MMP - 2011.9.30-10Q
Table of Contents


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.: 1-16335
 __________________________________________
 Magellan Midstream Partners, L.P.
(Exact name of registrant as specified in its charter)
Delaware
 
73-1599053
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
One Williams Center, P.O. Box 22186, Tulsa, Oklahoma 74121-2186
(Address of principal executive offices and zip code)
(918) 574-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
Large accelerated filer  x        Accelerated filer  £      Non-accelerated filer  £        Smaller reporting company  £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange
Act).    Yes  £    No  x
As of November 4, 2011 there were 112,736,571 outstanding limited partner units of Magellan Midstream Partners, L.P. that trade on the New York Stock Exchange under the ticker symbol "MMP."
 
 
 
 
 

Table of Contents


TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
 
 
1.
 
 
2.
 
 
3.
 
 
4.
 
 
5.
 
 
6.
 
 
7.
 
 
8.
 
 
9.
 
 
10.
 
 
11.
 
 
12.
 
 
13.
 
 
14.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II
OTHER INFORMATION
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.

 


1

Table of Contents


PART I
FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per unit amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2011
 
2010
 
2011
Transportation and terminals revenues
$
206,727

 
$
232,064

 
$
573,069

 
$
660,664

Product sales revenues
199,284

 
203,253

 
585,318

 
600,492

Affiliate management fee revenue
190

 
193

 
569

 
578

Total revenues
406,201

 
435,510

 
1,158,956

 
1,261,734

Costs and expenses:
 
 
 
 
 
 
 
Operating
87,584

 
89,458

 
219,980

 
233,142

Product purchases
186,993

 
159,550

 
503,516

 
489,616

Depreciation and amortization
27,403

 
30,234

 
79,460

 
90,261

General and administrative
23,624

 
20,470

 
67,044

 
70,341

Total costs and expenses
325,604

 
299,712

 
870,000

 
883,360

Equity earnings
1,654

 
1,955

 
4,323

 
4,765

Operating profit
82,251

 
137,753

 
293,279

 
383,139

Interest expense
25,316

 
27,332

 
69,611

 
79,806

Interest income
(74
)
 
(11
)
 
(85
)
 
(22
)
Interest capitalized
(884
)
 
(665
)
 
(2,535
)
 
(2,526
)
Debt placement fee amortization expense
358

 
410

 
1,015

 
1,180

Other expense
750

 

 
750

 

Income before provision for income taxes
56,785

 
110,687

 
224,523

 
304,701

Provision for income taxes
148

 
447

 
900

 
1,397

Net income
$
56,637

 
$
110,240

 
$
223,623

 
$
303,304

Allocation of net income (loss):
 
 
 
 
 
 
 
Non-controlling owners’ interest
$
(154
)
 
$

 
$
(222
)
 
$
(63
)
Limited partners’ interest
56,791

 
110,240

 
223,845

 
303,367

Net income
$
56,637

 
$
110,240

 
$
223,623

 
$
303,304

Basic and diluted net income per limited partner unit
$
0.51

 
$
0.98

 
$
2.06

 
$
2.69

Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation
111,522

 
112,864

 
108,437

 
112,825


See notes to consolidated financial statements.


2

Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2011
 
2010
 
2011
Net income
$
56,637

 
$
110,240

 
223,623

 
303,304

Other comprehensive income:
 
 

 
 
 
 
Net gain (loss) on commodity hedges
(179
)
 
6,539

 
(468
)
 
11,152

Reclassification of net gain on interest rate cash flow hedges to interest expense
(41
)
 
(41
)
 
(123
)
 
(123
)
Reclassification of net loss (gain) on commodity hedges to product sales revenues
(1,068
)
 
(1,493
)
 
967

 
(1,493
)
Settlement cost and amortization of prior service credit and actuarial loss
101

 
701

 
80

 
856

Adjustment to recognize the funded status of postretirement plans
(2,167
)
 
(10,254
)
 
(2,167
)
 
(10,254
)
Total other comprehensive income (loss)
(3,354
)
 
(4,548
)
 
(1,711
)
 
138

Comprehensive income
53,283

 
105,692

 
221,912

 
303,442

Comprehensive loss attributable to non-controlling owners’ interest in consolidated subsidiaries
(154
)
 

 
(222
)
 
(63
)
Comprehensive income attributable to partners’ capital
$
53,437

 
$
105,692

 
$
222,134

 
$
303,505

See notes to consolidated financial statements.

 

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Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31, 2010
 
September 30,
2011
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
7,483

 
$
198,065

Restricted cash
14,379

 

Trade accounts receivable (less allowance for doubtful accounts of $106 and $64 at December 31, 2010 and September 30, 2011, respectively)
92,192

 
89,838

Other accounts receivable
6,175

 
6,412

Inventory
216,408

 
257,120

Energy commodity derivatives contracts, net

 
36,205

Energy commodity derivatives deposits, net
22,302

 

Reimbursable costs
13,870

 
7,883

Other current assets
11,774

 
11,998

Total current assets
384,583

 
607,521

Property, plant and equipment
3,894,610

 
4,027,640

Less: accumulated depreciation
716,054

 
801,709

Net property, plant and equipment
3,178,556

 
3,225,931

Equity investments
23,728

 
31,726

Long-term receivables
1,167

 
3,862

Goodwill
39,925

 
53,262

Other intangibles (less accumulated amortization of $11,964 and $14,147 at December 31, 2010 and September 30, 2011, respectively)
16,924

 
15,840

Debt placement costs (less accumulated amortization of $5,439 and $6,619 at December 31, 2010 and September 30, 2011, respectively)
11,871

 
12,883

Tank bottom inventory
57,937

 
51,986

Other noncurrent assets
3,209

 
3,687

Total assets
$
3,717,900

 
$
4,006,698

LIABILITIES AND OWNERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
41,425

 
$
68,131

Accrued payroll and benefits
32,393

 
24,043

Accrued interest payable
35,799

 
33,250

Accrued taxes other than income
26,953

 
28,041

Environmental liabilities
12,202

 
18,655

Deferred revenue
34,733

 
36,923

Accrued product purchases
47,324

 
58,170

Energy commodity derivatives contracts, net
11,790

 

Energy commodity derivatives deposits, net

 
7,059

Other current liabilities
32,428

 
22,421

Total current liabilities
275,047

 
296,693

Long-term debt
1,906,148

 
2,153,437

Long-term pension and benefits
28,965

 
42,944

Other noncurrent liabilities
17,597

 
12,509

Environmental liabilities
20,572

 
24,787

Commitments and contingencies
 
 
 
Owners’ equity:
 
 
 
Partners’ capital:
 
 
 
Limited partner unitholders (112,481 units and 112,737 units outstanding at December 31, 2010 and September 30, 2011, respectively)
1,466,404

 
1,487,286

Accumulated other comprehensive loss
(11,096
)
 
(10,958
)
Total partners’ capital
1,455,308

 
1,476,328

Non-controlling owners’ interest in consolidated subsidiaries
14,263

 

Total owners’ equity
1,469,571

 
1,476,328

Total liabilities and owners’ equity
$
3,717,900

 
$
4,006,698

See notes to consolidated financial statements.

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Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Nine Months Ended
September 30,
 
2010
 
2011
Operating Activities:
 
 
 
Net income
$
223,623

 
$
303,304

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
79,460

 
90,261

Debt placement fee amortization
1,015

 
1,180

Loss on sale, retirement and impairment of assets
106

 
7,529

Equity earnings
(4,323
)
 
(4,765
)
Distributions from equity investments
3,240

 
4,365

Equity-based incentive compensation expense
11,482

 
11,751

Settlement cost and amortization of prior service credit and actuarial loss
80

 
856

Changes in operating assets and liabilities:
 
 
 
Restricted cash

 
14,379

Trade accounts receivable and other accounts receivable
(10,553
)
 
2,117

Inventory
(10,274
)
 
(40,712
)
Energy commodity derivatives contracts, net of derivatives deposits
2,633

 
(14,926
)
Reimbursable costs
1,808

 
5,987

Accounts payable
15,233

 
27,293

Accrued payroll and benefits
(1,986
)
 
(8,350
)
Accrued interest payable
(1,717
)
 
(3,228
)
Accrued taxes other than income
4,312

 
1,088

Accrued product purchases
(7,745
)
 
10,846

Tank bottom inventory

 
5,951

Current and noncurrent environmental liabilities
(1,676
)
 
10,668

Other current and noncurrent assets and liabilities
11,171

 
548

Net cash provided by operating activities
315,889

 
426,142

Investing Activities:
 
 
 
Property, plant and equipment:
 
 
 
Additions to property, plant and equipment
(160,691
)
 
(143,163
)
Proceeds from sale and disposition of assets
5,297

 
4,555

Increase (decrease) in accounts payable related to capital expenditures
3,888

 
(2,544
)
Acquisition of business
(290,991
)
 

Acquisition of assets
(29,300
)
 
(17,798
)
Acquisition of non-controlling owners' interests

 
(40,500
)
Other

 
(6,600
)
Net cash used by investing activities
(471,797
)
 
(206,050
)
Financing Activities:
 
 
 
Distributions paid
(235,019
)
 
(260,703
)
Net borrowings under revolver
(101,600
)
 
(15,000
)
Borrowings under long-term notes, net of discounts and premiums
298,899

 
260,914

Debt placement costs
(2,372
)
 
(2,192
)
Net receipt from financial derivatives
16,238

 
5,926

Decrease in outstanding checks
(5,116
)
 
(11,045
)
Settlement of tax withholdings on long-term incentive compensation
(3,371
)
 
(7,410
)
Issuance of common units, net
258,400

 

Capital contributed by non-controlling owners
3,082

 

Other
(384
)
 

Net cash provided (used) by financing activities
228,757

 
(29,510
)
Change in cash and cash equivalents
72,849

 
190,582

Cash and cash equivalents at beginning of period
4,168

 
7,483

Cash and cash equivalents at end of period
$
77,017

 
$
198,065

Supplemental non-cash financing activity:
 
 
 
Issuance of limited partner units in settlement of equity-based incentive plan awards
$
2,034

 
$
4,315

Non-cash capital contributed by non-controlling owners
$
10,299

 
$

See notes to consolidated financial statements.

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Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Organization and Basis of Presentation
Organization
Unless indicated otherwise, the terms “our,” “we,” “us” and similar language refer to Magellan Midstream Partners, L.P. together with its subsidiaries. We are a Delaware limited partnership and our limited partner units are traded on the New York Stock Exchange under the ticker symbol “MMP.” Magellan GP, LLC, a wholly-owned Delaware limited liability company, serves as our general partner.
We operate and report in three business segments: the petroleum pipeline system, the petroleum terminals and the ammonia pipeline system. Our reportable segments offer different products and services and are managed separately because each requires different marketing strategies and business knowledge.
Basis of Presentation
In the opinion of management, our accompanying consolidated financial statements, which are unaudited except for the consolidated balance sheet as of December 31, 2010, which is derived from our audited financial statements, include all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2011, and the results of operations for the three and nine months ended September 30, 2010 and 2011 and cash flows for the nine months ended September 30, 2010 and 2011. The results of operations for the nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for the full year ending December 31, 2011.
Pursuant to the rules and regulations of the Securities and Exchange Commission, the financial statements in this report do not include all of the information and notes normally included with financial statements prepared in accordance with accounting principles generally accepted in the United States. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 

2.
Owners’ Equity

The changes in owners’ equity for the nine months ended September 30, 2011 are provided in the table below (dollars in thousands):

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Limited
Partners’
Capital
 
Limited
Partners’
Accumulated 
Other
Comprehensive Loss
 
Non-controlling
Owners’  Interest
 
Total 
Owners’
Equity
Balance, January 1, 2011
$
1,466,404

 
$
(11,096
)
 
$
14,263

 
$
1,469,571

Comprehensive income:
 
 
 
 
 
 
 
Net income (loss)
303,367

 

 
(63
)
 
303,304

Net gain on commodity hedges

 
11,152

 

 
11,152

Reclassification of net gain on interest rate cash flow hedges to interest expense

 
(123
)
 

 
(123
)
Reclassification of net gain on commodity hedges to product sales revenues

 
(1,493
)
 

 
(1,493
)
Settlement cost and amortization of prior service credit and actuarial loss

 
856

 

 
856

Adjustment to recognize the funded status of postretirement plans

 
(10,254
)
 

 
(10,254
)
Total comprehensive income (loss)
303,367

 
138

 
(63
)
 
303,442

Distributions
(260,703
)
 

 

 
(260,703
)
Equity method portion of equity-based incentive compensation expense
7,738

 

 

 
7,738

Issuance of 255,222 common units in settlement of long-term incentive plan awards and board of director retainer fees
4,315

 

 

 
4,315

Settlement of tax withholdings on long-term incentive compensation
(7,410
)
 

 

 
(7,410
)
Acquisition of non-controlling owners' interest
(26,300
)
 

 
(14,200
)
 
(40,500
)
Other
(125
)
 

 

 
(125
)
Balance, September 30, 2011
$
1,487,286

 
$
(10,958
)
 
$

 
$
1,476,328

 
3.
Acquisitions
Acquisitions of Assets
In January 2011, we acquired the remaining undivided interest in our Southlake, Texas terminal. We accounted for this purchase as an acquisition of assets. The operating results of the Southlake terminal are reported in our petroleum pipeline system segment.
In April 2011, we acquired a petroleum products pipeline segment connected to our petroleum pipeline system at Reagan, Texas. We accounted for this purchase as an acquisition of assets. The operating results of these assets have been included in our petroleum pipeline system segment from the acquisition date.
In May 2011, we acquired petroleum products storage tanks in Riverside, Missouri. We accounted for this purchase as an acquisition of assets. The operating results of these assets have been included in our petroleum pipeline system segment from the acquisition date.
Collectively, the costs for the above-noted asset acquisitions were $17.8 million.
Acquisition of Non-Controlling Owners' Interest
In February 2011, we acquired a private investment group's common equity in Magellan Crude Oil, LLC ("MCO") for $40.5 million, which represented all of the non-controlling owners' interest in subsidiaries on our consolidated balance sheet (see Note 2 - Owners' Equity). The operating results of MCO continue to be reported in our petroleum terminals segment.
Business Combination
In September 2010, we acquired certain assets from BP Pipelines (North America), Inc. ("BP") and accounted for this

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


purchase as a business combination. We have completed our process of determining the fair value of the assets acquired and liabilities assumed. As a result, we have adjusted the preliminary purchase price and fair value of the assets acquired and liabilities assumed as reported in our Annual Report on Form 10-K for the year ended December 31, 2010. The final allocation of the purchase price of the fair value of the assets acquired and liabilities assumed were as follows (in thousands):
Purchase price
$
291,292

Fair value of assets acquired (liabilities assumed):
 
Property, plant and equipment
$
249,381

Other current assets
2,877

Goodwill
38,496

Other intangibles
3,898

Environmental liabilities
(375
)
Other current liabilities
(2,985
)
Total
$
291,292

 
 
Changes to the preliminary purchase price allocation were a reduction in property, plant and equipment of $13.3 million with a corresponding increase in goodwill. The change related to a fair value amount that was preliminarily assigned to an inactive pipeline section, which we subsequently determined had no value at the date of acquisition.
The following summarized pro forma consolidated income statement information assumes that the business acquired from BP referred to above occurred as of January 1, 2010. These pro forma results are for comparative purposes only and may not be indicative of the results that would have occurred had this acquisition been completed on January 1, 2010 or the results that will be attained in the future. The amounts presented below are in thousands:
 
 
Three Months Ended September 30,
 
 
2010
 
2011
 
 
As Reported
 
Pro Forma
Adjustments
 
Pro Forma
 
As Reported
Revenues
 
$
406,201

 
$
9,027

 
$
415,228

 
$
435,510

Net income
 
$
56,637

 
$
4,790

 
$
61,427

 
$
110,240


 
 
Nine Months Ended September 30,
 
 
2010
 
2011
 
 
As Reported
 
Pro Forma
Adjustments
 
Pro Forma
 
As Reported
Revenues
 
$
1,158,956

 
$
36,483

 
$
1,195,439

 
$
1,261,734

Net income
 
$
223,623

 
$
15,740

 
$
239,363

 
$
303,304


Significant pro forma adjustments include historical results of the acquired assets and our calculation of general and administrative ("G&A") costs, depreciation expense and interest expense on borrowings necessary to finance the acquisition.


4.
Product Sales Revenues
The amounts reported as product sales revenues on our consolidated statements of income include revenues from the physical sale of petroleum products and from mark-to-market adjustments from New York Mercantile Exchange (“NYMEX”) contracts. We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell from our business activities where we acquire or produce petroleum products. Some of these NYMEX contracts qualify for hedge accounting treatment, and we designate and account for these as either cash flow or fair value hedges. The effective portion of the fair value changes of the contracts we designate as cash flow hedges are recognized as adjustments to product sales when the hedged product is physically sold. Any ineffectiveness in these contracts is recognized as an adjustment to product sales in the period the ineffectiveness occurs. Changes in the fair value and any ineffectiveness of contracts designated as fair value hedges do not impact product sales. We account for those NYMEX contracts that do not qualify for hedge accounting treatment as economic hedges, with the period changes in fair value recognized as product sales. See Note 9 - Derivative Financial Instruments for further disclosures regarding our NYMEX contracts.
For the three and nine months ended September 30, 2010 and 2011, product sales revenues included the following (in

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2010
 
2011
 
2010
 
2011
Physical sale of petroleum products
$
206,682

 
$
173,181

 
$
577,919

 
$
606,603

NYMEX contract adjustments:
 
 
 
 
 
 
 
Change in value of NYMEX contracts that did not qualify for hedge accounting treatment and the effective portion of gains and losses of matured NYMEX contracts that qualified for hedge accounting treatment associated with our petroleum products blending and fractionation activities(1)
(3,279
)
 
21,865

 
2,599

 
807

Change in value of NYMEX contracts that did not qualify for hedge accounting treatment associated with the Houston-to-El Paso pipeline section linefill working inventory(1)
(4,924
)
 
8,281

 
3,995

 
(6,918
)
Change in value of NYMEX contracts that did not qualify for hedge accounting treatment associated with our crude oil activities
805

 
(74
)
 
805

 

Total NYMEX contract adjustments
(7,398
)
 
30,072

 
7,399

 
(6,111
)
Total product sales revenues
$
199,284

 
$
203,253

 
$
585,318

 
$
600,492

 
 
 
 
 
 
 
 
(1) The associated petroleum products for these activities are, to the extent still owned as of the statement date, or were, to the extent no longer owned as of the statement date, classified as inventory in current assets on our consolidated balance sheets.


5.
Segment Disclosures
Our reportable segments are strategic business units that offer different products and services. Our segments are managed separately because each segment requires different marketing strategies and business knowledge. Management evaluates performance based on segment operating margin, which includes revenues from affiliates and external customers, operating expenses, product purchases and equity earnings. Transactions between our business segments are conducted and recorded on the same basis as transactions with third-party entities.
We believe that investors benefit from having access to the same financial measures used 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 tables. Operating profit includes expense items, such as depreciation and amortization expense and G&A expenses, that management does not consider when evaluating the core profitability of our operations.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



 
Three Months Ended September 30, 2010
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
156,652

 
$
49,905

 
$
671

 
$
(501
)
 
$
206,727

Product sales revenues
195,177

 
4,233

 

 
(126
)
 
199,284

Affiliate management fee revenue
190

 

 

 

 
190

Total revenues
352,019

 
54,138

 
671

 
(627
)
 
406,201

Operating expenses
56,941

 
23,044

 
8,242

 
(643
)
 
87,584

Product purchases
186,023

 
1,597

 

 
(627
)
 
186,993

Equity earnings
(1,654
)
 

 

 

 
(1,654
)
Operating margin (loss)
110,709

 
29,497

 
(7,571
)
 
643

 
133,278

Depreciation and amortization expense
17,840

 
8,562

 
358

 
643

 
27,403

G&A expenses
16,965

 
6,033

 
626

 

 
23,624

Operating profit (loss)
$
75,904

 
$
14,902

 
$
(8,555
)
 
$

 
$
82,251

 
 
Three Months Ended September 30, 2011
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
167,500

 
$
60,621

 
$
4,644

 
$
(701
)
 
$
232,064

Product sales revenues
197,932

 
5,887

 

 
(566
)
 
203,253

Affiliate management fee revenue
193

 

 

 

 
193

Total revenues
365,625

 
66,508

 
4,644

 
(1,267
)
 
435,510

Operating expenses
61,075

 
22,780

 
6,349

 
(746
)
 
89,458

Product purchases
157,356

 
3,461

 

 
(1,267
)
 
159,550

Equity earnings
(1,954
)
 
(1
)
 

 

 
(1,955
)
Operating margin (loss)
149,148

 
40,268

 
(1,705
)
 
746

 
188,457

Depreciation and amortization expense
18,945

 
10,179

 
364

 
746

 
30,234

G&A expenses
15,162

 
4,743

 
565

 

 
20,470

Operating profit (loss)
$
115,041

 
$
25,346

 
$
(2,634
)
 
$

 
$
137,753


 

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Nine Months Ended September 30, 2010
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
421,028

 
$
144,010

 
$
9,547

 
$
(1,516
)
 
$
573,069

Product sales revenues
570,366

 
15,106

 

 
(154
)
 
585,318

Affiliate management fee revenue
569

 

 

 

 
569

Total revenues
991,963

 
159,116

 
9,547

 
(1,670
)
 
1,158,956

Operating expenses
149,211

 
57,679

 
15,458

 
(2,368
)
 
219,980

Product purchases
499,066

 
6,120

 

 
(1,670
)
 
503,516

Equity earnings
(4,323
)
 

 

 

 
(4,323
)
Operating margin
348,009

 
95,317

 
(5,911
)
 
2,368

 
439,783

Depreciation and amortization expense
51,200

 
24,809

 
1,083

 
2,368

 
79,460

G&A expenses
48,307

 
16,911

 
1,826

 

 
67,044

Operating profit (loss)
$
248,502

 
$
53,597

 
$
(8,820
)
 
$

 
$
293,279

 
 
Nine Months Ended September 30, 2011
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
472,730

 
$
172,811

 
$
17,431

 
$
(2,308
)
 
$
660,664

Product sales revenues
577,811

 
23,445

 

 
(764
)
 
600,492

Affiliate management fee revenue
578

 

 

 

 
578

Total revenues
1,051,119

 
196,256

 
17,431

 
(3,072
)
 
1,261,734

Operating expenses
150,522

 
71,403

 
13,406

 
(2,189
)
 
233,142

Product purchases
483,369

 
9,319

 

 
(3,072
)
 
489,616

Equity earnings
(4,764
)
 
(1
)
 

 

 
(4,765
)
Operating margin
421,992

 
115,535

 
4,025

 
2,189

 
543,741

Depreciation and amortization expense
56,788

 
30,193

 
1,091

 
2,189

 
90,261

G&A expenses
52,400

 
16,052

 
1,889

 

 
70,341

Operating profit
$
312,804

 
$
69,290

 
$
1,045

 
$

 
$
383,139

 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2011
Segment assets
$
2,702,501

 
$
1,042,325

 
$
36,790

 
$

 
$
3,781,616

Corporate assets
 
 
 
 
 
 
 
 
225,082

Total assets
 
 
 
 
 
 
 
 
$
4,006,698



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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



6.
Inventory
Inventory at December 31, 2010 and September 30, 2011 was as follows (in thousands):
 
 
December 31,
2010
 
September 30,
2011
Refined petroleum products
$
146,211

 
$
105,770

Natural gas liquids
27,982

 
91,354

Transmix
32,277

 
49,524

Crude oil
5,008

 
3,987

Additives
4,930

 
6,485

Total inventory
$
216,408

 
$
257,120


In third quarter 2011, we recorded a $2.3 million and a $0.7 million lower-of-average-cost-or-market adjustment to our refined petroleum products and transmix inventory, respectively, resulting from a decrease in market prices in late third quarter 2011. These adjustments were included in operating expenses on our consolidated statements of income.

The increase in natural gas liquids was due to the purchase of butane during 2011 in anticipation of the petroleum products blending season, which begins each September.


7.
Employee Benefit Plans
We sponsor two union pension plans for certain employees and a pension plan primarily for salaried employees, a postretirement benefit plan for selected employees and a defined contribution plan. The following tables present our consolidated net periodic benefit costs related to these plans during the three and nine months ended September 30, 2010 and 2011 (in thousands):
 
 
Three Months  Ended
September 30, 2010
 
Three Months  Ended
September 30, 2011
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
1,687

 
$
63

 
$
3,251

 
$
141

Interest cost
840

 
338

 
1,358

 
230

Expected return on plan assets
(890
)
 

 
(1,225
)
 

Amortization of prior service cost (credit)
76

 
(213
)
 
76

 
(212
)
Amortization of actuarial loss
138

 
100

 
766

 
1

Settlement cost

 

 
70

 

Net periodic benefit cost
$
1,851

 
$
288

 
$
4,296

 
$
160

 
 
 
 
 
 
 
 


12

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
 
Nine Months  Ended
September 30, 2010
 
Nine Months  Ended
September 30, 2011
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
5,040

 
$
239

 
$
7,221

 
$
323

Interest cost
2,506

 
744

 
3,257

 
749

Expected return on plan assets
(2,664
)
 

 
(3,268
)
 

Amortization of prior service cost (credit)
230

 
(638
)
 
230

 
(638
)
Amortization of actuarial loss
388

 
100

 
1,068

 
126

Settlement cost

 

 
70

 

Net periodic benefit cost
$
5,500

 
$
445

 
$
8,578

 
$
560

 
 
 
 
 
 
 
 
Contributions estimated to be paid into the plans in 2011 are $9.4 million and $0.5 million for the pension and other postretirement benefit plans, respectively.


8.
Debt
Consolidated debt at December 31, 2010 and September 30, 2011 was as follows (in thousands):
 
 
December 31,
2010
 
September 30,
2011
 
Weighted-Average
Interest Rate  at
September 30, 2011 (1)
Revolving credit facility
$
15,000

 
$

 
$250.0 million of 6.45% Notes due 2014
249,786

 
249,829

 
6.3%
$250.0 million of 5.65% Notes due 2016
252,466

 
252,144

 
5.7%
$250.0 million of 6.40% Notes due 2018
259,125

 
263,994

 
5.1%
$550.0 million of 6.55% Notes due 2019
581,890

 
579,372

 
5.9%
$550.0 million of 4.25% Notes due 2021
298,932

 
559,138

 
4.2%
$250.0 million of 6.40% Notes due 2037
248,949

 
248,960

 
6.3%
Total debt
$
1,906,148

 
$
2,153,437

 
 
 
(1)
Weighted-average interest rate includes the impact of outstanding interest rate swaps, the amortization/accretion of discounts and premiums and the amortization/accretion of gains and losses realized on historical cash flow and fair value hedges (see Note 9—Derivative Financial Instruments for detailed information regarding interest rate swaps).

The face value of our debt at September 30, 2011 was $2.1 billion. The difference between the face value and carrying value of the debt outstanding is the unamortized portion of various fair value hedges and the unamortized discounts and premiums on debt issuances. Note discounts and premiums are being amortized or accreted to the applicable notes over the respective lives of the associated note.
The amounts outstanding under the notes and revolving credit facility described in the table above are senior indebtedness.
Revolving Credit Facility. The total borrowing capacity under the revolving credit facility, which would have matured in September 2012, was $550.0 million at September 30, 2011. Borrowings under the facility are unsecured and bear interest at LIBOR plus a spread ranging from 0.3% to 0.8% based on our credit ratings and amounts outstanding under the facility. Additionally, a commitment fee is assessed at a rate from 0.05% to 0.125%, depending on our credit ratings. Borrowings under this facility are used for general purposes, including capital expenditures. As of September 30, 2011, there were no borrowings outstanding under this facility; however, $4.6 million was obligated for letters of credit. Amounts obligated for letters of credit are not reflected as debt on our consolidated balance sheets but do decrease our borrowing capacity under the facility. In October 2011, we replaced the above-noted revolving credit facility with a new revolving facility. See Note 14 - Subsequent Events for details.

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



2011 Debt Offering. In August 2011, we issued an additional $250.0 million of our 4.25% notes due 2021. We sold these notes at a price of 104.1% of their face value, or $260.2 million. Net proceeds from this offering, including accrued interest of $0.7 million, were $258.7 million after underwriting discounts of $1.6 million and other offering costs of $0.6 million. Proceeds from this debt offering were used to repay all of the borrowings outstanding under our revolving credit facility, which was $193.0 million at the time, and for general partnership purposes, including investments in capital expenditures.


9.
Derivative Financial Instruments

Commodity Derivatives

Our petroleum products blending activities produce gasoline products and we can estimate the timing and quantities of sales of these products. We use a combination of forward purchase and sales contracts, NYMEX contracts and butane price swap purchase agreements to lock in most of the product margins realized from our blending activities that we choose to hedge.

We account for the forward purchase and sales contracts we use in our blending activities as normal purchases and sales. As of September 30, 2011, we had commitments under forward purchase contracts for product purchases of approximately 0.4 million barrels that are being accounted for as normal purchases totaling approximately $32.4 million, and we had commitments under forward sales contracts for product sales of approximately 0.7 million barrels that are being accounted for as normal sales totaling approximately $82.7 million.

NYMEX Contracts & Butane Swap Agreements - We use NYMEX contracts and butane swap agreements to help manage commodity price risk. We use NYMEX contracts to hedge against changes in the price of petroleum products we expect to sell in future periods. Our NYMEX contracts fall into one of three categories:

Hedge Type
 
Hedge Purpose
 
Accounting Treatment
Qualifies for Hedge Accounting Treatment
    Cash Flow Hedge
 
To hedge the variability in cash flows related to a forecasted transaction.
 
The effective portion of changes in the value of the hedge are recorded to accumulated other comprehensive income/loss and reclassified to earnings when the forecasted transaction occurs. Any ineffectiveness is recognized currently in earnings.
    Fair Value Hedge
 
To hedge against the changes in the fair value of a recognized asset or liability.
 
The effective portion of changes in the value of the hedge are recorded as adjustments to the asset or liability being hedged. Any ineffectiveness is recognized currently in earnings.
Does not Qualify For Hedge Accounting Treatment
    Economic Hedge
 
To effectively serve as either a fair value or a cash flow hedge; however, the derivative agreement does not qualify for hedge accounting treatment in accordance with Accounting Standards Codification 815, Derivatives and Hedging.
 
Changes in the value of these agreements are recognized currently in earnings.

We also use butane swap agreements to hedge against changes in the price of selected butane purchases we expect to complete in the future. We elected to not designate the butane swap agreements we have entered into as hedges for accounting purposes because the related NYMEX contracts associated with the gasoline that will be produced and sold from these future butane purchases did not qualify for hedge accounting treatment. Changes in the fair value of these agreements are recognized currently in earnings. As outlined in the table below, at September 30, 2011, we had open NYMEX contracts representing 3.6 million barrels of petroleum products and open butane swap agreements on the purchase of 0.3 million barrels of butane.


14

Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
NYMEX - Cash Flow Hedges
 
0.6 million barrels of refined petroleum products
 
Between October and December 2011
NYMEX - Fair Value Hedges
 
0.7 million barrels of crude oil
 
Between October 2011 and November 2013
NYMEX - Economic Hedges
 
2.3 million barrels of refined petroleum products
 
Between October 2011 and April 2012
Butane Swap Agreements
 
0.3 million barrels of butane
 
Between October 2011 and March 2012

At September 30, 2011, the fair value of our open NYMEX contracts was a net asset of $38.2 million and the fair value of our butane swap agreements was a liability of $1.0 million. Combined, the net asset was $37.2 million, of which $36.2 million was recorded as energy commodity derivatives contracts and $1.0 million was recorded as other noncurrent assets on our consolidated balance sheet. At September 30, 2011, we had received margin cash of $7.1 million for these contracts, which were recorded as energy commodity derivatives deposits on our consolidated balance sheet. We have the right to offset the combined fair values of our open NYMEX contracts and our open butane swap agreements against our margin deposits under a master netting arrangement with our counterparty; however, we have elected to disclose the combined fair values of our open NYMEX and butane swap agreements separately from these related margin deposits on our consolidated balance sheet. We have the right of offset under the agreements and, therefore, have offset the fair values of our NYMEX agreements and butane swap agreements together on our consolidated balance sheets.

Interest Rate Derivatives

During 2011, we entered into interest rate swap agreements with respect to $100.0 million of our long-term debt, which were accounted for as fair value hedges, to hedge against changes in the fair value of a portion of our 6.40% notes due 2018. In third quarter 2011, we terminated and settled these interest rate swap agreements and received $6.1 million, of which $5.9 million was recorded as an adjustment to long-term debt and will be amortized over the remaining life of the notes and $0.2 million was recorded as a reduction of accrued interest.
Derivative activity included in accumulated other comprehensive loss ("AOCL") for the three and nine months ended September 30, 2010 and 2011 was as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Derivative Activity Included in AOCL
2010
 
2011
 
2010
 
2011
Beginning balance
$
3,407

 
$
7,856

 
$
1,743

 
$
3,325

Net gain (loss) on commodity hedges
(179
)
 
6,539

 
(468
)
 
11,152

Reclassification of net gain on interest rate cash flow hedges to interest expense
(41
)
 
(41
)
 
(123
)
 
(123
)
Reclassification of net loss (gain) on commodity hedges to product sales revenues
(1,068
)
 
(1,493
)
 
967

 
(1,493
)
Ending balance
$
2,119

 
$
12,861

 
$
2,119

 
$
12,861

As of September 30, 2011, the net gain estimated to be classified to interest expense and product sales revenues over the next twelve months from AOCL is approximately $0.2 million and $9.7 million, respectively.

The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2010 and 2011 of derivatives accounted for under Accounting Standards Codification ("ASC") 815-25, Derivatives and Hedging—Fair Value Hedges, that were designated as hedging instruments (in thousands):

15

Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Derivative  Instrument
 
Location of Gain
Recognized on
Derivative
 
Amount of Gain
Recognized on
Derivative
 
Amount of Interest
Expense Recognized on
Fixed-Rate Debt (Related
Hedged Item)
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
 
Sept. 30, 2010
 
Sept. 30, 2011
Interest rate swap agreements
 
Interest expense
 
$

 
$
264

 
$
4,604

 
$
1,275

 
$

 
$
(1,333
)
 
$
(17,277
)
 
$
(7,556
)
During 2011, we had open NYMEX contracts on 0.7 million barrels of crude oil which were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the unrealized gains of $1.4 million from the agreements as of September 30, 2011 were fully offset by adjustments of $1.0 million and $0.4 million to tank bottom inventory and other current assets, respectively; therefore, there was no net impact on product sales revenues.
The following is a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2010 and 2011 of the effective portion of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands). See Note 4 - Product Sales Revenues for further details regarding the impact of our NYMEX agreements on product sales.
 
 
 
Three Months Ended September 30, 2010
Effective Portion
Derivative Instrument
 
Amount of Loss
Recognized in
AOCL on Derivative
 
Location of Gain 
Reclassified from
AOCL into Income
 
Amount of Gain Reclassified
from AOCL into Income
Interest rate swap agreements
 
 
$

 
 
Interest expense
 
 
$
41

 
NYMEX commodity contracts
 
 
(179
)
 
 
Product sales revenues
 
 
1,068

 
Total cash flow hedges
 
 
$
(179
)
 
 
Total
 
 
$
1,109

 
 
 
Three Months Ended September 30, 2011
Effective Portion
Derivative Instrument
 
Amount of Gain
Recognized in
AOCL on Derivative
 
Location of Gain
Reclassified from
AOCL into Income
 
Amount of Gain  Reclassified
from AOCL into Income
Interest rate swap agreements
 
 
$

 
 
Interest expense
 
 
$
41

 
NYMEX commodity contracts
 
 
6,539

 
 
Product sales revenues
 
 
1,493

 
Total cash flow hedges
 
 
$
6,539

 
 
Total
 
 
$
1,534

 
 
 
 
Nine Months Ended September 30, 2010
Effective Portion
Derivative Instrument
 
Amount of Loss
Recognized in
AOCL on Derivative
 
Location of Gain (Loss) 
Reclassified from
AOCL into Income
 
Amount of Gain (Loss) Reclassified
from AOCL into Income
Interest rate swap agreements
 
 
$

 
 
Interest expense
 
 
$
123

 
NYMEX commodity contracts
 
 
(468
)
 
 
Product sales revenues
 
 
(967
)
 
Total cash flow hedges
 
 
$
(468
)
 
 
Total
 
 
$
(844
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2011
Effective Portion
Derivative Instrument
 
Amount of Gain
Recognized in
AOCL on Derivative
 
Location of Gain
Reclassified from
AOCL into Income
 
Amount of Gain  Reclassified
from AOCL into Income
Interest rate swap agreements
 
 
$

 
 
Interest expense
 
 
$
123

 
NYMEX commodity contracts
 
 
11,152

 
 
Product sales revenues
 
 
1,493

 
Total cash flow hedges
 
 
$
11,152

 
 
Total
 
 
$
1,616

 
There was no ineffectiveness recognized for any of our cash flow or fair value hedges during the three and nine months ended September 30, 2010 or 2011.

16

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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2010 and 2011 of derivatives accounted for under ASC 815-10-35; Derivatives and Hedging—Overall—Subsequent Measurement, that were not designated as hedging instruments (in thousands):
 
 
 
 
Amount of Gain (Loss)
Recognized on Derivative
 
 
 
Three Months  Ended
September 30,
 
Nine Months Ended September 30,
Derivative Instrument
Location of Gain (Loss)
Recognized on Derivative
 
2010
 
2011
 
2010
 
2011
NYMEX commodity contracts
Product sales revenues
 
$
(8,466
)
 
$
28,579

 
$
8,366

 
$
(7,604
)
NYMEX commodity contracts
Operating expenses
 

 
(923
)
 

 
598

Butane swap contracts
Product purchases
 

 
(50
)
 

 
(889
)
 
Total
 
$
(8,466
)
 
$
27,606

 
$
8,366

 
$
(7,895
)
The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were designated as hedging instruments as of December 31, 2010 and September 30, 2011 (in thousands):
 
December 31, 2010
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Other noncurrent assets
 
$

 
Other noncurrent liabilities
 
$
4,920

 
 
 
 
 
 
 
 
 
September 30, 2011
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$
8,689

 
Energy commodity derivatives contracts, net
 
$

NYMEX commodity contracts
Other noncurrent assets
 
1,030

 
Other noncurrent liabilities
 

 
Total
 
$
9,719

 
Total
 
$

 
The following tables provide a summary of the amounts included on our consolidated balance sheets of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, that were not designated as hedging instruments as of December 31, 2010 and September 30, 2011 (in thousands):
 
December 31, 2010
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$

 
Energy commodity derivatives contracts, net
 
$
11,790

 
 
 
 
 
 
 
 
 
September 30, 2011
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$
28,497

 
Energy commodity derivatives contracts, net
 
$

Butane swap contracts
Energy commodity derivatives contracts, net
 

 
Energy commodity derivatives contracts, net
 
981

 
Total
 
$
28,497

 
Total
 
$
981

 

17

Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



10.
Commitments and Contingencies

Clean Air Act - Section 185 Liability.

Section 185 of the Clean Air Act ("CAA 185") requires states to collect annual fees from major source facilities located in severe or extreme nonattainment ozone areas if the designated area within the state did not meet its attainment deadline. Imposition of the fee is mandated for each calendar year after the attainment date until the area is redesignated as an attainment area for ozone. The Houston-Galveston region was initially determined to be a severe nonattainment area that did not meet its 2007 attainment deadline and, as such, would be subject to CAA 185. The Texas Commission on Environmental Quality (“TCEQ”) drafted a “Failure to Attain Rule” (the “Rule”) to implement the requirements of CAA 185. The Rule was scheduled to be final in the spring of 2010 and would have provided for the collection of an annual failure to attain fee for emissions from calendar year 2008 forward.  Under the Rule, the annual fees to be paid by entities within the Houston-Galveston non-attainment area would have been determined by the emissions from a facility that exceed the established baseline. We have certain facilities in the Houston area that would have been subject to the TCEQ's Rule.

In January 2010, the Environmental Protection Agency ("EPA") issued guidance for states developing fee programs under CAA 185. In response to and based on the standards in the EPA's guidance, the TCEQ suspended the draft Rule and submitted a request for a determination by the EPA (a "Termination Determination") that the Houston-Galveston Region no longer qualified as a severe non-attainment area. If TCEQ's request for a Termination Determination was approved by the EPA, the requirement to assess a CAA 185 fee would be terminated.  Subsequent to the TCEQ's request for a Termination Determination, the Natural Resource Defense Counsel submitted a petition in federal court challenging the legality of the EPA's guidance. Based upon the EPA's belief and assertion that the guidance would be sustained in federal court, management determined the probability of the assessment of an annual fee for the Houston-Galveston area was remote.

In July 2011, the court issued an opinion in the National Resource Defense Counsel case vacating the EPA's January 2010 guidance memorandum on states' CAA 185 equivalent programs. As a result of the court's ruling, the EPA has instructed the TCEQ that it is unable to approve the Termination Determination request.

Based on the recent court decisions and statements by the EPA, management now believes that it is probable that the TCEQ will move forward with its CAA 185 rule making process.  A number of potential alternative outcomes exist, including the possibility that we will not be assessed any CAA 185 fees.  However, management believes it is probable we will be assessed fees for excess emissions at our Houston area facilities and estimates that the range of fees that could be assessed to us for the periods from 2007 through 2010 to be between $6.4 million and $13.7 million. During second quarter 2011, we recorded an accrual of $6.4 million related to this matter, of which $4.8 million was recorded as a current environmental liability and $1.6 million was recorded as a long-term environmental liability. Additionally, during third quarter 2011, we accrued $0.6 million for estimated fees associated with 2011 operations, which was recorded as a long-term environmental liability.

Environmental Liabilities.

Liabilities recognized for estimated environmental costs were $32.8 million and $43.4 million at December 31, 2010 and September 30, 2011, respectively. We have classified environmental liabilities as current or noncurrent based on management’s estimates regarding the timing of actual payments. Management estimates that expenditures associated with these environmental liabilities will be paid over the next 10 years. Environmental expenses recognized as a result of changes in our environmental liabilities are included in operating expenses on our consolidated statements of income. Environmental expense was $5.1 million and $10.2 million for the three and nine months ended September 30, 2010, respectively, and $3.6 million and $16.1 million for the three and nine months ended September 30, 2011. Year-to-date 2011 environmental expense includes expense recognized for the Section 185 contingent liability accrual discussed above.

Environmental Receivables.

Receivables from insurance carriers related to environmental matters at December 31, 2010 were $2.2 million, of which $1.0 million and $1.2 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet. Receivables from insurance carriers related to environmental matters at September 30, 2011 were $5.3 million, of which $1.4 million and $3.9 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet.

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Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Unrecognized Product Gains.
Our petroleum terminals operations generate product overages and shortages that result from metering inaccuracies and product evaporation, expansion, releases and contamination. Most of the contracts we have with our customers state that we bear the risk of loss (or gain) from these conditions. When our petroleum terminals experience net product shortages, we recognize expense for those losses in the periods in which they occur. When our petroleum terminals experience net product overages, we have product on hand for which we have no cost basis. Therefore, these net overages are not recognized in our financial statements until the associated barrels are either sold or used to offset product losses. The net unrecognized product overages for our petroleum terminals operations had a market value of approximately $3.8 million as of September 30, 2011. However, the actual amounts we will recognize in future periods will depend on product prices at the time the associated barrels are either sold or used to offset net future product shortages.
Other.
We are a party to various other claims, legal actions and complaints arising in the ordinary course of business. While the results cannot be predicted with certainty, management believes the ultimate resolution of these claims, legal actions and complaints after consideration of amounts accrued, insurance coverage or other indemnification arrangements will not have a material adverse effect on our financial position, results of operations or cash flows.

11.
Long-Term Incentive Plan
We have a long-term incentive plan (“LTIP”) for certain of our employees and for directors of our general partner. The LTIP primarily consists of phantom units and, as of September 30, 2011, permits the grant of awards covering an aggregate of 4.7 million of our limited partner units. The remaining units available under the LTIP at September 30, 2011 total 1.6 million. The compensation committee of our general partner’s board of directors administers the LTIP.
 
Our equity-based incentive compensation expense was as follows (in thousands):
 
 
Three Months Ended
September 30, 2010
 
Nine Months Ended
September 30, 2010
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
2007 awards
$

 
$

 
$

 
$

 
$
6

 
$
6

2008 awards
1,930

 
1,057

 
2,987

 
4,855

 
2,326

 
7,181

2009 awards
350

 
358

 
708

 
1,050

 
818

 
1,868

2010 awards
473

 
187

 
660

 
1,382

 
445

 
1,827

Retention awards
218

 

 
218

 
600

 

 
600

Total
$
2,971

 
$
1,602

 
$
4,573

 
$
7,887

 
$
3,595

 
$
11,482

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
 
 
 
 
G&A expense
 
 
 
 
$
3,975

 
 
 
 
 
$
10,031

Operating expense
 
 
 
 
598

 
 
 
 
 
1,451

Total
 
 
 
 
$
4,573

 
 
 
 
 
$
11,482

 

19

Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
Three Months Ended
September 30, 2011
 
Nine Months Ended
September 30, 2011
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
2009 awards
$
600

 
$
657

 
$
1,257

 
$
3,835

 
$
2,862

 
$
6,697

2010 awards
387

 
189

 
576

 
1,724

 
708

 
2,432

2011 awards
578

 
153

 
731

 
1,702

 
442

 
2,144

Retention awards
170

 

 
170

 
478

 

 
478

Total
$
1,735

 
$
999

 
$
2,734

 
$
7,739

 
$
4,012

 
$
11,751

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
 
 
 
 
G&A expense
 
 
 
 
$
2,375

 
 
 
 
 
$
10,696

Operating expense
 
 
 
 
359

 
 
 
 
 
1,055

Total
 
 
 
 
$
2,734

 
 
 
 
 
$
11,751

 
In January 2011, the cumulative amounts of the 2008 LTIP awards were settled by issuing 252,746 limited partner units and distributing those units to the LTIP participants. The minimum tax withholdings associated with this settlement and employer taxes of $7.4 million and $0.9 million, respectively, were paid in January 2011.

In January 2011, the compensation committee of our general partner's board of directors approved 148,670 phantom unit awards pursuant to our LTIP. These awards have a three-year vesting period that will end on December 31, 2013.


12.
Distributions
Distributions we paid during 2010 and 2011 were as follows (in thousands, except per unit amounts):
 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
2/12/2010
 
 
$
0.7100

 
 
 
$
75,779

 
5/14/2010
 
 
0.7200