Magellan to Discontinue Use of NH3 Pipeline; Industry Reacts to Potential Distribution Issues
Magellan Midstream Partners LP, Tulsa, announced on Jan. 31 that it has decided to discontinue commercial operations of the ammonia pipeline beginning in late 2019 due to the system’s low profitability and the expected decline in anhydrous ammonia production.
“Depreciation, amortization, and impairment expense increased due to recent expansion capital expenditures and a $49.1 million impairment to the partnership’s ammonia pipeline system as a result of management’s decision to begin decommissioning this asset later this year due to its challenging economic outlook,” Magellan said in its fourth-quarter earnings release.
“Magellan has become known for its disciplined approach to growth and management of our company,” said Magellan CEO Michael Mears. “Our recent decision to shut down the ammonia pipeline and cancellation of our stand-alone Delaware Basin pipeline construction project demonstrate our commitment to managing all aspects of our business in a disciplined manner.”
Magellan’s ammonia pipeline stretches 1,100 miles, from Borger, Texas, to Mankato, Minn., and transports ammonia to 13 terminals located in Kansas, Nebraska, Iowa, and Minnesota. The pipeline is fed by ammonia production facilities at Borger and at Enid and Verdigris, Okla.
“We are planning to begin safely ‘purging’ the ammonia from the southern portion of the pipeline system in late summer 2019, and by early spring 2020 from the northern segment of the system,” said Bruce Heine, Vice President, Government and Media Affairs, for Magellan. “We expect the decommissioning process to take up to one year after we discontinue taking receipts from the shippers.”
Nutrien Ltd., Saskatoon, which owns the Borger production facility, told Green Markets on Jan. 31 that Nutrien plans to discontinue its use of the Magellan pipeline as of August 2019. Neither Koch Industries Inc., which owns the Enid production facility, nor CF Industries Holdings Inc., which owns the Verdigris plant, had responded to Green Markets by press time.
Several industry sources commented that a shutdown of the pipeline will create significant disruptions to ammonia distribution in the Midwest. One contact told Green Markets that distributors and end-users will be forced to “rely on production points even more, and to fill terminal tanks. Once those are empty, they will probably struggle to recharge those terminals for the rest of the season.”
“Magellan’s choice to decommission the pipeline leaves U.S. producers with increasingly limited ammonia transportation alternatives,” said Alexis Maxwell, Research Director at Green Markets. “Without the Magellan pipeline, rail and truck shipments become the next best alternative to manage inventories, and those freight rates have become increasingly expensive. This reduction in transportation options could lead to relatively lower farm gate ammonia prices as producers manage production outages, ammonia upgrading options, and distribution and storage all through respective sales programs.”
Magellan contemplated a sale of the pipeline back in 2011 (GM Nov. 14, 2011), reporting at the time that the system was not a large contributor to the company’s financial results, nor a “core component” of its asset portfolio. Magellan reported in March 2012, however, that it had opted against a sale (GM March 12, 2012), noting that higher tariffs and ammonia volumes had returned the pipeline to profitability.
At that time, the pipeline represented a very negligible part of Magellan’s total business, representing only 1 percent of 2011 consolidated revenues, operating margin, and total assets.
Mears told analysts on Jan. 31 that the EBITDA and the distributable cash flow (DCF) from the ammonia pipeline was immaterial. The company also said the maintenance costs for the pipeline were significantly higher than any of the company’s other pipeline properties, with future costs expected to be even higher. Annual costs were reported to average $10 million, with those expected to go up significantly from 2020 and beyond. The company said it has looked at repurposing the pipeline over the years, but citing maintenance costs, said that is not an option.
While Magellan no longer releases ammonia volume statistics for the pipeline, in 2012 it reported that some 727,000 st of ammonia moved on the pipeline, versus 770,000 st in 2011 (GM Feb. 11, 2013). 2012 ammonia pipeline operating margins were $16.6 million on revenues of $27.7 million, up from 2011’s $7.3 million on revenues of $23.6 million. Magellan said 2012 margins were up due to higher tariffs.
The pipeline has also been a safety and reputational risk for the company due to a number of leaks over the years, the most recent occurring in October 2016 near Tekamah, Neb. That incident reportedly released nearly 82,000 gallons of ammonia, claiming the life of a local farmer and resulting in evacuations and road closures near the site that lasted for days (GM Oct. 21 and Nov. 18, 2016). At least one local resident filed a lawsuit in March 2018 against Magellan (GM March 16, 2018).
Another smaller leak was reported in July 2013 in northwestern Iowa (GM July 15, 2013), while an earlier and larger leak occurred near Kingman, Kan., in October 2004, resulting in the release of 204,000 gallons that also prompted local evacuations and caused a significant fish kill over a 13-mile stretch of nearby Smoots Creek. Magellan reached a settlement with the State of Kansas and the U.S. Department of Justice more than three years later over natural resource damages stemming from the incident (GM Jan. 5, 2009).
Magellan has performed periodic hydrotesting on the pipeline to check for leaks and to ensure proper maintenance, including a project in 2017 that shut down the pipeline for several months from Monona County, Iowa, south to Greenwood, Neb. (GM June 9, 2017), including the area that experienced the fatal 2016 leak. An earlier and more extensive maintenance project was carried out in 2010-2011 (GM Nov. 15, 2010).
The ammonia announcement came as Magellan was reporting results for the fourth-quarter and year-ending Dec. 31, 2018. Fourth-quarter net income was $314.1 million ($1.37 per diluted share) on revenues of $865.7 million, up from the year-ago $237.9 million ($1.04 per share) and $673.3 million, respectively.
Full-year net income was $1.33 billion ($5.84 per share) on revenues of $2.83 billion, up from the prior year $869.5 million ($3.81 per share) and $2.51 billion, respectively.
“Despite the volatility in the energy space during 2018, Magellan generated record DCF for the year driven by continued strong demand for our essential fee-based refined petroleum products and crude oil pipeline and terminal services,” added Mears.
DCF was $1.11 billion for 2018, up from 2017’s $1.02 billion. 2019 guidance is $1.14 billion. DCF was down slightly in the fourth quarter to $302.4 million from the year-ago $308.3 million, with the company citing $9 million of expected cash costs associated with the future shutdown of the ammonia pipeline, as well as $9 million of write-off charges for discontinued capital projects.