Magellan Midstream Reports Third-Quarter 2017 Financial Results
TULSA, Okla., Nov. 2, 2017 /PRNewswire/ -- Magellan Midstream Partners, L.P. (NYSE: MMP) today reported net income of $198.5 million for third quarter 2017 compared to $194.6 million for third quarter 2016. The 2017 results include an $18.5 million gain related to the sale of an inactive terminal along the partnership's refined products pipeline system.
Distributable cash flow (DCF), a non-generally accepted accounting principles (non-GAAP) financial measure that represents the amount of cash generated during the period that is available to pay distributions, was $235.2 million for third quarter 2017 compared to $243.9 million for third quarter 2016.
Diluted net income per limited partner unit was 87 cents in third quarter 2017 and 85 cents in third quarter 2016. Diluted net income per unit excluding mark-to-market (MTM) commodity-related pricing adjustments, a non-GAAP financial measure, was 97 cents for third quarter 2017, or 89 cents excluding the 8-cent favorable impact of the gain on asset sale. These results were similar to the 90-cent guidance provided by management in early August as better-than-expected financial results from the partnership's operations mainly overcame the 4-cent negative impact of Hurricane Harvey.
During the third quarter of 2017, Hurricane Harvey hit the Texas Gulf Coast, disrupting the partnership's operations located in the Houston and Corpus Christi areas for a limited time. No significant asset damage occurred, and the impacted facilities are now operational. Magellan currently estimates the total negative DCF impact of Hurricane Harvey to be approximately $20 million, net of expected insurance reimbursements. Of the total, approximately $10 million reduced third-quarter DCF ($8 million of which negatively impacted third-quarter net income) with the remainder associated with clean-up and repair activities to be completed in future periods.
"Magellan generated financial results during the third quarter of 2017 that were consistent with our expectations despite Hurricane Harvey, which negatively impacted the operations of each of our business segments for a period of time," said Michael Mears, chief executive officer. "Magellan's employees stepped up to the challenge and worked together as a true enterprise-wide team to safely resume operations as soon as possible while doing our best to limit the impact to our customers and the markets we serve. Further, the third quarter of 2017 was also notable because we launched three new large-scale construction projects for fee-based refined products and crude oil pipeline and storage assets that increased our expansion capital spending by $600 million, helping to solidify Magellan's future growth."
An analysis by segment comparing third quarter 2017 to third quarter 2016 is provided below based on operating margin, a non-GAAP financial measure that reflects operating profit before general and administrative (G&A) expense and depreciation and amortization:
Refined products. Refined products operating margin was $173.8 million, a decrease of $10.0 million. Transportation and terminals revenue increased $21.7 million between periods primarily due to operating results from the partnership's Little Rock pipeline that commenced commercial operations in July 2016 as well as 4% higher shipments on other segments of the partnership's pipeline system driven by stronger demand for refined products in large part due to higher distillate demand in crude oil production regions. Additionally, the current period benefited from a one-time customer payment associated with a dispute settlement and higher storage and other ancillary service fees along Magellan's refined products pipeline system.
Operating expenses increased $23.1 million primarily due to less favorable product overages (which reduce operating expenses), higher asset integrity spending related to the timing of maintenance work and higher environmental accruals for historical remediation sites.
Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) decreased $8.3 million between periods due in part to the recognition of more unrealized losses on open futures contracts used to economically hedge the partnership's commodity-related activities. Details of these MTM commodity-related and other inventory adjustments can be found on the Distributable Cash Flow Reconciliation to Net Income schedule that accompanies this news release. The partnership's cash product margin, which reflects only transactions that settled during the quarter, also declined between periods due to higher butane costs, resulting in compressed butane blending margins.
Crude oil. Crude oil operating margin was $115.8 million, an increase of $17.0 million and a quarterly record for this segment. Transportation and terminals revenue increased $16.2 million primarily due to contributions from the partnership's recently-constructed condensate splitter in Corpus Christi that began commercial operations in June 2017. Magellan also benefited from higher volumes on its Longhorn pipeline as the 2016 period was negatively impacted by shippers utilizing historical credits (earned by shipping in excess of their minimum commitments in the past) that were set to expire in the third quarter of 2016.
Earnings of non-controlled entities increased $13.1 million primarily due to higher earnings from BridgeTex Pipeline Company, LLC, which is owned 50% by Magellan. The higher BridgeTex earnings were mainly attributable to incremental spot shipments in the current period and additional volume from BridgeTex's new Eaglebine origin that began service in second quarter 2017. The partnership also benefited from higher earnings from Saddlehorn Pipeline Company, LLC, which is owned 40% by Magellan and began operations in Sept. 2016.
Operating expenses increased $6.6 million primarily due to higher costs associated with the partnership's new condensate splitter that began commercial operations in June 2017 and higher power costs for pipeline movements. Product margin decreased $4.9 million due to transportation charges Magellan paid to BridgeTex in connection with crude oil marketing activities in the current period. Overall, Magellan benefits from this crude oil marketing activity as it receives earnings contributions from BridgeTex as a result of higher volumes as described above.
Marine storage. Marine storage operating margin was $25.9 million, a decrease of $7.4 million. Revenue decreased $3.7 million primarily due to the impact of Hurricane Harvey, which resulted in less ancillary fees reflecting decreased customer activities and lower storage fees due to delayed maintenance projects and some tank damage in third quarter 2017. Operating expenses increased slightly due to higher environmental remediation accruals and clean-up costs related to Hurricane Harvey, and product margin declined due to the sale of less product overages inventory in the current period.
Other items. Depreciation and amortization increased due to recent expansion capital expenditures, and G&A expense increased because of higher prospecting costs for potential expansion projects. Other expense was unfavorable between periods primarily due to the 2016 period benefiting from a break-up fee related to a potential acquisition. As previously mentioned, the 2017 results also include an $18.5 million gain associated with the sale of an inactive terminal along the partnership's refined products pipeline system.
Net interest expense increased as a result of additional borrowings to finance expansion capital spending and lower interest capitalized for construction projects in the current period. As of Sept. 30, 2017, the partnership had $4.3 billion of debt outstanding, including $269.0 million outstanding under its commercial paper program. During Oct. 2017, Magellan issued $500 million of 4.2% notes due 2047 to repay borrowings outstanding under its commercial paper program and to fund future expansion capital needs.
Expansion capital projects
Magellan remains focused on expansion opportunities and continues to identify new opportunities for future growth. Based on the progress of expansion projects already underway, the partnership expects to spend $600 million in 2017, $800 million in 2018 and $350 million in 2019 to complete its current slate of construction projects. These spending estimates include the partnership's recently announced projects to expand its Pasadena, Texas marine storage terminal, to build a crude oil and condensate pipeline from the Delaware Basin to the origin of the Longhorn pipeline in Crane, Texas and to expand Magellan's refined products pipeline system in Texas. Further, these spending estimates include the construction of an incremental 1.5 million barrels of crude oil storage in Cushing, Oklahoma and Corpus Christi on a combined basis, which is supported by customer commitments.
The Cheyenne extension of the Saddlehorn pipeline commenced operations in early October, and the new connection of Magellan's Little Rock pipeline segment to a third-party pipeline is now complete, providing customers the option to ultimately transport refined products to the greater Memphis, Tennessee market.
Magellan continues to make significant progress on its other construction projects. The new 24-inch diameter crude oil pipeline being constructed from the partnership's East Houston terminal to Holland Avenue is now expected to be operational in early 2018 to help facilitate incremental crude oil shipments within the Houston and Texas City region. The expansion of the Seabrook Logistics joint venture, which includes the addition of 1.7 million barrels of storage and connectivity to Magellan's Houston crude oil distribution system, remains on target for a mid-2018 start-up.
Magellan also continues to evaluate well in excess of $500 million of potential organic growth projects in earlier stages of development as well as acquisition opportunities, all of which have been excluded from the partnership's spending estimates at this time. Active discussions with potential customers continue to further develop the partnership's new Pasadena marine terminal, to construct a crude oil and condensate pipeline from the Permian Basin to Corpus Christi and to develop other infrastructure investments in West Texas, among many other potential opportunities under consideration.
Financial guidance for 2017
Management reaffirms its annual DCF guidance of $1.02 billion for 2017, representing a record year for Magellan and 1.25 times the amount needed to pay projected cash distributions for 2017. Management remains committed to its goal of increasing annual cash distributions by 8% for both 2017 and 2018 while maintaining distribution coverage of 1.2 times each year.
Including actual results so far this year, net income per limited partner unit is estimated to be $3.92 for 2017, which results in fourth-quarter guidance of $1.15. Guidance excludes future MTM adjustments on the partnership's commodity-related activities.
Consistent with its historical approach, management plans to provide more specific details related to 2018 guidance early next year in conjunction with reporting year-end 2017 financial results.
Earnings call details
An analyst call with management to discuss third-quarter financial results, outlook for the remainder of 2017 and the status of significant expansion projects is scheduled today at 1:30 p.m. Eastern. To join the conference call, dial (866) 564-2842 and provide code 2203241. Investors also may listen to the call via the partnership's website at www.magellanlp.com/investors/webcasts.aspx.
Audio replays of the conference call will be available from 4:30 p.m. Eastern today through midnight on Nov. 8. To access the replay, dial (888) 203-1112 and provide code 2203241. The replay also will be available at www.magellanlp.com.
Non-GAAP financial measures
Management believes that investors benefit from having access to the same financial measures utilized by the partnership. As a result, this news release and supporting schedules include the non-GAAP financial measures of operating margin, product margin, adjusted EBITDA, DCF and net income per unit excluding MTM commodity-related pricing adjustments and the gain associated with the asset sale, which are important performance measures used by management.
Operating margin reflects operating profit before G&A expense and depreciation and amortization. This measure forms the basis of the partnership's internal financial reporting and is used by management to evaluate the economic performance of the partnership's operations.
Product margin, which is calculated as product sales revenue less cost of product sales, is used by management to evaluate the profitability of the partnership's commodity-related activities.
Adjusted EBITDA is an important measure utilized by management and the investment community to assess the financial results of an entity.
DCF is important in determining the amount of cash generated from the partnership's operations that is available for distribution to its unitholders. Management uses this performance measure as a basis for recommending to the board of directors the amount of cash distributions to be paid each period and for determining the payouts under the partnership's equity-based incentive plan.
Reconciliations of operating margin to operating profit and adjusted EBITDA and DCF to net income accompany this news release.
The partnership uses exchange-traded futures contracts to hedge against price changes of petroleum products associated with its commodity-related activities. Most of these futures contracts do not qualify for hedge accounting treatment. However, because these futures contracts are generally effective at hedging price changes, management believes the partnership's profitability should be evaluated excluding the unrealized gains and losses associated with petroleum products that will be sold in future periods. Further, because the financial guidance provided by management excludes future MTM commodity-related pricing adjustments, a reconciliation of actual results to those excluding these adjustments is provided for comparability to previous financial guidance.
Because the non-GAAP measures presented in this news release include adjustments specific to the partnership, they may not be comparable to similarly-titled measures of other companies.
About Magellan Midstream Partners, L.P.
Magellan Midstream Partners, L.P. (NYSE: MMP) is a publicly traded partnership that primarily transports, stores and distributes refined petroleum products and crude oil. The partnership owns the longest refined petroleum products pipeline system in the country, with access to nearly 50% of the nation's refining capacity, and can store approximately 100 million barrels of petroleum products such as gasoline, diesel fuel and crude oil. More information is available at www.magellanlp.com.
Forward-Looking Statement Disclaimer
Portions of this document constitute forward-looking statements as defined by federal law. Forward-looking statements can be identified by words such as: plan, goal, guidance, believe, estimate, expect, projected, future, may, will and similar references to future periods. Although management of Magellan Midstream Partners, L.P. believes such statements are based on reasonable assumptions, actual outcomes may be materially different. Among the key risk factors that may have a direct impact on the partnership's results of operations and financial condition are: (1) its ability to identify growth projects and to complete identified projects on time and at expected costs; (2) price fluctuations and changes in demand for refined petroleum products, crude oil and natural gas liquids, or changes in demand for transportation, storage, blending or processing of those commodities through its existing or planned facilities; (3) changes in the partnership's tariff rates or other terms imposed by state or federal regulatory agencies; (4) shut-downs or cutbacks at refineries or other businesses that use or supply the partnership's services; (5) changes in the throughput or interruption in service on pipelines or other facilities owned and operated by third parties and connected to the partnership's terminals, pipelines or other facilities; (6) the occurrence of operational hazards or unforeseen interruptions; (7) the treatment of the partnership as a corporation for federal or state income tax purposes or the partnership becoming subject to significant forms of other taxation; (8) an increase in the competition the partnership's operations encounter; (9) disruption in the debt and equity markets that negatively impacts the partnership's ability to finance its capital spending; and (10) failure of customers to meet or continue contractual obligations to the partnership. Additional information about issues that could lead to material changes in performance is contained in the partnership's filings with the Securities and Exchange Commission, including the partnership's Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2016 and subsequent reports on Forms 8-K and 10-Q. You are urged to carefully review and consider the cautionary statements and other disclosures made in those filings, especially under the heading "Risk Factors." Forward-looking statements made by the partnership in this release are based only on information currently known, and the partnership undertakes no obligation to revise its forward-looking statements to reflect events or circumstances learned of or occurring after today's date.
Contact: Paula Farrell
(918) 574-7650
paula.farrell@magellanlp.com
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2016 2017 2016 2017
---- ---- ---- ----
Transportation and
terminals revenue $413,433 $446,935 $1,175,748 $1,272,845
Product sales revenue 133,356 121,010 403,607 548,634
Affiliate management fee
revenue 4,993 4,903 11,140 12,883
----- ----- ------ ------
Total revenue 551,782 572,848 1,590,495 1,834,362
Costs and expenses:
Operating 134,915 165,368 392,011 442,254
Cost of product sales 118,242 121,819 327,530 440,670
Depreciation and
amortization 47,081 49,909 134,137 146,103
General and
administrative 35,584 37,202 110,814 120,876
------ ------ ------- -------
Total costs and expenses 335,822 374,298 964,492 1,149,903
Earnings of non-
controlled entities 18,576 31,151 51,543 78,173
------ ------ ------ ------
Operating profit 234,536 229,701 677,546 762,632
Interest expense 50,163 51,895 142,573 154,653
Interest income (302) (240) (1,067) (788)
Interest capitalized (7,877) (3,424) (21,143) (10,804)
Gain on sale of asset - (18,505) - (18,505)
Gain on exchange of
interest in non-
controlled entity - - (28,144) -
Other (income) expense (2,737) 549 (6,447) 3,762
------ --- ------ -----
Income before provision
for income taxes 195,289 199,426 591,774 634,314
Provision for income
taxes 738 926 2,294 2,678
--- ---
Net income $194,551 $198,500 $589,480 $631,636
======== ======== ======== ========
Basic net income per
limited partner unit $0.85 $0.87 $2.59 $2.77
===== ===== ===== =====
Diluted net income per
limited partner unit $0.85 $0.87 $2.59 $2.77
===== ===== ===== =====
Weighted average number
of limited partner units
outstanding used for
basic net income per
unit calculation 227,960 228,199 227,913 228,167
======= ======= ======= =======
Weighted average number
of limited partner units
outstanding used for
diluted net income per
unit calculation 227,999 228,260 227,947 228,222
======= ======= ======= =======
MAGELLAN MIDSTREAM PARTNERS, L.P.
OPERATING STATISTICS
Three Months Ended Nine Months Ended
September 30, September 30,
2016 2017 2016 2017
---- ---- ---- ----
Refined products:
Transportation revenue
per barrel shipped $1.503 $1.521 $1.451 $1.489
Volume shipped
(million barrels):
Gasoline 72.7 75.8 204.9 218.7
Distillates 37.3 41.0 110.0 119.6
Aviation fuel 7.2 6.7 19.6 20.2
Liquefied petroleum
gases 4.1 3.9 9.9 9.6
--- --- --- ---
Total volume shipped 121.3 127.4 344.4 368.1
Crude oil:
Magellan 100%-owned
assets:
Transportation revenue
per barrel shipped $1.189 $1.332 $1.325 $1.412
Volume shipped
(million barrels) 50.7 48.4 139.5 137.0
Crude oil terminal
average utilization
(million barrels per
month) 14.8 14.9 14.7 15.5
Select joint venture
pipelines:
BridgeTex -volume
shipped (million
barrels)(1) 20.6 25.7 58.7 66.4
Saddlehorn -volume
shipped (million
barrels)(2) 1.2 4.4 1.2 12.1
Marine storage:
Marine terminal
average utilization
(million barrels per
month) 24.3 22.5 23.6 23.4
(1) These volumes reflect the total shipments
for the BridgeTex pipeline, which is
owned 50% by Magellan.
(2) These volumes reflect the total shipments
for the Saddlehorn pipeline, which is
owned 40% by Magellan and began
operations in September 2016.
MAGELLAN MIDSTREAM PARTNERS, L.P.
OPERATING MARGIN RECONCILIATION TO OPERATING PROFIT
(Unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2016 2017 2016 2017
---- ---- ---- ----
Refined products:
Transportation and terminals
revenue $267,339 $289,030 $739,931 $808,818
Affiliate management fee revenue 218 353 422 1,035
Losses of non-controlled
entities (272) (700) (352) (167)
Less: Operating expenses 95,535 118,665 279,822 312,911
------
Transportation and terminals
margin 171,750 170,018 460,179 496,775
Product sales revenue(1) 105,834 107,175 372,061 509,068
Less: Cost of product sales(1) 93,761 103,391 300,009 396,292
Product margin 12,073 3,784 72,052 112,776
------ ----- ------ -------
Operating margin $183,823 $173,802 $532,231 $609,551
======== ======== ======== ========
Crude oil:
Transportation and terminals
revenue $100,113 $116,305 $303,181 $329,813
Affiliate management fee revenue 4,416 3,703 9,686 10,311
Earnings of non-controlled
entities 18,180 31,244 49,870 76,388
Less: Operating expenses 24,547 31,163 66,228 89,991
------ ------
Transportation and terminals
margin 98,162 120,089 296,509 326,521
Product sales revenue(1) 24,750 12,370 26,465 34,876
Less: Cost of product sales(1) 24,108 16,630 26,469 37,814
Product margin 642 (4,260) (4) (2,938)
--- ------ --- ------
Operating margin $98,804 $115,829 $296,505 $323,583
======= ======== ======== ========
Marine storage:
Transportation and terminals
revenue $46,182 $42,501 $132,837 $136,702
Affiliate management fee revenue 359 847 1,032 1,537
Earnings of non-controlled
entities 668 607 2,025 1,952
Less: Operating expenses 16,325 17,723 49,808 45,753
------ ------ ------ ------
Transportation and terminals
margin 30,884 26,232 86,086 94,438
Product sales revenue(1) 2,772 1,465 5,081 4,690
Less: Cost of product sales(1) 373 1,798 1,052 6,564
--- ----- ----- -----
Product margin 2,399 (333) 4,029 (1,874)
Operating margin $33,283 $25,899 $90,115 $92,564
======= ======= ======= =======
Segment operating margin $315,910 $315,530 $918,851 $1,025,698
Add: Allocated corporate
depreciation costs 1,291 1,282 3,646 3,913
----- ----- ----- -----
Total operating margin 317,201 316,812 922,497 1,029,611
Less:
Depreciation and amortization
expense 47,081 49,909 134,137 146,103
General and administrative
expense 35,584 37,202 110,814 120,876
------ ------ ------- -------
Total operating profit $234,536 $229,701 $677,546 $762,632
======== ======== ======== ========
Note: Amounts may not sum to
figures shown on the
consolidated statement of income
due to intersegment eliminations
and allocated corporate
depreciation costs.
(1) Includes gains and losses on
related exchange-traded futures
contracts.
MAGELLAN MIDSTREAM PARTNERS, L.P.
RECONCILIATION OF NET INCOME AND NET INCOME PER LIMITED PARTNER UNIT
EXCLUDING COMMODITY-RELATED ADJUSTMENTS TO GAAP MEASURES
(Unaudited, in thousands except per unit amounts)
Three Months Ended
September 30, 2017
Net Income Basic Net Income Diluted Net
Per Limited Income Per
Partner Unit Limited Partner
Unit
----
As reported $198,500 $0.87 $0.87
Unrealized derivative
(gains) losses associated
with future physical
product sales 16,797 0.07 0.07
Inventory valuation
adjustments associated
with future physical
product transactions 6,728 0.03 0.03
----- ----
Excluding commodity-
related adjustments* $222,025 $0.97 $0.97
======== ===== =====
Weighted average number of
limited partner units
outstanding used for
basic net income per unit
calculation 228,199
=======
Weighted average number of
limited partner units
outstanding used for
diluted net income per
unit calculation 228,260
=======
* Please see Distributable Cash
Flow Reconciliation to Net Income
for further descriptions of
commodity-related adjustments.
MAGELLAN MIDSTREAM PARTNERS, L.P.
DISTRIBUTABLE CASH FLOW RECONCILIATION TO NET INCOME
(Unaudited, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30, 2017
2016 2017 2016 2017 Guidance
---- ---- ---- ---- --------
Net income $194,551 $198,500 $589,480 $631,636 $895,000
Interest expense, net 41,984 48,231 120,363 143,061 194,000
Depreciation and
amortization 47,081 49,909 134,137 146,103 198,000
Equity-based incentive
compensation(1) 4,677 3,466 360 308 4,000
Loss on sale and retirement
of assets 2,134 2,250 5,397 7,581 12,000
Gain on sale of asset(2) - (18,505) - (18,505) (18,000)
Gain on exchange of
interest in non-
controlled entity(3) - - (28,144) - -
Commodity-related adjustments:
Derivative (gains) losses
recognized in the period
associated with future
product transactions(5) 12,272 16,797 10,071 13,518
Derivative gains (losses)
recognized in previous
periods associated with
product sales completed in
the period(5) 5,871 4,033 38,642 (25,493)
Inventory valuation
adjustments(6) (1,083) (875) (2,798) 4,048
------ ---- ------ -----
Total commodity-related
adjustments 17,060 19,955 45,915 (7,927) (13,000)
Cash distributions received
from non-controlled
entities in excess of
earnings 2,948 8,635 3,003 19,519 30,000
Other(4) 1,315 849 3,891 3,749 4,000
----- --- ----- ----- -----
Adjusted EBITDA 311,750 313,290 874,402 925,525 1,306,000
Interest expense, net,
excluding debt issuance
cost amortization (41,171) (47,403) (118,029) (140,579) (191,000)
Maintenance capital(7) (26,657) (30,737) (86,103) (71,832) (95,000)
Distributable cash flow $243,922 $235,150 $670,270 $713,114 $1,020,000
======== ======== ======== ======== ==========
(1) Because the partnership intends to
satisfy vesting of units under its
equity-based incentive
compensation plan with the
issuance of limited partner units,
expenses related to this plan
generally are deemed non-cash and
added back for DCF purposes.
Total equity-based incentive
compensation expense for the nine
months ended September 30, 2016
and 2017 was $14.7 million and
$14.2 million, respectively.
However, the figures above include
adjustments of $14.4 million and
$13.9 million in 2016 and 2017,
respectively, for cash payments
associated with its equity-based
incentive compensation plan, which
primarily include tax
withholdings.
(2) In September 2017, the partnership
recognized an $18.5 million gain
in connection with the sale of an
inactive terminal along the
partnership's refined products
pipeline system, which has been
deducted from the calculation of
DCF because it is not related to
the partnership's ongoing
operations.
(3) In February 2016, the partnership
transferred its 50% membership
interest in Osage Pipe Line
Company, LLC ("Osage") to an
affiliate of HollyFrontier
Corporation ("HFC"). In
conjunction with this transaction,
the partnership entered into
several commercial agreements with
affiliates of HFC, which were
recorded as intangible assets and
other receivables in its
consolidated balance sheets. The
partnership recorded a $28.1
million non-cash gain in relation
to this transaction.
(4) In conjunction with the February
2016 Osage transaction, HFC agreed
to make certain payments to the
partnership until HFC completes a
connection to the partnership's El
Paso terminal. These payments
replace distributions the
partnership would have received
had the Osage transaction not
occurred and are, therefore,
included in the partnership's
calculation of DCF.
(5) Certain derivatives the partnership
uses as economic hedges have not
been designated as hedges for
accounting purposes and the mark-
to-market changes of these
derivatives are recognized
currently in earnings. In
addition, the partnership has
designated certain derivatives
used to hedge its crude oil tank
bottoms as fair value hedges, and
the change in the differential
between the current spot price and
forward price on these hedges is
recognized currently in earnings.
The partnership excludes the net
impact of both of these
adjustments from its determination
of DCF until the hedged products
are physically sold. In the
period in which these products are
physically sold, the net impact of
the associated hedges is included
in the partnership's determination
of DCF.
(6) The partnership adjusts the amount
of lower-of-cost-or-market
adjustments related to inventory
and firm purchase commitments and
valuations of short positions
recognized each period as these
are non-cash items. In subsequent
periods when the partnership
physically sells or purchases the
related products, it adjusts DCF
for the valuation adjustments
previously recognized.
(7) Maintenance capital expenditure
projects maintain the
partnership's existing assets and
do not generate incremental DCF
(i.e. incremental returns to the
partnership's unitholders). For
this reason, the partnership
deducts maintenance capital
expenditures to determine DCF.
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SOURCE Magellan Midstream Partners, L.P.
