The decrease in current year net income was driven by reduced profits from the partnership’s commodity-related activities due to mark-to-market (MTM) pricing adjustments for related hedging positions, partially offset by higher contributions from Magellan’s core fee-based transportation and terminal activities.

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 $243.9 million for third quarter 2016 compared to $230.0 million for third quarter 2015.

Diluted net income per limited partner unit was 85 cents in third quarter 2016 and $1.10 in third quarter 2015. Diluted net income per unit excluding MTM commodity-related pricing adjustments, a non-GAAP financial measure, of 91 cents for third quarter 2016 was higher than the 80-cent guidance provided by management in early August primarily due to stronger-than-expected crude oil transportation volumes and higher product overage values.  

“Magellan continues to deliver solid financial results while maintaining our focus on developing opportunities to grow our business in a disciplined manner,” said Michael Mears, chief executive officer. “During the third quarter of 2016, we successfully started operation of the Little Rock and Saddlehorn pipelines, representing key infrastructure projects to deliver refined petroleum products and crude oil to important demand centers.”

An analysis by segment comparing third quarter 2016 to third quarter 2015 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 $183.6 million, a decrease of $58.0 million primarily related to the impact of MTM adjustments for New York Mercantile Exchange (NYMEX) positions used to hedge the partnership’s commodity-related activities. Transportation and terminals revenue increased $3.2 million between periods primarily due to higher average tariffs from the partnership’s mid-2016 tariff adjustment, which resulted in a 2% average increase over all the partnership’s markets. Shipments decreased slightly compared to the previous year due to refinery turnarounds that favorably impacted demand on the partnership’s system during third quarter 2015, partially offset by volumes from recent growth projects, including the Little Rock pipeline that commenced commercial operations in July 2016.

Operating expenses decreased $13.2 million primarily due to lower integrity spending for tank maintenance in the current period related to timing of project work, reduced environmental accruals for historical remediation sites and more favorable product overages in the current period (which reduce operating expenses).

Product margin (a non-GAAP measure defined as product sales revenue less cost of product sales) decreased $74.4 million between periods due to unrealized losses recognized in third quarter 2016 on NYMEX contracts used to economically hedge the partnership’s commodity-related activities compared to unrealized gains during the third quarter of 2015. 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, was relatively flat between periods.

Crude oil

Crude oil operating margin was $98.7 million, an increase of $4.1 million. Transportation and terminals revenue decreased slightly primarily due to lower pipeline volumes, partially offset by new leased storage contracts at the partnership’s East Houston, Texas terminal. Shipments declined on the Longhorn pipeline as customers utilized credits set to expire during third quarter 2016 that had been earned by moving volume in excess of minimum commitments in the past. Affiliate management fee revenue increased primarily due to a one-time start-up fee associated with the Saddlehorn pipeline.

Earnings of non-controlled entities increased $3.3 million due to contributions from Saddlehorn Pipeline Company, LLC, which is owned 40% by Magellan and began operations in Sept. 2016, and higher shipments on the pipeline owned by BridgeTex Pipeline Company, LLC, which is owned 50% by Magellan, as customers moved additional volume to BridgeTex due to operational issues on a competing pipeline. Operating expenses were essentially unchanged between periods as lower power costs were offset by expenses associated with incremental headcount to support the crude segment.

Marine storage

Marine storage operating margin was $33.2 million, an increase of $1.0 million and a quarterly record for this segment. Revenue increased slightly primarily due to higher average rates from contract renewals and escalations in the current period. Operating expenses increased due to the timing of maintenance work, and product margin grew from the sale of incremental product.

Other items

Depreciation and amortization increased due to recent expansion capital expenditures and impairment of an inactive refined products pipeline terminal, whereas G&A expense decreased primarily due to lower payout estimates for the partnership’s annual bonus accrual. Other income was favorable between periods related to the one-time break-up fee for a potential acquisition that did not close and more favorable non-cash MTM adjustments for hedged crude oil tank bottom inventory owned by the partnership.

Net interest expense increased due to additional borrowings to finance expansion capital spending, partially offset by more interest capitalized for construction projects in the current period. As of Sept. 30, 2016, the partnership had $4.3 billion of debt outstanding, including $34.9 million outstanding under its commercial paper program. Further, the partnership had $291.1 million of cash on hand at the end of third quarter 2016 following the partnership’s $500 million debt offering in Sept. 2016, with $250 million of the proceeds subsequently used to repay notes that matured in Oct. 2016.