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| MMP > SEC Filings for MMP > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
Introduction
We are a publicly traded limited partnership principally engaged in the transportation, storage and distribution of petroleum products. As of December 31, 2012, our three operating segments included:
• petroleum pipeline system, comprised of approximately 9,600 miles of pipeline and 49 terminals;
• petroleum terminals, which includes storage terminal facilities (consisting of six marine terminals located along coastal waterways and crude oil storage in Cushing, Oklahoma) and 27 inland terminals; and
• ammonia pipeline system, representing our 1,100-mile ammonia pipeline and six associated terminals.
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 our consolidated financial statements and related notes included in this Annual Report on Form 10-K for the year ended December 31, 2012.
Recent Developments
BridgeTex Pipeline Company, LLC. In November 2012, we formed BridgeTex Pipeline Company, LLC ("BridgeTex"), a joint venture with affiliates of Occidental Petroleum Corporation. BridgeTex was formed to construct and operate the BridgeTex pipeline, a 400-mile pipeline capable of transporting 300,000 barrels per day of Permian Basin crude oil from Colorado City, Texas for delivery to our East Houston, Texas terminal; a 50-mile pipeline between East Houston and Texas City, Texas; and approximately 2.6 million barrels of storage. We expect to spend approximately $600 million for our 50% ownership interest in BridgeTex. We are serving as construction manager and will serve as operator of BridgeTex upon its completion, which is expected in mid-2014.
Sale of Claim Against MF Global Inc. In October 2011, MF Global Holdings Ltd.,
the parent of MF Global Inc. ("MF
Global"), filed for bankruptcy protection under Chapter 11 of the U.S.
bankruptcy laws, and a trustee was appointed to oversee the liquidation of MF
Global under the Securities Investor Protection Act. At that time, MF Global
served as our sole clearing agent for New York Mercantile Exchange ("NYMEX")
futures contracts. We transferred our existing trading positions at MF Global to
a new clearing agent in November 2011. As of the date of transfer of our
account, MF Global owed us $29.4 million. We subsequently received $23.6 million
as partial payment of the amount owed to us. In December 2012, we sold our
remaining claim of $5.8 million to a third party for $5.4 million. The buyer of
the claim assumed the risk of ultimate collectability of the claim subject to
the accuracy of typical representations and warranties from us related to the
claim. We charged the $0.4 million loss we sustained from the sale of this
receivable to operating expense.
Debt Offering. In November 2012, we issued $250.0 million of 4.20% notes due December 1, 2042 in an underwritten public offering. The notes were issued for the discounted price of 99.3% of par. We have used or intend to use the net proceeds from this offering of approximately $245.8 million, after underwriting discounts and offering expenses, for general partnership purposes, including capital expenditures and investments in interest-bearing securities or accounts.
Cash Distribution. In January 2013, the board of directors of our general partner declared a quarterly cash distribution of $0.50 per unit for the period of October 1, 2012 through December 31, 2012. This quarterly cash distribution was paid on February 14, 2013 to unitholders of record on February 6, 2013. The total distributions paid on 226.7 million limited partner units outstanding was $113.3 million.
Pipeline Acquisition. On February 22, 2013, we announced an agreement to acquire approximately 800 miles of refined petroleum products pipeline from Plains All American Pipeline, L.P. for $190 million. Subject to regulatory approvals, we expect the acquisition to close during the second quarter of 2013. We expect to fund the acquisition with cash on hand and, if necessary, with borrowings under our revolving credit facility.
Overview
Our petroleum pipeline system and petroleum terminals generate the majority of our operating margin from the transportation and storage services we provide to our customers. The revenues generated from these businesses are significantly influenced by demand for refined petroleum products and crude oil. In addition, we generate operating margin from commodity-related activities. Operating expenses are principally fixed costs related to routine maintenance and system integrity as well as field and support personnel. Other costs, including power, fluctuate with volumes transported on our pipeline and stored in our terminals.
A prolonged period of high petroleum prices or a recessionary economic environment could lead to a reduction in demand and result in lower shipments on our pipeline system and reduced demand for our terminal services. Fluctuations in the prices of petroleum products impact the amount of cash our petroleum pipeline system generates from its blending and fractionation activities. In addition, increased maintenance regulations, higher power costs and higher interest rates could decrease the amount of cash we generate. See Item 1A-Risk Factors for other risk factors that could impact our results of operations, financial position and cash flows.
Petroleum Pipeline System. Our petroleum pipeline system is comprised of a common carrier pipeline that provides transportation, storage and distribution services for petroleum products in 14 states from Texas through the Midwest to Colorado, North Dakota, Minnesota, Wisconsin and Illinois. Through direct refinery connections and interconnections with other interstate pipelines, our petroleum pipeline system can access approximately 44% of U.S. refining capacity. In 2012, the petroleum pipeline system generated 73% of its revenues, excluding the sale of petroleum products, primarily through transportation tariffs for petroleum volumes shipped. These tariffs vary depending upon where the product originates, where ultimate delivery occurs and any applicable discounts. All interstate transportation rates and discounts are in published tariffs filed with the Federal Energy Regulatory Commission ("FERC"). The pipeline also earns revenues from non-tariff based activities, including leasing pipeline and storage tank capacity to shippers and by providing data services and product services such as ethanol and biodiesel unloading and loading, additive injection, terminalling, custom blending and laboratory testing.
Substantially all of the shipments on our pipeline system are for third parties, and we do not take title to these products. We do take title to products related to our petroleum products blending and fractionation activities and in connection with certain transactions involving the operation of our pipeline system and terminals.
During 2012, in conjunction with our Crane-to-Houston pipeline reversal project, we discontinued refined products transportation service on our Houston-to-El Paso pipeline section and shifted these volumes to a nearby pipeline section which we own. The associated linefill products we held title to on the Houston-to-El Paso pipeline were either sold or transferred to our other pipelines to fulfill product shortage positions on those systems. The $37.0 million decrease in the inventory balance between December 31, 2011 and 2012 was primarily attributable to these product sales and transfers. Although our petroleum products blending, fractionation and other commodity-related activities generate significant revenues from the sale of petroleum products and the associated gains/losses from the applicable associated derivative agreements, we believe the product margin from these activities, which takes into account the related product purchases, better represents its importance to our results of operations.
Petroleum Terminals. Our petroleum terminals segment is comprised of storage terminals and inland terminals, which store and distribute petroleum products throughout 13 states. Our storage terminals are comprised of six facilities that have marine access and are located near major refining hubs along the U.S. Gulf and East Coasts. We also have a crude oil terminal in Cushing, Oklahoma, one of the largest crude oil trading hubs in the U.S. These storage terminals principally serve refiners, marketers and traders. We earn revenues at our storage terminals primarily from storage and throughput fees. Our inland terminals are part of a distribution network located principally throughout the Southeastern U.S. These inland terminals are connected to large, third-party interstate pipelines and are utilized by retail suppliers, wholesalers and marketers to transfer gasoline and other petroleum products from these pipelines to trucks, railcars or barges for delivery to their final destination. We earn revenues at our inland terminals primarily from fees we charge based on the volumes of refined petroleum products distributed from these locations and from ancillary services such as additive injections and ethanol blending.
Ammonia Pipeline System. Our ammonia pipeline system transports and distributes ammonia from production facilities in Texas and Oklahoma to various distribution points in the Midwest for use as an agricultural fertilizer. We generate revenues principally from volume-based fees for the transportation of ammonia on our pipeline system.
Growth Projects
We remain focused on growth and have significantly increased our operations over the past several years through organic growth projects and acquisitions that expand or upgrade our existing facilities. Our current expansion projects are driven by:
• demand for storage because of volatility of petroleum products prices, which has provided significant opportunity for us to build tankage along our petroleum pipeline system and at our storage terminals, backed by long-term customer commitments; and
• demand for crude oil and condensate storage and transportation services, which has provided the opportunity for us to reverse and convert to crude oil service a significant portion of our Houston-to-El Paso pipeline segment (also known as the Longhorn pipeline), begin construction of 450 miles of crude oil pipeline and related infrastructure, in which we will hold a 50% ownership interest, and significantly expand our crude oil and condensate storage and transportation infrastructure in the Houston and Corpus Christi areas.
We spent $198.9 million and $364.7 million on acquisitions and growth projects during 2011 and 2012, respectively. Further, we currently expect to spend approximately $700.0 million in 2013 on projects now underway, with additional spending of approximately $290.0 million in 2014 to complete these projects. These expansion capital estimates exclude potential acquisitions or spending on more than $500.0 million of other potential growth projects in earlier stages of development.
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 and amortization expense and general and administrative ("G&A") costs, which management does not consider when evaluating the core profitability of our operations. 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; however, its components of product sales and product purchases are determined in accordance with GAAP.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2012
Variance
Year Ended December 31, Favorable (Unfavorable)
2011 2012 $ Change % Change
Financial Highlights ($ in millions,
except operating statistics)
Transportation and terminals revenues:
Petroleum pipeline system $ 637.8 $ 691.7 $ 53.9 8 %
Petroleum terminals 235.0 254.1 19.1 8 %
Ammonia pipeline system 23.6 27.7 4.1 17 %
Intersegment eliminations (3.0 ) (2.8 ) 0.2 7 %
Total transportation and terminals
revenues 893.4 970.7 77.3 9 %
Affiliate management fee revenues 0.8 2.0 1.2 150 %
Operating expenses:
Petroleum pipeline system 199.9 225.1 (25.2 ) (13 )%
Petroleum terminals 93.0 95.2 (2.2 ) (2 )%
Ammonia pipeline system 16.4 11.1 5.3 32 %
Intersegment eliminations (2.9 ) (2.9 ) - - %
Total operating expenses 306.4 328.5 (22.1 ) (7 )%
Product margin:
Product sales 854.5 799.4 (55.1 ) (6 )%
Product purchases 706.3 657.1 49.2 7 %
Product margin (a) 148.2 142.3 (5.9 ) (4 )%
Equity earnings 6.8 3.0 (3.8 ) (56 )%
Operating margin 742.8 789.5 46.7 6 %
Depreciation and amortization expense 121.2 128.0 (6.8 ) (6 )%
G&A expense 98.7 109.4 (10.7 ) (11 )%
Operating profit 522.9 552.1 29.2 6 %
Interest expense (net of interest income
and interest capitalized) 105.6 111.7 (6.1 ) (6 )%
Debt placement fee amortization 1.8 2.1 (0.3 ) (17 )%
Income before provision for income taxes 415.5 438.3 22.8 5 %
Provision for income taxes 1.9 2.6 (0.7 ) (37 )%
Net income $ 413.6 $ 435.7 $ 22.1 5 %
Operating Statistics
Petroleum pipeline system:
Transportation revenue per barrel
shipped $ 1.082 $ 1.086
Volume shipped (million barrels):(b)
Refined products:
Gasoline 208.9 223.7
Distillates 136.0 136.7
Aviation fuel 25.3 21.5
Liquefied petroleum gases 4.9 8.5
Crude oil 43.2 72.0
Total volume shipped 418.3 462.4
Petroleum terminals:
Storage terminal average utilization
(million barrels per month) 32.1 34.5
Inland terminal throughput (million
barrels) 115.6 116.2
Ammonia pipeline system:
Volume shipped (thousand tons) 727 770
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(a) Product margin does not include depreciation or amortization expense.
(b) Excludes capacity leases.
Transportation and terminals revenues increased by $77.3 million, resulting from:
• an increase in petroleum pipeline system revenues of $53.9 million resulting from:
? an 11% increase in transportation volumes, mainly due to increases in
crude oil and gasoline shipments. Crude oil shipments increased 67%
resulting from deliveries to additional locations that have been
connected to our pipeline system and increased deliveries to existing
customers. Gasoline volumes increased 7% attributable primarily to
higher volumes on our South Texas pipeline system due to increased
demand and new incentive tariffs put in place to attract volumes;
? a slight increase in the average per-barrel tariff rate, going from
$1.082 to $1.086, as the tariff rate increases we implemented in July
2011 and 2012 were mostly offset by more crude oil and South Texas
movements, which ship at a lower rate than our other shipments; and
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? higher leased storage revenue due to new tanks added to our system during 2011 and 2012.
• an increase in petroleum terminals revenues of $19.1 million primarily due to leasing tanks constructed throughout 2011, including new crude oil storage at Cushing, Oklahoma, and higher rates at our marine terminals; and
• an increase in ammonia pipeline system revenues of $4.1 million primarily because of higher average rates resulting from our mid-year tariff increases and more volumes transported as 2011 shipments were negatively impacted by certain hydrostatic testing completed that year.
Operating expenses increased $22.1 million, resulting from:
• an increase in petroleum pipeline system expenses of $25.2 million primarily due to lower product overages (which reduce operating expenses), additional asset integrity work, an increase in property taxes, higher personnel costs and higher losses on various asset retirements and replacements, which were partially offset by impairment charges in 2011 for a system terminal we closed and a potential air emission fee accrual in 2011;
• an increase in petroleum terminals expenses of $2.2 million primarily due to higher losses on various asset retirements and replacements, higher personnel costs and higher operating taxes, partially offset by an accrual recognized in 2011 for potential air emission fees with no corresponding charge in the current period; and
• a decrease in ammonia pipeline system expenses of $5.3 million primarily due to lower asset integrity costs as 2011 included expenses for certain hydrostatic testing conducted during that year.
Product sales revenues primarily resulted from our petroleum products blending
activities, terminal product gains and transmix fractionation. For 2011 and a
portion of 2012, product sales revenues also resulted from product marketing and
linefill management associated with our Houston-to-El Paso pipeline section. We
utilize NYMEX contracts to hedge against changes in the price of petroleum
products we expect to sell in the future. The period change in the
mark-to-market value of these contracts that are not designated as hedges for
accounting purposes, the effective portion of the change in value of matured
NYMEX contracts that qualified for hedge accounting treatment and any
ineffectiveness of NYMEX contracts that qualify for hedge accounting treatment
are also included in product sales revenues. We use butane futures agreements to
hedge against changes in the price of butane we expect to purchase in future
periods. The period change in the mark-to-market value of these futures
agreements, which were not designated as hedges, are included as adjustments to
product purchases. Product margin decreased $5.9 million between periods
primarily due to unrealized losses on NYMEX contracts in 2012 (compared to
unrealized gains in 2011) resulting from increasing product prices in the
current year, offset by increased volumes and profits from our petroleum
products blending activities primarily as a result of expanding our blending
operations, particularly at our East Houston facility. See Other Items-Commodity
Derivative Agreements-Product Sales Revenues below for more information about
our NYMEX contracts.
Equity earnings decreased $3.8 million from 2011 primarily due to an anticipated
settlement of a tariff claim against Osage Pipe Line Company, LLC ("Osage") (see
Note 16-Commitments and Contingencies-Osage Complaint in the Notes to
Consolidated Financial Statements for more information regarding this claim).
Depreciation and amortization expense increased $6.8 million in 2012 primarily
due to expansion capital projects placed into service over the past two years.
G&A expense increased $10.7 million between periods primarily due to higher
personnel costs and an increase in long-term equity-based incentive compensation
costs resulting from above-target payout estimates and a higher price for our
limited partner units.
Interest expense, net of interest income and interest capitalized, increased
$6.1 million in 2012. Our average outstanding debt increased to $2.2 billion for
2012 from $2.1 billion for 2011 primarily due to borrowings for expansion
capital expenditures, including $250.0 million of 4.25% senior notes issued in
August 2011 and $250.0 million of 4.20% senior notes issued in November 2012.
Our weighted-average interest rate of 5.3% at December 31, 2012 was essentially
unchanged from our weighted-average interest rate at December 31, 2011.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2011
Variance
Year Ended December 31, Favorable (Unfavorable)
2010 2011 $ Change % Change
Financial Highlights ($ in millions,
except operating statistics)
Transportation and terminals revenues:
Petroleum pipeline system $ 584.0 $ 637.8 $ 53.8 9 %
Petroleum terminals 196.7 235.0 38.3 19 %
Ammonia pipeline system 14.9 23.6 8.7 58 %
Intersegment eliminations (2.0 ) (3.0 ) (1.0 ) (50 )%
Total transportation and terminals
revenues 793.6 893.4 99.8 13 %
Affiliate management fee revenues 0.8 0.8 - - %
Operating expenses:
Petroleum pipeline system 191.0 199.9 (8.9 ) (5 )%
Petroleum terminals 75.2 93.0 (17.8 ) (24 )%
Ammonia pipeline system 19.1 16.4 2.7 14 %
Intersegment eliminations (3.1 ) (2.9 ) (0.2 ) (6 )%
Total operating expenses 282.2 306.4 (24.2 ) (9 )%
Product margin:
Product sales 763.1 854.5 91.4 12 %
Product purchases 668.6 706.3 (37.7 ) (6 )%
Product margin (a) 94.5 148.2 53.7 57 %
Equity earnings 5.7 6.8 1.1 19 %
Operating margin 612.4 742.8 130.4 21 %
Depreciation and amortization expense 108.7 121.2 (12.5 ) (11 )%
G&A expense 95.3 98.7 (3.4 ) (4 )%
Operating profit 408.4 522.9 114.5 28 %
Interest expense (net of interest income
and interest capitalized) 93.3 105.6 (12.3 ) (13 )%
Debt placement fee amortization 1.4 1.8 (0.4 ) (29 )%
Other (income) expense 0.7 - 0.7 n/a
Income before provision for income taxes 313.0 415.5 102.5 33 %
Provision for income taxes 1.4 1.9 (0.5 ) (36 )%
Net income $ 311.6 $ 413.6 $ 102.0 33 %
Operating Statistics
Petroleum pipeline system:
Transportation revenue per barrel
shipped $ 1.160 $ 1.082
Volume shipped (million barrels):(b)
Refined products:
Gasoline 194.3 208.9
Distillates 122.9 136.0
Aviation fuel 22.6 25.3
Liquefied petroleum gases 5.0 4.9
Crude oil 14.7 43.2
Total volume shipped 359.5 418.3
Petroleum terminals:
Storage terminal average utilization
(million barrels per month) 25.8 32.1
Inland terminal throughput (million 114.7 115.6
barrels)
Ammonia pipeline system:
Volume shipped (thousand tons) 462 727
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(a) Product margin does not include depreciation or amortization expense.
(b) Excludes capacity leases.
Transportation and terminals revenues increased by $99.8 million, resulting from:
• an increase in petroleum pipeline system revenues of $53.8 million. Revenues from the South Texas pipelines we acquired in September 2010 contributed $16.8 million of this increase. Otherwise, revenues increased $37.0 million primarily attributable to:
? a 4% increase in the average per-barrel tariff rate, going from $1.276
to $1.321, principally reflecting the 7% tariff rate increase we
implemented on July 1, 2011;
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? a 2% increase in transportation volumes driven primarily by higher demand for diesel fuel; and
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