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 ofSeptember 30, 2021 , our asset portfolio, excluding assets associated with discontinued operations, consisted of: •our refined products segment, comprised of our approximately 9,800-mile refined petroleum products pipeline system with 54 connected terminals 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 27 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 24 million barrels used for contract storage) are wholly-owned, with the remainder owned through joint ventures. 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 Annual Report on Form 10-K for the year endedDecember 31, 2020 . Recent Developments Discontinued Operations. InJune 2021 , we entered into an agreement to sell our independent terminals network comprised of 26 refined petroleum products terminals with approximately six million barrels of storage located primarily in the southeasternUnited States . The sale is expected to close upon the receipt of required regulatory approvals. The related results of operations, financial position and cash flows have been classified as discontinued operations for all periods presented. See Note 2 - Discontinued Operations and Assets Held for Sale in Item 1 of Part I of this report for further details. Sale of Partial Interest inMVP Terminalling, LLC . InApril 2021 , we sold nearly half of our membership interest in MVP and received proceeds of$272.1 million . Following the sale, we own approximately 25% of MVP and remain the operator of the facility.
Distribution. In
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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 the 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 the 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 the importance to our results
of operations.
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Three Months Ended September 30, 2020 compared to Three Months Ended September
30, 2021
Variance
Three Months Ended September 30 , Favorable (Unfavorable)
2020 2021 $ Change % Change
Financial Highlights ($ in millions, except operating statistics)
Transportation and terminals revenue:
Refined products $ 307.2 $ 349.4 $ 42.2 14
Crude oil 154.6 116.9 (37.7) (24)
Intersegment eliminations (1.9) (1.4) 0.5 26
Total transportation and terminals revenue 459.9 464.9 5.0 1
Affiliate management fee revenue 5.3 5.3 - -
Operating expenses:
Refined products 114.2 114.6 (0.4) -
Crude oil 47.0 35.1 11.9 25
Intersegment eliminations (3.5) (3.1) (0.4) (11)
Total operating expenses 157.7 146.6 11.1 7
Product margin:
Product sales revenue 111.2 168.8 57.6 52
Cost of product sales 89.4 145.8 (56.4) (63)
Product margin 21.8 23.0 1.2 6
Other operating income (expense) (2.9) 2.6 5.5 n/a
Earnings of non-controlled entities 39.2 36.5 (2.7) (7)
Operating margin 365.6 385.7 20.1 5
Depreciation, amortization and impairment expense 68.4 61.4 7.0 10
G&A expense 37.5 46.7 (9.2) (25)
Operating profit 259.7 277.6 17.9 7Interest expense (net of interest income and interest capitalized)
52.7 56.6 (3.9) (7)
Gain on disposition of assets - (3.2) 3.2 -
Other (income) expense 1.4 2.1 (0.7) (50)Income from continuing operations before provision for income taxes
205.6 222.1 16.5 8
Provision for income taxes 0.9 0.8 0.1 11
Income from continuing operations 204.7 221.3 16.6 8
Income from discontinued operations 6.9 15.3 8.4 122
Net income $ 211.6 $ 236.6 $ 25.0 12
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped $ 1.719 $ 1.724
Volume shipped (million barrels):
Gasoline 71.9 80.3
Distillates 42.5 53.0
Aviation fuel 4.7 8.4
Liquefied petroleum gases 0.1 0.1
Total volume shipped 119.2 141.8
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped $ 1.401 $ 0.803
Volume shipped (million barrels)(1) 45.1 49.2
Terminal average utilization (million barrels per month) 25.9
24.9
Select joint venture pipelines: BridgeTex - volume shipped (million barrels)(2) 30.6
29.1
Saddlehorn - volume shipped (million barrels)(3) 15.1 19.9
(1) Volume shipped includes shipments related to our crude oil marketing
activities.
(2) These volumes reflect the total shipments for the BridgeTex pipeline, which
is owned 30% by us.
(3) These volumes reflect the total shipments for the Saddlehorn pipeline, which
is owned 30% by us.
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Transportation and terminals revenue increased $5.0 million resulting from:
•an increase in refined products revenue of $42.2 million primarily due to
increased transportation revenue as a result of higher volumes versus the
pandemic levels of 2020 due to the recovery in travel, economic and drilling
activity as well as additional contributions from our Texas pipeline expansion
projects. Transportation revenues for the current period also benefited from our
mid-year 2021 tariff increase. These favorable items were partially offset by
lower storage revenues due to lower utilization and rates following recent
contract expirations; and
•a decrease in crude oil revenue of $37.7 million primarily due to lower average
tariff rates and reduced storage revenues. Average tariff rates decreased
primarily as a result of the late 2020 expiration of several higher-priced
contracts on our Longhorn pipeline, with much of this volume replaced by
activities of our marketing affiliate. In addition, deficiency revenue
recognized in the year-ago period did not recur in third quarter 2021. Storage
revenues decreased primarily due to the 2020 period benefiting from increased
short-term storage utilization at higher rates, with recent contract renewals at
lower rates in the current period.
Operating expenses decreased by $11.1 million primarily resulting from:
•an increase in refined products expenses of $0.4 million . An increase in
integrity spending related to the timing of maintenance work, higher power costs
due to higher volume shipped and higher property taxes were mainly offset by
favorable product overages (which reduce operating expenses); and
•a decrease in crude oil expenses of $11.9 million primarily due to a decrease
in integrity spending related to the timing of maintenance work, lower fees paid
to Seabrook for ancillary services and favorable product overages.
Product margin increased $1.2 million primarily due to recognition of losses on
futures contracts in third quarter 2020 offset by lower margins and lower sales
volumes on our gas liquids blending and fractionation activities in the current
period.
Other operating income (expense) was $5.5 million favorable in part due to
reduced estimates for retained liabilities related to our 2020 marine terminals
sale and lower losses recognized on a basis derivative agreement during the
current period.
Earnings of non-controlled entities decreased $2.7 million primarily due to the
sale of a portion of our interest in MVP during second quarter 2021. We also
earned less from Seabrook due to lower throughput fees and additional
depreciation for recently-constructed assets and BridgeTex due to less favorable
product overages. These decreases were partially offset by additional earnings
from Powder Springs due to gains on futures contracts in the current quarter.
Depreciation, amortization and impairment expense decreased $7.0 million
primarily due to the impairment in third quarter 2020 of certain terminalling
assets.
G&A expense increased $9.2 million primarily due to higher incentive
compensation costs as a result of improved financial results in 2021.
Interest expense, net of interest income and interest capitalized, increased
$3.9 million due to lower capitalized interest as a result of reduced ongoing
expansion capital spending and higher debt outstanding. Our weighted-average
debt outstanding was $5.1 billion in third quarter 2021 compared to $4.9 billion
in third quarter 2020. The weighted average interest rate was 4.4% in third
quarter 2021 compared to 4.3% in third quarter 2020.
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Gain on disposition of assets of
Income from discontinued operations increased by$8.4 million due to improved product margin for our independent terminals as a result of higher gas liquids blending volume sold at increased pricing and less depreciation now that the assets are classified as held for sale. 38 -------------------------------------------------------------------------------- Nine Months EndedSeptember 30, 2020 compared to Nine Months EndedSeptember 30, 2021 Variance Nine Months EndedSeptember 30 , Favorable (Unfavorable) 2020 2021 $ Change % Change Financial Highlights ($ in millions, except operating statistics) Transportation and terminals revenue: Refined products $ 876.4$ 984.9 $ 108.5 12 Crude oil 433.9 351.8 (82.1) (19) Intersegment eliminations (5.1) (4.4) 0.7 14 Total transportation and terminals revenue 1,305.2 1,332.3 27.1 2 Affiliate management fee revenue 15.9 15.9 - - Operating expenses: Refined products 316.3 314.2 2.1 1 Crude oil 139.7 118.1 21.6 15 Intersegment eliminations (9.9) (9.4) (0.5) (5) Total operating expenses 446.1 422.9 23.2 5 Product margin: Product sales revenue 443.1 575.6 132.5 30 Cost of product sales 364.9 488.6 (123.7) (34) Product margin 78.2 87.0 8.8 11 Other operating income (expense) 0.5 4.0 3.5 700 Earnings of non-controlled entities 116.5 116.1 (0.4) - Operating margin 1,070.2 1,132.4 62.2 6 Depreciation, amortization and impairment expense 183.2 168.3 14.9 8 G&A expense 115.5 148.7 (33.2) (29) Operating profit 771.5 815.4 43.9 6
Interest expense (net of interest income and interest capitalized)
168.0 169.3 (1.3) (1)
Gain on disposition of assets (12.9) (72.9) 60.0 465
Other (income) expense 3.7 18.1 (14.4) (389)Income from continuing operations before provision for income taxes
612.7 700.9 88.2 14
Provision for income taxes 2.2 2.0 0.2 9
Income from continuing operations 610.5 698.9 88.4 14
Income from discontinued operations 22.5 39.4 16.9 75
Net income $ 633.0 $ 738.3 $ 105.3 17
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped $ 1.658 $ 1.697
Volume shipped (million barrels):
Gasoline 199.4 224.1
Distillates 127.6 152.4
Aviation fuel 16.8 21.7
Liquefied petroleum gases 0.5 0.6
Total volume shipped 344.3 398.8
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped $ 1.145 $ 0.803
Volume shipped (million barrels)(1) 167.9 145.3
Terminal average utilization (million barrels per month) 24.7
25.1
Select joint venture pipelines: BridgeTex - volume shipped (million barrels)(2) 99.9
84.6
Saddlehorn - volume shipped (million barrels)(3) 46.5 56.0 (1) Volume shipped includes shipments related to our crude oil marketing activities. (2) These volumes reflect the total shipments for the BridgeTex pipeline, which is owned 30% by us. (3) These volumes reflect the total shipments for the Saddlehorn pipeline, which was owned 40% by us throughJanuary 31, 2020 and 30% thereafter. 39 -------------------------------------------------------------------------------- Transportation and terminals revenue increased$27.1 million resulting from: •an increase in refined products revenue of$108.5 million primarily due to increased transportation revenue as a result of higher volumes versus the pandemic levels of 2020 due to the recovery in travel, economic and drilling activity as well as additional contributions from ourTexas pipeline expansion projects. Revenues also benefited from an increase in the average tariff rate in the current period as a result of the 2020 and 2021 mid-year adjustments. These favorable items were partially offset by the absence of revenues in the current period associated with the three marine terminals we sold inMarch 2020 and lower storage revenues due to lower utilization and lower rates following recent contract expirations; and •a decrease in crude oil revenue of$82.1 million primarily due to lower average tariff rates, less volume shipped and reduced storage revenues. Average tariff rates decreased primarily as a result of the late 2020 expiration of several higher-priced contracts on our Longhorn pipeline. In addition, deficiency revenue recognized in the year-ago period did not recur in 2021. Transportation volumes also declined partially due to those Longhorn contract expirations, with much of this volume replaced by activities of our marketing affiliate, as well as short-term supply disruptions caused by the 2021 winter storm that negatively impacted shipments mainly on ourHouston distribution system. Storage revenues decreased primarily due to the 2020 period benefiting from increased short-term storage utilization at higher rates and contract renewals at lower rates in the current period. Operating expenses decreased by$23.2 million primarily resulting from: •a decrease in refined products expenses of$2.1 million . Favorable product overages and the absence of costs in the current period associated with the divested marine terminals were partially offset by higher compensation costs and more integrity spending due to timing of project work; and •a decrease in crude oil expenses of$21.6 million primarily due to lower power costs as a result of our recent optimization efforts as well as gains on power hedges driven by the winter storm in first quarter 2021, lower fees paid toSeabrook for ancillary services and lower integrity spending. Product margin increased$8.8 million primarily due to lower of cost or net realizable value adjustments that negatively impacted 2020 as a result of the significant decrease in commodity prices that year and higher margins on our fractionator and crude over/short activities, partially offset by reduced margins on our gas liquids blending activities in the current year. Other operating income (expense) was$3.5 million favorable primarily due to sales of unused air emission credits and reduced estimates for retained liabilities related to our 2020 marine terminals sale. Earnings of non-controlled entities decreased$0.4 million . Lower earnings from MVP following the sale of a portion of our interest during second quarter 2021 and fromPowder Springs due to lower gains recognized in the current year on futures contracts were mostly offset by contributions from expansion projects at MVP and Saddlehorn. Depreciation, amortization and impairment expense decreased$14.9 million primarily due to impairment losses recognized in 2020 related to certain terminalling assets. G&A expense increased$33.2 million primarily due to higher incentive compensation costs as a result of improved financial results, as well as higher benefits costs in 2021. Interest expense, net of interest income and interest capitalized, increased$1.3 million primarily due to lower capitalized interest in the current year as a result of reduced ongoing expansion capital spending. Our weighted-average debt outstanding was$5.1 billion in the 2021 period compared to$4.9 billion in 2020. The weighted average interest rate was 4.4% in 2021 compared to 4.5% in 2020. 40 -------------------------------------------------------------------------------- Gain on disposition of assets of$72.9 million in 2021 was primarily the result of the sale of a portion of our interest in MVP and$12.9 million recognized in 2020 was due to the sale of a portion of our interest in Saddlehorn. Other expense was$14.4 million unfavorable primarily due to amounts recognized in second quarter 2021 related to certain legal matters. Income from discontinued operations increased by$16.9 million due to improved product margin for our independent terminals as a result of higher gas liquids blending volume sold at increased pricing and less depreciation now that the assets are classified as held for sale.
Adjusted EBITDA, Distributable Cash Flow and Free Cash Flow
We believe that investors benefit from having access to the same financial measures utilized by management. In the following tables, we present the financial measures of adjusted EBITDA, distributable cash flow ("DCF") and free cash flow ("FCF"), which are non-GAAP measures. These measures include the results of our discontinued operations.
Adjusted EBITDA is an important measure utilized by management and the investment community to assess the financial results of a company. A reconciliation of adjusted EBITDA to net income, the nearest comparable GAAP measure, is included in the table below.
Our partnership agreement requires that all of our available cash, less amounts reserved by our general partner's board of directors, be distributed to our unitholders. DCF is used by management to determine the amount of cash that our operations generated, after maintenance capital spending, that is available for distribution to our unitholders, as well as a basis for recommending to our general partner's board of directors the amount of distributions to be paid each period. We also use DCF as the basis for calculating our performance-based equity long-term incentive compensation. A reconciliation of DCF to net income, the nearest comparable GAAP measure, is included in the table below. FCF is a financial metric used by many investors and others in the financial community to measure the amount of cash generated by a company during a period after accounting for all investing activities, including both maintenance and expansion capital spending, as well as proceeds from divestitures. We believe FCF is important to the financial community as it reflects the amount of cash available for distributions, unit repurchases, debt reduction, additional investments or other partnership uses. A reconciliation of FCF to net income and to net cash provided by operating activities, the nearest comparable GAAP measure, is included in the following tables.
Since the non-GAAP measures presented here include adjustments specific to us, they may not be comparable to similarly-titled measures of other companies.
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Adjusted EBITDA, DCF and FCF are non-GAAP measures. A reconciliation of each of
these measures to net income for the nine months ended September 30, 2020 and
2021 is as follows (in millions):
Nine Months Ended
2020 2021
Net income $ 633.0 $ 738.3
Interest expense, net 168.0 169.3
Depreciation, amortization and impairment(1) 193.4 174.4
Equity-based incentive compensation(2) (9.1) 9.5
Gain on disposition of assets(3) (10.5) (68.5)
Commodity-related adjustments: Derivative (gains) losses recognized in the period associated with future transactions(4)
6.7 21.1
Derivative gains (losses) recognized in previous periods associated with transactions completed in the period(4)
(18.9) (32.2)
Inventory valuation adjustments(5) 9.6 2.4
Total commodity-related adjustments (2.6) (8.7)
Distributions from operations of non-controlled entities in
excess of earnings 36.2 24.5
Adjusted EBITDA 1,008.4 1,038.8
Interest expense, net, excluding debt issuance cost
amortization(6) (152.4) (167.0)
Maintenance capital(7) (81.2) (50.2)
Distributable cash flow 774.8 821.6
Expansion capital(8) (310.0) (67.6)
Proceeds from asset sales 334.6 270.7
Free cash flow 799.4 1,024.7
Distributions paid (697.3) (685.0)
Free cash flow after distributions $
102.1
(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 excluded 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. (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 debt prepayment costs of$12.9 million in the nine months endedSeptember 30, 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. (8) Includes additions to property, plant and equipment (excluding maintenance capital and capital-related changes in accounts payable and other current liabilities), acquisitions and investments in non-controlled entities, net of distributions from returns of investments in non-controlled entities and deposits from undivided joint interest third parties. 42 --------------------------------------------------------------------------------
A reconciliation of FCF to net cash provided by operating activities for the
nine months ended
Nine Months Ended
2020 2021
Net cash provided by operating activities $ 840.1 $ 879.1
Changes in operating assets and liabilities 30.4 0.6
Net cash provided (used) in investing activities (110.3) 160.1
Payments associated with settlement of equity-based incentive compensation
(14.7) (6.2)
Settlement gain, amortization of prior service credit and actuarial loss
(4.0) (7.2)
Changes in accrued capital items 52.8 (4.0)
Commodity-related adjustments(1) (2.6) (8.7)
Other 7.7 11.0
Free cash flow 799.4 1,024.7
Distributions paid (697.3) (685.0)
Free cash flow after distributions (1) Please refer to the preceding table for a description of these commodity-related adjustments.
Liquidity and Capital Resources
Cash Flows and Capital Expenditures
Operating Activities. Net cash provided by operating activities was$840.1 million and$879.1 million for the nine months endedSeptember 30, 2020 and 2021, respectively. The$39.0 million increase in 2021 was due to higher net income as previously described and changes in our working capital, partially offset by adjustments for non-cash items and distributions in excess of earnings of our non-controlled entities. Investing Activities. Net cash used by investing activities for the nine months endedSeptember 30, 2020 was$110.3 million and net cash provided by investing activities for the nine months endedSeptember 30, 2021 was$160.1 million . During the 2021 period, we used$106.5 million for capital expenditures. Also, during 2021, we sold a portion of our interest in MVP for cash proceeds of$271.0 million . During the 2020 period, we used$357.1 million for capital expenditures. 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$73.7 million in conjunction with our joint venture capital projects, which we account for as investments in non-controlled entities. Financing Activities. Net cash used by financing activities for the nine months endedSeptember 30, 2020 and 2021 was$794.1 million and$1,041.2 million , respectively. During the 2021 period, we paid distributions of$685.0 million to our unitholders and repurchased common units for$473.1 million . Additionally, we had net commercial paper borrowings of$123.0 million . Also, inJanuary 2021 , our equity-based incentive compensation awards that vestedDecember 31, 2020 were settled by issuing 163,007 common units and distributing those units to the long-term incentive plan ("LTIP") participants, resulting in payments primarily associated with tax withholdings of$6.2 million . During the 2020 period, we paid distributions of$697.3 million to our unitholders and repurchased common units for$252.0 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$248.0 million , which collectively 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 LTIP participants, resulting in payments primarily associated with tax withholdings of$14.7 million . The quarterly distribution amount related to third quarter 2021 earnings is$1.0375 per unit (to be paid in fourth quarter 2021). If we were to continue paying distributions at this level on the number of common units 43 -------------------------------------------------------------------------------- currently outstanding, total distributions of approximately$898 million would be paid to our unitholders related to 2021 earnings. Management believes we will have sufficient DCF to fund these distributions. Capital Requirements Capital spending for our business 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 nine months endedSeptember 30, 2021 , our maintenance capital spending was$50.2 million , including$1.5 million for discontinued operations. For 2021, we expect to spend approximately$80 million on maintenance capital. During the first nine months of 2021, we spent$62.0 million for our expansion capital projects, including$0.2 million for discontinued operations, and contributed$5.6 million for expansion capital projects in conjunction with our joint ventures. Based on the progress of expansion projects already underway, we expect to spend approximately$80 million in 2021 and$20 million in 2022 to complete our current slate of expansion capital projects. In addition, we may repurchase our common units through our unit repurchase program (see Item 2 - Unregistered Sales ofEquity Securities and Use of Proceeds of Part II of this report for additional details). We may also repurchase portions of our existing long-term debt from time-to-time through open market transactions, tender offers or privately-negotiated transactions. Liquidity Cash generated from operations is a key source of liquidity for funding debt service, maintenance capital expenditures, quarterly distributions and repurchases of our common units. Additional liquidity for purposes other than quarterly distributions, such as expansion capital expenditures, 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 7 - Debt and Note 15 - 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).
Off-Balance Sheet Arrangements
None.
Other Items
Executive Officer Promotions.
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Pipeline Tariff Changes. Historically, the tariff rates on approximately 40% of
our refined products shipments have been regulated by the Federal Energy
Regulatory Commission ("FERC") primarily through an annual index methodology,
and nearly all the remaining rates are adjustable at our discretion based on
market factors. Due to the recent expansion of our Texas refined products
pipeline system, for which rates are not regulated by the FERC , we expect a
smaller percent of our total refined products shipments to be subject to the
index methodology in the future. The new 5-year FERC index beginning July 2021
is based on the change in the producer price index for finished goods plus
0.78%. Based on this methodology, we decreased our index rates by approximately
0.6% on July 1, 2021 , with an average increase of more than 4% on the remainder
of our refined products tariff rates, resulting in an overall average refined
products mid-year tariff increase of nearly 3%. Most of the tariffs on our
long-haul 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 changed the rates on our crude
oil pipelines between 0% and 2% in July 2021 .
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 are a party to a basis derivative
agreement for which settlements are determined based on the basis differential
of crude oil prices at different market locations.
See Item 3. Quantitative and Qualitative Disclosures about Market Risk for
further information regarding the quantities of refined products and crude oil
hedged at
Related Party Transactions. See Note 14 - Related Party Transactions in Item 1 of Part I of this report for detail of our related party transactions.
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