Maintenance costs continue to crimp margins on the anhydrous ammonia pipeline owned by Magellan Midstream Partners LP. The ammonia pipeline system saw an operating margin loss of $2.3 million in the third quarter ending Sept. 30, 2007, a decrease of $1.6 million from the year-ago quarter. Although revenues increased slightly due to higher average tariff rates, the quarter was negatively impacted by higher expenses for maintenance work necessary to comply with federal regulatory testing of high consequence areas.
Overall, Magellan expects 2007 ammonia expenses to be higher than 2006. These are due in part to corrective action that the U.S. Department of Justice has sought against the pipeline for two ammonia releases in the fall of 2004 at Kingman, Kan., and Blair, Neb. Mid-America Pipeline Co. LLC, which operates the pipeline for Magellan, recently settled with the DOJ for $1 million (GM Sept. 10, p. 12). In the meantime, Mid-America, which is owned by Enterprise Products Co., Houston, has sought indemnity against Magellan and has also notified Magellan that it will no longer operate the pipeline after June 30, 2008.
Magellan told Green Markets it plans to operate the pipeline itself after the Mid-America/Enterprise contract expires and does not expect the assumption of these responsibilities to have a material impact on operating expenses.
Magellan said that it has accrued an amount for these matters that is less than the statutory maximum, which could be as high as $17.4 million based on Magellan’s SEC filings. However, Magellan said the DOJ has indicated the amount assessed will not be at the statutory maximum. Magellan said adjustments to its recorded liability resulting from a final settlement with the EPA, which could occur in the near term, could be material to results.
Magellan is in discussions with the U.S. Environmental Protection Agency, the DOJ, and Mid-America/Enterprise regarding the releases and corrective actions. It said the DOJ has indicated it may take injunctive relief if the parties cannot come to terms.
Third-quarter ammonia pipeline revenues were $3.7 million on 133,000 st shipped, while expenses were $6 million. The year-ago quarter saw revenues of $3.5 million on 159,000 st, with $4.2 million in expenses.
Nine-month ammonia margins were a loss of $4.4 million on revenues of $13.1 million on 533,000 st shipped. Expenses were $17.5 million. Year-ago margins were a positive $2.3 million on revenues of $11.7 million on 537,000 st shipped. Year-ago expenses were $9.4 million.
Magellan-wide, third-quarter net earnings were up, at $59.4 million ($.65 per diluted lp unit) on revenues of $322.0 million, versus the year-ago $30.6 million ($.43 per unit) and $316.6 million, respectively. Nine-month net earnings were $170.6 million ($1.86 per unit) on sales of $942.1 million, versus the year-ago $136.3 million ($1.60 per unit) and $907.4 million, respectively.