MMP - 2012.9.30.10Q


 
 
 
 
 
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, 2012
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 12b-2 of the Exchange
Act).    Yes  £    No  x
As of October 31, 2012, there were 226,200,872 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.
 
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,
 
2011
 
2012
 
2011
 
2012
Transportation and terminals revenues
$
232,064

 
$
255,492

 
$
660,664

 
$
721,807

Product sales revenues
203,253

 
70,178

 
600,492

 
546,476

Affiliate management fee revenue
193

 
199

 
578

 
596

Total revenues
435,510

 
325,869

 
1,261,734

 
1,268,879

Costs and expenses:
 
 
 
 
 
 
 
Operating
89,458

 
103,272

 
233,142

 
254,050

Product purchases
159,550

 
85,819

 
489,616

 
478,929

Depreciation and amortization
30,234

 
31,692

 
90,261

 
94,688

General and administrative
20,470

 
27,551

 
70,341

 
76,709

Total costs and expenses
299,712

 
248,334

 
883,360

 
904,376

Equity earnings
1,955

 
1,749

 
4,765

 
4,875

Operating profit
137,753

 
79,284

 
383,139

 
369,378

Interest expense
27,332

 
29,113

 
79,806

 
87,354

Interest income
(11
)
 
(16
)
 
(22
)
 
(80
)
Interest capitalized
(665
)
 
(1,439
)
 
(2,526
)
 
(3,331
)
Debt placement fee amortization expense
410

 
519

 
1,180

 
1,556

Income before provision for income taxes
110,687

 
51,107

 
304,701

 
283,879

Provision for income taxes
447

 
585

 
1,397

 
2,012

Net income
$
110,240

 
$
50,522

 
$
303,304

 
$
281,867

Allocation of net income (loss):
 
 
 
 
 
 
 
Limited partners' interest
$
110,240

 
$
50,522

 
$
303,367

 
$
281,867

Non-controlling owners’ interest
—

 
—

 
(63
)
 
—

Net income
$
110,240

 
$
50,522

 
$
303,304

 
$
281,867

Basic and diluted net income per limited partner unit
$
0.49

 
$
0.22

 
$
1.34

 
$
1.25

Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation
225,728

 
226,431

 
225,649

 
226,348


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,
 
2011
 
2012
 
2011
 
2012
Net income
$
110,240

 
$
50,522

 
$
303,304

 
$
281,867

Other comprehensive income:
 
 

 
 
 

Net gain on interest rate cash flow hedges
—

 
10,126

 
—

 
11,134

Net gain (loss) on commodity cash flow hedges
6,539

 
(460
)
 
11,152

 
1,207

Reclassification of net gain on interest rate cash flow hedges to interest expense
(41
)
 
(41
)
 
(123
)
 
(123
)
Reclassification of net gain on commodity hedges to product sales revenues
(1,493
)
 
(1,384
)
 
(1,493
)
 
(1,384
)
Amortization of prior service credit and actuarial loss
701

 
1,269

 
856

 
2,974

Curtailment of postretirement benefit plan
—

 
(4,081
)
 
—

 
(4,081
)
Adjustment to recognize the funded status of postretirement plans
(10,254
)
 
8,325

 
(10,254
)
 
8,325

Total other comprehensive income (loss)
(4,548
)
 
13,754

 
138

 
18,052

Comprehensive income
105,692

 
64,276

 
303,442

 
299,919

Comprehensive loss attributable to non-controlling owners’ interest in consolidated subsidiaries
—

 
—

 
(63
)
 
—

Comprehensive income attributable to partners’ capital
$
105,692

 
$
64,276

 
$
303,505

 
$
299,919

See notes to consolidated financial statements.

 

3
Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2011
 
September 30,
2012
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
209,620

 
$
100,491

Trade accounts receivable (less allowance for doubtful accounts of $68 and $5 at December 31, 2011 and September 30, 2012, respectively)
82,497

 
106,208

Other accounts receivable
10,079

 
8,929

Inventory
258,860

 
220,716

Energy commodity derivatives contracts, net
4,914

 
—

Energy commodity derivatives deposits, net
26,917

 
37,725

Reimbursable costs
5,891

 
7,294

Other current assets
13,412

 
19,107

Total current assets
612,190

 
500,470

Property, plant and equipment
4,080,484

 
4,287,815

Less: accumulated depreciation
830,762

 
910,852

Net property, plant and equipment
3,249,722

 
3,376,963

Equity investments
35,594

 
73,261

Long-term receivables
2,534

 
3,190

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $14,813 and $16,334 at December 31, 2011 and September 30, 2012, respectively)
15,176

 
13,655

Debt placement costs (less accumulated amortization of $5,799 and $7,355 at December 31, 2011 and September 30, 2012, respectively)
14,615

 
13,059

Tank bottom inventory
59,473

 
58,479

Other noncurrent assets
2,437

 
13,020

Total assets
$
4,045,001

 
$
4,105,357

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
66,384

 
$
98,141

Accrued payroll and benefits
30,184

 
29,905

Accrued interest payable
40,547

 
33,264

Accrued taxes other than income
27,570

 
31,933

Environmental liabilities
17,852

 
16,365

Deferred revenue
39,983

 
45,065

Accrued product purchases
59,800

 
70,526

Energy commodity derivatives contracts, net
—

 
12,575

Other current liabilities
28,735

 
31,516

Total current liabilities
311,055

 
369,290

Long-term debt
2,151,775

 
2,146,749

Long-term pension and benefits
67,080

 
61,083

Other noncurrent liabilities
19,905

 
21,411

Environmental liabilities
31,783

 
35,247

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (225,473 units and 226,201 units outstanding at December 31, 2011 and September 30, 2012, respectively)
1,510,604

 
1,500,726

Accumulated other comprehensive loss
(47,201
)
 
(29,149
)
Total partners’ capital
1,463,403

 
1,471,577

Total liabilities and partners' capital
$
4,045,001

 
$
4,105,357

See notes to consolidated financial statements.

4
Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Nine Months Ended
 
September 30,
 
2011
 
2012
Operating Activities:
 
 
 
Net income
$
303,304

 
$
281,867

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
90,261

 
94,688

Debt placement fee amortization
1,180

 
1,556

Loss on sale, retirement and impairment of assets
7,529

 
10,575

Equity earnings
(4,765
)
 
(4,875
)
Distributions from equity investments
4,365

 
4,875

Equity-based incentive compensation expense
11,751

 
12,555

Amortization of prior service credit and actuarial loss
856

 
2,974

Gain on curtailment of postretirement benefit plan
—

 
(4,081
)
Changes in operating assets and liabilities:
 
 
 
Restricted cash
14,379

 
—

Trade accounts receivable and other accounts receivable
2,117

 
(22,561
)
Inventory
(40,712
)
 
38,144

Energy commodity derivatives contracts, net of derivatives deposits
(14,926
)
 
7,047

Reimbursable costs
5,987

 
(1,403
)
Accounts payable
27,293

 
(14,840
)
Accrued payroll and benefits
(8,350
)
 
(279
)
Accrued interest payable
(3,228
)
 
(7,283
)
Accrued taxes other than income
1,088

 
4,363

Accrued product purchases
10,846

 
10,726

Current and noncurrent environmental liabilities
10,668

 
1,977

Other current and noncurrent assets and liabilities
6,499

 
(3,783
)
Net cash provided by operating activities
426,142

 
412,242

Investing Activities:
 
 
 
Property, plant and equipment:
 
 
 
Additions to property, plant and equipment
(143,163
)
 
(230,015
)
Proceeds from sale and disposition of assets
4,555

 
255

Increase (decrease) in accounts payable related to capital expenditures
(2,544
)
 
45,197

Acquisition of assets
(17,798
)
 
—

Acquisition of non-controlling owners' interests
(40,500
)
 
—

Equity investments
(5,500
)
 
(37,495
)
Distributions in excess of equity investment earnings
—

 
1,228

Other
(1,100
)
 
—

Net cash used by investing activities
(206,050
)
 
(220,830
)
Financing Activities:
 
 
 
Distributions paid
(260,703
)
 
(293,778
)
Net borrowings under revolver
(15,000
)
 
—

Borrowings under long-term notes, net of discounts and premiums
260,914

 
—

Debt placement costs
(2,192
)
 
—

Net receipt from financial derivatives
5,926

 
—

Increase (decrease) in outstanding checks
(11,045
)
 
6,238

Settlement of tax withholdings on long-term incentive compensation
(7,410
)
 
(13,001
)
Net cash used by financing activities
(29,510
)
 
(300,541
)
Change in cash and cash equivalents
190,582

 
(109,129
)
Cash and cash equivalents at beginning of period
7,483

 
209,620

Cash and cash equivalents at end of period
$
198,065

 
$
100,491

Supplemental non-cash financing activity:
 
 
 
Issuance of limited partner units in settlement of equity-based incentive plan awards
$
4,315

 
$
7,295

See notes to consolidated financial statements.

5
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 August 2012, our general partner's board of directors approved a two-for-one split of our limited partner units, which was completed on October 12, 2012. We have retrospectively restated all limited partner unit and per unit amounts in this report, including earnings per limited partner unit, the weighted average number of limited partner units outstanding for basic and diluted net income per limited partner unit, limited partner units outstanding and per unit cash distribution amounts, for each respective period presented.
In the opinion of management, our accompanying consolidated financial statements, which are unaudited except for the consolidated balance sheet as of December 31, 2011, 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, 2012, the results of operations for the three and nine months ended September 30, 2011 and 2012 and cash flows for the nine months ended September 30, 2011 and 2012. The results of operations for the nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year ending December 31, 2012.
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, 2011.
 

2.
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 mark-to-market adjustments from New York Mercantile Exchange ("NYMEX") contracts. We use NYMEX contracts to hedge against changes in the prices of petroleum products we expect to sell from our business activities in which 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 in contracts designated 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 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 7 - Derivative Financial Instruments for further disclosures regarding our NYMEX contracts.

6
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

For the three and nine months ended September 30, 2011 and 2012, product sales revenues included the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2011
 
2012
 
2011
 
2012
Physical sale of petroleum products
$
173,181

 
$
113,500

 
$
606,603

 
$
584,624

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)
21,865

 
(36,172
)
 
807

 
(33,211
)
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)
8,281

 
(7,080
)
 
(6,918
)
 
(5,159
)
Other
(74
)
 
(70
)
 
—

 
222

Total NYMEX contract adjustments
30,072

 
(43,322
)
 
(6,111
)
 
(38,148
)
Total product sales revenues
$
203,253

 
$
70,178

 
$
600,492

 
$
546,476


(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.


3.
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 below. Operating profit includes depreciation and amortization expense and general and administrative ("G&A") expenses that management does not focus on when evaluating the core profitability of our separate operating segments.



7
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
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


 
 
 
Three Months Ended September 30, 2012
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
185,575

 
$
62,961

 
$
7,662

 
$
(706
)
 
$
255,492

Product sales revenues
63,065

 
7,114

 
—

 
(1
)
 
70,178

Affiliate management fee revenue
199

 
—

 
—

 
—

 
199

Total revenues
248,839

 
70,075

 
7,662

 
(707
)
 
325,869

Operating expenses
70,526

 
29,777

 
3,667

 
(698
)
 
103,272

Product purchases
82,335

 
4,191

 
—

 
(707
)
 
85,819

Equity earnings
(1,756
)
 
7

 
—

 
—

 
(1,749
)
Operating margin
97,734

 
36,100

 
3,995

 
698

 
138,527

Depreciation and amortization expense
19,664

 
10,945

 
385

 
698

 
31,692

G&A expenses
20,057

 
6,762

 
732

 
—

 
27,551

Operating profit
$
58,013

 
$
18,393

 
$
2,878

 
$
—

 
$
79,284





8
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
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


 
 
 
Nine Months Ended September 30, 2012
 
(in thousands)
 
Petroleum
Pipeline
System
 
Petroleum
Terminals
 
Ammonia
Pipeline
System
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenues
$
513,062

 
$
190,194

 
$
20,670

 
$
(2,119
)
 
$
721,807

Product sales revenues
522,362

 
24,578

 
—

 
(464
)
 
546,476

Affiliate management fee revenue
596

 
—

 
—

 
—

 
596

Total revenues
1,036,020

 
214,772

 
20,670

 
(2,583
)
 
1,268,879

Operating expenses
173,457

 
74,399

 
8,296

 
(2,102
)
 
254,050

Product purchases
468,026

 
13,486

 
—

 
(2,583
)
 
478,929

Equity earnings
(4,919
)
 
44

 
—

 
—

 
(4,875
)
Operating margin
399,456

 
126,843

 
12,374

 
2,102

 
540,775

Depreciation and amortization expense
59,202

 
32,190

 
1,194

 
2,102

 
94,688

G&A expenses
56,051

 
18,617

 
2,041

 
—

 
76,709

Operating profit
$
284,203

 
$
76,036

 
$
9,139

 
$
—

 
$
369,378




9
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4.
Inventory
Inventory at December 31, 2011 and September 30, 2012 was as follows (in thousands):
 
 
December 31, 2011
 
September 30,
2012
Refined petroleum products
$
127,999

 
$
83,127

Natural gas liquids
55,490

 
65,875

Transmix
60,251

 
50,759

Crude oil
8,065

 
14,140

Additives
7,055

 
6,815

Total inventory
$
258,860

 
$
220,716


In conjunction with the reversal and conversion to crude oil service of our Crane-to-Houston pipeline, we discontinued our pipeline linefill activities. Since December 31, 2011, we have sold approximately 0.4 million barrels of the linefill inventory, accordingly. At September 30, 2012, we owned 0.3 million barrels of refined petroleum products linefill inventory with a carrying value of approximately $39.6 million.


5.
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 for the three and nine months ended September 30, 2011 and 2012 (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
September 30, 2011
 
September 30, 2012
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
3,251

 
$
141

 
$
2,786

 
$
22

Interest cost
1,358

 
230

 
1,240

 
101

Expected return on plan assets
(1,225
)
 
—

 
(1,448
)
 
—

Amortization of prior service cost (credit)
76

 
(212
)
 
77

 
—

Amortization of actuarial loss
766

 
1

 
1,051

 
141

Settlement cost
70

 
—

 
—

 
—

Curtailment gain
—

 
—

 
—

 
(4,081
)
Net periodic benefit cost (credit)
$
4,296

 
$
160

 
$
3,706

 
$
(3,817
)


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

 
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2011
 
September 30, 2012
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
7,221

 
$
323

 
$
9,166

 
$
297

Interest cost
3,257

 
749

 
3,647

 
616

Expected return on plan assets
(3,268
)
 
—

 
(3,800
)
 
—

Amortization of prior service cost (credit)
230

 
(638
)
 
231

 
(424
)
Amortization of actuarial loss
1,068

 
126

 
2,704

 
463

Settlement cost
70

 
—

 
—

 
—

Curtailment gain
—

 
—

 
—

 
(4,081
)
Net periodic benefit cost (credit)
$
8,578

 
$
560

 
$
11,948

 
$
(3,129
)

During the current quarter, we modified our retiree medical plan to exclude retiree medical benefits for participants after age 65. As a result of this modification, we recognized a curtailment gain.
Net periodic benefit costs for the pension plans increased in 2012 primarily due to a decrease in the discount rate at December 31, 2011.
Contributions estimated to be paid into the plans in 2012 are $13.3 million and $0.4 million for the pension and other postretirement benefit plans, respectively.


6.
Debt
Consolidated debt at December 31, 2011 and September 30, 2012 was as follows (in thousands):
 
 
 
 
 
 
 
December 31, 2011
 
September 30, 2012
 
Weighted-Average Interest Rate at September 30,
2012 (a)
Revolving credit facility
 
$
—

 
$
—

 
—%
$250.0 million of 6.45% Notes due 2014
 
249,844

 
249,889

 
6.3%
$250.0 million of 5.65% Notes due 2016
 
252,037

 
251,715

 
5.6%
$250.0 million of 6.40% Notes due 2018
 
263,477

 
261,929

 
5.3%
$550.0 million of 6.55% Notes due 2019
 
578,521

 
575,938

 
5.7%
$550.0 million of 4.25% Notes due 2021
 
558,932

 
558,302

 
4.0%
$250.0 million of 6.40% Notes due 2037
 
248,964

 
248,976

 
6.4%
Total debt
 
$
2,151,775

 
$
2,146,749

 
5.3%
 
 
 
 
 
 
 
(a)
Weighted-average interest rate includes the impact of 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 on interest expense (see Note 7—Derivative Financial Instruments for detailed information regarding fair value hedges and interest rate swaps).

The revolving credit facility and notes detailed in the table above are senior indebtedness.

The face value of our debt at December 31, 2011 and September 30, 2012 was $2.1 billion. The difference between the face value and carrying value of the debt outstanding is the unamortized portion of various terminated fair value hedges and the unamortized discounts and premiums on debt issuances. Realized gains and losses on fair value hedges and note discounts and premiums are being amortized or accreted to the applicable notes over the respective lives of those notes.

Revolving Credit Facility. The total borrowing capacity under our revolving credit facility, which matures in October 2016, is $800.0 million. Borrowings under the facility are unsecured and bear interest at LIBOR plus a spread ranging from 0.875% to 1.75% based on our credit ratings and amounts outstanding under the facility. Additionally, an unused commitment fee is assessed at a rate from 0.125% to 0.3%, depending on our credit ratings. The unused commitment fee was 0.2% at September 30, 2012. Borrowings under this facility may be used for general purposes, including capital expenditures. As of

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

September 30, 2012, there were no borrowings outstanding under this facility; however, $5.0 million was obligated for letters of credit. Amounts obligated for letters of credit are not reflected as debt on our consolidated balance sheets but decrease our borrowing capacity under the facility.


7.
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 sale contracts, NYMEX contracts and butane swap agreements to help manage price changes, which has the effect of locking in most of the product margin realized from our blending activities that we choose to hedge.

We account for the forward purchase and sale contracts we use in our blending and fractionation activities as normal purchases and sales. Forward contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting. As of September 30, 2012, we had commitments under these forward purchase and sale contracts as follows (in millions):
 
Value
 
Barrels
Forward purchase contracts
$
79.6


0.8
Forward sale contracts
$
71.1


0.6

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 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 or is not designated as a hedge in accordance with Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.
 
Changes in the value of these agreements are recognized currently in earnings.

We also use butane swap agreements, which are not designated as hedges for accounting purposes, to hedge against changes in the price of butane we expect to purchase in the future. Changes in the fair value of these agreements are recognized currently in earnings as adjustments to product purchases.


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

As outlined in the table below, our open NYMEX contracts and butane swap agreements at September 30, 2012 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
NYMEX - Cash Flow Hedges
 
0.1 million barrels of refined petroleum products
 
October 2012
NYMEX - Fair Value Hedges
 
0.7 million barrels of crude oil
 
Between October 2012 and November 2013
NYMEX - Economic Hedges
 
2.4 million barrels of refined petroleum products and crude oil
 
Between October 2012 and April 2013
Butane Swap Agreements - Economic Hedges
 
0.4 million barrels of butane
 
Between October 2012 and April 2013

At September 30, 2012, we had made margin deposits of $37.7 million for our NYMEX contracts, which were recorded as a current asset under 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 each of our counterparties; however, we have elected to disclose the combined fair values of our open NYMEX and butane swap agreements separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our NYMEX agreements and butane swap agreements together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets.
Interest Rate Derivatives
During 2012, we entered into a total of $250.0 million of forward-starting interest rate swap agreements to hedge against the variability of future interest payments on debt that we anticipate issuing between December 1, 2013 and December 1, 2014 to refinance our $250.0 million of 6.45% notes due June 1, 2014. Under the terms of these agreements, we will pay a weighted-average fixed interest rate of 2.6% and receive LIBOR beginning June 1, 2014. The hedges have a 30-year maturity, which matches the expected maturity of the anticipated debt issuance; however, the hedges have a mandatory settlement date of June 1, 2014. We account for these agreements as cash flow hedges.
Impact of Derivatives on Income Statement, Balance Sheet and AOCL
The changes in derivative activity included in accumulated other comprehensive loss ("AOCL") for the three and nine months ended September 30, 2011 and 2012 were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Derivative Gains (Losses) Included in AOCL
2011
 
2012
 
2011
 
2012
Beginning balance
$
7,856

 
$
5,754

 
$
3,325

 
$
3,161

Net gain on interest rate cash flow hedges
—

 
10,126

 
—

 
11,134

Net gain (loss) on commodity cash flow hedges
6,539

 
(460
)
 
11,152

 
1,207

Reclassification of net gain on interest rate cash flow hedges to interest expense
(41
)
 
(41
)
 
(123
)
 
(123
)
Reclassification of net gain on commodity hedges to product sales revenues
(1,493
)
 
(1,384
)
 
(1,493
)
 
(1,384
)
Ending balance
$
12,861

 
$
13,995

 
$
12,861

 
$
13,995


As of September 30, 2012, the net gain (loss) estimated to be classified to interest expense and product sales revenues over the next twelve months from AOCL is approximately $0.2 million and $(0.2) million, respectively.


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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, 2011 of derivatives accounted for under ASC 815-25, Derivatives and Hedging—Fair Value Hedges, that were designated as hedging instruments (in thousands):
 
 
 
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
Derivative Instrument
 
 
September 30, 2011
Interest rate swap agreements
 
Interest expense
 
$
264

 
$
1,275

 
$
1,333

 
$
7,556

 
 
 
 
 
 
 
 
 
 
 
 
During 2012, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. Because there was no ineffectiveness recognized on these hedges, the unrealized losses of $5.4 million from the agreements as of September 30, 2012 were fully offset by an increase of $5.5 million to tank bottom inventory and a decrease of $0.1 million to other current assets; therefore, there was no net impact from these agreements on income/expense.
The following tables provide a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2011 and 2012 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):

 
 
Three Months Ended September 30, 2011
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

 
 
 
Three Months Ended September 30, 2012
Derivative Instrument
 
Amount of Gain (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
 
 
$
10,126

 
 
Interest expense
 
 
$
41

 
NYMEX commodity contracts
 
 
(460
)
 
 
Product sales revenues
 
 
1,384

 
Total cash flow hedges
 
 
$
9,666

 
 
Total
 
 
$
1,425

 


 
 
Nine Months Ended September 30, 2011
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

 
 
 
Nine Months Ended September 30, 2012
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
 
 
$
11,134

 
 
Interest expense
 
 
$
123

 
NYMEX commodity contracts
 
 
1,207

 
 
Product sales revenues
 
 
1,384

 
Total cash flow hedges
 
 
$
12,341

 
 
Total
 
 
$
1,507

 

There was no ineffectiveness recognized on the financial instruments disclosed in the above tables during the three and nine months ended September 30, 2011 or 2012.

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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, 2011 and 2012 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
 
Nine Months Ended
Derivative Instrument
Location of Gain (Loss)
Recognized on Derivative
 
September 30, 2011
 
September 30, 2012
 
September 30, 2011
 
September 30, 2012
NYMEX commodity contracts
Product sales revenues
 
$
28,579

 
$
(44,706
)
 
$
(7,604
)
 
$
(39,532
)
NYMEX commodity contracts
Operating expenses
 
(923
)
 
(7,733
)
 
598

 
(3,216
)
Butane swap agreements
Product purchases
 
(50
)
 
3,007

 
(889
)
 
(1,620
)
 
Total
 
$
27,606

 
$
(49,432
)
 
$
(7,895
)
 
$
(44,368
)
The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2011 and September 30, 2012 (in thousands):
 
December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts
 
$
31

 
Energy commodity derivatives contracts
 
$
—

NYMEX commodity contracts
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
6,457

 
Total
 
$
31

 
Total
 
$
6,457

 
 
September 30, 2012
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts
 
$
69

 
Energy commodity derivatives contracts
 
$
177

NYMEX commodity contracts
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
5,463

Forward-starting interest rate swap agreements
Other noncurrent assets
 
11,134

 
Other noncurrent liabilities
 
—

 
Total
 
$
11,203

 
Total
 
$
5,640

 


15
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2011 and September 30, 2012 (in thousands):

 
December 31, 2011
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts
 
$
6,403

 
Energy commodity derivatives contracts
 
$
1,514

Butane swap agreements
Energy commodity derivatives contracts
 
28

 
Energy commodity derivatives contracts
 
34

 
Total
 
$
6,431

 
Total
 
$
1,548

 
 
 
 
 
 
 
 
 
September 30, 2012
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts
 
$
259

 
Energy commodity derivatives contracts
 
$
11,656

Butane swap agreements
Energy commodity derivatives contracts
 
648

 
Energy commodity derivatives contracts
 
1,718

 
Total
 
$
907

 
Total
 
$
13,374

 

8.
Commitments and Contingencies

Clean Air Act - Section 185 Liability

Section 185 of the Clean Air Act ("CAA 185") requires states under certain conditions to collect annual fees from major source facilities located in severe or extreme nonattainment ozone areas until the area is redesignated as an attainment area for ozone. The Environmental Protection Agency ("EPA") is required to collect the fees if a state does not administer and enforce CAA 185. 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") is currently considering a “Failure to Attain Rule” to implement the requirements of CAA 185. The draft Failure to Attain Rule is anticipated to be adopted in the spring of 2013 and is expected to provide for the collection of an annual failure to attain fee for excess emissions. We have certain facilities in the Houston area that we expect will be subject to the TCEQ's Failure to Attain Rule. We have recorded an accrual of $8.9 million related to this matter for the period of 2008 through 2010, with a possible range of loss from zero to $13.7 million. This accrual is reflected as a long-term environmental liability at September 30, 2012.

Osage Complaint

In June 2012, HollyFrontier Refining & Marketing LLC (“HollyFrontier”) filed a complaint with the Federal Energy Regulatory Commission ("FERC") alleging that Osage Pipe Line Company, LLC (“Osage”) has been over-earning on its rates for transportation on Osage's crude oil pipeline system from Cushing, Oklahoma to El Dorado, Kansas.  We own 50% of Osage and serve as its operator.  We believe that it is reasonably possible that Osage could incur a liability as a result of this complaint.  As a 50% owner of Osage, we currently estimate that our ultimate exposure in this matter will be within a range of zero to approximately $6.3 million.  We believe the claims should be denied and are defending the Osage rates vigorously. As of September 30, 2012, neither we nor Osage had any amounts accrued for this matter.

MF Global Holdings Ltd. Bankruptcy

In October 2011, MF Global Holdings Ltd., the parent of MF Global Inc. (“MF Global”), filed for bankruptcy protection under Chapter 11 of the U.S. bankruptcy laws, and a trustee was appointed to oversee the liquidation of MF Global under the Securities Investor Protection Act ("SIPA").  At that time, MF Global served as our sole clearing agent for NYMEX futures contracts. 


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

The Chicago Mercantile Exchange (“CME”) requires us to maintain adequate margin against our NYMEX positions, which our clearing agent is required to hold on our behalf in a segregated account.  In October 2011, MF Global disclosed to the CME that it had a “significant shortfall” in its segregated customer accounts.  We transferred our existing trading positions at MF Global to a new clearing agent in November 2011, and all of our NYMEX activity is now being conducted with a different clearing agent. 

As of the date of transfer of our account, MF Global owed us $29.4 million; however, we have subsequently received $23.6 million as partial payment on our account.  We have a claim outstanding with the Trustee for the SIPA liquidation of MF Global for the remaining amount owed to us by MF Global of $5.8 million.  At this point it is uncertain what additional funds MF Global will have available for distribution to its former customers as well as how the claims against MF Global's remaining assets may be prioritized. As of September 30, 2012, we have not reserved any of our MF Global receivable balance.

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $49.6 million and $51.6 million at December 31, 2011 and September 30, 2012, 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 expenses were $3.6 million and $10.0 million for the three months ended September 30, 2011 and 2012, respectively, and $16.1 million and $12.7 million for the nine months ended September 30, 2011 and 2012, respectively. The higher environmental expenses in 2011 were primarily due to the CAA 185 liability accrual (described above).

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters at December 31, 2011 were $7.7 million, of which $5.2 million and $2.5 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, 2012 were $8.3 million, of which $5.1 million and $3.2 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet.
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 $3.4 million as of September 30, 2012. 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 results of operations, financial position or cash flows.

9.
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, 2012, permits the grant of awards covering an aggregate of 9.4 million of our limited partner units. The remaining units available under the LTIP at September 30, 2012 total 2.4 million. The compensation committee of our general partner’s board of directors administers our LTIP.
 

17
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our equity-based incentive compensation expense was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2011
 
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

 
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2012
 
September 30, 2012
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
2010 awards
$
1,489

 
$
1,776

 
$
3,265

 
$
3,666

 
$
2,954

 
$
6,620

2011 awards
684

 
566

 
1,250

 
2,111

 
1,021

 
3,132

2012 awards
581

 
259

 
840

 
1,711

 
557

 
2,268

Retention awards
192

 
—

 
192

 
535

 
—

 
535

Total
$
2,946

 
$
2,601

 
$
5,547

 
$
8,023

 
$
4,532

 
$
12,555

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
4,940

 
 
 
 
 
$
11,160

Operating expense
 
 
 
 
607

 
 
 
 
 
1,395

Total
 
 
 
 
$
5,547

 
 
 
 
 
$
12,555



18
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


10.
Distributions
Distributions we paid during 2011 and 2012 were as follows (in thousands, except per unit amounts):
 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
2/14/2011
 
 
$
0.37875

 
 
 
$
85,398

 
5/13/2011
 
 
0.38500

 
 
 
86,807

 
8/12/2011
 
 
0.39250

 
 
 
88,498

 
Through 9/30/2011
 
 
1.15625

 
 
 
260,703

 
11/14/2011
 
 
0.40000

 
 
 
90,189

 
Total
 
 
$
1.55625

 
 
 
$
350,892

 
 
 
 
 
 
 
 
 
 
2/14/2012
 
 
$
0.40750

 
 
 
$
92,177

 
5/15/2012
 
 
0.42000

 
 
 
95,004

 
8/14/2012
 
 
0.47125

 
 
 
106,597

 
Through 9/30/2012
 
 
1.29875

 
 
 
293,778

 
11/14/2012(a)
 
 
0.48500

 
 
 
109,707

 
Total
 
 
$
1.78375

 
 
 
$
403,485

 
 
 
 
 
 
 
 
 
 
(a)
Our general partner's board of directors declared this cash distribution on October 24, 2012 to be paid on November 14, 2012 to unitholders of record at the close of business on November 6, 2012.
 

11.
Fair Value
Fair Value of Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosure for financial instruments:
•
Cash and cash equivalents. The carrying amounts reported on our consolidated balance sheets approximate fair value due to the short-term maturity or variable rates of these instruments.
•
Energy commodity derivatives deposits. This asset represents short-term deposits we paid associated with our energy commodity derivatives contracts. The carrying amount reported on our consolidated balance sheets approximates fair value as the deposits paid change daily in relation to the change in value of the associated contracts.
•
Energy commodity derivatives contracts. These include NYMEX futures and butane swap agreements related to petroleum products. These contracts are carried at fair value on our consolidated balance sheets and are valued based on quoted prices in active markets. See Note 7 - Derivative Financial Instruments for further disclosures regarding these contracts.
•
Forward-starting interest rate swap agreements. Fair value was determined based on an assumed exchange, at the end of each period, in an orderly transaction with a market participant in the market in which the financial instrument is traded, adjusted for the effect of counterparty credit risk. We calculated the exchange value using present value techniques on estimated future cash flows based on forward interest rate curves.
•
Long-term receivables. Fair value was determined by estimating the present value of future cash flows using a risk-free rate of interest derived from US treasury rates.
•
Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2011 and September 30, 2012. The carrying amount of borrowings, if any, under our revolving credit facility approximates fair value due to the variable rates of that instrument.
 

19
Table of Contents
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects the carrying amounts and fair values of our financial instruments as of December 31, 2011 and September 30, 2012 (in thousands):
Assets (Liabilities)
December 31, 2011
 
September 30, 2012
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
209,620

 
$
209,620

 
$
100,491

 
$
100,491

Energy commodity derivatives deposits (current assets)
$
26,917

 
$
26,917

 
$
37,725

 
$
37,725

Energy commodity derivatives contracts (current assets)
$
4,914

 
$
4,914

 
$
—

 
$
—

Energy commodity derivatives contracts (current liabilities)
$
—

 
$
—

 
$
(12,575
)
 
$
(12,575
)
Forward-starting interest rate swap agreements (noncurrent assets)
$
—

 
$
—

 
$
11,134

 
$
11,134

Energy commodity derivatives contracts (noncurrent liabilities)
$
(6,457
)
 
$
(6,457
)
 
$
(5,463
)
 
$
(5,463
)
Long-term receivables
$
2,534

 
$
2,510

 
$
3,190

 
$
3,168

Debt
$
(2,151,775
)
 
$
(2,389,700
)
 
$
(2,146,749
)
 
$
(2,471,685
)
Fair Value Measurements
The following tables summarize the recurring fair value measurements of our NYMEX commodity contracts, forward-starting interest rate swap agreements, long-term receivables and debt as of December 31, 2011 and September 30, 2012, based on the three levels established by ASC 820-10-50; Fair Value Measurements and Disclosures—Overall—Disclosure (in thousands):
 
 
 
Fair Value Measurements as of
Assets (Liabilities)
 
 
December 31, 2011 using:
Total
 
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant