Note 7. Intangible Assets and Goodwill

Identifiable Intangible Assets

The following table summarizes our intangible assets by business segment at the dates indicated:

	December 31, 2017							December 31, 2016
	Gross Value		Accumulated Amortization			Carrying Value		Gross Value		Accumulated Amortization			Carrying Value
NGL Pipelines & Services:
Customer relationship intangibles	$	447.4	$	(187.5	)	$	259.9	$	447.4	$	(172.7	)	$	274.7
Contract-based intangibles		280.8		(218.4	)		62.4		279.9		(204.4	)		75.5
Segment total		728.2		(405.9	)		322.3		727.3		(377.1	)		350.2
Crude Oil Pipelines & Services:
Customer relationship intangibles		2,203.5		(127.0	)		2,076.5		2,204.4		(84.5	)		2,119.9
Contract-based intangibles		281.0		(171.0	)		110.0		281.0		(121.9	)		159.1
Segment total		2,484.5		(298.0	)		2,186.5		2,485.4		(206.4	)		2,279.0
Natural Gas Pipelines & Services:
Customer relationship intangibles		1,350.3		(417.1	)		933.2		1,350.3		(390.0	)		960.3
Contract-based intangibles		464.7		(379.5	)		85.2		464.7		(370.5	)		94.2
Segment total		1,815.0		(796.6	)		1,018.4		1,815.0		(760.5	)		1,054.5
Petrochemical & Refined Products Services:
Customer relationship intangibles		181.4		(45.9	)		135.5		185.5		(43.9	)		141.6
Contract-based intangibles		46.0		(18.4	)		27.6		54.0		(15.2	)		38.8
Segment total		227.4		(64.3	)		163.1		239.5		(59.1	)		180.4
Total intangible assets	$	5,255.1	$	(1,564.8	)	$	3,690.3	$	5,267.2	$	(1,403.1	)	$	3,864.1

The following table presents the amortization expense of our intangible assets by business segment for the periods indicated:

	For the Year Ended December 31,
	2017		2016		2015
NGL Pipelines & Services	$	28.9	$	30.6	$	33.6
Crude Oil Pipelines & Services		92.5		98.4		87.1
Natural Gas Pipelines & Services		36.2		33.2		40.0
Petrochemical & Refined Products Services		9.3		9.1		8.9
Offshore Pipelines & Services		--		--		4.5
Total	$	166.9	$	171.3	$	174.1

The following table presents our forecast of amortization expense associated with existing intangible assets for the years indicated:

2018				2019				2020				2021				2022
$	174.5			$	165.8			$	150.7			$	145.6			$	141.6

In general, our intangible assets fall within two categories – customer relationship and contract-based intangible assets. The values assigned to such intangible assets are amortized to earnings using either (i) a straight-line approach or (ii) other methods that closely resemble the pattern in which the economic benefits are estimated to be consumed or otherwise used, as appropriate.

Customer relationship intangible assets. Customer relationship intangible assets represent the estimated economic value assigned to commercial relationships acquired in connection with business combinations. Our customer relationship intangible assets can be classified as either (i) basin-specific or (ii) general. In certain instances, the acquisition of these intangible assets represents obtaining access to customers in a defined resource basin analogous to having a franchise in a particular area. Efficient operation of the acquired assets (e.g., a natural gas gathering system) helps to support commercial relationships with existing producers and provides us with opportunities to establish new ones within our existing asset footprint. The duration of such customer relationships is limited by the estimated economic life of the associated resource basin. In other situations, the acquisition of a customer relationship intangible asset provides us with access to customers whose hydrocarbon volumes are not attributable to specific resource basins. As with basin-specific customer relationships, efficient operation of the associated assets (e.g., a marine terminal that handles volumes originating from multiple sources) helps to support commercial relationships with existing customers and provides us with opportunities to establish new ones. The duration of these general customer relationships is typically limited to the term of the underlying service contracts, including assumed renewals.

Amortization expense attributable to customer relationships is recorded in a manner that closely resembles the pattern in which we expect to benefit from providing services to customers.

At December 31, 2017, the carrying value of our portfolio of customer relationship intangible assets was $3.4 billion, the principal components of which are as follows:

	Weighted Average Remaining Amortization Period	December 31, 2017
	Weighted Average Remaining Amortization Period	Gross Value		Accumulated Amortization			Carrying Value
Basin-specific customer relationships:
EFS Midstream (1)	24.4 years	$	1,409.8	$	(88.8	)	$	1,321.0
State Line and Fairplay (2)	29.2 years		895.0		(164.7	)		730.3
San Juan Gathering (3)	21.8 years		331.3		(218.0	)		113.3
Encinal (4)	9.0 years		132.9		(98.4	)		34.5
General customer relationships:
Oiltanking (5)	26.0 years		1,192.5		(57.1	)		1,135.4

(1) We acquired these intangible assets in connection with our acquisition of EFS Midstream in July 2015 (see Note 12 for additional information). (2) These customer relationships are associated with our State Line and Fairplay Gathering Systems, which we acquired in 2010. The State Line system serves producers in the Haynesville and Bossier Shale supply basins and the Cotton Valley formation in Louisiana and eastern Texas. The Fairplay system serves producers in the Cotton Valley formation within Panola and Rusk counties in East Texas. (3) These customer relationships are associated with our San Juan Gathering System, which serves producers in the San Juan Basin of northern New Mexico and southern Colorado. We acquired this intangible asset in 2004. (4) These customer relationships are associated with our Encinal Gathering System, which serves producers in the Olmos and Wilcox formations in South Texas. We acquired this intangible asset in 2006. (5) We acquired these intangible assets in connection with our acquisition of Oiltanking in October 2014 (see Note 12 for additional information).

EFS Midstream customer relationships

The EFS Midstream System serves producers in the Eagle Ford Shale, providing condensate gathering and processing services as well as gathering, treating and compression services for associated natural gas. The estimated fair value of these customer relationship intangible assets was determined using an income approach, specifically a discounted cash flow analysis. The EFS Midstream customer relationships provide us with long-term access to the natural gas, NGL and condensate resources served by EFS Midstream. Infrastructure like that owned by EFS Midstream requires a significant investment, both in terms of initial construction costs and ongoing maintenance, and is generally supported by long-term contracts with producers (e.g., PXD and Reliance) that establish a customer base. The level of expenditures involved in constructing these asset networks can create significant economic barriers to entry that effectively limit competition. The long-term nature of the underlying producer contracts and limited risk of competition ensure a long commercial relationship with existing producers.

The discounted cash flow analysis used to estimate the fair value of the EFS Midstream customer relationships relied on Level 3 fair value inputs, including long-range cash flow forecasts that extend for the estimated economic life of the hydrocarbon resource base served by the asset network, anticipated service contract renewals and resource base depletion rates. A discount rate of 15% was applied to the resulting cash flows.

Oiltanking customer relationships

These intangible assets represent the estimated value of the expected patronage of Oiltanking’s third party storage and terminal customers.

We valued the customer relationships using an income approach, specifically a discounted cash flow analysis. Our analysis was based on forecasting revenue for the existing terminal customers, including assumed service contract renewals, and then adjusting for expected customer attrition rates. The operating cash flows were then reduced by contributory asset charges. The cash flow projections were based on forecasts used to price the Oiltanking acquisition.

The discounted cash flow analysis used to estimate the fair value of the Oiltanking customer relationships relied on Level 3 fair value inputs, including long-range cash flow forecasts that extend for the estimated economic life of the terminal assets and anticipated service contract renewals. A discount rate of 6.5% was applied to the resulting cash flows.

Contract-based intangible assets. Contract-based intangible assets represent specific commercial rights we acquired in connection with business combinations or asset purchases. At December 31, 2017, the carrying value of our contract-based intangible assets was $285.2 million. Our most significant contract-based intangible assets are the Oiltanking customer contracts and the Jonah natural gas gathering agreements.

Oiltanking customer contracts

We recorded $297.4 million of contract-based intangible assets in connection with our acquisition of Oiltanking in October 2014. These intangible assets represent the estimated value of specific commercial rights we acquired in connection with third party customer storage and terminal contracts at the Houston and Beaumont terminals. We valued the contracts using an income approach. If a contract was in its renewal period and had not been cancelled, we assumed the contract was renewed on equivalent terms to the prior contract. We only valued those contracts that specified a minimum monthly fee, excluding contracts with a de minimis fee.

At December 31, 2017, the carrying value of this group of intangible assets was $118.7 million and the weighted average remaining amortization period for the group was 4.2 years. Amortization expense attributable to these contracts is recorded using a straight-line approach over the terms of the underlying contracts.

Jonah natural gas gathering agreements

These intangible assets represent the value attributed to certain natural gas gathering contracts on the Jonah Gathering System. At December 31, 2017, the carrying value of this group of intangible assets was $63.9 million and the weighted average remaining amortization period for the group was 24 years. Amortization expense attributable to these intangible assets is recorded using a units-of-production method based on gathering volumes.

Goodwill

Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed in the transaction. Goodwill is not amortized; however, it is subject to annual impairment testing at the end of each fiscal year, and more frequently, if circumstances indicate it is probable that the fair value of goodwill is below its carrying amount. The following table presents changes in the carrying amount of goodwill during the periods indicated:

	NGL Pipelines & Services		Crude Oil Pipelines & Services			Natural Gas Pipelines & Services		Petrochemical & Refined Products Services			Offshore Pipelines & Services			Consolidated Total
Balance at January 1, 2015	$	2,210.2	$	918.7		$	296.3	$	793.0		$	82.0		$	4,300.2
Reclassification of Oiltanking IDR balances to goodwill in connection with the cancellation of such rights and other adjustments		432.6		850.7			--		170.8			--			1,454.1
Reduction in goodwill related to the sale of assets		--		(2.1	)		--		--			(82.0	)		(84.1	)
Addition to goodwill related to the acquisition of EFS Midstream		8.9		73.7			--		--			--			82.6
Goodwill reclassified to assets held-for-sale		--		--			--		(7.6	)		--			(7.6	)
Balance at December 31, 2015		2,651.7		1,841.0			296.3		956.2			--			5,745.2
Balance at December 31, 2016		2,651.7		1,841.0			296.3		956.2			--			5,745.2
Balance at December 31, 2017	$	2,651.7	$	1,841.0		$	296.3	$	956.2		$	--		$	5,745.2

We did not record any goodwill impairment charges during the years ended December 31, 2017, 2016 or 2015. Based on our most recent goodwill impairment test at December 31, 2017, each reporting unit’s fair value was substantially in excess of its carrying value (i.e., by at least 10%).

Upon completion of Step 2 of the Oiltanking acquisition in February 2015, the IDRs of Oiltanking were cancelled and the associated $1.45 billion carrying value of this identifiable intangible asset was reclassified to goodwill. In the aggregate, we recorded $3.67 billion of goodwill in connection with the Oiltanking acquisition. Factors contributing to the recognition of goodwill in the Oiltanking acquisition include (i) opportunities for new business and repurposing existing assets for “best use” in order to meet anticipated increased demand for export and logistical services related to North American crude oil, condensate and NGL production, (ii) securing ownership and control of assets that are essential to our other midstream assets and (iii) cost savings from integrating Oiltanking’s operations into our midstream asset network. See Note 12 for additional information regarding the Oiltanking acquisition.

In July 2015, we recorded $82.6 million of goodwill in connection with our acquisition of EFS Midstream (see Note 12). In general, we attribute this goodwill to our ability to leverage the acquired business with our existing midstream asset network to create future business opportunities.

In July 2015, we removed $82.0 million of goodwill in connection with sale of the Offshore Business (see Note 10).