MAGELLAN MIDSTREAM PARTNERS, L.P. Introduction
We are a publicly traded limited partnership principally engaged in the
transportation, storage and distribution of refined petroleum products and crude
oil. As of
•our refined products segment, comprised of our approximately 9,800-mile refined petroleum products pipeline system with 54 terminals and two marine storage terminals (one of which is owned through a joint venture); and
•our crude oil segment, comprised of approximately 2,200 miles of crude oil pipelines, a condensate splitter and 39 million barrels of aggregate storage capacity, of which approximately 29 million barrels are used for contract storage. Approximately 1,000 miles of these pipelines, the condensate splitter and 31 million barrels of this storage capacity (including 25 million barrels used for contract storage) are wholly-owned, with the remainder owned through joint ventures.
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
See Item 1. Business for a detailed description of our business.
Overview
Fueling Prosperity and Security. World events over the past year have reinforced the criticality of the energy industry to our country and the world. We are well positioned to continue to responsibly provide the essential fuels such as gasoline, diesel fuel and jet fuel that our communities and economy rely on daily. Dynamic energy markets provide both challenges and opportunities. We own the longest refined products pipeline in the country and can access nearly 50% of the nation's refining capacity. During 2022, we shipped record refined products volumes as customers took advantage of our network's extensive connectivity to overcome various supply disruptions in the markets we serve. Creating and Returning Value to Investors. Our resilient business model continues to provide strong cash flow to consistently pay distributions. We recognize that investors value steady increases to the cash distribution and currently target annual distribution growth of 1% for 2023. We expect to continue to generate free cash flow after paying distributions to allocate in a manner that creates value for our investors. We continue to pursue investment opportunities that meet our disciplined financial requirements. For example, we have completed a number of small, bolt-on projects over the past year, including recent pipeline expansions toNew Mexico andColorado . Additionally, during 2022, we launched an expansion of our refined products pipeline toEl Paso, Texas , which will connect more supply to growing markets inTexas ,Arizona andMexico and is supported by commitments from high-quality counterparties. While we expect to continue finding opportunities to invest in new projects, attractive opportunities have been more limited over the last few years. This more limited capital investment environment, along with the fact that we believe the value of our equity has not reflected the economic potential of our company, has allowed us to simply invest in ourselves by repurchasing equity.
Through our equity repurchase program, we have reduced the number of our outstanding units by 11% over the last three years, providing meaningful growth in earnings and distributable cash flow on a per unit basis.
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We believe the combination of investing in good projects as they are available,
opportunistically repurchasing units and providing an attractive current cash
distribution is a strategy that will allow us to continue creating meaningful
value for our investors.
In total, we delivered over
Our Role in Energy Transition. We will remain an important part of a successful energy transition. The services we provide are vital to ensuring our communities and economies function while theU.S. and the world pursue a transition from fossil fuels. Supported by industry and government forecasts, we believe demand for the fuels we deliver will remain steady for the foreseeable future and essential for many more decades, and likely beyond.
Continuing to operate our business in a safe and responsible manner is a fundamental priority. We also believe that we must continue to optimize our business and adapt to future realities. However, we expect energy transition is likely to take longer and be more dynamic than many may currently predict.
For any transition to be truly successful, all of the costs and benefits must be weighed to seek a balance among policy objectives, technological capability and market acceptance in order to make sustainable progress.
Recent Developments
Sale of Independent Terminals Network. OnJune 8, 2022 , we completed the sale of our independent terminals network comprised of 26 refined petroleum products terminals in the southeasternU.S. toBuckeye Partners, L.P. for$446.2 million , including final working capital adjustments. Impairment ofDouble Eagle Investment . InDecember 2022 , as a result of the non-renewal on existing terms of customer commitments that expire in 2023 and reduced demand for transportation of condensate from the Eagle Ford basin, we recognized an impairment in our Double Eagle joint venture investment of$58.4 million . Distribution. InJanuary 2023 , our board declared a quarterly distribution of$1.0475 per unit for the period ofOctober 1, 2022 throughDecember 31, 2022 . This quarterly distribution was paid onFebruary 14, 2023 to unitholders of record onFebruary 7, 2023 .
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 table, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not aU.S. 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 table. Operating profit includes expense items, such as depreciation, amortization and impairment expense and G&A expense, which management does not focus on when evaluating the core profitability of our operating segments. Additionally, product margin, which management primarily uses to evaluate the profitability of our commodity-related activities, is provided in this table. Product margin is a non-GAAP measure but the components of product sales revenue and cost of product sales are determined in accordance with GAAP. Our blending, fractionation and other commodity-related activities generate significant revenue. However, we believe the product margin from these activities, which takes into account the related cost of product sales, better represents its importance to our results of operations. 39 --------------------------------------------------------------------------------
Year Ended
Variance
Year Ended December 31, Favorable (Unfavorable)
2021 2022 $ Change % Change
Financial Highlights ($ in millions, except operating
statistics)
Transportation and terminals revenue:
Refined products $ 1,338.5 $ 1,408.2 $ 69.7 5
Crude oil 466.2 473.7 7.5 2
Intersegment eliminations (5.8) (6.1) (0.3) (5)
Total transportation and terminals revenue 1,798.9 1,875.8 76.9 4
Affiliate management fee revenue 21.2 22.2 1.0 5
Operating expenses:
Refined products 416.7 431.5 (14.8) (4)
Crude oil 165.4 173.6 (8.2) (5)
Intersegment eliminations (12.4) (13.0) 0.6 5
Total operating expenses 569.7 592.1 (22.4) (4)
Product margin:
Product sales revenue 913.0 1,302.4 389.4 43
Cost of product sales 780.0 1,119.4 (339.4) (44)
Product margin 133.0 183.0 50.0 38
Other operating income (expense) 2.8 5.3 2.5 89
Earnings of non-controlled entities 154.4 147.4 (7.0) (5)
Operating margin 1,540.6 1,641.6 101.0 7 Depreciation, amortization and impairment expense 227.9 292.8 (64.9) (28) G&A expense 206.3 240.7 (34.4) (17) Operating profit 1,106.4 1,108.1 1.7 - Interest expense (net of interest income and interest 225.9 226.8 (0.9) capitalized) - Gain on disposition of assets (75.0) (0.9) (74.1) (99) Other (income) expense 20.9 20.3 0.6 3 Income from continuing operations before provision for 934.6 861.9 (72.7) income taxes (8) Provision for income taxes 2.3 2.7 (0.4) (17) Income from continuing operations 932.3 859.2 (73.1)
(8)
Income from discontinued operations (including gain on
disposition of assets of
49.7 177.2 127.5 257
Net income $ 982.0 $ 1,036.4 $ 54.4 6
Operating Statistics
Refined products:
Transportation revenue per barrel shipped $ 1.715 $ 1.781
Volume shipped (million barrels):
Gasoline 303.8 319.9
Distillates 205.6 206.1
Aviation fuel 30.5 33.3
Liquefied petroleum gases 0.9 0.6
Total volume shipped 540.8 559.9
Crude oil:
Magellan 100%-owned assets:
Transportation revenue per barrel shipped(1) $ 0.815 $ 0.643
Volume shipped (million barrels)(1) 189.6 229.8
Terminal average utilization (million barrels per 24.9 24.2
month)
Select joint venture pipelines: BridgeTex - volume shipped (million barrels)(2) 112.1 92.7 Saddlehorn - volume shipped (million barrels)(2) 77.6 80.9
(1) Includes shipments related to our crude oil marketing activities. (2) These volumes reflect total shipments for these joint ventures, which are owned 30% by us.
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Transportation and terminals revenue increased by
•an increase in refined products revenue of$69.7 million primarily due to higher average transportation rates and higher volumes. The higher average rate per barrel in the current year was favorably impacted by the 2021 and 2022 mid-year tariff adjustments as well as a higher proportion of long-haul shipments, which move at higher rates. Volume increased between periods as a result of additional contributions from ourTexas pipeline expansion projects, higher shipments on ourSouth Texas pipeline segment as well as continued demand recovery from pandemic levels. Higher tender deduction revenue that benefited from increased commodity prices mainly offset less storage revenue due to lower utilization and rates following recent contract expirations; and •an increase in crude oil revenue of$7.5 million primarily due to higher terminal throughput fees as a result of more customers utilizing a simplified structure for service in theHouston area and higher tender deduction revenue due to higher commodity prices. These favorable items were partially offset by less storage revenue from lower rates and utilization in the current backwardated market and decreased transportation revenues as overall lower tariff rates offset higher shipments on ourHouston distribution system, in part due to a recent pipeline connection.
Operating expenses increased
•an increase in refined products expenses of$14.8 million primarily due to higher power costs resulting from the benefit of gains on our power hedges in the prior year driven by the 2021 winter storms and more long-haul shipments in 2022, as well as higher asset integrity spending related to the timing of maintenance work. These higher costs were partially offset by more favorable product overages in the current period (which reduce operating expense); and
•an increase in crude oil expenses of
Product margin increased
Other operating income was favorable
Earnings of non-controlled entities decreased$7.0 million primarily due to lower average rates on the Saddlehorn pipeline and lower MVP earnings as a result of the sale of a portion of our interest inApril 2021 , partially offset by additional deficiency revenue recognized for the BridgeTex and Double Eagle pipelines.
Depreciation, amortization and impairment expense increased
G&A expense increased$34.4 million primarily due to expenses related to the retirement agreement for our former chief executive officer, higher incentive compensation costs resulting from overall improved financial results, as well as increased technology fees. Interest expense, net of interest income and interest capitalized, increased$0.9 million . Our average outstanding debt increased from$5.1 billion in 2021 to$5.2 billion in 2022. Our weighted average interest rate was 4.3% in 2022 compared to 4.4% in 2021.
Gain on disposition of assets was
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Other expense was favorable by
Income from discontinued operations increased by$127.5 million primarily due to the$164.0 million gain recognized on the sale of the independent terminals network, partially offset by lower contributions from these assets once the sale closed inJune 2022 . For a comparative discussion of the years endedDecember 31, 2020 and 2021, see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" in our 2021 Annual Report on Form 10-K . 42
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Adjusted EBITDA, Distributable Cash Flow and Free Cash Flow
In the following tables, we present the financial measures of adjusted EBITDA,
distributable cash flow ("DCF") and free cash flow ("FCF"), which are non-GAAP
measures. These measures include the results of our discontinued operations.
Adjusted EBITDA is an important measure utilized by management and the investment community to assess the financial results of a company. A reconciliation of adjusted EBITDA to net income, the nearest comparable GAAP measure, is included in the table below.
Our partnership agreement requires that all of our available cash, less amounts reserved by our board, be distributed to our unitholders. DCF is used by management to determine the amount of cash that our operations generated, after maintenance capital spending, that is available for distribution to our unitholders, as well as a basis for recommending to our board the amount of distributions to be paid each period. We also use DCF as the basis for calculating our performance-based equity long-term incentive compensation. A reconciliation of DCF to net income, the nearest comparable GAAP measure, is included in the table below. FCF is a financial metric used by many investors and others in the financial community to measure the amount of cash generated by a company during a period after accounting for all investing activities, including both maintenance and expansion capital spending, as well as proceeds from divestitures. We believe FCF is important to the financial community as it reflects the amount of cash available for distributions, additional expansion capital opportunities, equity repurchases, debt reduction or other partnership uses. Reconciliations of FCF to net income and to net cash provided by operating activities, which are the nearest comparable GAAP measures, are included in the following tables.
Since the non-GAAP measures presented here include adjustments specific to us, they may not be comparable to similarly-titled measures of other companies.
43-------------------------------------------------------------------------------- Adjusted EBITDA, DCF and FCF are non-GAAP measures. A reconciliation of each of these measures to net income for the years endedDecember 31, 2021 and 2022 is as follows (in millions): Year Ended December 31, 2021 2022 Net income$ 982.0 $ 1,036.4 Interest expense, net 225.9 226.8 Depreciation, amortization and impairment(1) 233.9 292.8 Equity-based incentive compensation(2) 15.6 29.6 Gain on disposition of assets(3) (70.6) (158.6)
Commodity-related adjustments: Derivative (gains) losses recognized in the period associated with future transactions(4)
27.7 18.6
Derivative gains (losses) recognized in previous periods associated with transactions completed in the period(4)
(36.8) (30.2)
Inventory valuation adjustments(5) 2.1 (9.0)
Total commodity-related adjustments (7.0) (20.6)
Distributions from operations of non-controlled entities in
excess of earnings 38.9 27.3
Adjusted EBITDA 1,418.7 1,433.7
Interest expense, net, excluding debt issuance cost amortization (222.8) (223.6)
Maintenance capital(6) (77.6) (81.9)
Distributable cash flow $ 1,118.3 $ 1,128.2
Expansion capital(7) (73.0) (83.0)
Proceeds from disposition of assets(3) 270.7 440.3
Free cash flow $ 1,316.0 $ 1,485.5
Distributions paid (906.4) (870.0)
Free cash flow after distributions $ 409.6 $ 615.5
(1) Depreciation, amortization and impairment expense is excluded from DCF to
the extent it represents a non-cash expense.
(2) Because we intend to satisfy vesting of unit awards under our equity-based
long-term incentive compensation plan with the issuance of common units,
expenses related to this plan generally are deemed non-cash and excluded for DCF
purposes. The amounts above have been reduced by cash payments associated with
the plan, which are primarily related to tax withholdings.
(3) Gains on disposition of assets are excluded from DCF to the extent they are
not related to our ongoing operations, while proceeds from disposition of assets
exclude the related gains to the extent they are already included in our
calculation of DCF.
(4) Certain derivatives have not been designated as hedges for accounting
purposes and the mark-to-market changes of these derivatives are recognized
currently in net income. We exclude the net impact of these derivatives from our
determination of DCF until the transactions are settled and, where applicable,
the related products are sold.
(5) We adjust DCF for lower of average cost or net realizable value adjustments
related to inventory and firm purchase commitments as well as market valuation
of short positions recognized each period as these are non-cash items. In
subsequent periods when we sell or purchase the related products, we recognize
these valuation adjustments in DCF.
(6) Maintenance capital expenditures maintain our existing assets and do not
generate incremental DCF (i.e. incremental returns to our unitholders). For this
reason, we deduct maintenance capital expenditures to determine DCF.
(7) Includes additions to property, plant and equipment (excluding maintenance
capital and capital-related changes in accounts payable and other current
liabilities), acquisitions and investments in non-controlled entities, net of
distributions from returns of investments in non-controlled entities and
deposits from undivided joint interest third parties.
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A reconciliation of FCF to net cash provided by operating activities for the
years ended
Year Ended
2021 2022
Net cash provided by operating activities $ 1,196.2 $ 1,141.3
Changes in operating assets and liabilities 9.7 113.0
Net cash provided by investing activities 118.1 274.4
Payments associated with settlement of equity-based incentive compensation
(6.2) (8.9)
Settlement cost, amortization of prior service credit and actuarial loss
(8.4) (13.9)
Changes in accrued capital items 7.8 7.3
Commodity-related adjustments(1) (7.0) (20.6)
Other 5.8 (7.1)
Free cash flow $ 1,316.0 $ 1,485.5
Distributions paid (906.4) (870.0)
Free cash flow after distributions $ 409.6 $ 615.5 (1) Please refer to the preceding table for a description of these commodity-related adjustments.
Liquidity and Capital Resources
Cash Flows and Capital Expenditures
Operating Activities. Net cash provided by operating activities was$1,196.2 million and$1,141.3 million for the years endedDecember 31, 2021 and 2022, respectively. The$54.9 million decrease from 2021 to 2022 was due to changes in our working capital, decreases in income from continuing operations, partially offset by adjustments for non-cash items and distributions in excess of earnings of our non-controlled entities. Investing Activities. Net cash provided by investing activities for the year endedDecember 31, 2021 and 2022 was$118.1 million and$274.4 million , respectively, including$148.6 million and$175.3 million used for capital expenditures for those same periods in 2021 and 2022, respectively. Also, during 2022, we sold our independent terminals network for$446.2 million inclusive of final working capital adjustments. During 2021, we sold a portion of our interest in MVP for cash proceeds of$272.1 million . Financing Activities. Net cash used in financing activities for the years endedDecember 31, 2021 and 2022 was$1,327.7 million and$1,417.8 million , respectively. During 2022, we paid distributions of$870.0 million to our unitholders and made common unit repurchases of$462.9 million . Additionally, we had net commercial paper payments of$76.0 million . During 2021, we paid distributions of$906.4 million to our unitholders and made common unit repurchases of$523.1 million . Additionally, we had net commercial paper borrowings of$108.0 million . The quarterly distribution amount related to fourth-quarter 2022 earnings was$1.0475 per unit, which was paid inFebruary 2023 . Based on the number of common units currently outstanding and our current quarterly distribution, total distributions paid to our unitholders related to 2023 earnings would be approximately$852 million . Management believes we will have sufficient DCF to fund these distributions. For a discussion of cash flows for the year endedDecember 31, 2020 , see Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our 2021 Annual Report on Form 10-K . 45 --------------------------------------------------------------------------------
Capital Requirements
Capital spending for our business consists primarily of:
•Maintenance capital expenditures. These expenditures include costs required to maintain equipment reliability and safety and to address environmental and other regulatory requirements rather than to generate incremental DCF; and •Expansion capital expenditures. These expenditures are undertaken primarily to generate incremental DCF and include costs to acquire additional assets to grow our business and to expand or upgrade our existing facilities and to construct new assets, which we refer to collectively as organic growth projects. Organic growth projects include, for example, capital expenditures that increase storage or throughput volumes or develop pipeline connections to new supply sources.
During 2022, our maintenance capital spending was
During 2022, we spent$83.0 million for our expansion capital projects and in conjunction with our joint ventures. Based on the progress of expansion projects already committed, we expect to spend approximately$110.0 million in 2023 and$40.0 million in 2024 to complete our current slate of expansion capital projects.
Liquidity
Cash generated from operations is a key source of liquidity for funding debt service, maintenance capital expenditures, quarterly distributions and repurchases of common units. Additional liquidity for purposes other than quarterly distributions, such as expansion capital expenditures, is available through borrowings under our commercial paper program and revolving credit facility, as well as from other borrowings or issuances of debt or common units (see Note 10 - Debt and Note 19 - Partners' Capital and Distributions in Item 8. Financial Statements and Supplementary Data of this report for detail of our borrowings and changes in partners' capital).
Off-Balance Sheet Arrangements
None.
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--------------------------------------------------------------------------------Other Items
Leadership Changes. InApril 2022 ,Michael N. Mears retired from his positions of President and Chief Executive Officer, and our board electedAaron L. Milford as Chief Executive Officer and President.Mr. Milford served as Chief Operating Officer since 2019. He served as Senior Vice President and Chief Financial Officer from 2015 to 2019 and various positions of increasing responsibility since joining us and our predecessor in 1995. InAugust 2022 ,Robert L. Barnes , Senior Vice President of Commercial - Crude Oil, retired from his position after 34 years of service. Our board electedKyle T. Krshka as Senior Vice President of Commercial - Crude Oil inNovember 2022 .Mr. Krshka served as Vice President of Commercial - Marine, Independent Terminals & Commodities since 2020 and various positions of increasing responsibility since joining us in 2016. InDecember 2022 ,Melanie A. Little , Executive Vice President, Chief Operating Officer, announced her resignation effectiveJanuary 1, 2023 to pursue another opportunity. Executive Officer Promotions. Two members of our senior management team were promoted effectiveJune 1, 2022 .Jeff L. Holman became Executive Vice President in addition to his titles of Chief Financial Officer and Treasurer.Michael J. Aaronson , who previously held the position of Senior Vice President of Business Development, became Executive Vice President, Chief Commercial Officer. Board of Director Changes.Michael N. Mears retired from his position of Chair of the Board of Directors inApril 2022 and our board electedBarry R. Pearl , our previous independent Lead Director, as Chair of the Board and also electedAaron L. Milford as a member of our board. InApril 2022 ,Robert G. Croyle retired from our board after 13 years of service. FollowingMr. Croyle's retirement,Sivasankaran Somasundaram was elected as an independent board member beginning inMay 2022 . Pipeline Tariff Changes. TheFERC regulates the rates charged on interstate common carrier pipelines. The tariff rates on approximately 30% of our refined products shipments have been regulated by theFERC primarily through an annual index methodology, and nearly all the remaining rates are adjustable at our discretion based on market factors. Based on the preliminary PPI-FG estimate for 2022, the ceiling level for our index-based rates will increase by 13.4%. However, we continue to evaluate increases to our index and market-based rates and currently expect to increase all of our refined products rates by an average of approximately 8% onJuly 1, 2023 . Most of the tariffs on our long-haul crude oil pipelines are established at negotiated rates that generally provide for annual adjustments in line with changes in theFERC index, subject to certain modifications. We expect to increase the rates on our long-haul crude oil pipelines between 2% and 5% inJuly 2023 . Commodity Derivative Agreements. Certain of our business activities result in our owning various commodities, which exposes us to commodity price risk. We use forward physical commodity contracts and derivative instruments to hedge against changes in prices of commodities that we expect to sell or purchase in future periods. For further information regarding the quantities of refined products and crude oil hedged atDecember 31, 2022 and the fair value of open hedge contracts at that date, please see Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Related Party Transactions. See Note 18 - Related Party Transactions in Item 8. Financial Statements and Supplementary Data of this report for detail of our related party transactions. 47 --------------------------------------------------------------------------------
Critical Accounting Estimates
Our management has discussed the development and selection of the following critical accounting estimates with the audit committee of our board, which has reviewed and approved these disclosures.
Pension Obligations
We sponsor a pension plan covering union employees and a pension plan for non-union employees. Various estimates and assumptions directly affect net periodic benefit expense and obligations for these plans. These estimates and assumptions include the expected long-term rate of return on plan assets, discount rates and the expected rate of compensation increases. Management reviews these assumptions annually and makes adjustments as necessary.
The discount rate directly affects the measurement of the benefit obligations of our pension benefit plans. The objective of the discount rate is to determine the amount, if invested at theDecember 31 measurement date in a portfolio of high-quality fixed income securities, that would provide the necessary cash flows to make benefit payments when due. Decreases in the discount rate increase the obligation and generally increase the related expense, while increases in the discount rate have the opposite effect. Changes in general economic and market conditions that affect interest rates on long-term high-quality fixed income securities as well as the duration of our plans' liabilities affect our estimate of the discount rate. We estimate the long-term expected rate of return on plan assets using expectations of capital market results, which includes an analysis of historical results as well as forward-looking projections. We base these capital market expectations on a long-term period and on our investment strategy and asset allocation. We develop our estimates using input from several external sources, including consultation with our third-party independent investment consultant. We develop the forward-looking capital market projections using a consensus of expectations by economists for inflation and dividend yield, along with expected changes in risk premiums. Because our determined rate is an estimate of future results, it could be significantly different from actual results. The expected rate of return on plan assets are long-term in nature; therefore, short-term market performance does not significantly affect our estimated long-term expected rate of return. The expected rate of compensation increases represents average long-term salary increases. An increase in this rate causes the pension obligation and expense to increase.
The following table presents the estimated increase (decrease) in net periodic benefit expense and obligations that would result from a 1% change in the specified assumption (in millions):
Benefit Expense Benefit Obligation
1% Increase 1% Decrease 1% Increase 1% Decrease
Pension benefits:
Discount rate $ (1.9) $ 3.1 $ (26.5) $ 32.3
Expected long-term rate of return on
plan assets $ (2.0) $ 2.0 $ - $ -
Rate of compensation increase$ 3.4 $ (2.9) $ 18.0 $ (17.0)
The following table sets forth the increase (decrease) in our pension funding based on our current funding policy assuming a 1% change in the specified criterion (in millions):
1% Increase 1% Decrease
Rate of compensation increase $0.4 $(0.4)
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Impairment of Long-Lived Assets,
Impairment of Long-Lived Assets. Long-lived assets, including fixed assets and intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Such indicators include, among others, the nature of the asset, the projected future economic benefit of the asset, changes in regulatory and political environments and historical and future cash flow and profitability measurements. If the carrying value of an asset exceeds the future undiscounted cash flows expected from the asset, we recognize an impairment charge for the excess of carrying value of the asset over its estimated fair value.Goodwill . The goodwill relating to each of our reporting units is tested for impairment annually as well as when an event or change in circumstances indicates an impairment may have occurred. For purposes of performing the impairment test for goodwill, our reporting units are our refined products and crude oil segments. Under GAAP, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of one of our reporting units is greater than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, we are not required to perform any further testing. However, if we conclude otherwise, we perform the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill of the reporting unit is less than its carrying value. Based on our qualitative assessments performed, we determined goodwill was not impaired. When indicators of impairment are identified, determination as to whether and how much goodwill or long-lived assets are impaired involves management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses and the outlook for national or regional market supply and demand conditions. We base the impairment reviews and calculations used in our impairment tests on assumptions that are consistent with our business plans and long-term investment decisions. See Note 6 - Property, Plant and Equipment,Goodwill and Other Intangibles in Item 8. Financial Statements and Supplementary Data for additional information regarding impairments of goodwill and long-lived assets. Investments. We evaluate investments in non-controlled entities for impairment whenever events or circumstances indicate that there is an other-than-temporary loss in value of the investment. When evidence of loss in value has occurred, we compare our estimate of fair value of the investment to the carrying value of the investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and we consider the decline in value to be other-than-temporary, the excess of the carrying value over the fair value is recognized in our consolidated financial statements as an impairment charge. InDecember 2022 , we determined the fair value of our investment in Double Eagle was less than the carrying value and recognized an impairment charge of$58.4 million . 49
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