MMP - 2013.6.30.10Q


 
 
 
 
 

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 June 30, 2013
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 August 1, 2013, there were 226,679,438 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 June 30,
 
Six Months Ended June 30,
 
2012
 
2013
 
2012
 
2013
Transportation and terminals revenue
$
248,761

 
$
282,462

 
$
466,315

 
$
509,733

Product sales revenue
200,568

 
157,922

 
476,298

 
359,633

Affiliate management fee revenue
198

 
3,528

 
397

 
6,967

Total revenue
449,527

 
443,912

 
943,010

 
876,333

Costs and expenses:
 
 
 
 
 
 
 
Operating
82,326

 
77,415

 
150,778

 
142,596

Product purchases
144,498

 
115,328

 
393,110

 
275,726

Depreciation and amortization
31,486

 
34,186

 
62,996

 
70,518

General and administrative
25,414

 
33,262

 
49,158

 
63,318

Total costs and expenses
283,724

 
260,191

 
656,042

 
552,158

Earnings of non-controlled entities
1,478

 
736

 
3,126

 
2,787

Operating profit
167,281

 
184,457

 
290,094

 
326,962

Interest expense
29,118

 
31,720

 
58,241

 
63,443

Interest income
(29
)
 
(13
)
 
(64
)
 
(35
)
Interest capitalized
(1,028
)
 
(3,243
)
 
(1,892
)
 
(6,694
)
Debt placement fee amortization expense
518

 
540

 
1,037

 
1,080

Income before provision for income taxes
138,702

 
155,453

 
232,772

 
269,168

Provision for income taxes
881

 
1,813

 
1,427

 
2,561

Net income
$
137,821

 
$
153,640

 
$
231,345

 
$
266,607

Basic and diluted net income per limited partner unit
$
0.61

 
$
0.68

 
$
1.02

 
$
1.18

Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation
226,429

 
226,864

 
226,305

 
226,785


See notes to consolidated financial statements.


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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2013
 
2012
 
2013
Net income
$
137,821

 
$
153,640

 
$
231,345

 
$
266,607

Other comprehensive income:
 
 

 
 
 

Net gain on interest rate cash flow hedges
1,008

 
—

 
1,008

 
—

Net gain (loss) on commodity cash flow hedges
1,667

 
—

 
1,667

 
(4,560
)
Reclassification of net gain on interest rate cash flow hedges to interest expense(1)
(41
)
 
(41
)
 
(82
)
 
(82
)
Reclassification of net loss on commodity hedges to product sales revenue(1)
—

 
—

 
—

 
4,408

Changes in employee benefit plan assets and benefit obligations(2)
853

 
503

 
1,705

 
982

Total other comprehensive income
3,487

 
462

 
4,298

 
748

Comprehensive income
$
141,308

 
$
154,102

 
$
235,643

 
$
267,355

(1) See Note 8–Derivative Financial Instruments for additional information on amounts reclassified from accumulated other comprehensive loss into income.
(2) These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 6–Employee Benefit Plans).




See notes to consolidated financial statements.

 

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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2012
 
June 30,
2013
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
328,278

 
$
119,491

Trade accounts receivable (less allowance for doubtful accounts of $5 and $4 at December 31, 2012 and June 30, 2013, respectively)
91,114

 
86,676

Other accounts receivable
12,329

 
8,600

Inventory
221,888

 
207,904

Energy commodity derivatives contracts, net
—

 
4,364

Energy commodity derivatives deposits
18,304

 
11,078

Reimbursable costs
4,863

 
1,701

Other current assets
23,502

 
24,505

Total current assets
700,278

 
464,319

Property, plant and equipment
4,408,550

 
4,581,603

Less: accumulated depreciation
943,248

 
1,005,766

Net property, plant and equipment
3,465,302

 
3,575,837

Investments in non-controlled entities
107,356

 
207,758

Long-term receivables
5,135

 
2,881

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $16,715 and $7,439 at December 31, 2012 and June 30, 2013, respectively)
13,274

 
8,659

Debt placement costs (less accumulated amortization of $7,886 and $8,966 at December 31, 2012 and June 30, 2013, respectively)
15,080

 
14,072

Tank bottom inventory
58,493

 
59,206

Other noncurrent assets
1,889

 
2,076

Total assets
$
4,420,067

 
$
4,388,068

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
112,002

 
$
81,636

Accrued payroll and benefits
32,434

 
28,005

Accrued interest payable
42,059

 
41,426

Accrued taxes other than income
33,089

 
30,352

Environmental liabilities
14,442

 
11,065

Deferred revenue
46,371

 
54,186

Accrued product purchases
72,049

 
49,164

Energy commodity derivatives contracts, net
7,338

 
—

Current portion of long-term debt
—

 
249,938

Other current liabilities
32,836

 
33,589

Total current liabilities
392,620

 
579,361

Long-term debt
2,393,408

 
2,140,083

Long-term pension and benefits
68,134

 
71,227

Other noncurrent liabilities
16,382

 
17,734

Environmental liabilities
33,821

 
24,348

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (226,201 units and 226,679 units outstanding at December 31, 2012 and June 30, 2013, respectively)
1,550,760

 
1,589,625

Accumulated other comprehensive loss
(35,058
)
 
(34,310
)
Total partners’ capital
1,515,702

 
1,555,315

Total liabilities and partners' capital
$
4,420,067

 
$
4,388,068

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
Six Months Ended
 
June 30,
 
2012
 
2013
Operating Activities:
 
 
 
Net income
$
231,345

 
$
266,607

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
62,996

 
70,518

Debt placement fee amortization
1,037

 
1,080

Loss on sale, retirement and impairment of assets
7,359

 
2,298

Earnings of non-controlled entities
(3,126
)
 
(2,787
)
Distributions from investments in non-controlled entities
3,126

 
1,302

Equity-based incentive compensation expense
7,008

 
10,282

Changes in employee benefit plan assets and benefit obligations
1,705

 
982

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
(1,025
)
 
8,167

Inventory
43,193

 
13,984

Energy commodity derivatives contracts, net of derivatives deposits
25,665

 
(4,628
)
Reimbursable costs
849

 
3,162

Accounts payable
(9,882
)
 
(322
)
Accrued payroll and benefits
(8,488
)
 
(4,429
)
Accrued interest payable
—

 
(633
)
Accrued taxes other than income
(2,714
)
 
(2,737
)
Accrued product purchases
(4,658
)
 
(22,885
)
Deferred revenue
1,052

 
7,815

Current and noncurrent environmental liabilities
(6,066
)
 
(12,850
)
Other current and noncurrent assets and liabilities
(10,890
)
 
7,081

Net cash provided by operating activities
338,486

 
342,007

Investing Activities:
 
 
 
Property, plant and equipment:
 
 
 
Additions to property, plant and equipment
(108,098
)
 
(181,165
)
Proceeds from sale and disposition of assets
237

 
2,305

Increase (decrease) in accounts payable related to capital expenditures
9,533

 
(30,044
)
Investments in non-controlled entities
(15,872
)
 
(99,667
)
Distributions in excess of earnings of non-controlled entities
1,227

 
750

Net cash used by investing activities
(112,973
)
 
(307,821
)
Financing Activities:
 
 
 
Distributions paid
(187,181
)
 
(228,380
)
Decrease in outstanding checks
(1,235
)
 
(2,334
)
Settlement of tax withholdings on long-term incentive compensation
(13,001
)
 
(12,259
)
Net cash used by financing activities
(201,417
)
 
(242,973
)
Change in cash and cash equivalents
24,096

 
(208,787
)
Cash and cash equivalents at beginning of period
209,620

 
328,278

Cash and cash equivalents at end of period
$
233,716

 
$
119,491

Supplemental non-cash financing activity:
 
 
 
Issuance of limited partner units in settlement of equity-based incentive plan awards
$
7,295

 
$
6,404

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, Description of Business 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.
During first quarter 2013, we completed a reorganization of our reporting segments. This reorganization was effected to reflect strategic changes in our businesses, particularly in the area of our crude oil activities, which have had or will have a significant impact on the way we manage our operations. Accordingly, we have updated our segment disclosures for all previous periods included in this report. Our reportable segments offer different products and services and are managed separately because each requires different marketing strategies and business knowledge.

Description of Business

We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil.  As of June 30, 2013, our asset portfolio consisted of:

•
our refined products segment, including our 8,800-mile refined products pipeline system with 49 terminals as well as 27 independent terminals not connected to our pipeline system and our 1,100-mile ammonia pipeline system;

•
our crude oil segment, comprised of approximately 800 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 15 million barrels; and

•
our marine storage segment, consisting of marine terminals located along coastal waterways with an aggregate storage capacity of more than 26 million barrels.

Products transported, stored and distributed through our pipelines and terminals include:

•
refined products, which are the output from refineries and are primarily used as fuels by consumers. Refined products include gasoline, diesel fuel, aviation fuel, kerosene and heating oil.  Collectively, diesel fuel and heating oil are referred to as distillates;

•
liquefied petroleum gases, or LPGs, which are produced as by-products of the crude oil refining process and in connection with natural gas production. LPGs include butane and propane;

•
blendstocks, which are blended with refined products to change or enhance their characteristics such as increasing a gasoline's octane or oxygen content. Blendstocks include alkylates and oxygenates;

•
heavy oils and feedstocks, which are used as burner fuels or feedstocks for further processing by refineries and petrochemical facilities. Heavy oils and feedstocks include No. 6 fuel oil and vacuum gas oil;

•
crude oil and condensate, which are used as feedstocks by refineries and petrochemical facilities;

•
biofuels, such as ethanol and biodiesel, which are increasingly required by government mandates; and

•
ammonia, which is primarily used as a nitrogen fertilizer.

Except for ammonia, we use the term petroleum products to describe any, or a combination, of the above-noted products.
 
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, 2012, which is derived from our audited financial statements, include all normal and recurring adjustments necessary to present fairly our financial position as of June 30, 2013, the results of operations for the three and six months ended June 30, 2012 and 2013 and cash flows for the six months ended June 30, 2012 and 2013. The

6
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results of operations for the six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the full year ending December 31, 2013.
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, 2012 and the updates to our Annual Report reflecting changes in our reporting segments included in our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 29, 2013.


2.
Product Sales Revenue
The amounts reported as product sales revenue on our consolidated statements of income include revenue 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 refined 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 in contracts designated as cash flow hedges are recognized as adjustments to product sales when the hedged product is physically sold. Ineffectiveness in the contracts designated as cash flow hedges is recognized as an adjustment to product sales in the period the ineffectiveness occurs. 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, except for those agreements that economically hedge the inventories associated with our pipeline system overages (the period changes in the fair value of these agreements are charged to operating expense). See Note 8 - Derivative Financial Instruments for further disclosures regarding our NYMEX contracts.
For the three and six months ended June 30, 2012 and 2013, product sales revenue included the following (in thousands): 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2013
 
2012
 
2013
Physical sale of petroleum products
$
163,418

 
$
145,580

 
$
471,124

 
$
353,460

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 butane blending and fractionation activities(1)
27,850

 
12,342

 
2,961

 
6,184

Change in value of NYMEX contracts that did not qualify for hedge accounting treatment associated with the Houston-to-El Paso pipeline linefill working inventory(1)
9,020

 
—

 
1,921

 
—

Other
280

 
—

 
292

 
(11
)
Total NYMEX contract adjustments
37,150

 
12,342

 
5,174

 
6,173

Total product sales revenue
$
200,568

 
$
157,922

 
$
476,298

 
$
359,633


(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
During the first quarter of 2013, we revised our reporting segments. See Note 1—Organization, Description of Business and Basis of Presentation for a discussion of this matter.
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 revenue from affiliates and external customers, operating

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



expenses, product purchases and earnings of non-controlled entities. 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.



 
Three Months Ended June 30, 2012
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
187,262

 
$
22,545

 
$
38,954

 
$
—

 
$
248,761

Product sales revenue
199,840

 
—

 
728

 
—

 
200,568

Affiliate management fee revenue
—

 
198

 
—

 
—

 
198

Total revenue
387,102

 
22,743

 
39,682

 
—

 
449,527

Operating expenses
66,153

 
1,502

 
15,341

 
(670
)
 
82,326

Product purchases
143,962

 
—

 
536

 
—

 
144,498

(Earnings) losses of non-controlled entities
—

 
(1,493
)
 
15

 
—

 
(1,478
)
Operating margin
176,987

 
22,734

 
23,790

 
670

 
224,181

Depreciation and amortization expense
21,586

 
2,594

 
6,636

 
670

 
31,486

G&A expenses
20,273

 
1,270

 
3,871

 
—

 
25,414

Operating profit
$
135,128

 
$
18,870

 
$
13,283

 
$
—

 
$
167,281


 
 
Three Months Ended June 30, 2013
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
202,397

 
$
41,158

 
$
38,907

 
$
—

 
$
282,462

Product sales revenue
156,321

 
—

 
1,601

 
—

 
157,922

Affiliate management fee revenue
—

 
3,239

 
289

 
—

 
3,528

Total revenue
358,718

 
44,397

 
40,797

 
—

 
443,912

Operating expenses
66,456

 
4,027

 
7,694

 
(762
)
 
77,415

Product purchases
114,460

 
—

 
868

 
—

 
115,328

Earnings of non-controlled entities
—

 
(110
)
 
(626
)
 
—

 
(736
)
Operating margin
177,802

 
40,480

 
32,861

 
762

 
251,905

Depreciation and amortization expense
21,224

 
5,104

 
7,096

 
762

 
34,186

G&A expenses
23,292

 
4,915

 
5,055

 
—

 
33,262

Operating profit
$
133,286

 
$
30,461

 
$
20,710

 
$
—

 
$
184,457






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



 
Six Months Ended June 30, 2012
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
344,932

 
$
43,758

 
$
77,625

 
$
—

 
$
466,315

Product sales revenue
472,658

 
—

 
3,640

 
—

 
476,298

Affiliate management fee revenue
—

 
397

 
—

 
—

 
397

Total revenue
817,590

 
44,155

 
81,265

 
—

 
943,010

Operating expenses
123,359

 
605

 
28,218

 
(1,404
)
 
150,778

Product purchases
391,798

 
—

 
1,312

 
—

 
393,110

(Earnings) losses of non-controlled entities
—

 
(3,161
)
 
35

 
—

 
(3,126
)
Operating margin
302,433

 
46,711

 
51,700

 
1,404

 
402,248

Depreciation and amortization expense
42,643

 
5,756

 
13,193

 
1,404

 
62,996

G&A expenses
39,310

 
2,391

 
7,457

 
—

 
49,158

Operating profit
$
220,480

 
$
38,564

 
$
31,050

 
$
—

 
$
290,094


 
 
Six Months Ended June 30, 2013
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
367,756

 
$
64,386

 
$
77,591

 
$
—

 
$
509,733

Product sales revenue
355,736

 
—

 
3,897

 
—

 
359,633

Affiliate management fee revenue
—

 
6,398

 
569

 
—

 
6,967

Total revenue
723,492

 
70,784

 
82,057

 
—

 
876,333

Operating expenses
112,737

 
9,134

 
22,247

 
(1,522
)
 
142,596

Product purchases
272,758

 
—

 
2,968

 
—

 
275,726

Earnings of non-controlled entities
—

 
(1,485
)
 
(1,302
)
 
—

 
(2,787
)
Operating margin
337,997

 
63,135

 
58,144

 
1,522

 
460,798

Depreciation and amortization expense
42,577

 
12,573

 
13,846

 
1,522

 
70,518

G&A expenses
44,494

 
9,042

 
9,782

 
—

 
63,318

Operating profit
$
250,926

 
$
41,520

 
$
34,516

 
$
—

 
$
326,962





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



4.
Investments in Non-Controlled Entities

We own a 50% interest in Texas Frontera, LLC ("Texas Frontera"), which owns 0.8 million barrels of refined products storage at our Galena Park, Texas terminal. The storage capacity owned by this venture is leased to an affiliate of Texas Frontera under a long-term lease agreement. Texas Frontera began operations in October 2012. We receive management fees from Texas Frontera, which we report as affiliate management fee revenue on our consolidated statements of income.

We own a 50% interest in Osage Pipe Line Company, LLC ("Osage"), which owns a 135-mile crude oil pipeline that we operate. We receive management fees from Osage, which we report as affiliate management fee revenue on our consolidated statements of income.

We own a 50% interest in Double Eagle Pipeline LLC ("Double Eagle"), which owns a 140-mile pipeline that connects to an existing pipeline owned by an affiliate of Double Eagle. Double Eagle is operated by a third-party entity. This pipeline, which began limited operation in second quarter 2013, transports condensate from the Eagle Ford shale formation to our terminal in Corpus Christi, Texas.

We own a 50% interest in BridgeTex Pipeline Company, LLC ("BridgeTex"), which is in the process of constructing a 450-mile pipeline with related infrastructure to transport crude oil from Colorado City, Texas for delivery to Houston and Texas City, Texas refineries. This pipeline is expected to begin service in mid-2014. We receive construction management fees from BridgeTex, which we report as affiliate management fee revenue on our consolidated statements of income.

A summary of our investments in non-controlled entities follows (in thousands):
 
 
Texas Frontera
 
Osage
 
Double Eagle
 
BridgeTex
 
Consolidated
Investment at December 31, 2012
 
$
15,728

 
$
18,888

 
$
40,840

 
$
31,900

 
$
107,356

Additional investment
 
—

 
—

 
33,454

 
66,213

 
99,667

Earnings (losses) of non-controlled entities:
 
 
 
 
 
 
 
 
 
 
Proportionate share of earnings (losses)
 
1,302

 
2,486

 
(670
)
 
1

 
3,119

Amortization of excess investment
 
—

 
(332
)
 
—

 
—

 
(332
)
Earnings (losses) of non-controlled entities
 
1,302

 
2,154

 
(670
)
 
1

 
2,787

Less:
 
 
 
 
 
 
 
 
 
 
Distributions from investments in non-controlled entities
 
1,302

 
—

 
—

 
—

 
1,302

Distributions in excess of earnings of non-controlled entities
 
750

 
—

 
—

 
—

 
750

Investment at June 30, 2013
 
$
14,978

 
$
21,042

 
$
73,624

 
$
98,114

 
$
207,758

 
 
 
 
 
 
 
 
 
 
 

The operating results from Texas Frontera are included in our marine storage segment and the operating results from Osage, Double Eagle and BridgeTex are included in our crude oil segment.

Our initial investment in Osage included an excess net investment amount of $21.7 million. Excess investment is the amount by which our initial investment exceeded our proportionate share of the book value of the net assets of the investment. The unamortized excess net investment amount at June 30, 2013 was $15.5 million.


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




5.
Inventory

Inventory at December 31, 2012 and June 30, 2013 was as follows (in thousands):
 
 
December 31, 2012
 
June 30,
2013
Refined products
$
88,630

 
$
63,698

Liquefied petroleum gases
45,657

 
68,930

Transmix
63,026

 
49,379

Crude oil
17,443

 
19,040

Additives
7,132

 
6,857

Total inventory
$
221,888

 
$
207,904



6.
Employee Benefit Plans
We sponsor two union pension plans for certain union 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 the pension and postretirement benefit plans for the three and six months ended June 30, 2012 and 2013 (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
June 30, 2012
 
June 30, 2013
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
3,190

 
$
137

 
$
3,374

 
$
67

Interest cost
1,204

 
258

 
1,334

 
91

Expected return on plan assets
(1,176
)
 
—

 
(1,645
)
 
—

Amortization of prior service cost (credit)(1)
77

 
(211
)
 
77

 
(928
)
Amortization of actuarial loss(1)
826

 
161

 
1,145

 
209

Net periodic benefit cost (credit)
$
4,121

 
$
345

 
$
4,285

 
$
(561
)
 
 
Six Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2013
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
 
Pension
Benefits
 
Other  Post-
Retirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
6,380

 
$
275

 
$
6,950

 
$
144

Interest cost
2,407

 
515

 
2,684

 
206

Expected return on plan assets
(2,352
)
 
—

 
(3,115
)
 
—

Amortization of prior service cost (credit)(1)
154

 
(424
)
 
154

 
(1,856
)
Amortization of actuarial loss(1)
1,653

 
322

 
2,167

 
517

Net periodic benefit cost (credit)
$
8,242

 
$
688

 
$
8,840

 
$
(989
)
 
 
 
 
 
 
 
 
(1)These amounts are included in our Consolidated Statements of Comprehensive Income and Consolidated Statement of Cash Flows as changes in employee benefit plan assets and benefit obligations.

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





7.
Debt
Consolidated debt at December 31, 2012 and June 30, 2013 was as follows (in thousands, except as otherwise noted):
 
 
 
 
 
 
 
December 31, 2012
 
June 30,
2013
 
Weighted-Average Interest Rate at June 30,
2013 (1)
Revolving credit facility
 
$
—

 
$
—

 
—%
$250.0 million of 6.45% Notes due 2014
 
249,905

 
249,938

 
6.3%
$250.0 million of 5.65% Notes due 2016
 
251,609

 
251,395

 
5.7%
$250.0 million of 6.40% Notes due 2018
 
261,411

 
260,380

 
5.4%
$550.0 million of 6.55% Notes due 2019
 
575,065

 
573,302

 
5.7%
$550.0 million of 4.25% Notes due 2021
 
558,088

 
557,654

 
4.0%
$250.0 million of 6.40% Notes due 2037
 
248,981

 
248,989

 
6.4%
$250.0 million of 4.20% Notes due 2042
 
248,349

 
248,363

 
4.2%
Total debt
 
$
2,393,408

 
$
2,390,021

 
5.2%
 
 
 
 
 
 
 
(1)
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.

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

The face value of our debt at December 31, 2012 and June 30, 2013 was $2.4 billion. The difference between the face value and carrying value of the debt outstanding is the unamortized portion of 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.

6.45% Notes due 2014. The maturity date of our $250.0 million of 6.45% notes is June 1, 2014. The carrying amount of these notes was recorded as current portion of long-term debt on our consolidated balance sheet as of June 30, 2013.

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 June 30, 2013. Borrowings under this facility may be used for general purposes, including capital expenditures. As of June 30, 2013, there were no borrowings outstanding under this facility; however, $5.6 million was obligated for letters of credit. Amounts obligated for letters of credit are not reflected as debt on our consolidated balance sheets but decrease our borrowing capacity under the facility.


8.
Derivative Financial Instruments

Interest Rate Derivatives

We periodically enter into interest rate derivatives to economically hedge debt, interest or expected debt issuances, and we have historically designated these derivatives as cash flow or fair value hedges for accounting purposes. No interest rate derivatives were outstanding at June 30, 2013; however, adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

During 2012, we terminated and settled certain interest rate swap agreements and realized a gain of $11.0 million, which was recorded to other comprehensive income. The purpose of these swaps was to hedge against the variability of future interest payments on the refinancing of our debt that matures in 2014. If management were to determine that it was probable this forecasted transaction would not occur in 2014, the $11.0 million gain we have recorded to other comprehensive income would be reclassified into earnings.


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



Commodity Derivatives

Our butane blending activities produce gasoline products, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of forward purchase and sale contracts, NYMEX contracts and butane futures agreements to help manage price changes, which has the effect of locking in most of the product margin realized from our butane blending activities that we choose to hedge.

We account for the forward physical purchase and sale contracts we use in our butane 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 June 30, 2013, we had commitments under these forward purchase and sale contracts as follows (in millions):
 
Value
 
Barrels
Forward purchase contracts
$
107.2


1.8
Forward sale contracts
$
30.6


0.3

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 hedge categories:

Hedge Category
 
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 exchange-traded butane futures 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.

Additionally, we currently hold petroleum product inventories that we obtained from overages on our pipeline systems. We use NYMEX contracts, which are not designated as hedges for accounting purposes, to help manage price changes related to these overage inventory barrels. Changes in the fair value of these agreements are recognized currently in earnings as adjustments to operating expense.

As outlined in the table below, our open NYMEX contracts and butane futures agreements at June 30, 2013 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
NYMEX - Fair Value Hedges
 
0.7 million barrels of crude oil
 
Between July and November 2013
NYMEX - Economic Hedges
 
2.6 million barrels of refined products and crude oil
 
Between July 2013 and February 2014
Butane Futures Agreements - Economic Hedges
 
0.3 million barrels of butane
 
Between September and December 2013

At June 30, 2013, we had made margin deposits of $11.1 million related to 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 futures agreements against our margin deposits

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



under a master netting arrangement; however, we have elected to disclose the combined fair values of our open NYMEX and butane futures 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 futures agreements together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets. A schedule of the derivative amounts we have offset and the deposit amounts we could offset under a master netting arrangement are provided below as of December 31, 2012 and June 30, 2013 (in thousands):

 
 
December 31, 2012
Description
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts of Assets Offset in the Consolidated Balance Sheet
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheet
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Amount
Derivative-related balances
 
$
(9,388
)
 
$
2,050

 
$
(7,338
)
 
$
18,304

 
$
10,966

 
 
 
 
 
 
 
 
 
 
 

 
 
June 30, 2013
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Liabilities Offset in the Consolidated Balance Sheet
 
Net Amounts of Assets Presented in the Consolidated Balance Sheet
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Amount
Derivative-related balances
 
$
5,458

 
$
(1,094
)
 
$
4,364

 
$
11,078

 
$
15,442

 
 
 
 
 
 
 
 
 
 
 
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 six months ended June 30, 2012 and 2013 were as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Derivative Gains (Losses) Included in AOCL
2012
 
2013
 
2012
 
2013
Beginning balance
$
3,120

 
$
13,933

 
$
3,161

 
$
14,126

Net gain on interest rate cash flow hedges
1,008

 
—

 
1,008

 
—

Net gain (loss) on commodity cash flow hedges
1,667

 
—

 
1,667

 
(4,560
)
Reclassification of net gain on interest rate cash flow hedges to interest expense
(41
)
 
(41
)
 
(82
)
 
(82
)
Reclassification of net loss on commodity hedges to product sales revenue
—

 
—

 
—

 
4,408

Ending balance
$
5,754

 
$
13,892

 
$
5,754

 
$
13,892


As of June 30, 2013, the net gain estimated to be classified to interest expense over the next twelve months from AOCL is approximately $0.2 million.

During 2013, we had open NYMEX contracts on 0.7 million barrels of crude oil that were designated as fair value hedges. These agreements hedge against the change in value of our crude oil linefill and tank bottom inventory. Because there was no ineffectiveness recognized on these hedges, the cumulative losses of $6.0 million from the agreements as of June 30, 2013 were fully offset by a cumulative increase of $6.2 million to tank bottom inventory and a cumulative decrease of $0.2 million to our crude oil linefill, which is reported in other current assets; therefore, there was no net impact from these agreements on our results of operations.
The following tables provide a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2012 and 2013 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):


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



 
 
Three Months Ended June 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
 
 
$
1,008

 
 
Interest expense
 
 
$
41

 
NYMEX commodity contracts
 
 
1,667

 
 
Product sales revenue
 
 
—

 
Total cash flow hedges
 
 
$
2,675

 
 
Total
 
 
$
41

 
 
 
Three Months Ended June 30, 2013
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
 
 
—

 
 
Product sales revenue
 
 
—

 
Total cash flow hedges
 
 
$
—

 
 
Total
 
 
$
41

 

 
 
Six Months Ended June 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
 
 
$
1,008

 
 
Interest expense
 
 
$
82

 
NYMEX commodity contracts
 
 
1,667

 
 
Product sales revenue
 
 
—

 
Total cash flow hedges
 
 
$
2,675

 
 
Total
 
 
$
82

 
 
 
Six Months Ended June 30, 2013
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
 
 
$
82

 
NYMEX commodity contracts
 
 
(4,560
)
 
 
Product sales revenue
 
 
(4,408
)
 
Total cash flow hedges
 
 
$
(4,560
)
 
 
Total
 
 
$
(4,326
)
 

There was no ineffectiveness recognized on the financial instruments disclosed in the above tables during the three or six months ended June 30, 2012 or 2013.
The following table provides a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2012 and 2013 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
 
Six Months Ended
Derivative Instrument
Location of Gain (Loss)
Recognized on Derivative
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
 
June 30, 2013
NYMEX commodity contracts
Product sales revenue
 
$
37,150

 
$
12,342

 
$
5,174

 
$
10,581

NYMEX commodity contracts
Operating expenses
 
9,701

 
3,348

 
4,517

 
1,462

Butane futures agreements
Product purchases
 
(4,670
)
 
20

 
(4,627
)
 
(761
)
 
Total
 
$
42,181

 
$
15,710

 
$
5,064

 
$
11,282

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, 2012 and June 30, 2013 (in thousands):
 
December 31, 2012
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$
473

 
Energy commodity derivatives contracts, net
 
$
207

 

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



 
June 30, 2013
 
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
 
$
484

 
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, 2012 and June 30, 2013 (in thousands):

 
December 31, 2012
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$
227

 
Energy commodity derivatives contracts, net
 
$
8,954

Butane futures agreements
Energy commodity derivatives contracts, net
 
1,350

 
Energy commodity derivatives contracts, net
 
227

 
Total
 
$
1,577

 
Total
 
$
9,181

 
 
 
 
 
 
 
 
 
June 30, 2013
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
Energy commodity derivatives contracts, net
 
$
5,293

 
Energy commodity derivatives contracts, net
 
$
505

Butane futures agreements
Energy commodity derivatives contracts, net
 
165

 
Energy commodity derivatives contracts, net
 
105

 
Total
 
$
5,458

 
Total
 
$
610

 

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




9.
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 that did not meet the attainment deadline.  The CAA 185 fees are required annually 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. In June 2013, the Texas Commission on Environmental Quality (“TCEQ”) adopted its “Failure to Attain Rule” to implement the requirements of CAA 185 which will provide for the collection of an annual failure to attain fee for excess emissions but does not require retroactive assessment of Section 185 fees for the annual periods of 2008 through 2011. As a result, we reduced our accrual and decreased our environmental expense by $10.6 million in the second quarter of 2013 in accordance with the TCEQ's final rule. The total remaining accrual as of June 30, 2013 is $0.6 million.

Potential Responsible Party in a Pasadena, Texas Superfund Site

We may have liability at the U.S. Oil Recovery Superfund Site in Pasadena, Texas as a potential responsible party under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Currently, there is an ongoing removal action designed to stabilize the site, remove the immediate threat posed at the site and set the stage for a later more comprehensive action. We have accrued an amount less than $0.1 million related to this matter. We believe that the ultimate resolution of this matter will not have a material impact on our results of operations, financial position or cash flows.

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $48.3 million and $35.4 million at December 31, 2012 and June 30, 2013, 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 for the three and six months ended June 30, 2012 were $0.1 million and $2.7 million, respectively. Environmental expenses for the three and six months ended June 30, 2013 were $(9.4) million and $(8.7) million, respectively, with both of these amounts including a $10.6 million favorable adjustment to the CAA 185 liability noted above.

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters at December 31, 2012 were $7.9 million, of which $2.8 million and $5.1 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet. Receivables from insurance carriers and other third parties related to environmental matters at June 30, 2013 were $4.3 million, of which $1.4 million and $2.9 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheet.
Other
We are a party to various other claims, legal actions and complaints arising in the ordinary course of business, including without limitation those disclosed in Item 1, Legal Proceedings of Part II of this report on Form 10-Q. 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.

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




10.
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 permits the grant of awards covering an aggregate of 9.4 million of our limited partner units as of June 30, 2013. The remaining units available under the LTIP at June 30, 2013 total 1.8 million. The compensation committee of our general partner’s board of directors administers our LTIP.
 
Our equity-based incentive compensation expense was as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 30, 2012
 
June 30, 2012
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
Performance-based awards:
 
 
 
 
 
 
 
 
 
 
 
2010 awards
$
1,655

 
$
770

 
$
2,425

 
$
2,177

 
$
1,178

 
$
3,355

2011 awards
684

 
182

 
866

 
1,427

 
455

 
1,882

2012 awards
569

 
147

 
716

 
1,130

 
298

 
1,428

Retention awards
158

 
—

 
158

 
343

 
—

 
343

Total
$
3,066

 
$
1,099

 
$
4,165

 
$
5,077

 
$
1,931

 
$
7,008

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
3,715

 
 
 
 
 
$
6,220

Operating expense
 
 
 
 
450

 
 
 
 
 
788

Total
 
 
 
 
$
4,165

 
 
 
 
 
$
7,008

 
 
Three Months Ended
 
Six Months Ended
 
June 30, 2013
 
June 30, 2013
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
Performance-based awards:
 
 
 
 
 
 
 
 
 
 
 
2010 awards
$
—

 
$
—

 
$
—

 
$
121

 
$
73

 
$
194

2011 awards
2,120

 
1,076

 
3,196

 
3,103

 
2,223

 
5,326

2012 awards
826

 
370

 
1,196

 
1,707

 
981

 
2,688

2013 awards
733

 
198

 
931

 
1,459

 
387

 
1,846

Retention awards
103

 
—

 
103

 
228

 
—

 
228

Total
$
3,782

 
$
1,644

 
$
5,426

 
$
6,618

 
$
3,664

 
$
10,282

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
5,317

 
 
 
 
 
$
9,802

Operating expense
 
 
 
 
109

 
 
 
 
 
480

Total
 
 
 
 
$
5,426

 
 
 
 
 
$
10,282



11.
Distributions
Distributions we paid during 2012 and 2013 were as follows (in thousands, except per unit amounts):

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



 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
2/14/2012
 
 
$
0.40750

 
 
 
$
92,177

 
5/15/2012
 
 
0.42000

 
 
 
95,004

 
Through 6/30/2012
 
 
0.82750

 
 
 
187,181

 
8/14/2012
 
 
0.47125

 
 
 
106,597

 
11/14/2012
 
 
0.48500

 
 
 
109,707

 
Total
 
 
$
1.78375

 
 
 
$
403,485

 
 
 
 
 
 
 
 
 
 
2/14/2013
 
 
$
0.50000

 
 
 
$
113,340

 
5/15/2013
 
 
0.50750

 
 
 
115,040

 
Through 6/30/2013
 
 
1.00750

 
 
 
228,380

 
8/14/2013(1)
 
 
0.53250

 
 
 
120,707

 
Total
 
 
$
1.54000

 
 
 
$
349,087

 
 
 
 
 
 
 
 
 
 
(1) Our general partner's board of directors declared this cash distribution on July 25, 2013 to be paid on August 14, 2013 to unitholders of record at the close of business on August 7, 2013.
 

12.
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 have made associated with our energy commodity derivatives contracts. The carrying amount reported on our consolidated balance sheets approximates fair value as the deposits change daily in relation to the associated contracts and are held in separate accounts.
•
Energy commodity derivatives contracts. These include NYMEX futures and exchange-traded butane futures 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 8 - Derivative Financial Instruments for further disclosures regarding these contracts.
•
Long-term receivables. These are primarily insurance receivables, whose fair value was determined by estimating the present value of future cash flows using a risk-free rate of interest derived from U.S. treasury rates.
•
Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2012 and June 30, 2013; however, where recent observable market trades were not available, prices were determined using adjustments to the last traded value for that debt issuance or by adjustments to the prices of similar debt instruments of peer entities that are actively traded. The carrying amount of borrowings, if any, under our revolving credit facility approximates fair value due to the variable rates of that instrument.
 
The following table reflects the carrying amounts and fair values of our financial instruments as of December 31, 2012 and June 30, 2013 (in thousands):
Assets (Liabilities)
December 31, 2012
 
June 30, 2013
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Cash and cash equivalents
$
328,278

 
$
328,278

 
$
119,491

 
$
119,491

Energy commodity derivatives deposits
$
18,304

 
$
18,304

 
$
11,078

 
$
11,078

Energy commodity derivatives contracts (current assets)
$
—

 
$
—

 
$
4,364

 
$
4,364

Energy commodity derivatives contracts (current liabilities)
$
(7,338
)
 
$
(7,338
)