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MarketScreener Homepage  >  Equities  >  Nyse  >  Magellan Midstream Partners, L.P.    MMP

MAGELLAN MIDSTREAM PARTNERS, L.P.

(MMP)
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MAGELLAN MIDSTREAM PARTNERS L P : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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07/31/2020 | 09:00am EDT

Introduction

We are a publicly traded limited partnership principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil. As of June 30, 2020, our asset portfolio consisted of: • our refined products segment, comprised of our approximately 9,800-mile

refined products pipeline system with 53 connected terminals, as well as 25

independent terminals not connected to our pipeline system and two marine

     storage terminals (one of which is owned through a joint venture); and


• our crude oil segment, comprised of approximately 2,200 miles of crude oil

pipelines, a condensate splitter and 37 million barrels of aggregate storage

capacity, of which approximately 25 million barrels are used for contract

     storage. Approximately 1,000 miles of these pipelines, the condensate
     splitter and 30 million barrels of this storage capacity (including 22
     million barrels used for contract storage) are wholly-owned, with the
     remainder owned through joint ventures.



During first quarter 2020, we completed a reorganization of our reportable
segments.  This reorganization was effected to reflect changes in the management
of our business in conjunction with the sale of three of our marine terminals.
Following this sale, two of our remaining marine terminals were combined with
our refined products segment and one terminal was combined with our crude oil
segment based on the types of product stored at the facilities.  Accordingly, we
have restated our segment disclosures for all previous periods included in this
report.

The following discussion provides an analysis of the results for each of our
operating segments, an overview of our liquidity and capital resources and other
items related to our partnership. The following discussion and analysis should
be read in conjunction with (i) our accompanying interim consolidated financial
statements and related notes and (ii) our consolidated financial statements,
related notes and management's discussion and analysis of financial condition
and results of operations included in our Form 8-K filed with the Securities and
Exchange Commission on May 4, 2020, which reflects changes in our reporting
segments since the filing of our Annual Report on Form 10-K for the year ended
December 31, 2019.


Recent Developments

COVID-19 and Decline in Commodity Prices.  The recent period of unprecedented
events impacting travel and economic activity have significantly reduced demand
for refined products in the markets we serve.  Recent declines in commodity
prices have also significantly reduced the value of tender barrels we receive
from our transportation customers and the margins we earn from our gas liquids
blending activities.  The reduction in refined products demand and lower crude
oil prices have combined to put significant downward pressure on domestic crude
oil production.  While we benefit from take-or-pay commitments for the majority
of the capacity of our crude oil pipelines, a sustained reduction in crude oil
production could cause delays in the timing of our recognition of revenue from
these commitments.  These factors have also significantly decreased the
creditworthiness of certain of our crude oil transportation customers, resulting
in an increased risk of customer defaults.  To date, our operations and our
employees have successfully adapted to the recent developments, enabling our
customers to continue benefiting from the services they rely on from our
critical infrastructure, and our customers have continued to meet their
obligations to us.  Given the uncertain timing of a return of refined products
demand to historical levels and a further recovery in commodity prices, the
extent of the impact these events will continue to have on our results of
operations is unclear and could be material.  However, we do not believe these
events will impact our ability to meet any of our financial obligations or
result in any significant impairments to our assets.

Cash Distribution. In July 2020, our general partner's board of directors
declared a quarterly cash distribution of $1.0275 per unit for the period of
April 1, 2020 through June 30, 2020. This quarterly cash distribution will be
paid on August 14, 2020 to unitholders of record on August 7, 2020.

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Results of Operations

We believe that investors benefit from having access to the same financial
measures utilized by management. Operating margin, which is presented in the
following tables, is an important measure used by management to evaluate the
economic performance of our core operations. Operating margin is not a generally
accepted accounting principles ("GAAP") measure, but the components of operating
margin are computed using amounts that are determined in accordance with GAAP. A
reconciliation of operating margin to operating profit, which is its nearest
comparable GAAP financial measure, is included in the following tables.
Operating profit includes expense items, such as depreciation, amortization and
impairment expense and general and administrative ("G&A") expense, which
management does not focus on when evaluating the core profitability of our
separate operating segments. Additionally, product margin, which management
primarily uses to evaluate the profitability of our commodity-related
activities, is provided in these tables. Product margin is a non-GAAP measure
but its components of product sales revenue and cost of product sales are
determined in accordance with GAAP. Our gas liquids blending, fractionation and
other commodity-related activities generate significant revenue. However, we
believe the product margin from these activities, which takes into account the
related cost of product sales, better represents its importance to our results
of operations.

During first quarter 2020, we revised our reporting segments. See Note 1 - Organization, Description of Business and Basis of Presentation of the consolidated financial statements included in Item 1 of Part I of this report for a discussion of this matter.

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Three Months Ended June 30, 2019 compared to Three Months Ended June 30, 2020
                                                                                                                  Variance
                                                                      Three Months Ended June 30,         Favorable  (Unfavorable)
                                                                        2019               2020           $ Change          % Change
Financial Highlights ($ in millions, except operating statistics)
Transportation and terminals revenue:
Refined products                                                   $      347.6$      279.8$      (67.8 )         (20)
Crude oil                                                                 160.2              133.6            (26.6 )         (17)
Intersegment eliminations                                                  (1.4 )             (1.6 )           (0.2 )         (14)
Total transportation and terminals revenue                                506.4              411.8            (94.6 )         (19)
Affiliate management fee revenue                                            5.4                5.3             (0.1 )         (2)
Operating expenses:
Refined products                                                          132.8              103.4             29.4            22
Crude oil                                                                  38.8               45.9             (7.1 )         (18)
Intersegment eliminations                                                  (2.6 )             (3.2 )            0.6            23
Total operating expenses                                                  169.0              146.1             22.9            14
Product margin:
Product sales revenue                                                     190.0               43.3           (146.7 )         (77)
Cost of product sales                                                     152.9               50.6            102.3            67
Product margin                                                             37.1               (7.3 )          (44.4 )         n/a
Other operating income (expense)                                           (5.0 )              4.0              9.0           n/a
Earnings of non-controlled entities                                        40.8               33.7             (7.1 )         (17)
Operating margin                                                          415.7              301.4           (114.3 )         (27)
Depreciation, amortization and impairment expense                          62.6               58.6              4.0            6
G&A expense                                                                52.4               42.1             10.3            20
Operating profit                                                          300.7              200.7           (100.0 )         (33)
Interest expense (net of interest income and interest capitalized)         45.9               64.8            (18.9 )         (41)
Gain on disposition of assets                                              (4.6 )                -             (4.6 )        (100)
Other (income) expense                                                      4.5                1.4              3.1            69
Income before provision for income taxes                                  254.9              134.5           (120.4 )         (47)
Provision for income taxes                                                  1.2                0.7              0.5            42
Net income                                                         $      253.7$      133.8$     (119.9 )         (47)
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped                          $      1.606$      1.675
Volume shipped (million barrels):
Gasoline                                                                   70.8               61.3
Distillates                                                                47.2               41.3
Aviation fuel                                                               9.9                2.7
Liquefied petroleum gases                                                   4.5                  -
Total volume shipped                                                      132.4              105.3
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped(1)                       $      0.977$      1.048
Volume shipped (million barrels)(1)(2)                                     80.5               47.7
Terminal average utilization (million barrels per month)                   22.9               25.5
Select joint venture pipelines:
BridgeTex - volume shipped (million barrels)(3)                            38.8               32.2
Saddlehorn - volume shipped (million barrels)(4)                           13.4               15.1



(1) Volume shipped includes shipments related to our crude oil marketing
activities. Revenues from those activities are reflected as product sales
revenue in our consolidated financial statements. Transportation revenue per
barrel shipped reflects average rates on third-party volumes only.
(2) Volume shipped in 2020 reflects a change in the way our customers contract
for our services pursuant to which customers are able to utilize crude oil
storage capacity at East Houston and dock access at Seabrook. Subsequent to this
change, the services we provide no longer include a transportation element.
Therefore, revenues related to these services are reflected entirely as
terminalling revenues and the related volumes are no longer reflected in our
calculation of transportation volumes.
(3) These volumes reflect the total shipments for the BridgeTex pipeline, which
is owned 30% by us.
(4) These volumes reflect the total shipments for the Saddlehorn pipeline, which
was owned 40% by us through January 31, 2020 and 30% thereafter.

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Transportation and terminals revenue decreased $94.6 million resulting from: • a decrease in refined products revenue of $67.8 million. Transportation

          volumes primarily decreased due to lower demand during second quarter
          2020 associated with travel and economic restrictions related to
          COVID-19 and reduced drilling activity from the lower commodity price
          environment. Revenues also decreased due to the sale of three marine
          terminals in first quarter 2020 and discontinuation of the ammonia
          pipeline in late 2019. These declines were partially offset by an
          increase in the average tariff rate in the current period as a result
          of the 2019 mid-year adjustment of 4.3%, as well as contributions from
          the newly-constructed East Houston-to-Hearne pipeline segment that
          became operational in late 2019; and

• a decrease in crude oil revenue of $26.6 million. Lower transportation

          revenue on our Longhorn pipeline resulted from less third-party spot
          shipments due to unfavorable differentials between the Permian Basin

and Houston as well as the recent assignment of a customer contract to

our marketing affiliate, with volume shipped by our affiliate

recognized as product margin instead of transportation revenue. Lower

tariff volume on our Houston distribution system resulted primarily

from a change in the way customers now contract for services at our

Seabrook Logistics, LLC ("Seabrook") export facility, and was offset by

          incremental revenue from the related terminal transfer fee as well as
          more contract storage utilized at higher rates.

Operating expenses decreased by $22.9 million primarily resulting from: • a decrease in refined products expenses of $29.4 million primarily due

          to timing of planned integrity spending and more favorable product
          overages (which reduce operating expenses) as well as no costs in the
          current period associated with the sold or discontinued assets; and

• an increase in crude oil expenses of $7.1 million due to the timing of

planned integrity spending.



Product margin decreased $44.4 million primarily due to higher losses on futures
contracts in the current period and lower gas liquids sales volumes as a result
of lower economic blending opportunities, partially offset by product margins in
second quarter 2020 from marketing activities on our Longhorn pipeline.
Other operating income (expense) was $9.0 million favorable in second quarter
2020 primarily due to unrealized gains on a basis derivative agreement during
the current period compared to losses in the prior period.
Earnings of non-controlled entities decreased $7.1 million primarily due to
decreased earnings from BridgeTex Pipeline Company, LLC ("BridgeTex") and
Saddlehorn Pipeline Company, LLC ("Saddlehorn"). BridgeTex revenues were less
primarily due to lower spot shipments, and Saddlehorn equity earnings were lower
due to our reduced ownership interest. Otherwise, MVP Terminalling, LLC ("MVP")
contributed additional earnings to the 2020 period due to the recent start-up of
newly-constructed storage and dock assets.
Depreciation, amortization and impairment expense decreased $4.0 million
primarily due to lower depreciation expense following recent asset sales.
G&A expense decreased $10.3 million primarily due to lower incentive
compensation accruals to reflect the estimated impacts of COVID-19 related
reductions in economic activity and the significant decline in commodity prices.

Interest expense, net of interest income and interest capitalized, increased
$18.9 million primarily due to $12.9 million of debt prepayment costs in the
second quarter of 2020 related to the early extinguishment of our 4.25% Notes
that were due February 2021, as well as higher outstanding debt. Our average
outstanding debt increased from $4.4 billion in second quarter 2019 to $4.9
billion in second quarter 2020. Our weighted-average interest rate decreased
slightly from 4.6% in second quarter 2019 to 4.5% in second quarter 2020.

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Gain on disposition of assets was $4.6 million unfavorable. Second quarter 2019
included a gain from the sale of an inactive terminal along our refined products
pipeline system.

Other expense was $3.1 million favorable due to lower pension-related costs in the current period.



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Six Months Ended June 30, 2019 compared to Six Months Ended June 30, 2020

                                                                                                                  Variance
                                                                       Six Months Ended June 30,          Favorable  (Unfavorable)
                                                                        2019               2020           $ Change          % Change
Financial Highlights ($ in millions, except operating statistics)
Transportation and terminals revenue:
Refined products                                                   $      657.2$      594.1$      (63.1 )         (10)
Crude oil                                                                 312.3              279.3            (33.0 )         (11)
Intersegment eliminations                                                  (2.3 )             (3.2 )           (0.9 )         (39)
Total transportation and terminals revenue                                967.2              870.2            (97.0 )         (10)
Affiliate management fee revenue                                           10.5               10.6              0.1            1
Operating expenses:
Refined products                                                          235.5              209.3             26.2            11
Crude oil                                                                  84.5               92.7             (8.2 )         (10)
Intersegment eliminations                                                  (5.0 )             (6.4 )            1.4            28
Total operating expenses                                                  315.0              295.6             19.4            6
Product margin:
Product sales revenue                                                     353.0              362.4              9.4            3
Cost of product sales                                                     322.0              299.8             22.2            7
Product margin                                                             31.0               62.6             31.6           102
Other operating income (expense)                                            1.9                3.5              1.6            84
Earnings of non-controlled entities                                        72.1               77.3              5.2            7
Operating margin                                                          767.7              728.6            (39.1 )         (5)
Depreciation, amortization and impairment expense                         124.4              122.1              2.3            2
G&A expense                                                                98.4               79.0             19.4            20
Operating profit                                                          544.9              527.5            (17.4 )         (3)
Interest expense (net of interest income and interest capitalized)        101.0              115.3            (14.3 )         (14)
Gain on disposition of assets                                             (26.4 )            (12.9 )          (13.5 )         (51)
Other expense                                                               6.6                2.3              4.3            65
Income before provision for income taxes                                  463.7              422.8            (40.9 )         (9)
Provision for income taxes                                                  2.3                1.4              0.9            39
Net income                                                         $      461.4$      421.4$      (40.0 )         (9)
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped                          $      1.590$      1.626
Volume shipped (million barrels):
Gasoline                                                                  132.9              127.5
Distillates                                                                91.8               85.1
Aviation fuel                                                              18.7               12.1
Liquefied petroleum gases                                                   5.1                0.4
Total volume shipped                                                      248.5              225.1
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped(1)                       $      0.961$      0.970
Volume shipped (million barrels)(1)(2)                                    159.9              122.8
Terminal average utilization (million barrels per month)                   22.6               24.1
Select joint venture pipelines:
BridgeTex - volume shipped (million barrels)(3)                            76.5               69.3
Saddlehorn - volume shipped (million barrels)(4)                           22.4               31.4



(1) Volume shipped includes shipments related to our crude oil marketing
activities. Revenues from those activities are reflected as product sales
revenue in our consolidated financial statements. Transportation revenue per
barrel shipped reflects average rates on third-party volumes only.
(2) Volume shipped in 2020 reflects a change in the way our customers contract
for our services pursuant to which customers are able to utilize crude oil
storage capacity at East Houston and dock access at Seabrook. Subsequent to this
change, the services we provide no longer include a transportation element.
Therefore, revenues related to these services are reflected entirely as
terminalling revenues and the related volumes are no longer reflected in our
calculation of transportation volumes.
(3) These volumes reflect the total shipments for the BridgeTex pipeline, which
is owned 30% by us.
(4) These volumes reflect the total shipments for the Saddlehorn pipeline, which
was owned 40% by us through January 31, 2020 and 30% thereafter.

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Transportation and terminals revenue decreased $97.0 million resulting from: • a decrease in refined products revenue of $63.1 million. Transportation

          volumes decreased due to lower demand during 2020 associated with
          travel and economic restrictions related to COVID-19 and reduced
          drilling activity from the lower commodity price environment. Revenues
          also decreased due to the sale of three marine terminals in first
          quarter 2020 and discontinuation of the ammonia pipeline in late 2019.
          These declines were partially offset by an increase in the average
          tariff rate in the current period as a result of the 2019 mid-year

adjustment of 4.3%, as well as contributions from the newly-constructed

          East Houston-to-Hearne pipeline segment that became operational in late
          2019; and

• a decrease in crude oil revenue of $33.0 million. Lower transportation

          revenue on our Longhorn pipeline resulted from less third-party spot
          shipments due to unfavorable differentials between the Permian Basin

and Houston as well as the recent assignment of a customer contract to

our marketing affiliate, with volume shipped by our affiliate

recognized as product margin instead of transportation revenue. Lower

tariff volume on our Houston distribution system resulted primarily

          from a change in the way customers now contract for services at our
          Seabrook export facility, and was offset by incremental revenue from
          the related terminal transfer fee as well as more contract storage
          utilized at higher rates.

Operating expenses decreased by $19.4 million primarily resulting from: • a decrease in refined products expenses of $26.2 million primarily due

to timing of planned integrity spending and more favorable product

overages as well as no costs in the current period associated with the

sold or discontinued assets; and

• an increase in crude oil expenses of $8.2 million due to the timing of

planned integrity spending and less favorable product overages.



Product margin increased $31.6 million primarily due to recognition of gains on
futures contracts in the current period compared to losses in 2019 and product
margins from marketing activities on our Longhorn pipeline in 2020, partially
offset by unfavorable lower of cost or net realizable value adjustments during
2020 due to the significant decrease in commodity prices.
Other operating income (expense) was $1.6 million favorable in 2020 primarily
due to realized gains on a basis derivative agreement during the current period
compared to losses in the prior period, partially offset by insurance
settlements received in 2019 related to Hurricane Harvey.
Earnings of non-controlled entities increased $5.2 million primarily due to
increased earnings from Powder Springs Logistics, LLC ("Powder Springs") mainly
as a result of gains recognized in the current year on futures contracts
compared to losses in the prior year and additional earnings from MVP from the
recent start-up of newly-constructed storage and dock assets. Partially
offsetting these increases were lower earnings from BridgeTex and Saddlehorn in
the second quarter of 2020.
Depreciation, amortization and impairment expense decreased $2.3 million
primarily due to lower depreciation expense following recent asset sales.
G&A expense decreased $19.4 million primarily due to lower incentive
compensation accruals to reflect the estimated impacts of COVID-19 related
reductions in economic activity and the significant decline in commodity prices.

Interest expense, net of interest income and interest capitalized, increased
$14.3 million primarily due to higher outstanding debt. Our average outstanding
debt increased from $4.4 billion in 2019 to $4.9 billion in 2020. Our
weighted-average interest rate decreased from 4.7% in 2019 to 4.5% in 2020. Debt
prepayment costs following the early extinguishment of notes each year were also
$4.6 million higher in 2020.

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Gain on disposition of assets was $13.5 million unfavorable. In 2020, we
recognized a gain on the sale of a portion of our interest in Saddlehorn of
$12.9 million. In 2019, we recognized a deferred gain of $11.0 million related
to the 2018 sale of a portion of our investment in BridgeTex, a gain of $10.2
million related to our discontinued Delaware Basin crude oil pipeline
construction project that was sold to a third party and a gain of $5.3 million
resulting from the sale of an inactive terminal along our refined products
pipeline system.

Other expense was $4.3 million favorable due to lower pension-related costs in the current period.




Distributable Cash Flow

We calculate the non-GAAP measures of distributable cash flow ("DCF") and
adjusted EBITDA in the table below. Management uses DCF as a basis for
recommending to our general partner's board of directors the amount of cash
distributions to be paid to our common unitholders each period. Management also
uses DCF as a basis for determining the payouts for the performance-based awards
issued under our equity-based compensation plan. Adjusted EBITDA is an important
measure that we and the investment community use to assess the financial results
of an entity. We believe that investors benefit from having access to the same
financial measures utilized by management for these evaluations. A
reconciliation of DCF and adjusted EBITDA for the six months ended June 30, 2019
and 2020 to net income, which is its nearest comparable GAAP financial measure,
follows (in millions):
                                                      Six Months Ended June 30,          Increase
                                                       2019               2020          (Decrease)
Net income                                        $      461.4$      421.4$      (40.0 )
Interest expense, net                                    101.0              115.3             14.3
Depreciation, amortization and impairment(1)             118.9              121.6              2.7
Equity-based incentive compensation(2)                     6.0              (10.3 )          (16.3 )
Gain on disposition of assets(3)                         (16.3 )            (10.5 )            5.8
Commodity-related adjustments:
Derivative (gains) losses recognized in the
period associated with future transactions(4)             20.8               (4.9 )          (25.7 )
Derivative gains (losses) recognized in
previous periods associated with transactions
completed in the period(4)                                71.2              (16.0 )          (87.2 )
Inventory valuation adjustments(5)                        (9.4 )             27.8             37.2
Total commodity-related adjustments                       82.6                6.9            (75.7 )
Distributions from operations of non-controlled
entities in excess of earnings                            11.1               25.4             14.3
Adjusted EBITDA                                          764.7              669.8            (94.9 )
Interest expense, net, excluding debt issuance
cost amortization(6)                                     (91.1 )           (100.5 )           (9.4 )
Maintenance capital(7)                                   (40.8 )            (53.3 )          (12.5 )
DCF                                               $      632.8$      516.0$     (116.8 )

(1) Depreciation, amortization and impairment expense is excluded from DCF to

the extent it represents a non-cash expense.

(2) Because we intend to satisfy vesting of unit awards under our equity-based

long-term incentive compensation plan with the issuance of common units,

expenses related to this plan generally are deemed non-cash and added back

for DCF purposes. The amounts above have been reduced by cash payments

associated with the plan, which are primarily related to tax withholdings.



(3) Gains on disposition of assets are excluded from DCF to the extent they are
not related to our ongoing operations.
(4) Certain derivatives have not been designated as hedges for accounting
purposes and the mark-to-market changes of these derivatives are recognized
currently in net income.  We exclude the net impact of these derivatives from
our determination of DCF until the transactions are settled and, where
applicable, the related products are sold.  In the period in which these
transactions are settled and any related products are sold, the net impact of
the derivatives is included in DCF.

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(5) We adjust DCF for lower of average cost or net realizable value

adjustments related to inventory and firm purchase commitments as well as

market valuation of short positions recognized each period as these are

non-cash items. In subsequent periods when we physically sell or purchase

       the related products, we adjust DCF for the valuation adjustments
       previously recognized.


(6)    Interest expense includes $8.3 million of debt prepayment costs in 2019
       and $12.9 million in 2020, which are excluded from DCF as they are
       financing activities and not related to our ongoing operations.


(7)    Maintenance capital expenditures maintain our existing assets and do not

generate incremental DCF (i.e. incremental returns to our unitholders).

For this reason, we deduct maintenance capital expenditures to determine

       DCF.



Liquidity and Capital Resources

Cash Flows and Capital Expenditures


Operating Activities. Net cash provided by operating activities was $570.6
million and $563.3 million for the six months ended June 30, 2019 and 2020,
respectively. The $7.3 million decrease in 2020 was due to lower net income as
previously described, mostly offset by changes in our working capital and
adjustments for non-cash items.
Investing Activities. Net cash used by investing activities for the six months
ended June 30, 2019 and 2020 was $502.2 million and $18.8 million, respectively.
During the 2020 period, we incurred $235.6 million for capital expenditures,
which included $53.3 million for maintenance capital, $182.1 million for our
expansion capital projects and $0.2 million for undivided joint interest
projects for which cash was received from a third party. Also, during 2020, we
sold three marine terminals for cash proceeds of $251.8 million and sold a
portion of our interest in Saddlehorn for cash proceeds of $79.9 million.
Additionally, we contributed capital of $59.5 million in conjunction with our
joint ventures, which we account for as investments in non-controlled entities.
During the 2019 period, we incurred $514.8 million for capital expenditures,
which included $40.8 million for maintenance capital, $411.2 million for our
expansion capital projects and $62.8 million for undivided joint interest
projects for which cash was received from a third party. Additionally, we
contributed net capital of $104.8 million in conjunction with our joint
ventures, of which $99.8 million related to capital projects.
Financing Activities. Net cash used by financing activities for the six months
ended June 30, 2019 and 2020 was $346.4 million and $619.9 million,
respectively. During the 2020 period, we paid cash distributions of $466.0
million to our unitholders and made common unit repurchases of $202.0 million.
Additionally, we received net proceeds of $499.4 million from the issuance of
long-term senior notes and had net commercial paper borrowings of $141.0
million, which were used to repay our $550.0 million of 4.25% notes due 2021.
Also, in January 2020, our equity-based incentive compensation awards that
vested December 31, 2019 were settled by issuing 284,643 common units and
distributing those units to the long-term incentive plan ("LTIP") participants,
resulting in payments primarily associated with tax withholdings of $14.7
million. During the 2019 period, we paid cash distributions of $457.4 million to
our unitholders. Additionally, we received net proceeds of $496.9 million from
borrowings under long-term notes and had net commercial paper borrowings of
$197.0 million, which were used to repay our $550.0 million of 6.55% notes due
2019. Also, in January 2019, our equity-based incentive compensation awards that
vested December 31, 2018 were settled by issuing 208,268 common units and
distributing those units to the LTIP participants, resulting in payments
primarily associated with tax withholdings of $9.8 million.
The quarterly distribution amount related to our second quarter 2020 financial
results (to be paid in third quarter 2020) is $1.0275 per unit.  If we were to
continue paying cash distributions at this level on the number of common units
currently outstanding, total cash distributions of approximately $925 million
would be paid to our unitholders related to 2020 earnings. Management believes
we will have sufficient DCF to fund these distributions.
During 2020, we initiated our common unit repurchase program, with authorization
to repurchase up to $750 million of our common units through 2022. During the
six months ended June 30, 2020, we repurchased 3.6 million of our common units
for $202 million. The timing, price and actual number of common units
repurchased will depend on a number of factors including our expected expansion
capital spending needs, excess cash available, balance sheet metrics, legal and
regulatory requirements, market conditions and the trading price of our common
units.


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Capital Requirements

Our businesses require continual investments to maintain, upgrade or enhance existing operations and to ensure compliance with safety and environmental regulations. Capital spending consists primarily of: • Maintenance capital expenditures. These expenditures include costs

          required to maintain equipment reliability and safety and to address
          environmental or other regulatory requirements rather than to generate
          incremental DCF; and


• Expansion capital expenditures. These expenditures are undertaken

          primarily to generate incremental DCF and include costs to acquire
          additional assets to grow our business and to expand or upgrade our
          existing facilities and to construct new assets, which we refer to
          collectively as organic growth projects. Organic growth projects
          include, for example, capital expenditures that increase storage or
          throughput volumes or develop pipeline connections to new supply
          sources.


For the six months ended June 30, 2020, our maintenance capital spending was $53.3 million. For 2020, we expect to spend approximately $90 million on maintenance capital.


During the first six months of 2020, we spent $182.1 million for our expansion
capital projects and contributed $59.5 million for capital projects in
conjunction with our joint ventures. Based on the progress of expansion projects
already underway, we expect to spend approximately $400 million in 2020 and $40
million in 2021 to complete our current projects.

Liquidity


Cash generated from operations is a key source of liquidity for funding debt
service, maintenance capital expenditures and quarterly distributions.
Additional liquidity for purposes other than quarterly distributions, such as
expansion capital expenditures and debt repayments, is available through
borrowings under our commercial paper program and revolving credit facility, as
well as from other borrowings or issuances of debt or common units (see Note 6 -
Debt and Note 14 - Partners' Capital and Distributions of the consolidated
financial statements included in Item 1 of Part I of this report for detail of
our borrowings and changes in partners' capital). If capital markets do not
provide us access to capital or the ability to issue additional debt or equity
securities on acceptable terms, our business may be adversely affected, and we
may not be able to acquire additional assets and businesses, fund organic growth
projects or continue paying cash distributions at the current level.


Off-Balance Sheet Arrangements

None.


Other Items

Pipeline Tariff Changes. The Federal Energy Regulatory Commission ("FERC")
regulates the rates charged on our interstate common carrier pipelines. We
increased our rates by approximately 2.0% in the 40% of our refined products
markets that are subject to the FERC's index methodology on July 1, 2020. In the
60% of our remaining refined products markets, we increased our rates by an
average of nearly 4.5%, for an overall average refined rate increase of 3.5%.
Most of the tariffs on our crude oil pipelines are established at negotiated
rates that generally provide for annual adjustments in line with changes in the
FERC index, subject to certain modifications. As a result, we also increased the
rates on the majority of our crude oil pipelines by approximately 2.0% in July
2020.

The FERC-approved indexing method for the past five years has been the annual
change in the producer price index for finished goods plus 1.23%.  In June 2020,
the FERC issued a Notice of Inquiry ("NOI") to initiate a review of the rate
index to be utilized over the next five-year period beginning July 1, 2021. 

The

FERC's proposal in the NOI preliminarily recommends the use of the producer price index for finished goods plus 0.09% as the new

                                       42
--------------------------------------------------------------------------------

index level to calculate annual tariff changes. The FERC has invited comments on the NOI, which is subject to further review and adjustment.


Commodity Derivative Agreements. Certain of our business activities result in
our owning various commodities, which exposes us to commodity price risk. We
generally use forward physical commodity contracts and exchange-traded futures
contracts to hedge against changes in prices of the commodities that we expect
to sell or purchase in future periods. We also entered into a basis derivative
agreement for which settlements are determined based on the basis differential
of crude oil prices at different market locations.

For further information regarding the quantities of refined products and crude
oil hedged at June 30, 2020 and the fair value of open hedge contracts at that
date, please see Item 3. Quantitative and Qualitative Disclosures about Market
Risk.

Related Party Transactions. See Note 13 - Related Party Transactions in Item 1 of Part I of this report for detail of our related party transactions.

© Edgar Online, source Glimpses

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