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 theSecurities and Exchange Commission onMay 4, 2020 , which reflects changes in our reporting segments since the filing of our Annual Report on Form 10-K for the year endedDecember 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. InJuly 2020 , our general partner's board of directors declared a quarterly cash distribution of$1.0275 per unit for the period ofApril 1, 2020 throughJune 30, 2020 . This quarterly cash distribution will be paid onAugust 14, 2020 to unitholders of record onAugust 7, 2020 . 33 --------------------------------------------------------------------------------
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.
34 -------------------------------------------------------------------------------- Three Months EndedJune 30, 2019 compared to Three Months EndedJune 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 atEast Houston and dock access atSeabrook . 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 throughJanuary 31, 2020 and 30% thereafter. 35 --------------------------------------------------------------------------------
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-constructedEast 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 thePermian 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 atEast Houston and dock access atSeabrook . 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 throughJanuary 31, 2020 and 30% thereafter. 38 --------------------------------------------------------------------------------
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-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 thePermian 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 ourSeabrook 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$5.3 million resulting from the sale of an inactive terminal along our refined products pipeline system.
Other expense was
Distributable Cash Flow We calculate the non-GAAP measures of distributable cash flow ("DCF") and adjusted EBITDA in the table below. Management uses DCF as a basis for recommending to our general partner's board of directors the amount of cash distributions to be paid to our common unitholders each period. Management also uses DCF as a basis for determining the payouts for the performance-based awards issued under our equity-based compensation plan. Adjusted EBITDA is an important measure that we and the investment community use to assess the financial results of an entity. We believe that investors benefit from having access to the same financial measures utilized by management for these evaluations. A reconciliation of DCF and adjusted EBITDA for the six months endedJune 30, 2019 and 2020 to net income, which is its nearest comparable GAAP financial measure, follows (in millions): Six Months Ended June 30, Increase 2019 2020 (Decrease) Net income$ 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. 40 --------------------------------------------------------------------------------
(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 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
42 --------------------------------------------------------------------------------
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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