goods or services. The steps include: (i) identify the contract; (ii) identify the performance obligations of the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and then (v) recognize revenue when (or as) the performance obligation is satisfied. Each of these steps involves management judgment and an analysis of the contract’s material terms and conditions.
Our customer sales contracts primarily include sales of natural gas, NGL, crude oil, CO2 and transmix, as described below. Generally, for the majority of these contracts (i) each unit (Bcf, gallon, barrel, etc.) of commodity is a separate performance obligation, as our promise is to sell multiple distinct units of commodity at a point in time; (ii) the transaction price principally consists of variable consideration, which amount is determinable each month end based on our right to invoice at month end for the value of commodity sold to the customer that month; and (iii) the transaction price is allocated to each performance obligation based on the commodity’s standalone selling price and recognized as revenue upon delivery of the commodity, which is the point in time when the customer obtains control of the commodity and our performance obligation is satisfied.
Our customer services contracts are primarily for transportation service, storage service, gathering and processing service, and terminaling, as described below. Generally, for the majority of these contracts (i) our promise is to transfer (or stand ready to transfer) a series of distinct integrated services over a period of time, which is a single performance obligation; (ii) the transaction price includes fixed and/or variable consideration, which amount is determinable at contract inception and/or at each month end based on our right to invoice at month end for the value of services provided to the customer that month; and (iii) the transaction price is recognized as revenue over the service period specified in the contract (which can be a day, including each day in a series of promised daily services, a month, a year, or other time increment, including a deficiency makeup period) as the services are rendered using a time-based (passage of time) or units-based (units of service transferred) output method for measuring the transfer of control of the services and satisfaction of our performance obligation over the service period, based on the nature of the promised service (e.g., firm or non-firm) and the terms and conditions of the contract (e.g., contracts with or without makeup rights).
Firm Services
Firm services (also called uninterruptible services) are services that are promised to be available to the customer at all times during the period(s) covered by the contract, with limited exceptions. Our firm service contracts are typically structured with take-or-pay or minimum volume provisions, which specify minimum service quantities a customer will pay for even if it chooses not to receive or use them in the specified service period (referred to as “deficiency quantities”). We typically recognize the portion of the transaction price associated with such provisions, including any deficiency quantities, as revenue depending on whether the contract prohibits the customer from making up deficiency quantities in subsequent periods, or the contract permits this practice, as follows:
•Contracts without Makeup Rights. If contractually the customer cannot make up deficiency quantities in future periods, our performance obligation is satisfied, and revenue associated with any deficiency quantities is generally recognized as each service period expires. Because a service period may exceed a reporting period, we determine at inception of the contract and at the beginning of each subsequent reporting period if we expect the customer to take the minimum volume associated with the service period. If we expect the customer to make up all deficiencies in the specified service period (i.e., we expect the customer to take the minimum service quantities), the minimum volume provision is deemed not substantive and we will recognize the transaction price as revenue in the specified service period as the promised units of service are transferred to the customer. Alternatively, if we expect that there will be any deficiency quantities that the customer cannot or will not make up in the specified service period (referred to as “breakage”), we will recognize the estimated breakage amount (subject to the constraint on variable consideration) as revenue ratably over such service period in proportion to the revenue that we will recognize for actual units of service transferred to the customer in the service period. For certain take-or-pay contracts where we make the service, or a part of the service (e.g., reservation) continuously available over the service period, we typically recognize the take-or-pay amount as revenue ratably over such period based on the passage of time.
•Contracts with Makeup Rights. If contractually the customer can acquire the promised service in a future period and make up the deficiency quantities in such future period (the “deficiency makeup period”), we have a performance obligation to deliver those services at the customer’s request (subject to contractual and/or capacity constraints) in the deficiency makeup period. At inception of the contract, and at the beginning of each subsequent reporting period, we estimate if we expect that there will be deficiency quantities that the customer will or will not make up. If we expect the customer will make up all deficiencies it is contractually entitled to, any non-refundable consideration received relating to temporary deficiencies that will be made up in the deficiency makeup period will be deferred as a contract liability, and we will recognize that amount as revenue in the deficiency makeup period when either of the following occurs: (i) the customer makes up the volumes or (ii) the likelihood that the customer will exercise its right for deficiency volumes then becomes remote (e.g., there is insufficient capacity to make up the volumes, the deficiency makeup period expires). Alternatively, if we expect at inception of the contract, or at the beginning of any subsequent reporting period, that there will be any deficiency quantities that the customer cannot or will not make up (i.e., breakage), we will recognize the estimated breakage amount (subject to the constraint on variable consideration) as revenue ratably over the specified service periods in proportion to the revenue that we will recognize for actual units of service transferred to the customer in those service periods.
Non-Firm Services
Non-firm services (also called interruptible services) are the opposite of firm services in that such services are provided to a customer on an “as available” basis. Generally, we do not have an obligation to perform these services until we accept a customer’s periodic request for service. For the majority of our non-firm service contracts, the customer will pay only for the
actual quantities of services it chooses to receive or use, and we typically recognize the transaction price as revenue as those units of service are transferred to the customer in the specified service period (typically a daily or monthly period).
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. We recognize contract assets in those instances where billing occurs subsequent to revenue recognition, and our right to invoice the customer is conditioned on something other than the passage of time. Our contract assets are substantially related to breakage revenue associated with our firm service contracts with minimum volume commitment payment obligations and contracts where we apply revenue levelization (i.e., contracts with fixed rates per volume that increase over the life of the contract for which we record revenue ratably per unit over the life of the contract based on our performance obligations that are generally unchanged over the life of the contract). Our contract liabilities are substantially related to (i) capital improvements paid for in advance by certain customers generally in our non-regulated businesses, which we subsequently recognize as revenue on a straight-line basis over the initial term of the related customer contracts; (ii) consideration received from customers for temporary deficiency quantities under minimum volume contracts that we expect will be made up in a future period, which we subsequently recognize as revenue when the customer makes up the volumes or the likelihood that the customer will exercise its right for deficiency volumes becomes remote (e.g., there is insufficient capacity to make up the volumes, the deficiency makeup period expires); and (iii) contracts with fixed rates per volume that decrease over the life of the contract where we apply revenue levelization for amounts received for our future performance obligations. We reassess amounts recorded as contract assets or liabilities upon contract modification.
Refer to Note 15 for further information.
Cost of Sales
Cost of sales primarily includes the cost to purchase energy commodities sold, including natural gas, crude oil, NGL and other refined petroleum products, adjusted for the effects of our energy commodity hedging activities, as applicable. Costs of our crude oil, gas and CO2 producing activities, such as those in our CO2 business segment, are not accounted for as costs of sales.
Operations and Maintenance
Operations and maintenance includes costs of services and is primarily comprised of (i) operational labor costs and (ii) operations, maintenance and asset integrity, regulatory and environmental costs. Costs associated with our crude oil, gas and CO2 producing activities included within operations and maintenance totaled $367 million, $180 million and $319 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Environmental Matters
We capitalize or expense, as appropriate, environmental expenditures. We capitalize certain environmental expenditures required to obtain rights-of-way, regulatory approvals or permitting as part of the construction of facilities we use in our business operations. We accrue and expense environmental costs that relate to an existing condition caused by past operations, which do not contribute to current or future revenue generation. We generally do not discount environmental liabilities to a net present value, and we record environmental liabilities when environmental assessments and/or remedial efforts are probable and we can reasonably estimate the costs. Generally, our accrual of these environmental liabilities coincides with either our completion of a feasibility study or our commitment to a formal plan of action. We recognize receivables for anticipated associated insurance recoveries when such recoveries are deemed to be probable. We record at estimated fair value, where appropriate, environmental liabilities assumed in a business combination.
We routinely conduct reviews of potential environmental issues and claims that could impact our assets or operations. These reviews assist us in identifying environmental issues and estimating the costs and timing of remediation efforts. We also routinely adjust our environmental liabilities to reflect changes in previous estimates. In making environmental liability estimations, we consider the material effect of environmental compliance, pending legal actions against us, and potential third-party liability claims we may have against others. Often, as the remediation evaluation and effort progresses, additional information is obtained, requiring revisions to estimated costs. These revisions are reflected in our income in the period in which they are reasonably determinable.
Leases
We lease property including corporate and field offices and facilities, vehicles, heavy work equipment including rail cars and large trucks, tanks, office equipment and land. Our leases have remaining lease terms of one to 48 years, some of which have options to extend or terminate the lease. We determine if an arrangement is a lease at inception or upon modification. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
Our operating ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Leases with variable rate adjustments, such as Consumer Price Index (CPI) adjustments, are reflected based on contractual lease payments as outlined within the lease agreement and not adjusted for any CPI increases or decreases. Because most of our leases do not provide an explicit rate of return, we use our incremental secured borrowing rate based on lease term information available at the commencement date of the lease in determining the present value of lease payments. We have real estate lease agreements with lease and non-lease components, which are accounted for separately. For certain equipment leases, such as copiers and vehicles, we account for the leases under a portfolio method. Leases that were grandfathered under various portions of Topic 842, such as land easements, are reassessed when the agreements are modified.
Refer to Note 17 for further information.
Share-based Compensation
We recognize compensation expense ratably over the vesting period of the restricted stock award based on the grant-date fair value, which is determined based on the market price of our Class P common stock on the grant date, less estimated forfeitures. Forfeiture rates are estimated based on historical forfeitures under our restricted stock award plans. Upon vesting, the restricted stock award will be paid in shares of our Class P common stock.
Pensions and Other Postretirement Benefits
We recognize the differences between the fair value of each of our and our consolidated subsidiaries’ pension and other postretirement benefit plans’ assets and the benefit obligations as either assets or liabilities on our consolidated balance sheets. We record deferred plan costs and income—unrecognized losses and gains, unrecognized prior service costs and credits, and any remaining unamortized transition obligations—net of income taxes in “Accumulated other comprehensive loss,” with the proportionate share associated with less than wholly owned consolidated subsidiaries allocated and included within “Noncontrolling interests,” or as a regulatory asset or liability for certain of our regulated operations, until they are amortized as a component of benefit expense.
Deferred Financing Costs
We capitalize financing costs incurred with new borrowings and amortize the costs over the contractual term of the related obligations.
Redeemable Noncontrolling Interest
Through December 14, 2021, we had a redeemable noncontrolling interest which represented the interest in one of our consolidated subsidiaries, ELC, not owned by us, and which in certain limited circumstances, the partner had the right to relinquish its interest in the subsidiary and redeem its cumulative contributions, net of distributions it had received through date of the amended operating agreement. Distributions paid to EIG prior to that date were recorded as a reduction to the redeemable noncontrolling interest balance and included in “Distributions to investment partner” in our accompanying consolidated statements of cash flows. On December 14, 2021, the ownership agreement was modified such that EIG’s interest was no longer contingently redeemable, and the balance was reclassified to “Noncontrolling Interests.” Net income attributable to redeemable noncontrolling interest was $58 million and $54 million for the years ended December 31, 2021 and 2020, respectively, and is included in “Net Income Attributable to Noncontrolling Interests” in our accompanying consolidated statements of income.
Noncontrolling Interests
Noncontrolling interests represents the interests in our consolidated subsidiaries that are not owned by us. In our accompanying consolidated statements of income, the noncontrolling interest in the net income of our less than wholly owned consolidated subsidiaries is shown as an allocation of our consolidated net income and is presented separately as “Net Income
Attributable to Noncontrolling Interests.” In our accompanying consolidated balance sheets, noncontrolling interests is presented separately as “Noncontrolling interests” within “Stockholders’ Equity.”
Income Taxes
Income tax expense is recorded based on an estimate of the effective tax rate in effect or to be in effect during the relevant periods. Changes in tax legislation are included in the relevant computations in the period in which such changes are enacted. We do business in a number of states with differing laws concerning how income subject to each state’s tax structure is measured and at what effective rate such income is taxed. Therefore, we must make estimates of how our income will be apportioned among the various states in order to arrive at an overall effective tax rate. Changes in our effective tax rate, including any effect on previously recorded deferred taxes, are recorded in the period in which the need for such change is identified.
Deferred income tax assets and liabilities are recognized for temporary differences between the basis of assets and liabilities for financial reporting and tax purposes. Deferred tax assets are reduced by a valuation allowance when it is more-likely-than-not that all, or a portion, of a deferred tax asset will not be realized. While we have considered estimated future taxable income and prudent and feasible tax planning strategies in determining the amount of our valuation allowance, any change in the amount that we expect to ultimately realize will be included in income in the period in which such a determination is reached.
In determining the deferred income tax asset and liability balances attributable to our investments, we apply an accounting policy that looks through our investments. The application of this policy resulted in no deferred income taxes being provided on the difference between the book and tax basis on the non-tax-deductible goodwill portion of our investments, including KMI’s investment in its wholly-owned subsidiary, KMP.
Risk Management Activities
We utilize energy commodity derivative contracts for the purpose of mitigating our risk resulting from fluctuations in the market price of commodities including crude oil, natural gas, and NGL. In addition, we enter into interest rate swap agreements for the purpose of managing our interest rate exposure associated with our debt obligations. We also enter into cross-currency swap agreements to manage our foreign currency risk associated with certain debt obligations. We measure our derivative contracts at fair value and we report them on our balance sheet as either an asset or liability. For certain physical forward commodity derivatives contracts, we apply the normal purchase/normal sale exception, whereby the revenues and expenses associated with such transactions are recognized during the period when the commodities are physically delivered or received.
For qualifying accounting hedges, we formally document the relationship between the hedging instrument and the hedged item, the risk management objectives, and the methods used for assessing and testing effectiveness. When we designate a derivative contract as a cash flow accounting hedge, the entire change in fair value of the derivative that is included in the assessment of hedge effectiveness is deferred in “Accumulated other comprehensive loss” and reclassified into earnings in the period in which the hedged item affects earnings. When we designate a derivative contract as a fair value accounting hedge, the change in fair value of the hedged item is recorded as an adjustment to the carrying value of the hedged item and recognized currently in earnings in the same line item that the change in fair value of the derivative is recognized currently in earnings. Therefore, any difference between the changes in fair values of the item being hedged and the derivative contract results in a gain or loss from the hedging relationship recognized currently in earnings.
For derivative instruments that are not designated as accounting hedges, or for which we have not elected the normal purchase/normal sales exception, changes in fair value are recognized currently in earnings.
Fair Value
The fair values of our financial instruments are separated into three broad levels (Levels 1, 2 and 3) based on our assessment of the availability of observable market data and the significance of non-observable data used to determine fair value. We assign each fair value measurement to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. Recognized valuation techniques utilize inputs such as contractual prices, quoted market prices or rates, and discount factors. These inputs may be either readily observable or corroborated by market data.
Regulatory Assets and Liabilities
Regulatory assets and liabilities represent probable future revenues or expenses associated with certain charges and credits that will be recovered from or returned to customers through the ratemaking process. In instances where we receive recovery in tariff rates related to losses on dispositions of operating units, we record a regulatory asset for the estimated recoverable amount. We include the amounts of our regulatory assets and liabilities within “Other current assets,” “Deferred charges and other assets,” “Other current liabilities” and “Other long-term liabilities and deferred credits,” respectively, in our accompanying consolidated balance sheets.
The following table summarizes our regulatory asset and liability balances as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In millions) |
| Current regulatory assets | $ | 73 | | | $ | 66 | |
| Non-current regulatory assets | 183 | | | 220 | |
| Total regulatory assets(a) | $ | 256 | | | $ | 286 | |
| | | |
| Current regulatory liabilities | $ | 50 | | | $ | 32 | |
| Non-current regulatory liabilities | 175 | | | 163 | |
| Total regulatory liabilities(b) | $ | 225 | | | $ | 195 | |
(a)Regulatory assets as of December 31, 2022 include (i) $110 million of unamortized losses on disposal of assets; (ii) $45 million income tax gross up on equity AFUDC; and (iii) $101 million of other assets, including amounts related to fuel tracker arrangements. Approximately $143 million of the regulatory assets, with a weighted average remaining recovery period of 10 years, are recoverable without earning a return, including the income tax gross up on equity AFUDC for which there is an offsetting deferred income tax balance for FERC rate base purposes; therefore, it does not earn a return.
(b)Regulatory liabilities as of December 31, 2022 are comprised of customer prepayments to be credited to shippers or other over-collections that are expected to be returned to shippers or netted against under-collections over time. Approximately $110 million of the $175 million classified as non-current is expected to be credited to shippers over a remaining weighted average period of 15 years, while the remaining $65 million is not subject to a defined period.
Earnings per Share
We calculate earnings per share using the two-class method. Earnings were allocated to Class P common stock and participating securities based on the amount of dividends paid in the current period plus an allocation of the undistributed earnings or excess distributions over earnings to the extent that each security participates in earnings or excess distributions over earnings. Our unvested restricted stock awards, which may be restricted stock or restricted stock units issued to employees and non-employee directors and include dividend equivalent payments, do not participate in excess distributions over earnings.
The following table sets forth the allocation of net income available to shareholders of Class P common stock and participating securities:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions, except per share amounts) |
| Net Income Available to Stockholders | $ | 2,548 | | | $ | 1,784 | | | $ | 119 | |
| Participating securities: | | | | | |
| Less: Net Income Allocated to Restricted stock awards(a) | (13) | | | (14) | | | (13) | |
| Net Income Allocated to Class P Stockholders | $ | 2,535 | | | $ | 1,770 | | | $ | 106 | |
| | | | | |
| Basic Weighted Average Shares Outstanding | 2,258 | | | 2,266 | | | 2,263 | |
| Basic Earnings Per Share | $ | 1.12 | | | $ | 0.78 | | | $ | 0.05 | |
(a)As of December 31, 2022, there were approximately 13 million restricted stock awards outstanding.
The following maximum number of potential common stock equivalents are antidilutive and, accordingly, are excluded from the determination of diluted earnings per share. As we have no other common stock equivalents, our diluted earnings per share are the same as our basic earnings per share for all periods presented.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions on a weighted average basis) |
| Unvested restricted stock awards | 13 | | | 13 | | | 13 | |
| Convertible trust preferred securities | 3 | | | 3 | | | 3 | |
| | | | | |
| 3. | Acquisitions and Divestitures |
Business Combinations
For acquired businesses, we recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition with any excess purchase price over the fair value of net assets acquired recorded to goodwill. Determining the fair value of these items requires management’s judgment and the utilization of an independent valuation specialist, if applicable, and involves the use of significant estimates and assumptions.
As of December 31, 2022, our allocation of the purchase price for significant acquisitions completed during the years ended December 31, 2022 and 2021 are detailed below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Assignment of Purchase Price | | |
| Ref | Date | Acquisition | Purchase price | | Current assets | | Property, plant & equipment | | Other long-term assets | | Current liabilities | | Long-term liabilities | | Resulting goodwill |
| | | (In millions) |
| (1) | 8/22 | North American Natural Resources | $ | 132 | | | $ | 2 | | | $ | 5 | | | $ | 64 | | | $ | — | | | $ | — | | | $ | 61 | |
| (2) | 7/22 | Mas Ranger, LLC | 358 | | | 9 | | | 31 | | | 320 | | | (2) | | | — | | | — | |
| (3) | 8/21 | Kinetrex | 318 | | | 18 | | | 49 | | | 272 | | | (6) | | | (68) | | | 53 | |
| (4) | 7/21 | Stagecoach | 1,258 | | | 53 | | | 1,187 | | | 24 | | | (6) | | | — | | | — | |
(1) North American Natural Resources Acquisition
On August 11, 2022, we completed the acquisition of seven landfill assets with the purchase of North American Natural Resources, Inc. and, its sister companies, North American Biofuels, LLC and North American-Central, LLC (NANR) consisting of GTE facilities in Michigan and Kentucky for $132 million, including purchase price adjustments for working capital. Other long-term assets within the preliminary purchase price allocation consists of intangibles related to gas rights and customer contracts with a weighted average amortization period of approximately 13 years. The goodwill associated with this acquisition is tax deductible. The acquired assets align with our strategy to invest in low-carbon energy and are included as part of our new Energy Transition Ventures group within our CO2 business segment.
(2) Mas Ranger Acquisition
On July 19, 2022, we completed an acquisition of three landfill assets with the purchase of Mas Ranger, LLC and its subsidiaries from Mas CanAm, LLC, comprising an RNG facility in Arlington, Texas and medium Btu facilities in Shreveport, Louisiana and Victoria, Texas for $358 million including preliminary purchase price adjustments for working capital. Other long-term assets within the preliminary purchase price allocation reflects an intangible related to a customer contract with an amortization period of approximately 17 years. The acquired assets align with our strategy to invest in low-carbon energy and are included as part of our new Energy Transition Ventures group within our CO2 business segment.
(3) Kinetrex Acquisition
On August 20, 2021, we completed the acquisition of Indianapolis-based Kinetrex from an affiliate of Parallel49 Equity for $318 million, including purchase price adjustments for working capital. Deferred charges and other within the purchase price allocation includes $63 million related to an equity investment and $199 million related to a customer relationship with an amortization period of approximately 10 years. Kinetrex is a supplier of LNG in the Midwest and a producer and supplier of
RNG under long-term contracts to transportation service providers. Kinetrex has a 50% interest in the largest RNG facility in Indiana, and we commenced construction on three additional landfill-based RNG facilities in September 2021. The acquired assets align with our strategy to invest in low-carbon energy and are included as part of our new Energy Transition Ventures group within our CO2 business segment.
(4) Stagecoach Acquisition
On July 9, 2021 and November 24, 2021, we completed the acquisitions of Stagecoach and its subsidiaries, a natural gas pipeline and storage joint venture between Consolidated Edison, Inc. and Crestwood Equity Partners, LP, for approximately $1,258 million, including a purchase price adjustment for working capital. Deferred charges and other within the purchase price allocation relates to customer contracts with a weighted average amortization period of less than 2 years. The determination of fair value utilized valuation methodologies including discounted cash flows and the cost approach. The significant assumptions made in performing these valuations include a discount rate of approximately 12%, future revenues and replacement costs. To compute estimated future cash flows for Stagecoach, transportation and storage revenue forecasts were developed based on projected demand and future rates for services in the Northeast market areas.
Pro Forma Information
Pro forma consolidated income statement information that gives effect to the above acquisitions as if they had occurred as of January 1, 2021 is not presented because it would not be materially different from the information presented in our accompanying consolidated statements of income.
Divestitures
Sale of Interest in ELC
On September 26, 2022, we completed the sale of a 25.5% ownership interest in ELC. We received net proceeds of $557 million which were used to reduce short-term borrowings. As we continue to have a controlling financial interest in ELC, we recorded an increase of $190 million to “Additional paid in capital” for the impact of the change in our ownership interest in ELC, which is reflected on our accompanying consolidated statement of stockholders’ equity for the year ended December 31, 2022. We continue to own a 25.5% interest in and operate ELC.
We continue to consolidate ELC. We have determined that ELC is a variable interest entity and Southern Liquefaction Company, LLC (SLC), which is indirectly controlled by us, is the primary beneficiary because it has the ability to direct the activities that most significantly impact ELC’s economic performance and the right to receive benefits and the obligation to absorb losses. In addition to being the operator of ELC, the evaluation of ELC as a variable interest entity and SLC as the primary beneficiary included consideration of the following: (i) a liquefaction service agreement between ELC and its customer was designed for recovery by ELC of actual costs for operating and maintaining ELC’s facilities, which reduces the risk for all equity owners to absorb losses resulting from cost variability; and (ii) substantially all ELC’s activities involve KMI subsidiaries under common control that provide services for and benefit from the operations of ELC.
The following table shows the carrying amount and classification of ELC’s assets and liabilities in our consolidated balance sheet:
| | | | | |
| December 31, 2022 |
| (In millions) |
| Assets | |
| Current assets | $ | 34 | |
| Property, plant and equipment, net | 1,197 | |
| Deferred charges and other assets | 6 | |
| |
| Liabilities | |
| Current liabilities | $ | 15 | |
| Other long-term liabilities and deferred credits | 5 | |
| |
We receive distributions from ELC, indirectly, through our interest in SLC, but otherwise, the assets of ELC cannot be used to settle our obligations. ELC’s creditors have no recourse against our general credit and the obligations of ELC may only be settled using the assets of ELC. ELC does not guarantee our debt or other similar commitments.
Sale of an Interest in NGPL Holdings LLC
On March 8, 2021, we and Brookfield Infrastructure Partners L.P. (Brookfield) completed the sale of a combined 25% interest in our joint venture, NGPL Holdings LLC (NGPL Holdings), to a fund controlled by ArcLight Capital Partners, LLC (ArcLight). We received net proceeds of $412 million for our proportionate share of the interests sold, which included the transfer of $125 million of our $500 million related party promissory note receivable from NGPL Holdings to ArcLight with quarterly interest payments at 6.75%. We recognized a pre-tax gain of $206 million for our proportionate share, which is included within “Other, net” in our accompanying consolidated statement of income for the year ended December 31, 2021. We and Brookfield now each hold a 37.5% interest in NGPL Holdings.
4. Gains and Losses on Divestitures, Impairments and Other Write-downs
During the years ended December 31, 2022, 2021, and 2020, we recorded net pre-tax (gains) losses of $(32) million, $1,535 million and $1,922 million, respectively, reflecting net (gains) losses on divestitures, impairments and other write downs as detailed further below. The year ended December 31, 2021 amount primarily includes pre-tax long-lived asset impairments of $1,634 million. The year ended December 31, 2020 amount primarily includes pre-tax goodwill and long-lived asset impairment losses of $1,600 million and $376 million, respectively.
We recognized the following non-cash pre-tax (gains) losses on divestitures, impairments or other write-downs on assets and equity investments during the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions) |
| Natural Gas Pipelines | | | | | |
| Impairments of long-lived assets(a) | $ | — | | | $ | 1,600 | | | $ | — | |
| Impairment of goodwill(b) | — | | | — | | | 1,000 | |
| Gain on sale of interest in NGPL Holdings(c) | — | | | (206) | | | — | |
| Loss on write-down of related party note receivable(d) | — | | | 117 | | | — | |
| (Gains) losses on divestitures of long-lived assets | (10) | | | (1) | | | 10 | |
| | | | | |
| | | | | |
| Products Pipelines | | | | | |
| Impairments of long-lived assets | — | | | — | | | 21 | |
| Gain on divestiture of long-lived asset | (12) | | | — | | | — | |
| | | | | |
| Terminals | | | | | |
| Impairments of long-lived assets | — | | | 34 | | | 5 | |
| (Gains) losses on divestitures of long-lived assets(e) | (9) | | | 2 | | | (54) | |
| Gain on sale of equity investment interests | — | | | — | | | (10) | |
CO2 | | | | | |
| Impairment of goodwill(b) | — | | | — | | | 600 | |
| Impairments of long-lived assets(f) | — | | | — | | | 350 | |
| Gains on divestitures of long-lived assets | (1) | | | (8) | | | — | |
| | | | | |
| Other gains on divestitures of long-lived assets | — | | | (3) | | | — | |
| Pre-tax (gains) losses on divestitures, impairments and other write-downs, net | $ | (32) | | | $ | 1,535 | | | $ | 1,922 | |
(a)2021 amount represents non-cash impairments associated with our South Texas gathering and processing assets.
(b)2020 amount represent non-cash goodwill impairments associated with our Natural Gas Pipelines Non-Regulated and CO2 reporting units (see “—Impairments—Goodwill” below).
(c)See Note 3.
(d)See “—Investment in Ruby” below for a further discussion.
(e)2020 amount includes a $55 million gain related to the sale of our Staten Island terminal.
(f)2020 amount represents a non-cash impairment of oil and gas properties.
Impairments
Long-lived Assets
During the second quarter of 2021, we evaluated our South Texas gathering and processing assets within our Natural Gas Pipeline business segment for impairment, which was driven by lower expectations regarding the volumes and rates associated with the re-contracting of contracts expiring through 2024. To compute the estimated undiscounted future cash flows we used the forecast of expected revenues adjusted for upcoming contract expirations. This analysis indicated that our South Texas gathering and processing assets failed step one. In step two, we utilized an income approach to estimate fair value and compared it to the carrying value. The significant assumptions made in calculating fair value include estimates of future cash flows and discount rates. We applied an approximate 8.5% discount rate, a Level 3 input, which we believed represented the estimated weighted average cost of capital of a theoretical market participant. As a result of our evaluation, we recognized a non-cash, long-lived asset impairment of $1,600 million during the year ended December 31, 2021.
During the first half of 2020, the energy production and demand factors related to COVID-19 and the sharp decline in commodity prices represented a triggering event 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 which resulted in a non-cash impairment of long-lived assets within our CO2 business segment shown in the above table during the year ended December 31, 2020.
As of March 31, 2020, for our CO2 assets, the computation of estimated undiscounted future cash flows included the following:
•To compute estimated future cash flows for our oil and gas producing properties, we used our reserve engineer specialists to estimate future oil and gas production volumes. These estimates of future oil and gas production volumes 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, throughput and production 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.
For certain oil and gas properties that failed the first step, 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
The fair value estimates used in our goodwill impairment test are primarily based on Level 3 inputs of the fair value hierarchy. The inputs include valuation estimates using market and income approach valuation methodologies, which include assumptions primarily involving management’s significant judgments and estimates with respect to market multiples, comparable sales transactions, weighted average costs of capital, general economic conditions and the related demand for products handled or transported by our assets as well as assumptions regarding future cash flows based on production growth rate assumptions, terminal values and discount rates. Prior to 2022, we used primarily a market approach and, in some instances where deemed necessary, also used discounted cash flow analyses to determine the fair value of our assets. We used discount rates representing our estimate of the risk-adjusted discount rates that would be used by market participants specific to the particular reporting unit.
During the first quarter of 2020, we conducted interim impairment tests of goodwill for our CO2 and Natural Gas Pipelines Non-Regulated reporting units, and during the second quarter 2020, we conducted our annual impairment test of goodwill for all of our reporting units which resulted in non-cash impairments of goodwill within our CO2 and Natural Gas Pipelines business segments during the year ended December 31, 2020 as shown in the table above.
•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, while no impairment was required as of March 31, 2020, 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 forecasted commodity throughput volumes and contract prices for each underlying asset within the reporting unit. 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.
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 tests 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 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. 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.
For additional information regarding changes in our goodwill, see Note 8.
Investment in Ruby
During the first quarter of 2021, we recognized a pre-tax charge of $117 million related to a write-down of our subordinated note receivable from our equity investee, Ruby, which is included within “Earnings from equity investments” in our accompanying consolidated statement of income for the year ended December 31, 2021. The write-down was driven by the impairment recognized by Ruby of its assets.
Ruby Chapter 11 Bankruptcy Filing
The balance of Ruby Pipeline, L.L.C.’s 2022 unsecured notes matured on April 1, 2022 in the principal amount of $475 million. Although Ruby had sufficient liquidity to operate its business, it lacked sufficient liquidity to satisfy its obligations under the 2022 unsecured notes on the maturity date of April 1, 2022. Accordingly, on March 31, 2022, Ruby filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Ruby, as the debtor, continued to operate in the ordinary course as a debtor in possession under the jurisdiction of the United States Bankruptcy Court. We fully impaired our equity investment in Ruby in the fourth quarter of 2019 and fully impaired our investment in Ruby’s subordinated notes in the first quarter of 2021. We had no amounts included in our “Investments” on our accompanying consolidated balance sheets associated with Ruby as of December 31, 2022 or 2021.
On January 13, 2023, the bankruptcy court confirmed a plan of reorganization satisfactory to all interested parties regarding Ruby, which involved payment of Ruby’s outstanding senior notes with the proceeds from the sale of Ruby to Tallgrass, a settlement by KMI and Pembina of certain potential causes of action relating to the bankruptcy, and cash on hand. Our payment to the bankruptcy estate, net of payments it received in respect of a long-term subordinated note receivable from Ruby, was approximately $28.5 million which was accrued for as of December 31, 2022 and included within “Other, net” in our accompanying consolidated statement of income for the year ended December 31, 2022. Consummation of the settlement and the sale of Ruby to Tallgrass occurred on January 13, 2023.
The components of “Income Before Income Taxes” are as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| U.S. | $ | 3,318 | | | $ | 2,217 | | | $ | 663 | |
| Foreign | 17 | | | 2 | | | (2) | |
| Total Income Before Income Taxes | $ | 3,335 | | | $ | 2,219 | | | $ | 661 | |
Components of the income tax provision applicable for federal, foreign and state taxes are as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions) |
| Current tax expense (benefit) | | | | | |
| Federal | $ | — | | | $ | — | | | $ | (20) | |
| State | 14 | | | 11 | | | 9 | |
| Foreign | 4 | | | 3 | | | 147 | |
| Total | 18 | | | 14 | | | 136 | |
| Deferred tax expense (benefit) | | | | | |
| Federal | 642 | | | 334 | | | 440 | |
| State | 50 | | | 21 | | | 49 | |
| Foreign | — | | | — | | | (144) | |
| Total | 692 | | | 355 | | | 345 | |
| Total tax provision | $ | 710 | | | $ | 369 | | | $ | 481 | |
The difference between the statutory federal income tax rate and our effective income tax rate is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (In millions, except percentages) |
| Federal income tax | $ | 700 | | | 21.0 | % | | $ | 466 | | | 21.0 | % | | $ | 139 | | | 21.0 | % |
| Increase (decrease) as a result of: | | | | | | | | | | | |
| Net effects of noncontrolling interests | (16) | | | (0.5) | % | | (14) | | | (0.6) | % | | (13) | | | (2.0) | % |
| State income tax, net of federal benefit | 69 | | | 2.0 | % | | 50 | | | 2.2 | % | | 52 | | | 7.9 | % |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Dividend received deduction | (36) | | | (1.1) | % | | (46) | | | (2.1) | % | | (27) | | | (4.1) | % |
| | | | | | | | | | | |
| Release of valuation allowance | — | | | — | % | | (38) | | | (1.7) | % | | — | | | — | % |
| Nondeductible goodwill | — | | | — | % | | — | | | — | % | | 336 | | | 50.8 | % |
| General business credit | — | | | — | % | | (36) | | | (1.6) | % | | — | | | — | % |
| Federal refunds | — | | | — | % | | — | | | — | % | | (20) | | | (3.0) | % |
| | | | | | | | | | | |
| Other | (7) | | | (0.2) | % | | (13) | | | (0.6) | % | | 14 | | | 2.2 | % |
| Total | $ | 710 | | | 21.2 | % | | $ | 369 | | | 16.6 | % | | $ | 481 | | | 72.8 | % |
Deferred tax assets and liabilities result from the following:
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| (In millions) |
| Deferred tax assets | | | |
| Employee benefits | $ | 116 | | | $ | 154 | |
| | | |
| Net operating loss carryforwards | 2,007 | | | 1,476 | |
| Tax credit carryforwards | 303 | | | 301 | |
| | | |
| Interest expense limitation | 82 | | | — | |
| Other | 192 | | | 229 | |
| Valuation allowances | (79) | | | (93) | |
| Total deferred tax assets | 2,621 | | | 2,067 | |
| Deferred tax liabilities | | | |
| Property, plant and equipment | 163 | | | 166 | |
| | | |
| Investments | 3,056 | | | 1,769 | |
| Other | 25 | | | 17 | |
| Total deferred tax liabilities | 3,244 | | | 1,952 | |
| Net deferred tax (liability)/asset | $ | (623) | | | $ | 115 | |
| | | |
| | | |
| | | |
Deferred Tax Assets and Valuation Allowances
A reconciliation of our valuation allowances for the year ended December 31, 2022 is as follows:
| | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | | | |
| | (In millions) |
| Balance at beginning of period | | $ | 93 | | | | | |
| Statute expirations for federal and state NOL and foreign tax credits | | (16) | | | | | |
| Currency fluctuation | | 2 | | | | | |
| | | | | | |
| Balance at end of period | | $ | 79 | | | | | |
The following table provides details related to our deferred tax assets and valuation allowances as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Unused Amount | | Deferred Tax Asset | | Valuation Allowance | | Expiration Period |
| | (In millions) | | |
| Net Operating Loss | | | | | | | | |
| U.S. federal net operating loss | | $ | 5,005 | | | $ | 1,051 | | | $ | — | | | Indefinite |
| U.S. federal net operating loss | | 3,209 | | | 674 | | | — | | | 2029 - 2037 |
| State losses | | 5,034 | | | 254 | | | (47) | | | 2023 - 2042 |
| Foreign losses | | 83 | | | 28 | | | (28) | | | Indefinite |
| Tax Credits | | | | | | | | |
| General business credits | | 299 | | | 299 | | | — | | | 2036 - 2042 |
| Foreign tax credits | | 4 | | | 4 | | | (4) | | | 2023 - 2027 |
| | | | | | | | |
Use of a portion of our U.S. federal carryforwards is subject to the limitations provided under Sections 382 and 383 of the Internal Revenue Code as well as the separate return limitation rules of Internal Revenue Service regulations. If certain substantial changes in our ownership occur, there would be an annual limitation on the amount of carryforwards that could be utilized.
Unrecognized Tax Benefits: We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based not only on the technical merits of the tax position based on tax law, but also the past administrative practices and precedents of the taxing authority. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution.
A reconciliation of our gross unrecognized tax benefit excluding interest and penalties is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In millions) |
| Balance at beginning of period | | $ | 21 | | | $ | 18 | | | $ | 16 | |
| Reductions based on statute expirations | | (5) | | | — | | | — | |
| Additions to state reserves for prior years | | 7 | | | 3 | | | 2 | |
| Balance at end of period | | $ | 23 | | | $ | 21 | | | $ | 18 | |
| | | | | | |
| Amounts which, if recognized, would affect the effective tax rate | | $ | 23 | | | | | |
In addition, we believe it is reasonably possible that our liability for unrecognized tax benefits will increase by $4 million during the next year, primarily due to additions for state filing positions taken in prior years, offset by releases from statute expirations.
The following table summarizes information of our open tax years:
| | | | | | | | |
| Jurisdiction | | Open Tax Year |
| U.S. | | 2017 - 2021 |
| Various states | | 2012 - 2021 |
| Foreign | | 2008 - 2021 |
6. Property, Plant and Equipment, net
As of December 31, 2022 and 2021, our property, plant and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Straight Line
Estimated Useful Life | | Composite
Depreciation Rates | | December 31, |
| | | | 2022 | | 2021 |
| (Years) | | (%) | | (In millions) |
| Interstate Natural Gas FERC-Regulated | | | | | | | |
| Pipelines (Natural gas) | | | 0.80-6.67 | | $ | 11,793 | | | $ | 11,718 | |
| Equipment (Natural gas) | | | 0.80-6.67 | | 8,839 | | | 8,722 | |
| Other(a) | | | 0.00-25 | | 833 | | | 769 | |
| Accumulated depreciation, depletion and amortization | | | | | (9,883) | | | (9,433) | |
| Depreciable assets | | | | | 11,582 | | | 11,776 | |
| Land and land rights-of-way | | | | | 388 | | | 387 | |
| Construction work in process | | | | | 258 | | | 114 | |
| Total interstate natural gas FERC-regulated | | | | | 12,228 | | | 12,277 | |
| | | | | | | |
| Other | | | | | | | |
Pipelines (Natural gas, liquids, crude oil and CO2) | 5-40 | | 0.79-33.33 | | 8,329 | | | 8,536 | |
Equipment (Natural gas, liquids, crude oil, CO2 and terminals) | 5-40 | | 0.79-33.33 | | 18,645 | | | 17,789 | |
| Other(a) | 3-10 | | 0.00-33.33 | | 4,791 | | | 4,587 | |
| Accumulated depreciation, depletion and amortization | | | | | (10,529) | | | (9,359) | |
| Depreciable assets | | | | | 21,236 | | | 21,553 | |
| Land and land rights-of-way | | | | | 1,350 | | | 1,331 | |
| Construction work in process | | | | | 785 | | | 492 | |
| Total other | | | | | 23,371 | | | 23,376 | |
| | | | | | | |
| Property, plant and equipment, net | | | | | $ | 35,599 | | | $ | 35,653 | |
(a)Includes general plant, general structures and buildings, computer and communication equipment, intangibles, vessels, transmix products, linefill and miscellaneous property, plant and equipment.
Depreciation, depletion and amortization expense for property, plant and equipment was $1,905 million, $1,873 million and $1,928 million for the years ended December 31, 2022, 2021 and 2020, respectively.
7. Investments
Our investments primarily consist of equity investments where we hold significant influence over investee actions and for which we apply the equity method of accounting. The following table provides details on our investments as of December 31, 2022 and 2021, and our earnings (loss) from these respective investments for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ownership Interest | | Equity Investments | | Earnings (Loss) from
Equity Investments |
| | December 31, | | December 31, | | Year Ended December 31, |
| | 2022 | | 2022 | | 2021 | | 2022 | | 2021 | | 2020 |
| | | (In millions) |
| Citrus Corporation | 50% | | $ | 1,781 | | | $ | 1,768 | | | $ | 145 | | | $ | 151 | | | $ | 165 | |
| SNG | 50% | | 1,669 | | | 1,514 | | | 145 | | | 128 | | | 129 | |
| PHP | 26.67% | | 666 | | | 647 | | | 70 | | | 63 | | | — | |
| NGPL Holdings(a) | 37.5% | | 610 | | | 604 | | | 111 | | | 94 | | | 116 | |
| Gulf Coast Express Pipeline LLC | 34% | | 597 | | | 618 | | | 91 | | | 86 | | | 90 | |
| MEP | 50% | | 371 | | | 388 | | | 10 | | | (17) | | | (6) | |
| Products (SE) Pipe Line Corporation | 51.17% | | 348 | | | 346 | | | 51 | | | 48 | | | 43 | |
| Utopia Holding LLC | 50% | | 325 | | | 328 | | | 20 | | | 20 | | | 20 | |
| Gulf LNG Holdings Group, LLC | 50% | | 311 | | | 347 | | | 24 | | | 22 | | | 19 | |
| EagleHawk | 25% | | 273 | | | 266 | | | 13 | | | 8 | | | 17 | |
| Red Cedar Gathering Company | 49% | | 155 | | | 168 | | | 17 | | | 10 | | | 12 | |
| Double Eagle Pipeline LLC | 50% | | 90 | | | 112 | | | 18 | | | 9 | | | 12 | |
| Watco Companies, LLC | (b) | | 79 | | | 75 | | | 9 | | | 9 | | | 16 | |
| Cortez Pipeline Company | 52.98% | | 31 | | | 28 | | | 30 | | | 29 | | | 24 | |
| FEP | 50% | | — | | | — | | | 2 | | | — | | | 70 | |
| Ruby(c) | (d) | | — | | | — | | | — | | | (116) | | | 15 | |
| All others | | | 347 | | | 369 | | | 47 | | | 47 | | | 38 | |
| Total investments | | | $ | 7,653 | | | $ | 7,578 | | | $ | 803 | | | $ | 591 | | | $ | 780 | |
| Amortization of excess cost | | | | | | | $ | (75) | | | $ | (78) | | | $ | (140) | |
(a)Our investment in NPGL Holdings includes a related party promissory note receivable from NGPL Holdings with quarterly interest payments at 6.75%. On March 8, 2021, we and Brookfield completed the sale of a combined 25% interest in our joint venture, NGPL Holdings, to ArcLight including a transfer of $125 million in principal amount of our related party promissory note receivable (see Note 3). We and Brookfield now each hold a 37.5% interest in NGPL Holdings. The outstanding principal amount of our related party promissory note receivable at both December 31, 2022 and 2021 was $375 million. For the years ended December 31, 2022, 2021 and 2020, we recognized $25 million, $27 million and $34 million, respectively, of interest within “Earnings from equity investments” on our accompanying consolidated statements of income.
(b)We hold a preferred equity investment in Watco Companies, LLC (Watco). We own 50,000 Class B preferred shares and pursuant to the terms of the investment, receive priority, cumulative cash and stock distributions from the preferred shares at a rate of 3.00% per quarter. We do not hold any voting powers, but the class does provide us certain approval rights, including the right to appoint one of the members to Watco’s board of managers. During the fourth quarter of 2020, we sold our Preferred A and common equity investment in Watco, and recognized a pre-tax gain of $10 million within “Other, net” on our accompanying consolidated statement of income for the year ended December 31, 2020.
(c)The loss from our investment in Ruby for the year ended December 31, 2021 includes a non-cash impairment charge of $117 million related to a write-down of our subordinated note receivable from Ruby driven by the impairment by Ruby of its assets (see Note 4 “Gains and Losses on Divestitures, Impairments, and Other Write-downs—Investment in Ruby.)
(d)As of December 31, 2022, we operated Ruby and owned an effective 50% interest. As of January 13, 2023, we no longer own an interest in Ruby. For further information regarding Ruby’s bankruptcy filing, see Note 4 “Gains and Losses on Divestitures, Impairments, and Other Write-downs—Investment in Ruby—Ruby Chapter 11 Bankruptcy Filing.”
Summarized combined financial information for our significant equity investments (listed or described above) is reported below (amounts represent 100% of investee financial information):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Income Statement | | 2022 | | 2021(a) | | 2020 |
| | (In millions) |
| Revenues | | $ | 5,967 | | | $ | 5,537 | | | $ | 5,200 | |
| Costs and expenses | | 4,204 | | | 6,153 | | | 4,325 | |
| Net income (loss) | | $ | 1,763 | | | $ | (616) | | | $ | 875 | |
| | | | | | | | | | | | | | |
| | December 31, |
| Balance Sheet | | 2022 | | 2021 |
| | (In millions) |
| Current assets | | $ | 1,470 | | | $ | 1,314 | |
| Non-current assets | | 23,361 | | | 23,154 | |
| Current liabilities | | 1,622 | | | 1,808 | |
| Non-current liabilities | | 10,207 | | | 10,001 | |
| Partners’/owners’ equity | | 13,002 | | | 12,659 | |
(a)2021 amounts include a non-cash impairment charge of $2.2 billion recorded by Ruby.
8. Goodwill
Changes in the amounts of our goodwill for each of the years ended December 31, 2022 and 2021 are summarized by reporting unit as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Natural Gas Pipelines Regulated | | Natural Gas Pipelines Non-Regulated | | CO2 | | Products Pipelines | | Products Pipelines Terminals | | Terminals | | Energy Transition Ventures | | Total | |
| (In millions) | |
Gross goodwill | $ | 15,892 | | | $ | 4,940 | | | $ | 1,528 | | | $ | 2,575 | | | $ | 221 | | | $ | 1,481 | | | $ | — | | | $ | 26,637 | | |
Accumulated impairment losses | (1,643) | | | (2,597) | | | (600) | | | (1,197) | | | (70) | | | (679) | | | — | | | (6,786) | | |
| December 31, 2020 | 14,249 | | | 2,343 | | | 928 | | | 1,378 | | | 151 | | | 802 | | | — | | | 19,851 | | |
| | | | | | | | | | | | | | | | |
| Acquisitions | — | | | — | | | — | | | — | | | — | | | — | | | 63 | | | 63 | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| December 31, 2021 | 14,249 | | | 2,343 | | | 928 | | | 1,378 | | | 151 | | | 802 | | | 63 | | | 19,914 | | |
| | | | | | | | | | | | | | | | |
| Acquisitions(a) | — | | | — | | | — | | | — | | | — | | | — | | | 51 | | | 51 | | |
| | | | | | | | | | | | | | | | |
| December 31, 2022 | 14,249 | | | 2,343 | | | 928 | | | 1,378 | | | 151 | | | 802 | | | 114 | | | 19,965 | | |
| | | | | | | | | | | | | | | | |
Gross goodwill | 15,892 | | | 4,940 | | | 1,528 | | | 2,575 | | | 221 | | | 1,481 | | | 114 | | | 26,751 | | |
Accumulated impairment losses | (1,643) | | | (2,597) | | | (600) | | | (1,197) | | | (70) | | | (679) | | | — | | | (6,786) | | |
| December 31, 2022 | $ | 14,249 | | | $ | 2,343 | | | $ | 928 | | | $ | 1,378 | | | $ | 151 | | | $ | 802 | | | $ | 114 | | | $ | 19,965 | | |
(a)Includes goodwill arising from our acquisition of NANR and a $10 million purchase price adjustment related to our acquisition of Kinetrex in 2021 that was attributed to long-term deferred tax liabilities.
As of May 31, 2022, the results of our annual analysis did not indicate an impairment of goodwill. Each of our reporting units had an estimated fair value in excess of their respective carrying values (by at least 10%). We did not identify any triggers requiring further impairment analysis during the remainder of the year.
We estimated fair value based on a market approach utilizing forecasted earnings before interest, taxes, depreciation and amortization (EBITDA) and the enterprise value to estimated EBITDA multiples of comparable companies for each of our reporting units. The value of each reporting unit was determined from the perspective of a market participant in an orderly transaction between market participants at the measurement date.
The fair value estimates used in our Step 1 analysis are subject to variability in the forecasted EBITDA projections and in the enterprise value to estimated EBITDA multiples of comparable companies for each of our reporting units. A significant unfavorable change to any one or combination of these factors would result in a change to the reporting unit fair values discussed above and potentially result in future impairments of goodwill. Such non-cash impairments could have a significant effect on our results of operations.
9. Debt
The following table provides detail on the principal amount of our outstanding debt balances:
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| (In millions) |
| Credit facility and commercial paper borrowings | $ | — | | | $ | — | |
| Corporate senior notes(a) | | | |
4.15%, due March 2022 | — | | | 375 | |
1.50%, due March 2022(b) | — | | | 853 | |
3.95%, due September 2022 | — | | | 1,000 | |
3.15%, due January 2023 | 1,000 | | | 1,000 | |
| Floating rate, due January 2023(c) | 250 | | | 250 | |
3.45%, due February 2023 | 625 | | | 625 | |
3.50%, due September 2023 | 600 | | | 600 | |
5.625%, due November 2023 | 750 | | | 750 | |
4.15%, due February 2024 | 650 | | | 650 | |
4.30%, due May 2024 | 600 | | | 600 | |
4.25%, due September 2024 | 650 | | | 650 | |
4.30%, due June 2025 | 1,500 | | | 1,500 | |
1.75%, due November 2026 | 500 | | | 500 | |
6.70%, due February 2027 | 7 | | | 7 | |
2.25%, due March 2027(b) | 535 | | | 569 | |
6.67%, due November 2027 | 7 | | | 7 | |
4.30%, due March 2028 | 1,250 | | | 1,250 | |
7.25%, due March 2028 | 32 | | | 32 | |
6.95%, due June 2028 | 31 | | | 31 | |
8.05%, due October 2030 | 234 | | | 234 | |
2.00%, due February 2031 | 750 | | | 750 | |
7.40%, due March 2031 | 300 | | | 300 | |
7.80%, due August 2031 | 537 | | | 537 | |
7.75%, due January 2032 | 1,005 | | | 1,005 | |
7.75%, due March 2032 | 300 | | | 300 | |
4.80%, due February 2033 | 750 | | | — | |
7.30%, due August 2033 | 500 | | | 500 | |
5.30%, due December 2034 | 750 | | | 750 | |
5.80%, due March 2035 | 500 | | | 500 | |
7.75%, due October 2035 | 1 | | | 1 | |
6.40%, due January 2036 | 36 | | | 36 | |
6.50%, due February 2037 | 400 | | | 400 | |
7.42%, due February 2037 | 47 | | | 47 | |
6.95%, due January 2038 | 1,175 | | | 1,175 | |
6.50%, due September 2039 | 600 | | | 600 | |
6.55%, due September 2040 | 400 | | | 400 | |
7.50%, due November 2040 | 375 | | | 375 | |
6.375%, due March 2041 | 600 | | | 600 | |
5.625%, due September 2041 | 375 | | | 375 | |
5.00%, due August 2042 | 625 | | | 625 | |
4.70%, due November 2042 | 475 | | | 475 | |
5.00%, due March 2043 | 700 | | | 700 | |
5.50%, due March 2044 | 750 | | | 750 | |
5.40%, due September 2044 | 550 | | | 550 | |
5.55%, due June 2045 | 1,750 | | | 1,750 | |
5.05%, due February 2046 | 800 | | | 800 | |
5.20%, due March 2048 | 750 | | | 750 | |
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
3.25%, due August 2050 | 500 | | | 500 | |
3.60%, due February 2051 | 1,050 | | | 1,050 | |
5.45%, due January 2052 | 750 | | | — | |
7.45%, due March 2098 | 26 | | | 26 | |
| TGP senior notes(a) | | | |
7.00%, due March 2027 | 300 | | | 300 | |
7.00%, due October 2028 | 400 | | | 400 | |
2.90%, due March 2030 | 1,000 | | | 1,000 | |
8.375%, due June 2032 | 240 | | | 240 | |
7.625%, due April 2037 | 300 | | | 300 | |
| EPNG senior notes(a) | | | |
8.625%, due January 2022 | — | | | 260 | |
7.50%, due November 2026 | 200 | | | 200 | |
3.50%, due February 2032 | 300 | | | — | |
8.375%, due June 2032 | 300 | | | 300 | |
| CIG senior notes(a) | | | |
4.15%, due August 2026 | 375 | | | 375 | |
6.85%, due June 2037 | 100 | | | 100 | |
EPC Building, LLC, promissory note, 3.967%, due January 2022 through December 2035 | 348 | | | 364 | |
Trust I Preferred Securities, 4.75%, due March 2028(d) | 220 | | | 221 | |
| Other miscellaneous debt(e) | 242 | | | 248 | |
| Total debt – KMI and Subsidiaries | 31,673 | | | 32,418 | |
| Less: Current portion of debt | 3,385 | | | 2,646 | |
| Total long-term debt – KMI and Subsidiaries(f) | $ | 28,288 | | | $ | 29,772 | |
(a)Notes provide for the redemption at any time at a price equal to 100% of the principal amount of the notes plus accrued interest to the redemption date plus a make whole premium and are subject to a number of restrictions and covenants. The most restrictive of these include limitations on the incurrence of liens and limitations on sale-leaseback transactions.
(b)Consists of senior notes denominated in Euros that have been converted to U.S. dollars and are respectively reported above at the December 31, 2022 exchange rate of 1.0705 U.S. dollars per Euro and at the December 31, 2021 exchange rate of 1.1370 U.S. dollars per Euro. As of December 31, 2022 and 2021, the cumulative changes in the exchange rate of U.S. dollars per Euro since issuance had resulted in a decrease of $8 million and an increase of $26 million, respectively, related to the 2.25% series, and as of December 31, 2021, an increase of $38 million to our debt balance related to the 1.50% series. As of December 31, 2022, we had outstanding associated cross-currency swap agreements which are designated as cash flow hedges.
(c)As of December 31, 2022, we had outstanding an associated floating-to-fixed interest rate swap agreement which is designated as a cash flow hedge.
(d)Capital Trust I (Trust I), is a 100%-owned business trust that as of December 31, 2022, had 4.4 million of 4.75% trust convertible preferred securities outstanding (referred to as the Trust I Preferred Securities). Trust I exists for the sole purpose of issuing preferred securities and investing the proceeds in 4.75% convertible subordinated debentures, which are due 2028. Trust I’s sole source of income is interest earned on these debentures. This interest income is used to pay distributions on the preferred securities. We provide a full and unconditional guarantee of the Trust I Preferred Securities. There are no significant restrictions from these securities on our ability to obtain funds from our subsidiaries by distribution, dividend or loan. The Trust I Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 4.75% and carry a liquidation value of $50 per security plus accrued and unpaid distributions. The Trust I Preferred Securities outstanding as of December 31, 2022 are convertible at any time prior to the close of business on March 31, 2028, at the option of the holder, into the following mixed consideration: (i) 0.7197 of a share of our Class P common stock; and (ii) $25.18 in cash without interest. We have the right to redeem these Trust I Preferred Securities at any time.
(e)Includes finance lease obligations with monthly installments. The lease terms expire between 2026 and 2070.
(f)Excludes our “Debt fair value adjustments” which, as of December 31, 2022 and 2021, increased our combined debt balances by $115 million and $902 million, respectively. In addition to all unamortized debt discount/premium amounts, debt issuance costs and purchase accounting on our debt balances, our debt fair value adjustments also include amounts associated with the offsetting entry for hedged debt and any unamortized portion of proceeds received from the early termination of interest rate swap agreements. For further information about our debt fair value adjustments, see “—Debt Fair Value Adjustments” below.
On February 23, 2022, EPNG issued in a private offering $300 million aggregate principal amount of 3.50% senior notes due 2032 and received net proceeds of $298 million after discount and issuance costs.
On August 3, 2022, we issued in a registered offering two series of senior notes consisting of $750 million aggregate principal amount of 4.80% senior notes due 2033 and $750 million aggregate principal amount of 5.45% senior notes due 2052 and received combined net proceeds of $1,484 million. We used a portion of the proceeds to repay short-term borrowings and for general corporate purposes.
On January 31, 2023, we issued in a registered offering $1,500 million aggregate principal amount of 5.20% senior notes due 2033 for net proceeds of $1,485 million, which were used to repay short-term borrowings, maturing debt and for general corporate purposes.
We and substantially all of our wholly owned domestic subsidiaries are party to a cross guarantee agreement whereby each party to the agreement unconditionally guarantees, jointly and severally, the payment of specified indebtedness of each other party to the agreement.
Current Portion of Debt
The following table details the components of our “Current portion of debt” reported on our consolidated balance sheets:
| | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (In millions) |
$3.5 billion credit facility due August 20, 2027 | | $ | — | | | $ | — | |
$500 million credit facility due November 16, 2023 | | — | | | — | |
| Commercial paper notes | | — | | | — | |
| Current portion of senior notes | | | | |
8.625%, due January 2022(a) | | — | | | 260 | |
4.15%, due March 2022(a) | | — | | | 375 | |
1.50%, due March 2022(a)(b) | | — | | | 853 | |
3.95% due September 2022(c) | | — | | | 1,000 | |
3.15% due January 2023(d) | | 1,000 | | | — | |
| Floating rate, due January 2023(d)(e) | | 250 | | | — | |
3.45% due February 2023 | | 625 | | | — | |
3.50% due September 2023 | | 600 | | | — | |
5.625%, due November 2023 | | 750 | | | — | |
Trust I Preferred Securities, 4.75% due March 2028(f) | | 111 | | | 111 | |
| Current portion of other debt | | 49 | | | 47 | |
| Total current portion of debt | | $ | 3,385 | | | $ | 2,646 | |
| | | | |
(a)We repaid the principal amount of these senior notes during the first quarter of 2022.
(b)Denominated in Euros.
(c)We repaid the principal amount of these senior notes on June 1, 2022.
(d)On January 17, 2023, we repaid these senior notes using cash on hand and short-term borrowings.
(e)These senior notes have an associated floating-to-fixed interest rate swap agreement which is designated as a cash flow hedge.
(f)Reflects the portion of cash consideration payable if all the outstanding securities as of the end of the reporting period were converted by the holders.
Credit Facilities and Restrictive Covenants
On December 15, 2022, we amended our credit facilities, discussed further below, to provide for, among other things, the replacement of LIBOR-based provisions with term SOFR provisions, related updates to benchmark replacement provisions and the extension of the maturity date on our $3.5 billion credit facility from August 2026 to August 2027.
Our revolving credit facilities consist of (i) a $3.5 billion revolving credit facility due August 2027 with a syndicate of lenders, which can be increased by up to $1.0 billion if certain conditions, including the receipt of additional lender commitments, are met, and (ii) a $500 million amended revolving credit facility due November 2023. Borrowings under our credit facilities can be used for working capital and other general corporate purposes and as backup to our commercial paper program.
We maintain a $3.5 billion commercial paper program through the private placement of short-term notes. On September 26, 2022, we reduced our commercial paper program from $4.0 billion to $3.5 billion to conform its size to that of our $3.5 billion revolving credit facility, which matures in August 2027. The notes mature up to 270 days from the date of issue and are not redeemable or subject to voluntary prepayment by us prior to maturity. The notes are sold at par value less a discount representing an interest factor or if interest bearing, at par. Borrowings under our commercial paper program reduce the borrowings allowed under our credit facilities.
Depending on the type of loan request, our borrowings under our credit facilities bear interest at either (i) SOFR, plus (x) a credit spread adjustment and (y) an applicable margin ranging from 1.000% to 1.750% (for our $3.5 billion credit facility) or to 2.000% (for our $500 million credit facility) per annum based on our credit ratings or (ii) the greatest of (1) the Federal Funds Rate plus 0.5%; (2) the Prime Rate; or (3) SOFR for a one-month eurodollar loan, plus (x) a credit spread adjustment, (y) 1%, and (z) in each case, an applicable margin ranging from 0.100% to 0.750% (for our $3.5 billion credit facility) or to 1.000% (for our $500 million credit facility) per annum based on our credit rating. Standby fees for the unused portion of the credit facility will be calculated at a rate ranging from 0.100% to 0.250% (for our $3.5 billion credit facility) or to 0.300% (for our $500 million credit facility).
Our credit facilities contain financial and various other covenants that apply to us and our subsidiaries and are common in such agreements, including a maximum ratio of Consolidated Net Indebtedness to Consolidated EBITDA (as defined in the credit facilities, as amended) of 5.50 to 1.00, for any four-fiscal-quarter period. Other negative covenants include restrictions on our and certain of our subsidiaries’ ability to incur debt, grant liens, make fundamental changes or engage in certain transactions with affiliates, or in the case of certain material subsidiaries, permit restrictions on dividends, distributions or making or prepayments of loans to us or any guarantor. Our credit facilities also restrict our ability to make certain restricted payments if an event of default (as defined in the credit facilities) has occurred and is continuing or would occur and be continuing.
As of December 31, 2022, we had no borrowings outstanding under our credit facilities, no borrowings outstanding under our commercial paper program and $81 million in letters of credit. Our availability under our credit facilities as of December 31, 2022 was approximately $3.9 billion. As of December 31, 2022, we were in compliance with all required covenants.
Maturities of Debt
The scheduled maturities of the outstanding debt balances, excluding debt fair value adjustments as of December 31, 2022, are summarized as follows:
| | | | | | | | |
| Year | | Total |
| | (In millions) |
| 2023 | | $ | 3,385 | |
| 2024 | | 1,925 | |
| 2025 | | 1,566 | |
| 2026 | | 1,102 | |
| 2027 | | 890 | |
| Thereafter | | 22,805 | |
| Total | | $ | 31,673 | |
Debt Fair Value Adjustments
The following table summarizes the “Debt fair value adjustments” included on our accompanying consolidated balance sheets:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| | (In millions) |
| Purchase accounting debt fair value adjustments | | $ | 472 | | | $ | 498 | |
| Carrying value adjustment to hedged debt | | (367) | | | 376 | |
| Unamortized portion of proceeds received from the early termination of interest rate swap agreements(a) | | 204 | | | 223 | |
| Unamortized debt discounts, net | | (68) | | | (71) | |
| Unamortized debt issuance costs | | (126) | | | (124) | |
| Total debt fair value adjustments | | $ | 115 | | | $ | 902 | |
(a)As of December 31, 2022, the weighted-average amortization period of the unamortized premium from the termination of interest rate swaps was approximately 12 years.
Fair Value of Financial Instruments
The carrying value and estimated fair value of our outstanding debt balances is disclosed below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Carrying
value | | Estimated
fair value(a) | | Carrying
value | | Estimated
fair value(a) |
| (In millions) |
| Total debt | $ | 31,788 | | | $ | 30,070 | | | $ | 33,320 | | | $ | 37,775 | |
(a)Included in the estimated fair value are amounts for our Trust I Preferred Securities of $195 million and $218 million as of December 31, 2022 and 2021, respectively.
We used Level 2 input values to measure the estimated fair value of our outstanding debt balance as of both December 31, 2022 and 2021.
Interest Rates, Interest Rate Swaps and Contingent Debt
The weighted average interest rate on all of our borrowings was 4.76% during 2022 and 4.67% during 2021. Information on our interest rate swaps is contained in Note 14. For information about our contingent debt agreements, see Note 13 “Commitments and Contingent Liabilities—Contingent Debt”).
10. Share-based Compensation and Employee Benefits
Share-based Compensation
Class P Common Stock
Following is a summary of our stock compensation plans:
| | | | | | | | | | | | | | |
| | Directors’ Plan | | Long Term Incentive Plan |
| Participating individuals | | Eligible non-employee directors | | Eligible employees |
| Total number of shares of Class P common stock authorized | | 1,190,000 | | | 63,000,000 | |
| Vesting period | | 6 months | | 1 year to 10 years |
Kinder Morgan, Inc. Second Amended and Restated Stock Compensation Plan for Non-Employee Directors
We have a Kinder Morgan, Inc. Second Amended and Restated Stock Compensation Plan for Non-Employee Directors (Directors’ Plan). The plan recognizes that the compensation paid to each eligible non-employee director is fixed by our board of directors, generally annually, and that the compensation is payable in cash. Pursuant to the plan, in lieu of receiving some or all of the cash compensation, each eligible non-employee director may elect annually to receive shares of Class P common stock. During the year ended December 31, 2022, we made restricted Class P common stock grants to our non-employee directors of 34,820.
Kinder Morgan, Inc. 2021 Amended and Restated Stock Incentive Plan
We also have a Kinder Morgan, Inc. 2021 Amended and Restated Stock Incentive Plan (Long Term Incentive Plan). The following table sets forth a summary of activity and related balances under our Long Term Incentive Plan:
| | | | | | | | | | | |
| |
| |
| Shares | | Weighted Average Grant Date Fair Value per Share |
| (In thousands, except per share amounts) |
Outstanding at December 31, 2021 | 12,617 | | | $ | 17.63 | |
| Granted | 4,110 | | | 17.31 | |
| Vested | (2,744) | | | 20.94 | |
| Forfeited | (695) | | | 17.17 | |
Outstanding at December 31, 2022 | 13,288 | | | $ | 16.87 | |
The following tables set forth additional information related to our Long Term Incentive Plan:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In millions, except per share amounts) |
| Weighted average grant date fair value per share | $ | 17.31 | | | $ | 17.44 | | | $ | 15.10 | |
| Intrinsic value of awards vested during the year | 47 | | | 77 | | | 59 | |
| Restricted stock awards expense(a) | 60 | | | 59 | | | 73 | |
| Restricted stock awards capitalized(a) | 9 | | | 9 | | | 11 | |
(a)We allocate labor and benefit costs to joint ventures that we operate in accordance with our partnership agreements. |
| | | | | |
| | | December 31, 2022 |
Unrecognized restricted stock awards compensation costs, less estimated forfeitures (in millions) | | $ | 104 | |
Weighted average remaining amortization period | | | | 1.99 years |
Pension and Other Postretirement Benefit (OPEB) Plans
Savings Plan
We maintain a defined contribution plan covering eligible U.S. employees. We contribute 5% of eligible compensation for most of the plan participants. Certain collectively bargained participants receive Company contributions in accordance with collective bargaining agreements. A participant becomes fully vested in Company contributions after two years and may take a distribution upon termination of employment or retirement. The total cost for our savings plan was approximately $51 million, $48 million and $53 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Pension Plans
Our pension plans are defined benefit plans that cover substantially all of our U.S. employees and provide benefits under a cash balance formula. A participant in the cash balance formula accrues benefits through contribution credits based on a combination of age and years of service, multiplied by eligible compensation. Interest is also credited to the participant’s plan account. A participant becomes fully vested in the plan after three years and may take a lump sum or annuity distribution upon termination of employment or retirement. Certain collectively bargained and grandfathered employees accrue benefits through career pay or final pay formulas.
OPEB Plans
We and certain of our subsidiaries provide OPEB benefits, including medical benefits for closed groups of retired employees and certain grandfathered employees and their dependents, and limited postretirement life insurance benefits for retired employees. These plans provide a fixed subsidy to post-age 65 Medicare eligible participants to purchase coverage through a retiree Medicare exchange. Medical benefits under these OPEB plans may be subject to deductibles, co-payment provisions, dollar caps and other limitations on the amount of employer costs, and we reserve the right to change these benefits.
Benefit Obligation, Plan Assets and Funded Status. The following table provides information about our pension and OPEB plans as of and for each of the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | OPEB |
| 2022 | | 2021 | | 2022 | | 2021 |
| (In millions) |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of period | $ | 2,658 | | | $ | 2,844 | | | $ | 257 | | | $ | 299 | |
| Service cost | 55 | | | 53 | | | 1 | | | 1 | |
| Interest cost | 57 | | | 45 | | | 5 | | | 4 | |
| Actuarial gain | (503) | | | (80) | | | (44) | | | (21) | |
| Benefits paid | (190) | | | (204) | | | (26) | | | (28) | |
| Participant contributions | — | | | — | | | 1 | | | 1 | |
| Other | — | | | — | | | 1 | | | 1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Benefit obligation at end of period | 2,077 | | | 2,658 | | | 195 | | | 257 | |
| | | | | | | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of period | 2,231 | | | 2,199 | | | 382 | | | 361 | |
| Actual return on plan assets | (350) | | | 180 | | | (63) | | | 40 | |
| Employer contributions | 50 | | | 56 | | | 7 | | | 7 | |
| Participant contributions | — | | | — | | | 1 | | | 1 | |
| Other | — | | | — | | | 1 | | | 1 | |
| Benefits paid | (190) | | | (204) | | | (26) | | | (28) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Fair value of plan assets at end of period | 1,741 | | | 2,231 | | | 302 | | | 382 | |
| Funded status - net (liability) asset at December 31, | $ | (336) | | | $ | (427) | | | $ | 107 | | | $ | 125 | |
| | | | | | | |
| Amounts recognized in the consolidated balance sheets: | | | | | | | |
| Non-current benefit asset(a) | $ | — | | | $ | — | | | $ | 239 | | | $ | 302 | |
| Current benefit liability | — | | | — | | | (15) | | | (18) | |
| Non-current benefit liability | (336) | | | (427) | | | (117) | | | (159) | |
| Funded status - net (liability) asset at December 31, | $ | (336) | | | $ | (427) | | | $ | 107 | | | $ | 125 | |
| | | | | | | |
| Amounts of pre-tax accumulated other comprehensive (loss) income recognized in the consolidated balance sheets: | | | | | | | |
| Unrecognized net actuarial (loss) gain | $ | (455) | | | $ | (495) | | | $ | 135 | | | $ | 176 | |
| Unrecognized prior service (cost) credit | (1) | | | (2) | | | 4 | | | 6 | |
| Accumulated other comprehensive (loss) income | $ | (456) | | | $ | (497) | | | $ | 139 | | | $ | 182 | |
| | | | | | | |
Information related to plans whose accumulated benefit obligations exceeded the fair value of plan assets: | | | | | | | |
| Accumulated benefit obligation | $ | 2,047 | | | $ | 2,608 | | | $ | 167 | | | $ | 219 | |
| Fair value of plan assets | 1,741 | | | 2,231 | | | 34 | | | 42 | |