MAGELLAN MIDSTREAM PARTNERS, L.P. 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
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
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
revenue on our Longhorn pipeline resulted from less third-party spot
shipments due to unfavorable differentials between the Permian Basin
and
our marketing affiliate, with volume shipped by our affiliate
recognized as product margin instead of transportation revenue. Lower
tariff volume on our
from a change in the way customers now contract for services at our
incremental revenue from the related terminal transfer fee as well as
more contract storage utilized at higher rates.
Operating expenses decreased by
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
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 fromBridgeTex Pipeline Company, LLC ("BridgeTex") andSaddlehorn 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 dueFebruary 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. 36 -------------------------------------------------------------------------------- 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
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Six Months Ended
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
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-yearadjustment 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
revenue on our Longhorn pipeline resulted from less third-party spot
shipments due to unfavorable differentials between the Permian Basin
and
our marketing affiliate, with volume shipped by our affiliate
recognized as product margin instead of transportation revenue. Lower
tariff volume on our
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
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
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 fromPowder 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. 39 -------------------------------------------------------------------------------- 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 discontinuedDelaware 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
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 notgenerate 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 endedJune 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 endedJune 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 endedJune 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, inJanuary 2020 , our equity-based incentive compensation awards that vestedDecember 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, inJanuary 2019 , our equity-based incentive compensation awards that vestedDecember 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 endedJune 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. 41
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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
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. TheFederal 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 theFERC's index methodology onJuly 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 theFERC 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% inJuly 2020 . TheFERC -approved indexing method for the past five years has been the annual change in the producer price index for finished goods plus 1.23%. InJune 2020 , theFERC issued a Notice of Inquiry ("NOI") to initiate a review of the rate index to be utilized over the next five-year period beginningJuly 1, 2021 .
The
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index level to calculate annual tariff changes. The
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 atJune 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.
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