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 ofJune 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$271.0 million in cash, including working capital adjustments. Following the sale, we own approximately 25% of MVP and remain the operator of the facility. Distribution. InJuly 2021 , our general partner's board of directors declared a quarterly distribution of$1.0275 per unit for the period ofApril 1, 2021 throughJune 30, 2021 . This quarterly distribution will be paid onAugust 13, 2021 to unitholders of record onAugust 6, 2021 . 34 --------------------------------------------------------------------------------
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 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 June 30, 2020 compared to Three Months Ended June 30, 2021
Variance
Three Months Ended June 30 , Favorable (Unfavorable)
2020 2021 $ Change % Change
Financial Highlights ($ in millions, except operating statistics)
Transportation and terminals revenue:
Refined products $ 267.8 $ 337.8 $ 70.0 26
Crude oil 133.6 118.7 (14.9) (11)
Intersegment eliminations (1.6) (1.2) 0.4 25
Total transportation and terminals revenue 399.8 455.3 55.5 14
Affiliate management fee revenue 5.3 5.3 - -
Operating expenses:
Refined products 97.0 108.1 (11.1) (11)
Crude oil 45.9 43.8 2.1 5
Intersegment eliminations (3.2) (2.8) (0.4) (13)
Total operating expenses 139.7 149.1 (9.4) (7)
Product margin:
Product sales revenue 34.4 193.1 158.7 461
Cost of product sales 44.0 171.8 (127.8) (290)
Product margin (9.6) 21.3 30.9 n/a
Other operating income (expense) 4.0 1.9 (2.1) (53)
Earnings of non-controlled entities 33.7 40.5 6.8 20
Operating margin 293.5 375.2 81.7 28
Depreciation, amortization and impairment expense 55.0 52.3 2.7 5
G&A expense 41.7 56.1 (14.4) (35)
Operating profit 196.8 266.8 70.0 36Interest expense (net of interest income and interest capitalized)
64.8 56.4 8.4 13
Gain on disposition of assets - (69.7) 69.7 -
Other (income) expense 1.4 14.8 (13.4) (957)Income from continuing operations before provision for income taxes
130.6 265.3 134.7 103
Provision for income taxes 0.7 0.4 0.3 43
Income from continuing operations 129.9 264.9 135.0 104
Income from discontinued operations 3.9 15.5 11.6 297
Net income $ 133.8 $ 280.4 $ 146.6 110
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped $ 1.675 $ 1.690
Volume shipped (million barrels):
Gasoline 61.3 78.8
Distillates 41.3 52.9
Aviation fuel 2.7 7.2
Total volume shipped 105.3 138.9
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped $ 1.048 $ 0.816
Volume shipped (million barrels)(1) 47.7 49.6
Terminal average utilization (million barrels per month) 25.5
25.0
Select joint venture pipelines: BridgeTex - volume shipped (million barrels)(2) 32.2
28.6
Saddlehorn - volume shipped (million barrels)(3) 15.1 20.0
(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
is owned 30% by us.
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Transportation and terminals revenue increased $55.5 million resulting from:
•an increase in refined products revenue of $70.0 million primarily due to
increased transportation revenue as a result of significantly higher volumes
versus the pandemic levels of 2020 due to the recovery in travel, economic and
drilling activity as well as contributions from our recent Texas pipeline
expansion projects. Transportation revenues for the current period also
benefited from our mid-year 2020 tariff increase; and
•a decrease in crude oil revenue of $14.9 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. 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 expense increased by $9.4 million primarily resulting from:
•an increase in refined products expenses of $11.1 million primarily due to an
increase in integrity spending related to the timing of maintenance work as well
as higher compensation to reflect improved financial results and higher benefits
costs; and
•a decrease in crude oil expenses of $2.1 million primarily due to lower fees
paid to Seabrook for ancillary services and the timing of integrity spending,
partially offset by higher compensation costs related to improved financial
results and higher benefit costs.
Product margin increased $30.9 million primarily due to unrealized losses on
futures contracts in the 2020 period as well as more sales in the current
quarter associated with our gas liquids blending activities as a result of
improved blending opportunities.
Earnings of non-controlled entities increased $6.8 million primarily due to
higher earnings from Saddlehorn related to the recent expansion of the pipeline
and from MVP as a result of a favorable revenue adjustment in the current year.
Depreciation, amortization and impairment expense decreased $2.7 million
primarily due to a reduction in our asset retirement obligations.
G&A expense increased $14.4 million primarily due to higher incentive
compensation costs to reflect improved financial results and higher benefits
costs in 2021.
Interest expense, net of interest income and interest capitalized, decreased
$8.4 million primarily due to the absence of debt prepayment costs recorded in
2020, partially offset by lower capitalized interest as a result of reduced
ongoing expansion capital spending. Our weighted-average debt outstanding was
$5.0 billion in second quarter 2021 compared to $4.9 billion in second quarter
2020. The weighted average interest rate was 4.4% in second quarter 2021
compared to 4.5% in second quarter 2020.
Gain on disposition of assets of
Other expense was
Income from discontinued operations increased by$11.6 million as a result of higher volumes at our independent terminals due to the economic recovery, improved product margin from higher sales volume at better pricing and lower operating expenses due to favorable product overages (which reduce operating expenses). 37
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Six Months Ended
Six Months Ended Variance
June 30 , Favorable (Unfavorable)
2020 2021 $ Change % Change
Financial Highlights ($ in millions, except operating statistics)
Transportation and terminals revenue:
Refined products $ 569.2 $ 635.5 $ 66.3 12
Crude oil 279.3 234.9 (44.4) (16)
Intersegment eliminations (3.2) (3.0) 0.2 6
Total transportation and terminals revenue 845.3 867.4 22.1 3
Affiliate management fee revenue 10.6 10.6 - -
Operating expenses:
Refined products 202.1 199.6 2.5 1
Crude oil 92.7 83.0 9.7 10
Intersegment eliminations (6.4) (6.3) (0.1) (2)
Total operating expenses 288.4 276.3 12.1 4
Product margin:
Product sales revenue 331.9 406.8 74.9 23
Cost of product sales 275.5 342.8 (67.3) (24)
Product margin 56.4 64.0 7.6 13
Other operating income (expense) 3.4 1.4 (2.0) (59)
Earnings of non-controlled entities 77.3 79.6 2.3 3
Operating margin 704.6 746.7 42.1 6
Depreciation, amortization and impairment expense 114.8 106.9 7.9 7
G&A expense 78.0 102.0 (24.0) (31)
Operating profit 511.8 537.8 26.0 5Interest expense (net of interest income and interest capitalized)
115.3 112.7 2.6 2
Gain on disposition of assets (12.9) (69.7) 56.8 440
Other (income) expense 2.3 16.0 (13.7) (596)Income from continuing operations before provision for income taxes
407.1 478.8 71.7 18
Provision for income taxes 1.3 1.2 0.1 8
Income from continuing operations 405.8 477.6 71.8 18
Income from discontinued operations 15.6 24.1 8.5 54
Net income $ 421.4 $ 501.7 $ 80.3 19
Operating Statistics:
Refined products:
Transportation revenue per barrel shipped $ 1.626 $ 1.682
Volume shipped (million barrels): Gasoline 127.5 143.8 Distillates 85.1 99.4 Aviation fuel 12.1 13.3 Liquefied petroleum gases 0.4 0.5 Total volume shipped 225.1 257.0 Crude oil: Magellan 100%-owned assets: Transportation revenue per barrel shipped$ 0.970 $
0.803
Volume shipped (million barrels)(1) 122.8
96.1
Terminal average utilization (million barrels per month) 24.1
25.3
Select joint venture pipelines: BridgeTex - volume shipped (million barrels)(2) 69.3
55.5
Saddlehorn - volume shipped (million barrels)(3) 31.4 36.1 (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. 38 -------------------------------------------------------------------------------- Transportation and terminals revenue increased$22.1 million resulting from: •an increase in refined products revenue of$66.3 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 contributions from our recentTexas pipeline expansion projects. 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 •a decrease in crude oil revenue of$44.4 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. Transportation volumes also declined partially due to those Longhorn contract expirations, with much of this volume replaced by activities of our marketing affiliate. Tariff movements on theHouston distribution system partially decreased due to an early 2020 change in the way customers now contract for services at the partnership'sSeabrook export facility joint venture. Further, short-term supply disruptions caused by the winter storms in first quarter 2021 also negatively impacted shipments on both Longhorn and theHouston 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 expense decreased by$12.1 million primarily resulting from: •a decrease in refined products expenses of$2.5 million primarily due to the absence of costs in the current period associated with the divested marine terminals as well as lower power costs from our recent optimization efforts and gains from power hedging activity driven by the winter storms in first quarter 2021, partially offset by higher compensation costs and integrity spending; and •a decrease in crude oil expenses of$9.7 million primarily due to lower power costs from our recent optimization efforts and gains from power hedging activity driven by the winter storms in first quarter 2021. Product margin increased$7.6 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, partially offset by reduced margins on our gas liquids blending activities in the current year. Earnings of non-controlled entities increased$2.3 million primarily due to increased capabilities over the past year for MVP and Saddlehorn, mostly offset by lower earnings from Powder Springs mainly as a result of lower gains recognized in the current year on futures contracts compared to the prior year. Depreciation, amortization and impairment expense decreased$7.9 million primarily due to an impairment loss recognized in 2020 related to certain terminalling assets. G&A expense increased$24.0 million primarily due to higher incentive compensation costs to reflect improved financial results and higher benefits costs in 2021. Interest expense, net of interest income and interest capitalized, decreased$2.6 million primarily due to the absence of debt prepayment costs recorded in 2020 partially offset by 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 second quarter 2021 compared to 4.5% in second quarter 2020. Gain on disposition of assets of$69.7 million in 2021 is primarily the result of a gain on the sale of a portion of our interest in MVP recognized in the second quarter of 2021 and$12.9 million in 2020 is due to a gain on the sale of a portion of our interest in Saddlehorn recognized in first quarter 2020. Other expense was$13.7 million unfavorable primarily due to amounts recognized in second quarter 2021 related to certain legal matters. 39 -------------------------------------------------------------------------------- Income from discontinued operations increased by$8.5 million as a result of higher volumes at our independent terminals due to the economic recovery and improved product margin from additional sales volume at better pricing.
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 six months ended June 30, 2020 and 2021 is
as follows (in millions):
Six Months Ended
2020 2021
Net income $ 421.4 $ 501.7
Interest expense, net 115.3 112.7
Depreciation, amortization and impairment(1) 121.6 118.3
Equity-based incentive compensation(2) (10.3) 3.9
Gain on disposition of assets(3) (10.5) (68.4)
Commodity-related adjustments: Derivative (gains) losses recognized in the period associated with future transactions(4)
(4.9) 23.5
Derivative gains (losses) recognized in previous periods associated with transactions completed in the period(4)
(16.0) (29.5)
Inventory valuation adjustments(5) 27.8 3.4
Total commodity-related adjustments 6.9 (2.6)
Distributions from operations of non-controlled entities in
excess of (less than)
earnings 25.4 14.8
Adjusted EBITDA 669.8 680.4
Interest expense, net, excluding debt issuance cost
amortization(6) (100.5) (111.2)
Maintenance capital(7) (53.3) (24.7)
Distributable cash flow 516.0 544.5
Expansion capital(8) (241.5) (42.1)
Proceeds from asset sales 332.9 270.6
Free cash flow 607.4 773.0
Distributions paid (466.0) (458.4)
Free cash flow after distributions $
141.4
(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 six months endedJune 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. 41 --------------------------------------------------------------------------------
A reconciliation of FCF to net cash provided by operating activities for the six
months ended
Six Months Ended
2020 2021
Net cash provided by operating activities $ 563.3 $ 593.0
Changes in operating assets and liabilities 10.6 (21.6)
Net cash provided (used) in investing activities (18.8) 197.8
Payments associated with settlement of equity-based incentive compensation
(14.7) (6.2)
Settlement gain, amortization of prior service credit and actuarial loss
(2.5) (4.5)
Changes in accrued capital items 56.6 7.4
Commodity-related adjustments(1) 6.9 (2.6)
Other 6.0 9.7
Free cash flow 607.4 773.0
Distributions paid (466.0) (458.4)
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$563.3 million and$593.0 million for the six months endedJune 30, 2020 and 2021, respectively. The$29.7 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 six months endedJune 30, 2020 was$18.8 million and net cash provided by investing activities for the six months endedJune 30, 2021 was$197.8 million . During the 2021 period, we used$67.4 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$280.3 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$59.5 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 six months endedJune 30, 2020 and 2021 was$619.9 million and$546.9 million , respectively. During the 2021 period, we paid distributions of$458.4 million to our unitholders and repurchased common units for$82.3 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$466.0 million to our unitholders and repurchased common units for$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 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 . 42 -------------------------------------------------------------------------------- The quarterly distribution amount related to second quarter 2021 earnings is$1.0275 per unit (to be paid in third quarter 2021). If we were to continue paying distributions at this level on the number of common units currently outstanding, total distributions of approximately$912 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 six months endedJune 30, 2021 , our maintenance capital spending was$24.7 million , including$0.8 million for discontinued operations. For 2021, we expect to spend approximately$85 million on maintenance capital. During the first six months of 2021, we spent$36.5 million for our expansion capital projects, including$0.3 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$75 million in 2021 and$15 million in 2022 to complete our current slate of expansion capital projects. In addition, we may expend capital to repurchase our common units or long-term debt. Our common unit repurchase program allows us to repurchase up to$750 million of common units through 2022 (see 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 changes in partners' capital). 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 June 30, 2021 and the fair value of open hedge and basis derivative
contracts at that date.
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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