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United Kingdom Energy Crisis and Impairment Charges | 9 Months Ended
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Sep. 30, 2021
Restructuring and Related Activities [Abstract] |
United Kingdom Energy Crisis and Impairment Charges | United Kingdom Energy Crisis and Impairment Charges During the third quarter of 2021, the United Kingdom experienced an energy crisis that included a substantial increase in the price of natural gas. In the first half of 2021, natural gas prices had increased to levels that were considered high compared to historical prices, and prices then more than doubled within the third quarter of 2021. On September 15, 2021, we announced the halt of operations at both our Ince and Billingham manufacturing facilities in the United Kingdom due to negative profitability driven by the high cost of natural gas. The halt of operations at our U.K. plants impacted the availability of certain products in the United Kingdom, including carbon dioxide, which is a byproduct of ammonia production. Due to the critical nature of carbon dioxide to certain industries in the United Kingdom, on September 21, 2021, we entered into an interim agreement with the U.K. government. Under the terms of the agreement, the U.K. government agreed to cover the costs to restart the ammonia plant at Billingham and to offset losses incurred from production for a 21-day period. As a result, we resumed production of ammonia at the Billingham facility in order to produce carbon dioxide for the United Kingdom. While the interim agreement was in place, we entered into carbon dioxide pricing and offtake agreements with our customers, which have an initial term through January 31, 2022. The amount of financial support that will be provided by the U.K. government for the September 2021 period of the interim agreement is not expected to be material to our results of operations. As of the filing of this report, production continues to be idled at our Ince facility. Impairment Charges The U.K. energy crisis necessitated an evaluation of the goodwill and long-lived assets, including definite-lived intangible assets, of our U.K. operations to determine if their fair value had declined to below their carrying value. We performed the impairment evaluations on the U.K. ammonia, U.K. AN and U.K. Other asset groups’ long-lived assets, including definite-lived intangible assets, and the U.K. ammonia, U.K. AN and U.K. Other reporting units’ goodwill as of September 30, 2021. Based on these analyses, we concluded that a decline in the fair value had occurred and we recognized impairment charges of $495 million in the third quarter of 2021, consisting of a goodwill impairment charge of $259 million and long-lived and intangible asset impairment charges of $236 million. The valuation of our asset groups and reporting units requires significant judgment in evaluating recent indicators of market activity and estimating future cash flows, discount rates, and other factors. Expected cash flows used in both the goodwill and long-lived asset impairment tests include assumptions about product selling prices and natural gas costs, as well as estimates of future production and sales volumes, operating rates, operating expenses, inflation, discount rates, tax rates and capital spending. These assumptions include the time it could take for the U.K. energy crisis to be resolved. For purposes of our goodwill impairment analysis, we estimated the fair value of the reporting units using the income approach, which incorporated the estimated future cash flows and a terminal value discounted to their present value using an appropriate risk-adjusted discount rate from the perspective of a market participant. The estimated future cash flows were based on our internal forecasts, updated for recent events. These estimated future cash flows went beyond the specific operating plans, using a terminal value calculation, which incorporated historical and forecasted trends and an estimate of long-term future growth rates. The future growth rates were based on our view of the long-term outlook for each reporting unit. The discount rates utilized in the income approach, for our goodwill impairment test, and to discount the cash flows in calculating the long-lived asset impairment were derived using a capital asset pricing model and analyzing published rates for industries relevant to our reporting units to estimate the cost of equity financing. The discount rates are commensurate with the risks and uncertainties inherent in the business and in the United Kingdom and our cash flow forecasts, updated for recent events. The discount rate utilized in the determination of fair value of our asset groups for the long-lived asset impairment test was 11.25%. The fair value of our property, plant and equipment utilized in the long-lived asset impairment analysis was estimated using the indirect method of the cost approach by determining the reproduction cost new of the assets and applying an appropriate inutility adjustment for certain assets in an idled state. Additional assumptions utilized in the long-lived asset impairment analysis were royalty rates and attrition rates in estimating the fair value of our definite-lived intangible assets, consisting of trade names and customer relationships, for which we used the relief from royalty method of the income approach and the multi-period excess earnings method, respectively. Due to the inherent uncertainties involved in making estimates and assumptions, actual results may differ from those assumed in our forecasts. Of the factors discussed above, the assumptions for product selling prices and natural gas costs included in the expected cash flows utilized in both the long-lived asset and goodwill impairment tests, and the discount rates utilized in the income approach, for our goodwill impairment test, and to discount the cash flows in calculating the long-lived asset impairment, are more sensitive than others. Assuming that all other assumptions utilized in our expected cash flows and the other inputs used in our long-lived asset and goodwill impairment tests remain unchanged, a change in each of these three inputs would have the following effect on the amount of long-lived asset and goodwill impairment recognized in the three months ended September 30, 2021:
| Increase/(Decrease) in |  | Increase/(Decrease) in
| Long-lived Asset Impairment |  | Goodwill Impairment
Assumption | (in millions)
| +$5.00 |  | -$5.00 |  | +$5.00 |  | -$5.00
Average Selling Price per Product Ton | $ | (87) |  |  | $ | 8 |  |  | $ | (20) |  |  | $ | 25 |
| +$0.50 |  | -$0.50 |  | +$0.50 |  | -$0.50
Natural Gas Cost per MMBtu(1) | $ | 7 |  |  | $ | (33) |  |  | $ | 20 |  |  | $ | (53) |
| +50 bps |  | -50 bps |  | +50 bps |  | -50 bps
Discount Rate | $ | 1 |  |  | $ | (1) |  |  | $ | 14 |  |  | $ | (22) |
_______________________________________________________________________________ (1)The sensitivity impact of a $0.50/MMBtu increase or decrease in the cost of natural gas includes any corresponding impact to selling prices from contractually stipulated sales provisions. As of September 30, 2021, after the recognition of the $495 million of impairment charges noted above, the goodwill related to our U.K. operations was approximately $26 million, and the remaining long-lived assets related to our U.K. operations were approximately $450 million, primarily consisting of property, plant and equipment. For further information see Note 6—Property, Plant and Equipment—Net and Note 7—Goodwill and Other Intangible Assets.

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- Definition The entire disclosure for the details of the charge against earnings resulting from the aggregate write down of all assets from their carrying value to their fair value. Disclosure may also include a description of the impaired asset and facts and circumstances leading to the impairment, amount of the impairment loss and where the loss is located in the income statement, method(s) for determining fair value, and the segment in which the impaired asset is reported. + References No definition available. + Details
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